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Friday, April 23, 2010

Hedge Funds: Legal Status and Proposals for Regulation

Kathleen Ann Ruane
Legislative Attorney

Michael V. Seitzinger
Legislative Attorney

Hedge funds have received a great deal of media coverage in the past several years because large sums of money have been gained or lost in a relatively short time by some hedge funds. Most hedge funds are not required to register with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 or the Investment Advisers Act of 1940. In 2004, the SEC implemented a rule that would have required all hedge fund advisers to register with the SEC under the Investment Advisers Act. Hedge funds challenged the rule in federal court, arguing that the SEC had misinterpreted provisions of the Investment Advisers Act. The U.S. Court of Appeals for the D.C. Circuit agreed with the hedge funds and struck down the SEC's rule. Following that decision, it appeared that congressional action would be necessary to require all hedge funds to register. 

In the wake of the financial crisis, Congress and President Obama's Administration have begun to debate proposals for financial regulatory reform. One of the main thrusts of the proposals seems to be to allow agencies better access to information regarding large market participants whose failure may have a detrimental effect on the entire financial system. It is widely believed that many hedge funds could fall into the category of market participants that pose this sort of risk. In order to require hedge fund managers to register with the SEC, many of the reform proposals would eliminate some or all of these exemptions granting the agency wider access to the information proponents see as necessary to protect the markets. 

This report will discuss the SEC's previous rule requiring hedge fund advisers to register with the agency and the appeals court decision that struck it down. It will also discuss some of the proposals to amend the Investment Advisers Act and the Investment Company Act that would require registration of hedge funds with the SEC, including The White Paper, Title IV of the Treasury Department's proposed bill, the Restoring American Financial Stability Act of 2010 as ordered to be reported by the Senate Committee on Banking, Housing, and Urban Affairs, H.R. 4173, H.R. 3818, H.R. 711, S. 1276, and S. 344. Further discussion of the various policy perspectives on this topic may be found in CRS Report 94-511,
Hedge Funds: Should They Be Regulated?, by Mark Jickling. 


Date of Report: April 14, 2010
Number of Pages: 15
Order Number: R40783
Price: $29.95

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