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News September 20, 2004 Issue

Some Questions - and Answers - on Donaldson’s Hedge Fund Project

What did commenters have to say?

With the notable exceptions of the ICAA and ICI, which each supported hedge fund manager registration, nearly all commenters strongly opposed it. The Managed Funds Association (MFA) and the U.S. Chamber of Commerce filed letters supporting the lack-of-authority arguments in Wilmer Haleís "shot across the bow" letter. A highly entertaining letter was submitted by Phillip Goldstein of Kimball & Winthrop, who took a rather unorthodox approach to expressing his feelings. The letter is worth a read, particularly if you are already feeling a bit cranky towards the SEC.

Is SEC Chairman Donaldson still planning to schedule an open meeting to adopt the rule?

"Yes," said an SEC spokesperson, who had checked with the Chairmanís office. "A date has not been set." In all likelihood, look for an open meeting to be scheduled before the November election. Expect a three-two split, with Commissioners Cynthia Glassman and Paul Atkins dissenting.

Will Congress step in to derail Donaldsonís hedge fund train?

Itís unlikely. At most, a group of concerned Congressmen might send a letter over to the SEC or publicly disagree with the Chairmanís approach, but given where we are in the Congressional session, itís highly unlikely that there will a legislative effort to thwart the SECís action. Peggy Peterson, spokesperson for House Financial Services committee Chairman Michael Oxley, described her bossís views on the topic: "It probably would not be his preference that the SEC go ahead and do this, as he feels they have other priorities right now." However, she added, Oxley "understands that Chairman Donaldson feels strongly about it" and feels that itís his "prerogative."

Senator Richard Shelby (R-AL) could not be reached for comment (he was in his home state surveying the damage caused by Hurricane Ivan).

Is there going to be a lawsuit?

Probably. "Iíd be very surprised if somebody didnít challenge this rule given that it clearly exceeds the SECís authority," said David Hirschmann, senior vice president of the U.S. Chamber of Commerce.

But asked directly whether the Chamber will sue, he replied that "no decisions have been made." Hirschmann added that his group is "still hopeful that the Chairman will avail himself of the opportunity to do this in a way that will yield unanimous support within the Commission" by adopting a disclosure regime, "not this excessive charge to regulate all hedge funds." The Chamber fundamentally believes that "this matters for our capital markets," he added. "Itís not just jousting for position in Washington. Itís a serious threat to our economy."

What about the MFA? Scott Parsons, the groupís executive vice president, said that theyíve been getting lots of calls asking whether they are going to sue the SEC. For now, he said, they are focusing on working with the SEC during the rulemaking process.