The Securities and Exchange Commission is overreaching in seeking regulatory oversight of hedge funds.
That's not because such oversight might not be useful, but because the SEC already has more on its plate than it can handle.
The SEC's failure to detect — or at least take action on — the Wall Street scandals, the corporate accounting scandals and, most recently, the mutual fund market-timing scandals suggests the SEC is overwhelmed.
It has too many responsibilities, so it is handling none of them well.
It took New York Attorney General Eliot Spitzer to detect and crack down on the conflicts of interest between Wall Street research and investment banking, and the mutual fund scandals. Where was the SEC in these cases? Both issues fell squarely within the SEC's areas of responsibility.
The SEC allowed the investment consulting pay-to-play issue to fester for years, although audits of state and private pension funds provided evidence of possible conflicts of interest. A few months ago, the SEC finally began a massive examination of consultants regarding that issue.
Government is rarely reluctant to extend the reach of its regulation, even when it inadequately performs its existing and most fundamental tasks. Thus the SEC's proposal that it provide some regulation of hedge funds should come as no shock, even as its resources are strained trying to police investment regulations for its main constituency, individual investors.
But it should be disturbing. The SEC should be focused on carrying out its current responsibilities more thoroughly, and battling Congress for more resources if they are needed, rather than reaching for more responsibilities.
Certainly the Wall Street research and mutual fund market-timing and late-trading scandals might have been uncovered sooner if the SEC had better used its resources, or demanded and gained more resources from Congress.
In fact, some may point to hedge fund involvement in the market timing and stale pricing scandals as reason for more SEC oversight of hedge funds. But both of those scandals could have been discovered sooner if the SEC had been closely monitoring mutual fund trading patterns.
The hedge fund industry no doubt has dark corners, but those who invest in hedge funds are high-net-worth or institutional investors who are presumed to be sophisticated and able to scrutinize the risks involved. In addition, some estimate that 40% to 50% of hedge funds already are registered with the SEC. That figure indicates the proposed rule is unnecessary at this time.
Further, the SEC already has broad regulatory authority over publicly traded securities; and its anti-fraud provisions cover many kinds of non-registered investment managers, such as hedge funds and private equity funds investing in non-public markets.
Before the SEC gains more authority over hedge funds, it must get more resources from Congress and demonstrate that it has enough resources to fulfill its current responsibilities and is using those resources efficiently.