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News December 6, 2004 Issue

Sununu Announces Hedge Fund Hearings; Blasts SEC on Rulemaking

The Senate Banking committee will hold hearings on the SECís hedge fund rule to ensure that the agency sticks to its promise and does not attempt to substantively regulate hedge funds. So said Senator John Sununu (R-NH), a member of the committee, at the SIAís hedge fund conference last week. "We will have hearings on [the new rules] in the coming year, I would imagine," he said. The hearings will address the effects of regulation on hedge fund managers and "continue the debate" over the rules, "despite the fact that they have already been put into effect," said Sununu. "We want to make sure that the claims being made by those supporting the regulations are kept."

Sununu downplayed any notion that Congress would legislatively un-do the SECís rulemaking. "Weíre not going to pass a law superseding" the hedge fund rule, he said. Instead, the goal is to "draw a line" and make sure that the SEC does not promulgate additional regulations in order to try to obtain more information about hedge funds, he said. "I think the burden is on the SEC right now to justify . . . what value can be provided by the choice that it made."

Senate Banking committee spokesperson Andrew Grey said that the committee will not schedule any hearings until Senator Richard Shelby (R-AL) is officially reappointed as committee Chairman for the 109th Congress, an event that is expected to occur during the first week of January. However, Grey confirmed that Senator Shelby intends for the committee to "continue its oversight of hedge funds."

At the SIA conference, Sununu sharply criticized the SECís hedge fund rule as "defensive posturing" following the mutual fund late trading and market timing scandals. "Iím concerned about the general direction that this regulation signals for the SEC," he said. "When you miss something so glaring . . . that it is of importance to so many investors. . . it doesnít look good." The move to regulate hedge funds, said Sununu, "is a reflection of discomfort at the SEC of the fact that they missed the mutual fund scandal."

The lawmaker expressed concerns about the substance of the regulation, saying that he was not aware of any empirical data suggesting that registration under the Advisers Act will lead to better returns for hedge fund investors or result in a reduced likelihood of fraud. He said that he gets "a little bit suspect" when asked to impose new laws without supporting empirical data. "I think this is dangerous precedent," he added. "Look at the mutual fund industry." There, he said, the SEC had "all the records at their disposal, all the regulatory powers necessary to act." But all that "wasnít enough, apparently" to prevent misconduct.

Sununu also took issue with the rationale that requiring hedge fund manager registration would protect investors that invest in hedge funds through pension funds. "The suggestion here is that those in a position of fiduciary responsibility on behalf of the pensions somehow donít have the intelligence, the wherewithal, the responsibility, or the commitment to that pension fund to make sound investment decisions," said Sununu. He said that he found that position "insulting."

He also expressed concerns about unintended consequences flowing from the registration requirement. He noted that there are perhaps 200,000 hedge fund investors, compared to the estimated 92 million mutual fund investors. "Resources are finite," he said. In his view, the SECís resources "are far better spent" focused on mutual fund investors, given that they are typically less sophisticated investors with lower levels of income. "Any time you are expanding the regulatory reach of a bureaucracy you are risking diverting resources," he said.

Sununu also noted that registration carries additional costs. For larger funds, he said, "this is not an issue." But cost may be an issue for new entrants or smaller funds. At the margin, he said, the registration requirement may encourage fund managers to operate offshore. "I donít think thatís in anyoneís interest."