All indications are that during the next year, hedge funds will

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1 The Ascent of the Hedge Fund CCO and Compliance Program By Steven B. Boehm and Bibb L. Strench Steven B. Boehm is a partner in the Washington, DC office of Sutherland, Asbill & Brennan LLP. He concentrates his practice in the corporate and securities area, with an emphasis on matters involving asset management arising under the jurisdiction of the SEC. He represents registered and unregistered investment funds and investment advisers on a broad range of regulatory and transactional matters. His practice includes representing business development companies (BDCs) and other public vehicles for private equity investing. Additionally, Steve is known as a leading authority on the organization and operation of college tuition savings 529 plans. Bibb L. Strench is a partner in the Washington, DC offices of Sutherland, Asbill & Brennan LLP. He provides advice to registered investment companies, organizers of hedge funds and other private investment companies, investment advisers and SMA sponsors on all issues related to the operation of their businesses. He focuses his practice on fund formation, compliance programs and auditor independence issues. All indications are that during the next year, hedge funds will experience a dramatic shift from operating in a virtually regulation-free environment to being subject to substantial regulatory oversight in some form. Except for a brief period a few years ago when it appeared that hedge fund advisers would have to be registered with the U.S. Securities and Exchange Commission (SEC), hedge fund sponsors have had the luxury of operating without the transparency required by compliance mandates. The world financial crisis, with its high-profile progeny, such as the exposure of the Bernard L. Madoff Ponzi scheme, has abruptly ended this era, which started in 1949, the year most accept as the birth of the hedge fund industry. From an industry perspective, the storm clouds of regulation are on the horizon and moving fast. A steady stream of rumors and predictions even drafts of laws, regulations and best practices appears nearly monthly, emanating from international financial organizations, Congress, the SEC and other federal regulators, states and trade groups. Naturally, senior executives at hedge funds are turning to their chief compliance officers (CCOs) to best prepare and equip them for the coming wave of regulation. One fundamental axiom in the compliance profession is the direct relationship between new regulation and increased demands placed on compliance programs and the CCOs who administer them. This article considers the new regulatory initiatives, laws and regulations that hedge fund CCOs will soon be asked to tackle, as well as the lesspublicized regulations with which hedge funds currently have had to comply. Following this discussion are suggestions on how hedge funds and their CCOs may begin to prepare themselves for the expected regulatory onslaught. When the dust settles, a safe bet that does not have to be hedged is that the CCOs at most hedge fund organizations will have risen to the top echelons of the corporate ladder, and the programs they administer will stand shoulder to shoulder with other operating functions of the hedge fund organization in terms of resources and senior executive attention. New Hedge Fund Laws and Rules on the Horizon Legislators, regulators and trade groups of every kind have recently proposed hedge fund regulations. 1 Although these proposals are, in 2009, Sutherland, Asbill & Brennan LLP PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

2 most cases, preliminary and extremely fluid, this article provides a snapshot of where legislation and regulations stand today. U.S. Senate On January 29, 2009, Senators Chuck Grassley (R-Iowa) and Carl Levin (D-Michigan) introduced the Hedge Fund Transparency Act of 2009 (S. 344), which now has moved to the Senate Committee on Banking, Housing and Urban Affairs. Under S. 344, Congress would amend the Investment Company Act of 1940 (1940 Act) to require hedge funds with $50 million or more of assets under management to: register with the SEC, 2 maintain books and records that the SEC may require, cooperate with any request by the SEC for information or examination, establish an anti-money laundering program, and file an information form with the SEC electronically, at least once a year. The information form would contain: the name and current address of each individual who is a beneficial owner of the hedge fund, the name and current address of any company with an ownership interest in the hedge fund, the name and current address of the hedge fund s primary accountant and primary broker, an explanation of the structure of ownership interests in the hedge fund, information on any affiliation with another financial institution, a statement of any minimum investment commitment required of an investor in the hedge fund, the total number of any investors in the hedge fund, and the current value of the assets of the hedge fund and the assets under management by the hedge fund s adviser. With respect to the first item, Grassley and Levin clarified on February 5, 2009, that their bill would not require disclosure of such personal details. According to their statement, the bill does not require the disclosure of hedge fund clients who merely invest in the fund. Instead, the bill requires disclosure of a hedge fund s benefi cial owners, who profi t from the fees generated in operating the fund; such ownership information has already been requested and provided on a routine basis for years in the voluntary hedge fund registrations filed with the Securities and Exchange Commission. In short, any interpretation or characterization of our bill as requiring hedge funds to disclose their clients names is incorrect. 