Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Hedge funds are not unregulated!

The Chairman of the US Securities and Exchange Commission declares
boldly that hedge funds are not
unregulated. Announcing the SEC’s decision not to appeal a
court verdict invalidating the hedge fund registration rules,
Chairman Cox states:

Finally, notwithstanding the Goldstein decision,
it is important to point out that hedge funds today remain subject to
SEC regulations and enforcement under the antifraud, civil liability,
and other provisions of the federal securities laws. The SEC will
continue to vigorously enforce the federal securities laws against
hedge funds and hedge fund advisers who violate those laws. Hedge
funds are not, should not be, and will not be unregulated.

One can well imagine an excerpts from this paragraph adorning the
publicity material of a hedge fund to reassure its investors that a
hedge fund is a well regulated entity not too different from a mutual

I understand the feeling of “sour grapes” that
underlies the statement of Cox. But one expects a little more care and
circumspection from the top securities regulator in the world. A good
deal of anti fraud and civil liability exists even under contract
law. Push the logic a little further and one could argue that the
SEC does not need to exist. Ha! Ha! Perhaps we should all re-read
Stigler’s classic paper on that subject once again
(Journal of Business, Volume 37, 1964, page 117-142 and


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