On This Day In Finance: June 23 – SEC Attempt To Regulate Hedge Funds Fails

By Joseph Nguyen | June 21, 2009 AAA

On June 23, 2006, the Court of Appeals ruled that the Securities and Exchange Commission (SEC) did not have the right to regulate hedge funds - an industry with over 1.1 trillion in assets at that time. The court ruled the SEC did not have the authority to treat hedge fund investors as clients.
The SEC had adopted a rule in 2004 that required fund managers with over $30 million in assets and over 15 investors to register with the SEC. In its attempt to regulate hedge funds, the SEC tried to broaden the definition of a "client" to include hedge fund investors, but the Court rejected this interpretation.

History
Hedge funds are typically only open to wealthy investors, and charge large fees based on the assets under management and performance. The funds' investment strategies are flexible and allow significant leverage that mutual funds may not.

Ever since the near collapse of Long-Term Capital Management (LTCM) in 1998, there has been increased pressure to enhance oversight in the hedge fund industry. The argument was that some hedge funds were so large that their failure could cause systematic risk to financial markets. This was believed to be the case with LTCM, and triggered a bailout plan that was set in place in order for the hedge fund to protect the markets. (Read more about LTCM in our article Massive Hedge Fund Failures.)

Financial Regulation Overhaul
In 2009, in the midst of a sever recession, President Obama released a financial overhaul plan that detailed a requirement by hedge fund managers to register with the SEC. However, the report (released in June) was very unclear as to how The Administration would regulate the size and risk involved in hedge funds.

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