Darren Sherman, chief executive of Regulatory Advisory Services and former SEC official, outlines the key implications of the overturned registration rule.

With respect of last Friday's ruling by a DC Circuit Court of Appeals striking down the SEC's hedge funds registration rule, hedge funds should note the following points of order:

1. The US Court of Appeals verdict overturning hedge fund registration will not stop the SEC from regulating the activities of hedge fund advisers. To the extent that fraud occurs in the hedge fund industry, the SEC will not hesitate to take enforcement action against wrongdoers.
2. It is ill-advised and premature for hedge fund advisers to de-register with the SEC Importantly, the Appeals Court has issued a subsequent order directing the Court clerk to withhold issuance of any mandate (to put its order into effect) until seven days after the disposition of any timely petition by the SEC for rehearing. The SEC has until 45 days after June 23rd to file such a petition. Thus, all hedge fund advisers registered with the SEC continue to be subject to the requirements of the Investment Advisers Act of 1940.
3. "Side letter" arrangements used in the hedge fund industry will continue to be closely examined by the SEC staff, however enforcement actions will likely be delayed.
4. The US Court of Appeals verdict overturning hedge fund registration should not be an indication that the controversial rule requiring mutual fund boards be composed primarily of independent directors will be overturned.

This US regulatory comment was provided by Darren Sherman, chief executive of Regulatory Advisory Services. Sherman previously served as a senior official with the US Securities and Exchange Commission, Division of Investment Management and Office of Compliance, Inspections and Examinations.