Tag Archives: fund registration

Hedge Fund Regulation Principles

IOSCO Pushes Securities Regulators to Adopt Registration Provisions

Over the past few months we have been highlighting the Congressional attempts to regulate and/or register hedge funds and more recently have discussed the Obama hedge fund registration plan.  However, we have not discussed what is happening internationally.  Like the in the US, other major financial centers around the world have suffered from the economic downturn and have begun looking towards greater regulation of the financial system – this of course means greater regulation of hedge funds and registration for hedge fund managers.

There has been much discussion, both in the US and abroad, about world-wide principles for regulation.  There would be obvious benefits for some sort of international standards for all parts of the financial system, but there would need to be an unprecedented amount of cooperation between the various financial regulatory agencies which seems like an insurmountable task.  However, one group, the International Organization of Securities Commissions’ (IOSCO), is doing its best to act as a sort of communicator of best practices that financial regulatory systems should integrate into new regulations which are expected to be proposed in many jurisdictions.

Below I have published a press release announcing the IOSCO’s report on hedge fund oversight.  The full 26 page report, IOSCO Hedge Fund Regulation Report, tackles some of the high level issues which regulatory bodies should consider when drafting new hedge fund regulations.  It will be interesting to see how this report is received in the different jurisdictions throughout the world.


Madrid, 22 June 2009

IOSCO publishes principles for hedge funds regulation

The International Organization of Securities Commissions’ (IOSCO) Technical Committee has today published Hedge Funds Oversight: Final Report which contains six high level principles that will enable securities regulators to address, in a collective and effective way, the regulatory and systemic risks posed by hedge funds in their own jurisdictions while supporting a globally consistent approach.

The report, which was prepared by the Task Force on Unregulated Entities (Task Force), recommends that all securities regulators apply the principles in their regulatory approaches.

The six high level principles are:

  1. Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;
  2. Hedge fund managers/advisers which are required to register should also be subject to appropriate ongoing regulatory requirements relating to:
    1. Organisational and operational standards;
    2. Conflicts of interest and other conduct of business rules;
    3. Disclosure to investors; and
    4. Prudential regulation.
  3. Prime brokers and banks which provide funding to hedge funds should be subject to mandatory registration/regulation and supervision. They should have in place appropriate risk management systems and controls to monitor their counterparty credit risk exposures to hedge funds;
  4. Hedge fund managers/advisers and prime brokers should provide to the relevant regulator information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks);
  5. Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate;
  6. Regulators should have the authority to co-operate and share information, where appropriate, with each other, in order to facilitate efficient and effective oversight of globally active managers/advisers and/or funds and to help identify systemic risks, market integrity and other risks arising from the activities or exposures of hedge funds with a view to mitigating such risks across borders.

Kathleen Casey, Chairman of the Technical Committee, said:

“Securities regulators recognise that the current crisis in financial markets is not a hedge fund driven event. Hedge funds contribute to market liquidity, price efficiency, risk distribution and global market integration. Nevertheless the crisis has given regulators the opportunity to consider the systemic role hedge funds may play and the way in which we deal with the regulatory risks they may pose to the oversight of markets and protection of investors.

“The application of these principles, in a collective, cooperative and efficient way, can provide regulators with the tools to obtain sufficient, relevant information in order to address the regulatory and systemic risks posed by hedge funds.”

The Task Force was chaired by the CONSOB of Italy and the Financial Services Authority of the United Kingdom. It was established in November 2008 to support the initiatives undertaken by the G-20 to restore global growth and achieve reforms in the world’s financial systems.

The Task Force will continue to work to support the implementation of these standards by its members and to deal with future regulatory issues that may arise in relation to hedge funds. It will act as the contact point with prudential regulators and banking standards setters, as well as other regulatory bodies such as the Joint Forum and the hedge fund industry in relation to the development and implementation of industry standards of best practice.


1. Hedge Funds Oversight – Final Report of the Technical Committee of IOSCO is available on IOSCO’s website.

2. Hedge Funds Oversight – Consultation Report of the Technical Committee of IOSCO was published on 30 April 2009.

3. IOSCO is recognized as the leading international policy forum for securities regulators. The organization’s wide membership regulates more than 95% of the world’s securities markets and IOSCO is the international cooperative forum for securities regulatory agencies. IOSCO members regulate more than one hundred jurisdictions and its membership is steadily growing.

4. The Technical Committee, a specialised working group established by IOSCO’s Executive Committee, is made up of eighteen agencies that regulate some of the worlds larger, more developed and internationalized markets. Its objective is to review major regulatory issues related to international securities and futures transactions and to coordinate practical responses to these concerns. Ms. Kathleen Casey, Commissioner of the United States Securities and Exchange Commission is the Chairman of the Technical Committee. The members of the Technical Committee are the securities regulatory authorities of Australia, Brazil, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the Netherlands, Ontario, Quebec, Spain, Switzerland, United Kingdom and the United States.

