CHICAGO (HedgeWorld.com)--Rules that expand the U.S. Securities and Exchange Commission's oversight of the hedge fund industry went into effect today, making Feb. 10 the demarcation line between the "old" era of lighter federal regulation and the "new" regime that requires most hedge fund managers with U.S. clients to register with the commission as investment advisers and subject themselves to periodic examinations.
For all practical purposes, not much changes today. Managers are not required to complete their registration with the commission until Feb. 1, 2006. However, according to new rules passed by the SEC in October, beginning today unregistered hedge fund managers are subject to rules governing their record keeping and their ability to accept certain types of investors.
Specifically, hedge fund managers who were unregistered before today don't have to have books and records detailing past fund performance and rates of return for periods ending before Feb. 10. Going forward, though, managers who will be required under the new SEC rules to register as investment advisers must maintain books and records of performance and rates of return for periods ending after Feb. 10.
Another set of rules governing who can be charged performance fees goes into effect today, also. Only so-called qualified clients--those with a net worth of at least US$1.5 million or at least US$750,000 in investments with the adviser--can be charged performance fees.
SEC officials recognized, however, that some funds that will be required to register by Feb. 1, 2006, might have pre-existing investors who do not meet the qualified client standard. So the new rules include a grandfather provision that allows hedge fund managers to keep those clients and continue to charge performance fees, as long as those clients were in the fund prior to Feb. 10. Non-qualified clients will be allowed to keep and add to their existing accounts but will not be allowed to invest in new funds the manager offers after Feb. 10.
And from today on, hedge fund managers that will be required to register can no longer accept non-qualified clients into their funds.
Irwin M. Latner, partner at the New York law firm Herrick, Feinstein LLP, said some "ambiguity" still exists with respect to the post-Feb. 10 requirements for hedge fund mangers. He said when the SEC originally proposed its hedge fund rules, the cutoff date for record keeping and grandfathering non-qualified clients was Feb. 1, 2006, the same date by which managers must be registered as investment advisers.
But when the final rules came out in December, the date had been moved back to Feb. 10 of this year.
"Some managers are still hoping to get the SEC to change the effective dates back to the registration date," Mr. Latner said.
Regardless of whether they are successful, Mr. Latner said he expects most hedge fund managers will start working seriously on coming into full compliance with the new rules this summer. "The real compliance date is February 2006," he said. "Managers are gearing up to register by then, likely before then, and summer is when we will see a lot of activity."
Michael G. Tannenbaum with the law firm Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York, agreed, saying "well-advised" managers would be starting to understand the rules better, working on getting components of the rules adopted at their firms, and reviewing and preparing information required for the Form ADV.
"This year is supposed to be spent putting these materials together and getting the compliance procedures more formalized than they have been," Mr. Tannenbaum said. "The whole kit and caboodle must be in place by February 2006, but in order to get it done you have to start now."
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