SEC’s Hedge Fund Registration Proposals Receive Legal Challenge

by Phillip Morton, Investors Offshore.com

16 September 2004

It has emerged from reports that a Washington-based legal firm is challenging the Securities and Exchange Commission’s hedge fund regulation proposals on a legal basis.

A letter handed to the SEC last week signed by partners of the Washington office of Wilmer Cutler Pickering Hale & Dorr has argued that the SEC has no legal jurisdiction and cannot therefore initiate new laws, according to a report by Marhedge.com.

"The rulemaking power granted to an administrative agency...is not the power to make law. Rather it is the power to adopt regulations to carry into effect the will of Congress as expressed by the statute," the letter stated, citing case law.

"Congress has determined that hedge fund investors do not need the protection of registration...The proposal exceeds the powers granted to the commission, and should be withdrawn," the lawyers argued.

Under the proposed changes, fund managers will have to count each investor in the fund as a client. Until now, a single hedge fund operated by a fund manager constituted a single client, and while a fund manager rendered advice to fewer than fifteen such clients, no registration as an investment adviser with the SEC was needed.

The SEC proposes to change the definition of 'client' to require the fund manager to look through and count each investor in the fund as an individual customer. Except for the smallest firms, this change would mean that virtually every US hedge fund would need to register.

The consultation period for the registration proposals closed on September 15.

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