Hedge Fund Legislation and Regulation

manager may have mirror funds in the United States and offshore that
carry nearly identical positions. Some managers may also run separate ac-
counts for certain investors with positions that closely resemble the hedge
fund managed in parallel. These relationships could require a hedge fund
manager to register as an investment adviser, but most managers limit the
number of relationships to preserve their exemption. However, the SEC re-
cently proposed requiring all hedge fund managers to register.
SECURITIES EXCHANGE ACT OF 1934
The Securities Exchange Act created the SEC, defined the duties of the
SEC, and empowered the agency. The Act also defined certain illegal activ-
ities and required market participants to make certain disclosures.
The SEC is responsible for registering securities and registering and
regulating securities market participants. But for the exemptions written
into individual securities acts, a hedge fund would be regulated by the SEC
in many ways. The sale of interests to investors (at least in the United
States) would be controlled by the Securities Act of 1933 and enforced by
the SEC. The day-to-day management of the investments by the manage-
ment company would be controlled by the Investment Company Act of
1940 and enforced by the SEC. Finally, the marketing of hedge fund inter-
ests (unless outsourced) would require a hedge fund to register as a broker-
dealer, as provided by the Securities Exchange Act.
The Securities Exchange Act established a policy of handing off a sub-
stantial portion of the monitoring and enforcement to self-regulating agen-
cies. The Commodity Exchange Act (see next section) follows this pattern of
mixing governmental and industry regulation, with the SEC regulating the se-
curities markets and Commodity Futures Trading Commission (CFTC) regu-
lating the futures and cash commodity markets. The New York Stock
Exchange (NYSE), the Nasdaq over-the-counter market, and the National
Association of Securities Dealers (NASD) all operate as self-regulating bodies.
COMMODITY EXCHANGE ACT
The Commodity Exchange Act regulates commodity pool operators and the
commodity pools they manage. The Commodity Exchange Act will define a
hedge fund as a commodity pool if a hedge fund trades futures or commodi-
ties. Many hedge funds therefore register as commodity pools and their man-
agers register as commodity pool operators. There is no exemption used by
hedge funds to escape regulation under the Commodity Exchange Act, ex-
cept not trading futures and commodities (which really isn't an exemption).
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