Registering with the SEC should not be a requirement of hedge funds, at least not in the mind of Federal Reserve Chairman Alan Greenspan.

Calling hedge funds helpful to the "internal flexibility of our financial system," Greenspan intimated that as long as lower- and middle-income families do not invest in hedge funds, the SEC should not be as stringent with these investment vehicles as it is with lower-shelf investments. The SEC has proposed that hedge funds be required to register with the commission just like mutual funds.

"I would grant you that registering advisors in and of itself is not a problem. The question is, what is the purpose of that unless you're going to go further?" Greenspan said.

Speaking to the Senate Banking Committee, Greenspan defined hedge funds "as financial institutions in which investors are only of high-income levels."

"The value of these institutions is to create a very significant amount of liquidity in our system," Greenspan said.

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