The Securities and Exchange Commission Division of Investment Management late Thursday issued a seven-page response to queries from the American Bar Association regarding the U.S. Court of Appeals decision to overturn hedge fund registration rules.

The July 31 letter, sent by Subcommittee on Private Investment Entities Chairman Paul N. Roth and Vice Chairman Jeffrey  E. Tabak,  sought guidance to hedge fund advisors that were unsure how to react to the rule for fear of breaching SEC rules.

In his response, SEC Investment Management Associate Director Robert Plaze assured the ABA that his division will not hold hedge fund advisors to the standards set by the overturned Rule 203(b)(3)-2 or its ancillary amendments. Plaze warned that the response letter represents the opinions of his division, not legal findings.

First, Plaze said that non-U.S. advisors dealing with non-U.S. investors will not be bound by any provisions of the Investment Advisers Act of 1940, but those dealing with U.S. investors that are registered as advisors with the SEC already must abide to the Act and any rules related to the Act when dealing with those clients.

Second, because the courts found the SEC rule to be illegal, the Division of Investment Management will not recommend enforcement proceedings against any hedge fund managers that registered because of the rule, but did not preserve their books or records of meetings prior to Feb. 10, 2005, because they were too new.

Plaze also confirmed that his division will not trigger enforcement proceedings against qualified advisors that take a cut of clients' gains if those advisors would have been exempt from such proceedings under the rule.

The rule also allowed funds-of-funds that are required to provide annual audits 180 days after the end of the fund's fiscal year to distribute that audit, rather than 120 days, as required of other investment vehicles. Plaze said his division will not seek enforcement against funds-of-funds that waited 180 days, because they had set their schedules according to the now-invalid rule.

For those hedge funds planning to withdraw registration, they must do so by Feb. 1, 2007. Plaze noted that funds can chose to withdraw, even if they were held out to the general public or had more than 14 clients while they were registered. Funds with fewer than 15 clients and that did not advertise as investment advisors were exempt from registration.

Finally, Plaze addressed the ABA's concern that funds that revoked their registration using the appropriate form but did not provide balance sheets at the time of withdrawal could be subject to enforcement. Plaze said such funds will not face regulators' reprisal.

Plaze also addressed two issues not included in the ABA letter. 

First, while the rule called for funds that withdraw from registration to offer information about funds they advise, such data is no longer requested. Furthermore, he reaffirmed the fact that the Investment Advisers Act of 1940 required registered investment advisors to make records available for SEC exanimation upon request.  Proxy parties cannot hold the records on behalf of hedge funds, Plaze wrote. "The advisor may not evade this requirement."

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