On July 14, 2004, the SEC voted 3-2 to propose rules that, if adopted, would require many hedge fund managers to register with the SEC as investment advisers under the Investment Advisers Act of 1940, as amended (the “IAA”). The rules would generally apply to managers with 15 or more investors and at least $25 million in assets under management (although SEC registration would be optional for managers with between $25 and $30 million under management).
Registration as an IA would impose new burdens and restrictions, the impact of which will depend on the size, structure and investor base of the fund or funds a manager advises. Primary burdens for hedge fund managers of adviser registration would be: (1) adoption of compliance policies and procedures and approval of a chief compliance officer; (2) limitations on fees; (3) books and records requirements; and (4) SEC inspections. However, registration offers hedge fund managers several potential advantages. Registered advisers are less restricted in their ability to advertise their advisory business. They also can structure their funds to more particularly meet the needs of investors without worrying about their numbers of funds or clients.