SEC May Face Legal Challenge To Hedge Fund Registration Rule

by Carla Johnson, Investors Offshore.com

05 November 2004

The US Securities and Exchange Commission is facing a likely legal challenge from a hedge fund manager planning an attempt to prevent the introduction of new rules requiring hedge fund advisors to register by 2006.

Phillip Goldstein, portfolio manager at hedge fund Opportunity Partners 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 has been quoted as observing.

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

The change will mean that fund managers will have to count each investor in the fund as a client. Until recently, a single hedge fund operated by a fund manager constituted a single ‘client’, and whilst a fund manager rendered advice to fewer than fifteen such clients, no registration as an investment adviser with the SEC was needed.

Only hedge funds with assets of less than $25 million have been exempted from the new regulations.

The measure has been greeted with a mixed reaction by observers and industry participants. Some consider the new rule will make little difference to the way that hedge funds operate, while others believe it will be a hindrance and ineffective at preventing fraud.

Goldstein is thought likely to make his legal challenge after the SEC publishes the regulations sometime in the next few weeks.

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