Securities Exchange Act of 1934

The Securities Exchange Act of 1934 created the modern framework for securities market regulation in the United States. The Act established the Securities and Exchange Commission (SEC) and set comprehensive rules for disclosure and trading that significantly affect how hedge funds operate.

The focuses on companies when they first sell securities to the public. In contrast, the Exchange Act of 1934 governs the secondary trading markets—the places where investors buy and sell securities after the initial offering. Most hedge fund trading happens in these secondary markets.

The Act created the Securities and Exchange Commission as the primary federal agency that regulates securities markets. The SEC oversees securities markets, broker-dealers, and market participants. It has broad authority to enforce securities laws and protect investors.

Hedge funds and their advisers must follow multiple layers of regulations. These include fiduciary duties from state law, the , the Exchange Act itself, and the . This creates a comprehensive regulatory framework that governs most hedge fund activities.

The Act establishes the regulatory framework for securities trading. This includes anti-manipulation provisions, short selling rules, and market structure regulations that hedge funds must follow in their trading activities. These provisions work together to ensure fair and orderly markets while preventing abusive trading practices that could harm market integrity.

Section 13 of the Exchange Act creates important reporting requirements that apply to many hedge fund managers. These rules require large investors to publicly disclose their holdings when they reach certain thresholds.

requires disclosure when someone acquires of more than 5% of any voting class of publicly traded equity securities. Beneficial ownership means having the power to vote shares or direct how they are voted, even if you don't technically own them. When investors cross this 5% threshold, they must file a report within five business days.

The Schedule 13D filing must reveal the investor's intentions regarding potential changes to, or influence over, control of the company. If material changes occur to previously filed Schedule 13D statements, investors must file amendments within two business days of the triggering event.

applies to institutional investment managers who control accounts worth at least $100 million in qualifying securities. These managers must file quarterly reports within forty-five days after each calendar quarter ends. The reports must include standardized information about their holdings: the company name, type of security, (a unique nine-character code for each security), number of shares owned, and current market value.

The SEC significantly expanded Section 13 reporting requirements when it adopted and in October 2023. This new reporting system became operationally effective in early 2024, with full compliance required starting July 1, 2025.

Form SHO requires institutional investment managers to disclose monthly short sale positions and activity in equity securities above specified thresholds. involves borrowing shares and selling them, hoping to buy them back later at a lower price. Form SHO filings must be submitted within fourteen calendar days after month-end.

This new requirement covers a much broader range of equity securities than traditional Schedule 13F reporting. It includes securities of privately held companies and international equity instruments. Form SHO provides information that complements traditional Schedule 13F long position reporting by revealing short positions.

This requirement represents a major expansion of transparency regarding short positions. Many hedge fund managers had to implement new operational processes for data collection and reporting to comply with these rules.

and require entities that meet "large trader" thresholds to provide identifying information to the SEC. These entities must file when they reach the specified activity level.

Entities that meet these reporting requirements receive Large Trader IDs (LTIDs). They must disclose these IDs to their broker-dealers. This system allows regulators to track and connect significant trading activity across multiple broker relationships and market venues.

Section 16 of the Exchange Act creates reporting requirements and liability rules for corporate insiders. These rules apply to officers, directors, and shareholders who own more than 10% of a public company's equity securities.

These provisions affect hedge fund managers who may be considered beneficial owners through their fund positions. They also apply to managers who serve on corporate boards of companies in which they invest.

The Exchange Act's beneficial ownership rules create particular challenges for seed investors in hedge funds. A seed investor is typically a large investor who provides initial capital to help launch a new hedge fund.

If a seed investor can vote, direct the voting of, invest through, or direct the investment activities of securities that a fund manager trades, the seed investor may be considered to beneficially own those securities. Whether beneficial ownership exists requires a detailed analysis of multiple factors.

Key factors include the size of the seed investment compared to total fund capital, the investor's ability to redeem their investment and receive , the degree of the investor's oversight of the fund manager's decisions, the investor's access to real-time position and trading information, whether trading occurs on the seed investor's balance sheet, and how much the seed investor can direct or influence the fund manager's investment strategy and activities.

This analysis is complex because each situation involves different arrangements and relationships between the seed investor and the fund manager. The determination affects both parties' regulatory obligations under the Exchange Act.