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In the U.S., financial-overhaul legislation moving through Congress is widely expected to include mandatory registration with the Securities and Exchange Commission for hedge funds if they have a certain amount of assets, probably $100 million or more.
Mandatory SEC registration has long been expected, and many hedge-fund managers already are registered because deep-pocketed investors such as pension funds demand it. But registration under a newly emboldened SEC is expected to bring fresh disclosure requirements and other uncomfortable realities managers previously have staved off.
Hedge-fund executives and lawyers cite broadening insider-trading investigations, questions about how fund managers treated investors during the financial crisis and in-depth probes into details of hedge-fund operations even during routine scheduled examinations as examples of the SEC's harder-line posture.
Hedge funds have avoided heavy regulation partly because they cater to wealthy individuals, pension funds, university endowments and other investors that are supposed to be sophisticated enough to protect their own interests.
Assets controlled by hedge funds have roughly quadrupled over the past decade to $1.7 trillion now, and their share of trading volume on major exchanges has skyrocketed. Hedge funds often pursue trading strategies in corners of the financial markets that are lightly regulated, including bearish bets known as credit-default swaps.
Around the world, regulators have become increasingly concerned that their oversight of hedge funds hasn't kept up with their growing market power and the complex strategies they ply.
In recent weeks, lobbyists for Wall Street banks have tried to convince lawmakers on Capitol Hill to focus more attention on hedge funds. Heavier regulation of big investment and commercial banks would only push more money and risk-taking toward less-regulated hedge funds, the banks' representatives have argued.
Hedge funds stand to gain from certain proposals targeted at banks, such as legislation aimed at limiting their trading, which could drive talent and customers to hedge funds, investment managers say.
Hedge funds have been lobbying aggressively on Capitol Hill and with agencies including the SEC and Commodity Futures Trading Commission, trying to help craft proposed new rules in the funds' favor.
In Europe, regulators are worried that the opaque dealings of hedge funds could weaken an already creaky financial system. In the wake of bank failures and the current sovereign-debt crisis, many European officials want to know what risks hedge funds pose to markets. Speculators have also been decried by some politicians for their bearish bets on eurozone debt.
Europe has a well-worn regulatory regime for conventional asset managers that set common standards across EU countries. "Now we want to regulate that which is not yet covered" at the EU level, Elena Salgado, the Spanish finance minister, told reporters Tuesday.
In addition to disclosure obligations and leverage limits, new requirements in the EU legislation include restrictions on compensation for fund executives.
The European parliament's version of the hedge-fund law also would ban so-called naked short selling, in which an investor takes a bearish short position on a security without actually borrowing it. On Tuesday, Germany's financial-markets regulator said it is banning naked short-selling of certain euro-zone debt and credit-default swaps until next March, citing "excessive price movements" that could endanger the stability of the financial system. Also covered by the curbs are 10 financial stocks, including Deutsche Bank AG and Allianz SE. In naked short selling, the shares being sold aren't borrowed in advance.
Perhaps the most contentious provision is an EU plan to put up hurdles to marketing of so-called third-country funds doing business in the EU.
Under one version of the legislation, non-EU hedge funds would need to get permission from each country in which they want to operate. Under another version, third-country funds could get a "passport" for access to all 27 EU nations, but only if they met requirements, such as voluntarily complying with the EU's risk and compensation restrictions.
Such restrictions would apply to U.S. hedge funds and to the many London managers whose funds are domiciled offshore in tax havens like the Cayman Islands
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