WEST PALM BEACH, FL (www.hedgeco.net) – According to the SEC, the effective date for registration as Investment Advisors is �February 10, 2005, except for the amendments to �275.206(4)-2 [rule206(4)-2] and �279.1 [Form ADV], which will become effective January 10, 2005.” The new law stipulates that, �Advisors that will be required to register under the new rule and rule amendments must doso by February 1, 2006. Advisors must respond to the amended items of Form ADV in their next ADV filing after March 8, 2005.”
The law has new implications for hedge fund managers. For instance, in other for hedge funds to meet the �private� qualification as specified by the SEC, such fund must only accept investors or entities which meet the �accredited� investor requirement. Upon meeting such standard, such fund can charge investors any kind of fees which those investors are willing to pay.
Buchanan Hedge Fund Services, stresses that the SEC�s new laws will impact hedge fund managers in different ways. One of the first areas of change relates to screening for potential hedge fund investors. When an advisor registers as an investment Advisor with the SEC, the manager will subsequently become subject to Rule 205-3; which places some restrictions on the charges relating to performance fees. Buchanan Hedge Fund Services also explained that the new SEC laws also carry more stringent financial requirements for investor eligibility.
The issue now as it relates to the RIA registration is that new laws may impact on the fees that may be charged. According to Emmett Ryan, a spokesman for Buchanan Hedge Fund Services, �With RIA registration, additional SEC rules come into play with respect to the fees that may be charged. As an SEC Registered Investment Advisor, you are prohibited from charging a performance fees to little investors. For the purposes of this regulation the SEC has set a number of benchmarks for the dividing line between little investors and big investors that they will allow to pay incentive fees. For individuals, one test is $750,000 under management with the adviser. An alternative test for individuals is that the advisor has a reasonable belief that the investor has a net worth of $1.5M�.
The implication of this is that an accredited investor with $1 million may invest money with a fund which is managed by an advisor who is also registered with the SEC, without altering the status of that fund as �Private�. This means that under the standard required for an investor to pay performance fees, �that investor would be unable to be charged a performance fee� according to Ryan.
The lengthy SEC laws and regulations remain complex to decipher, and for hedge fund managers who are generally preoccupied with the business of making money for their investors, these new laws will undoubtedly divert some of their attention away from trading. According to Buchanan Hedge Fund Services, �Code of Ethics will establish restrictions on the personal investments of those involved in the investment process. It will also require the investment advisor to: create and maintain a written Code of Ethics, institute a process for informing all subject persons, and monitor compliance of each subject person with those restrictions on an ongoing basis.”
Commenting on the impact of the new SEC laws on Hedge Fund Managers, Ryan also said, “This change is just the first shot fired by the SEC. Hedge management firms are facing a regulatory regime that will demand the adoption of extensive and time-consuming business practices. Hedge fund management firms, and especially those firms with head counts below twenty, would be wise to make an early and careful examination of the regulatory requirements, the burdens those requirements place on their firm, and the alternatives for meeting these challenges.”
Ryan added, �Firms should be wary of boilerplate paperwork or a quick software fix. Ultimately, there’s no real replacement for the flexible, responsive approach folks with experience in compliance management can provide. For many firms with limited personnel whose time has a high value, outsourcing many of the day to day tasks of meeting regulatory requirements will be an obvious business decision.”
Buchanan Associates is a compliance consulting firm located in New York. For more information, contact Emmett Ryan at: 212 809-7171 ext 245.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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