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Register Hedge Funds? Experts Debate Dangers

There oughta be a law, says Sen. Charles "Chuck" Grassley (R-Iowa), that requires hedge funds to register with the Securities and Exchange Commission. Would the so-called Grassley Amendment produce healthy accountability -- or stifle investment? Ex-SEC Chairman Harvey Pitt and a Wharton professor debated the question on "Morning Call."

CNBC's Liz Claman asked if regulating hedge funds might not make sense, given that the sector controls some $1.2 trillion, and taking into account that that figure is merely an estimate -- as the funds are not required to publicly specify their holdings.

Pitt says no. He conceded that "we probably don't have enough data" on what hedge funds do -- but says that the answer is not expending "great government resources" and producing "burdensome regulations." The former SEC chief and CEO and founder of consulting firm Kalorama Partners believes the industry has an obligation to "create its own regulations" -- and hopefully, stick to them.

But Thomas Donaldson took issue with Pitt. A professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania, Donaldson maintains that the industry has not "done a good job" of self-managing transparency issues. He details the "vulnerabilities" of hedge funds, including the inability to verify their holdings, and the high fees that create a risky "pressure to perform." And the recent influx of pension-fund money and lower-net-worth investors -- whom Grassley referred to as "the average Joe" -- reminds Donaldson "of the dot-com craze."