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Rating:SEC Takes Step to Make Hedge Funds Register Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, September 30, 2003

SEC Takes Step to Make Hedge Funds Register

by: Sean Hanna, Editor in Chief

The line between hedge funds and mutual funds may be about to get a little bit more blurred. Yesterday afternoon the SEC recommended that hedge funds with more than $25 million of assets be required to register under the Investment Advisors Act of 1940. If hedge funds are required to open up with more disclosure investment companies may eventually lose one of their edges.

Currently about 25 percent of hedge funds choose to register with the SEC. All counted, there are about 6,000 to 7,000 hedge funds operating in the United States, according to Paul Roye, the SEC director of the investment management division.

A requirement that hedge fund advisers register as investment advisers would mean that they would be subject to regular inspections and examinations. The fact that registered hedge funds would be subject to examinations worried at least two of the commissioners and SEC Chair William Donaldson. They worry that the increased inspections would sap SEC resources.

The proposal would also require registered investment companies investing in in hedge funds to value their holdings in a manner consistent with federal securities laws. Mutual funds would also be required to disclose the estimated fees and expenses of the hedge funds they inves in in a fee table. Finally, the SEC is planning to issue a concept release that would call for an examination of how registered funds use hedge fund strategies such as short selling.

While few hedge fund firms would admit to the benefits of forced disclosure, there is no doubt that fund firms have benefited from the transparency that has resulted. The periodic disclosures of holdings and manager information along with the publication of daily NAVs created the fund analysis industry.

Indeed, there are some hedge funds that see a requirement to register as a potential positive. In a report today, the Wall Street Journal likens a registered hedge fund to a product carrying the "Good Housekeeping Seal of Approval."

Meanwhile, hedge funds have historically kept information about their products a well-cloaked secret. While one reason for the furtiveness of hedge funds was to protect their trading strategies, another was to avoid running afoul of rules that prohibited the promotion of the funds to non-qualified investors. If hedge funds are forced to register anyway they may become more willing to provide information to both reporters and analytical services that are now shut out.

While the SEC is not considering requirements that hedge funds disclose portfolio information to the commission, a requirement to register may be the first step on this path.

Indeed, SEC Commissioner Cynthia A. Glassman told reporters yesterday that she is concerned that the registration requirement could lead investors to become complacent when investing in hedge funds. The registration, she believes, could be mistaken for an SEC stamp of approval and lead people to think that the investment is safe, like a mutual fund.  

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