PrintSummary: Based on statements by the Administration and the SEC, analyzes potential consequences of requiring hedge funds and other managers of private funds to register with the SEC. The analysis notes that proposal largely defers the details so that the impact will depend on the interpretations and enforcement that the SEC adopts after the legislation is passed.
Given the administration’s proposed foundation for Financial Regulatory Reform, the presence of multiple bills in Congress, and the vocal acquiescence of the hedge fund industry itself, it appears certain that most hedge fund advisers will be required to register under the Advisers Act by year-end. The prospects are sketchier, but comments from Mary Schapiro at the SEC and some of the legislative momentum indicate that the funds themselves may be required to register under the 40 Act. Hedge Fund registration of either sort obviously isn’t an end in itself, however – the response of the industry and any cost/benefit assessments will depend on what is to follow registration.
For example, registration could be a precursor to having the regulators / SROs increase their oversight of individual hedge fund activity. For the more visible recent problems like Madoff and Stanford Financial, however, the primary problem seems to have been gaps in the effectiveness of the oversight performed in its ability to achieve the twin goals of protecting investors from abuses and protecting the system from catastrophic risks.
The secondary problem has been the high compliance cost imposed on registered entities to achieve these limited benefits, as documented in SIFMA’s study of the Costs of Compliance in the securities industry. The recent scandals clearly undercut many assumptions underlying the asserted value of the hedge fund regulation already in place.
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