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News February 21, 2005 Issue

Roye on Hedge Fund Two-Year Lockups

Can a hedge fund impose a two-year lockup to avoid registration? Yes, if clients agree. SEC Division of Investment Management director Paul Roye predicts they won’t.

"It is our expectation that few investors will agree to leave their money tied up for so long and that the ‘market’ will therefore prevent circumvention of the rule," said Roye at a recent Managed Funds Association conference. He encouraged hedge fund investors "to seriously scrutinize any hedge fund manager that is seeking to extend redemption periods in order to avoid adviser registration." That, he said, would be expected to "serve as a red flag" for investors, "signaling that the adviser may be structuring its operations to avoid SEC oversight." Investors should ask themselves "whether they are comfortable handing a multi-million dollar investment" to an adviser that may be trying to avoid SEC registration. "My guess is that, in most cases, the answer will be no," said Roye.

He promised that the SEC staff would continue to monitor the two-year lockup issue. "If it becomes necessary to recommend rule revisions to the Commission in order to enhance the effectiveness of our hedge fund adviser registration requirements, we certainly will do so," he said.