Wednesday, January 10, 2007

New hedge fund regulations proposed in December 2006

After the SEC's court defeat on hedge fund registration, sources told me that wouldn't end the Commission's efforts to regulate hedge funds.

They were right. The SEC proposed new regulations late in December 2006. They focus on tightening the requirements for status as a qualified investor and protecting the interests of hedge fund investors against fraud, according to a presentation to the Boston Security Analysts Society by George J. Mazin, partner in the law firm of Dechert LLP.

The SEC would tighten the definition of an accredited investor, known in technical terms as an "Accredited Natural Person." The biggest difference between old and new definitions is the requirement for the investor to hold $2.5 million in investments. But there are other, more minor tweaks.

The new definition will impact hedge fund sales and marketing, said Mazin. Likely implications include:

  • Organization of fewer 3(c)1 funds
  • Conversion or dissolution of existing funds
  • End to some existing investors' ability to invest more in hedge funds
  • Possible creation of a market for registered fund of funds products
  • Disadvantaging of smaller institutions

The SEC's other new regulatory thrust was expressed in anti-fraud Rule 206(4)-8 to make it illegal for hedge funds to engage in business practices that are fraudulent, deceptive or manipulative toward current or prospective investors.

The comment period for the proposed regulation ends March 9. Mazin anticipates the regulations will be issued and take effect in late March or early April, assuming no major issues surface during the comment period.

The new regulations aren't the only regulatory issues for hedge funds to worry about. Mazin also discussed side letters and side pocketing.

To stay current on hedge fund regulation, Mazin recommended Hedgewire Daily News, Hedgeweek, and Alternative Investment News. I noticed at the bottom of his bio, that he frequently lectures or publishes on hedge funds and other securities topics.

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Anonymous Evan Andersen said...

I have always taken the view that hedge funds need scrutiny and regulation. It is to the benefit of the consumer that there is full disclosure along the way. Although there are many myths about hedge funds that are not true, like they are full of lofty managers aimed at hurting the economy when if fact they are serving to make it more efficient and stable.

Hedge Funds by name are kind of misleading. I think what needs to happen in American regulation is that we distinguish between what traditionally would be known as hedging, protecting ones capital, and an Investment Fund that takes positions in the markets. It would be nice to have some legislation clarify the difference. They have Investment Funds in Ireland and I think that this is what they should properly be called.

Evan Andersen, Lydia Capital

9:01 AM  
Blogger SusanW said...


Thank you for your comment!

9:15 AM  

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