Hedge fund regulation: Resistance is futile

When it comes to regulatory oversight of the hedge funds industry, it is no longer a question of if it will happen but when, according to industry representatives speaking today at a conference in Key Biscayne, Fla. “Get over the fact that it’s coming, because the issue now becomes what can we as an industry do to help shape the debate,” said Darcy Bradbury, senior vice president with D.E. Shaw & Co. L.P. in New York, who was a panelist at the Managed Funds Association’s Network 2009 gathering. The panel discussion, entitled “The Impact of the Obama Administration,” was designed as a regulatory update for the Washington-based association’s membership of hedge funds and commodity trading advisers. The MFA is seeking to become more involved in the regulatory process in an effort to clarify misconceptions about the industry and hopefully head off knee-jerk-style regulatory actions, according to Richard Baker, MFA president and chief executive. “One absolute certainty about Washington is that facts don’t get in the way of action,” said Mr. Baker, a former Republican congressman from Louisiana who took over as head of the MFA a year ago. Moderating the panel, he acknowledged that a proposal to require hedge fund managers to register with the Securities and Exchange Commission does not address the kinds of problems associated with the $50 billion Ponzi scheme allegedly operated by Bernard Madoff. “The point of [portfolio] custody is not lost on anyone,” Mr. Baker said. “We know that registration in and of itself is not the remedy.” An SEC rule requiring hedge fund managers to register as investment advisers was overturned three years ago, but the current economic environment combined with Democratic leadership in Congress and the White House, is likely to make resistance at this point futile, the panelists believe. “The SEC is under pressure like never before in its 75-year history, and I’ve never seen the morale and general feeling at the SEC so low,” said Stuart Kaswell, MFA’s general counsel. The SEC’s current mood is tied directly to the fact that “they missed the Madoff scandal,” he added. “Hedge fund registration is going to be a big-ticket item for the SEC,” Mr. Kaswell said. “The SEC is trying to position itself as a strong regulator, and they want to be seen as able to step up and do the job.” The MFA intends to deal with the momentum toward greater oversight of alternative investments by acting as a resource to lawmakers. “We need to keep in mind that broad-brush oversight will help our image,” said Ms. Bradbury. “By being regulated we will be able to take the argument off the table that this industry is just a bunch of cowboys.