As Donaldson Resigns, Warns Of Problems in Hedge Fund Industry
In case you were in Bora Bora last week: On June 1, SEC Chairman William Donaldson announced that he planned to step down at the end of the month. The next day, President Bush nominated Rep. Christopher Cox (R-CA) to take his place. Leaving us all wondering: Will Coxís SEC come to resemble a Wal-Mart commercial, with a smiling chairman bouncing around, rolling back rules left and right? ("Another rollback!")
So far, the pundits think Chairman Cox will be very pro-business. Of course, thatís what they said about Donaldson . . .
In any event, thereís one rule that the outgoing chairman clearly doesnít want touched: his hedge fund manager registration rule. "It would be almost impossible for me to conceive of an SEC that did not recognize an industry that is almost at the three trillion dollar level," said Donaldson during a June 1 press conference following the announcement of his resignation. (Donaldson misspoke: itís more like one trillion, and even that figure may double count assets in hedge funds and funds of hedge funds. Unless, of course, he was accounting for leverage.)
Under the rule, explained Donaldson, hedge funds will be regulated "in a rather benign way." The SEC, he said, is "not seeking to regulate who can invest in what," but rather to obtain a fundamental knowledge about the hedge fund industry, "just the simplest kinds of things that pertain to anyone who runs money," such as the adviserís identify, experience, and "whatís their track record with infractions with the law." This information, he said, will help the SEC better understand what impact hedge funds have on the other side of the market. "Every time a hedge fund does a transaction, they are dealing with a potpourri of investors," he said, including individuals. "We need to know more about the impact of trading techniques on those people."
An SEC press statement circulated before the 4 pm conference touted the hedge fund rulemaking as "a prime example of the Commissionís new regulatory approach of getting out in front of emerging issues, rather than reacting after a problem has occurred and investors have been harmed."
And problems there may be, according to Donaldson. "I would expect that down the pike here that we will identify some problems in the hedge fund industry," he remarked during the press conference. "It just stands to reason [with] that amount of money seeking to justify those kinds of returns, that people are going to be trying harder and harder, many of them to get through the same keyhole, and that spells skating on thinner and thinner ice . . . . We would hope that there are no problems but Iíve been around long enough and know enough about this industry to say that weíve got to get out ahead of these problems."
Hmmm . . . no push back from good funds . . . problems down the pike . . . skating on thin ice . . . .
"Now, having said that," added Donaldson, "this is not condemnation of the hedge fund industry." He said that heíd actually like people to have a better idea of what hedge funds really do. Noting that few hedge funds are actually hedged in any kind of way, "we should call it the pooled vehicle industry," he suggested. "They are really pooled vehicles that you do anything you want with."
The outgoing chairman also defended the other controversial 3-2 Commission votes, such as the independent chairman rule ("I donít think you can wear two hats") and Reg. NMS. "I hope that there will be no legalistic rollback of any of these key items that we have put forward," said Donaldson, adding that he was "pretty optimistic" that the logic and the legality of what his Commission had done would "hold up."