Rare Candor from a Government Agency

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A SEC commissioner admits that mandatory hedge fund registration has been a big waste of time and money

SEC commissioner criticizes hedge fund rule
Atkins complains that registration is not effective
By Ross Kerber, Globe Staff | March 31, 2006

A new hedge fund registration rule has created extra burdens for the Securities and Exchange Commission without protecting investors, one of the agency's Republican commissioners said yesterday.

The new rule has proven ''costly and ineffective," commissioner Paul S. Atkins said at a gathering sponsored by Boston University's Morin Center for Banking and Financial Law. In the period before the rule went into effect last month roughly 1,000 hedge fund advisers have filed paperwork to be reviewed by the agency but which won't do much to deter fraud, he said.

Also, the new rule forces the SEC to police the holdings of perhaps 100,000 hedge-fund investors who tend to be wealthier at the expense of its work overseeing the mutual funds held by 90 million people of more modest means on average, Atkins said. And it creates too many burdens on the funds themselves. While the new policies might seem appropriate, he said, ''a closer look reveals them to be rooted rather tenuously in reality."

Atkins's remarks show his continuing opposition to a rule that could wind up under SEC review again depending on how a US Appeals Court in Washington decides an ongoing case challenging the regulation. Although Atkins' view was outvoted, 3-2, when the SEC adopted the registration rule in 2004, two members of the body are new since then and could make modifications.

Atkins said it's unlikely the commission will revisit the issue on its own. But he said the agency's staff is reviewing other potential requirements for hedge funds and said he would favor other approaches such as overseeing hedge funds in cooperation with the Treasury Department.

Hedge funds operate largely outside of traditional securities oversight and often pursue high-risk investment strategies such as selling stock short or making complex bets on currencies. They have soared in popularity even though their returns are often no better than mutual funds, and by some estimates there is now around $1 trillion in assets spread among 8,000 funds worldwide, including much money from pension funds run by government and nonprofit institutions.

But since the 1990s, the high-profile collapse of several hedge funds such as Long Term Capital Management drove concerns that regulators and investors deserved more information on them.

Under the new rules, hedge-fund advisers are required to file forms about themselves and their business, giving details such as their investment strategy. Also, the public can now look up information on specific investment advisers on the agency's website.

The reaction of advisers to the new rule varies, said James Harris, chief financial officer of Pi Capital Inc. a Los Angeles hedge-fund adviser, who is also a director of the Hedge Fund Association, a trade group.

Some larger funds have found the new rules burdensome, he said, but added that he doesn't mind it and most clients prefer the added disclosure. ''They like to know the firm they're working with has some kind of regulatory authority, and that it's required to have some internal controls," Harris said.

Tamar Frankel, a Boston University securities-law professor who attended the speech, said Atkins's views are no surprise, but could matter depending on the courts' eventual ruling. She said she would favor a system in which at least some hedge funds would have to register themselves, to provide more information to investors. After years of growth, now ''we have small hedge funds, these could be rogue hedge funds and I think it's a good idea to have them register," Frankel said.

But, she said, registrations for advisers on midsize funds might be more trouble than they're worth. ''Why I'm hedging about hedge funds is because I think they're not all one of a kind," she said.

In disclosing the new rule, the SEC said it promises new ways to deter fraud and curtail losses, such as permitting the agency to screen individuals seeking to advise hedge funds and prohibit those who have faced disciplinary actions in the past.

Atkins said the rule carries too many costs, such as making it too burdensome for some hedge funds to do business or forcing them not to use technologies such as instant messaging because of bookkeeping requirements. The agency would do better to rely on its traditional sources of spotting fraud, such as suspicious employees or business partners of crooked funds, he said.

Ross Kerber can be reached at kerber@globe.com.

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