October 17, 2003

Hedge Fund Advisers Should Register, SEC Report Sa

WASHINGTON (HedgeWorld.com)?The U.S. Securities and Exchange Commission released its long-anticipated report on hedge funds, recommending that hedge fund advisers be required to register with the commission.

The SEC report, called ?Implications of the Growth of Hedge Funds,? also recommends general solicitations be allowed for investors considered to be qualified purchasers as defined by the commission, which requires investable assets of US$5 million.

The recommendations would need approval from the commission itself in order to become effective. The 134-page report is downloadable at www.sec.gov.

In addition to adviser registration, the staff report urged the SEC commission and National Association of Securities Dealers to monitor closely capital introductions and recommended that the commission improve education.

A concept release also could be forthcoming on the matter of registered hedge funds.

The SEC is hoping to use the threat of examination and, in the future, improved technology to enforce its rules. Advisers would be required to fill out an ADV form and possibly a separate hedge fund disclosure form.

?We think the specter of an SEC analysis will lead to a culture of compliance within these organization,? said Paul Roye, director, division of investment management in the SEC. The Internal Revenue Service by no means examines everyone, and the SEC could use a similar targeted-approach in its examinations, SEC officials believe.

There isn?t concern within the SEC that hedge fund advisers will move offshore under the proposed changes, because firms managing funds with more than 14 U.S. investors would be required to register, as well, Mr. Roye said.

And SEC Chairman William Donaldson hopes to better leverage technology in its examinations. ?I think you?ll see a lot more imagination and effort? using technology, Mr. Donaldson said.

Mr. Roye said he thought roughly two-thirds of hedge fund managers had not registered with the commission as advisers, but later he said he thought about half of the 100 largest funds ?that you see in various press sources? have registered.

Expanding on why there?s a difference, he said, ?I think the reason a number of hedge fund managers have registered is because pension plans etc. are asking ?are you registered with the commission?? It?s a response to that.?

A bonus for these recommendations is that qualifications for investors to buy into hedge funds effectively would be raised, because funds charging a performance fee only can be sold to certain investors, Mr. Roye said. Those investors must have a net worth of US$1.5 million or US$750,000 invested with a fiduciary. That level then could be changed by the commission without affecting other entities operating under private offering rules.

Chris Clair and Susan Barreto contributed to this report.

PBarr@HedgeWorld.com

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