The investment management industry is one of the most regulated industries in the United States.
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This article briefly introduces some important Acts every hedge fund manager should know.
The Securities Act of 1933
Congress enacted the Securities Act of 1933 during the great depression in response to the stock market crash of 1929. This act regulates the offer and sales of securities.
Section five of this act created a registration requirement for securities. Not all securities need to be registered and exemption is granted through Rule 506 Regulation D. Almost all hedge funds use this exemption to avoid disclosure and hassle.
As a hedge fund manager, you must give up some freedom in order to qualify for the exemption. Understanding the Securities Act of 1933 will help explain why hedge fund investors are mostly accredited invests, why hedge funds don't advertise, and other hedge fund quirks.
Investment Company Act of 1940
The Investment Company Act of 1940 was enacted by Congress in response to the stock market crash of 1929, the Great Depression, and the rise of mutual funds and other investment companies. The purpose of this act is to develop investor confidence by regulating investment companies.
As a hedge fund manager, you need to understand Section 3(c )1 of this Act. This section details how an investment company could be exempt from registration. This section tells you how many investors you could have, how individuals are counted (which is probably more complicated than you would suppose), who can invest, marketing regulartions, etc.
The Investment Advisers Act of 1940
As the name implies, this act regulates money managers. This Act contains provisions on a wide variety of issues, from accounting to prohibited transactions. For example, the record-keeping requirements regulate the custody of securities and the reporting requirements regulate communication between managers and clients.
There are other important Acts hedge fund managers should be aware of too, including the Employee Retirement Income security Act of 1974, Commodities Exchange Act of 1936, Taxpayer Relief Act of 1997, etc.
It is important for hedge fund managers to understand the rules and regulations that directly impact their business. If you are thinking about starting a hedge fund, I highly recommend you to go read the original sources and also stay tuned to updates.