Fewer hedge funds under SEC watch

The number of hedge funds subject to inspection by the Securities and Exchange Commission fell 21% in the year since a federal appeals court rejected the agency’s effort to require more funds to register.

There are 1,977 hedge funds signed up with the SEC, down from about 2,500 a year ago, agency spokesman John Nester said.

The U.S. Court of Appeals in Washington struck down the SEC’s oversight requirement in June 2006, saying the agency overstepped its authority. Funds registered with the SEC are subject to routine inspections.

The SEC imposed its hedge fund regulation in 2004, over objections from two of the agency’s Republican commissioners. William H. Donaldson, the Republican SEC chairman at the time, said the industry’s rapid growth and the lack of oversight by regulators were likely to hurt investors and financial markets. He joined the commission’s two Democrats to approve the rule.

Hedge funds, private pools of capital that allow managers to share in investment gains, have avoided strict regulation because they raise money only from institutional investors and wealthy individuals. The industry’s assets under management have more than doubled in the last five years to almost $1.6 trillion, industry tracker Hedge Fund Research estimates.

After the court decision, SEC Chairman Christopher Cox proposed new rules in an effort to clarify the agency’s authority to sue hedge funds that misled investors. The SEC will make a final decision on that anti-fraud measure Wednesday.