There are currently two separate
bills before the US Congress which, if enacted, would lead to the removal of
regulatory exemptions which allow hedge funds and their advisors to remain
unregistered. The Hedge Fund Registration Act introduced in the House in
January 2009 would remove the exemption from SEC registration for investment
advisers to hedge funds and require them to be registered under the Investment
Advisers Act of 1940. The Hedge Fund Transparency Act introduced in the Senate
would require the fund vehicles themselves to be registered as investment
companies under the Investment Company Act of 1940.
But while there is considerable momentum behind SEC registration, it
remains unclear what form the final law and any SEC rules implementing that law
will take. Since the
devil is in the details, it is hard to predict the consequences of SEC
registration until we know more about the requirements of any final law and any
related implementing SEC rules.
Under either bill, SEC registered
hedge fund managers will likely have to
make annual filings with the SEC and likely follow rules regarding compliance
manuals and advertising. Hedge fund managers will be subject to routine
examinations by the SEC. Past that, to the extent that only requirements akin to
the Investment Advisers Act of 1940 apply, the whole experience may not be too
bad. Most hedge fund managers cite the cost of legal advice and the time spent
filling out forms as the biggest drawbacks of being registered as far the Investment Advisers Act of 1940 is concerned
By contrast, an extensive and
complex registration statement has to be filed with the SEC for registered
investment companies. Audited financials of the investment company are required
and that adds greatly to the expense of registration - not to mention what can
be a lot of legal time involved in thrashing out registration details with SEC
staff. In addition, ongoing audited
financial statements must be furnished and numerous other formal operating and
organizational procedures must be followed for the ongoing compliance of a
registered investment company. However, many have described the HFTA (the version that will require registration under the Investment Company Act of 1940) as sort of
an “investment company lite” so it seems likely that it will not expose hedge
fund managers to the full horrors of investment company registration.
Hedge fund managers with bad
memories of registering in 2006 with the SEC under the Investment Advisers Act
(only to find out that they didn't have to) can take some comfort from the fact that the requirements of being registered
as an investment adviser are better understood now than in the past. The major
and the industry boutique law firms have a wealth of practical experience in
this area. Also this time round the authority is coming from Congress so no court is going to be able to overturn the law on any ground except constitutionality - a highly unlikely outcome.
The hedge fund advisers we have
worked with have not had any difficulty complying with the requirements of the
Investment Advisers Act. Many of them find that being registered as investment
advisers with the SEC gives them added cache and inspires confidence on the
part of investors. However, all bets in terms of relative ease and simplicity
are off if registration as an investment company under the Investment Company
Act is required notwithstanding any “investment company lite” moniker currently
being bandied about.
