September 15, 2004
I am strongly opposed to the SECs proposal to require direct oversight of hedge fund managers through mandatory registration.
While the SEC has pointed to the prevention of fraud as a principal goal of the proposed rule, the SECs report on the hedge fund industry indicates that fraud is no more prevalent in the hedge fund industry than in other contexts. As noted in the dissent filed by Commissioners Glassman and Atkins, of the 40 hedge fund fraud cases cited by the SEC, only 8 actually would be affected by the proposed registration requirement. This evidence does not suggest that any expansion of regulation is warranted.
The SEC has grossly underestimated the costs that the government and the industry will be forced to bear if the proposed rule is adopted, costs that will be passed on to U.S. taxpayers in the form of higher taxes and to investors in the form of higher fees.
I share Federal Reserve Chairman Alan Greenspans view that the current system of voluntary registration is appropriate and that the SECs scarce resources may be used more productively in other areas -- in particular, protecting retail investors from misconduct by mutual fund operators and unscrupulous corporations than policing investment vehicles that are exclusively available to large institutional and wealthy individual investors that have the sophistication and resources to evaluate the merits and risks of an investment in a private investment fund.
Rather than precipitously imposing an unjustified rule covering a narrow segment of the financial services industry, the SEC should devote additional time to studying the industry, in greater consultation with the Executive Office, Congress, the Treasury Department, the various self-regulatory organizations that oversee the industry and industry participants, with a view toward identifying and addressing the problems that most significantly affect retail investors.