The US Senate Banking Subcommittee on Securities held a hearing on 16th July 2009 to discuss how to improve federal oversight of hedge funds and other private pools of capital. The hearing came just a month after the Obama administration unveiled its white paper on regulatory reform recommending that hedge fund managers register with the US Securities and Exchange Commission (SEC). The following are extracts from the testimony of four of the speakers.


Andrew J. Donohue, Director, SEC

Over the past two decades, private funds, including hedge, private equity and venture capital funds, have grown to play an increasingly significant role in our capital markets both as a source of capital and the investment vehicle of choice for many institutional investors. We estimate that advisers to hedge funds have almost $1.4 trillion under management. Since many hedge funds are very active and often leveraged traders, this amount understates their impact on our trading markets. Hedge funds reportedly account for 18%-22% of all trading on the New York Stock Exchange.

The Commission has incomplete information about the advisers and private funds that are participating in our markets. It is not uncommon that our first contact with a manager of a significant amount of assets is during an investigation by our Enforcement Division. The data that we are often requested to provide members of Congress (including the data we provide above) or other federal regulators are based on industry sources, which have proven over the years to be unreliable and inconsistent because neither the private funds nor their advisers are required to report even basic census-type information. This presents a significant regulatory gap in need of closing. The Commission tried to close the gap in 2004 – at least partially – by adopting a rule requiring all hedge fund advisers to register under the Investment Advisers Act of 1940. That rulemaking was overturned by an appellate court in the Goldstein decision in 2006.

Since then, the Commission has continued to bring enforcement actions vigorously against private funds that violate the federal securities laws, and we have continued to conduct compliance examinations of the hedge fund advisers that remain registered under the Advisers Act. But we only see a slice of the private fund industry, and the Commission strongly believes that legislative action is needed at this time to enhance regulation in this area.