3 Hedge funds, however, would not be subject to the full panoply of regulations under the 1940 Act that apply to traditional investment companies currently required to be registered with the SEC, such as mutual funds. 4 Furthermore, S. 344 would not require funds with less than $50 million under management to register with the SEC. Another bill related to hedge funds was also introduced recently in the U.S. Senate. The Financial Crisis Investigation Act of 2009, S. 400, would expand the authority and responsibilities of the panel overseeing the Troubled Asset Relief Program, to include a review of current regulation over hedge funds, private equity funds, and the markets for alternative investments. U.S. House of Representatives On January 27, 2009, Representatives Michael Capuano (D-Massachusetts) and Michael Castle (R-Delaware) introduced the Hedge Fund Adviser Registration Act of 2009 (HR 711) that would amend the Investment Advisers Act of 1940 (Advisers Act) to eliminate the registration exception for investment advisers with fewer than 15 hedge fund clients. H.R. 711 would accomplish this by striking subsection (b)(3) from Section 203 of the Advisers Act, thereby making SEC Rules 203(b) (3)-1 and 203(b)(3)-2 null and void. These rules exempt hedge fund advisers from registering with the SEC by deeming the hedge fund, not the investors, to count as clients for purposes the 15 or fewer client-exemption in Section 203(b)(3). Thus, under the current regulatory scheme, an adviser to five hedge funds with 100 investors is not required to register as an investment adviser because it is deemed to have 5, not 100, clients. If H.R. 711 is enacted, such an adviser, or even an adviser to a single hedge fund, would have to register with the SEC because the 15-client de minimis exemption would no longer exist. Also on January 27, 2009, Representative Castle introduced the Hedge Fund Study Act (HR 731), 16 MAY JUNE 2009 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

3 which would require the President s Working Group on Financial Markets ( Working Group ) to conduct a study on the hedge fund industry. If the bill is enacted, the Working Group would have to submit a report to Congress no later than 180 days after the date of enactment. The Working Group would be authorized to study the: nature and characteristics defining a hedge fund, growth of hedge funds, growth of pension fund investment in hedge funds, extent to which hedge funds can protect themselves from risk, extent to which there are constraints on hedge fund leverage, extent to which hedge funds pose risks to financial markets or investors, nature and extent of international regulation of hedge funds, and the nature of benefits hedge funds provide to the economy and markets. The report submitted to Congress would have to include: any proposed legislation relating to suggested disclosure requirements for hedge funds; the type of information hedge funds should disclose to the regulators and the public; the efforts the hedge fund industry or financial institution regulators should undertake to improve practices or provide successful examples of initiatives; and the nature, degree and scope of any oversight responsibilities the President s Working Group should have over the hedge fund industry. Other bills related to hedge funds were also introduced recently in the House: The Financial Oversight Commission Act of 2009, H.R. 74, which would establish a body within the legislative branch to investigate the causes underlying the financial crisis, including the role that hedge funds and private equity may have played; and the Pension Security Act of 2009, H.R. 712, which would amend the 1974 Employee Retirement Income Security Act to require defined benefit pension plan disclosure of plan investments in hedge funds. U.S. Department of Treasury Treasury Secretary Tim Geithner has provided a general framework of hedge fund regulatory reform in Congressional testimony and speeches, including testimony on March 26, 2009, before the U.S. Senate Committee on Banking, Housing and Urban Affairs. He has rationalized regulation, in part, by arguing that activities of large hedge funds pose a potential systemic risk to the United States and global economies. In general, he advocates the regulation of hedge funds in the following ways: One fundamental axiom in the compliance profession is the direct relationship between new regulation and increased demands placed on compliance programs and the CCOs who administer them. All advisers to hedge funds and other private pools of capital whose assets under management exceed a certain threshold would have to register with the SEC. All funds advised by an SEC-registered investment adviser would be subject to investor and counterparty disclosure and reporting requirements. Funds would have to disclose information necessary to determine whether their size or leverage would pose a systemic threat. The SEC would share the information it received with the systemic risk regulator. 5 Securities and Exchange Commission The SEC has made public proposed hedge fund regulations. One reason is that the SEC is waiting on Congress to pass hedge fund legislation, which would then specify what rule-making authority the SEC would have over hedge funds. Nevertheless, SEC Chairman Mary Schapiro testified on March 26, 2009, before the Senate Committee on Banking, Housing and Urban Affairs concerning proposals to enhance regulation of the securities markets, including requiring investment advisers of hedge funds to register under the Advisers Act. She stated that such laws, if enacted, would likely subject hedge fund advisers to the SEC s examination authority and lay the groundwork for future rule-making. 6 She also suggested requiring the individual hedge funds themselves to register under the 1940 Act, which would give the SEC deeper insight into such funds. On January 13, 2009, Chairman Schapiro testified before the PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

