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WSJ: Update on Hedge Fund Registrations with SEC

The November 10, 2005 edition of The Wall Street Journal reports in an article written by Gregory Zuckerman and Ian McDonald entitled “Hedge Funds Avoid SEC Registration Rule” on how some large hedge funds are changing investor lock-up rules and refusing to accept new investments in order to avoid registering with the Securities and Exchange Commission despite new rules aimed at forcing most hedge-fund advisers to sign up by early next year. The firms reported to planning on avoiding registration through these loopholes include SAC Capital Management LLC, Kingdon Capital Management LLC, Citadel Investment Group PLC, Eton Park Capital Management LLP, Lone Pine Capital and Greenlight Capital.

“Last year, SEC commissioners voted to make hedge funds managing more than $25 million register with the SEC, requiring them to submit to periodic audits and provide detailed information about their trading, among other steps. SEC Chairman Christopher Cox recently signaled that the changes will go into effect, as planned, in February. A recent spurt of alleged fraud at hedge-fund firms such as Bayou Management, Wood River Capital Partners and KL Financial Group has added to calls for more oversight. But the SEC's rule only applies to advisors that permit investors to redeem their interests in a hedge fund within two years of purchasing their stakes. The agency concluded that the average "lockup" period for hedge funds is 12 months, so the 12-month period is the time frame covered by the rule.”

“Some of these funds say they are wary of registration because they fear an SEC audit will tie up traders and senior management for weeks, and they worry that SEC examiners won't fully understand their trading strategies, which can be complex. Others say they expect the SEC to be aggressive in its oversight in the early months of the registration process, to demonstrate that it is serious about tracking down problems. Still others are wary of the cost of complying with the SEC's registration requirement, which could cost more than $500,000 for many funds.”

“’We're aware that some hedge-fund advisers are planning to extend their lockup period and we'll evaluate the situation when we have a better picture of the situation in February,’ said Robert Plaze, associate director of the SEC's investment-management division. However, the SEC's registration rule proved quite contentious, even within the agency, so in the near term it may be difficult for the SEC to adjust the rules to capture the lockup extenders.” One reason given for avoiding registration is that "SEC registered advisors will face a time-consuming SEC audit process and an onerous email retention requirement." Further it is stated “the additional administrative burden of SEC registration may result in a distraction to senior management with no discernible benefit to [the fund] investors.”

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Ian McDonald at ian.mcdonald@wsj.com.