SEC Votes to Propose Requirements on Hedge Fund Advisers

The Securities and Exchange Commission (SEC) voted this week to publish for comment proposed new Rule 203(b)(3)-2 that would require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940. The Commission also voted to propose related rule amendments.

The Commission's staff estimate that approximately 40 to 50 percent of all hedge fund advisers are currently registered with the Commission.

Registration under the new rule would permit the Commission to:

  • Collect and provide to the public basic information about hedge funds and hedge fund advisers, including the number of hedge funds operating in the United States, the amount of assets, and the identity of their advisers.

  • Examine hedge fund advisers to identify compliance problems early and deter questionable practices. If fraud does occur, examinations offer a chance to discover it early and limit the harm to investors.

  • Require all hedge fund advisers to adopt basic compliance controls to prevent violation of the federal securities laws.

  • Improve disclosures made to prospective and current hedge fund investors.

  • Prevent felons or individuals with other serious disciplinary records from managing hedge funds.

The proposed new rule would require advisers to "private funds" to register with the Commission by requiring the advisers to "look through" the funds and to count the number of investors (rather than the fund) when determining whether the advisers are eligible for the Adviser Act's exemption for advisers with 14 or fewer clients.

A "private fund" would be one that:

  • Should be an investment company but for the exceptions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940;

  • permits owners to redeem their ownership interests within two years of purchase; and

  • is offered based on the investment advisory skills, ability or expertise of the investment adviser.

The proposed rule would contain special provisions for advisers located outside the United States designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S.
investors.

Comments on the proposed provisions should be submitted to the Commission by September 15, 2004.

The full text of the detailed release concerning this proposal will be posted to the SEC Web site as soon as possible.

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