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More on Hedge Fund SEC Registration Impact

The Financial Engineering News Inside the Black Box column entitled “February 1, 2006: The Hedge Fund Registration Stakes” is a noteworthy article on the issue of hedge fund registration. Toomre Capital Markets would suggest that people who are interested in how the markets may be influenced by requirement that hedge funds register with the SEC as investment advisors read the complete article.

The article starts off by stating: “February 1, 2006, looms as the deadline for hedge fund registration in the U.S. By that date, domestic advisers to hedge funds with 15 or more investors and lockup periods of less than two years will have to register as investment advisers under the 1940 Investment Advisers Act. That will subject them to an assortment of compliance obligations and allow the Securities and Exchange Commission to conduct inspections to ensure that they’re complying with federal securities laws. Hedge funds’ two-year caterwaul of distress over registration faded when the SEC announced its decision last fall. With the uncertainty about whether hedge funds would have to register removed, the interested parties have been gearing up for February.

“But uncertainty remains. Perhaps less about the ins and outs of registration than about what’s next. No one is sure whether registration is the first step on a path of greater regulation. Or how registration will play out, practically speaking. Will compliance exams identify warning signs that could nip the sort of alleged fraud that recently exposed Bayou, a Stamford, Connecticut-based hedge fund that earlier this year told investors it had $440 million, as a sham? Is the SEC’s Office of Compliance Inspections and Examinations, whose stomping ground has been traditional asset managers, prepared to deal with funds that trade more complex products and pursue multiple strategies across asset classes? At this point, no one can reliably say whether registration will turn out to be a big deal or just a dimple in the road.

“There’s a lot of speculation going on. Hedge funds moving through the registration process are trying to figure out if the compliance programs they’re instituting are up to snuff for the SEC, if they’re dotting their I’s, crossing every T and so on. They’re trying to gauge exactly what information the SEC is seeking from hedge funds and whether the SEC will look for a whipping boy to drive home the importance of hedge fund investment adviser compliance. The SEC, meanwhile, is trying to understand the habits and habitats of hedge funds, and how their disclosures and fiduciary responsibilities impact their activities.”

The complete article by Nina Mehta can be found at this link.