WASHINGTON - Non-registered hedge fund advisers who cooperate with directories and publications are putting their exemption from government regulation at risk.
Jack W. Murphy, associate director (chief counsel) at the Securities and Exchange Commission's division of investment management, said hedge fund advisers who provide information to hedge fund directories may be holding themselves out as investment advisers.
Federal law is interpreted to say investment advisers who hold themselves out to the public are regulated by the SEC under the Investment Advisers Act. While non-regulated investment advisers always have been restricted from promoting themselves, among other things, the SEC has tried to clarify the issue in response to a question as to what a non-regulated adviser can do, Mr. Murphy said. The SEC is planning on responding with a letter outlining its stance, he said.
Lawyers for hedge fund advisers generally recommend that cooperation with hedge fund directories is kept to a minimal or non-existent level. Many are surprised when hedge fund directories get as much cooperation as they do from the advisers.
Budge Collins, president of Collins Associates, Newport Beach, Calif., said the SEC's stand is necessary. (Mr. Collins said his firm uses both registered and non-registered advisers in its fund-of-funds, which includes hedge funds).
He noted a recent article in Barron's as an example of hedge fund manager information becoming widely available. The Feb. 20 article included performance and phone numbers for individual hedge funds, and resembled a mutual fund report.
Legal experts say a major purpose of the advertising restriction is that a private investment adviser dealing with a limited number of investors is unlikely to cause harm to the investment public.
In addition, Joseph Collins, partner with Mayer, Brown & Platt in Chicago, said the SEC is probably trying to limit hedge fund directories because of big hedge fund losses last year, such as the losses suffered by Askin Capital Management, New York.
While the SEC's apparent desire to rein in hedge fund directories might be a sign of the industry's growth, those in the industry say it is unlikely to have much of an effect on hedge fund investing.
A hedge fund attorney, who asked to not be identified, said the SEC's statements would have a negative effect on publishers of hedge fund directories, but "it doesn't affect the industry at all." While he said the SEC's actions are not "unfounded," it's "very rare" that a hedge fund directory results in a sale anyway.
Likewise, Mr. Collins, of Mayer, Brown & Platt, said, "Any hedge fund (investment) involves a high degree of trust." Institutional investors are going to do a lot of due diligence before investing in a hedge fund, and won't rely on directories for investment decisions, he said.
Meanwhile, hedge fund consultants may benefit from the SEC's statements, because they have established databases and access to hedge fund information through their clients' investments.