The Connecticut Department of Banking has created a new unit to oversee hedge funds based in the state. The regulatory move comes after legislative attempts to regulate hedge funds failed earlier this year. But why bother with democratic processes like legislation when you can just pass fiat regulations anyway?
The Connecticut Department of Banking has created a unit that will oversee hedge funds based in the state. Connecticut has been pushing for more rules governing the growing industry in the wake of high-profile collapses including bankrupt broker Refco, failed hedge fund Bayou Management and more recently Amaranth Advisors.
The unit’s main objective is to help prevent or detect fraud and will give the state greater oversight of the hedge fund industry. The unit, which has recently begun operating, has not yet passed any new regulations for hedge funds.
This comes on the heals of news that Connecticut's Attorney General has assembled a hedge fund task force. There’s good reason to be skeptical of moves by Connecticut bureaucrats to regulate hedge funds. In the first place, there’s always the possibility of hedge fund exit. Hedge funds don’t have to locate in Connecticut, and if the regulatory burden gets too intense, many could probably relocate.
Second, it’s not at all clear that this is sensible use of Connecticut tax-revenues, since the benefits of greater regulation (assuming they exist) would accrue to investors world-wide while the costs would be borne by Connecticut tax-payers. Why should Connecticut foot the regulatory bill for the world. And any attempt to try to shift the costs back on to the hedge funds themselves only increases the likelihood of exit.
Nothing we’ve seen indicates that anyone in the Connecticut Department of Banking has thought this through very well. Does Connecticut really want to make itself inhospitable to hedge funds? What's more, does it really want to make this decision by regulation and administrative action rather than legislation?
Connecticut creates hedge fund oversight unit [FinancialNews]