The International Organization of Securities Commissions ("IOSCO"), an international organization comprised of regulators of the world's securities markets and whose objectives include cooperation, information exchange, standard setting, surveillance and mutual assistance, released a report on June 22 that presents six high level principles it believes will enable securities regulators to effectively address the regulatory and systemic risks posed by hedge funds in their home jurisdictions while supporting a globally consistent approach. IOSCO's 189 members, which include the SEC and the UK's Financial Services Authority, regulate more than 90 percent of the world's securities markets.
The six principles are:
- Hedge funds and/or hedge fund advisers should be subject to mandatory registration;
- Hedge fund advisers which are required to register should also be subject to appropriate ongoing regulatory requirements relating to: (i) organizational and operational standards; (ii) conflicts of interest and other conduct of business rules; (iii) disclosure to investors and (iv) prudential regulation;
- Prime brokers and banks which provide funding to hedge funds should be subject to mandatory registration/regulation and supervision and have in place appropriate risk management systems and controls to monitor their counterparty credit risk exposures to hedge funds;
- Hedge fund advisers and prime brokers should provide to the relevant regulator information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks);
- Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate; and
- Regulators should have the authority to cooperate and share information, where appropriate, with each other, in order to facilitate efficient and effective oversight of globally active advisers and/or funds and to help identify systemic risks, market integrity and other risks arising from the activities or exposures of hedge funds with a view to mitigating such risks across borders.
Although IOSCO does not believe that the current financial crisis is a hedge fund driven event, it noted that the crisis has given regulators the opportunity to consider hedge funds' systemic role and the regulatory risks they may pose to the oversight of markets and protection of investors.
Both the Managed Funds Association (the "MFA") and AIMA voiced their general support of the IOSCO report. However, the MFA cautioned that it looked forward to reviewing the report's full text and noted that it represents "the basis for a continued dialogue toward a smart approach to the regulation of fund advisers." Similarly equivocal, AIMA stressed its position that hedge fund advisers, rather than the funds themselves, should be registered and noted that it is concerned that IOSCO's recommendations may lead regulators to seek quantity rather than quality of data.
IOSCO Report: IOSCO Hedge Fund Oversight Final Report (June 2009) (PDF)
IOSCO Press Release: IOSCO Publishes Principles for Hedge Funds Regulation (June 22, 2009)
MFA Press Release: Managed Funds Association Responds to IOSCO (June 22, 2009)
AIMA Press Release: AIMA Welcomes IOSCO Hedge Fund Regulation Principles (June 22, 2009)