August 8, 2006

SEC Will Not Appeal Goldstein Ruling

Decision striking down hedge fund registration to stand

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SEC Commissioner Christopher Cox said August 7 that the SEC will not appeal the D.C. Circuit Court of Appeals' decision in Goldstein v. SEC, which struck down the SEC's hedge fund manager registration rule.

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, Cox said, the SEC 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, he said, 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.

SEC staff is also "considering whether we should increase the minimum asset and income requirements for individuals who invest in hedge funds," Cox said.

In addition, the staff guidance, he said, "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."

Hedge funds today remain subject to SEC regulations and enforcement under the antifraud, civil liability, and other provisions of the federal securities laws, Cox said. "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."

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