Registration Requirements for an SEC Hedge Fund
Original post by Geri Terzo of Demand Media
Financial regulation that was established in the wake of the U.S. financial crisis of 2008 introduced greater transparency into the investment management arena. As a result of the new rules, hedge funds, which have a reputation of being loosely regulated, of a certain size must register with the Securities and Exchange Commission. The move is meant to give regulators more insight into the strategies and behaviors behind these investment funds as well as the professionals who oversee the assets.
Before U.S. financial legislation took shape, hedge funds were not required to register with the SEC. As a result of the Dodd-Frank requirements, hedge fund and other private investment managers who oversee approximately $150 million or greater must file with the regulatory body, according to "The New York Times." There are some exemptions to the law. Hedge funds fought the legislation for competitive reasons and argued that some of the requirements are arbitrary.
Hedge funds must disclose certain information that before fund managers were able to keep closely held to the vest. Details surrounding the total value of portfolio assets in addition to certain aspects of trading strategies and the types of financial securities traded must be shared. Also, fund managers may be asked to keep records on communications, including electronic mail. Hedge funds use several third-party service providers, including prime brokers, and these relationships are of interest to the SEC.
Filing with regulators is an expensive process for small firms, and many hedge funds must ramp up risk management and legal resources in order to comply. According to an article in "The New York Times," new regulation was directed at hedge funds in 2004, although those requirements were not sustained. In the article, one hedge fund manager with assets of $150 million recounts the cost associated with filing with the regulatory body at that time as being $250 thousand.
Although hedge funds must report the gross value of assets managed at a firm, professional fund managers do not need to reveal the net value, according to an article in "The Wall Street Journal." Hedge funds are known to tack on leverage, or debt, to trades in order to bolster returns. The allowance to protect the net-asset value is a win for fund managers because otherwise, the article suggests, competing hedge funds might determine the leverage strategy employed by a rival firm.
- The New York Times Dealbook; For Small Hedge Funds, Success Brings New Headaches; Azam Ahmed; January 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.