The Securities and Exchange Commission issued a 134-page report Monday recommending that hedge funds register as investment advisors with the SEC. The SEC said that while it has historically allowed hedge funds to exist without registering, regulators are now concerned that the recent rapid growth of hedge funds, particularly among institutional investors, and increasing cases of fraud, now warrant oversight. The most recent high-profile case of fraud is the investigation into market timing and late trading by Canary Capital Partners.

The SEC called hedge funds – which currently have $600 billion of assets and are expected to reach $1 trillion within 10 years – "increasingly influential participants in the U.S. financial markets."

By registering, hedge funds would be required to disclose fees and potential conflicts of interest, and the SEC would be able to conduct inspections and examinations, the SEC said. One piece of information that is of particular interest to the SEC is the true valuation of a hedge fund’s assets. The SEC would also be able to investigate a hedge fund’s holdings and trading practices, although it is not planning to make that closely guarded information public.

The SEC noted that its "wait-and-see" posture has prevented it from taking action against fraud until substantial losses have been incurred. "We believe that our examination program not only allows the commission to identify misconduct by registered investment advisers earlier, but it also assists in identifying and possibly preventing certain misconduct from developing into fraud," the SEC said.

And finally, the SEC is interested in increasing the minimum investment requirement in hedge funds. Right now, they are generally prohibited from charging performance fees unless investors have $750,000 invested with the advisor or have a net worth of $1.5 million, the SEC said.

One area that the SEC is considering easing oversight is advertising. The commission reasoned that by eliminating the current restriction on advertising by hedge funds, that could allow them to raise capital.

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