SEC Adopts Rules to Require Hedge Fund Advisers to Register Under Investment Advisers ActOctober 2004 By: Glenn E. Morrical and Craig T. Gretter In July 2004 we reported that the Securities and Exchange Commission had proposed that advisers to hedge funds be required to register under the Investment Advisers Act of 1940. Today the Commission voted 3-2 to adopt that proposal. Under new rule 203(b)(3)-2, hedge fund advisers would no longer be allowed to count just the fund itself as a client. Instead, each hedge fund adviser would be required to count each fund investor toward the maximum of 14 clients that an adviser may have in a 12-month period without registering. The registration requirement will only apply to advisers with assets under management in excess of $30 million. The new rule also contains 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. The Commission has justified the new rule on the basis that registration of advisers to hedge funds would permit the Commission to:
Advisers will not be required to comply under the new rule until February 1, 2006. Various transition rules have been adopted to grandfather investors who are already in a hedge fund but would not be an eligible investor in the fund after the adviser is required to register. Questions concerning the new rule and the transition rules may be directed to any to the following Tucker Ellis & West LLP attorneys: Glenn E.Morrical 216-696-3431
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