(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC to Consider Hedge Fund Adviser Registration

The SEC will consider whether to propose new Investment Advisers Act Rule 203(b)(3)-2 to require hedge fund advisers to register with the Commission at an open meeting scheduled for July 14, 2004. Certain conforming and transitional amendments to Rules 203(b)(3)-1, 204-2, 205-3, 206(4)-2 and Form ADV will also be considered. The rulemaking recommended by the staff would require adviser registration only and would not require hedge funds to register the offerings of their interests with the SEC or to modify their organizational structures.

The measure is controversial and the SEC appears divided on the issue. The chairman and Commissioners Goldschmid and Campos are expected to support a registration proposal, but Commissioners Atkins and Glassman are expected to oppose the measure. Federal Reserve Chairman Alan Greenspan and House Financial Services Committee Chairman Michael Oxley have also expressed opposition to registration.

In congressional testimony in April 2004, SEC Chairman William Donaldson stated that "it troubles me that the Commission, under the current rules, is limited in its ability to gather information that could provide answers to these questions, and could help protect millions of investors. " He added that " I fundamentally believe that the Commission has a legitimate interest in obtaining the information, and imposing appropriate recordkeeping and other regulatory requirements, if needed, to protect investors receiving advisory services from hedge fund managers."

The chairman recognized that hedge funds perform a vital role in the financial markets and that he does not seek to impede hedge fund operations through regulation. The proposal to require registration by hedge fund advisers is designed, according to the chairman, "to enhance the Commission's ability to prevent, detect and deter abusive, fraudulent conduct in the hedge fund segment of the investment management industry." Regulatory activity in this area "would be specifically tailored to the unique dynamics of these types of managers, " he stated.

In a report issued in September 2003, the SEC staff identified several advantages to hedge fund adviser registration of hedge fund advisers would have several benefits. Registered hedge fund advisers would become subject to the Commission's regular inspections and examinations program. According to the staff, " effective Commission oversight could lead to earlier detection of actual and potential misconduct, help to deter fraud and encourage a culture of compliance and controls." Registration could also foster the development of stronger compliance practices, suggested the report.

The SEC would also be authorized to collect "basic and meaningful " information about the activities of hedge fund advisers and hedge funds, stated the staff. Areas of interest include conflicts arising from side-by-side management of hedge funds and other client accounts and hedge funds' relationships with their prime brokers. Registration would also effectively increase the minimum investment requirement for direct investments in some hedge funds because registered advisers are generally prohibited from charging performance fees unless investors have $750,000 invested with the adviser or have a net worth of $1.5 million, stated the report.

The staff report recognized that adviser registration would impose additional costs on hedge fund advisers. Advisers would face costs associated with electronic filing, recordkeeping and regulatory compliance costs. In addition, the report noted that "the Commission's resources available to examine advisers are limited."