SEC “Kicks the Can Down the Road” with Hedge Fund Registration


New York, NY – A few weeks ago, the Securities and Exchange Commission finalized rules requiring registration of most hedge fund managers with either their state or the SEC.  The good news for most hedge funds is that the SEC “kicked the can down the road” by delaying the deadline for registration from July 21st until the end of March, 2012.

The Impact of Dodd-Frank

Historically, US hedge funds have been exempt from complying with the Investment Advisors Act which has been the major regulation overseeing traditional investment firms since 1940.  However, with the passage of The Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, hedge funds’ compliance practices and regulatory disclosures will soon be equal in most respects to those of traditional asset managers.

Now, most US hedge funds will be required to actively report on their operations, identify their risks and potential conflicts of interest, and develop internal compliance processes that align with regulatory requirements.  

New Hedge Fund Registration Rules

Under the new rules passed by the SEC a few weeks ago, smaller hedge funds with assets under management of between $25 mln to $100 mln will be required to register with their states; hedge funds with between $100 million and $150 million may either voluntarily register with the SEC or come under state oversight; while hedge funds with more than $150 mln in assets under management, or with more than 15 clients will be required to register with the SEC. 

The SEC believes that as a result of these new rules, about 3,200 of its current 11,500 registered advisers will de-register from reporting to the SEC to registering with the states.  However, the agency also believes that roughly 750 big funds will now be subject to the new regulations.

Being registered with the SEC means, among other things, that hedge fund managers will need to appoint a chief compliance officer, establish compliance policies and procedures, undergo regular reporting requirements (such as conflicts of interest, key service providers, custody matters), and submit to potential examinations by SEC staff.

Problems of New Registration Rules 

Of course, one of the big concerns with the new hedge fund registration requirements is whether the SEC will be able to effectively handle their new reporting burden without a significant increase in staffing and resources.  A study released by the SEC in January indicates that under the existing system the average fund manager can expect to be examined once every 11 years.

Another issue is whether the states will have the resources to be able to handle the oversight requirements of their new hedge fund registrants.  This is of particular concern given the financial strains most state governments have been under in the past few years.  


Benefits of Delaying Registration

The good news about the SEC’s delay in requiring hedge fund registration is that this will give hedge fund advisers more time to prepare.  This includes hiring internal legal, compliance and technology professionals; developing and implementing professional compliance policies and procedures; as well as implementing the technology systems required to meet the monitoring and reporting requirements established by the Dodd-Frank act.

This is particularly true for smaller hedge funds.  According to estimates by global professional services firm Kinetic Partners, a significant number of small fund managers are behind in preparing for SEC registration.  According to the firm’s estimates, only about 40% of small fund managers ($300 million AUM or less) have begun the registration process, compared with roughly 85% of the mid-tier fund managers ($300 million to $3 billion AUM).


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