SEC Set To Recommend Hedge Fund Registration

September 26, 2003 ( - The US Securities and Exchange Commission (SEC) is set to recommend hedge fund registration, opening the door to SEC oversight.

>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 other public officials as well (See  CA Comptroller Calls For Hedge Fund Disclosure ).   However, an SEC staff report to be released next week will urge registration in an effort to increased transparency in their investment vehicles, according to an Associated Press report.

>This would put hedge funds more on par with mutual 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.

>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.  

>This led the SEC to express concern about the $600-billion hedge fund industry earlier this year in the form of an investor warning (See  SEC Issues Hedge Fund Investor Warning ) and through comments made by SEC Chairman William Donaldson at a public roundtable on the hedge fund industry.   At the roundtable discussion, Donaldson said the agency’s probe of the industry had highlighted worries about “potential conflicts of interest, questionable marketing tactics, valuation concerns and market impact of hedge-fund strategies.”

In response to this, the Washington DC- basedManaged Funds Association(MFA) – a trade association representing professionals who specialize in alternative investment strategies including hedge funds, funds of funds and futures funds – said this year’s version of its sound practices has sought to make the recommendations applicable to a broader range of hedge fund managers and to take account of evolving management practices in the industry (See  Hedge Fund Group Offers ‘Best Practices’ Guide To SEC ).

Noticeably absent was hedge fund registration and SEC oversight.   This is in an effort to further the MFA’s belief that the most effective form of industry oversight is self-evaluation combined with self-discipline and self-policing; an attempt to dissuade the SEC from any tighter controls on the industry.