SEC's new rules assert control over hedge funds

WASHINGTON -- The Securities and Exchange Commission adopted new rules ensuring it can sue hedge funds for misleading investors, following a court ruling that put in doubt the regulator's authority over the $1.6 trillion industry.

The SEC barred hedge funds from lying about investing strategies, performance, a manager's experience, and the risks of putting money in a fund. SEC commissioners unanimously approved the rule at a public meeting in Washington yesterday .

"This rule will give the commission an important tool to help us police this market," SEC chairman Christopher Cox said. It allows the agency to hold responsible hedge funds that "have breached their obligations to investors," he said.

The SEC acted after a federal appeals court rejected regulations last year that required hedge funds to report their size and submit to routine inspections.

Hedge funds are private pools of capital that allow managers to participate substantially in investment gains. The industry has more than doubled its assets under management in the past five years, according to Hedge Fund Research, a company that tracks the industry.

The court ruling hadn't dissuaded the SEC from suing hedge fund managers, and no hedge fund accused of fraud asserted the agency lacked authority to bring an enforcement case, said agency spokesman John Nester.

"Whether we believe the rule was necessary or not, if the commission didn't believe they had the authority to pursue cases," yesterday's action was appropriate, said Nora Jordan, cohead of the investment management group at Davis Polk & Wardwell, a New York-based law firm that represents hedge funds.

The SEC is also considering making it harder to put money in hedge funds by requiring that potential clients own at least $2.5 million in investments. Anyone with $1 million in assets, including the value of their home, can currently invest.