Ten Hedge Funds De-Register After Court Decision

by Mike Godfrey, Tax-News.com, Washington

25 July 2006

Since the US Court of Appeals threw out the SEC's vexed hedge fund registration rule in June, leaving in limbo the 1,200 or so funds which have registered since last year, ten have applied to de-register, says the SEC.

2,500 funds are registered in total, but 1,300 of them registered under previous rules which remain in place. It is only the broadening of the meaning of the term 'client' which was struck down by the Court. The new registration rule achieved its goal by classifying the investors in a hedge fund as clients of the fund's adviser (manager), thereby causing many more fund managers to fall within existing fund registration rules which apply when there are more than 14 clients.

The reasons for the de-registrations are not known, although in at least one case it is because a fund had ceased trading.

Although the SEC itself, now with a built-in Republican majority among its five Commissioners, will not challenge the Court's ruling, Democrats in Congress are attempting to legislate, probably vainly, to strengthen hedge fund supervision.

The US Senate Banking Committee will discuss the regulation of hedge funds at a hearing today.

Late last month, Congressman Barney Frank, the Ranking Democratic Member on the House Financial Services Committee introduced legislation to authorize the registration and monitoring of hedge funds, attempting a reversal of the Court of Appeals decision. Frank stated at the time that his legislation, known as the 'Securities and Exchange Commission Authority Restoration Act of 2006,' would give the SEC clear authority to require registration and monitoring.

“Given the increasing size of hedge funds and the growing role they are playing in the economy, it would be a grave error to allow the court decision denying any authority by the SEC to stand,” commented Frank.

“At the very least Congress should give the SEC the power it has sought to require registration, and we should also be looking into whether any further SEC or regulatory authority regarding hedge funds is needed," he added.

Witnesses at the Senate hearing will include SEC Chairman Christopher Cox, who said after the appeal court decision that he would instruct his staff to draw up a list of alternative plans for hedge fund supervision.

However there is little appetite for additional regulation among Republicans. The administration has already told Congress that further regulation of the hedge fund sector is not required. Testifying in May before the Senate Banking Committee in a hearing on hedge funds, Randal K. Quarles, Treasury Under Secretary for Domestic Finance stated that while the Treasury will continue to gather information on the fast growing hedge fund universe, he believed the need for further regulation now was unnecessary.

"I think, at this point, I wouldn't see evidence that would suggest that there should be greater regulation of hedge funds," Quarles told the committee.

Federal Reserve chief Ben Bernanke also rejects the need for more stringent government oversight of hedge funds. According to Bernanke, a system whereby the major regulatory role was assumed by government could create a "moral hazard" lulling private investors into thinking that they would be bailed out in the event of loss.

"Would counterparties relax their vigilance if they thought the authorities were monitoring and constraining hedge funds' risk-taking?" Bernanke asked in a speech to a conference on hedge fund risk sponsored by the Atlanta Fed in Sea Island, Georgia.

Bernanke argues that the best people to keep an eye on the activities of hedge funds are the banks. "A focus on counterparty risk management places the responsibility for monitoring risk squarely on the private market participants with the best incentives and capacity to do so," he stated.

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