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AIMA, MFA Reaction to SEC Rule Proposal Ranges from Wait-And-See to Whoa, Nellie

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CHICAGO (–Hedge fund industry trade groups on both sides of the Atlantic said they planned to carefully review the Securities and Exchange Commission’s proposed hedge fund manager registration rule, but early indications are that once they do neither will much like what it sees.

In a statement, officials at the Washington-based Managed Funds Association emphasized the split vote by SEC commissioners to forward for 60 days of public comment a proposed rule and rule amendments that effectively would require hedge fund managers to register as investment advisers. They also reiterated the MFA’s longstanding position that mandatory registration of hedge fund managers is unnecessary and has the potential to be overly burdensome.

“Any resort to governmental regulation has to be carefully considered to ensure the benefits afforded outweigh the burdens created,” said MFA President John G. Gaine. “The case for mandatory investment adviser registration of hedge fund managers has not been made, and we expect that once all the facts are in, the proposal will not be adopted.”

Adam C. Cooper, chairman of the MFA as well as senior managing director and general counsel for Chicago hedge fund firm Citadel Investment Group LLC, testified before the Senate Banking Committee on Thursday that, if adopted as proposed, new SEC rules could “adversely impact” the hedge fund industry.

Mr. Cooper said hedge funds play a critical role in capital markets, providing liquidity by acting as counterparties to investors who want to hedge risk and by offering investment opportunities uncorrelated with stocks and bonds. Current regulations, which allow hedge fund managers to register as investment advisers voluntarily or take advantage of exemptions and not register, have worked well for both the industry and for investors, Mr. Cooper said.

“The success and growth of the hedge fund industry and the general satisfaction of its investors testify to the fact that the current regulatory regime works extremely well,” Mr. Cooper told members of the Banking Committee. “This framework reflects the long-standing recognition by Congress and federal regulators that government resources should be devoted to protecting investors that require protection, rather than those that can look out for themselves.”

He said the government’s current level of hedge fund oversight is consistent with how it monitors other private investments such as venture capital, over-the-counter derivatives and private equity.

Despite the MFA’s reservations about the proposed SEC rules, Mr. Cooper said some of the underlying issues raised by SEC staff to support the need for further regulation have merit. For instance, Mr. Cooper said the MFA shares the SEC’s concern about hedge funds reaching people for whom they might not be appropriate. To address this, Mr. Cooper proposed doubling the current “accredited investor” standards to US$2 million in net worth and minimum annual income of US$400,000 from current levels of US$1 million in net worth and annual income of US$200,000.

MFA officials also recognize the SEC’s desire to obtain more information about the hedge fund industry, Mr. Cooper said, and he proposed greater cooperation between governmental agencies that already collect “vast amounts of industry data” on hedge funds.

In London, the Alternative Investment Management Association released a statement saying it would study the proposed SEC rules once they are published and would not have any further comment until later this summer, after it submits its formal response to the commission.

However the same release included a link to AIMA’s response in March to the SEC’s September 2003 staff report on the growth of the hedge fund industry. In that response, AIMA officials said the effect of mandatory registration on the association’s global membership was “so great” that they felt they needed to respond, even though “AIMA does not usually involve itself in lobbying activities in the U.S.A.”

A majority of the association’s members were opposed to additional U.S. regulation, chiefly because they already were subject to regulation in their home countries. Additionally, almost all offshore hedge funds have some U.S. investors, and the potential effect of mandatory registration on them “would be very considerable and onerous,” AIMA officials said.

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Contact Robert F. Keane with questions and comments at [email protected].