Research conducted by Carbon360 of publicly available information from the SEC shows that between July 1 and September 5, 2005, only 213 new managers have been become approved Registered Investment Advisors ("RIA"). In a universe of over 8,000 funds, including hedge funds and fund of funds, approximately 1,900 managers are expected to register with the SEC, taking into account single managers may represent several funds and funds with a two-year lock-up will have a registration exemption.
"Given that filings are averaging about 100 a month, we would expect the SEC to be flooded with new registrants come December or January as managers rush to make the deadline," said Brian Shapiro, President of Carbon360, a research and advisory firm focused on the alternative asset industry. "Quoting an SEC officer with whom we spoke, they are clearly facing a management challenge." The agency will be hard pressed to find and deploy what Carbon360 believes is an additional 193 examiners beyond what the 2006 Congressional Budget Request is asking for, Shapiro added.
"There is also the question of the initial examination (audit) that the SEC is required to perform when a fund registers," said Shapiro. New registrants should expect to be examined by the SEC's internal staff within one year. The agency takes a risk-basis approach with the biggest investment managers on one to two year investment cycles, under the assumption that by focusing on the fund managers with the most assets under management more investors will be protected. Though with only 13 Risk Assessment FTE's requested in the Fiscal 2006 budget, it appears highly unlikely that the SEC will be moving quickly, especially against smaller managers that pose the greatest risk to investors.
The SEC's New York and Boston offices, which oversee New Jersey and Connecticut respectively, as well as their own states, are expected to be the hardest hit as the majority of hedge funds fall into their jurisdiction.
The SEC said that it expected to see an 8% to 15% increase in its pool of registered investment advisors, from its September 5 2005 level of 9,025, believing that nearly 50% of all hedge fund and fund of fund managers are already registered. Carbon360 believes this figure is vastly under estimated and the increase will be in the 22% range.
"We really don't believe the SEC has seen the wave hit them yet", says Shapiro. "We were surprised to see that many established players, several recognizable multi-billion dollar managers are not on the IARD list of names," he said.