President's Working Group Finds Market Discipline Trumps Government Regulation

February 28, 2007

The President’s Working Group on Financial Markets (the “PWG”) released a positive and thoughtful set of ten fundamental principles on February 22, 2007 as part of its ongoing effort to guide U.S. legislators, as they consider and address public policy issues associated with the rapid growth of private pools of capital, including hedge funds and private equity funds (collectively, “Funds”).  The PWG concluded that market discipline, governed by institutional investors and managers of Funds, together with statutory limitations restricting access to Funds to wealthy investors, are for the most part sufficient means by which to mitigate industry risks, thereby sending a clear message to Congress that additional and targeted regulation of the hedge fund industry is unnecessary.

In finding the current regulatory framework sufficient to maintain market risk, the PWG emphasized that the onus of ensuring adequate disclosure by Funds to prevent financial crises remains on counterparties, creditors, and institutional investors, who “have a duty under applicable law to act in the best interest of the beneficiaries… [and] to perform due diligence to ensure that their investment decisions are prudent and conform to sound practices for fiduciaries.”  The release further indicates that investors in Funds should receive accurate and timely information to perform due diligence on a Fund’s strategy, risk management, and investment terms, thereby enabling the investor to make informed investment decisions.

For more information about this e-Alert, please contact your regular Sonnenschein attorney.

Click here to read the e-Alert.


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