Three significant regulatory agencies govern the activity of hedge funds and the managers who advise them in the United States: the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the National Futures Association (NFA).
The SEC administers the U.S. federal securities laws. It defines hedge fund generally to include any private fund having any one of three common characteristics of a hedge fund: (1) a performance fee that takes into account market value (instead of only realized gains), (2) high leverage, or (3) short selling. The CFTC is the U.S. government agency that is responsible for regulating the futures and options markets. The NFA is a nationwide self-regulatory organization that is charged with regulating every firm or individual who conducts futures trading business with public customers.
Several U.S. federal securities laws are relevant to the hedge fund manager, the funds they advise, or their investors. They are discussed in the following sections.
The Investment Advisers Act of 1940 governs the registration and regulation of U.S. investment advisors. Section 202(a)(11) of the act defines an investment advisor for purposes of the act as any person (can be either an individual or an entity) who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability ...