St. John's Law Review

Article Title

Is Systemic Risk Prevention the New Paradigm? A Proposal To Expand Investor Protection Principles to the Hedge Fund Industry

Authors

Cary Martin

Document Type

Article

Abstract

(Excerpt)

Part I of this Article describes the basic hedge fund structure, explains the benefits that hedge funds can provide to the national securities markets and highlights the controversies that are frequently associated with these investment vehicles. Part II explains why the Dodd-Frank Act is mostly focused on systemic risk prevention as opposed to investor protection, and gives a broad overview of its relevant provisions. It also demonstrates that the Dodd-Frank Act does little to increase investor protection. For example, with respect to preventing hedge fund fraud, the exemptions provided under the act will limit the SEC’s ability to detect fraud within hedge funds where fraud is most likely to occur. Part III identifies the unique investor protection issues that arise from hedge fund investments, such as the lack of standardized disclosure practices, risk calculations, and valuation mechanisms, and Part IV explains how the losses of sophisticated investors can impact other market participants, as well as the entire economy. Part V then proposes an alternative regulatory framework which would eliminate certain exemptions and exclusions from the definition of “private fund” under the Dodd-Frank Act and create a new self-regulatory organization (“SRO”) that would: (1) establish certain standardized business practices for private funds so that hedge fund investors can adequately investigate and compare potential hedge fund investments; and (2) develop a risk database system that would resolve transparency issues and promote competition within the hedge fund industry, while protecting the legitimate investing needs of hedge funds.