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Wasn't it Elvis Presley who sang, "We can't go on together with suspicious minds?" Perhaps management at the US Securities and Exchange Commission (SEC) would do well to listen to these lyrics again. Because in this new era of financial turbulence, it seems that regulators are taking on a tyrannical approach to policing financial companies, especially hedge funds.

This time the scanner is on "communication." The SEC is probing New York-based Third Point, which manages USD 5.6 billion, for its communications with other hedge funds. In other words, aggressive activist Dan Loeb's hedge fund is being investigated over talks its managers regularly have with rivals at other funds. Loeb, in turn, has said in a letter that his "give-and-take'" with other hedge fund managers doesn't violate securities laws.

The investigation follows an SEC audit last year during which examiners noted the firm "regularly communicated with hedge funds about investment and trading ideas." But Loeb countered in the letter, "Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors."

Since when does "talking" represent an indication of a violation of law? In legal terms and, let's be honest, in a truly democratic society, the SEC's findings would not stand a chance. Putting it bluntly, this investigation is essentially a waste of money, human resources, skills and time. But the "shake-up" that regulators have received in the past year means that they are not allowed to think outside the box.

As obligations and demands of the current regulatory environment continue to increase, life for hedge fund is poised to become somewhat claustrophobic.


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