[JURIST] US Securities and Exchange Commission Chairman Christopher Cox [official profile] suggested that Congress may need to permit increased SEC oversight over hedge funds [prepared statement] to protect retail investors and prevent fraud, during a hearing [committee materials] held by the Senate Banking Committee Tuesday. Cox lamented a June decision [JURIST report] by a federal appeals court to invalidate the SEC hedge fund rule [PDF text; JURIST report], saying that it has forced the SEC "back to the drawing board to devise a workable means of acquiring even basic census data that would be necessary to monitor hedge fund activity in a way that could mitigate systemic risk." The rule required hedge fund advisors responsible for at least $30 million in assets to register with the SEC, thus subjecting them to legal scrutiny for potential fraud, and in a unanimous decision [PDF text] the appeals court held that hedge funds escape SEC regulation under the Investment Company Act of 1940 [PDF text] because "investment vehicles that remain private and available only to highly sophisticated private investors have historically been understood not to present the same dangers to public markets as more widely available public investment companies."

Cox further said:

The concerns about hedge funds that the SEC enunciated when we adopted our hedge fund rule in December 2004 remain the same today. The remarkable pace of hedge fund growth, which we noted at the time, has continued unabated. The potential for retail investors to be harmed by hedge fund risk remains as serious a concern now as then. And the growth in hedge fund fraud that we have seen accompany the growth in hedge funds implicates the very basic responsibility of the SEC to protect investors from fraud, unfair dealing and market manipulation.

And on that point, let me make very clear that notwithstanding the Goldstein decision, hedge funds today remain subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws. We will continue to vigorously enforce the federal securities laws against hedge funds and hedge fund advisers who violate those laws. Hedge funds are not, should not be, and will not be unregulated. The challenge for the SEC and the President's Working Group going forward is, rather, to what extent to add new regulations, particularly in light of the recent Court of Appeals ruling.

A congressional aide said last month that the House Financial Services Committee is drafting a bill [Reuters report] that would essentially reverse the federal court's decision in Goldstein, and last month, several officials called for Congressional hedge fund regulation [JURIST report] during hearings. Bloomberg has more.