By James Hamilton, J.D., LL.M.
A bill introduced by Sen. Charles Grassley would require hedge fund advisers to register with the SEC, effectively providing a legislative override of the federal appeals court Goldstein ruling. The Hedge Fund Registration Act would authorize the SEC to require all investment advisers, including hedge fund managers, to register with the SEC. The bill would, however, exempt investment advisers who manage less than $50 million, have fewer than fifteen clients, do not hold themselves out to the public as investment advisers, and manage the assets for fewer than fifteen investors, regardless of whether investment is direct or through a pooled investment vehicle, such as a hedge fund.
I think that a legislative override of a federal appeals court decision is fairly rare and a difficult thing to accomplish. But Sen. Grassley is determined to get hedge fund advisers registered. This is at least his second try. His main concern is that pension funds are becoming heavy investors in hedge funds.
Specifically, the bill would amend section 203(b)(3) of the Investment Advisers
Act to narrow the current exemption from registration for certain investment
advisers. This exemption is used by large, private pooled investment vehicles, commonly
referred to as hedge funds. According to Sen. Grassley, who is the Ranking Member on the Finance Committee, hedge funds are operated by advisors who manage billions of
dollars for groups of wealthy investors in total secrecy. They should at least have to register with the SEC, he emphasized, like other investment advisers do.
According to Sen. Grassley, Congress needs to act because of the appeals court decision, which struck down as arbitrary an SEC rule that required registration of hedge fund advisers. The appeals panel rejected the SEC’s suggestion of counting the investors in the hedge fund as clients of the fund’s adviser within the statute’s meaning of clients in order to get over the statutory client level. (Goldstein v. SEC, CA DofC 2006). That decision effectively ended all registration of hedge funds with the SEC, unless and until Congress acts.