Taking a first step toward heightened oversight of the burgeoning hedge fund industry, federal regulators suggested yesterday that advisers be required to provide details about their activities.
A report from the staff of the Securities and Exchange Commission urged commissioners to adopt rules mandating that hedge fund advisers register with regulators, subjecting them to greater scrutiny and routine SEC examination of their operations to help protect investors.
"We currently lack the regulatory tools to monitor adequately the activities and operations of hedge funds and their investment advisers," SEC Chairman William H. Donaldson said in unveiling the report.
"The commission needs to have a means of examining hedge fund advisers and monitoring their operations."
Hedge funds, designed for wealthy investors, use complex strategies, including derivatives, leverage, arbitrage and short-selling. They are largely unregulated, particularly compared with mutual funds. Some prominent problems, plus what Donaldson calls the funds' "exponential growth," have led to calls for greater federal regulation.
Concern about hedge funds swelled after the Long-Term Capital Management fiasco in 1998, when its near-collapse created tumult in markets. It resulted in a $3.5 billion bailout orchestrated by then-Federal Reserve official William McDonough, who now heads the new accounting oversight board.
Earlier this month, New York Attorney General Eliot Spitzer secured a $40 million settlement from Canary Capital Partners over what he called fraudulent activities, alleging that mutual funds allowed it to trade at prices unavailable to others.
Paul Roye, director of the SEC's division of investment management and architect of the report, said the proposal's main effects would be to enhance disclosure for investors and to help head off potential fraud through better oversight.
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