The House Financial Services Committee passed a bill Wednesday that would allow states to oversee hedge funds and other investment advisors with $100 million or less in assets under management, leaving larger investment managers up to the Securities and Exchange Commission.

Because the SEC currently regulates advisers with $25 million or more under management, the bill would shift 43% of these companies, or roughly 710, back over to state oversight.

But some critics, including the SEC and Connecticut Attorney General Richard Blumenthal, whose state is home to some of the nation’s biggest hedge funds, say that shifting oversight to the 50 states would fragment regulation and inevitably lead to problems for investors.

“We are concerned that some fund advisors could exploit this exemption and avoid registration by splitting up any funds that are larger than $150 million,” said SEC spokesman John Nester. “This could have the unintended effect of creating a loophole that would defeat the purpose of the bill.”

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.