On February 25, 2010, the International Organization of Securities Commissions’ (IOSCO) Technical Committee published a global template (IOSCO Template) listing suggested categories of information to be collected from hedge funds and hedge fund managers by national securities regulators. According to Kathleen Casey, Chairman of the IOSCO Technical Committee and a Commissioner of the U.S. Securities and Exchange Commission (SEC), the IOSCO Template seeks to: (1) enable the collection of comparable data by regulators in different jurisdictions; (2) facilitate sharing of that data among regulators; (3) facilitate monitoring of systemic risk; (4) prevent gaps in regulatory reporting requirements; and (5) inform the legislative processes in jurisdictions considering hedge fund adviser registration bills, such as the U.S. See “U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration
,” Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009). Broadly, the IOSCO Template seeks to effectuate these goals by collecting data in four categories: (1) hedge fund trading activities; (2) the markets in which hedge funds operate; (3) hedge fund credit and funding information; and (4) hedge fund counterparty data. The IOSCO Template builds on the principles embodied in the IOSCO Technical Committee’s June 2009 report endorsing mandatory registration for hedge fund managers. See “IOSCO Report Suggests Mandatory Registration for Hedge Fund Managers and Prime Brokers
,” Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009). IOSCO is an international organization whose members include national securities regulators. Generally, its pronouncements have persuasive, but not legal, force. See “Will Hedge Fund Industry Self-Regulatory Codes, Such as the ‘Standards’ Promulgated by The Hedge Fund Standards Board, Preempt Additional Hedge Fund Regulation or Complement It?
,” Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009).
In parallel, on March 15, 2010, Senate Banking Committee Chairman Christopher Dodd (D-CT) released a Chairman’s Mark of the comprehensive financial reform bill (Dodd Bill) that he introduced as a Discussion Draft in November 2009. A week later, the Senate Banking Committee passed Chairman Dodd’s bill on a party line vote, thereby sending the bill to the Senate floor for debate, and approved a package of technical amendments to the bill. Notably, the Dodd Bill would rescind the “private adviser exemption” of Section 203(b)(3) of the Investment Advisers Act of 1940, thus requiring most hedge fund managers to register with the SEC as investment advisers. Also, the Dodd Bill would require hedge fund advisers to maintain, and potentially to file with the SEC, records and reports pertaining to assets under management, leverage, counterparty exposure, other trading and operational matters and “such other information as the SEC determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.” Importantly, the Dodd Bill includes provisions requiring the SEC, a to-be-created Financial Stability Oversight Council (FSOC) and any department, agency or self-regulatory organization that receives reports or information from the SEC (which the SEC in turn received from a hedge fund manager) to maintain the confidentiality of those reports and that information. The IOSCO Template contains no analogous confidentiality provision.
In short, the Dodd Bill lists categories of information required to be disclosed by registered hedge fund advisers and delegates considerable rulemaking authority to the SEC to expand those categories or add additional categories. Generally, the IOSCO Template calls for a broader range of disclosures from hedge fund advisers than the Dodd Bill. Especially given SEC Commissioner Casey’s role as Chairman of the IOSCO Technical Committee, hedge fund industry participants are wondering whether the SEC will look to the IOSCO Template when proposing rules relating to required disclosures by registered hedge fund advisers. (This presumes, of course, that the hedge fund adviser registration provision in the Dodd Bill or a similar provision in another bill will become law, and the broad industry consensus is that such a provision will become law.) Sources interviewed by the Hedge Fund Law Report suggested that SEC-required hedge fund adviser disclosures are likely to include more than what is included in the Dodd Bill but less than what is included in the IOSCO Template. In an effort to assist hedge fund managers in preparing for an imminent registration requirement, and the concomitant disclosures it may require, this article: provides a chart comparing the categories of disclosure called for by the IOSCO Template and the Dodd Bill, showing precisely what is included in each and where they differ; discusses the confidentiality provisions in the Dodd Bill; and analyzes the potential downsides of such disclosures, as well as the potential upsides of such disclosures. (Counterintuitive though it may sound, there may be practical benefits associated with the required disclosures.)