Prime brokerage and capital introduction: Regulatory background

Speaking about hedge funds, Stephen M. Cutler, Director of the United States Securities and Exchange Commission’s Division of Enforcement, stated that “firms that provide… prime brokerage services while recommending that fund to their customers may raise conflict issues as thorny as the hedging strategies these funds employ.” These conflicts have contributed to an increased level of regulatory scrutiny over hedge funds and their relationships with brokers. The purpose of this article is to discuss the regulatory background surrounding the relationship between hedge funds and their prime brokers and capital introduction programs sponsored by prime brokers.