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 Securities Act of 1933 Securities Act of 1933 The Securities Act of 1933 is the primary U.S. law that governs how securities are offered to investors. It requires companies to register their securities with the SEC and provide detailed information to potential investors, unless they qualify for specific exemptions. Hedge funds typically avoid the costly and complex registration process by using private offering exemptions, particularly those found under Regulation D. 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 Investment Advisers Act of 1940 Investment Advisers Act of 1940 The Investment Advisers Act of 1940 is the primary U.S. legislation regulating investment advisers, including hedge fund managers, establishing registration requirements, fiduciary duties, disclosure obligations, and compliance standards for advisers meeting certain thresholds. , the Exchange Act itself, and the Dodd-Frank Act Dodd-Frank Act The Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act) is comprehensive U.S. financial regulatory legislation enacted in 2010 that significantly impacted hedge funds through registration requirements, reporting obligations, trading restrictions, and enhanced compliance standards. . 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.

Section 13(d) Section 13(d) Section 13(d) of the Securities Exchange Act requires any person or group acquiring beneficial ownership of more than 5% of a company's registered equity securities to file disclosure reports with the SEC within five business days of such acquisition, applicable to hedge funds making significant equity investments. requires disclosure when someone acquires beneficial ownershipThe concept of identifying the natural persons who ultimately own or control a legal entity, used in compliance screening to detect indirect relationships with sanctioned parties. 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 Schedule 13D Schedule 13D Schedule 13D is an SEC filing that individuals or groups must submit when they acquire more than 5% ownership in a publicly traded company's voting stock. The filing reveals who the buyer is, why they bought the shares, and what they plan to do with their ownership stake—making it especially important for activist hedge funds. 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.

Section 13(f) Section 13(f) Section 13(f) of the Securities Exchange Act mandates that institutional investment managers exercising discretion over $100 million or more in qualifying securities file quarterly reports with the SEC disclosing their holdings, establishing a comprehensive disclosure regime applicable to most established hedge fund managers. applies to institutional investment managers who control accounts worth at least $100 million in qualifying securities. These managers must file quarterly Schedule 13F Schedule 13F Schedule 13F is a quarterly report that large institutional investment managers must file with the SEC. These managers must have at least $100 million in qualifying U.S. stocks, options, and certain convertible bonds under their control. The report shows what securities they owned at the end of each quarter. 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, CUSIP identifierA unique nine-digit identifier assigned to securities to facilitate trading, settlement, and clearing in the United States financial markets. (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 Rule 13f-2SEC rule requiring institutional investment managers to file monthly reports disclosing short positions exceeding specified thresholds, adopted in 2023 to increase transparency in short selling activity. and Form SHOThe SEC reporting form that institutional investment managers must file monthly to disclose gross short positions in equity securities exceeding specified dollar or percentage thresholds. 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. Short selling Short selling Short selling is an investment strategy where a hedge fund borrows securities and sells them with the expectation of repurchasing them at a lower price in the future, profiting from price declines while incurring the obligation to return the borrowed securities. 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.

Section 13(h)Provision of the Securities Exchange Act of 1934 that establishes requirements for identifying and reporting large traders in U.S. securities markets. and Rule 13h-1SEC regulation implementing the large trader identification procedures under Section 13(h), including filing requirements, entity structure rules, and broker-dealer obligations. require entities that meet "large trader" thresholds to provide identifying information to the SEC. These entities must file Form 13HSEC filing form required for large traders to register with the SEC and obtain a large trader identification number for regulatory tracking purposes. 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 in-kind distributionsDistributions where investors receive actual securities instead of cash when withdrawing from a fund., 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.