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Portfolio > Alternative Investments > Hedge Funds

Lawyers on Registration Day Find Varying Reactions from Clients

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NEW YORK (–A partner at a law firm that does a lot of work for hedge fund managers said [last] week that there [was] no rush of “clients who are just now realizing they need to register,” although there is work under way at the firm, as there has been for months, to assure that its clients are in compliance with the new registration regime effective [Feb. 1].

Martin Sklar, partner at Kleinberg, Kaplan, Wolff & Cohen PC in New York, has been with the firm for 20 years. Much of his work there involves hedge funds.

He said [Jan. 30] that KKWC’s clients include examples spread out over the “whole range of reactions” to the new Securities and Exchange Commission mandate. Some clients are suspending their offerings; others are going to 25-month lock-ups to avoid the requirement.

The new rule imposes the registration requirement on most hedge funds but has a statutory exemption that covers investment advisers with fewer than 15 clients, by “looking through” a pooled investment vehicle as the “client” of an adviser and counting each contributor to that pool as one. Some of KKWC’s clients have determined, Mr. Sklar said, that they have fewer than 15 clients even after this look-though, and so are outside the requirement.

He declined to estimate, even roughly, any percentages as to how many of KKWC’s hedge fund clients fit into each one of the reactions along that range.

The look-through rule is at the heart of an ongoing challenge to the legitimacy of the SEC’s regulation under the statute, a challenge being pressed by Phillip Goldstein, the principal of Opportunity Partners LP in Pleasantville, N.Y. Mr. Sklar said that he “hasn’t had people rely upon the possibility that the regulation will be overturned, although a lot are hoping for it.”

On the opposite coast, Christopher Rupright, partner at San Francisco-based Shartsis Friese LLP, shared a similar assessment of his clients’ positions. Speaking on Tuesday [Jan. 31], he said, “What we’re looking at tomorrow is the deadline for registration, not for the filing of registration. It’s a process that has taken some time, so anyone just now discovering the impending deadline has missed it.”

It has been a two-step process, he added. “What took awhile was to institute policies and procedures that would comply. The second step was to tell the SEC about them.” To do the latter, registrants had to obtain a user account through the Investment Adviser Registration Depository, then submit a Form ADV through the IARD system by Dec. 16. Registration itself has taken up to 45 days after that filing.

Asked whether most of his clients have hired full-time chief compliance officers, Mr. Rupright said that they haven’t. “Usually, they’ve added the CCO title to some other administrator’s responsibilities,” he said. There has been some speculation in recent weeks that such arrangements can’t last, and that in months to come firms will find themselves splitting functions when they realize CCO is a full-time vocation. But whether that will happen, Mr. Rupright said Tuesday, “depends upon the size and complexity of the management firm and its funds.”

Have any of his clients opted for 25-month lock ups? “There have been some–I wouldn’t say a lot,” he said, adding that this was to be expected given the publicity that option for circumventing registration has received since the rule was promulgated in 2004.

As to how his firm is holding up under deadline pressure: “Everything is orderly,” he said.

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