| The ongoing battle to regulate hedge funds |
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| 28/01/2004 | |
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How hedge funds are marketed to institutional investors and private investors is continuing to dominate discussions at the Securities & Exchange Commission (SEC), the US financial regulator. There has been a trickle of recommendations by SEC members to try and bring the hedge fund industry into a more regulatory climate. In September 2003, SEC's hedge fund report – Implications of the growth of hedge funds – proposed that all managers register as investment advisors, potentially bringing a new zone of controls, procedures, and restrictions into the industry. According to George Mason, a US hedge fund advisor with the firm Decker, once registered, managers would be compelled to produce a marketing brochure, to be distributed to investors of the hedge funds. "The brochure would have to describe how the funds are managed (and if it is a fund of funds, then what makes up the portfolio's content), how they are controlled, and what risk procedures are in place in case the fund dissolves," said Mason. However, by the end of September, SEC's recommendations had been met with key objections. Two SEC commissioners criticised some of the report's findings and the influential hedge fund association in the US pressed for certain funds to be made exempt from some of the recommendations. Where SEC wants protection for investors of all hedge funds, big and small, hedge fund pressure groups are looking for smaller managers to be excluded from the regulator's latest proposals. In a compromise, SEC agreed that the larger managers, those with 3c7 funds, should be required to register as investment advisors, with smaller managers (sub-$25m fund size) compelled to work with their own individual state legislatures on a fund by fund basis, but no SEC registration is necessary. Other SEC proposals include the stipulation that if hedge funds are deemed to have custody of the fund's assets (this is still being decided by SEC commissioners), then they must employ a qualified custodian. Custodian rules will differ for fund of funds, says SEC. In terms of marketing strategies, the SEC report wants hedge funds to stop using the performance of a related fund they manage, as a guide or selling point for another fund. In other words, a manager cannot use the performance of its domestic fund as marketing material for one of its offshore products. However, SEC agreed in December 2003 that 3c7 funds can use related-performance marketing material. |
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