Appeals Court Rejects SEC Hedge Fund Rule

Federal regulators seeking to increase regulations of hedge funds suffered a setback Friday when the U.S. Court of Appeals for the District of Columbia called the Securities and Exchange Commission's adviser registration rule "arbitrary," sending it back to the SEC for further review.

The rule, approved by the SEC in 2004, requires hedge fund advisers to register with the regulator as investment advisors.

Phillip Goldstein, principal of Pleasantville, N.Y.-based Opportunity Partners, filed a lawsuit late that year, opposing the rule, which exempted funds with fewer than 100 investors in accordance with the Investment Company Act regulations, but at the same time required all companies with more than 14 investors to register in accordance with competing guidelines, beginning Feb. 1, 2006.

The rule, as passed, also requires qualifying hedge funds to hire a compliance officer, be subject to inspections and specified certain recordkeeping practices.

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