SEC issues emergency rules

WASHINGTON, DC – The US Securities and Exchange Commission (SEC) has issued emergency rules protecting managers suddenly run afoul of the Investment Advisors Act, and has decided against challenging the US Court of Appeals decision to vacate the SEC’s controversial hedge fund registration rule. The SEC’s Division of Investment Management implemented these measures after acknowledging that the Court’s decision could inadvertently remove safeguards for newly registered hedge fund managers to ensure that they comply with the Investment Advisers Act and other regulations. The rules address issues including offshore investment advisors, records on performance information, performance-based compensation arrangements, custody of funds and securities, and procedures for withdrawal of SEC registration.

"What the SEC did was plug the holes created by the Court of Appeals when they vacated the Goldstein decision," Baris explains.

"In some ways the court threw out the baby with the bathwater – by eliminating the rule they also eliminated certain safe harbours for investment advisers who had to register because of the rule."

Baris adds that the SEC will roll out additional rules dealing with anti-fraud measures and disclosures as it pursues less ‘invasive’ efforts to address hedge fund compliance. "If you look at what the Commission is trying to accomplish, they’re trying to add more protections so that there’s less need for the rule that the Court threw out," he says. "They’re taking a more creative approach to achieve their goals and also be as non-invasive as possible."

The bottom line: In pushing through these measures the SEC may have removed a potential disincentive to stay registered, but pending anti-fraud and disclosure rules on managers should prove a more decisive factor.