"Emergency Rules" for Hedge Funds

SEC Chairman Christopher Cox has recommended his staff implement "emergency" provisions in response to the D.C. Circuit Court's decision invalidating the SEC new hedge fund registration requirements.  He has instructed his staff to re-institute a "look-through" rule under another section of the Investment Adviser's Act, Section 206(4), a general anti-fraud rule.  This does not re-establish a registration system for hedge funds however.  Hedge funds, once the Court decision becomes effective in August, can voluntarily choose to register with the SEC but no longer will be required to do so.  Cox has also asked the staff to raise the minimum wealth requirement for an individual to invest in hedge funds that charge a performance fee (most do) to $1.5 million (it is now $1 million).  With heavy irony, Cox noted that the SEC now had to protect hedge funds that had relied on exemptions to past regulations contained in the now invalidated rules.  These funds could be in violation of the old rules of the Investment Adviser's Act when the Court suspends the new rules in August. 

Hasty regulations and now a hasty retreat are roiling the industry.  The Treasury Undersecretary Randal Quarles, also testifying before Congress, had it right -- "it [is] premature to say we need regulation until we complete our review..."