The Securities and Exchange Commission expects to charge more hedge funds with illegal trading, Linda Thomsen, director of enforcement at the SEC, indicated last week.

Regulators are "worried" about potential harm to investors, Thomsen said.

In addition, added Susan Merrill, director of enforcement at the New York Stock Exchange, prime brokerage firms that lend money to hedge funds and process their trades could also be held accountable if they fail to detect illegal activity.

As assets in hedge funds have swelled to $1.3 trillion, regulators have grown increasingly concerned about them. The SEC and its counterparts are "follow[ing] the money," Thomsen continued. "These days, [because] the money is in hedge funds, the potential for abuse, the potential for securities law violations, is there because there is so much money there."

SEC Chairman Christopher Cox also recently indicated that the Commission will propose higher minimum investment requirements for hedge funds, as well as a new hedge fund anti-fraud rule.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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