Sen. Grassley Seeks Hedge-Fund Rule

The amendment would narrow the exemption used by big hedge funds "to avoid registering with the Securities and Exchange Commission," says the ranking Republican on the Finance Committee.

Breaking ranks with the Bush Administration and apparently with the Securities and Exchange Commission itself, Sen. Chuck Grassley has proposed legislation that would require most hedge funds to register with the SEC.

The amendment would narrow the exemption “that is currently used by large, private pooled investment vehicles to avoid registering with the Securities and Exchange Commission,” stated Grassley, the ranking Republican member of the Senate Finance Committee.

Grassley’s measure would amend the Investment Advisers Act of 1940, which exempts advisers from registering with the SEC if they have fewer than 15 clients in the preceding 12-month period and who don’t present themselves to the public as investment advisers.

Since last June, when the D.C. Circuit Court of Appeals
overturned an SEC rule requiring most hedge fund advisers to register with the commission by Feb. 1, 2006, hedge fund advisers have been able to define the word “client” as the hedge fund itself, rather than the investors who own shares in it. Thus, an adviser serving two hedge funds is exempt from registration—even if the funds have many more than 15 investors.

Under the SEC’s rule, advisers had to count “shareholders, limited partners, members, or beneficiaries” as clients.

To date, 335 advisers have withdrawn in the wake of the Circuit Court decision, SEC spokesperson John Nester told CFO.com, while another 113 have withdrawn for assorted business. Seventy advisers have registered with the commission since the ruling. Nester said the SEC “declined immediate comment” on Grassley’s proposed amendment.

In the June Circuit Court ruling, Goldstein v. SEC the judges decided that the rule was “arbitrary.” While SEC Commissioner Christopher Cox said that the decision left a “gaping hole” in its ability to register and inspect hedge funds, the commission chose not to appeal the ruling.

Further, the SEC, as part of the President’s Working Group on Capital Market chaired by U.S. Treasury Secretary Henry Paulson, has agreed not to pursue more regulatory power over hedge funds.

Filed on Wednesday by Grassley, the amendment would empower the SEC to require all investment advisers to register except for those who:

• Have $50 million or less in assets under management;

• Have fewer than 25 clients;

• Don’t hold themselves out to the public as investment advisers;

•And manage the assets of fewer than 15 investors, regardless of whether the investors make use of the advisers’ services directly or through a pooled investment vehicle like a hedge fund.

Grassley filed the measure as an amendment to S.4, the 9/11 homeland security bill now being debated by the full Senate. The senator said the amendment is relevant to the larger bill because reports have shown that there are terrorist links to hedge funds.

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