Alert June 30, 2009

IOSCO Publishes Final Report Recommending Principles for Hedge Fund Oversight

The Technical Committee of the International Organization of Securities Commissions (“IOSCO”) published “Hedge Funds Oversight: Final Report” (the “Report”), which articulates six high level principles designed to enable securities regulators in different jurisdictions to address the regulatory and systemic risks posed by hedge funds using a globally consistent approach. The Report emphasizes the need for collective global action and application, but acknowledges that some of the Technical Committee’s recommendations will need support from other regulators, including banking standard setters. The Report also calls for a strengthening of regulatory resources and improved information sharing among regulators. SEC Commissioner Kathleen Casey chairs the Technical Committee.

The six high level principles are as follows:

  1. Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;
  2. Hedge fund managers/advisers that are required to register should also be subject to appropriate ongoing regulatory requirements relating to:
    • Organizational and operational standards;
    • Conflicts of interest and other conduct of business rules;
    • Disclosure to investors; and
    • Prudential regulation.
  3. Prime brokers and banks that provide funding to hedge funds should be subject to mandatory registration/regulation and supervision. They should have in place appropriate risk management systems and controls to monitor their counterparty credit risk exposures to hedge funds;
  4. Hedge fund managers/advisers and prime brokers should provide to the relevant regulator information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks);
  5. Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate;
  6. Regulators should have the authority to co-operate and share information, where appropriate, with each other, in order to facilitate efficient and effective oversight of globally active managers/advisers and/or funds and to help identify systemic risks, market integrity and other risks arising from the activities or exposures of hedge funds with a view to mitigating such risks across borders.

The Report notes that the focus of the initiative that produced the Report was on hedge funds, and not on “other potentially ‘unregulated’ entities such as private equity funds,” or special investment vehicles. It goes on to state, however, that many of the Report’s observations and conclusions may be applicable to other market participants that hold or control large pools of capital. (The Technical Committee issued a final report on private equity in May 2008, which is available at

The Report, which includes additional detail on disclosure (to investors and to regulators), risk management, operational standards and areas of oversight, is available at