Two senior US senators, Michigan Democrat Carl Levin and Iowa Republican Charles Grassley, have taken the first steps toward the inevitable introduction of regulation of US hedge funds and their managers.
Under their proposed legislation, the Hedge Fund Transparency Act, funds would be obliged to file an annual disclosure form with the Securities and Exchange Commission, comply with the agency's record-keeping requirements and co-operate with any investigations. The senators say the proposed measures are necessary to protect investors and the financial system.
Moves to bring hedge funds within the regulatory ambit have already been flagged by Timothy Geithner, President Barack Obama's nominee as Treasury secretary, who pledged to introduce regulation of over-the-counter derivatives and registration of hedge funds to improve market transparency, and newly-installed SEC chairman Mary Schapiro (pictured).
Some hedge fund managers are already registered with the SEC, as a result of an abortive rule introduced in February 2006 that required advisers to funds with more than 14 US investors to register. The rule was struck down four months later, following a lawsuit by Phillip Goldstein, the combative head of Bulldog Investors, when a court ruled that the SEC did not have the authority to introduce the measure. However, many managers that had complied continued to do so on a voluntary basis.
The Hedge Fund Transparency Act of 2009 would clarify the law to remove any doubt that the SEC had the authority to require hedge funds to register. However, on this occasion the industry is likely to submit with rather better grace, recognising that the proposed measures do not seem to compromise managers' ability to produce alpha. If this bill reflects the Obama administration's approach to financial sector regulation, hedge fund managers have little to fear.