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February 1, 2005

SEC Defends Fund Registration

By Gregory Bresiger

The Securities and Exchange Commission has "distorted" the meaning of the word adviser in its new hedge fund registration measure, according to Phillip Goldstein, president of Kimball & Winthrop. Goldstein, who runs the Pleasantville, New York-based Opportunity Partners L.P. hedge fund, recently filed a lawsuit against the SEC in U.S. District Court in Washington, D.C. The fund has some $75 million in assets under management.

"The legal fiction that forms the basis of the Hedge Fund Rule - that the security holders of a private fund are clients of the adviser to the fund itself - is irrational and arbitrary," according to Goldstein's compliant. "The Commission itself, in adopting the 1985 safe harbor rule, recognized that Congress intended to reach an advisory relationship that was direct and based on personalized investment advice."

The SEC said it is ready for the lawsuit. "The commission carefully complied with its legal obligations in adopting these rules and we expect to defend them vigorously in court," according to Giovanni Prezioso, the commission's general counsel. At press time, the lawsuit appeared to be the only one filed against the controversial hedge fund rule, said Meg Bode, a spokeswoman for the Managed Funds Association. Goldstein, in an interview with Traders Magazine, contended that, "others are afraid to file a lawsuit because of the potential regulatory consequences." The SEC, according to the complaint, "also improperly chilled the expression of opposition to the proposed rule... suggesting that anyone who opposed registration had something to hide and was therefore a potential target of special Commission attention."

Goldstein also accused the commission of overstepping its bounds. "They're trying to say that hedge fund managers are advisers. That's ridiculous. I don't give personal advice," he says. He added that the rule will increase compliance costs. Goldstein argues that the effect of the SEC decision will be "to transfer wealth from shareholders to lawyers." Goldstein is asking the courts to overturn the hedge fund registration rule.

A securities lawyer in private practice said Goldstein's chances are not good. "The courts tend to side with the regulatory agencies. They give them a lot of leeway. I think it is a long shot here that a court will throw out the rule," according to David Mahle, a securities specialist who practices with Jones Day, a New York City firm.