$150 million or more in your hedge fund? – The SEC says you will have to register
At a recent open meeting, the U.S. Securities and Exchange Commission outlined proposals as to how it would enforce Title IV of recently enacted Dodd-Frank legislation.
Specifically, hedge funds with at least $150 million in assets will be required to register with the SEC. As a reminder hedge funds were previously required to register with the SEC but that requirement was lifted after Philip Goldstein sued the SEC (and won) in 2006 to lift the registration ban – here is the decision. Despite the Goldstein rule the hedge fund industry, via groups such as the Managed Funds Association, have expressed support for hedge fund registration:
Additionally, the SEC will require hedge fund and other private fund managers to provide a whole host of new information. These suggestions piggyback on already enacted amendments for enhanced disclosures on form ADV . Hedge funds will be required to disclose basic information, including assets under management and the types of investors in the fund, as well as its auditors, prime brokers, custodians, administrators and marketers. Additionally, advisers themselves will have to provide more information as well, including about their employees, potential conflicts of interest such as soft-dollar deals, and advisory activities. Such firms may have to register even if they manage less than $150 million or exclusively venture capital funds.
The new rule also changes the SEC’s pay-to-play regulations in the wake of a scandal at the New York State Common Retirement Fund….:
While these proposals face a 45 day comment period it is likely that they will meet with little opposition.
These news rules will certainly increase the cost of compliance for hedge funds. In addition to devoting more time and resources towards compliance (both for the initial registration process and on-going compliance) hedge fund’s will continue to make more use of third-party compliance consulting firms. As part of the operational due diligence process investors should take steps to understand a number of issues related to registration including:
- How does a hedge fund plan to comply with the new registration requirements?
- Do they plan to do the bear minimum to be in compliance?
- Are there any areas of their firm (i.e. – because of legal structure, types of investors or investment strategy) which may put them at more or less risk based on the new registration requirements?
- How will the hedge fund deal with the increased cost of resources required to be dedicated to compliance?
- Has a hedge fund developed a dialogue with their legal and compliance service providers (i.e. – attorneys, third-party compliance consultants) to prepare for the registration process?
It is unlikely that these rules will do anything to prevent the next Madoff, as SEC registration creates an artificial floor for operational due diligence (for more on this please refer to Corgentum: Hedge Fund Regulation Doesn’t Matter) but that being said the more eyes on a hedge fund the better. Often the threat of an SEC exam does more to ensure on-going compliance then the the actual exam itself…
