Advisers May Find Themselves Targets in Hedge Fund Regulation
Reed: Hedge funds escape oversight
July 20, 2009
In a bellwether hearing Wednesday, members of the Senate were told that regulation of hedge fund advisers--an approach already tried by the Securities and Exchange Commission--is the cornerstone to crafting a regime for hedge fund oversight.
"The adviser approach is the minimum that is necessary," said Andrew Donohue, director of the SEC's Division of Investment Management, at a hearing on hedge fund regulation called by the Senate securities subcommittee, chaired by U.S. Senator Jack Reed ( D-RI).
Donohue spoke of a "regulatory gap" under which hedge funds continue to escape federal oversight despite the fact that they manage $1.4 trillion in assets and account for 18 to 22 percent of all trading on the New York Stock Exchange.
He supports the adviser approach over its main rival, regulation of the hedge fund itself. That alternative would be achieved through the Investment Company Act, a 1940 law defining and regulating investment companies of various types, including mutual funds, and largely aimed at protecting retail investors.
A concern if this statute is used for hedge funds, which are designed for wealthy investors and institutions, is that it might open the door to heavier, mutual-fund-like regulation.
"The Investment Company Act is really intended for retail investors," Donohue told the subcommittee. "Investment adviser registration is appropriate for any adviser managing $30 million or more."
Since the financial crisis erupted last year, there has been general agreement that greater oversight of hedge funds is inevitable. Now, as Wednesday's hearing made clear, there also appears to be agreement on what type of oversight that should be. "There absolutely will be registration of hedge funds under the Investment Advisers Act," said one prominent industry figure, signaling a shift in stance that puts the hedge fund industry on the same page as many of the key Congressional players in the hedge fund arena.
At the July 15 hearing, the hedge fund industry's support for adviser registration was voiced by witness Dinakar Singh, founder and CEO of TPG Axon Capital and a member of the Managed Funds Assn. (MFA) the main hedge fund trade association. Speaking for the MFA, Singh said "We believe mandatory registration of investment advisers is the right approach" to hedge fund regulation. Singh added that MFA supports this type of registration not only because many hedge fund advisers are already registered voluntarily with the SEC, but also because the Investment Advisers Act "provides a meaningful regulatory framework for investment advisers."
Central to the emerging consensus is a bill introduced by Reed that appears to have the blessing of the industry as well as the Obama Administration, whose own proposal it resembles. "The bill represents an intelligent approach to tackling financial regulatory reform," said Richard H. Baker, president and CEO of the MFA, the day after Reed introduced the bill on June 16.
That represents a significant shift. Before the near-collapse of global financial markets last year caused severe damage to the hedge fund industry, the industry was staunchly against any type of increased hedge fund oversight by the SEC. Now, acknowledging that regulation is inevitable, the industry, via the MFA, has chosen to throw its weight behind the least objectionable form of registration, represented by the Reed bill.
