Federal Regulation for Hedge Funds

It's official. After months of anticipation, the Securities & Exchange Commission approved October 26 its proposal rule requiring hedge fund managers to register with the securities regulator. Hedge fund managers have some time to prepare for the new rule's requirements, however, as it doesn't go into effect until February 1, 2006.

This should give managers time to appoint a chief compliance officer, if they haven't already done so, and prepare for SEC inspections, says Steve Zoric, head of legal and compliance at Man Investments in Chicago. Hedge fund managers will also be required to file a Form ADV. So there will be additional "costs issues," says John Kelly, president of Man Investments, Inc., a global distributor of hedge funds and other alternative investments whose U.S. headquarters is in Chicago.

While it's unclear how often the SEC will examine hedge fund managers, Zoric says the SEC is contemplating switching to a risk-based exam schedule, the exam regimen used by regulators in the UK. For instance, "if the SEC thinks that soft dollars are a big concern, they'll go after the managers that are using lots of soft dollars," Zoric says.