Monday, December 04, 2006


Hedge Funds, SEC and Sunshine



In compliance with the provisions of the Government in the Sunshine Act, the SEC will hold a meeting today to discuss a variety of things, including the proposal of new rules to determine whether to (1.) "revise the criteria for natural persons to be considered 'accredited investors' for purposes of investing in certain privately offered investment vehicles" and (2.) "prohibit advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds."

Click here for the meeting announcement and here to access the webcast.

While both items merit discussion, the issue of accredited investor qualifications got people talking over lunch a few days ago. The current definition, pursuant to the General Rules and Regulations promulgated under the Securities Act of 1933, Rule 501, Definitions and Terms Used in Regulation D, applies various criteria including whether someone's individual net worth, "or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000."

In the event that the SEC applies more rigor to the definition of accredited investor, how will they proceed? Will they increase the minimum net worth number and if so, why? Is the implication that wealthier investors are smarter or just that their losses don't count as much in proportionate terms? While accredited investors are excluded for purposes of calculating the number of purchasers under relevant securities rules, why is a "non-contributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974" counted as one purchaser when the "trustee makes all investment decisions for the plan?"

Hopefully a detailed explanation will accompany any decisions made in the aftermath of this meeting. Better understanding what responsibilities regulators want each hedge fund investor to shoulder by virtue of changing the rules can only be a good thing.

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posted by Susan Mangiero at 12/04/2006 12:02:00 AM