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SEC moves ahead with hedge fund registration despite opposition

The SEC Commissioners voted 3-2 in favour of the hedge fund adviser registration proposal only six weeks after the close of the comment period.

Managers with 15 or more US investors in their fund and USD 30 million in assets must register as investment advisers and submit to spot checks on their activities.

The proposals affect not only US-based managers but also "offshore" (ie non-US) advisers to offshore funds, albeit on a modified basis. It is not clear how much heed has been taken of submissions made, but little appears to have changed from the July proposals (see previous articles in the  US Legal & Regulation section) in hedgeweek.

The five member Commission was divided three to two in favour, with Commissioners Glassman and Atkins voting against, consistent with their earlier opposition.

Chairman Donaldson and the SEC staff cited the rapid growth in hedge fund assets and their role in the markets as a reason for the SEC to gather more information about them and indicated that registration would not be burdensome.

In the view of the dissenting commissioners, the SEC does not have the resources to perform a meaningful review of hedge funds for the SEC to achieve its objectives, and has not properly take account of the views of the CFTC and the Federal Reserve.

In the SEC's view, registration will allow it to conduct examinations and audits of hedge fund managers and identify conduct harmful to investors, as well as empowering it to bar registration of individuals who had been convicted of felonies.

The final rule is not yet available, but there do not appear to be significant changes from the adviser registration rule as proposed, other than a delayed effective date of February 2006.

European hedge fund advisers caught by the new rules will be subject to SEC's requirements to keep books and records, although most of them are already regulated and subject to similar local requirements.

Added SEC oversight and regulation will be a tiresome additional burden, as AIMA had pointed out on behalf of its non-US manager members.

However, it may be that the fat lady has yet to sing, as questions have been raised from earnest sources as to the legality of the new rule and there may yet be challenges to it.

This news update was contributed by Simon Firth, a London-based partner with the law firm Berwin Leighton Paisner (BLP).

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