SEC To Seek Info From Hedge Fund Service Providers

Sep 14 2006 | 12:00am ET

No hedge fund is an island—or, at least, no hedge fund is an island without bridges. They need prime brokers, broker-dealers and investment banks, among others, to do what they do. And thankfully for the U.S. Securities and Exchange Commission, all of those types of firm are regulated.

Stymied in its attempt to directly regulate hedge funds by unfriendly courts, the SEC will use broker-dealers as a “window” on what hedge funds are doing. The head of the agency’s enforcement division, Linda Chatman Thomsen, says the SEC will be paying very close attention to the relationships between broker-dealers, especially, and hedge funds.

“What we’re seeing in cases is beyond a blind eye and into aiding and abetting,” she told a Practicing Law Institute seminar in New York. “Activities with hedge funds are going to be something we’re going to focus on.”

And the SEC isn’t the only one increasing its scrutiny of the hedge fund world. Standard & Poor’s Ratings Services said this week that it has tightened its hedge fund rating system and will look more closely at such hot-button areas as governance and legal issues.

“The key revisions in the up-dated criteria include a greater focus on operational risk, including governance, legal, organizational and back-office issues,” analyst Tanya Azarchs said.


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