Senators Grassley and Levin have introduced a bill that would require certain hedge funds to register under the Investment Company Act and the give the SEC the long-desired power it needs to examine them. The SEC tried to regulate hedge funds under the Investment Advisers Act a few years ago, but the D.C. Circuit ruled the SEC had exceeded its power. The Hedge Fund Transparency Act of 2009 is a proposed congressional response to the D.C. Circuit opinion.

Regulation of hedge funds was opposed by several members of Congress, President Bush, and many hedge fund managers when regulation was first attempted, but the current financial crisis has changed the debate. Hedge funds are traditionally small groups of private investors with significant net worth. Many argue these are not the type of investors who need the help of SEC oversight. However, given the power of institutional investors like hedge funds to move markets and affect prices for securities, a general feeling is growing that small investors want to know what hedge funds are doing.

The proposed bill would require hedge funds to register but would not subject them to the same requirements of an average public mutual fund (a traditional registered investment company). The newly registered funds would have to maintain books and records for inspection by the SEC and would need to disclose the names of all owners and explain the structure of ownership interests.

The big concern is how broad will the registration requirements be? The proposed bill eliminates the exemptions from Investment Company Act registration for investment companies with less than 100 beneficial owners and investment companies held solely by qualified purchasers. Any entity relying on those exemptions would have to register, regardless of whether it is a hedge fund.