Beginning in early 2006, the
SEC
will require certain hedge fund managers to be
registered investment advisers (RIAs).
The regulation applies to managers of private funds that have more than $30 million in assets, 15 or more investors, and a lock-up period of up to two years. Prior to the regulation, all hedge fund managers were considered private advisers and therefore exempt from SEC oversight. That will continue to be the case for those managers whose funds don't fit the private fund definition.
RIAs, who must assume fiduciary responsibility for their investment management decisions, are required to have official, written policies and procedures for running their funds, a code of ethics, and a chief compliance officer (CCO). They must keep official trading and other records, which are subject to SEC inspections, and submit an annual compliance report.
This registration requirement doesn't affect the managers' continued use of a range of investment strategies though it does subject them to special rules on performance fees. RIAs are prohibited from charging performance fees unless the fund's investors are qualified, which means they have at least $750,000 under management and a net worth of more than $1.5 million at the time they invest.
Changes afoot? The new SEC regulation of hedge funds may affect the practice of using side letters which offer shorter lock-up periods to favored investors if the change brings the hedge fund within the definition of private fund.
