SEC's light touch on hedge funds: There was always a risk that the US would get heavy handed with hedge funds in a generalised backlash against financial skulduggery. In the process, the industry would have been driven offshore - in much the same way that the eurobond market was in the 1970s.
That risk now looks extremely remote. The proposed regulations from the Securities and Exchange Commission staff are light touch, not heavy handed. They call for hedge fund managers to be registered as investment advisers. The reporting requirement that goes with this will, undoubtedly, be irksome for some. But there will be no restriction on the way hedge funds operate. They will still be able to short stocks, leverage themselves and use derivatives.
Nor will the US be shooting itself in the foot. In the UK, the home of most European hedge funds, managers already have to be registered with the Financial Services Authority. So it's not as if the US is giving other jurisdictions a regulatory advantage.
What's more, the industry - at least established players - may benefit from compulsory registration. It may help banish some of the industry's cowboy image. Fraud by hedge funds may be small. Only 2% of SEC enforcement actions last year related to hedge funds. But that was double the previous year - and such cases get heavily publicised because there is a big industry in hedge-fund bashing.
Already around a third of US hedge funds register voluntarily with the SEC, presumably thinking that having "Registered with the SEC" at the bottom of their letterhead reassures investors. Requiring everybody to be registered is good for public relations. It could even keep some upstarts out of the industry.
Context News
The SEC has released a report recommending the US hedge fund managers are registered as investment advisers.
The report drafted by SEC staff is not yet official policy. But William Donaldson, the SEC’s chairman, welcomed the report and said the full commission would review the report.
The report said that compulsory registration of hedge fund managers with the SEC would have several benefits. First, regular inspections could help detect and deter fraud. Second, extra information collected by the SEC would help it gain a better understanding of the industry’s activities. Third, the SEC would be able to protect investors by requiring hedge funds to disclose more information. Fourth, investors would need to have net worth of $1.5m to directly invest in hedge funds – a higher threshold than at present.
The SEC said that registration would not impede the manner in which hedge funds invest or operation. It would not restrict their ability to use leverage, sell short or use derivatives.
