SEC Approves Hedge Fund Registration Proposal

by Phillip Morton, Investors Offshore.com

28 October 2004

US hedge funds will soon have to register with Securities and Exchange Commission and submit to a stricter regime of regulation and disclosure after the regulator’s leadership approved new measures on Tuesday.

The new regime, which was approved after a 3-2 vote by the SEC Commissioners, will come into effect in February 2006, and only funds with less than $25 million under management will be exempt from registration.

SEC chairman William Donaldson, who pressed hard for the change, argued that tighter regulation was necessary to prevent a repeat of recent market timing and late trading scandals, telling an open meeting of the SEC that not regulating the industry "would be a major dereliction of the commission's responsibility."

"The message to the hedge fund people is, work with us,” Donaldson told reporters, adding:

“But recognize that we will pursue our regulatory obligation and we will not tolerate fraud in any form.”

The split vote reflected continued divisions among policy makers and the industry at large over the need for closer regulation of the booming hedge fund industry.

SEC Commissioner Cynthia Glassman, who voted against the measure, charged that the new rules were rushed through without sufficient consultation.

The other dissenter, Commissioner Paul Atkins, also raised concerns over the SEC’s statutory authority.

During the consultation period on the proposals, many hedge funds threatened to move offshore if the registration regulation was imposed.

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