The Securities and Exchange Commission on Monday plans to release the results of its year-long investigation into hedge funds, and may recommend that fund managers must register with the SEC.
The move would be unpopular with most hedge funds, who tend to be averse to further regulation of the $600 billion industry. The 700-member Managed Funds Association has lobbied against SEC registration.
However, more than half of all hedge fund managers are already registered with the SEC. Registering as an investment adviser is relatively simple and requires compliance with rules relating to record-keeping, employees’ trading and custody, among other things. Registering an actual fund can be costly, and requires lodging more detailed financial statements.
SEC staff may recommend that hedge fund managers, but not necessarily their funds, must register with the Commission, according to industry members.
The move would give the SEC more control over the $600 billion industry, which is growing rapidly. There are no barriers to entry, and investors have increasingly been turning to hedge funds in a bid to lift returns in a poor investing environment.
The growing SEC scrutiny comes after several hedge fund fraud cases and the increasing use of the funds by pension funds and retail investors. The latest blow to hedge funds’ reputation was the revelation by New York Attorney-general Eliot Spitzer that one fund was involved in illegal late trading of mutual fund shares, and that many funds were active in market timing of mutual funds shares, which is not illegal but is frowned upon.
Not all hedge fund managers are opposed to registration. Steve Persky, managing partner at Dalton Investments, which has $240 million in mostly distress funds, said: “I think it’s a good idea. We are registered, and it’s not onerous. Hedge funds have become large enough and important enough that they warrant some oversight. It’s not a little sliver of the investment world, we can’t operate outside the system.
“Registration means the SEC can see whether you are violating securities legislation. The records you lodge are things you should be recording anyway,” he said.
Monday’s report is only a first step. The recommendations, which come from SEC staff working on the inquiry, will be considered by SEC commissioners, including the chairman, William Donaldson. If the proposals are approved by the commissioners, they will be circulated for public comment before becoming regulation.