Despite Controversy, SEC Schedules Hedge Fund Vote
The SEC has scheduled a July 14 meeting to vote on a new Advisers Act rule to require hedge fund managers to register with the SEC as investment advisers. The vote is expected to be 3-2 in favor, with Commissioners Paul Atkins and Cynthia Glassman dissenting. The Division of Investment Management has estimated that between 600 and 1,100 hedge fund managers would be required to register, according to a GAO report.
On June 29, before the SEC’s announcement, CFTC Commissioner Sharon Brown-Hruska publicly blasted the SEC for having ambitions in the hedge fund area. "It is almost surreal to me that the staff at the SEC have continually failed to acknowledge that most hedge funds are already registered with the CFTC," she said, speaking at a London derivatives conference.
Brown-Hruska noted that "a significant proportion of the hedge fund industry is duly registered with the CFTC and this number is growing." In 2003, she said, 65 of the 100 largest hedge funds were registered with the CFTC as commodity pool operators (CPOs), and 50 of the 100 largest funds also were registered as commodity trading advisors (CTAs). "The operators and advisers to hedge funds, as collective investment vehicles, are not distinct from CPOs and CTAs, but rather are an important, and apparently increasing, subset of the population we oversee as a whole," she said. The market activity of hedge funds "is a routine part of the weekly surveillance briefings that I receive at the [CFTC]," she added.
The commissioner ended her remarks on a conciliatory note, saying that she hoped the CFTC could work with the SEC to find a regulatory approach that "avoids burdening" hedge funds. "In my view, we are playing on the same team and share a common goal of protecting customers and promoting healthy markets," she said.
The day after her speech, Chairman William Donaldson picked up the phone and granted interviews with several wire news service reporters, for the first time officially announcing that the SEC would vote on the hedge fund manager registration issue on July 14 (that date had been widely reported in the trade press earlier). An SEC digest item issued the next day noted that the agency would vote on new Advisers Act Rule 203(b)(3)-2 "to require hedge fund advisers to register with the Commission."
The news that a vote has been scheduled shouldn’t come as a surprise. The SEC has been making noises that it wants hedge fund managers to register since at least 2001. Chairman Donaldson recently explained that the goal of the hedge fund manager registration was to enable the SEC to collect more accurate information about the hedge fund industry and better target its inquiries to hedge fund managers "where there is some reasonable concern that they may be violating the federal securities laws." Donaldson emphasized that the SEC has "no desire to regulate how hedge funds make their investments, to require disclosure of their methods, or to choke off their expansion, as hedge funds have an important role to play in our equity markets."
The more interesting story, perhaps, is the intense, behind-the-scenes effort being put on by the hedge fund industry to avert registration. "There is some big money being thrown at this," said one industry observer.
Commissioner Harvey Goldschmid said that he’s had a number of hedge fund industry participants come in and meet with him to discuss the issue. While he said he would "listen to any argument," he added that "no lobbying will be effective except on the merits."
Among those opposed to the hedge fund registration requirement: CFTC Chairman James Newsome, Federal Reserve Chairman Alan Greenspan, House Financial Services Committee Chairman Michael Oxley (R-OH), and, interestingly, New York Attorney General Eliot Spitzer. Moreover, IM Insight has reason to believe that Senate Banking Committee Chairman Richard Shelby (R-AL) and Treasury Department John Snow do not support a registration requirement, although neither seems to have publicly expressed his views on the matter.
Stay tuned: the Senate Banking Committee may take up the hedge fund issue in the next few weeks. A Shelby spokesperson noted that no hearing has been scheduled to date, but added that "as part of our ongoing oversight, it is an issue that we intend to address in the committee in the future."