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Article Excerpt
From the Investment Management Group
The Securities and Exchange Commission ("SEC") has proposed Rule 203(b)(3)-2 (the "Rule") under the Investment Advisers Act of 1940 (the "Act") in order to require advisers to hedge funds with at least $25 million in assets under management to register as investment advisers under the Act.1 The SEC cited as reasons for the Rule the growing amount of assets invested in hedge funds, the increasing significance of hedge funds in the US securities markets, the rise in the number of hedge fund fraud enforcement cases and the increased exposure of smaller investors in hedge funds. The Rule seeks to bring hedge funds under the regulatory scheme of the Act by requiring investment advisers to count as "clients" each investor in certain unregistered investment funds for which they provide advice. Importantly, however, the Rule does not seek to cover persons who advise private equity funds, venture capital funds, or similar funds that require investors to make long-term capital commitments (i.e., greater than two years).
The purposes of the Rule as stated by the SEC include the following:
Access to information: Registered advisers provide the SEC with access to reliable, current and complete information regarding hedge fund investment advisers, including, for example, the number of hedge funds an investment manager advises, the amount of assets in a particular hedge fund and the identity of the hedge funds' control persons and affiliates.
Ongoing oversight and deterrence of fraud: According to the SEC the expansion of regulatory coverage over hedge funds will significantly deter the occurrence of fraud and other inappropriate behavior by investment advisers and their affiliates. Registered advisers are subject to SEC examination enabling the SEC staff to...
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