Should Wall Street be afraid of the new rules established by the Dodd-Frank Act? For more than 30 years until the enactment of the Dodd-Frank Act, the hedge-fund industry had resisted attempts by the Securities and Exchange Commission to register hedge-fund managers. The SEC’s last attempt to register hedge-fund managers failed in 2006 when the United States District Court of Appeals for the District of Columbia in Goldstein v. SEC vacated the registration of hedge-fund managers by the SEC as arbitrary. All hedge-fund managers who had registered with the SEC under the invalidated rule deregistered after the Goldstein decision.
The industry’s opposition to regulatory oversight can be traced back to several factors. Since the inception of the hedge-fund industry, hedge-fund managers considered regulatory oversight an infringement on their ability to generate absolute returns. Hedge-funds evolved in a regulatory environment that allowed them through so-called safe harbors to stay exempt from regulatory oversight. Hedge-funds’ ability to operate without regulatory oversight facilitated successful hedge-fund launches, generated higher returns and attracted investors.
The Dodd-Frank Act appears to be the last chapter in the debate on hedge-fund adviser registration and disclosure. Title IV of the Dodd-Frank Act authorized the SEC to register hedge-fund managers and demand enhanced disclosure. The SEC now requires the disclosure of financing information, risk metrics, strategies and products used by hedge-fund managers, performance and changes in performance, positions held by the investment adviser, percentage counterparties and credit exposure, assets traded using algorithms, and the percentage of equity and debt, among others.
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About the Author: Wulf Kaal is an associate professor at the University of St. Thomas School of Law. Before entering the academy, he graduated with a Ph.D., J.D., M.B.A. and LL.M. and worked for Cravath, Swaine & Moore, L.L.P., in New York City and Goldman Sachs in London. Kaal specializes in hedge-fund regulation, international finance, European law and corporate law securities regulation. He has published in leading European law and finance journals and leading American law reviews.