|
Hedge funds have
always enjoyed light-touch
regulatory attention. Indeed,
the key debate surrounding hedge
funds for a number of years has
been whether that light-touch
regulation continues to be
suitable given the increasing
importance of the hedge fund
sector to the worlds financial
markets and their increasing
attractiveness to retail
investors.
The fund is
regulated where it is domiciled.
As discussed in
question
11, this is
generally in an offshore
jurisdiction such as Cayman
Islands, hence the light-touch
regulation. The fund appoints
the manager and the
administrator who will
respectively be regulated where
they are based.
The UK
Whilst many hedge fund managers
are based in the UK, the funds
are generally domiciled
off-shore and the administrators
are generally in jurisdictions
outside the UK. As the
administrators are appointed by
the offshore funds themselves
rather than the manager,
administration is not a
delegated function of the
manager and the managers are not
responsible in regulatory terms
for the administration services
(such as valuations) provided to
the client.
The implication
of this is that, unlike
authorised funds (CIS), most
administration issues are
outside the FSA's remit. It
therefore falls to other
Regulators such as the Irish
Financial Services Regulatory
Authority to regulate most of
the administrators of UK managed
hedge funds.
The Managers
themselves will however be
caught by the FSA rules. These
include requirements on Senior
Management Arrangements, Systems
and Controls. i.e. that a firm
must take reasonable care to
establish and maintain such
systems and controls as are
appropriate to its business (SYSC
3.1.1R). Managers are also
covered by the FSAs Conduct of
Business rules (including for
example best execution, and fair
and timely trade allocation).
These rules apply to dealings on
behalf of both private and
intermediate customers. The
Code of Market Conduct Market
Abuse regime also applies to
hedge fund managers. The FSA
recently took its first action
against a firm for distorting
the market through short selling
activities.
The USA
On
26 October 2005, the US Securities and
Exchange Commission (SEC) voted
to introduce mandatory
registration of hedge fund
investment advisers under the
Investment Advisers Act. This
is to come into effect from
February 2006. SEC authorisation
will be based on the number of
US clients (more than 14) and an
asset size threshold ($30m). The
location of the Manager is not a
criteria and hence, UK based
hedge fund managers could be
caught by this also if they have
more than 14 US clients.
A
potential loophole to the rule
is that it permits an offshore
adviser to treat an offshore
private fund as its client (and
not the investors) for many of
the provisions of the Act.
However, even in such cases,
many provisions of the Act would
continue to apply, including:
|
