Hedge Funds Escape Registration

Posted by John Carney, Jun 23, 2006, 12:02pm

Hedge funds do not need to register under the Investment Advisors Act of 1940, a US Court of Appeals in Washington, D.C. said today. The court found that the SEC rules requiring hedge funds with more than 15 investors to register were arbitrary and struck down the rule.

The US Court of Appeals for the DC Circuit is considered one of the most important and prestigious appeals courts in the US. It rarely spanks the SEC so hard, so this case is definitely a big deal.

Correction: An earlier version of this story had said the decision had come from the Court of Appeals for the Federal Circuit. That was wrong. We're sorry. Here's a link to the opinion.

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Posted in: Hedge Funds

Comments

Posted by Lola, Jun 23, 2006 1:37PM

I think you mean the Court of Appeals for the D.C. Circuit? "U.S. Court of Appeals" is generally applicable to every federal circuit court.

Posted by clare, Jun 23, 2006 2:07PM

I thought it was just punted back to the SEC for review and consideration?

Call Cox.

Posted by clare, Jun 23, 2006 2:13PM

Also, it's not the funds that have to register but the manager. It's the new definition of client which is "arbitrary".

It used to be that managers counted the funds themselves as clients. New rule said there was a look through to investors in the funds, subject to certain exemptions which are generally qpplicable to private equity funds.

Posted by John, Jun 23, 2006 2:20PM

When an appeals strikes down a rule, the rule is gone. That's what happened today. The SEC is free to try again and put in a new rule, but the rule the court had considered in today's case is gone. Unless, of course, the Supreme Court reverses them.

You are correct, of course, that the managers were required to register rather than the funds themselves, and that the case was decided based on a somewhat obscure consideration of what constitutes a hedge fund client. The court said investors aren't clients. This is probably a fascinating discussion for lawyers. For everyone else, though, the decision means: hedge funds don't have to do 40 Act registration.

Posted by , Jun 23, 2006 4:44PM

Oh I'm sure your target demographic understands the difference.

Posted by John Carney, Jun 23, 2006 5:05PM

I'm sure they do! Our readers are the best.

Posted by VA, Jun 23, 2006 5:22PM

Dealbreaker John-The decision was from the US Court of Appeals for the District of Columbia Circuit. Go look at the opinion. The US Court of Appeals for the Federal Circuit hears a variety of specialized claims like patent, trademark and government contracts claims, not challenges to SEC rules.

Posted by John, Jun 23, 2006 5:46PM

Correction made. Thanks VA.

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