Securities and Exchange Commission Chairman William H. Donaldson yesterday said the agency would be "irresponsible" if it did not go ahead with a plan to register hedge funds.
The largely unregulated hedge fund industry controls more than $850 billion in assets, most of which is invested by wealthy individuals and institutions. Watchdogs are calling for greater oversight after regulators last year uncovered evidence that some hedge funds engaged in trading abuses.
"We have an obligation to at least know the most fundamental things about a player in the market as big as hedge funds are," Donaldson said in an interview.
The SEC is likely to vote this month on a proposal requiring hedge funds to file registration forms. The agency's two Democratic commissioners have said they support the plan, while two of the three Republicans on the panel have expressed concerns about whether extra monitoring is needed -- and whether the SEC has sufficient resources to do the job without giving short shrift to other areas.
Donaldson, the swing vote on the issue, talked briefly yesterday about his reasons for supporting the measure.
Chief among them: SEC leaders are trying to anticipate trouble spots before investors are hurt. Critics lashed out at the agency last year for lagging behind New York state Attorney General Eliot L. Spitzer in digging up problems in the mutual fund industry.
About 40 hedge funds have been implicated in trading abuses stemming from the mutual fund scandals. Another 40 have been sued by the SEC over the past several years, with the agency using its legal authority to combat fraud at investment companies, whether or not they are registered, officials said.
The Managed Funds Association, a trade group for hedge funds, argues that the SEC proposal unduly burdens investment vehicles whose customers are sophisticated investors. Under current rules, hedge funds are exempt from registration if they are composed of investors who have a net worth of at least $1 million each, or annual household income of more than $300,000 for the past two years.
"These investors know far more about what to look for and ask about hedge funds than any SEC regulations could prescribe," said John G. Gaine, the hedge fund association's president.
Federal Reserve Chairman Alan Greenspan, among others, has expressed concern about what the SEC would do with the information it gathers from hedge funds and how it might seek to rein them in. For their part, SEC officials who support the plan say they need more information to determine whether the funds are keeping investors' best interests at heart, maintaining clean books and pricing their securities properly.
About one-third of the nation's 7,000 hedge funds, including those operated by mutual funds, already register with the SEC.