Former SEC Lawyer Advises Hedge Funds To 'Stand Pat'

Jun 30 2006 | 6:04pm ET

While the Securities and Exchange Commission rule may be dead in the water, hedge fund managers shouldn't jump for joy just yet, according to a former counsel for the government regulatory agency.

"Given the amount of work that the SEC has put into it, including the hedge fund study, I don't see them just dropping it," said Sidney Wigfall, a former managing counsel with the SEC who is now a managing attorney-advisor at Barge Consulting, a boutique regulatory and asset management consultancy that works with hedge fund managers.

"The SEC may come back and say we want to go with a different regulatory oversight scheme based on a more middle-ground position acceptable to new SEC Chairman Christopher Cox and his four fellow SEC commissioners, or they could adopt a revised definition of 'client' that would satisfy the D.C. Circuit's standards and concerns.

"It was, in fact, the word 'client' and its definition which caused the U.S. Court of Appeals to send the rule back to the SEC, saying that term referred to the hedge fund advisor, not the underlying investors in a fund.

The other wildcard, as noted by Wigfall, is that the SEC com-missioners composition is changing at some point in 2006 or 2007in light of Commissioner Cynthia Glassman's announced intention to leave the SEC at the end of her term.

Despite the good news for those who oppose the registration requirement, Wigfall recommends that registered hedge funds stay registered, and the ones that haven't yet done so should "stand pat" and monitor the situation. "If they were to fall into the way the SEC rule is written, they should consider continuing with the registration," he said. "From a broader practical view, what firms need to carefully assess first, before taking action that may be premature, is who, as investors, constitutes their client-base."

He added that where institutional investors predominate, firms should "be mindful of possible institutional client pushback or pressure on the issue of voluntary SEC de-registration and possible impacts upon the stability of the firm's assets under management." Just yesterday, Rep. Barney Frank (D-Mass.) introduced legislation that would require hedge funds with more than 15 individual 'investors' —not 'clients' —to register with the SEC. "Given the increasing size of hedge funds and the growing role they are playing in the economy, it would be a grave error to allow the court decision denying any authority by the SEC to stand," said Frank in a statement.

He added that lawmakers should also be looking into whether any further regulation of hedge funds is needed. Meanwhile, The Alternative Investment Management Association —a global organization representing the hedge fund industry —has given a cautious thumbs up to the decision by the U.S. Courts of Appeals to strike down the SEC's rule requiring hedge funds to register.

Christopher Fawcett, chairman of AIMA released a statement saying, "The impact of the existing rule affected all hedge fund managers globally…hilst AIMA is generally in favor of efficient and appropriate regulations, such as those that exist in the U.K. and many other countries, AIMA has always been firmly against the SEC requirement for dual registration for non-U.S. based managers, who are already effectively regulated in their own jurisdictions."

But while the brouhaha over registration is far from over, Wigfall doesn't think that the SEC will actually seek a rehearing on the issue with the D.C. courts because the ruling by the three-panel judge was unanimous.

"You won't usually see a group of judges overruling their colleagues, especially where unanimity is involved in the initial court decision," he said. "Now that the SEC has new Chairman Cox driving consensus-building efforts…he SEC staff will get this on his radar, as well as on the radar of the new head of the Division of Investment Management Buddy Donohue."

He added that they will likely also look at the previous vote and the dissent of Commissioners Glassman and Paul Atkins when then-Chairman William Donaldson was there.

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