4 same Senate Banking Committee at her nomination hearing that requiring hedge fund advisers to show their books to regulators will give the SEC a better handle on that industry. 7 States Several states have proposed or are considering the regulation of hedge funds. Recently, the Connecticut General Assembly proposed three bills that would regulate hedge funds. If these bills are enacted, they would require: All indications are that during the next year, hedge funds will experience a dramatic shift from operating in a virtually regulation-free environment to being subject to substantial regulatory oversight in some form. hedge funds located or conducting business in Connecticut to obtain a license from the Connecticut Banking Commissioner; hedge funds domiciled in Connecticut and receiving money from Connecticut pension funds to disclose to prospective pension fund investors, upon request, certain fi nancial information, including portfolio information relative to the assets and liabilities of such funds; and stringent qualifications for, and information provided to, investors in private funds that have offices in Connecticut. International Regulatory Bodies As part of their efforts to monitor systemic risk to global financial systems, the Group of Twenty Finance Ministers and Central Bank Governors (G-20) announced on April 2, 2009, its intention to regulate systemically important hedge funds. 8 Commentators have speculated that systemically important hedge funds are those funds that have $50 billion or greater of assets under management. The G-20 issued a communique stating that hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of the systemic risk that they pose individually or collectively. The purpose of this message is to ensure that [hedge funds] have adequate risk management. The communique further stated that a new Financial Stability Board would determine that criteria by the end of Another international body, the Group of Thirty (G-30) 9 recently made similar recommendations. In February 2009, the G-30 issued a report stating: The need for greater transparency supports the introduction of formal authority to register and track those funds, in terms of size, use of leverage, risk styles, and other important variables. Managers of hedge funds with strategies that employ substantial borrowed funds should be required to register with an appropriate national prudential regulator. The prudential regulator of such managers should have authority to require periodic regulatory reports and public disclosures of appropriate information. For hedge funds above a size judged to be potentially systemically significant, the prudential regulator should have authority to establish appropriate standards for capital, liquidity, and risk management. 10 Trade Groups Since 2000, the Managed Funds Association (MFA), which is the leading trade group for the hedge fund industry, has annually issued its Sound Practices for Hedge Fund Managers. The 2009 edition of Sound Practices provides comprehensive updates in every area of guidance, including recommendations for disclosure and responsibilities to investors, valuation policies and procedures, risk management, trading, business operations, compliance, conflicts of interest, business practices, anti-money laundering, and business continuity and disaster recovery practices. These are core areas generally covered by the compliance programs of investment advisers and public funds (e.g., mutual funds). MFA coordinates with similar offshore trade groups, including the Alternative Investment Management Association (AIMA), a large hedge fund organization based in the United Kingdom. AIMA recently proposed a number of significant new hedge fund reforms, including: Regular reporting and increased transparency of systemically significant positions and risk 18 MAY JUNE 2009 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

5 exposures by managers of large hedge funds to their national regulators (the regulator of the jurisdiction in which the manager is authorized and registered to operate). An aggregated short position disclosure regime to national regulators. 11 Other international hedge fund trade groups have called for regulation. The International Organization of Securities Commissioners published a report stating that the mitigation of systemic risk requires not only direct regulation of hedge funds through registration and ongoing supervision requirements, but oversight of the prime brokers and banks that fund and otherwise facilitate the industry. Existing Regulations Surprising to many, hedge funds currently are, as a practical matter, regulated, although only to a limited degree. Hedge fund regulation is less obvious because it often takes the form of conditions to exemptive rules that hedge funds must comply with in order to avoid the general application of certain securities and commodities laws to their operations. Hedge funds avoid having to register their interests under the Securities Act of 1933 (Securities Act) by relying on Rule 506 of Regulation D under that Act, which prohibits advertising and general solicitations and imposes other restrictions. Thus, hedge fund advisers must have procedures in place to ensure that they preserve their ability to rely upon the Regulation D exemption, including