updated 7/25/2006 12:05:15 PM ET 2006-07-25T16:05:15

With fraud among hedge funds on the rise and ordinary investors getting hurt, the chairman of the Securities and Exchange Commission said Tuesday he will push for new emergency regulations of the high-risk investment pools.

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SEC Chairman Christopher Cox disclosed the plan in testimony before the Senate Banking Committee. It comes several weeks after a federal appeals court overturned the agency’s new rules for oversight of hedge funds, which traditionally catered to the very wealthy but are increasingly luring ordinary investors.

Concern about hedge funds’ explosive growth and virtually unbridled operations had prompted the SEC regulations, which required most hedge fund managers to register with the agency, thereby opening the funds’ books to SEC examiners. The appeals court ruling on June 23 left hedge funds — with assets estimated to exceed $1 trillion — in a regulatory vacuum, experts and regulators have said.

“The potential for retail investors to be harmed by hedge-fund risk remains” a serious concern, Cox testified. “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.”

Cox said he will recommend that the SEC adopt a new anti-fraud rule for hedge funds that would establish serious obligations to investors on the part of fund managers and would meet the legal objections of the appeals court. In its decision last month, the U.S. Court of Appeals for the District of Columbia Circuit sent the SEC’s hedge-fund oversight program — which bitterly divided the five SEC commissioners when it was adopted in October 2004 — back to the agency to be reviewed.

In addition, Cox told the Senate panel, he will direct the SEC staff to take several immediate actions which, among other things, would encourage hedge fund managers that voluntarily registered with the agency to remain so. And he has asked the staff for a report on the possibility of revising rules in a way that would raise income requirements for individual investors in hedge funds.

At the same time, the SEC will continue to vigorously pursue cases of hedge fund fraud, Cox said. The agency has seen an increase in fraud among hedge funds in recent years and has been bringing more enforcement cases against them — charging fund managers with defrauding investors of a total exceeding $1 billion in the last five years.

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