Hedge Fund Regulatory Framework
Hedge funds are regulated investment vehicles designed to facilitate investment by pensions, endowments and other sophisticated investors in traditionally liquid investment opportunities. Hedge fund managers act as investment advisers to the funds they manage and generally are subject to federal and, in some cases, state laws covering their activities as investment advisers.
Hedge funds are overseen by…
State Regulatory Agencies
Federal Agencies Overseeing Hedge Funds
1) Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is the primary regulator of hedge funds and their managers.
2) Commodity Futures Trading Commission (CFTC)
The Commodity Futures Trading Commission (CFTC) is an independent federal agency that regulates, together with the SEC, many aspects of the derivatives market. It protects market users and the public from fraud, manipulation, and abusive practices in the sale of commodity and financial futures and options, and fosters open, competitive option markets.
3) Financial Stability Oversight Council (FSOC)
The Financial Stability Oversight Council (FSOC) is a council of regulators established by the Dodd-Frank Act. The Council (1) monitors systemic risks to the U.S. financial system; (2) eliminates expectations that any American financial firm is “too big to fail;” (3) coordinates regulatory reporting and rulemaking; and (4) responds to emerging threats to U.S. financial stability. FSOC can also make recommendations to financial regulatory agencies to apply new or heightened standards and safeguards for financial activities or practices that could create risk to U.S. financial stability. The Treasury Secretary chairs FSOC.
4) Board of Governors of the Federal Reserve System (FRB)
The FRB, serves as the central banking system. The FRB oversees monetary policy, regulates the banking system and monitors systemic risk in the financial markets. The FRB is the regulator tasked with enforcing the enhanced regulatory framework governing systemically important financial institutions and setting margin requirements for securities.
5) Federal Trade Commission (FTC)
The FTC is an independent agency charged with policing unfair, deceptive or fraudulent practices in the marketplace and enforcing antitrust laws to promote competitive markets. Among its tools to address competition concerns is the Hart-Scott-Rodino Act (HSR), which established a federal premerger notification program that provides the FTC and the Department of Justice with information about large mergers and acquisitions before they occur. Under HSR, acquisitions of stock in excess of a certain dollar threshold and percentage of an issuers voting shares must be first reported unless an exemption applies. This filing requirement sometimes applies to acquisitions of stock made by hedge funds.
1) National Futures Association (NFA)
The NFA is a self-regulatory organization (“SRO”) that regulates the managed futures industry, including hedge funds that are CPOs. Membership in NFA is mandatory for the more than 4,200 firms and 55,000 individuals trading in the marketplace NFA regulates industry participants through: registration; annual reporting and disclosure; examinations; monitoring for market manipulation and systemic risk; and enforcement mechanisms to address potential manipulation.
2) Financial Industry Regulatory Authority (FINRA)
The Financial Industry Regulatory Authority (FINRA) is an SRO for broker-dealers and certain stock exchanges. FINRA regulates and examines broker-dealer firms and their registered personnel. FINRA also regulates sales of hedge fund interests to investors through broker-dealers.
State Regulatory Agencies
Each state has financial services regulators who oversee financial services markets and participants to the extent not preempted by federal law. Additionally, many state attorneys general have oversight authority, including general antifraud authority.
Hedge fund managers with less than $110 million in assets under management or that are not otherwise subject to regulation by the SEC generally are required to register with the state securities commissioners in the jurisdictions in which they are headquartered or operate. Personnel affiliated with hedge fund managers and certain solicitors also may be required to register individually with state regulatory agencies as investment adviser representatives. In addition, certain states impose substantive reporting and compliance requirements on hedge fund managers registered with the state that mirror – or in some cases expand upon – requirements applicable to SEC-registered investment advisers under the Advisers Act.