The New York Times today has an editorial on regulating hedge funds:
Before the 2009 financial crisis, David Skeel, an expert on financial regulation, explained that "hedge funds are best understood by what they are not. They are not regulated." Astoundingly, that is basically still true.
While the new reform law requires hedge funds to register with the Securities and Exchange Commission and gives the S.E.C. the power to inspect them, the funds can still skirt nearly all the laws regulating investment funds. They can operate largely in secret unless the S.E.C. audits them. They don't have to file quarterly financial statements, disclose what they are investing in or worry about restrictions on risky investments.
Professor Skeel's own Web site lists his expertise as bankruptcy and corporate labor law, and his research areas as "law and poetry" and "Christianity and the law," not hedge funds or financial regulation. Which may explain why he, and the New York Times, are so wrong about this. Here are some — just some, not all — of the ways in which hedge funds are regulated:
If they are public companies, such as Fortress or Och-Ziff, they are subject to the same rules as any other public company.
If they are private companies, they are regulated privately by their investors, who, if they don't like what is going on, can either choose not to invest or decide to pull their money out. Any fund with more than $100 million has to file a quarterly form 13F with the SEC, as this SEC Web site page explains; it's simply false that funds "don't have to file quarterly financial statements, disclose what they are investing in." If the fund accumulates 5% or more of a publicly traded security in a public company, it has to file a form 13D with the SEC. Plus there are all kinds of regulations on how a fund can raise capital — only from qualified purchasers, not by advertising to the general public. Most hedge funds spend lots of money on lawyers and/or compliance consultants to help comply with these laws and regulations that the Times claims do not exist.
