SEC Commissioner Annette Nazareth spoke at the PLI Hedge Fund Conference in New York. She spoke about the D.C. Court of Appeals Goldstein decision in June 2006. Commissioner Nazareth noted that since that time, the SEC has taken four "discrete" steps in the hedge fund regulation area:

  • The SEC has sought to clarify its ability to bring enforcement actions under Section 206 of the Investment Advisers Act of 1940 against investment advisers who defraud investors of investment companies and other pooled investment vehicles.
  • The SEC has proposed changes to Regulation D under the Securities Act (Reg D) that would define a new category of accredited investors called "accredited natural persons." Among other things, these investors would need to own at least $2.5 million in investments.
  • The SEC hosted three roundtable discussions dealing with proxy access issues. Among the many issues addressed in those proceedings was the more active role being played by some hedge funds in the shareholder voting and control area. As hedge funds engage in more active investment strategies, critics have expressed concerns about the short-term nature of many hedge fund investments and whether hedge funds are taking positions contrary to the long-term interests of shareholders.
  • The SEC has examined hedge funds in a broader context due to their role as market participants of potentially systemic importance. Hedge funds are significant counterparties to our largest regulated entities, including the banks overseen by the banking regulators and the Consolidated Supervised Entities (CSEs) overseen by the SEC. The CSEs are the SEC regulated holding companies of our five largest internationally active U.S. investment banks - Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley. Hedge funds are trading counterparties to the CSEs and banks through a wide range of over-the-counter derivatives and secured financing transactions. They are both clients - as purchasers of clearing and ancillary services - and debtors - as borrowers under margin loans through prime brokerage arrangements.

Commissioner Nazareth concluded with the question: "So what should we be doing, short of regulating hedge funds?" She stated that regulators will clearly need to engage with certain key hedge funds more holistically and more directly than in the past. She noted that regulatory attention may stop well short of legislative action and formal regulation. Structured and regular dialogue between the largest hedge funds and supervisors may be very useful, and she stated that "some of these funds, which would surely be of greatest interest from the systemic risk perspective, have already indicated a willingness to interact with Commission staff on a voluntary basis."

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