SEC Investment Management Director Buddy Donohue spoke at the Securities Industry and Financial Markets Association ("SIFMA") Conference in New York. He began by updating the audience on the regulatory developments related to the hedge fund industry and discussing the SEC's recent activities in this area. Director Donohue noted that it has now been almost a year since the D.C. Court of Appeals vacated the SEC's rule requiring hedge fund managers to register with the SEC.

Director Donohue noted that although many advisers to hedge funds did withdraw their registrations following the D.C. Circuit's decision in June last year, a significant number have voluntarily maintained their registrations. Specifically, about 2,000 of the approximately 10,000 investment advisers currently registered with the Commission indicate they advise at least one hedge fund. While about 350 hedge fund advisers appear to have withdrawn their registration as a result of the court decision, the SEC has also seen 83 advisers register since the decision for a net reduction of only about 270 advisers.

Next, the Director covered the SEC's recent rule-making activity related to hedge funds. In December last year, the SEC proposed an anti-fraud rule under the Investment Advisers Act that would clarify, in light of the D.C. Circuit's decision, the ability of the SEC to bring an enforcement action against investment advisers, including those who advise hedge funds. The SEC also proposed to revise the availability of Regulation D to hedge funds relying on the section 3(c)(1) exclusion provided by the Investment Company Act. In addition to the current accredited investor requirements for individuals ($1 million net worth or $200,000 of income ($300,000 with spouse)), these investors would also be required to have $2.5 million in investments.

Director Donohue then spoke about how the SEC's inspection arm, OCIE, and its Enforcement division have been active with respect to hedge funds. One area of particular focus has been insider trading and policies and procedures designed to prevent insider trading. He next reviewed a number of self-imposed mechanisms that have developed as the hedge fund industry has evolved and become more mature and established.

Director Donohue concluded his speech by discussing mutual fund products registered with the SEC that have the same structure and attributes of certain hedge funds. An example is the so-called long/short, or 130/30 funds, that have gained increased popularity in the past year.

Please click to access a copy of the speech.