procedures designed to make sure the hedge fund adviser and its employees do not inadvertently advertise the hedge funds. Similarly, to avoid registration under the 1940 Act, a hedge fund must rely on one of two exceptions to the definition of investment company under that statute. One choice Section 3(c) (1) limits the number of hedge fund investors to no more than 100 persons. Section 3(c)(7) limits the eligible pool of investors to qualified purchasers, individuals with at least $5 million under management or institutions with $25 million. Procedures must be in place to cap investors at 100 for 3(c)(1) funds or screen investors to only those who are qualified purchasers for 3(c)(7) funds. Hedge funds and hedge fund advisers are potentially subject to direct regulation under the Securities Exchange Act of 1934 (Exchange Act). For example, a number of reporting provisions require filings with the SEC when ownership positions in public companies cross certain thresholds, as well as when the aggregate ownership of public companies equals or exceeds $100 million. Investment advisers that provide advice on futures contracts and commodity options to a hedge fund generally must register with the Commodity Futures Trading Commission (CFTC) as a commodity trading adviser and a commodity pool operator, or rely on exemptions from CFTC regulations. In order to obtain favorable pass-through tax treatment, hedge funds must comply with a number of provisions under the Internal Revenue Code that affect their structure and operations. Many advisers do not allow more than 25 percent of the hedge fund s assets to consist of funds invested by retirement plans to avoid being deemed a fiduciary and subject to the prohibited transaction rules of the Employee Retirement Income Securities Act of Hedge funds are also subject to the privacy rules administered by the Federal Trade Commission (FTC). Finally, hedge fund advisers of offshore funds often must comply with the anti-money laundering laws of the country where the offshore fund is organized. In addition, hedge funds that engage in short sales are subject to SEC interim rules governing such transactions, which include limited disclosure requirements under the SEC s interim rule requiring nonpublic reporting of short positions. Part of a package of emergency actions to stem abusive short selling in the marketplace, the rule is scheduled to expire in August 2009, unless the SEC finalizes it. Senior officials have indicated that public disclosure of short positions remains under consideration. Irrespective of whether a hedge fund or its adviser relies on an exemption, they remain subject to the antifraud provisions of the securities and commodities laws. Thus, the SEC, CFTC and state securities agencies retain jurisdiction to investigate or bring enforcement action with respect to fraud, deceit, or unlawful conduct by a hedge fund adviser in connection with securities or securities transactions. Designing or Revamping Core Structure of a Compliance Program to Address New Regulations As a first step toward preparing for the coming wave of regulation and accompanying operational transparency, hedge fund advisers should review their PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

6 current compliance programs to ensure certain core components are present. These are components of compliance programs that are common at most types of financial service organizations whether or not they manage hedge funds. Obvious components of a compliance program are the compliance manual and CCO. Other components include the following. Annual Reviews: Registered investment advisers are required to conduct an annual review of their compliance programs, although the review does not have to include a written report. Nevertheless, a written annual review should be drafted because it is an information piece that can be used to educate the senior management and/or board of the hedge fund adviser, as well as regulators. Certifications and sub-certifications of the performance of specific compliance procedures can be used to support conclusions made in the report. Matrices and Other Tools: Keeping track of the myriad regulations soon to arrive at hedge fund complexes and how they are being addressed will be challenging. One tool available to a hedge fund adviser is a matrix that vertically lists all of the legal requirements that must be met and horizontally describes the procedure in place to meet the requirement and the person responsible for ensuring the procedure is followed. Other tools common in compliance programs that regulators expect to see are checklists, exception reports, internal audits and various types of reports (e.g., post-transaction reports). Supervisory System: The increased regulation will lead to increased compliance procedures that must be followed and monitored to ensure they were followed. Compliance functions are likely to be diffused among personnel in the entire organization. Ultimately, the top officers of a hedge fund bear direct and indirect compliance responsibilities. Since multiple employees are involved, it is critical that a hierarchical supervisory system be implemented to ensure that everyone knows his or her compliance responsibilities, that certain employees make sure other employees have fulfilled their responsibilities, and that these checkers are checked. An effective supervisory system may not only lead to a smoother functioning compliance program, it can also protect a supervisor from liability caused by a compliance violation of a direct or indirect subordinate, as the SEC often adds failure-tosupervise charges to charges it brings against the primary violators. Testing: Regulators heavily discount their assessment