Risk & Compliance

Inflection Point

Hedge funds have raised the ire of CFOs and the eyebrows of regulators.
Lori CalabroJanuary 30, 2007

There is no denying that hedge funds are the black holes of the investment galaxy. With some 9,000 funds pulling in $1.2 trillion in investments while offering almost no transparency, they have raised the ire of CFOs and the eyebrows of regulators.

The Securities and Exchange Commission, which was rebuffed in its efforts to make hedge funds register with the agency last summer, recently made another attempt to rein them in. In December, the SEC proposed shrinking the pool of hedge-fund investors. Under a standard established in 1982, individuals had to show a net worth of only $1 million, including their homes, or an annual income of $200,000 to qualify to invest in a fund. The new proposal would raise that benchmark to $2.5 million in investment assets, excluding primary residences, which could reduce the number of qualified investors by 88 percent.

The SEC was “slapped in the Goldstein case [which ruled against registration] and they don’t like to go down quietly,” says David Lerner, a partner with Morrison Cohen in New York. With this proposed new rule, explains Aaron S. Kase, head of the Securities Service Group at law firm Levenfeld Pearlstein in Chicago, the agency is well within its purview to “preclude hedge funds from accepting investors who haven’t amassed a significant amount of assets.”

Whether the move will actually limit tougher attempts to regulate hedge funds remains to be seen. In the wake of the November elections, many observers believe that hedge funds will get a slight reprieve, given everything else that Congress has on its plate. Moreover, says Richard Goldman, a Boston-based partner with law firm Bingham McCutchen, the “SEC is sending a message to Congress with these new rules that it’s getting its hands around hedge-fund regulation.”