Grassley Presses for Hedge Fund Registration

March 9, 2007 ( - Concerned about pension fund exposure to the asset class, a senior lawmaker is calling for greater hedge fund registration.

“The secretive way that hedge funds operate might not be an issue for the super rich who first invested in hedge funds, but today the average Joe has a stake as pension funds are invested in hedge funds,” said Senator Chuck Grassley (R-Iowa), who has offered an amendment that would require hedge funds to register with the Securities and Exchange Commission.  

Grassley filed his amendment to S.4, the 9-11 homeland security legislation now being debated by the full Senate. Grassley said the amendment is relevant to the larger bill as reports have indicated terrorist links to some pooled investment groups including hedge funds.  “My amendment gives Congress a good opportunity to say there should be greater transparency with hedge funds,” Grassley said.  

Statutory Exemption

Grassley’s amendment would affect section 203(b)(3) of the Investment Advisors Act of 1940 (15 U.S.C. § 80b-3(b)(3)), which currently provides a statutory exemption from registration for investment advisers who had fewer than fifteen clients in the preceding twelve month period and who does not hold himself out to the public as an investment adviser.   According to a  press release , the amendment would narrow the exemption that is currently used by large, private pooled investment vehicles to avoid registering with the Securities and Exchange Commission.

The amendment would authorize the SEC to require investment advisers to register

unless the advisor:

  • had $50,000,000 or less in assets under management,
  • had fewer than fifteen clients,
  • did not hold himself out to the public as an investment advisor, and
  • managed the assets of fewer than fifteen investors, regardless of whether the investors participate directly or through a pooled investment vehicle, such as a hedge fund.

Call for Action

Introducing the bill, Grassley said Congress needs to act because the D.C. Circuit Court of Appeals last year overturned a regulation imposed by the Securities and Exchange Commission requiring hedge funds to register.   The appellate court said the SEC failed to justify its definition of “client” in the new rule and that its interpretation “falls outside the bounds of reasonableness” and comes close to violating “the plain language” of the 1940 Investment Advisers Act (see  Court Throws out Hedge Fund Registration Rule ).    

The rule imposed by the SEC last year would have required managers that run hedge funds with at least 15 US clients to register as an investment adviser with the SEC.   It required each hedge fund investor to be counted as a client, forcing most large managers to register with the SEC, and to provide the SEC with basic information about themselves and submit to spot inspections (See  SEC Imposes Hedge Fund Registration ).   The SEC subsequently said it would not appeal the appellate court decision (see  SEC Will Not Appeal Ruling on Hedge Fund Registration ).