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September 30, 2004

Hedge Fund Plan Ripoff' Upsets Commissioner

By Gregory Bresiger

A pending plan to regulate hedge funds through registration amounts to asking the "taxpayers to foot the bill for a fishing expedition designed to protect the very rich."

That's the opinion of Paul Atkins, one of two members of the Securities and Exchange Commission who have filed a dissent against the proposed rule.

SEC Chairman William Donaldson has argued in favor of registration because the regulators now have "an almost total lack of information" about the booming hedge fund industry.

Widespread Abuses

Mark Borrelli, a former SEC official and now a securities attorney in private practice in Chicago, also supports the registration proposal. "I don't think it is a burden on the hedge fund industry in light of the potential benefits," Borrelli says.

Registration might prevent widespread abuses in the business provided the regulators have an effective method, according to Borrelli. He added that the SEC should take "a focused regulatory approach." That means, he says, that it should concentrate on hedge fund firms that have the biggest potential for compliance problems.

Hedge funds, part of the panoply of so-called alternative investments, are hot. They are estimated to have some $1 trillion in assets. And more retail investors are supposedly buying these funds.

But Atkins, along with fellow commissioner Cynthia Glassman, warns that, "mandatory registration of hedge fund advisers under the Advisers Act would not fill in the information gaps, but would significantly increase industry and Commission burdens."

The two commissioners, in their dissent, contend they see no evidence of an explosion of retail investors in the sector. They note that only some one percent of pension fund assets are in hedge funds.

The commissioners add that adjusting the accreditation standards for hedge fund investing would be more effective than fund registration.

The SEC should have done more research before going ahead with the proposed rules, according to Glassman and Atkins.

Harm Investors

"Although the proposal seems innocuous on its face, it may harm investors without helping us perform our role," the two SEC commissioners wrote.

The SEC could have a final vote on the hedge fund proposal sometime this fall.