01 July 2009

SEC Aguilar: Hedge Fund Regulation on the Horizon

"It may be appropriate to think through whether some of the risk limitation concepts built into the Investment Company Act make sense to apply to hedge funds such as imposing limits on leverage", Aguilar said.

SEC Commissioner Luis Aguilar laid out the current state of affairs regarding the hedge fund industry and described the calls for regulation of the industry.

 

Speaking at the Hedgeworld Fund Services Conference in New York, he underlined that the lack of transparency and oversight over hedge funds gives rise to a number of concerns. These include market integrity concerns about the nature and extent of counterparty risk, concerns about whether hedge funds engage in insider trading, and questions about how hedge funds drive the demand for derivatives, such as CDSs, as well as how they impact the demand for securitized products, Aguilar said.

 

There are a number of questions as to exactly how, and to what extent, hedge funds may have contributed to the economic crisis and how they contributed to the overall systemic risk of the financial markets, he noted.

 

According to Aguilar, hedge funds advisers with over $25 million in assets should register with the SEC. “But that may not be enough”, he said. “Many hedge fund advisers are currently registered with the SEC but we still lack a complete picture of what is going on in the industry”, he noted.

 

For funds that could significantly affect the market, it may be appropriate to require more than recordkeeping, he said.

 

“For example, it may be appropriate to think through whether some of the risk limitation concepts built into the Investment Company Act make sense to apply to these hedge funds — such as imposing limits on leverage.”

 

However, the Commissioner also underlined that regulation is more than the bare requirements of registering and reporting, but should include inspection authority.

 

Full speech

 

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