Wednesday, January 26, 2005
New Provision of HF RIA Rule On 2/10/05
Registering with SEC as an Investment Adviser Will Change Life as a Hedge Fund Manager…Here's One Change that Starts February 10, 2005
posted by southport on Tuesday 25 Jan 2005 19:29 GMT
The December 2, 2004 decision by the SEC to extend its oversight to a large portion of the hedge fund industry will result in the need for changes in a number of common hedge fund industry business practices.
One common practice that is likely to change is the criteria utilized for screening of potential U.S. investors.
Currently, many hedge funds screen investments by U.S. persons or entities for “accredited investor’ status so that the fund they manage may remain “private” under the exemption available under Reg D.
This practice will likely be adjusted once an adviser becomes registered as investment adviser with the SEC.
As registered investment adviser, a firm will be subject to Rule 205-3; which largely restricts the practice of charging performance fees to funds that satisfy the exemptions available under 3(c)(1) and 3(c)(7).
The financial requirements for investor eligibility under each of these exemptions are generally more stringent than the tests for eligibility as an “accredited investor”.
Funds utilizing the exemption under 3(c)(1) may have up to 100 investors that meet the test of “qualified clients”. The tests for “qualified client” are generally more stringent than those for “accredited investors”. For instance, the net worth test for an individual “accredited investor” is $1 million. While the net worth test for “qualified clients” is $1.5 million.
The financial tests for eligibility under 3(c)(7) are substantially greater than 3(c)(1) and “accredited investor” tests.
The practical effect of this new regime will be that unless investors pass the “qualified client” test, the manager will not be able to charge a performance fee to that client and will probably not view that prospect as an attractive candidate for investing in his fund.
The SEC, under a grandfather provision, will allow managers to charge performance fees to hedge fund investors who meet the “accredited investor” test, but not the “qualified client” test, if the client invested in the fund prior to February 10, 2005.
So, if a prospect is an “accredited investor” but does not quite meet the “qualified client” test, February 10, 2005 is the last day that he can invest in the fund and be eligible to pay a performance fee once the investment adviser registers with the SEC.
If you have any questions with respect to this matter or any other questions relating to the forthcoming regulation of hedge fund managers give a call to Emmett Ryan or Paul Taylor at Buchanan Hedge Fund Services (212 809-7171) and we will try to get you an answer.
posted by southport on Tuesday 25 Jan 2005 19:29 GMT
The December 2, 2004 decision by the SEC to extend its oversight to a large portion of the hedge fund industry will result in the need for changes in a number of common hedge fund industry business practices.
One common practice that is likely to change is the criteria utilized for screening of potential U.S. investors.
Currently, many hedge funds screen investments by U.S. persons or entities for “accredited investor’ status so that the fund they manage may remain “private” under the exemption available under Reg D.
This practice will likely be adjusted once an adviser becomes registered as investment adviser with the SEC.
As registered investment adviser, a firm will be subject to Rule 205-3; which largely restricts the practice of charging performance fees to funds that satisfy the exemptions available under 3(c)(1) and 3(c)(7).
The financial requirements for investor eligibility under each of these exemptions are generally more stringent than the tests for eligibility as an “accredited investor”.
Funds utilizing the exemption under 3(c)(1) may have up to 100 investors that meet the test of “qualified clients”. The tests for “qualified client” are generally more stringent than those for “accredited investors”. For instance, the net worth test for an individual “accredited investor” is $1 million. While the net worth test for “qualified clients” is $1.5 million.
The financial tests for eligibility under 3(c)(7) are substantially greater than 3(c)(1) and “accredited investor” tests.
The practical effect of this new regime will be that unless investors pass the “qualified client” test, the manager will not be able to charge a performance fee to that client and will probably not view that prospect as an attractive candidate for investing in his fund.
The SEC, under a grandfather provision, will allow managers to charge performance fees to hedge fund investors who meet the “accredited investor” test, but not the “qualified client” test, if the client invested in the fund prior to February 10, 2005.
So, if a prospect is an “accredited investor” but does not quite meet the “qualified client” test, February 10, 2005 is the last day that he can invest in the fund and be eligible to pay a performance fee once the investment adviser registers with the SEC.
If you have any questions with respect to this matter or any other questions relating to the forthcoming regulation of hedge fund managers give a call to Emmett Ryan or Paul Taylor at Buchanan Hedge Fund Services (212 809-7171) and we will try to get you an answer.
