Here, FedFin assesses provisions in the Dodd-Frank Act forcing SEC registration for “private funds” – that is, hedge funds and private-equity firms (other than venture-capital ones and certain others) previously outside the Commission’s ambit. New law also subjects these funds and their advisers to extensive reporting requirements and examinations to ensure that investor-protection concerns are anticipated and systemic risk is averted. This will subject covered advisers and funds to scrutiny – some of it potentially public – and prudential examination significantly different from any previously experienced by these entities and many of their advisers. Far-reaching changes in the hedge-fund and private-equity (PE) business model could reduce the ability of these entities to earn returns significantly above those of more traditional and regulated asset-management operations. Banks and their holding companies may well revisit their own asset-management business model in response not only to these provisions, but also to the “Volcker Rule” included elsewhere in the Dodd-Frank Act, which will make it far more difficult for them to invest in hedge funds and PE firms. The sharp curtailment of bank hedge-fund and PE activities enhances the competitiveness of freestanding funds, but only if the new regulatory framework permits them to operate as desired. At the least, covered funds will need to build compliance and risk-management functions often unfamiliar to them, with this posing a particular challenge for foreign investment funds seeking to continue U.S. operations.
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