February 04, 2008
More on Hedge-Fund Self-Regulation: A Verret Proposal
Posted by David Zaring

Last week, we took a look at the Hedge Fund Working Group's proposed self-regulatory best practices.  JW Verret has his own proposal, out in both the Delaware Journal of Corporate Law and the Administrative and Regulatory Law News.  Here's the takeaway:

A self-regulatory model that utilizes the inherent advantage of firms regulating each other is a major theme of the policy recommendations presented. Crafting regulatory safe harbors, permissive information access, and designing legal defenses that encourage the operation of a self-regulatory entity to monitor this industry can help to overcome the severe disadvantage that bureaucratic regulators face in this field.
The SEC should take steps to encourage creation of a private market intermediary. One step might be to make information gathered through a compliance process available to a select few officially chartered private rating agencies.
The SEC should request the [industry association] to put together a proposal for a disclosure statement requirement in accordance with an original suggestion of the SEC staff SEC Report.
The SEC should enhance coordination with other regulators. It should also exempt CFTC registrants from any future registration requirement. This would continue to encourage funds to register with the [industry group], thus continuing the benefits of self-regulation in this exceptionally complex and rapidly changing environment.
The SEC should establish some statutory recognition to hedge fund best practices through safe harbor rulemaking to encourage registration with a self-regulatory body. It could provide a defense to regulatory enforcement action to any hedge fund that follows guidelines promulgated by such a body, in much the same way it recognizes such for firms that follow Generally Accepted Accounting Principles (GAAP), accounting rules promulgated by the FASB or broker-dealer best practices promulgated by the NASD.
The Martin Act should be amended by the New York legislature to limit the powers of the New York Attorney General, so that activities in compliance with SEC regulations are statutorily exempt from the definition of fraud.

But there's more in the article, including some modeling, some more recommendations, and a bit of a history of hedge funds.  Worth reading.

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