Government not the hedge fund “police”: US official
Apr 27th, 2007 | Filed under: Hedge Fund RegulationA few months ago, we wrote about the “moral hazard” that might result for investors if the SEC were to create a voluntary registration regime for hedge funds ( “SEC Hedge Fund Registration: Now Just A Seal of Approval?” ). Like many other voluntary programs such as the Good Housekeeping Seal of Approval, The American Dental Association’s “Seal of Acceptance”, or Krusty the Clown’s Seal of Approval (“It’s Not Just Good, It’s Good Enough!”), such a registration program would simply become another weapon in the hedge fund marketing arsenal.
It seems the US Treasury Department is also concerned about this. According to Bloomberg, Robert Steel, Undersecretary for Domestic Finance at the Treasury told a conference in New York yesterday:
“I don’t like the moral hazard of communicating a government all-clear…(such regulation might) communicate confidence in a product that is riskier than normal investors should get involved in…”
One way to remove the risk of moral hazard is to make adherence to new rules compulsory. But Steel is not a big fan of that either. On April 15 he told the media that a hedge fund code of conduct would make the government’s role:
“…sound like a policeman and that’s not what I’m into.”
According to Bloomberg, Treasury Secretary Henry Paulson is also apprehensive about either appearing to be a policeman or appearing to endorse some funds over others. Instead, he prefers that investors “discipline” hedge funds themselves. Says Bloomberg:
“Paulson in February opted for a hands-off approach, saying that hedge funds are best disciplined by their investors, who can withstand risk because of their wealth, and creditors. Paulson, who heads the President’s Working Group on Financial on Financial Market, issued principles and guidelines rather than new rules.”
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