5. IOSCO aims through its permanent structures:

  • to cooperate together to promote high standards of regulation in order to maintain just, efficient and sound markets;
  • to exchange information on their respective experiences in order to promote the development of domestic markets;
  • to unite their efforts to establish standards and an effective surveillance of international securities transactions;
  • to provide mutual assistance to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offenses.

Greg Tanzer
Direct Line + 34 91 417 5549
Email: [email protected]
Website: www.iosco.org

Other related hedge fund law articles include:

Hedge Fund Registration Quick Facts

Hedge Fund Transparency Act of 2009 Overview

This article provides an overview of the major provisions of the Hedge Fund Transparency Act of 2009.  There are two major things that the HFTA does: (1) increases regulation of hedge funds under the Investment Company Act and (2) requires hedge funds to adopt anti-money laundering programs.

Changes under the Investment Company Act

The HFTA replaces Section 3(c)(1) of the Investment Company Act  with a new Section 6(a)(6).  Section 3(c)(7) is replaced by new Section 6(a)(6).  These new sections, which are functionally equivalent to Section 3(c)(1) and Section 3(c)(7) respectively, will exempt hedge funds from the mutual fund regulations that are found in the Investment Company Act, provided that the hedge funds comply with the provisions of Section 6(g).

Section 6(g) applies to hedge funds with assets under management (AUM) of $50 million or more.  Those hedge funds which have less than $50 million of AUM will not be subject to Section 6(g).  Section 6(g) requires:

1.  The hedge fund manager to register with the SEC.  (HFLB note: I believe the statute is not clearly written.  It seems that the hedge fund itself would be required to register with the SEC which does not make sense.)

2.  Maintain certain books and records as required by the SEC.  This requirements is likely to look like the current books and records rule of the Investment Advisors Act (Rule 204-2), for more background please see article on Investment Advisor Compliance Information.

3.  Cooperate with the SEC with regard to any request for information or examination.

4.  File the following information with the SEC on a no less than annual basis:

a.  The name and current address of each investor in the fund.

b.  The name and current address of the primary accountant and broker of the fund.

c.  An overview of the fund’s ownership structure.

d.  An overview of the fund’s affiliations, if any, with financial institutions.

e.  A statement of the fund’s terms (i.e. minimum investment).

f.  Other information including the total number of investors and the current value of the fund’s assets.

The SEC is charged with issuing forms and guidance on the implementation of the above.  Such forms and guidance must be issued within 180 days from the enactment of the HFTA.

New AML Requirements

The HFTA requires the Secretary of the Treasury (in consultations with the Chairman of the SEC and the Chairman of the CFTC) to establish AML requirements for hedge funds.  The bill sets aggressive timelines for drafting and implementation of the rules.

Hedge Fund Transparency Act Analysis

In the current politically charged environment it is not surprising that a hedge fund regulation law is being contemplated.  What is interesting, however, is the way that Grassley and Levin have chosen to regulate hedge funds.  The prior hedge fund registration rule, promulgated by the SEC, was enacted under the Investment Advisors Act – in essence requiring hedge fund managers (and not the hedge fund itself) to register as Investment Advisors with the SEC.  The Hedge Fund Transparency Act does not follow this path – instead, it regulates hedge funds under the Investment Company Act by modifying the current exemptions which hedge funds enjoy under the act.  In essence the changes subject hedge funds to a kind of light version of the mutual fund regulations.  In this way Congress is going past previous registration by regulating the hedge fund vehicle, as well as the hedge fund management company through the registration requirement.

While it is no surprise that regulation and registration has reached the hedge fund industry, one aspect of the bill is surprising.  The act would require hedge funds to disclose the names and addresses of each investor in the fund.  These names and addresses would be made available to the general public through an electronic searchable format to be developed by the SEC.  Hedge fund investors are notoriously protective of their privacy and I cannot imagine that there will not be pushback by the hedge fund industry on this point.

Another consequence of investment advisor registration is that hedge fund managers (if not currently regulated by the state in which their business resides) may be subject to certain state investment advisory rules including a “notice” filing requirement.  Depending on the nature of the management company’s business, some employees may need to register as investment advisor representatives at the state level which generally requires an employee to have passed the Series 65 exam.  We will keep you updated on this possibility as we learn more about the HFTA over time.


Please contact us if you have any questions releted to this post or registering your management company as an investment advisor with the SEC.  Other related posts include: