Global Hedge Fund Regulation

Hedge funds are strictly regulated by a range of methods worldwide.  While rules vary by jurisdiction, the most common method of oversight is the direct regulation of advisers to the funds.

US Regulation:

Hedge funds are subject to the same trading reporting and record-keeping requirements as other investors in publicly traded securities.  They are also subject to a number of additional restrictions and regulations, including a limit on the number and type of investors that each fund may have.  Specifically, hedge funds are restricted under Regulation D under the Securities Act of 1933 to raising capital only in non-public offerings and only from “accredited investors,” or individuals with a minimum net worth of $1,000,000 or a minimum income of $200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. Under Dodd-Frank, the SEC was given explicit authority to adjust the net worth and income standards for individuals as it deems appropriate.  For banks and corporate entities, they must have a minimum of $5,000,000 in total assets.  Many investors in larger hedge funds must also meet heightened “qualified purchaser” standards under the Investment Company Act of 1940, which generally requires individuals to have $5,000,000 in investments and requires companies and pension plans to have $25,000,000 in investments.   Hedge funds are also prohibited by the Investment Company Act of 1940 from making public offerings and are subject to the anti-fraud provisions included in the Securities Act of 1933 and Securities Exchange Act of 1934.

Many hedge funds operating in the U.S. are also regulated by the Commodity Futures Trading Commission (CFTC), including advisers registered as Commodity Pool Operators (CPO) and Commodity Trading Advisors (CTA).  Hedge funds investing in markets governed by the CFTC would also be regulated by the body and subject to the requirements set forth in the Commodity Exchange Act.

The regulatory landscape in the U.S. evolved recently with the passage of the Dodd-Frank Act, which set forth new registration and other requirements for hedge fund managers.  Please click here for more information on the Dodd-Frank Act and hedge funds.

European Regulation:

European lawmakers have also undertaken regulatory changes affecting hedge funds in recent years.  In 2010 the European Union (EU) approved the Directive on Alternative Investment Fund Managers (AIFMD), the first EU directive focused specifically on alternative investment fund managers.  AIFMD requires hedge funds to register with national regulators and increases disclosure requirements and frequency for fund managers operating in the EU.  Furthermore, the directive increases capital requirements for hedge funds and places further restrictions on leverage utilized by the funds.  The AIFMD requires EU-based managers to comply with all provisions of the AIFMD once it is adopted at the member state level in 2013, while non-EU managers marketing funds in the EU will be subject to reporting requirements under an enhanced national private placement regime until they are eligible to or required to market under an EU passport in the future, at which point those non-EU managers will be subject to all of the provisions in the AIFMD.  EU member countries were required to adopt the AIFMD into their own national legislation by early 2013.  The European Securities and Markets Authority and the European Commission are developing implementing rules and guidance to give effect to the AIFMD.

MFA Resources:

MFA’s Canada Client Electronic Trading Services Representation Template

MFA’s Hong Kong Client Electronic Trading Services Representation Template

Further Resources

MFA Submits Comments to Cayman Islands Ministry of Financial Services Regarding Consultation on Beneficial Ownership

MFA and AIMA Submit Joint Letter on FSB Consultation on Key Attributes of Resolution Regimes for Non-Bank Financial Institutions

MFA and AIMA Submit Joint Letter on CPSS-IOSCO Consultative Report on Financial Market Infrastructure Recovery

MFA and AIMA Submit Letter on Canadian Early Warning Reporting System

MFA Submits Comments to Cayman Islands Monetary Authority in Response to Consultation on Corporate Governance

MFA Submits Comments on Basel-IOSCO Second Consultative Document on Margin Requirements for Uncleared Derivatives

MFA and AIMA Submit Joint Letter to Australian Treasury Regarding Concerns with Investment Manager Regime Legislation

MFA Submits Letter to U.S. Trustee on Revised Proposed Compensation Guidelines in Chapter 11 Cases

MFA Submits Comment Letter in Response to Basel-IOSCO’s Consultative Document on Margin Requirements for Non-Cleared Derivatives

MFA Submits Comments to USTR on Mexican Bankruptcy Law for Trade Negotiations

MFA and Other Trade Associations Submit Summary of LSOC Issues to CFTC Commissioners

MFA Submits Comments to CFTC Regarding the JOBS Act

MFA Supports Nasdaq Market Quality Program

MFA Submits Comments to SEC on FINRA Rule 5123

MFA Submits Amicus Brief on Issue of Creditor Coordination

MFA Submits Letter to SEC on Implementation of the JOBS Act

MFA Submits Comments to SEC Supporting ICE Clear Credit’s Portfolio Margining Petition

MFA Submits White Paper to European Commission on Shadow Banking

MFA Responds to HM Treasury’s Discussion Paper on AIFMD

MFA Submits Comment Letter to CFTC on Harmonization Proposal on Compliance Obligations

MFA Submits Joint Letter on Concerns with India’s Finance Bill

MFA Submits Comment Letter to CFTC on Proposed Process for Making a Swap Available to Trade

MFA Submits Comments to Regulators on Proposed Volcker Rule

MFA, SIFMA and GFXD Submit Joint Letter to the CFTC with Proposed Safe Harbor for the ECP Definition

MFA Submits Comments Urging CFTC to Grant ICE Portfolio Margining Petition

MFA supplemental comment letter to CFTC in response to recent MF Global events

MFA comment letter on Massachusetts Department of Revenue Directive on Professionally Managed Trader Funds

Letter to ERISA Advisory Council on Hedge Funds’ Benefit to Pensions and Beneficiaries

MFA Comment Letter on Incentive-Based Compensation Rules

MFA Comment Letter on Form PF

MFA Comment Letter on Bad Actor Disqualification

MFA Comment Letter on New Issues Allocations

MFA Comment Letter on Qualified Client Definition