SEC Imposes Hedge Fund Registration

October 26, 2004 ( - In an extremely significant development affecting the investment community, a badly divided US Securities and Exchange Commission (SEC) has ordered hedge fund managers to register for the first time.

>The 3 to 2 vote enacts the rule over the opposition of many in the $866-billion hedge fund industry, gives agency inspectors power to examine hedge funds’ books and is considered a victory for SEC Chairman William Donaldson who has led the hedge-fund registration drive. Democratic SEC Commissioners Roel Campos and Harvey Goldschmid joined Donaldson, a Republican, in adopting the rule. Republican Commissioners Paul Atkins and Cynthia Glassman voted against the measure.

>This regulatory step also comes at a time when more and more pension funds are considering taking a hedge fund position in an effort to drive market returns. SEC officials have estimated that about 40% of hedge fund managers already register with the agency – most because they are hoping to attract pension business.

>The  registration regulation ,which doesn’t kick in until February of 2006, requires managers that run hedge funds with at least 15 US clients to register as an investment adviser with the SEC. Advisers must give the agency information such as their names, addresses and how much money they manage, according to news reports.  

>Registration also lets the SEC conduct periodic inspections of the investment advisers. Under the rule, hedge funds would be required to name a chief compliance officer and develop safeguards to uncover fraud.

“It would seem that the weight of evidence is overwhelming that we” oversee hedge funds, Donaldson said at a meeting in Washington, according to news reports. “In fact, not to do so would be a major dereliction of the commission’s responsibility.”   

>Glassman likewise expressed her dissatisfaction. “I am disappointed with the approach that was chosen and know that we can and must do better,” Glassman said. “I believe it is the wrong solution to an undefined problem.”

>Tuesday’s development concluded a yearlong lobbying campaign and pitted Donaldson against critics such as Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow, who opposed the new regulation (See  SEC Proposing Hedge Fund Adviser Registration ).

>The Investment Company Institute (ICI), an investment trade group, applauded the move in a Web site statement. “Requiring hedge fund advisers to register with the SEC seems altogether prudent in light of the record before the Commission,” said ICI President Paul Schott Stevens.

>Managers of more than 1,000 hedge funds probably will sign up with the SEC because of the order, according to the news reports. Because hedge funds have been exempt from SEC scrutiny, the funds can bet on securities that rise or fall and often use leverage to boost their returns.