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US Court Hears Challenge To SEC Hedge Fund Registration Rule

by Leroy Baker, for LawandTax-News.com, New York

12 December 2005


A US appeals court on Friday began hearing arguments in a challenge to a new regulation that will soon oblige hedge fund advisers to register with the US Securities and Exchange Commission as investment advisors.

Phillip Goldstein, portfolio manager at hedge fund Opportunity Partners in New York, 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 investment advisors from February. He also argues that the SEC made procedural errors in adopting the rule.

However, according to an SEC legal brief filed earlier in the year with the US Court of Appeals for the DC Circuit, claims against the regulator "do not come close" to providing a basis upon which the courts could set aside the new rule.

The SEC brief also tackles the lawsuit's claim that a 1999 Presidential Working Group determined that registering hedge fund advisors wasn't an appropriate way to monitor hedge funds.

According to the Commission's lawyers, the SEC is charged with investor protection, and acted properly since hedge funds have grown substantially since 1999 and have subsequently been linked to trading abuses in the $8 trillion mutual fund industry.

The SEC approved the decision to adopt the new rule after a narrow 3-2 vote under the former chairman William Donaldson. The rule will mean that larger US hedge funds will have to become more transparent and undergo on site inspections from the regulator.


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