SEC Will Not Appeal Ruling on Hedge Fund Registration

August 8, 2006 ( - Securities and Exchange Commission (SEC) Chairman Christopher Cox said the agency will not further appeal an appellate court decision throwing out its hedge fund registration rule.

The Associated Press reports that Cox said in a statement, “further appeal would be futile and would simply delay and distract from our goal of advancing investor protection.” This week, the SEC will issue a new rule, intended to deter fraud among hedge funds, according to the AP.

Cox said SEC staff are also considering the increase of the minimum asset and income requirements for hedge fund investors.

In June, the US Court of Appeals for the District of Columbia Circuit vacated the rule that would require certain hedge funds to register with the agency (See Court Throws out Hedge Fund Registration Rule ). At issue with the appellate panel was the meaning the SEC attributed to the word “client.” Regulation existing at the time the SEC was considering the rule allowed hedge funds to avoid registration by defining each hedge fund they manage as a separate “client.” The new rule required each hedge fund investor to be counted as a client.

Cox said pending SEC staff guidance will address “the grandfathering, transition and other miscellaneous relief necessitated by the vacating of the rule,” according to the AP. “This will help to eliminate disincentives for voluntary registration, and enable hedge fund advisers who are already registered under the rule to remain registered.”

The SEC focus on regulating hedge funds is driven by an increase in fraud among hedge funds in recent years. The number of SEC enforcement cases against hedge funds, involving alleged pilfering of fund assets, insider trading and lying about fund performance, has grown from four in 2001 to more than 60, the AP reports.