of the effectiveness of a given compliance program when there is no evidence that testing has occurred. Testing involves performing an analysis of a particular operation to ascertain whether any unusual patterns exist that might suggest a compliance irregularity. For example, a compliance officer might compare the performance of a hedge fund with the performance of a private account that the adviser manages with similar investment objectives. Deviations would warrant further investigation to ensure that one client is not being purposely or inadvertently disadvantaged as compared to other clients. Key aspects of the organization should be periodically tested and results of the testing, as well as any actions taken in response to the testing, should be retained. Third-Party Reviewers: A hedge fund adviser s entire compliance program or significant parts of the program may present challenges, some highly technical in nature. One example is hedge fund accounting, which is quite complex since accounts are maintained, and thus accounting is done, both at the fund level and for each investor. One available tool is an SAS-70 report issued by an independent accounting firm that assesses a particular compliance procedure or set of procedures. Regulators often find comfort in such reports. Training: Virtually every employee in a hedge fund complex will have some compliance responsibilities and cannot be expected to perform them in a satisfactory way without training. Training sessions also demonstrate to regulators that the hedge fund adviser has a vibrant compliance program. SEC-registered investment advisers are required to conduct training programs. Specific Compliance Areas Most Likely Impacted by the Coming Hedge Fund Regulations Once the compliance structure is in place, the hedge fund adviser should create an inventory of laws and regulations applicable to the hedge fund operations. These, of course, may include some of the new statutory provisions and rules currently in draft form with congressional drafting committees and regulators such as the SEC. As previously noted, hedge fund advisers are potentially subject to myriad regulations even though neither the adviser nor the hedge fund it advises is required to register with the SEC. Procedures 20 MAY JUNE 2009 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY

7 should be in place designed to ensure that hedge fund operations comply with such regulations. While the specific regulations due to arrive over the course of the year are not precisely known, it is highly likely that the following compliance program areas will be affected. Anti-Money Laundering Programs: Ever since the enactment of the USA PATRIOT Act, the hedge fund industry has dodged being subjected to anti-money laundering regulation, except for those advisers managing hedge funds in foreign jurisdictions. Those days appear to be numbered, as at least one bill, previously described, would require hedge fund advisers to have anti-money laundering procedures. Hedge fund advisers likely will need to implement procedures designed to ascertain the identity of and evaluate any foreign person who supplies funds or plans to supply funds to be invested, monitor for suspicious activities and, in certain cases, file reports with the U.S. Department of the Treasury or other government agencies. It is reasonable to expect that such compliance programs would principally be implemented by the investment adviser or broker-dealer. Conflicts of Interest: Undisclosed conflicts of interests and the lack of procedures to address them are centerpieces of many of the recent enforcement cases brought against hedge fund advisers. Even in clean shops, the very nature of the hedge fund adviser and hedge fund investor relationship creates a conflict of interest. For example, an adviser that charges a performance fee without clawback provisions or high water marks may have the incentive to cause the hedge fund to make more risky investments. All conflicts of interest should be identified and, where necessary, procedures designed to address them should be implemented. Filings: The SEC, banking agencies and other regulatory bodies have all indicated that transparency of hedge fund operations is a public policy goal. Thus, hedge fund advisers will be required to generate information about the hedge funds and report such information to various agencies. Hedge fund CCOs will need to develop systems to ensure that mandatory reports are timely filed. In many cases, reports will have to be filed electronically, which may require special hardware or software to transmit the filings or contracting with vendors that can make such filings. Licensing Requirements: A number of states have expressed an interest in regulating employees involved in hedge fund operations. The likely approach is requiring them to register. Thus, compliance procedures will have to ensure that appropriate personnel are licensed and that their actions comply with applicable regulations. Marketing and Securities Offering: Hedge fund advisers and hedge funds themselves likely will have to register; however, the securities they issue will remain unregistered. This does not free the adviser from implementing marketing and securities offering compliance procedures. On the contrary, these procedures may be the most important. Strict procedures must be in place and designed to prevent the hedge fund from making an unregistered public offering violating the Securities Act of 1933, as amended. For example, specific information about the hedge fund should not be placed on public areas of the adviser s web site. In addition, procedures should be in place that govern the private offering of the interests in the hedge funds, including