KEY BISCAYNE, Fla. - Less than a week after a rule took effect that requires hedge fund managers to register as investment advisers with the Securities and Exchange Commission, the focus already has shifted toward what might be next on the regulatory front.
"Right now, hedge funds are being looked at from all different angles," said Steven Lofchie, a partner at New York law firm Davis Polk & Wardwell.
Mr. Lofchie, who spoke here last week to more than 600 hedge fund industry representatives attending the Managed Funds Association's annual conference, echoed sentiments heard throughout the conference regarding what was perceived as the SEC's general lack of understanding about hedge funds.
"The SEC is well intentioned, but having sat in on training sessions with examiners, I can't believe they are going to be able to understand hedge fund trading strategies," he said. "My sense is that many of the exams will be along the lines of business strategies and operations, but hedge funds will also be looked at indirectly through their broker-dealer relationships."
Speculation as to how and why the SEC will start to home in on the $1 trillion hedge fund industry emerged as a central theme at the con- ference, hosted by the Washington- based MFA, which promotes itself as the industry's voice.
"Hedge fund managers represent the square peg being forced into the round hole of the Investment Advisers Act, and that's why I think you'll see more and more regulation popping in the Advisers Act," said Terrance O'Malley, a partner at New York-based law firm Schulte Roth & Zabel LLP.
In some respects, the general fear that the new registration rule could push the industry down a slippery slope of increased regulatory oversight is partially driven by the notion of a regulatory unknown - something the MFA is trying to address.
"We have met with the review staff at the SEC, and we've held education seminars over there," said Robert Aaron, the MFA's chairman. "It's an active process."
While the MFA has voiced strong opposition to the registration rule, the association also has worked to maneuver the hedge fund industry and the SEC onto the same page in terms of what each can expect from the other.
The MFA, which initially was established 15 years ago as the Managed Futures Association, has experience in building relationships with regulatory bodies.
Because of the association's origins, many of its members are commodity trading advisers, a type of hedge fund.
The relationship between the MFA and futures industry regulator bodies, such as the Commodity Futures Trading Commission and the National Futures Association, has been described as open and amicable.
The contrasts between such regulatory authorities and the SEC have been perceived by some as stark and telling.
One example was the keynote luncheon speech by CFTC Chairman Reuben Jeffery III, who compared hedge fund managers to National Football League quarterbacks in that "they get too much of the blame and too much of the credit for whatever happens."
As a way of rolling with the changes, he encouraged the hedge fund industry to "memorize" the contents of a sound-practices research report published by the MFA in 2003.
"The hedge fund industry is a victim of its own success, and gone are the days of thinking of this as a cottage industry," Mr. Jeffery said. "Greater interest in hedge funds by a wider market of individual investors has increased the regulatory concerns."
SEC Chairman Christopher Cox declined an invitation to speak at the conference, citing a scheduling conflict. Another example of the chasm relates to a working list of possible audit questions, which hedge fund managers haven't been able to get from the SEC even though the futures industry regulators do share such lists."It shouldn't be a secret what the regulators are looking for," said David Matteson, a partner at Chicago law firm Gardner Carton & Douglas LLP.
Mr. Aaron acknowledged that there is much work to be done, but he remains confident that hedge fund managers can learn to work with the SEC. "We do expect, over time, to develop a relationship with the SEC that's similar to the relationship we have with the CFTC," he said. "Remember, there were a lot of rules at the CFTC that we opposed 15 years ago."