Up until the mid-2000s, private fund firms enjoyed an exemption from SEC registration. As long as a firm managed 14 or fewer funds and didn’t publicly advertise, it was off the SEC’s radar. Some firms nevertheless implemented robust legal and compliance programs. Others did not.

The other part of the registration exemption included that funds had to be limited to 100 investors. But the limit changed in 1997 with new Section 3(c)(7) of the Investment Company Act that allowed private funds to have an unlimited number of “qualified purchaser” investors. The change (and an average annual return for the S&P index of just over 28% from 1995 to 1999) led to huge success, tremendous wealth creation, and of course regulatory scrutiny.

Then in 2003, the SEC released its milestone report, “Implications of the Growth of Hedge Funds.” The report laid the groundwork for the SEC to change its rules and require the registration of private fund firms.

At the same time, the SEC was adopting the “Compliance Rule” making registered firms have a chief compliance officer and a compliance manual, and was proposing another rule to require that registered firms have a written code of ethics. The agency was also ramping up its compliance reviews of emails, particularly in the wake of the mutual fund market-timing scandal.