SEC Approves Registration Requirements for Hedge Fund Investment Advisers
 
October 29, 2004
 
Scott R. MacLeod- Orlando

On October 26, 2004, the Securities and Exchange Commission (SEC) voted to adopt a new rule requiring most hedge fund advisers to register with the SEC by February 1, 2006 under the Investment Advisers Act of 1940. The SEC also adopted related rule amendments.

Currently, hedge fund advisers who advise fewer than 15 clients are exempt from adviser registration. The new rule will limit the ability of hedge fund advisers to rely on such an exemption by “looking through” and counting each shareholder or beneficiary of a hedge fund towards the 15-client test. Partners, family members, key employees and certain other insiders will not be counted. The new rule will only apply to funds that allow redemptions within two years of investment.

Advisers who manage less than $25 million will continue to be exempt from SEC registration under the Advisers Act, but must follow state law regarding their registration status. Additionally, the new rule contains special provisions for advisers located outside the United States. These provisions are designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S. investors.

Registration under the new rule will permit the SEC to do the following:

• collect important information about the operations of hedge fund advisers
• conduct examinations of hedge fund advisers, which the SEC anticipates will permit it to identify compliance problems at an early stage, identify practices that may be harmful to investors and provide a deterrent to unlawful conduct
• require all hedge fund advisers to adopt basic compliance controls to prevent violation of the federal securities laws
• prevent hedge funds from charging performance fees to investors with less than $1.5 million net worth
• improve disclosures made to prospective and current hedge fund investors
• prevent felons or individuals with other serious disciplinary records from managing hedge funds

The SEC has not released the full text of the detailed release concerning the new rule. Holland & Knight will provide a more detailed update when the full text becomes available.

For more information, e-mail Scott R. MacLeod at scott.macleod@hklaw.com, or call toll free, 1-888-688-8500.

This Investment Management Alert is a summary for general information and discussion only. It is not a complete analysis of the matters presented and may not be relied upon as legal advice which may often turn on specific facts. Readers should seek legal advice before acting with regard to the matters mentioned herein.