NEW YORK (HedgeWorld.com)–Now that registration with the Securities and Exchange Commission is the law of the land, it's time for hedge funds to grin and comply with it.
But first they have to figure just what the SEC means by "comply." Divining the commission's intent was the goal of a seminar held Wednesday in New York by the Managed Funds Association. Panelists and audience members at the gathering talked through the specifics of registration, the practicalities of compliance policies and what hedge funds might expect from SEC examiners as they implement the new regulatory framework. One dramatic exchange arose over what has been seen as a murky aspect of the new rule: proxy policies.
Concern about the supposed youth and inexperience of examiners became a motif through the day's four panel discussions. It was the third panel, on "compliance policies and sound practices," that saw the most vigorous panel/audience interaction of the day.
Panelist Kenneth Raisler, a partner in the New York law firm Sullivan & Cromwell, said that the SEC discourages off-the-shelf solutions. One can't simply run off copies of some preexisting "compliance policies" booklet and stick one's own name on it, he noted. Michael Neus, chief operating officer at RHG Capital LP, went further. In formulating a compliance policy, he said, an adviser is "telling the SEC 'this is the blueprint, try to catch me on these standards.'"
This led another panelist, Joel Press, senior partner, global hedge fund practice at Ernst & Young, to give the discussion a different twist. He said that examiners, who don't know much about the industry yet but can read, will likely ask not just about what is in a firm's compliance policy, but what it left out. Mr. Press raised the issue of proxy voting by funds with corporate equity in their portfolios, and whether a policy on proxy voting now has to be committed to writing. Will examiners find silence on this point suspicious?
Mr. Neus broke in at this point and suggested that funds could say that they've outsourced their proxy voting decisions to Institutional Shareholder Services, Inc., Menlo Park, Calif., which offers proxy analysis and research and which provides objective proxy vote recommendations.
At this point a woman in the audience who identified herself as a manager of a quant fund interjected, "our policy is that it makes no sense for us to vote in proxy contests, so we don't do so." This stoked additional views from the panelists on whether the SEC, given the new rule and the mechanisms it's establishing, is likely to regard that statement as a sufficient policy on proxy fights. The seminar's keynote speaker, Paul Roye, director of the SEC's Division of Investment Management, had left by this time, and Mr. Raisler drew some laughter by saying, "Paul is theoretically still here and his failure to object to that policy means that it's fine."
Mr. Press said, "I hope everybody here from the press writes that down."
The seminar began with a few words of welcome from MFA President John G. Gaine. There was little indication of continued opposition to mandatory registration–the general perspective of industry participants on the various panels was that the rule is here to stay and the sensible thing to do is to adapt to it. The one brief reference to current litigation seeking a judicial nullification of the rule was rather disparaging.
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