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By REUTERS
Published: July 11, 2007
WASHINGTON - The U.S. Securities and Exchange Commission Wednesday took a step to regulate the hedge fund industry by adopting a rule to protect investors from hedge fund advisers who make false or misleading statements.
Skip to next paragraph Reuters
The rule was approved amid growing Congressional scrutiny of the roughly $1.5 trillion hedge fund industry, which often employs high-risk techniques to pull in tremendous returns.
Three separate Congressional hearings were held on Wednesday to examine the risks of hedge funds and private equity funds, and whether fund managers should pay a sharply higher tax rate.
The SEC commissioners voted 5-0 in favor of a rule that prohibits hedge fund advisors from defrauding those who invest or intend to invest in the private pools of equity.
The SEC's adoption of the rule came one year after a federal court quashed the agency's first attempt to oversee the lightly regulated industry by overturning a requirement that hedge fund advisors register with the agency.
The new rule also applies to investment advisers of private equity funds, venture capital funds and mutual funds.
"Collectively these funds hold trillions of dollars in investors assets that play an important and growing role in our capital markets," SEC Chairman Christopher Cox said at the meeting. "This rule will give the commission an important tool to help us police this market, to deter misconduct, to call to task those who breach their obligations to investors."
The SEC is also considering adopting a rule designed to ensure that investors in hedge funds are capable of "evaluating and bearing the risks" of their investments.
That proposal would require an investor to hold at least $2.5 million in investments before putting money into hedge funds, up from the $1 million standard that has stood since 1982.
The minimum threshold plan has enraged some investors who wrote letters to the SEC earlier this year, arguing that setting such a high bar would deprive them of investment opportunities.
Cox told reporters after the meeting the plan was being reviewed and the commission would act on it soon. "It's at the top of our agenda," he said.
An earlier SEC attempt to regulate hedge funds by requiring registration with the agency and periodic audits was struck down by a federal appeals court last June. The court threw it out, saying the SEC rule was arbitrary because it exempted funds with fewer than 15 clients.
That rule, which was adopted under the SEC's previous chairman, would have also given the agency a chance to peer into the highly secretive industry, which has played an increasingly role on Wall Street.
The hedge fund industry is under the microscope after the high profile collapse of Amaranth Advisors LLC, which lost $6.4 billion making bad bets on natural gas last year, and recent liquidity problems at two Bear Stearns Cos. hedge funds that placed big bets on subprime mortgage investments.
Published: July 11, 2007
WASHINGTON - The U.S. Securities and Exchange Commission Wednesday took a step to regulate the hedge fund industry by adopting a rule to protect investors from hedge fund advisers who make false or misleading statements.
Skip to next paragraph Reuters
The rule was approved amid growing Congressional scrutiny of the roughly $1.5 trillion hedge fund industry, which often employs high-risk techniques to pull in tremendous returns.
Three separate Congressional hearings were held on Wednesday to examine the risks of hedge funds and private equity funds, and whether fund managers should pay a sharply higher tax rate.
The SEC commissioners voted 5-0 in favor of a rule that prohibits hedge fund advisors from defrauding those who invest or intend to invest in the private pools of equity.
The SEC's adoption of the rule came one year after a federal court quashed the agency's first attempt to oversee the lightly regulated industry by overturning a requirement that hedge fund advisors register with the agency.
The new rule also applies to investment advisers of private equity funds, venture capital funds and mutual funds.
"Collectively these funds hold trillions of dollars in investors assets that play an important and growing role in our capital markets," SEC Chairman Christopher Cox said at the meeting. "This rule will give the commission an important tool to help us police this market, to deter misconduct, to call to task those who breach their obligations to investors."
The SEC is also considering adopting a rule designed to ensure that investors in hedge funds are capable of "evaluating and bearing the risks" of their investments.
That proposal would require an investor to hold at least $2.5 million in investments before putting money into hedge funds, up from the $1 million standard that has stood since 1982.
The minimum threshold plan has enraged some investors who wrote letters to the SEC earlier this year, arguing that setting such a high bar would deprive them of investment opportunities.
Cox told reporters after the meeting the plan was being reviewed and the commission would act on it soon. "It's at the top of our agenda," he said.
An earlier SEC attempt to regulate hedge funds by requiring registration with the agency and periodic audits was struck down by a federal appeals court last June. The court threw it out, saying the SEC rule was arbitrary because it exempted funds with fewer than 15 clients.
That rule, which was adopted under the SEC's previous chairman, would have also given the agency a chance to peer into the highly secretive industry, which has played an increasingly role on Wall Street.
The hedge fund industry is under the microscope after the high profile collapse of Amaranth Advisors LLC, which lost $6.4 billion making bad bets on natural gas last year, and recent liquidity problems at two Bear Stearns Cos. hedge funds that placed big bets on subprime mortgage investments.