Wednesday, February 4, 2009

Legislative Spotlight Falls on Hedge Funds

Discussions of regulatory reform are beginning to heat up in Congress. Hedge funds are clearly an area of focus. In 2005, the SEC sought to require hedge funds to register, but its rule was ultimately struck down by the courts, which concluded that the Commission lacked authority under the Investment Advisers Act to impose registration requirements on hedge funds or their advisers.

On Friday, Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced a bill to provide the Commission with that authority. The “Hedge Fund Transparency Act” would require all hedge funds with more than $50 million in assets to register with the SEC. As part of their registration, they would be required to disclose, among other things:

  • The beneficial owners of the hedge fund;
  • A description of the structure of ownership interests in the fund;
  • Information on any affiliations the fund has with other financial institutions;
  • The identity of the fund’s primary accountant and broker;
  • Details on the minimum investment required of an investor;
  • A statement of the total number of investors in the fund; and
  • A statement of the total assets under management.

Hedge funds would be required to provide this information to the Commission electronically and the Commission would be required to make it publicly available in searchable form.

Notably, the proposed legislation would not require hedge funds to disclose their holdings. The Act would, however, require that hedge funds maintain any books and records required by the Commission and cooperate with any request for information or examination by the Commission. Finally, the Act would impose anti-money laundering obligations on hedge funds.

The legislation is clearly motivated by the growing sense among many commentators and many in Congress that hedge funds pose some systemic risk to the financial system, and thus require at least some regulation, even if the scope of that regulation is much less than what is imposed on other types of investment companies such as mutual funds. Indeed, bothe Treasury Secretary Timothy Geithner and SEC Chair Mary Schapiro testified during their confirmation hearings that they supported additional regulation of hedge funds. In introducing the bill, Senator Levin stated that:

“Our bill imposes a set of basic disclosure obligations on hedge funds and makes it clear they are subject to full SEC oversight while, at the same time, exempting them from many of the obligations that the Investment Company Act imposes on other types of investment companies, such as mutual funds that are open for investment by all members of the public. The bill imposes a more limited set of obligations on hedge funds in recognition of the fact that hedge funds do not open their doors to all members of the public, but limit themselves to investors of means. The bill also, however, gives the SEC the authority it needs to impose additional regulatory obligations and exercise the level of oversight it sees fit over hedge funds to protect investors, other financial institutions, and the U.S. financial system as a whole.”

The introduction of this bill follows by two days the introduction of a bill in the House of Representatives by Congressman Mike Castle that would require the President’s Working Group on Financial Markets to conduct a comprehensive study of the hedge fund industry. This proposed legislation – “The Hedge Fund Study Act” -- would require the Working Group to examine issues ranging the growth of investment in hedge funds by pension funds to the use of leverage by hedge funds, to the broader systemic risks and benefits of hedge funds. The proposed legislation also directs the Working Group to propose any necessary legislation regarding hedge funds within 180 days of the Act’s passage.

The proposed “Hedge Fund Transparency Act” is available at

Senator Levin’s full remarks in introducing the bill are at

A copy of the “Hedge Fund Study Act” is available at