US SEC And Treasury Threat To Hedge Funds Grows

by Glen Shapiro, LawAndTax-News.com, New York

12 February 2003

As the US Securities and Exchange Commission (SEC), under the stewardship of incoming SEC chairman William Donaldson, reaches the end of its mammoth study of hedge funds, with unpredictable consequences for the often secretive sector, a key Congressional committee has promised to monitor the SEC's actions in respect of hedge funds. But at the same time the Treasury has continued its war against hedge funds with the announcement that it has drawn up rules that would compel any hedge fund with a "US nexus" - taken to mean a US investor, manager or sponsor - to give US authorities access to files on its investors.

For its part, the SEC is reported to be planning to implement changes in the way hedge funds operate and are regulated. 'The investing public is susceptible,' SEC Commissioner Roel Campos observed this week. 'At the minimum we may need more disclosure about the risks.' Lawyers connected with the investigation revealed recently that options for change which have been discussed by the SEC include: obliging hedge fund managers to register with the agency as investment advisers, imposing stricter regulations on who can buy the funds, slowing down the number of hedge fund vehicles available to smaller investors, and changing the way in which the funds market themselves so that investors are provided with better information about their performance and assets.

Concerned about the effect of precipitate action against the important and lucrative hedge fund sector, Congress is adopting a cautious position. The recently-released "Oversight Plan" of the House Financial Services committee, chaired by Rep. Michael Oxley (Rep - Ohio) states that the committee will:

• monitor the SEC's review of hedge fund regulation;
• consider the implications to U.S. markets if the hedge fund business were to move offshore; and
• examine investors' access to hedge funds and the risk disclosure that hedge fund investors must receive.

Meanwhile, in another part of the jungle, it's reported that the US Treasury may seek access to confidential hedge fund data as part of its effort to track funding of terrorism under the Patriot Act. The Treasury is said to have drafted rules that would require any hedge fund with US investors, managers or sponsors to give US authorities access to files on its investors. Although the Treasury plans consultation with the industry, the move has upset hedge fund managers, who believe the proposal threatens client confidentiality.

"Our client confidentiality is out of the window," said one London-based manager to the Financial Times. "If you have one US investor - and nearly all funds do - you will have to disclose all your investors to the US."

A Treasury official stresses that the proposals are just that, saying: "We take very seriously the notion of not over-reaching when it is not appropriate." But top-drawer Washington law firm Wilmer, Cutler & Pickering said: "Offshore managers who are concerned have every right to be concerned."

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