Securities and Exchange Commission Chairman Christopher Cox told the Senate Banking Committee that he will recommend that the SEC pursue implementing an anti-fraud rule for hedge funds that would increase the obligations of investors and would satisfy the complaints of an appeals court.
Cox’s statement to the committee comes as an answer to a ruling by the US Court of Appeals for the District of Columbia last month that overturned a SEC rule that required hedge funds to register with the commission.
The three-judge panel ruled that in its new rules, the SEC had twisted the legal definition of who can be considered a client of a hedge fund. The agency had deviated from its prior definition of who is a client, saying that investors could be included along with the hedge funds themselves, where the original definition said only hedge funds themselves to be clients.
Cox told legislators that he is proposing a new rule that would “look through” hedge funds to their investors and would be founded upon a detail noted by the court, that certain federal anti-fraud regulations are not limited to fraud against clients.
Cox stopped short of asking Congress for an expansion of the SEC’s authority – a move that may mark his intent to work within current SEC bounds before asking for a legislative solution.
Cox also said he would pursue introducing a policy that would allow the SEC to sue managers on behalf of fund investors.
The SEC is trying to find an answer to the uncomfortable question: how does an agency regulate, and possibly restrict, a burgeoning industry that is becoming more and more influential on global markets? Hedge funds have seen their collective profits double in only the past five years and face almost no regulations on their investment strategies.