HedgeCo.Net  (West Palm Beach, FL) – The U.S. Court of Appeals for the D.C. Circuit has struck down the Securities and Exchange Commission rule requiring hedge funds to register. The court called hedge funds notoriously difficult to define, and sent the rule back to the SEC for review. “The term appears nowhere in the federal securities laws and industry participants do not agree upon a single definition for hedge funds,” U.S. Circuit Court Judge A. Raymond Randolph wrote in the court’s unanimous 19-page ruling.

The controversial hedge fund registration rule, which went into effect in February 2006, had required hedge funds with assets of more than $30m and more than 15 investors, or “clients”, to register with the agency. The SEC’s definition of the word ‘client’ also came under scrutiny by the court because regulators did not provide a specific explanation of what the word means in the context of a hedge fund.

In the ruling, Judge Randolph wrote, “Consider an investment adviser to a hedge fund that is about to go bankrupt. His advice to the fund will likely include any and all measures to remain solvent. His advice to an investor in the fund, however, would likely be to sell. If there are certain characteristics present in some investor-adviser relationships that mark a ‘client’ relationship, then the commission should have identified those characteristics and tailored its rule accordingly.”

SEC Chairman Christopher Cox said in a statement: “The court’s finding that, despite the commission’s investor protection objective, its rule is arbitrary and in violation of law, requires that going forward we re-evaluate the agency’s approach to hedge fund activity. I have instructed the SEC’s professional staff to promptly evaluate the court’s decision and to provide to the commission a set of alternatives for our consideration.”

The end result of the latest legal wrangling is yet to be determined. It is possible the SEC could appeal the ruling all the way to the Supreme Court, or seek another judge panel to review the ruling.

Evan Rapoport
Principal
HedgeCo Networks
erapp@hedgeco.net