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Hedge Fund Registration: No Silver Bullet

Wednesday, 23 May 2007 | 10:11 AM ET

The effort to require hedge funds to register just doesn't die. After the court struck down the Securities and Exchange Commission's mandate to require registration, Sen. Charles Grassley picked up the torch. But Senator, consider the comments of the US Attorney for the State of Connecticut.

I sat down with Kevin O'Connor at the Department of Justice last week (that interview was for a Business Nation piece on a hedge fund scammer, which airs June 6). And I asked him about Sen. Grassley's effort to revive registration. O'Connor diplomatically said he could not comment on proposed legislation. But his skepticism about the efficacy of registration in preventing or detecting fraud was clear.

"The bottom line is, when you look at it as a prosecutor," O'Connor said, "certainly registration is an effective way to monitor. But most of the times, it's the victims. And you know, if you're really intent on committing a fraud, you can avoid detection through registration. So registration, without taking an opinion on 'it's good or bad', it's not the silver bullet that's going to prevent fraud."

He also made the point that mandatory registration in other industries hasn't been the antidote either: "A lot of the industries with fraud are registered, regulated industries by the Securities and Exchange Commission."

What can we learn from the U.S. Attorney of the state that houses a concentration of hedge funds? That making hedge funds register won't prevent fraudsters from setting up shop and bilking investors. That fraudsters who want to commit fraud will find -- as in many other industries -- a way to skirt the rules designed to obliterate them. And that no matter what Congress ultimately decides, it will not impact how Connecticut cracks down on the fastest growing industry in the state.

"I think, from our perspective, whether there's registration or not, we're gonna be equally aggressive in our policing of this industry," O'Connor said.

Sen. Grassley, are you listening?

Questions? Comments? PowerandMoney@cnbc.com