SEC Concedes Defeat In Hedge Fund Registration Battle

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

10 August 2006

Christopher Cox, chairman of the United States Securities and Exchange Commission, has announced that the SEC will not seek to appeal a court decision which overturned the regulator's registration rule for hedge funds.

In June 2006, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit unanimously struck down the SEC's hedge fund adviser registration rules under the Investment Advisers Act, in the case Phillip Goldstein, et al. v. Securities and Exchange Commission.

Based on advice from the SEC's Solicitor and General Counsel, Cox said in a statement that it would be "futile" for the Commission to appeal against the decision since the ruling was based on multiple grounds and was unanimous.

Instead, Cox explained that the SEC has changed its tack to concentrate on "moving aggressively" on an agenda of rulemaking and staff guidance to address the legal consequences from the invalidation of the rule. Some of these rules may be issued as early as this week.

"Among the significant new proposals will be a new anti-fraud rule under the Investment Advisers Act that would have the effect of 'looking through' a hedge fund to its investors," Cox stated.

"This would reverse the side-effect of the Goldstein decision that the anti-fraud provisions of the Act apply only to 'clients' as the court interpreted that term, and not to investors in the hedge fund. At my direction, Commission staff are also considering whether we should increase the minimum asset and income requirements for individuals who invest in hedge funds."

Phillip Goldstein, portfolio manager at hedge fund Opportunity Partners in New York, had 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 would have been required to register as investment advisors. He also argued that the SEC made procedural errors in adopting the rule.

Cox continued that staff guidance can be expected to address the grandfathering, transition and other miscellaneous relief necessitated by the vacating of the rule.

"This will help to eliminate disincentives for voluntary registration, and enable hedge fund advisers who are already registered under the rule to remain registered," he explained.

Cox also stressed that hedge funds remain subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws.

"The SEC will continue to vigorously enforce the federal securities laws against hedge funds and hedge fund advisers who violate those laws. Hedge funds are not, should not be, and will not be unregulated," he warned.

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