By James Hamilton, J.D., LL.M.
In the wake of the judicial invalidation of its hedge fund adviser registration rule, the SEC is moving forcefully on a rulemaking and guidance agenda to regulate hedge funds. Chairman Cox emphatically declared that hedge funds are not, should not be, and will not be unregulated. I applaud the chairman’s efforts and his aggressive position. In my view, any entities that on a given day account for over 50% of trading on the NYSE, as hedge funds reportedly do, should be subject to regulation. It should not even be a matter of debate.
While the SEC said it would not appeal en banc the federal appeals court panel’s ruling in Goldstein, Chairman Cox said that a new antifraud rule under the Investment Advisers Act will be proposed, which would effectively look through a hedge fund to its investors. This would reverse the side effect of the Goldstein decision that the antifraud provisions of the Act apply only to clients as the court interpreted that term, and not to investors in the hedge fund.
At the chairman’s direction, SEC staff are also considering whether to increase the minimum asset and income requirements for individuals who invest in hedge funds. In addition, staff guidance can be expected to address the grandfathering, transition and other miscellaneous relief necessitated by the vacating of the rule. This will help eliminate disincentives for voluntary registration, and enable hedge fund advisers who are already registered under the rule to remain registered.