$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…
Corgentum’s Scharfman Discusses Private Equity Compliance with Wall Street Journal: Gearing Up For SEC Registraiton
Jason Scharfman, Corgentum Consulting Managing Partner, discusses the initial and on-going compliance requirements to be faced by private equity funds in light of the new Dodd-Frank financial law and pending likely Securities and Exchange Commission registration requirements with the Wall St. Journal. The article is entited, ” Private Equity Funds Gear Up For SEC Registration “.
Drawing a distinction between hedge fund and private equity compliance risks, the article quotes Mr. Scharfman in part as saying,
” Some of the compliance problems that could arise in a transaction-based business model, such as a hedge fund, aren’t likely to crop up at private equity funds, said Scharfman. The risk is very low, for example, that private equity fund employees would trade equities from their own accounts ahead of the fund, he said. Developing and monitoring insider trading restrictions, however, will be necessary for both types of firms, said Scharfman. “
The full article can be read on the Wall St. Journal website (subscription required).
Changing Landscape of Operational Due Diligence in Alternative Investments: Corgentum
It has been announced that Corgentum Consulting Managing Partner, Jason Scharfman will moderate a panel at an event entitled, The Changing Landscape of Alternative Investments and what opportunities lie ahead? at the Opal Investment’s Consultant Forum Midwest.
It is expected that Mr. Scharfman will discuss the developing role of operational due diligence, considerations for integrating operational risk into the asset allocation process, and techniques for family offices to integrate operational due diligence into their investment process.
The event will take place on December 2, 2010 at the W Hotel Lakeshore, Chicago, IL. To register for the event here, please click here.
