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Hedge Funds after Dodd-Frank

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By Stephen Brown, Anthony Lynch, and Antti Petajisto

Now that the Dodd-Frank Act has been passed by both houses of Congress, we finally know its broad implications for hedge funds. As expected, it requires all large hedge fund advisers to register with the SEC. Also the new rules on derivatives trading have an additional impact on many hedge funds. However, since the Act leaves many specifics up to the regulators, considerable uncertainty remains about the exact form of the new rules. The main tradeoff is between the government's desire to learn more about hedge funds, both to assess systemic risk and to protect investors, and the compliance costs this imposes on funds and investors. Overall, how economically sensible is hedge fund regulation in the Act, and how well does the Act resolve this tradeoff?

Senate Bill and Hedge Funds

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The Senate bill requires hedge funds to register with the SEC as investment advisers and raises the assets threshold for federal regulation of investment advisers from $25 million to $100 million, a move expected to increase the number of advisors under state supervision by 28%. According to the Senate bill, the SEC may require any investment adviser registered with the SEC to maintain such records and file such reports as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Agency for Financial Stability. This data will be shared with the Agency for Financial Stability. The records and reports required to be filed with the SEC shall include a description of: 1) the amount of assets under management and the use of leverage; 2) counterparty credit risk exposure; 3) trading and investment positions; 4) valuation methodologies of the fund; 5) types of assets held; 6) side arrangements whereby certain investors in a fund obtain more favorable rights or entitlements than other investors; 7) trading practices; and, 8) such other information as the SEC, in consultation with the Agency for Financial Stability, deems necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. Further, the SEC shall conduct periodic inspections and other inspections prescribed as necessary by the SEC of all records maintained by an investment adviser registered with the SEC.

About RegulatingWallStreet.com

The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors