Federal regulators have completed work on controversial regulations meant to bring more oversight to the world of hedge funds.[@@]
The U.S. Securities and Exchange Commission has published the new regulations and discussions supporting and opposing the new regulations today in the Federal Register.
The final regulations, adopted under the federal Investment Advisers Act of 1940, are scheduled to take effect Jan. 10, 2005. The regulations will require affected advisors to respond to amended items in Form ADV in their next ADV filing after March 8, 2005.
The final regulations also will require affected advisors to register with the SEC by Feb. 1, 2006.
The SEC believes the new registration and reporting requirements apply to 975 hedge fund advisors.
The SEC is expanding the number of advisors who must register by changing the way advisors count their fund clients.
In the past, federal securities laws have required advisors to register with the SEC only when the advisors have had 15 or more clients. Many advisors have tried to get around the red tape facing ordinary retail mutual funds by aiming their services mainly at very small groups of wealthy, sophisticated individual investors.
Some advisors have created pyramid-like structures of trusts, limited partnerships or other types of private funds. Each trust may hold the assets of many individuals, but the advisor gets around the “15 client” limit by treating each trust as a single advisee.
Now, in many cases, the SEC will require advisors to “look through” the “top tier” investors and count the actual number of individual investors.
Advisors are not “required to ‘look through’ most clients that are business organizations, including insurance companies, broker-dealers and banks, but [they] are required to look through many types of pooled investment vehicles investing in securities, including hedge funds,” SEC officials write.