WASHINGTON -- Federal regulators yesterday proposed new oversight for hedge funds, investment pools traditionally for the wealthy that are growing and attracting small investors but have scant federal scrutiny.
The vote was 3-2, marking the second time in less than a month the Securities and Exchange Commission split over a significant regulatory move. In both instances, SEC chairman William Donaldson and the two Democratic commissioners opted for stricter regulation while the two other Republican members opposed it.
On June 23, the panel voted in the same fashion to mandate that mutual fund boards have chairmen who are independent from the companies managing the funds.
This time, the SEC approved a proposed new rule ordering most hedge fund managers to register with the agency.
If formally adopted after a 60-day public comment period, the rule would open the funds' books to SEC examiners and make them subject to an array of regulations including accounting and disclosure requirements.
The agency could, for example, conduct inspection ''sweeps" of groups of hedge funds, something it now lacks legal authority to do.
The high-risk, potentially high-return funds have an estimated $750 billion to $1 trillion in assets and are growing, and oversight is needed to head off potential blowups that could hurt ordinary investors, SEC officials say.
''Small investors are increasingly being exposed to the risks of hedge fund investing," Paul Roye, head of the SEC's investment fund division, said before the vote at a public meeting. He said the agency ''needs to detect and prevent fraud at an earlier stage, and prevent these fraudulent activities from damaging markets and harming average investors."
Donaldson said some 40 hedge funds are believed to have been involved in the scandal engulfing the $7 trillion mutual fund industry.
The two Republican commissioners, Paul Atkins and Cynthia Glassman, opposed the proposal. But the two Democrats on the panel supported it along with Donaldson.
Tighter regulation of the funds also is strenuously opposed by other policy makers, notably Federal Reserve chairman Alan Greenspan, who maintains that it would hinder the flexibility of financial markets.