Starting February 1, the Securities and Exchange Commission will have its hands full in its brand new role as hedge fund overseer under Rule 203(b)(3)-2 of the Investment Advisers Act of 1940. Despite all the focus on the SEC, don't forget about another set of regulators: state securities commissioners. While state regulators are much lower profile than the SEC, they have a critically important role to play in regulating hedge funds and protecting investors.
The securities industry has long complained about state regulation, saying that it is a quagmire of more than 50 different conflicting laws. It would be so much easier to have just the SEC oversee financial firms, the argument goes.
However, many states are in a better position to know the local lay of the land than the D.C.-based SEC. The state financial regulators, either the securities or banking departments, may raise the...