US says no to more Hedge Fund regs

The news that the U.S. government will not regulate hedge funds may come as a surprise to many media observers, but the writing was always on the wall once former Goldman Sachs CEO Hank Paulson was appointed Secretary of the U.S. Treasury.

“…the administration, in an agreement it reached with the independent regulatory agencies, announced that investors, hedge fund companies and their lenders could adequately take care of themselves by adhering to a set of nonbinding principles.”

This decision, which is against the wishes of the SEC, flies in the face of the draft rules released earlier this week in Canada by the Canadian Securities Administrators. And they appear to be aimed directly at the Canadian hedge fund community, according to the Globe, and is greatly influenced by what the Portus fellows pulled-off:

“Portus operated in the exempt market, selling products to wealthy investors, an area that would be more closely regulated under the new standards. Its managers would also now have to be registered under the proposed new rules. And the disclosure of referral fees was a particular concern with Portus, where investors complained that they hadn’t known their advisers had received large fees for steering them into Portus products.”

The benefits of improved disclosure and transparency for individual retail investors is clear, but “registering” the hedge manager is a different kettle of fish altogether. One can sympathize with the desire to prevent inexperienced Oakville teenagers from raising funds from “accredited investors” and then promptly losing those funds, or pilfering them for that matter. Even if these rules goes thorough untouched, there is the obvious loophole, of course, which is the formation of an “investment club” by that unregistered teenager hedge fund manager wanabee.

But what about the Canadian office of a U.S.-based hedge fund manager that taps the Canadian market for limited partner capital? Should Fortress (FIG-NYSE), for example, not be subject to regulation but a Toronto-based Amaranth II would be?

As I understand it, under these rules every hedge fund would now be required to have Chief Compliance Officer who was either a C.A. or a lawyer. To make those two professions the only appropriate credentials for trustworthiness is odd, when lawyers and accountants were some of those blamed by the regulators and courts for the difficulties at Hewlett-Packard, Apple, Enron, Qwest, etc. And that is no slap at my friends and family members who honourably pursue careers in those professional streams. But to apply many of the same regulations on hedge funds that exist for investment dealers is not going to prevent another Portus or Norshield from happening.

Mark Valentine was carefully regulated and worked down the hall from a compliance officer, as did Michael Holoday, Peter Bacanovic and the rest.

More on this topic later.

MRM