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News July 12, 2004 Issue

Senate Banking Committee Schedules Hedge Fund Hearing

The Senate Banking Committee has scheduled a July 15 hearing on the "Regulation of the Hedge Fund Industry." Thatís just one day after the SEC is scheduled to vote on a controversial new rule proposal that would require hedge fund managers to register with the SEC as investment advisers.

The Senate hearing will begin with testimony by SEC Chairman William Donaldson, followed by a panel consisting of Patrick McCarty, general counsel of the Commodity Futures Trading Commission, James Chanos, president of Kynikos Associates, and Adam Cooper, senior managing director and general counsel of Citadel Investment Group.

Given the makeup of the panel, itís clear that the Senators want to hear the hedge fundsí side of the story. Cooper is the current chairman of the Managed Funds Association, the hedge fund trade group. McCarty, prior to his tenure at the CFTC, served as the groupís general counsel.

Chanos, a short seller, had submitted comments to the SECís May 2003 hedge fund roundtable suggesting that the SEC amend Rule 203(b)(3)-1, the de mimimis exemption relied on by many hedge fund managers to avoid SEC registration as investment advisers, to effectively require registration if a hedge fund has not adopted certain investor qualification and protection requirements. Specifically, Chanos suggested that the rule be amended to require a "look through" to count the investors in the fund if the fund has not adopted safeguards such as: minimum investor qualifications above current accredited investor levels; clear disclosure of financial arrangements with the fundís manager, custodian, prime broker, and others; and clear, objective and transparent valuation standards subject to audit.

Neither the ICI nor the ICAA were invited to testify, according to spokespersons for those groups.