N.Y. Times and the Hedge Fund Oral Argument

Yesterday the D.C. Circuit heard arguments on the new SEC hedge fund regulations.  Several hedge funds and hedge fund advisers have brought suit charging that the SEC exceeded its authority in enacting the new regulations.  The suit hinges primarily on whether the SEC can redefine the word "client" under the Investment Company Act of 1940 to count individual investors separately, thus bringing hedge funds with more than 15 investors under the company's regulatory authority.

The New York Times reports on the oral arguments here.  If you read the article closely, you might detect a subtle hint of bias in the reporter's judgment.

[Plaintiffs] have maintained that the commission's decision to broaden its oversight of hedge funds . . . exceeded its authority and that only Congress, where the hedge fund business has more allies than the commission, may make the changes that the agency is planning to impose.

The lawyers and judges taking part in the oral arguments focused largely on statutory interpretation rather than broad financial policy questions, and in so doing, shifted the battle to a more friendly terrain for a business that is barely regulated.

. . .

"You can't come in and say we will make 'client' whoever you want it to be," Judge Edwards said impatiently and dismissively to Mr. Stillman.

Mr. Stillman, a seasoned appeals court litigant, appeared unfazed by the questions and carefully guided the judges through the history and purposes of the complex regulatory regime.

. . .

The panel's third member, Judge Thomas B. Griffith, pressed an industry lawyer, Philip D. Bartz, for support of his legal argument about the proper way to interpret the word "client" and suggested that the squabbling over legislative interpretation was less important than giving the agency the tools necessary to detect financial chicanery. He also suggested that the agency and Congress should set policy, not the courts.

"What's more important," Judge Griffith asked Mr. Bartz, "the concept of client or for them to root out fraud?"