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Atkins Reviews Status of Hedge Fund Adviser Rule

In remarks to the New York Bar Association, SEC Commissioner Paul Atkins reviewed the SEC's controversial hedge fund adviser registration rule which is currently being challenged in the D.C. Circuit Court. Atkins expects a decision soon, and noted that the oral argument last December was quite heated. Atkins said that, regardless of how the court decides the case, it has served as a reminder of the dangers of "undergoing regulatory contortions to achieve a questionable objective." Atkins' prepared remarks were posted on the SEC's Web site.

Atkins noted that one of the rationales for the adoption of the rule was the increasing retailization of hedge funds. When this argument was discounted, Atkins said that proponents focused on the growing pension fund investments in hedge funds as a form of retailization. Atkins pointed out that pension funds have sophisticated fiduciaries. Even if their fiduciaries are not highly sophisticated, he said the ERISA laws and the marketplace would prompt them to hire professionals to help with their investments. He maintained that ERISA law and pension fund investing had prompted many hedge fund advisers to voluntarily register with the SEC before the adoption of the rule. 

While he opposed the hedge fund rule, Atkins said he was encouraged to find that hedge fund advisers are not being singled out for examinations. Hedge fund advisers are being assessed just like other advisers based on a risk-based approach, he advised. Atkins said he is also encouraged by the extensive training the staff has undergone to prepare for hedge fund examinations.

In Atkins' view, the staff failed to reach out to other regulators before adopting the hedge fund rule. It is not too late, he said. He believes the SEC should coordinate with the CFTC, Treasury, the Federal Reserve and others to determine how to achieve its regulatory objective. Atkins also wants to work with foreign regulators to gain a better understanding of the interaction of the SEC's requirements with foreign regulatory frameworks. Any systemic concerns about hedge funds should be dealt with by the President's Working Group, in his view.

Atkins added that he did not discount the SEC's responsibility with respect to hedge fund fraud. However, he believes that registration of hedge fund advisers was unnecessary given the SEC's broad authority under the securities laws. As long as the rule is on the books, Atkins said he hopes the Commission will administer it wisely and use it to assist in the agency's oversight of the securities markets.