HEDGE FUNDS
RESOURCES & LINKS

LEGAL AND REGULATORY RESOURCES

The key money issue for hedge fund entrepreneurs is being able to charge (very lucrative) performance compensation to investors.

For a national-US securities hedge fund, which is SEC or state registered, current rule business plans only allow performance compensation to be charged to "qualified client" investors (who have $1.5 million of net worth). Some states allow performance compensation from all investors.

The SEC proposals change requirements for accredited versus non-accredited investors; but they do not propose any changes to qualified client rules (and that's where the money is).

• The SEC Release contains proposed amendments to rules under the Securities Act of 1933 (e.g., Regulation D, which contains the rules for determining who is an "accredited investor") and amendments to the anti-fraud rules under the Investment Advisers Act of 1940.
  
  
• The proposed rules would not amend Investment Advisers Act Rule 205-3, which provides rules for when a registered investment adviser can take performance fees or profit allocations from a "qualified client." Rule 205-3 does not cross-reference the rules for accredited investor under the 1933 Act, and provides its own set of definitions.
  
  
• Our reading of the changes that the proposed rules would make is that the qualified client test is applied of its own force, whether or not an investor is an accredited investor client or not. For example, where an SEC registered investment adviser has managed accounts, the accredited investor rules are irrelevant but the qualified client rules govern whether the adviser can take performance from that managed account's client.
  
  
• The effect of the proposed rules, which will very heavily decrease the universe of "accredited investors" would not by itself affect the determination of when performance can be charged. However, the proposed rules would have that practical effect, by increasing the pressure on filling the 35 non-accredited investors in a 3(c)(1) fund.
  
  
• Similarly, the proposed rules would not affect the determination of when a manager must register, because the SEC cannot overrule Goldstein through regulations -- overruling Goldstein would require Congressional action.

Bottom line, your hedge fund business plans may not have to change significantly with new SEC proposed rule changes. You just need to know how to fit your investors into the proper boxes (non-accredited, accredited, and qualified client). The new rules require much more fine tuning about which box investors fit into and who and how many investors you can take into each box.

Hedge Fund & Money Management links (part of our trader links section)

Investment Advisors Act of 1940
The full text of the Act is accessible from the above link. The SEC administers this area of the law. If you choose (or are required) to become a SEC-registered Investment Advisor, this is the law that affects you. There are federal exemptions from registration as an Investment Advisor, but they are narrow, and you must be careful to ensure that you follow the rules. Because of the unique structure of the state and federal legislation system, your state’s rules may take precedence over the SEC rules. There are a number of rules that have been issued by the SEC related to the implementation of the Act. You can read those rules here: www.access.gpo.gov/nara/cfr/waisidx_00/17cfr275_00.html.

Investment Company Act of 1940
If you end up with more than 100 investors in your fund, you will be subject to this Act. Similar to the Investment Advisors Act of 1940, the Investment Company Act of 1940 also has a number of rules associated with the Act. See those rules here: www.law.uc.edu/CCL/InvCoRls/index.html.

Securities Act of 1933
This is the Act that determines how you issue your hedge fund. Most of our clients sell their fund under a Rule 506 exemption under Regulation D of the Securities Act of 1933. The Act basically requires that potential investors receive financial and other data of significance on securities being offered for sale (which is technically what is done with a hedge fund vehicle), although there are exemptions.

Securities Act Rules
The link can take you to both the “General” rules of the ’33 Act as well as significant regulations, such as Regulation D. The minutia is significant, but all the rules under the Securities Act of 1933 are here!

USA Patriot Act of 2001/Bank Secrecy Act.
The implementation of the Patriot Act is still in process. However, there are going to be significant impacts on the hedge fund community when the rules are finalized. As it stands right now, there are going to be anti-money laundering rules, and you are going to be required to have an audit of your anti-money laundering compliance program. There will also be rules that will require all hedge fund managers to inform the SEC they are operating a hedge fund. At this point, there is no indication you are going to be required to provide your investors’ identity, but you will need to provide your name and contact information as well as the total amount of assets you have under management and the number of investors you have.

Commodity Futures Modernization Act (CFMA) of 2000
H.R. 5660 Dec 14, 2000. The most significant aspect of this legislation was the legal creation of the single-stock future contract and taxation of broad-based indices.

Taxation under the CFMA of 2000
Technical explainations of the tax provisions of CFMA. If you want to learn more about the taxation of commodities, this is an excellent resource.

Analysis of CFMA by GTT
A bevy of new products have hit the market in the last few years – ETFs, E-Minis, single-stock futures, new indices, and options and futures on almost everything. Learn how all these new products are taxed in accordance with CFMA, and why it matters to you.

Securities Exchange Act of 1934
This is the law that created the SEC. It provides the basis under which the SEC performs all of its activities. The SEC’s activities include being the primary regulator of the following activities: corporate reporting, proxy solicitations, tender offers, insider trading, and the registration of Exchanges and Associations.

SEC Release No. IA-2091
If you are operating your investment advisor (IA) firm via the Internet and dispensing advice via the Internet, this new rule will allow you to choose to register your IA with the SEC as opposed to being forced to only register with specific states. Previously, you were required to register with more than 30 states (if you had less than $25 million under management) before you could register with the SEC. This new rule could reduce your administrative burden.

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