SEC Stops Short of Hedge Fund Crackdown

Updated from 10:52 a.m. EDT

Securities regulators are considering requiring hedge-fund managers to register as investment advisers, a move that could subject the $600 billion industry to periodic inspections for the first time.

The recommendation is contained in a long-awaited Securities and Exchange Commission report on the state of the hedge fund business. SEC officials released the report at a Monday morning press conference in Washington.

"The staff is concerned that the commission's inability to examine hedge fund advisers makes it difficult to uncover fraud and other misconduct," the report said. "The commission typically is able to take action with respect to fraud and other misconduct only after it receives relevant information from third parties."

But hedge fund managers will likely breathe a sigh of relief after reading the report because it does not call for many other sweeping reforms. In the wake of a number of recent hedge fund scandals, some had thought the SEC would want to crack down on these loosely regulated investment funds that are favored by the rich and famous.

"Can most managers live with this? Sure,'' said Ron Geffner, a New York attorney who advises hedge funds. "It's a sign the SEC is sensitive to the impact its actions will have on an industry.''

Most of the other recommendations are vague. For instance, the report said the SEC should "encourage the hedge fund industry to embrace and further develop best practices."

It's also worth noting the recommendation about registering hedge fund managers is a long way from becoming law. The SEC must first propose a regulation to register hedge fund managers and then seek public comments on it. It could be many months before such a regulation is adopted.

Still, the idea of registering hedge-fund managers is an important first step by regulators to bring some order to the Wild West environment that many hedge funds operate in.

By registering hedge fund managers, the SEC would gain the authority to periodically inspect and examine the funds and their books. Registration also would require hedge fund managers to disclose more information about themselves to investors, including potential conflicts of interests. It also would force hedge funds to raise the minimum amount needed to invest from $500,000 to $750,000.