Hedge Funds Get Off Easy In Regulatory Overhaul, For Now

Jun 18 2009 | 11:06am ET

President Barack Obama’s long-awaited financial regulation reform seems to have let hedge funds off relatively easy, for the time being.

While other jurisdictions, notably the European Union, consider substantially stricter measures to limit hedge funds’ activities, the Obama plan doesn’t have any specific restrictions at all. But there are signs that the U.S. administration may eventually impose more demanding regulations on the industry should it deem such measures necessary.

The centerpiece of Obama’s regulatory overhaul for hedge funds is the return of the hedge fund registration requirement, which was tossed by a federal court three years ago. Both houses of Congress are already considering the measure, which would require hedge fund advisers to register with the Securities and Exchange Commission.

Most hedge funds are already registered with the agency, Hedge Fund Research said in February, and most in the industry have dropped their opposition to mandatory registration in the face of potentially much harsher measures.

But some aspects of the Obama plan—including registration—may simply be the first shoe dropping.

The president’s plan still needs to be fleshed out, and Congressional leaders have yet to have their full say. Indeed, while the proposal calls for giving the Federal Reserve greater powers over systemically important financial firms, including the power to break them up, it does not yet precisely define just how big is too big, or how much leverage is too much.

And the administration indicated that hedge fund registration and the data collection that comes with it—including on-sight SEC inspections—may be a precursor to more heavy-handed regulation, if it is needed. The rules unveiled yesterday will help Obama’s team decide if hedge funds “have become so large, leveraged or interconnected that they require regulation for stability purposes,” the administration said.

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