The Securities and Exchange Commission last week dropped the hammer on hedge fund managers by unanimously voting to adopt a new anti-fraud rule under the Investment Advisors Act. "This rule applies to investment advisers not only of hedge funds, but also private equity funds, venture capital funds, and mutual funds," said SEC Chairman Christopher Cox. This may be a blow to hedge fund managers who are used to operating in a lightly regulated industry.

"In absence of hedge funds having to register with the SEC, it was important to clarify the SEC's role in enforcement," says Neil Simon, vice president of government relations at the Investment Advisors Association. He also went on to say that the vote was significant but unsurprising. "It is unlikely that anything will change." The Financial Planning Association's director of affairs Brad White agrees. "The vote will not translate to any substantive changes in the anti-fraud rules for financial planners."

 The SEC still has to work out whether or not to raise the wealth requirements that would make it harder for individuals to invest in hedge funds from $1 million to $2.5 million. "This was a proposal and there are still issues that need to be worked out," says Michael Tannenbaum founding partner of Tannenbaum, Helpern, Syracuse, and Hirschtritt a financial services law firm. "Some parts of the proposal are appropriate and others are over reaching. Everybody wants anti-fraud in the industry, but there has to be a line," he says. "What this proposal has done is eliminate the rule for intent, a manager can be sanctioned for innocent mistakes.  The SEC realizes the importance of hedge funds to the markets and the rules should reflect that. The fear is some quality managers are mobile enough to move their shop from the United States to the United Kingdom or to other non-regulated markets."

Barry Barbash a partner at the law firm Willkie, Farr, Gallagher sees confusion throughout the industry on how to regulate hedge funds and private equity specifically. "There is no consensus on what the standards should be," he says. "Where to draw the line and what kind of funds will be included is hazy." When asked if this is an attack on hedge funds he said, "because of the tremendous growth hedge funds have had and their potential to lose a lot of money, the SEC is just looking to prevent unjustified harm."