House Debates Hedge Fund Regulation

According to the SEC, hedge funds represent 5% of all US assets under management, and about 30% of all US equity trading volume. So concern over hedge fund oversight and regulation is on the agenda of the US House of Representatives. Lawmakers debated a bill on the the floor last Thursday, requiring a White House body to come up with recommendations on hedge fund disclosure requirements.

Hedge fund regulation has remained a priority since a US court in July overturned a SEC rule requiring hedge fund managers to register with the regulator. The bill would require the President’s Working Group to study the growth of pension funds investing in hedge funds and “whether hedge fund investors are able to protect themselves adequately from risk associated with their investments”.

The current light regulation enables the funds to raise and deploy capital very quickly and to use very sophisticated financial strategies. Today there are more than 8,000 such funds with more than $1 trillion of capital under management.

The bill debated by the Presidents Working Group, was seen likely to pass in a “voice vote” on the House floor, was tabled by congressman Mike Castle, a Delaware Republican. The President’s Working Group is made up of the heads of the Treasury, the SEC and the Commodity Futures Trading Commission, the US futures industry regulator and other agencies.

Timothy Geithner, president of the New York Fed, said supervision of core banks and investment banks had encouraged the transfer of risk to unregulated institutions such as hedge funds.

However, hedge funds are not as “unregulated,” as they seem. The anti-fraud provisions of the 1933 and 1934 acts apply to the activities of the funds and state laws against investor fraud apply as well. Banking laws also restrict the activities of hedge fund lenders.

The SEC has also set new registration requirements to take effect in February of 2006, in effect narrowing the traditional exemption under the Investment Advisors Act of 1940, they will require funds to register their name and location, the professional history of the funds’ managers, and a brief statement of the funds’ investment strategy. The SEC will have the option of auditing the accounts of selected funds.