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SEC won't appeal hedge fund rule

Agency will try alternatives to aid small investors

WASHINGTON -- The Securities and Exchange Commission said yesterday it will not challenge a federal appeals court ruling that overturned its new rules for oversight of hedge funds.

Because the appellate court's decision was based on multiple grounds and was unanimous, ``further appeal would be futile and would simply delay and distract from our goal of advancing investor protection," SEC chairman Christopher Cox said in a statement.

But as early as this week, the SEC will introduce a new antifraud rule under the Investment Advisers Act that would have the effect of ``looking through" a hedge fund to its investors.

``At my direction, commission staff are also considering whether we should increase the minimum asset and income requirements for individuals who invest in hedge funds," Cox said.

With fraud among hedge funds on the rise and ordinary investors getting hurt, Cox has pushed for new emergency regulations of the high-risk investment pools, which traditionally catered to the very wealthy but are increasingly luring ordinary investors.

The SEC regulations had required most hedge fund managers to register with the agency, thereby opening the funds' books to SEC examiners.

In its decision June 23, the Court of Appeals for the District of Columbia Circuit sent the SEC's hedge-fund oversight program -- which bitterly divided the five SEC commissioners when it was adopted in October 2004 -- back to the agency to be reviewed.

A three-judge appeals court panel found that the SEC, in its new rules, had contorted the legal definition of who can be considered a client of a hedge fund.

The agency had previously considered hedge funds themselves to be the fund's clients, as opposed to actual investors.

The new rules changed the definition of clients to the investors.

The court's ruling left hedge funds -- with assets estimated to exceed $1 trillion -- in a regulatory vacuum, experts and regulators have said.

Federal Reserve chairman Ben Bernanke, like his predecessor Alan Greenspan, has said he believes that market discipline -- rather than new regulation -- is the best way to police the funds.

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