SEC Approves Measure to Tighten Hedge Fund Registration

The proposed rule also wouldn't apply to very small hedge fund managers with less than $25 million in assets under management.

Still, opponents say the registration requirement is unnecessary because it will increase costs for many hedge funds and divert attention at the SEC away from other problems.

"I think it's a bad idea,'' says Harry Davis, a lawyer with Schulte Roth & Zabel, which represents many large hedge funds. "It runs the risk of stretching the SEC too thin.''

Critics also point out that even without the new regulation, the SEC has the authority to investigate allegations of fraud or misconduct at a hedge fund.

But usually by the time the SEC gets involved in a fraud investigation, a hedge fund is well on its way to collapsing and investors have lost much of their money. Regulators hope periodic examinations will serve as an early warning system, an alert them to the possibility that a hedge fund manager may be inflating asset values in order to boost a fund's performance and the manager's fees.

In recent years, some of the most spectacular hedge fund debacles have stemmed from managers deliberately overstating asset values. Such allegations have led to the demise of Kenneth Lipper's Lipper Funds, Michael Lauer's Lancer Management Group and New Jersey fund Beacon Hill Asset Management.

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