Through these bills, Congress is attempting to address the court's
invitation to enact legislation to amend the existing registration
rules and trigger much greater oversight of the hedge fund industry.
The Hedge Fund Adviser Registration Act of 2009, pending in the
House, comprises a single sentence. It is, however, as far-reaching in
its impact as it is economical in its length.
The Registration Act strikes in its entirety Section 203(b)(3) of
the Advisers Act. That section provides the exemption from registration
that virtually all hedge fund advisers rely upon, exempting an adviser
who:
does not advise a company registered under the Investment Company Act of 1940.
By striking this section, the Registration Act, in one fell swoop,
subjects virtually all hedge advisers to registration under the
Advisers Act.
The bill pending in the Senate, the Hedge Fund Transparency Act of
2009, achieves the same end through a different approach. The
Transparency Act amends the Investment Company Act and, most notably,
requires hedge funds with $50 million or more in assets or assets under
management to "register with the Commission." As mentioned, the
Advisers Act provides an exemption from registration only to advisers
who do not advise a registered company. By requiring all large funds to
register with the SEC, the Transparency Act makes the 203(b)(3)
exemption unavailable to a significant number of advisers.
Beyond its impact on advisers, the Transparency Act has significant
consequences for funds themselves. All large funds meeting the $50
million threshold are also required to file an annual information form
with the SEC, maintain books and records as required by the SEC and
cooperate with SEC examinations and requests for information. The
annual information form, which must be electronically filed, must
disclose the name and address of: (i) each natural person who is a
beneficial owner of the fund; (ii) any company with an ownership
interest in the fund; and (iii) the primary accountant and broker used
by the fund. In addition, it must provide: (i) an explanation of the
structure of the ownership interests in the fund; (ii) information as
to any affiliation the fund may have with other financial institutions;
(iii) a statement as to any minimum investment required of a limited
partner, member or other investor; (iv) the total number of partners,
members or other investors; and (v) the current value of the fund's
assets, as well as that of its assets under management. The SEC is
required to make all this information available to the public at no
cost in a searchable electronic format.
The other requirements of the Transparency Act, dealing with the
maintenance of books and records and cooperation with SEC requests, are
not fleshed out in any further detail. Indeed, this lack of detail
should cause the hedge fund industry the greatest concern. Nothing in
the act would prevent the SEC from inquiring as to the proprietary
investment strategy or model employed by a given fund, and nothing
prevents this information from being disclosed to the public. The
Transparency Act, in its current form, has the potential to make a
hedge fund's most closely guarded secrets part of the public domain. In
its effort to foster transparency, it has the potential to stymie
creative investment strategies and the returns that they bring.
Mark A. Berube is a partner in the white-collar and civil fraud
defense practice group at Sheppard, Mullin, Richter & Hampton LLP.
George Soros and John Paulson have no complaints about these changes, and expressed no concerns that the information that they provide would prevent them from making Billions every year.
My suspicions are that many of the phony funds that have been launched faster than low cost mortgage providers in the 2004 would be the ones unable to protect their "closely guarded secrets".
Since we know that the Ayn Rand. Greenspan model of free market self regulation has been debunked then we need to see how much we can be trusted.
If the past history is any indication is about as far as you can throw Rush Limbaugh.