April 26 (Bloomberg) -- Robert Steel, the U.S. Treasury's top finance official, said he opposes stricter regulation of hedge funds because it would increase risks by suggesting the government has given their investments an ``all-clear.''

Steel, the Treasury undersecretary for domestic finance, also said it would be costly and impossible to train enough people to keep tabs on some 8,000 hedge funds.

``I don't like the moral hazard of communicating a government all-clear,'' Steel said at a conference hosted by the Manhattan Institute in New York today. The risk is that regulation ``communicates confidence in a product that is riskier than normal investors should get involved in,'' he said.

The hedge fund industry has more than tripled in the past decade, to $1.5 trillion, spurring some U.S. legislators and governments in countries such as Germany to call for more oversight. The growth has generated concern the collapse of one of one or more funds could trigger a broader financial crisis.

Steel's remarks reviewed the Treasury's work on addressing concerns that regulatory and litigation costs are making American capital markets less competitive. Many political and business leaders have warned that slowing U.S. share sales show that Wall Street is losing ground to London, Hong Kong and other financial centers.

The U.S. accounted for 20 percent of all initial share sales in 2006, down from 35 percent in 2001, according to the Washington-based Financial Services Forum, which represents the chief executives of country's biggest banks.

Meeting Paulson

Treasury Secretary Henry Paulson said he will meet with Steel tomorrow to discuss proposals. ``There will be a number of things we will look to do,'' Paulson, the former head of Goldman Sachs Group Inc., told reporters in Mexico City April 24, without elaborating. Steel is also a Goldman Sachs veteran.

Steel said the Treasury, following a conference on capital markets last month in Washington, analyzed what the government can do over different time frames, using administrative action, legislation, or discussions to help frame the issues. He declined to be specific.

In one area -- the application of Sarbanes-Oxley corporate governance rules -- the Treasury official said he's optimistic about changes that will reduce the burden of audit requirements. The Securities and Exchange Commission proposed recommendations in December that instruct managers to focus on items most likely to cause financial misstatements.

International Rules

The SEC also this week said it may allow American companies to use international accounting rules for reporting financial data whether or not they list overseas. It plans to review the practice of forcing companies to use generally accepted accounting principles in the U.S. and international rules elsewhere.

Steel declined to say when the Treasury would complete its work, telling reporters after the speech ``we're going to work on these issues and figure them out.''

In his remarks, Steel said the most ``fundamental'' challenge for U.S. markets is a ``patchwork-quilt of regulation'' with unclear lines between federal and state authority. Both he and Paulson have said U.S. regulations would benefit from a shift to being based on ``principles'' rather than strict rules, the violation of which may spur costly lawsuits.

The U.S. approach on hedge funds, which are lightly regulated pools of capital, has been criticized by some European governments.

Hands-Off

Paulson in February opted for a hands-off approach, saying that hedge funds are best disciplined by their investors, who can withstand risk because of their wealth, and creditors. Paulson, who heads the President's Working Group on Financial on Financial Market, issued principles and guidelines rather than new rules.

That's ``not enough,'' German Finance Minister Peer Steinbrueck told reporters after a meeting of European finance chiefs and central bankers in Berlin on April 21.

Germany is using its presidency of the Group of Eight nations this year to push for a code of conduct for hedge funds after Amaranth Advisors LLC lost a record $6.6 billion in September.

Steinbrueck wants the 15 or so hedge funds that dominate the industry to agree to follow a code of conduct voluntarily. ``It should be market-driven, but the industry itself should have a deep interest to support us in stabilizing financial markets and in protecting investors,'' he said in an April 21 interview. ``A self-regulating system would be important.''

The U.S. and the U.K. are resisting the idea. Steel, in an interview after deputies from the Group of Seven countries met representatives from the hedge fund industry in Washington on April 15, said a code of conduct ``sounds like a policeman and that's not what I'm into.''

To contact the reporter on this story: Kevin Carmichael in Washington at kcarmichael@bloomberg.net

Last Updated: April 26, 2007 16:20 EDT