Private Funds Need Not Panic Over 'Transparency' Rule

Jun 23 2006 | 7:36pm ET

The Securities and Exchange Commission has announced new rules aimed at making funds-of-hedge funds more transparent, but according to one lawyer, money managers shouldn't sweat it.

The rules, which were adopted on Wednesday, require any registered fund that invests its assets in another fund to disclose the cumulative amount of expenses charged by the fund and any of the sub-funds in which it invests. However, George Zornada, a partner at law firm Kirkpatrick & Lockhart Nicholson Graham, said that private funds, including most hedge funds and fund-of-hedge funds, will not be affected by the rule.

"These rules apply only to registered investment companies," said Zornada. "There are some hedge funds that are registered investment companies (such as Man Investments), but the rules relate solely and absolutely to registered investment companies."

According to a statement by the SEC, "the rules impose restrictions on these [fund-of-funds] arrangements to prevent abusive 'pyramiding' schemes."

The regulatory agency also said that the increased transparency allow investors to more easily understand and compare the relative costs of different funds-of-funds arrangements.

Zornada explained that the rule was proposed three years ago and since been on the back burner because the SEC was so busy with the mutual fund scandals. However, now that the SEC has a permanent director there is pressure to move exceptive applications along faster. 

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