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Industrial Energy Group Seeks Tighter Rein over Hedge Funds

The Securities and Exchange Commission's (SEC) December 2004 initiative that will require hedge fund advisors to register with the agency and open their books for review to prevent fraud and other market irregularities "[does] not go far enough or take effect soon enough," a Washington, DC-based group of large industrial energy users told the agency last Monday.

"We are concerned that the rule will not take effect until February of 2006 and that current investors in hedge funds and other clients of hedge fund advisors will be grandfathered," wrote Paul N. Cicio, executive director of the Industrial Energy Consumers of America, in a Jan. 31 letter to SEC Chairman William Donaldson.

In addition, the group pointed to a loophole in the new SEC rule, which may allow hedge funds to avoid registering with the SEC altogether. It specifically would allow "any fund that requires investors to commit their money for more than two years" to not register with the SEC, the IECA noted. "IECA would like to know why the SEC established the loophole."

In late 2004, the SEC staff estimated that 40-50% of all hedge fund advisors already were registered with the agency. The agency said there were more than 8,000 hedge funds worldwide (mostly in the U.S.) valued at $870 billion and growing. The industry was expected to expand to $1 trillion by the end of the year. Of the individual hedge funds, more than 200 were identified as active in the energy industry, including natural gas, crude oil and heating oil.

Hedge funds trade crude oil on both the New York Mercantile Exchange (Nymex) and London's International Petroleum Exchange (IPE) as well as the over-the-counter (OTC) energy derivatives markets. Similarly, they trade natural gas on both futures exchanges and the North American OTC markets.

"As consumers, we are...alarmed at the significant increase in unregulated hedge funds trading on the Nymex and OTC natural gas markets," Cicio told Donaldson. "U.S. natural gas prices are the highest and most volatile in the world. These hedge funds have little concern about what impact their trading may have on the ultimate delivered price of natural gas to consumers, such as homeowners and the manufacturing industries in the United States," he said.

"We expect the SEC to put in place, at minimum, the same requirements [for hedge funds] that are imposed upon other institutions such as commercial banks, insurance or securities sectors...We need strong government oversight that sends a clear message to the hedge fund managers that the SEC is closely monitoring their activities and will impose tough penalties when they don't play by the rules."

IECA includes 26 of the largest industrial companies in the U.S., such as Dow Chemical, Dow Corning Corp., Celanese Corp., Coors Brewing Co., Owens Corning Corp., Tyson Foods, Lyondell Chemical Co. and Eastman Chemical Co.

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