The ongoing financial meltdown has resulted in intense scrutiny of the existing financial industry regulatory scheme, with calls for greater regulation coming from all quarters. Hedge funds have found themselves in the crosshairs in both the US and Europe; and increased regulation of hedge fund managers and the funds they advise is inevitable.

President Obama has promised changes in the way the federal government regulates Wall Street, calling for a “21st century regulatory framework to restore accountability, transparency and trust in our financial markets.” The president specifically identified hedge funds as entities that should be subjected to “proper oversight.” Under the Emergency Economic Stabilization Act of 2008 (commonly known as the bailout plan), the administration is charged with reviewing the current state of the financial markets and the regulatory system. By 30 April, it must submit a report to Congress providing recommendations for improvement, including “whether any participants in the financial markets that are currently outside the regulatory system should become subject to the regulatory system.” While hedge funds were not referenced directly, it is safe to assume that they were intended to be included. And on 26 March, the administration outlined its proposed “framework for regulatory reform” which includes new rules for hedge funds.

Although the administration has provided few specific details of the revised rules it will seek to impose on hedge funds, the general contours of the expected rules have become clear. On 6 February, President Obama created the President’s Economic Recovery Advisory Board (PERAB), chaired by former Federal Reserve Chairman Paul A Volcker. PERAB is an advisory body charged with providing, among other things, “analysis and information with respect to the operation, regulation, and healthy functioning of the economy and of the financial and banking system.” Volcker served as chairman of the Steering Committee of the Group of 30 which, on 15 January, issued a report focusing on recommended changes to the global framework of financial regulation. The report provides a series of core recommendations for the regulation of hedge funds that serves as a good indication of the changes which may be sought by the administration. The report also raises some interesting issues that the administration will likely address in any proposal for changes in regulation.