SEC Proposing Hedge Fund Adviser Registration

July 14, 2004 ( - The Securities and Exchange Commission (SEC) has taken a major step in requiring hedge fund managers to disclose more information about their investments.

The Commission voted 3-2 to propose a rule requiring hedge fund advisers to register with the SEC, according to an Associated Press report.   Under the proposal, which will be sent out for a 60-day public comment period, hedge funds will be required to give the SEC basic information about themselves.

In September 2003, the SEC proposed a range of recommendations for hedge funds that would place these loosely regulated investment vehicles on par withmutual funds, which, like hedge funds, pool money from investors and invest it.  However, unlike mutual funds, hedge fund investors generally do not receive the full protection – such as disclosure of fund information – afforded other investments under federal and state securities laws. 

“The staff further recommends that the commission consider amending its rules to require that registered hedge fund advisers file … a disclosure statement specifically designed for hedge fund investors,” the SEC staff said in its September report to the SEC’s five-member commission.

Hedge funds, which have opened up their traditional market of institutional and wealthy investors to include smaller entities, are largely unregulated and have seen their share of criticism from not only the SEC but also other public officials.  Until recently, the problem was concentrated among the upper crust of the investment world within the ranks of the “qualified investor.”  However, the advent of funds of hedge funds has opened the door to smaller investors, offering lower minimum entry requirements than traditional hedge funds, such as $25,000 compared with $1 million.   Now the $ 850-billion hedge fund business is expected to control assets topping $1 trillion in five to 10 years, which has SEC Chairman William Donaldson concerned.

“The hedge fund industry is a $1 trillion corner along Wall Street, with ‘warning signs’ flashing at us. We simply can’t afford to continue to walk by and ignore it,” Donaldson told the Associated Press.

A statement by Paul Roye, SEC director of the Division of Investment Management on the hedge fund proposal, is  here .