SEC Calls Hearings Into Hedge Funds
Securities and Exchange Commission Chairman William Donaldson, worried that hedge funds are luring less sophisticated investors, said Monday that the agency will hold public hearings on the industry in the next few months.
Donaldson said he is concerned that the private partnerships for wealthy individuals and institutions are being marketed to a broader base of individuals. Also, the SEC will “take a hard look” at allegations that hedge funds have tried to manipulate the stock market by issuing biased research reports, he said.
“There are a number of trends here that are too important to leave unexamined,” Donaldson said in a speech to a group of business economists.
The SEC staff has been conducting an investigation of the hedge fund industry for about a year. Donaldson’s call for public hearings shows that the agency is moving toward rulemaking that could bring hedge funds, which aren’t regulated, under greater SEC oversight.
The agency opened its review of hedge funds last May following several high-profile fraud cases, including that of fund manager Michael W. Berger, who hid $400 million of losses from investors over four years.
The SEC also is concerned about conflicts of interest involving money managers that operate mutual funds and hedge funds.
The investigation hasn’t come to any conclusions and the SEC is considering a range of possibilities, from doing nothing to raising wealth requirements for prospective investors and increasing disclosure requirements.
Donaldson spoke about the “retailization” of hedge funds, which is of particular concern to the SEC. New investments, called “funds of hedge funds,” allow investors to buy into several different hedge funds with investments of as little as $25,000. Hedge funds generally have minimums of $250,000 or more.
“I am concerned about less sophisticated investors not understanding the risk,” Donaldson said.
“We look forward to working with the SEC and the staff, as we have in the past, concerning their comprehensive fact-finding review of the hedge fund industry,” said John Gaine, president of the Managed Funds Assn., the industry’s trade group.