SEC Seeks Hedge Fund Restrictions, Democrats Split

Dec 14 2006 | 12:42pm ET

Hedge fund marketers are going to be a lot less busy if the Securities and Exchange Commission gets its way.

The SEC proposed two regulations concerning hedge funds at its open meeting yesterday. The first reasserts its authority to protect hedge fund investors from fraud perpetrated by hedge fund managers, a role called into question by the federal court decision that invalidated the agency’s hedge fund registration requirement.

The second proposal would slash by 88% the number of U.S. households permitted to invest in hedge funds by redefining—for the first time in more than 20 years—what makes an accredited investor.

Under the SEC’s proposal, in addition to the existing requirements that state that a person must have a net worth of $1 million or have earned $200,000 in each of the previous two years, now investors will also be required to have $2.5 million in financial investments. That would leave just 1.29% of American households eligible, down from the current 8.5%.

Both proposals have been published for comment, and will require commission approval before taking effect.

The hometown regulator for many a hedge fund, Connecticut Attorney General Richard Blumenthal, threw his support behind the redefinition, saying, “raising net-worth requirements is a critically significant first step toward helping protect vulnerable investors in the higher risk world of hedge fund investment” and “exactly the type of measure I have repeatedly urged.”

“Especially in areas like Connecticut, increasing real estate values have escalated the retailization of hedge funds—and entitled and exposed exponentially growing masses of middle class investors to hedge funds.” He added that, while the measure is important, “the SEC and Congress must consider additional steps to address the regulatory black hole surrounding hedge funds.”

That sentiment may fall on deaf ears in Washington, especially among Blumenthal’s own party. Fellow Democrat and SEC Commissioner Roel Campos expressed concern about ordinary investors being deprived of the opportunities hedge funds provide.

“Shouldn’t all investors have access to potential high returns of hedge funds?” he asked at the open meeting. “Why should only the rich have exposure to hedge funds if they are so good?”

What’s more, newly-empowered Democrats on Capitol Hill seem to share Campos’ desire to see only “very moderate oversight” of hedge funds, which are big donors to Democratic campaigns. Connecticut’s own Sen. Christopher Dodd, set to become head of the Senate Banking Committee, said he is in no rush to pursue hedge fund legislation. Other Democratic leaders of key committees in both houses of Congress have echoed his sentiment.


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