MFA issues warning on SEC hedge fund registration proposals

The Managed Funds Association says the SEC registration proposals are unwarranted and warns of detrimental costs to hedge funds and investors.


MFA this week called upon the President's Working Group on Financial Markets (PWG) to assess the information and data on hedge funds that are currently available to its constituent members, namely the Board of Governors of the Federal Reserve System, the Department of the Treasury, the Commodity Futures Trading Commission, and the Securities and Exchange Commission (SEC).


As part of this review, MFA recommends that the regulators implement arrangements that would facilitate the appropriate sharing of that information among them.


MFA opposes the SEC's proposal to impose additional investment adviser regulation on hedge fund managers for several reasons, including the fact that most, if not all, of the information sought by the SEC is already available to other federal financial regulators. In addition MFA maintains that the implementation of the SEC proposal will result in unnecessary, burdensome costs to the hedge fund industry, potentially causing a chilling effect on hedge fund activities that will adversely impact hedge fund investors and the financial system as a whole.


MFA President John G. Gaine said: "We believe that an analysis of the information available on hedge funds makes good policy sense, and that such a review should be undertaken prior to the SEC's acting upon its rule proposal. An efficient use of available sources of information will enable regulators to protect the interests of investors without imposing unnecessary burdens and costs on the hedge fund industry, its investors, and taxpayers."


In its comment letter, filed yesterday, and posted on www.mfainfo.org, MFA maintains that the new regulatory regime contemplated by the SEC's proposal is not justified by the three reasons cited in the SEC's release - growth of the industry, incidence of fraud, and "retailization" of the industry. MFA demonstrates in detail that the SEC's rationale for the proposal is supported neither by empirical data nor by logic.


In its comment letter, MFA maintains that an appropriate regulatory framework for the hedge fund industry already exists and that the highly controversial SEC proposal goes far beyond "mere registration". Given that the SEC's proposal would adversely impact hedge funds, investors and capital markets in a material way, MFA  believes that a meaningful consensus should be reached prior to unilateral SEC action.


MFA stresses that the establishment of arrangements for sharing the hedge fund information that is available to the regulators that comprise the PWG would satisfy the SEC's objectives without the attendant costs of the SEC's proposal. MFA has offered to work with the members of the PWG to facilitate their review of available information in an effort to help them achieve their respective policy objectives.


Importantly, MFA believes the SEC has grossly underestimated the potential quantifiable costs and impact of its proposal on hedge funds, their investors and the capital markets. The greatest costs, however, could be those that cannot be quantified. "The unquantifiable costs of the chilling effect that would result from the SEC's proposal are likely to be significant not only to our financial system in terms of flexibility and liquidity, but also to the hedge fund industry's investors in terms of performance and the risk-return profile they seek," said Mr. Gaine.


MFA also joins with other comment letters in questioning the SEC's authority to implement its proposal given existing legal precedent and historical interpretation of the related regulations and legislation by both Congress and the SEC.


Background Note: MFA, headquartered in Washington, DC, is the US  trade association representing professionals who specialize in alternative investment strategies including hedge funds, funds of funds and managed futures funds through effective advocacy and education. MFA's approximately 800 members manage a significant portion of the estimated USD 800 billion invested in these strategies.

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