US court throws out hedge fund registration rule

24 Jun, 2006

In a setback for the Securities and Exchange Commission, a federal appeals court on Friday threw out an agency rule requiring most US hedge funds to register with the SEC.
The court said the rule, which went into effect on February 1, was arbitrary because it exempted hedge funds with fewer than 15 clients. "The number of investors in a hedge fund - the 'clients' according to the commission's rule - reveals nothing about the scale or scope of the fund's activities," the US Appeals Court for the District of Columbia said.
"It is the volume of assets under management or the extent of indebtedness of a hedge fund or other such financial metrics that determines a fund's importance to national markets," the court said in a 19-page opinion.
The registration rule adopted by the SEC required most US hedge funds with more than $30 million in assets and 15 or more clients to register with the agency. That means submitting to periodic audits, keeping better records and following new procedures aimed at discouraging would-be cheaters in the $1.1 trillion industry.

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