NEW YORK (HedgeWorld.com)–Debate is under way over the recent recommendation by Securities and Exchange Commission staff to require hedge fund managers to register as investment advisers. In particular, how broadly applicable the requirement will be is an open question.
While most observers expect SEC commissioners to take action on the long-expected proposal, there may be need to compromise. "There seems to be disagreement over whether or not managers should register," said attorney Michael Tannenbaum of Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York. "We'll have to wait and see how that plays out."
Lawyers say one option is to limit compulsory registration to managers that have funds for accredited investors and exclude from the mandate those that meet the higher "qualified purchaser" criterion of section 3(c)(7) of the Investment Company Act. Funds that use this exemption from having to register as an investment company are limited to individuals with at least US$5 million net worth and institutions with at least US$25 million.
These are sometimes referred to as the "super-sophisticated" group. By contrast, the current standard for accredited individuals in section 3(c)(1) funds is US$1 million. Many hedge fund managers run funds in both these categories.
Raising the Bar
David Scherl, managing partner of Morrison Cohen Singer & Weinstein LLP, New York, identified three underlying goals in the SEC staff report–to get all or most hedge funds on the SEC radar screen; to standardize reporting and disclosure requirements so that investors can more easily compare hedge funds; and to increase the financial threshold for investing in hedge funds.
Regulators apparently preferred to tackle the third issue indirectly–by having most of the industry register. RIAs are not allowed to charge an incentive fee unless their clients have at least US$1.5 million net worth or $750,000 invested with the manager. That already sets the bar a little higher than the US$1 million accredited investor standard applied to non-registered investment advisers with 3(c)(1) funds.
As it stands, the registration proposal spreads its net wide, including any manager having more than 14 clients, with a new look-through provision that counts each investor as a client. Until now, each fund counted as a client.
A threshold for total assets under management also is recommended, possibly at US $25 million–managers below that would be exempted. But the definition is open, said Stephen Vine of Akin Gump Strauss Hauer & Feld LLP, New York, speaking at a panel.
At least two commissioners, as well as chairman William Donaldson, would have to approve any revision of current registration rules. It probably will be some time early next year before a final decision emerges. "We are still at a very early stage, and a lot needs to happen before this staff report results in new rules or amendments to the law," said Mr. Scherl.
