NEW YORK (HedgeWorld.com)--The North American Securities Administrators Association suggested five areas for increased hedge fund regulation in a July 8th letter to the Securities and Exchange Commission.
While it is not the case that this area is unregulated, the document states, "the hedge fund industry is presently regulated in a haphazard manner that presents gaps in investor protection." The memorandum, signed by Patricia Struck, chair of the NASAA investment adviser section, points in particular to gaps between state laws and SEC rules.
Many states require hedge fund advisers with 15 or more clients to register and, for this purpose, count each person with an interest in a fund as a customer. But the SEC counts each fund as a customer, so that only a manager of 15 or more funds must register with the Commission. This federal policy allows large investment advisers to avoid regulation unless they operate in states that make them register. NASAA recommends that the SEC criterion for counting clients be brought in line with the states' approach.
The second issue is hedge fund inspections, which the association argues should be the responsibility of the SEC rather than state regulators as far as larger funds are concerned. That will be the case once they are required to register at the federal level.
Third, NASAA asks that accredited investor standards of net worth of more than US$1 million or annual income of more than US$200,000 be raised and indexed for inflation. Fourth, the group suggests that Rule 506 of Regulation D notice filings include, at a minimum, a copy of the fund's private placement memorandum. "This would enable regulators and members of the public to obtain these documents from an official source, should the need arise," Ms. Struck writes.
The fifth proposal is to add a question as to whether the offering is a hedge fund, with a yes/no check box, to Form 506. The goal is to determine how many hedge funds exist and ensure they are registered where necessary.
"This, of course, would necessitate the Commission establishing a definition of 'hedge fund' for the purpose of the form," Ms. Struck writes. "We believe that such a definition would be helpful to regulators at all levels, as well as informative to potential investors."
The letter follows other comments by the association, including a presentation at the Hedge Fund Forum held by the SEC in May .