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SEC Releases Final Hedge Fund Rule, with No Surprises

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WASHINGTON (–Little differs between the proposals the Securities and Exchange Commission originally made regarding its regulation of hedge fund managers and the final rule it just published

Little, perhaps, except for the lengthy documentation providing the agency’s reasoning behind its new rule 203 (b)(3)-2 and accompanying the final rule. In making their case for the registration of hedge fund managers as investment advisers, commissioners and staff supplied lengthy footnotes to a document that now totals 160 pages.

Overall the rule remains the same as it did in its infancy. If you are a U.S. hedge fund manager with more than 14 clients and US$25 million in assets, you will need to become a registered investment adviser.

The deadline for compliance is February 1, 2006.

A separate section stipulates that firms with less than a two-year lock-up provision will also be eligible for registration. This separate provision allows for the exclusion of private equity firms and venture capital funds, many of which opposed the rule fearing inclusion in future SEC rulemaking.

Most of the SEC final rule release is spent defending the commissioner’s decision, while the final thirty pages carries the dissent of Commissioners Cynthia S. Glassman and Paul Atkins.

On the majority side for the agency, staffers said that the rule should act as a fraud deterrent. Still careful to not the bill the rule as a complete deterrent to fraud, the agency asserts that the rule could “alter hedge fund advisers’ behavior by forcing them to account for the consequences of a compliance examination.” But as with tax audits, regulators say examinations may not occur with great frequency.

At the same time, the SEC is not expecting the resulting workload to be too onerous. The staff estimates that the new rule will increase the annual aggregate information collection burden by 78 hours to total 578 hours per year. Officials also estimate that the 975 hedge funds that will be new registrants will withdraw from SEC registration at the rate of 16% per year.

In addition, the rule is thought by the SEC to be a hindrance to so-called retailization since most hedge funds will need to rely on Rule 205-3. That rule stipulates that only “qualified” investors can be charged performance fees. Qualified investors are those with US$1.5 million in net worth or at least US$750,000 in assets under management.

The rule can be read in its entirety at .

Contact Bob Keane with questions or comments at: [email protected].


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