Federal Regulation of Hedge Funds: A Blessing in Disguise?
Notwithstanding the fact that most hedge fund investments are sold as Regulation D private offerings, which are “covered” securities under the National Securities Markets Improvement Act (“NSMIA”) of 1996, states are taking an increasing interest in study and oversight of the private investment industry.
Connecticut’s Department of Banking, for example, recently formed its own task force to oversee hedge fund operations within its borders. Although Connecticut has yet to pass any additional regulations specific to hedge funds, it has pledged to help prevent and detect fraud in the widely dispersed industry.
The task force is expected to conduct background checks and monitor registered persons affiliated with Connecticut-based hedge funds. At the same time, it appears as though Connecticut’s approach to regulation would include overseeing not just those hedge funds organized under its laws but all private investment companies operating within its borders. Thus, any hedge fund soliciting investors in Connecticut would presumably be subject to oversight.
And just last week, Massachusetts’ Secretary of State William Galvin reported that his office is probing UBS's ties with hedge funds to which it provides services, and that the state is examining relationships between hedge funds and other investment banks.
The potential for hedge fund oversight by individual states is problematic insofar as it could lead to piecemeal regulation and added compliance costs. Proponents argue that the $1.3 trillion industry is incompletely monitored and largely removed from oversight, therefore, leaving unsophisticated investors at risk. Last month, however, the SEC proposed to increase the threshold for investing in hedge funds. The new rules would require individuals to have $2.5 million in available assets to invest in hedge funds, up from $1 million currently. If the rules are adopted, it should lessen concerns relating to the sophistication of hedge fund investors and could deflate the momentum of individual state regulators. Consequently, the industry that once fought against mandatory registration may ultimately wind up embracing some degree of federal oversight and regulation.
Connecticut’s Department of Banking, for example, recently formed its own task force to oversee hedge fund operations within its borders. Although Connecticut has yet to pass any additional regulations specific to hedge funds, it has pledged to help prevent and detect fraud in the widely dispersed industry.
The task force is expected to conduct background checks and monitor registered persons affiliated with Connecticut-based hedge funds. At the same time, it appears as though Connecticut’s approach to regulation would include overseeing not just those hedge funds organized under its laws but all private investment companies operating within its borders. Thus, any hedge fund soliciting investors in Connecticut would presumably be subject to oversight.
And just last week, Massachusetts’ Secretary of State William Galvin reported that his office is probing UBS's ties with hedge funds to which it provides services, and that the state is examining relationships between hedge funds and other investment banks.
The potential for hedge fund oversight by individual states is problematic insofar as it could lead to piecemeal regulation and added compliance costs. Proponents argue that the $1.3 trillion industry is incompletely monitored and largely removed from oversight, therefore, leaving unsophisticated investors at risk. Last month, however, the SEC proposed to increase the threshold for investing in hedge funds. The new rules would require individuals to have $2.5 million in available assets to invest in hedge funds, up from $1 million currently. If the rules are adopted, it should lessen concerns relating to the sophistication of hedge fund investors and could deflate the momentum of individual state regulators. Consequently, the industry that once fought against mandatory registration may ultimately wind up embracing some degree of federal oversight and regulation.
posted by Jason C. Roberts, Esq. at
8:58 PM
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