U.S. Court Strikes Down SEC’s Hedge Fund Rules

By Edwin Laurenson, Joseph E. Suh, John J. Sullivan, Nick Terras and William Yonge

On June 23 a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously invalidated the U.S. Securities and Exchange Commission’s (SEC) hedge fund rules. The court acted on the grounds that the SEC’s redefinition of the term "client" to look through to fund investors (unless the fund adopted a two-year redemption lock-up) for purposes of determining a fund manager’s federal registration obligations "falls outside the bounds of reasonableness." (Currently, a U.S. investment adviser must register if it has had more than 14 clients in the preceding 12 months and has at least $30 million under management; the dollar threshold does not apply to offshore managers, who need count only U.S. clients.)