Hedge Fund Regulation & Compliance

Bryan Cave alerts some hedge fund rules will be effective Feb. 10th While the new rules only require registration by February 1, 2006, certain provisions of the new rules will be effective on February 10, 2005. First, the Advisers Act prohibits registered hedge fund managers from charging a performance fee unless the client is a "Qualified Client" (as defined in Rule 205-3 under the Advisers Act). The New Rules contain a grandfathering provision that allows hedge fund managers registering under the New Rules to continue charging performance fees to existing clients that are not "Qualified Clients". However, the grandfathering provision only applies to existing investors as of February 10, 2005. As a result, currently unregistered hedge fund managers that will be required to register under the New Rules may only charge a performance fee to a client admitted to a fund or otherwise investing with the hedge fund manager after February 10, 2005, if the client is a "Qualified Client".
Second, a registered investment adviser must keep and maintain certain books and records supporting its performance history in order to advertise such performance history. As with the performance fee rule, the New Rules contain a grandfathering provision that allows hedge fund managers required to register under the New Rules to continue advertising on the basis of their (or their hedge funds') performance despite not having kept adequate books and records. However, an unregistered hedge fund manager that will be required to register under the New Rules may only rely on this grandfathering provision if it keeps and maintains appropriate records relating to performance beginning February 10, 2005.