President's Working Group Releases Guidelines on Hedge Funds (HF)

2.22.2007 The President's Working Group on Financial Markets released the Principles and Guidelines Regarding Private Pools of Capital. This document is a set of guidelines that apply to hedge funds and other private investment pools. Issues are covered from the perspectives of investors, counterparties, hedge funds and regulators. In general, the guidelines recommend:

  • Private Pools of Capital: maintain and enhance information, valuation, and risk management systems to provide market participants with accurate, sufficient, and timely information.
  • Investors: consider the suitability of investments in a private pool in light of investment objectives, risk tolerances, and the principle of portfolio diversification.
  • Counterparties and Creditors: commit sufficient resources to maintain and enhance risk management practices.
  • Regulators and Supervisors: work together to communicate and use authority to ensure that supervisory expectations regarding counterparty risk management practices and market integrity are met.

The Working Group concluded that investors can best be protected and risk minimized by regulation and public policies that support market discipline, participant awareness of risk, and prudent risk management.

The Working Group is made up of the:

  • Secretary of the Treasury (Chair),
  • Chairmen of the Board of Governors of the Federal Reserve System,
  • Chairman of the SEC; and
  • Chairman of the CFTC.

The guidelines support the SEC proposal to raise the accredited investor standard for private placements of private funds. They do not recommend hedge fund manager registration with the SEC. The guidelines recommend that bank regulators increase their focus on counterparty credit exposures.