[JURIST] Connecticut Attorney General Richard Blumenthal called for congressional action [statement] on regulation of the hedge fund industry, during a Senate Judiciary Committee [official website] hearing [meeting materials] Wednesday. Blumenthal told the panel that federal oversight was needed to fill a "regulatory void" and said that states would exercise their police powers to regulate hedge funds if Congress hesitates to "toughen federal criminal, civil and administrative penalties to deter and punish fraudulent hedge fund and short selling practices." Former US Securities and Exchange Commission [official website] investigator Gary Aguirre testified [prepared statement] that current federal law fails to adequately protect capital markets and their participants from the risk of manipulation and fraud by hedge funds. Aguirre also said that his investigation of a prominent hedge fund management company was stymied last year due to political pressures.

Last week, in Goldstein v. SEC [opinion, PDF], a federal appeals court struck down an SEC rule subjecting hedge funds to routine inspections [JURIST report], ruling that hedge funds are not subject to SEC regulation under the Investment Company Act of 1940 [PDF text]. A congressional aide to Rep. Barney Frank (D-MA), ranking Democrat on the House Financial Services Committee [official website], said Wednesday that the committee is drafting a bill [Reuters report] that would essentially reverse the federal court's decision in Goldstein. Bloomberg has more.