CNBC Exclusive: SEC Member Says Hedge Fund Rules Not Needed

In an exclusive interview on CNBC, SEC Commissioner Paul Atkins said that the SEC should focus on mutual funds and insider trading--not hedge funds.

In a taped interview, Atkins told Melissa Lee that trying to regulate hedge funds was “not the wisest effort.” A Congressional hearing on the issue is scheduled to begin Tuesday in Washington.

Atkins said about 90 million people use mutual funds to invest for retirement or other personal goals while about 200,000 wealthy individuals invest in hedge funds. Wealthy investors hire top-notch money managers to advise them on their investments and therefore don’t need government oversight, he said.

The President’s Working Group on Financial Markets, comprised of representatives of the SEC, Treasury, Commodities Futures Trading Commission and the Federal Reserve, recently released a report that concluded that existing hedge fund regulations are sufficient.

Priorities Straight

Atkins said the SEC now has its priorities straight and is working with the exchanges to monitor insider trading. President Bush appointed Atkins to the Securities and Exchange Commission in 2002. His term expires in 2008.

Congress, however, is considering ways to regulate hedge funds, including having them register with the SEC and requiring investors to have a net worth of at least $2.5 million, rather then the current $1 million, before they could invest in a hedge fund.

In an interview on CNBC’s “Morning Call,” Gary Marks, chief executive officer at Sky Bell Asset Management, said such proposed regulations aren't needed.

“It’s not a matter of harm, it’s a matter of fairness,” Marks said. “We have right now a caste system in the U.S. where middle class investors aren’t able to access many strategies that are fantastically good at protecting people’s assets in bear markets and volatile markets.”

The House Financial Services Committee on Tuesday will hold a hearing to determine if hedge funds provide enough information about their investment strategy to protect the interests of their clients. It's the first in a series of hearings to investigate the effect hedge funds and private equity pools have on domestic and overseas financial markets.

Richard Ferlauto, director of pensions and benefits at the American Federation of State, County and Municipal Employees (AFSCME), said hedge funds are a “black box” and called for full disclosure so investors can do their due diligence.

"We Need Registration"

“I don’t mind investors who are truly wealthy taking a gamble on hedge funds, but when people’s money is invested in them in pension funds, you’ve got risk associated with it that’s really unknowable,” Ferlauto said. “What we need is registration, monitoring and a much greater degree of transparency--transparency is the disinfectant that we need.”

But Marks said there is no “black box” in hedge funds and smart investors will ignore funds that don’t provide needed information.

“You know who’s running the fund,” he said. “You understand the strategy. Investors have to look at the number numbers, risks and make their own decisions. The SEC should not be making those decisions.”

Witnesses scheduled to testify at Tuesday’s hearing or present prepared testimony include E. Gerald Corrigan, managing director, Goldman Sachs & Co., and former president of the Federal Reserve Bank of New York; Kenneth D. Brody, co-founder and principal, Taconic Capital Advisors and chairman of the investment committee at the University of Maryland; James Chanos, founder and president of Kynikos Associates ; George Hall, founder and CEO of Clinton Group; Jeffrey L. Matthews, Ram Partners; Andrew Golden, president of Princeton University Investment Co.; Professor Stephen Brown, David S. Loeb professor of finance at New York University’s Stern School of Business.