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SEC faces questions of power

The SEC's authority to reform the US funds sector is coming under fire — even from law firms. Legal action against the SEC is being expected in some quarters.

The US Securities and Exchange Commission has come under fire on two fronts as it attempts to reform the regulatory oversight of the US mutual and hedge funds industries.

On September 2 the US Chamber of Commerce filed a lawsuit to try to derail an SEC rule that would require mutual funds to have independent chairmen – a case the regulator will vigorously contest. Just days later, the SEC received a letter from a Washington DC law firm questioning its rulemaking authority over proposed hedge fund reforms.

Wilmer Cutler Pickering Hale and Dorr argued that the SEC would be going beyond its authority if it forced hedge fund advisers to register with the regulator. Wilmer Cutler cited Ernst & Ernst v Hochfelder (1976) as saying: “The rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law. Rather, it is the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.”

The proposed SEC rule would force advisers to private funds to register under the Investment Advisers Act of 1940 if they had more than 14 clients.

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