July 14, 2004
1. Registration Under the Advisers Act of Certain Hedge Fund Advisers
The Commission today will consider whether to propose new Rule 203(b)(3)-2 that would require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940. The Commission also will consider whether to propose related rule amendments.
The Commission’s staff estimate that approximately 40 to 50 percent of all hedge fund advisers are currently registered with the Commission.
Registration under the new rule would permit the Commission to–
* Collect and provide to the public basic information
about hedge funds and hedge fund advisers, including the number of hedge funds operating in the United States, the amount of assets, and the identity of their advisers.
* Examine hedge fund advisers to identify compliance
problems early and deter questionable practices. If fraud does occur, examinations offer a chance to discover it early and limit the harm to investors.
* Require all hedge fund advisers to adopt basic
compliance controls to prevent violation of the federal securities laws.
* Improve disclosures made to prospective and current
hedge fund investors.
* Prevent felons or individuals with other serious
disciplinary records from managing hedge funds.
The proposed new rule would require advisers to “private funds” to register with the Commission by requiring the advisers to “look through” the funds and to count the number of investors (rather than the fund) when determining whether the advisers are eligible for the Adviser Act’s exemption for advisers with 14 or fewer clients.
A “private fund” would be one that
o would be an investment company but
for the exceptions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940;
o permits owners to redeem their
ownership interests within two years of purchase; and
o is offered based on the investment
advisory skills, ability or expertise of the investment adviser.
The proposed rule would contain special provisions for advisers located outside the United States designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S. investors.