SEC Gets Ready To Regulate Hedge Funds

by Carla Johnson, Investors Offshore, London

18 October 2002

A report in Institutional Investor magazine suggests that the investigation of the hedge fund sector in the US being carried out by the Securities and Exchange Commission is likely to result in substantially greater oversight of the sector in future.

Currently, hedge funds are not obliged to report to the SEC, or to register, although there is a voluntary scheme under which registration carries some privileges in terms of marketing freedoms. Only a small minority of hedge funds have taken up voluntary registration.

The SEC launched a study of the hedge fund sector last May, concerned about hedge fund fraud, erroneous valuations and misrepresentation to investors. The agency sent extensive questionnaires to large numbers of US hedge funds, and is now studying the information collected.

Institutional Investor says that lawyers tracking events at the SEC expect a recommendation that hedge fund managers should be required to register as investment advisors under the Investment Advisers Act. This could be easily done by changing Rule 203(b)-1, which currently has the effect of exempting hedge funds.

The US Treasury also recently stepped up its surveillance programs in the hedge fund sector from a money-laundering perspective, and many hedge fund operators are beginning to wonder whether the time is coming for a move offshore, where many of their funds and investments are based, in any event.

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