Hedge Fund Regulation

   Next year the Securities and Exchange Commission will register hedge funds.  Funds must submit their address and attest that they are not run by those who have committed financial crimes.  The SEC then has the power to perform discretionary audits on registered funds and presumable, if the SEC does not like what it finds, to suspend their operations.  At issue is whether the new regulations are enough, given the recent proliferation of hedge funds and the two most recent spectacular failures, the Bayou Group and the KL Group, or whether they are too much, expanding SEC registration to what was formerly considered private investing activity.  Regardless of registration, of course, hedge fund operators that defraud investors can be prosecuted criminally and pursued civilly for damages.   The SEC, in pursuing these new regulations, have, in my view, put itself in a very difficult position.  Bad operators will continue to take people's money and the SEC will take considerable heat for each new failure beginning next year.  Defrauded investors will be angry that the SEC either did not audit the failed fund fast enough or that it did not catch the fund fast enough if it did.  The SEC so chastised will be forced to conduct more thorough and searching audits with each new scandal.  It is a recipe for eventual total regulation by the SEC of hedge fund activity.