Private Funds
SEC Prposes Amendments to Antifraud and Eligibility Rules for Hedge Funds
On December 27, 2006, the SEC issued a proposal to adopt two new rules relating to hedge funds and other privately offered investment pools. First, the SEC proposed to expressly extend its antifraud authority under the Investment Advisers Act of 1940 (the Advisers Act) to registered and unregistered investment advisers’ conduct relating to investors and proposed investors in pooled investment vehicles. Second, the SEC proposed to increase the eligibility requirements for natural persons to be considered “accredited investors” with regard to certain investments in hedge funds and other privately offered investment pools. Comments on the proposal are due to the SEC by March 9, 2007.
SEC Staff Issues Guidance on Registration of Hedge Fund Advisers
On August 10, 2006, the SEC’s Division of Investment Management (Staff) issued a letter on the effects of the decision of the U.S. Court of Appeals for the D.C. Circuit in Goldstein v. SEC. In vacating the SEC’s rule requiring registration of certain hedge fund advisers, Rule 203(b)(3)-2 under the Investment Advisers Act of 1940 (Advisers Act), the Goldstein decision referred to the entire SEC Release that accompanied the adoption of the rule. As a result, the D.C. Circuit appears to have vacated the entire rulemaking, which included rule amendments in addition to the registration requirement itself.
SEC Staff Issues Guidance on Investment Adviser Registration
On August 7, 2006, the SEC staff told an adviser that it was prohibited from registering under the Investment Advisers Act, despite past staff positions suggesting the adviser was required to register. The letter, issued to Credit Agricole Asset Management Alternative Investments, Inc. (CAAMAI), illustrates how advisers can be caught between past staff guidance on the one hand, and the statutory and Form ADV changes brought about by the National Securities Markets Improvement Act of 1996 (NSMIA) on the other.
SEC Hedge Fund Registration Rule Vacated by D.C. Circuit
On June 23, the U.S. Court of Appeals for the D.C. Circuit vacated the SEC’s rule requiring registration of certain hedge fund advisers, Rule 203(b)(3)-2 (Hedge Fund Rule) under the Investment Advisers Act of 1940 (Advisers Act). The SEC adopted the Hedge Fund Rule on December 2, 2004 under then-Chairman William Donaldson, and over the dissent of Commissioners Paul Atkins and Cynthia Glassman. The Hedge Fund Rule officially took effect on February 6, 2006.
SEC Adopts Rules Regarding Fund-of-Funds Arrangements
Yesterday, the SEC adopted three new rules under the Investment Company Act of 1940 (1940 Act) that provide exemptive relief for certain fund-of-funds arrangements. The rules codify and expand on a number of exemptive orders the SEC has issued that permit funds to invest in other funds. The SEC also mandated enhanced disclosure concerning the expenses associated with a fund-of-funds arrangement by requiring the expenses of acquired funds to be aggregated and shown as a separate line item in the acquiring fund’s prospectus fee table. The disclosure requirements have a compliance date of January 2, 2007.
Department of Labor Provides a No Enforcement Period for LM-10 Filings
The Department of Labor (“DOL”) issued the attached advisory effectively extending the Form LM-10 filing deadline by 45 days (from March 31, 2006 to May 15, 2006) for employers with fiscal years ending on December 31, 2005 who are filing reports covering calendar year 2005. In the advisory, the DOL provides that although it has no authority to grant extensions of statutory filing deadlines, it can, pursuant to its enforcement discretion, agree to not take enforcement action with respect to late filings.
FTC Fines Hedge Fund Manager $350,000 for HSR Violations
The Federal Trade Commission recently accused a hedge fund manager of violating the Hart-Scott-Rodino Act by failing to report to the FTC and Department of Justice when his fund bought more than $50 million of stock in two different companies on two separate occasions. The hedge fund manager, Scott Sacane, agreed to pay a $350,000 fine. The fine here was relatively modest considering that Mr. Sacane’s total exposure was over $17 million or $11,000 per day for each day of violation. Hedge funds and other financial institutions that actively trade for house accounts (so-called proprietary trading) are particularly vulnerable to falling afoul (even inadvertently) of the reporting requirements of the HSR Act.