Securities and Exchange Commission

Chairman William Donaldson is determined to increase his agency's oversight of the $750 billion hedge fund industry, even if it means creating special measures to register its advisers.

Donaldson recently told a group representing investment advisers -- including hedge fund and mutual fund managers -- that the agency was "evaluating a form of registration and an oversight regime for hedge fund managers different from what we use for other investment advisers," but offered no further details.

He said the SEC's knowledge of the estimated 6,800 hedge funds in the U.S., which manage about $600 billion, was "woefully inadequate." He said registration would help ward off problems such as fraud, and prevent circumstances such as the role that hedge funds played in the mutual fund market-timing scandal that was uncovered last year.

Hedge funds have been a target of the SEC's attention since 2002, when Harvey Pitt was in charge of the agency. But any proposals for legislation have taken a back seat to turmoil in the SEC's leadership and its subsequent struggle to get a handle on mutual fund reform.

The agency's staff issued a report last September calling for additional oversight, just before the hedge fund

Canary Capital Partners

emerged as a central player in the market-timing scandal that continues to roil the $7.6 million mutual fund industry.

Donaldson, who replaced Pitt last year as SEC chairman, may be rethinking his position on what hedge funds would have to disclose, meaning it may not be the same information required under the Investment Advisers Act of 1940. But because he still faces opposition from fellow Republican-appointed commissioners, observers are left to glean his occasional utterances and speculate on how reforms will look, if they happen at all. The SEC can inspect registered investment advisers' records, and it claims that such a measure will ward off potential conflicts of interest when managers run both hedge funds and mutual funds.

In their past discussions of hedge funds, SEC commissioners Cynthia Glassman and Paul Atkins -- both Republican appointees -- consistently opposed regulation. The Democratic appointees, Roel Campos and Harvey Goldschmid, support the staff report recommendations.

An agency spokesman, John Nestor, said that while Donaldson is still discussing registration for hedge funds, reforming the mutual fund industry is now a top priority.

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Saying his views were his own and not those of the commissioners, Donaldson last week told the Investment Counsel Association of America that although only wealthy investors and institutional investors are allowed to invest in the lightly regulated investment pools, many investors have a stake in their governance and oversight.

"The critics argue that hedge fund investors are wealthy and sophisticated individuals who do not need protecting," he said. "This is not the point. Hedge fund managers are directly and indirectly providing advisory services for many U.S. investors -- with significant impact on those investors, and on the operation of the U.S. securities markets.

"In fact, hedge funds are being purchased by intermediaries on behalf of millions of ultimate small investor beneficiaries, retirees, pensioners and others who are not generally thought of as the traditional hedge fund investor."

David Tittsworth, executive director of the Investment Counsel Association of America, said his group supported registration even before Canary Capital emerged as a player in the mutual fund scandal.

"Why shouldn't you know where the managers of these funds are located and how much they have under management?" he said. "You see these reports saying it's approaching a total of $1 trillion, but nobody really knows."

Longtime registration foe Jack Gaine, president of the Managed Futures Association, a hedge fund lobbying group, said it was too early to tell if Donaldson's talk of a different registration regime signaled a change that would make increased SEC oversight a reality.

"I can't read those tea leaves," he said. "It seems that he is using different language and wording than in his prior speeches. But when it comes down to the issues he perceives

the SEC should address, they are still in there. I'm not jumping off a bridge because I've heard it, but I'm not clapping because I've heard it."

Gaine said the sustained opposition of SEC commissioners Glassman and Atkins and last year's relaxation of hedge fund oversight by the Commodity Futures Trading Commission (CFTC) made hedge funds an appropriate subject for the president's Working Group on Financial Markets, rather than for the SEC alone. The group includes Donaldson,

Federal Reserve

Chairman Alan Greenspan, Treasury Secretary John Snow and James Newsome, chairman of the CFTC.