WEST PALM BEACH, FL (www.hedgeco.net) – Paul Roye, director of the SEC’s Division of Investment Management said he is not concerned about the much talked about loophole in the new SEC hedge fundlaws. Under the new passed laws, funds with two-year lock-up provisions would be exempt, such provision was however intended for private equity and venture capital funds with traditionally longerlock-up periods than hedge funds. Some in the industry see such loophole as a possible avenue to avoid the much talked about SEC scrutiny. The SEC hopes such loophole does not come back to hurt theagency\u00c3\u00af\u00c2\u00bf\u00c2\u00bds plans to maintain a close eye on the US based hedge fund managers.<\/p>\n
In a recent seminar on hedge fund regulation, sponsored by the Managed Funds Association, Roye said, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdOne issue that has received significant attention as hedge fund advisers consider registration under our new rule involves the possibility that some advisers might extend their redemption provisions beyond two years in order to avoid SEC registration.\u00c3\u00af\u00c2\u00bf\u00c2\u00bd He added, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdUnder the new rule advisers to so-called “private funds” are required to “look through” their funds to determine whether they qualify for the small adviser exemption from registration that most unregistered hedge fund managers currently rely on. Obviously, when required to “look through” their funds to count clients, most hedge fund advisers will exceed the exemption’s 14 client limit\u00c3\u00af\u00c2\u00bf\u00c2\u00bd.<\/p>\n
Roye noted that few investors will agree to leave their money tied up for so long and that the “market” will therefore prevent circumvention of the rule. He said, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdI encourage hedge fund investors to seriously scrutinize any hedge fund manager that is seeking to extend redemption periods in order to avoid adviser registration. I expect that a redemption period longer than two years on all initial and subsequent investments will serve as a red flag for hedge fund investors, signaling that the adviser may be structuring its operations to avoid SEC oversight.\u00c3\u00af\u00c2\u00bf\u00c2\u00bd<\/p>\n
According to Roye, investors must determine whether it is wise to invest money with hedge fund managers trying to avoid SEC regulation. He also noted that the SEC will change the rules if such loophole was widely abused.<\/p>\n
Paul Oranika
Editor-in-Chief
HedgeCo.Net
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