SEC Commissioner Paul S. Atkins discusses hedge funds and other alternative investments at the 9th Annual Alternative Investment Roundup in Scottsdale, Arizona. He reviewed the SEC's recent history of hedge fund regulation initiatives, including the SEC's ill-fated attempt to require advisers to hedge funds to register with the SEC.

According to Commissioner Atkins, the SEC learned the following lessons from that experience:

  • 1. The SEC should thoroughly consider why it needs to regulate, before regulating.
  • 2. The SEC should consider whether a proposed regulatory approach will work to meet that need.
  • 3. The SEC should consider whether the benefits of a particular regulatory approach outweigh the costs.
  • 4. The SEC should consider whether the proposed regulatory approach is within its regulatory authority.
  • 5. The SEC needs to work better with other regulators.

Atkins further stated that one irony of the SEC's complaints about the secretive nature of the hedge fund industry is that advertising restrictions on hedge funds have been interpreted broadly so that hedge fund advisers do not dare to say anything publicly. In his view, the SEC should consider undertaking the long-overdue task of revising Form D and, as part of that revision, refine the form so that it solicits census information on offerings of private investment funds.

Finally, Atkins reviewed the SEC's recently proposed hedge fund rules, which would do two things:

  • They would clarify the SEC's authority to bring enforcement actions against investment advisers for fraud against investors and prospective investors in their funds (as opposed to fraud against the funds themselves);and
  • They would significantly narrow the pool of investors eligible to invest in hedge funds and private equity funds by creating a new category of accredited investor for private investment pools. It would include anyone who satisfies the existing $1,000,000 net worth or the $200,000 net income test and owns at least $2.5 million in investments (which would exclude the person's home).

The new investment minimum would be adjusted for inflation every five years. Essentially, then, the proposed rule would layer an additional requirement on top of the existing accredited investor requirements for Section (3)(c)(1) funds. Section (3)(c)(7) funds would not be affected since investors in those funds already are similarly subject to a two-part test.