| New registration cost burden in sight for hedge fund managers as the SEC closes its consultation period |
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| 27/09/2004 | |
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The US Securities and Exchange Commission consultation has now closed, and while hedge funds have by and large accepted the SEC's proposal, many voices have been raised to ask for exemption for non-US hedge funds, following the SEC specific request for comments on its scope. Two thirds of the approximately 45 hedge funds that have sent their comments to the SEC have expressed their agreement with the proposal, which would make registration with the regulatory body mandatory for hedge funds with over €21 million and more than 15 US investors, leaving only entities with investor lock-ups of two years or more exempt. That rule would also apply to non-US funds meeting those criteria. "Obviously there are certain burdens associated with registration", wrote Steven D. Holzman, Managing Partner, Vantis Capital Management LLC. "However, due to the fact that we made a significant investment in our firm's operational infrastructure independent of our registration, the additional cost for us has been relatively benign. We do appreciate that for smaller non-registered firms, or for firms that have not invested adequately in systems and people, the burden and cost may be greater." All, of course, do not share this view. This is the case of Amaranth, another hedge fund manager, which commented, through a letter sent by its general counsel Karl Wachter: "We do not understand why the Commission is proceeding so urgently with this rulemaking when the public policy problem to be addressed remains poorly defined and the proposed regulatory response is so burdensome." On the buy side of the industry, some investors are said to favour stricter regulation for hedge funds. According to a survey ran by Hennessee Group LLC, a New York-based hedge fund advisory, 59% of the foundations and endowments it has surveyed say they are in favour of the proposal requiring hedge funds to be listed as Registered Investment Advisor (RIA). "However, the 30% that were against the proposed rule manage three times more capital, allocate 46% more to hedge funds, and have 50% more years of experience investing in hedge funds", stated E. Lee Hennessee, Managing Principal of the Hennessee Group. New burden Mark F. Dalton, the president of Tudor Investment Corporation, one of the biggest US hedge fund managers, was fairly critical of the proposed rule when applied to foreign hedge funds. Commenting on the proposal, he said: "Imposing overlapping and layered Commission registration and regulation on investment advisers that are already registered with the CFTC or another primary regulator is duplicative, inefficient, and unnecessary, will be burdensome and costly to the Commission and to industry participants, and is contrary to the notions of deference to other regulatory authorities and of sensible regulation and regulatory authority coordination." Among the new burden that would be supported by foreign hedge funds already subject to their national jurisdiction are the new responsibilities created by the proposed regulation in terms of reporting and disclosure, document retention and transparency regarding executive employment history for the hedge funds. "The SEC will be free to audit and examine hedge funds. In addition, hedge funds will be required to employ a chief compliance officer and impose anti-fraud controls", reminds the Hennessee Group LLC, a New York-based hedge fund advisory. Exemption This view was echoed by the London-based Alternative Investment Management Association (AIMA). Pointing out that it usually did not get involved in lobbying activities in the US, but that the proposed regulation would have a global impact, the association took a firm stance against the proposal in its current form. "The considerable and onerous likely impact on non-US fund managers and other interested parties, in terms of additional and significant regulatory burden and costs, has caused us to make representation to the SEC; almost all non-US hedge fund managers have US investors in their funds", explained AIMA. Patricia A. Poglinco and Robert B. Van Grover, lawyers at the Seward & Kissel law firm in New York, share this view. Reminding that the Financial Services Authority submits hedge fund managers to a registration process similar to the one proposed by the SEC, they wrote: "[…] we recommend that the Commission provide an exemption from registration for a non-U.S. adviser that is registered with a non-U.S. regulatory agency that has substantive regulatory requirements comparable to those of the Commission." David Wright, Director at the Internal market directorate of the European Commission, welcomed the attempt by the SEC to avoid regulatory overlapping through the proposal of an "exemption" clause, but asked for more clarification regarding its application pertaining to European funds. He wrote: "Indeed, reasons of our uncertainty over possible implications of the Proposed Rule for advisers to EU domiciled investment funds arise largely from the fact that it is couched in terms of publicly/ privately placed funds. We appreciate that these are concepts, which are clearly established in the US law on funds. However, rules governing authorization and supervision within the EU are not predicated on the same classification." That is exactly the type of problem fingered by Karl Wachter at Amaranth, according to whom such an important regulation deserve much more attention: "We believe that a better informed approach would result in better public policy", he said. J.L. |
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