Hedge Fund Manager’s Lawsuit Against Regulation Rebuffed By SEC Lawyers

by Mike Godfrey, for LawandTax-News.com, Washington

23 May 2005

Lawyers acting for the Securities and Exchange Commission in an action challenging the regulator's decision to subject hedge funds to greater scrutiny have dismissed claims that the SEC overstepped its legal remit.

According to an SEC legal brief filed last week with the US Court of Appeals for the DC Circuit, claims against the regulator "do not come close" to providing a basis upon which the courts could set aside the new rule that effectively classifies hedge fund managers as investment advisors and therefore subject to regulatory oversight.

The brief was submitted in response to a lawsuit brought by Phillip Goldstein, portfolio manager at hedge fund Opportunity Partners in New York. Goldstein has accused the SEC of overstepping its authority by changing the definition of a ‘client’ under the Investment Act of 1940, so that virtually all US hedge fund managers will be required to register as an Investment Advisor.

“That was never the intent of Congress,” Goldstein stated late last year.

“What the SEC is essentially doing is superseding Congress’s intent and making law, and they’re not allowed to do that, and we plan to challenge that,” he added.

Goldstein explained that legal action is "really the only route you can go when you feel that an agency is abusing its authority".

In response, an SEC statement released prior to the case stated that: "The Commission carefully complied with its legal obligations in adopting these rules, and we expect to defend them vigorously in court."

The SEC brief also tackles the lawsuit's claim that a 1999 Presidential Working Group determined that registering hedge fund advisors wasn't an appropriate way to monitor hedge funds.

According to the Commission's lawyers, the SEC is charged with investor protection, and acted properly since hedge funds have grown substantially since 1999 and have subsequently been linked to trading abuses in the $8 trillion mutual fund industry.

Goldstein will have the opportunity to reply to the SEC in the weeks ahead. Oral arguments in the case could be scheduled later this summer.

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