SEC’s Atkins slams hedge fund rule again

Paul Atkins, a commissioner at the US Securities and Exchange Commission (SEC), has renewed his criticism of the regulator’s hedge fund registration rule – due to go into effect in February 2006.

Speaking at a meeting of the Managed Funds Association (MFA) in New York yesterday, Atkins said the rule “imposes a cost on investors that doesn’t provide a proportional return”.

Opponents of mandatory registration have argued that operational costs associated with registration will be passed on to investors in the form of higher fees, with little benefit in terms of investor protection.

And, according to Atkins, the SEC simply doesn’t have the resources to enable it to complete the examinations associated with registration. He believes the SEC’s efforts are disproportionate, given the relatively small number of investors in hedge funds. “I believe there are fewer than 100,000 investors in hedge funds – compared with the more than 90 million mutual fund investors,” said Atkins.

But Atkins went on to urge pragmatism, saying hedge funds should embrace the rule as it is already in place. According to the SEC commissioner, examiners at the Office of Compliance Inspection and Examination (OC) will soon begin in-depth hedge fund training sessions, some of which will be led by the MFA.

Parties wary of the SEC’s ability to keep closer tabs on hedge funds will not have been comforted by a report written by the US Government Accountability Office (GAO) last month. The report questions the regulator’s ability to adequately oversee the mutual fund industry. As part of its oversight efforts, the OC randomly selects a sample of what it deems to be high-risk funds, alongside a smaller number of low-risk funds for examination.

Given constraints on resources, the GAO questioned the SEC’s capacity to examine mutual funds considered low risk within a 10-year period and to accurately identify funds that pose a higher risk and effectively target them for routine examination. The GAO suggested the SEC may be able to avoid becoming overstretched next year by modifying the registration rule so fewer hedge funds need register, and by gaining an increase in funding from the US Congress.