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AG Blumenthal: "More Teeth" Needed In Hedge Fund Rules

The President's Working Group (PWG) on Financial Markets vowed to increase its vigilance of hedge funds -- but its members demurred from taking action. SEC Chairman Christopher Cox and Connecticut Attorney General Richard Blumenthal took sides on the matter.

Cox explained on "Street Signs" that the PWG is an "umbrella group" comprising the SEC, the Treasury Department, the Federal Reserve, and the Commodities and Futures Trading Commission -- and as such a coalition, actually does not have the authority "to directly issue regulations." (Unlike the SEC, which Cox said has "pending regulations" aimed at hedge fund activity.) Instead, he said, the PWG urged the adoption of "guidelines" and a "set of principles" for the "private pools of capital," as he defined hedge funds, private equity and venture capital groups.

The securities chief said that another complication is the fact that the U.S. must coordinate with its "counterpart regulators, overseas" before taking action. Cox did declare that for safety's sake, the U.S. ought to raise the minimum net worth of hedge-fund investors, to $2.5 million from $1 million.

Blumenthal agreed with Cox about wanting to keep the market unfettered and raising the entry bar -- but took issue with just about everything else. The AG told CNBC's Melissa Francis that the PWG's "guidelines offer very little guidance," and suffer from a great "level of generality." He called for statements with "a lot more teeth" and "specificity" -- and offered some himself: Blumenthal wants to sees more transparency in disclosing the name of a fund's auditor, "what his conflicts are," and the fund's specific strategies -- and especially, changes in strategies. He pointed to the infamous case of Amaranth, where "opaque" schemes with natural gas futures led to financial disaster. Blumenthal added that if the Federal authorities fail to sufficiently protect investors, then state "enforcement" -- like his office -- will take action.

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  • Co-anchor of CNBC's "Street Signs," Amanda Drury is based at the network's global headquarters in Englewood Cliffs, N.J.