On 9 March 2009 a high profile panel was convened at the 10th Annual International Conference on Private Investment Funds (a conference co-presented by the Private Investment Funds Subcommittee of the IBA Investment Funds Committee and the Subcommittee on Hedge Funds of the Committee on Federal Regulation of Securities of the American Bar Association Section of Business Law, and supported by the IBA European Regional Forum) to discuss the pressing issue of the New Regulatory Environment. It was a difficult task, given that the panel was meeting less than a month before the G20 summit in London was likely to hatch its own plans for just this question.

The panel was chaired by Michael P. Harrell of Debevoise and Plimpton in New York, and consisted of Andrew Baker (Alternative Investment Management Association, London), Andrew J. Donohoe (US Securities and Exchange Commission, Washington DC), Stuart J. Kaswell (Managed Funds Association, Washington DC) and Kenneth M. Raisler (Sullivan & Cromwell LLP, New York).

A future model for hedge fund regulation
Starting with the UK, the issue before the panel was whether hedge funds would require more regulation, and if so, how pervasive was this likely to be? Baker quickly came to the fore as an advocate of the system already in place in the UK, supervised by the FSA, as well as arguing for a best-of-breed approach to regulation – i.e. use those models that work, that are effective, rather than re-writing the rule book from scratch, much as that might be tempting for G20 finance ministers and others.

Manager authorisation works well in the UK, Baker said, as well as in other European countries and in Asia. The manager authorisation process is an onerous one, requiring submission of a business plan, and the putting aside of capital, as well as a request for permission from the regulator to manage a particular strategy. It also includes an approved persons regime, in which senior staff have to submit to scrutiny, and be appointed to specific roles within the organisation. If an individual does not have the qualifications to man a given post within a firm then the regulator has the power to disqualify him/her from doing so. Add to this a specialist supervisory team that maintains strong relationships with the top hedge funds in terms of size, and a solid regulatory framework is already in place, Baker argued.