Hedge Fund Ruling Puts Ball in Congress' Court

The recent DC Circuit's ruling that the SEC 's hedge fund registration rule is arbitrary seems to really doom regulatory efforts to get a handle on the exploding world of private equity. It is ironic that the appeals court panel acknowledged the need to somehow regulate this private world that has the potential to create a financial market systemic crisis, but at the same time struck down efforts to monitor this risk. With hedge funds generating around 30 to 40 percent (depending on the source) of equity trading on exchanges, we seem to be reaching a critical mass. The inventive lawyers at the SEC tried to get around the statutory investment adviser 15 client rule by counting investors in the funds as clients. But the court rejected that approach in favor of counting the funds as clients, which effectively doomed the effort to register advisers to hedge funds. It seems to me that Congress must step up and change the statute in order to save the SEC's effort to obtain a window into the secretive world of hedge funds before a major financial crisis. Let us hope that Congress can be proactive on this issue instead of reactive.