SEC decides not to seek review of HF adviser registration ruling

SEC Chairman Christopher Cox announced this week that the agency would not seek a review of the US Court of Appeals ruling on registration of HF advisers.

In June 2006, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit unanimously struck down the SEC's hedge fund adviser registration rules under the Investment Advisers Act.

Chairman Cox issued the following statement this week concerning the agency's decision not to seek en banc review of the decision of the US Court of Appeals in Phillip Goldstein, et al. v. Securities and Exchange Commission, and not to petition the US Supreme Court for a writ of certiorari.

Chairman Cox said: "The Commission's Solicitor and General Counsel have concluded that, since the appellate court's decision was based on multiple grounds and was unanimous, further appeal would be futile and would simply delay and distract from our goal of advancing investor protection.

"Instead, the Commission is moving aggressively on an agenda of rulemaking and staff guidance - some of which may be issued as early as this week - to address the legal consequences from the invalidation of the rule.

"Among the significant new proposals will be a new anti-fraud rule under the Investment Advisers Act that would have the effect of 'looking through' a hedge fund to its investors. This would reverse the side-effect of the Goldstein decision that the anti-fraud provisions of the Act apply only to 'clients' as the court interpreted that term, and not to investors in the hedge fund. At my direction, Commission staff are also considering whether we should increase the minimum asset and income requirements for individuals who invest in hedge funds.

"In addition, our staff guidance can be expected to address the grandfathering, transition and other miscellaneous relief necessitated by the vacating of the rule. This will help to eliminate disincentives for voluntary registration, and enable hedge fund advisers who are already registered under the rule to remain registered.

"Finally, notwithstanding the Goldstein decision, it is important to point out that hedge funds today remain subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws. The SEC will continue to vigorously enforce the federal securities laws against hedge funds and hedge fund advisers who violate those laws. Hedge funds are not, should not be, and will not be unregulated."

On July 25, 2006, Chairman Cox testified before the US Senate Committee on Banking, Housing and Urban Affairs on proposed new rules and Commission initiatives concerning hedge funds. These would expand the Commission's authority to hold hedge fund advisers accountable for fraud against individual hedge fund investors; remove legal impediments that might otherwise force currently registered hedge fund advisers to deregister; and update protections for unsophisticated investors by raising the thresholds to qualify for sophisticated investor status.

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