So, despite the odds, one man, Phillip Goldstein, has won his case against the SEC (see Euromoney, March 2005 issue, “Hedge funds register scorn at SEC ruling”). Goldstein argued that the SEC’s 2005 ruling requiring registration for hedge fund managers that had more than $30 million in assets under management and more than 14 US clients was beyond its realm of duty. Congress, not the SEC, he argued, has the power to alter or introduce law. The three judges in a federal appeals court in Washington in June effectively backed this view, finding that the SEC ruling was “arbitrary” and could not be sustained.
It was a judgement that the majority of hedge fund managers would have liked back in 2005 when they were grappling with the prospects of registration costs and intrusive visits by the regulator. (It should be noted, though, that virtually none of them had the courage to back Goldstein’s case.) But now that the case is won, there are a few disgruntled voices.
For a start, although not as many hedge funds registered by the February 2006 deadline as the SEC would have liked – estimates run just below 1,000 – those that did so spent a lot of time and money employing or training staff to deal with registration, sending them to conferences and filling in paperwork. What to do with the extra staff? Stay registered and keep them on the payroll? Or let them go and get back to focusing on the business of making returns?
And investors are now in a quandary. Some agreed to the imposition of two-year lock-ups, a way around the SEC ruling. And some US investors were even forced to leave funds. Will managers change their minds again?
Then there is the SEC, which has been made to look unprofessional. Regulators are not law makers, and the case reinforces the argument that many in the market made last year – that the regulator’s ruling had been rushed through. The court has given the SEC 45 days to appeal, but the consensus view is that it won’t bother.
Although former SEC chairman William Donaldson was keen on getting a regulatory grip on the hedge fund industry, his successor, Christopher Cox, seems less concerned about doing this. The only option for the SEC seems to be for it to go to Congress and ask for legislative backing (which it should have done in the first place). It appears, though, that Congress wants to have little to do with the matter.
And the most disgruntled people of all must be the lawyers, consultants and events organizers who were on to a sure thing advising managers how to register.
Deregistration won’t be quite so fruitful for them. Although the SEC ordinarily investigates firms that ask to deregister, it is assumed, in this instance, that the regulator will let managers go without a fight.