Ex-Securities and Exchange Commission Chairman Harvey Pitt urged the investment community--particularly hedge funds--to engage the agency instead of waiting for regulations from it or, even worse, state regulators.

Speaking before a packed audience, Pitt accused both businesses and hedge funds of "reverse laissez faire" by waiting for the government to tell them they did something wrong. "We sit, we wait for a response and we're shocked, shocked with the answer we get from the government." Pitt suggested the recent decision freeing hedge funds from SEC oversight could be a double-edged sword: without the agency's presence, the door is open to the likes of New York and Connecticut attorney generals Eliot Spitzer and Richard Blumenthal, whom Pitt warned could be tougher than federal regulators.

Pitt, who now runs Kalorama Partners, a consulting firm, warned about the proliferation of hedge funds. The more they grow, the more interest hedge funds will garner interest from politicians, he said.