arising from effective exposures to the same hedge fund through funds of funds or from investments in different funds with similar trading strategies. current restrictions on hedge fund investors, which limit direct investors to institutions or wealthy individuals, reflect the recognition of the difficulties that a retail investor would face in adequately assessing these types of risk. but as instruments and trading strategies become more complex and intertwined, even the most sophisticated investors will be challenged to make reliable judgments about their risk exposures. likewise, complex and difficult - to - value financial instruments could be exploited as vehicles for profiting from insider trading or market manipulation, although, as history shows, simpler instruments can be used in this way as well. policymakers must be confident of their ability to detect such market abuses when they occur. a principles - based, risk - focused approach how best to respond to these daunting challenges? as i noted, there are powerful arguments against ad hoc instrument - specific or institution - specific regulation. the better alternative is a consistent, principles - based, and risk - focused approach that takes account of the benefits as well as the risks that accompany financial innovation. some commentators have sought to draw a sharp distinction between the approach to financial regulation in the united states and that in the united kingdom. these observers have characterized the british approach as being principles - based and as using a " light touch " – the implication being that these two features somehow go together. in a speech in february of this year, sir callum mccarthy, the head of the united kingdom's financial services authority ( fsa ), took issue with this interpretation. 1 sir callum confirmed that the fsa's approach is built on a framework of principles, although he noted that the fsa also has an 8, 500 - page rulebook to accompany the eleven principles it has laid out. but the fsa head rejected the view that their approach is " light touch. " rather, he said, it is risk - based, which means that regulatory resources and attention are devoted to firms, markets, or instruments in proportion to the perceived risks to the fsa's regulatory objectives. in fact, as in the united kingdom, the principles - based, risk - focused approach to regulation has had considerable influence on this side of the atlantic as well. for example, as you may know, the president's working group on financial markets ( pwg ) recently issued a statement of principles – ten in this case – relating to the regulation of private pools of capital, including

). to the extent possible, we should work toward common principles and approaches as well as improved information sharing. international cooperation is also essential for establishing and maintaining effective oversight of the payment and settlement systems that constitute the infrastructure of global financial markets. organizations such as the committee on payments and settlements systems ( cpss ) and iosco have developed shared international principles to ensure the safety and efficiency of payment systems. see callum mccarthy ( 2007 ), " financial regulation : myth and reality, " speech delivered at the british american business london insight series and financial services forum, february 13. investor protection can also be addressed in a risk - focused, principles - based manner. most important, disclosures and protections should be tailored to the level of sophistication of the investor. mutual funds, for example, must provide disclosures sufficient to help retail investors make informed choices. when instruments and strategies are so complex that an unsophisticated investor could not be expected to effectively evaluate and manage the associated risks, u. s. regulators have chosen to limit the exposure of those investors. for example, most retail investors are effectively precluded from engaging in over - the - counter credit derivative transactions or from investing directly in hedge funds unless they meet various criteria regarding income and net worth. retail investors may have indirect exposures to complex instruments and strategies – for example, through pension funds. the appropriate principle for investor protection in this case is that the investors'agents – pension fund managers, for example – must apply sound risk - management practices and take risks consistent with the stated objectives of the ultimate investors. regulators have a role to play in imposing fiduciary duties and standards on the investors'agents. for example, the employee retirement income security act ( erisa ) sets standards for private pension fund managers, including the requirements that, as fiduciaries, they act prudently and solely in the interest of the pension fund participants. supervision of these fiduciaries must ensure that these standards are consistently met and that fiduciaries themselves fully understand the nature of their risk exposure. market integrity is the third public policy objective that i noted earlier. consistent with a principlesbased approach, u. s. securities laws against insider trading and market manipulation apply broadly to all financial institutions, including hedge funds, and to trading in a wide range of financial instruments, including securities - based over - the - counter derivatives transactions. just as institutions and other investors need to adopt best practices to measure and manage