Hedge Fund Regulation Inches Forward
After a year of proposals, hedge fund regulation took a small leap forward during the past week here in the US with the introduction of truly viable legislation by Senator Dodd. In the EU, regulation is more or less at a standstill for the moment (but probably not for long).
In the meekly-titled 64 page bill called “Restoring American Financial Stability Act of 2010“, hedge funds are squarely in the mix of financial institutions that are being reined in. As expected, adviser registration requirements for advisers with over $100m under management are proposed. In addition, there is only a limited exemption for foreign advisers: they will only be exempt from registration if they have no place of business in the US, have fewer than 15 clients, have less than $25m in US client assets and do not hold themselves out to US investors as investment advisers (that’s a big “and”).
Dodd’s bill also calls for additional collection of information from hedge funds, including: level of assets, leverage, counterparty credit risk exposure, trading and investment positions, and types of assets held. The bill exempts venture capital firms and family offices from it entirely, but includes private equity firms to the extent that they will now have record-keeping responsibilities. The bill calls for “studies” of short-selling regulations, accredited investor standards (which in any case will be adjusted for inflation) and the feasibility of a self-regulatory organization for private funds. States will be required to pick up the supervision of hedge fund advisers that have under $100m in assets.
The “Volker Rule” is part of the Dodd bill and this directly impacts hedge funds to the extent that banks will be prohibited from “….proprietary trading, sponsoring and investing in hedge funds and and private equity funds, and from having certain financial relationship with those hedge fund or private equity funds for which they serve as investment adviser”. Divestitures that would follow if this rule is adopted would be massive, as in-house hedge funds have grown substantially over the last 10 years.
Separately, the fight in the EU over hedge fund regulation continues, with only a decision to “not decide” at the current time. It’s the UK vs. the rest of the EU on these proposed regulations, with the deep divide coming over the extent to which marketing by non-EU-based funds will be allowed in the EU (the so-called “passport”). Gordon Brown managed to score a victory of sorts by having a decision delayed for probably just a few months until June.
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