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"When the Dodd-Frank reform bill was signed last summer, hedge funds and private equity firms fretted over the prospect of being really regulated for the first time. But a year later, it\u2019s become clear that no regulator \u2013 especially not the overburdened SEC \u2013 is prepared for such a task.\n\n\nThe registration and regulation of hedge funds, private-equity funds and other \u201Calternative\u201D investment advisers was one of the cornerstones of the financial reform bill. It was supposed to shine a light into the otherwise murky world of institutional trading \u2013 a world that\u2019s often blamed for everything from the financial crisis to the Bernard Madoff scam. But the SEC can\u2019t even answer the simple question of when hedge funds must register, which hardly inspires confidence in the oversight of what is now a multi-trillion dollar industry.\n\u201CI\u2019ve never seen anything like this, and I\u2019ve been practicing for almost 30 years as a regulatory lawyer in the investment management area,\u201D says Laurin Blumenthal Kleiman, a partner at Sidley Austin, a law firm that advises financial clients on Dodd-Frank reform. She says she has sympathy for SEC staff because even the most gradual rules usually take months to deliberate and refine. Now that a whole industry is moving from an unregulated status to the SEC\u2019s umbrella, the change is being pushed through at \u201Cbreakneck speed,\u201D she says.\nLarry Eiben, chief operating officer of TFS Capital, a hedge-fund firm that\u2019s already registered with the SEC because it also runs mutual funds, is also sympathetic. \u201CI think they\u2019re overloaded,\u201D Eiben says. \u201CThe registration of hedge funds is a massive, massive undertaking, with every hedge fund doing something different, and many of them doing things the SEC has never seen before.\u201D\nThe main area of confusion: the SEC\u2019s November draft rule requiring hedge funds with over $150 million in assets under management to register with the agency, with a proposed deadline of July 21. The agency had a standard 45-day review period for investment-adviser registration papers. So the proposed deadline for registration filings was effectively Monday, June 6. Two days after that, the SEC broke its silence and scheduled a vote on the final rule for June 22.\nIn the meantime, hedge funds are left with a dilemma: Do they rush to comply with a deadline that&amp;#8217;s still only a proposal? Or do they wait for June 22 to see if the SEC will officially extend the deadline, and in so doing risk breaking a regulation before they have even become regulated entities?\nRegistration with the SEC entails more than filing the paperwork. As outlined in the draft rule, many firms will have to change bookkeeping, trading data, asset-valuation and asset-custody protocols to meet uniform SEC standards. As a practical matter, most funds will have to hire compliance officers and produce compliance literature.\nThe challenges of getting all these ducks in a row prompted the SEC\u2019s talk of a deadline extension in the first place, at least in part. Benette Zivley, the commissioner of the Texas State Securities Board, says there was also a technical holdup with the Investment Adviser Registration Depositary, an online registry used by both the SEC and the states.\nJudith Burns, an SEC spokeswoman, says an April 8 letter from senior SEC staffer Robert Plaze to David Massey, the head of the North American Securities Administrators Association, a confederation of state regulators, was made public to clear up the matter of the deadline.\nThe letter is clear, for a letter of its kind:\n\u201CWe anticipate that the Commission will issue\u2026final rules in advance of July 21,\u201D wrote Plaze. \u201CWe expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.\u201D\nBut a letter to a state regulator is a long way from a binding directive for funds to follow, says Janaya Moscony, a former examiner at the SEC who now runs a compliance-services firm called SEC Compliance Consulting. \u201CIt\u2019s not normal to write a letter to NASAA and think that the industry is going to rely on that from a legal perspective,\u201D she says.\nReading the SEC&amp;#8217;s smoke signals\nMoscony\u2019s hedge fund clients are left scratching their heads. \u201CSome don\u2019t want to rely on a letter from the SEC to a state regulator that\u2019s not official,\u201D she says. \u201CThen I talked to the SEC, and they says there\u2019s nothing we can do to make it more official.\u201D Some hedge funds she advises want to follow the letter of the law and are scrambling to complete registration by July 21.\nKleiman recalled reading Plaze\u2019s letter on her Blackberry, and thinking: \u201CWhat does it mean? \u2018The commission will consider the deadline\u2019? Are they doing it or are they not, how do we gauge?\u201D she says. She even wondered whether the threat of a government shutdown on April 8 had prompted the SEC to publicize the letter in haste, like some kind of final wish.\nReading the \u201Csmoke signals\u201D from the SEC, Kleiman is advising fund clients to delay filing until the final rule appears while expediting their preparations for the regulatory regimes.\nIn another letter dated April 27, SEC Chairwoman Mary Schapiro reiterated Plaze\u2019s point that the deadline was likely to be extended until the first quarter of 2012. There is still no official guidance has emerged from the SEC. Burns, the SEC spokeswoman, says to \u201Cstay tuned.\u201D\nState regulatory bodies had also expected to hear more from the SEC by now. As outlined in Plaze\u2019s letter, the draft rule requires \u201Cmid-sized\u201D hedge funds and alternative advisers, or those with assets under management of between $25 million and $100 million registered at the federal level to shift their paperwork to relevant state authorities.\nFor funds forced to shift from state to federal registration, Zivley recommended pursuing a dual registration with states that allow such a thing, to avoid falling between two stools during the process.\nAs for funds based overseas that invest in the U.S., much hangs on the final version of the rule, says Kleiman. Under the rule currently proposed, hedge funds domiciled offshore could invest billions of dollars in the U.S. but still avoid registration with the SEC as long as they don\u2019t have more than a handful of U.S. investors.\n\u201CI think it\u2019s safe to say that Dodd-Frank as a general matter and the rules and regulations that come out of it are going to provide some interesting interpretive issues for lawyers,\u201D says Kleiman."^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2011/06/14/hedge-fund-regulation-what-hedge-fund-regulation/>