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News February 7, 2005 Issue

Hedge Fund Manager Registration: Trying to Get Out of It

Might some hedge fund managers attempt to avoid Advisers Act registration by morphing their funds from a 3(c)(1) or (3)(c)(7) fund to, say, a 3(c)(3) fund (such as a bank common trust fund)?

Speaking at ALI-ABAís January 28 investment adviser conference, Douglas Scheidt, chief counsel in the SECís Division of Investment Management, relayed his concerns about focusing the registration requirement on managers of 3(c)(1) and 3(c)(7) funds. Scheidt said that when the rule was being crafted, he predicted that hedge fund managers will make lawyers look more closely at the other exclusions. "There will be a lot of pressure to fit into those exclusions to stretch interpretations," he said. Scheidt noted that some of the 3(c) exclusions are "not exactly clear" and that "thereís not a lot of guidance out there about the meaning of those things."

However, as one New York hedge fund lawyer pointed out, "just seven years ago, 3(c)(1) was the only thing out there." If there was some way to get around 3(c)(1)ís 100 investor limit under the other 3(c) exclusions, "there would have been a proliferation of that way back when."

What about having a general two-year period for the lockup, but arranging, via side letters, a shorter than two-year period for certain investors? SEC associate director Robert Plaze was asked that very question at the ALI-ABA conference, and answered unequivocally:

"That would bust their two-year."