In a Shift, Hedge Fund Groups Support Registration
May 7, 2009
The Alternative Investment Management Association (AIMA) and Managed Funds Association (MFA), in a reversal that reflects the hedge fund industry’s changing landscape, said today that they support registration of investment managers--including hedge fund managers--with the Securities and Exchange Commission.
“Such a process of registration … creates a relationship and dialogue which supports greater understanding of hedge fund activities,” AIMA chairman W. Todd Groome told the House Subcommittee on Capital Markets today at a hearing on fund registration.
Groome’s comments were echoed by Richard Baker, president of the MFA. “We believe that the approach of registering investment advisers, including private pools of capital, under the Investment Advisers Act of 1940 is the right approach in considering this issue,” said Baker.
The hearing focused on HR 711, a bill sponsored by Reps. Michael Capuano, D-Mass., and Michael Castle, R-Del., that would require hedge fund managers to register as investment advisers. The bill would resurrect an SEC rule that took effect in February 2006 before being vacated four months later by the U.S. Court of Appeals for the District of Columbia Circuit.
The House bill is considered the least stringent of several approaches to hedge fund regulation under consideration by Congress. In the Senate, the Hedge Fund Transparency Act, introduced in January by Senators Chuck Grassley, R-Iowa, and Carl Levin, D-Mich., focuses on the regulation of fund entities rather than advisers--and is strongly opposed by the industry.
Past efforts to bring hedge funds under greater oversight have been opposed by the industry on the grounds that costs would outweigh benefits, given that wealthy hedge fund investors are financially literate and generally less in need of regulatory protection than less sophisticated investors.
However, the financial meltdown has changed the equation. At the hearing, James Chanos, chairman of the Coalition of Private Investment Companies, noted that hedge funds lost an average of 18.3 percent last year--their worst performance since 1990--as assets fell from $1.93 trillion to $1.41 trillion. Chanos said he does not think registration as envisioned by the House bill will provide needed protections. “Using the Advisers Act as the basic template for regulation will ultimately prove ineffective to mitigate systemic risk,” he said. “We believe that the twin goals of improved investor protection and enhanced systemic oversight could be better achieved with a stand-alone statute tailored for private investment funds.”
“We cannot have major players in the financial world operating completely in the dark and answerable to no one,” said Capuano. “This bill is simply a beginning.”
