In a rare rebuke, the SEC's new regulations of hedge funds were overturned by a Federal court last Friday.
Until 2004, the SEC had traditionally not required hedge fund managers to be registered investment advisors. With the dramatic growth of hedge funds and in the shadow of the failure of Long Term Capital Management in 1999, the SEC wanted an increased say over the operation of hedge funds.
The Federal court, in striking down the regulations, suggested that the SEC had acted arbitrarily under Chairman Donaldson's leadership. This creates an interesting question for new Chairman Cox, who is widely considered to be more conservative and business friendly: will he seek to revise the regulations to accomplish his predecessor's objectives or will he accept defeat and move on?
My take on the situation is that I could hardly be more pleased that the Federal courts have established limits on new regulations.
The safety and soundness of the U.S. and global financial markets is paramount, but there is ample regulation in place without the increased scrutiny. This may be best evidenced by the Pequot investigation by the SEC. The investigation revolves around insider trading, having nothing to do with the regulations that were struck down last Friday.
Those who seek to take advantage of the unsuspecting the markets should be afraid of the SEC.
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