SEC guides hedge funds after rule struck down

The US Securities and Exchange Commission has moved to reassure hedge fund advisers already registered with it that they will not run into trouble as a result of a June court ruling that struck down an SEC registration order.
Hedge fund managers and their lawyers welcomed the SEC's emergency guidance, issued late on Thursday, saying it will go a long way toward clearing up confusion left by the court's decision and Monday's news that the SEC will not appeal.
"This is a very helpful letter because it restores protective provisions of the rule," said Elizabeth Fries, a partner at Boston law firm Goodwin Procter.
The SEC's hedge fund order was adopted by the investor protection agency in 2004. It took effect in February, requiring most hedge fund advisers to give the SEC basic information about themselves and submit to examinations.
A hedge fund manager sued in an attempt to block the SEC and won. A federal court threw out the order in June, saying the SEC staff had overstepped its bounds. But by the time the court ruled, more than 2,500 advisers had registered.
In its new guidance, the SEC told the registered advisers that the agency will not initiate enforcement actions against them if they obey the provisions in the invalidated rule.
For example, the rule said funds-of-funds had a more-generous 180 days to send audited financial statements to investors. As long as the advisers remain registered, they will still have roughly half a year to deliver those documents, according to the guidance.
This may be especially important for funds-of-funds, which put together portfolios of individual hedge funds for their clients and likely need additional time to collect the data from their hedge fund managers. "This guidance makes it clear that it won't hurt those funds that have registered," Fries said.
Also, as long as they stay registered, funds will not be penalised for having kept performance data only since February, 2005, the guidance said. Funds that are not registered have to show much longer data histories.
The SEC said 24 hedge fund advisers have registered with it since June 23, when the rule was struck down. And only eight advisers have told the SEC they intend to withdraw their registrations based on the order's invalidation. Twenty-two other advisers have filed registration withdrawal documents for other reasons, the SEC said.
Hedge funds are lightly-regulated private investment partnerships that use unconventional investing strategies. After years of explosive growth, hedge funds today number roughly 8,000 and boast combined assets of $1.2 trillion.