the accuracy of the private placement memorandum s content and timeliness of its delivery, subscription process, questionnaires eliciting information about potential investors, and the form of communications made to investors who have no prior relationship with the hedge fund adviser or its placement agent. Operational Core Areas: Procedures governing core areas of the hedge fund s operations must be the heart of the compliance manual and receive the most attention. These core areas are: portfolio management, trading practices, valuing hedge fund assets, calculating and collecting fees from the hedge, and hedge fund accounting, including investors capital accounts and custody. Risk Management: Advisers of large hedge funds likely will be required to register because they create systemic risks for the economy. It follows that their operations create internal risks, especially if they leverage or invest in esoteric securities or instruments that have counterparties. Risks must be identified and assessed. Procedures designed to monitor and, if possible, control the risks should then be put in place. Service Providers: The day-to-day operations of a hedge fund involve a multitude of service providers, including its prime broker, accountants, banks and counterparties. The functions performed by PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY MAY JUNE

8 these service providers, many of which are governed by contracts, should be cataloged and procedures put in place to ensure they operate smoothly. Senior Management and CCOs: If Congress elects to require hedge fund advisers to register with the SEC as investment advisers, they will be required to have CCOs. In the current world of investment advisers, there has been a dramatic rise in the importance of the CCO position in the adviser s organization. In many mutual fund complexes, the CCO is a senior officer who resides on the executive floor along side the Chief Investment Officer, Chief Operating Officer, Treasurer and General Counsel. This model is appropriate for a hedge fund complex in light of the significant number of regulations likely headed toward the hedge fund industry. Conclusion Hedge fund regulatory schemes are being constructed. While their ultimate contents remain uncertain, enough of their basic features can be intuited to warrant hedge fund advisers to start the process of revamping their compliance programs to address the expected requirements. The CCO, with the strong support of management, must be proactively gearing up the organization for the new regulatory order. ENDNOTES 1 Many of the proposed statutes and regulations would apply to private investment companies, which would include venture capital funds, private equity funds and special purpose vehicles, in addition to the types of vehicles commonly referred to as hedge funds. This article focuses only upon hedge funds; i.e., pools of investment securities, the interests of which are privately offered. Hedge funds differ from venture capital and private equity funds primarily because the managers of hedge funds attempt to control, dictate the affairs of, or otherwise influence the companies in which the funds invest to a lesser degree than the managers of venture capital and private equity funds, which typically exert some degree of control over the portfolio companies in which their funds invest. 2 Currently private investment funds avoid registration under the 1940 Act by complying with the exceptions to the definition of investment company set forth in either Section 3(c)(1) or 3(c)(7) of the 1940 Act. A hedge fund that meets the requirements set forth in either section 3(c)(1) or 3(c)(7) is specifically excluded from the definition of investment company and therefore outside the scope of the 1940 Act. S. 344 would strike sections 3(c)(1) and 3(c)(7) as exclusions from the definition of investment company, therefore bringing such funds within the scope of the 1940 Act. 3 See Floor Statement of Senator Chuck Grassley of Iowa (Jan. 29, 2009, senate.gov/news/article.cfm?customel_data- PageID_1502= S. 344 would exempt hedge funds from the full requirements by adding provisions to Section 6 of the 1940 Act. 5 See Treasury Secretary Tim Geithner written Testimony House Financial Services Committee Hearing (March 26, 2009), ustreas.gov/press/release/tg71.htm. 6 See Testimony Concerning Enhancing Investor Protection and Regulation of the Securities Markets (March 26, 2009), ts032609mls.htm. 7 In 2005, the SEC sought to oversee hedge funds by regulating their advisers. It adopted amendments to rules that effectively required hedge fund advisers to register under the Advisers Act. Those amended rules were invalidated by the U.S. Court of Appeals of the District of Columbia in See Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). If either S. 344 or H.R. 711 are enacted, it would effectively overturn the Goldstein decision. 8 The G-20 was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. 9 The G-30 is a private, nonprofit, international body established in 1978 that is composed of very senior representatives of the private and public sectors and academia. 10 See 11 See AIMA Announces New Policy Platform (Feb. 24, 2009), dia_centre/press-releases.cfm/id/56cd27dd- 6B BC5D4CA784ED55B1. This article is reprinted with permission from Practical Compliance and Risk Management for the Securities Industry, a professional journal published by Wolters Kluwer Financial Services, Inc. For more information on this journal or to order a subscription to Practical Compliance and Risk Management for the Securities Industry, go to onlinestore.cch.com and search keywords practical compliance 22 MAY JUNE 2009 PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY