from wallstreet journal 11-10-2005 A large number of major hedge-fund firms won't be registering with the Securities and Exchange Commission despite new rules aimed at forcing most hedge-fund advisers to sign up by early next year. These firms have adopted measures to take advantage of a loophole provided by the agency -- potentially undercutting the SEC's efforts to uncover fraud and get a better understanding of the growing business. The firms include SAC Capital Management LLC, Kingdon Capital Management LLC, Citadel Investment Group PLC, Eton Park Capital Management LLP, Lone Pine Capital and Greenlight Capital. Like other hedge funds, these private partnerships manage large pools of capital for wealthy individuals and institutions, but they are larger than most, managing billions of dollars each, and pursue cutting-edge strategies that can have an impact on specific securities and overall markets. Representatives of the firms wouldn't comment or weren't available. (Meanwhile, the SEC sued a $43 million hedge fund, Groundswell Partners LLC, over allegedly hidden losses. See article.) Last year, SEC commissioners voted to make hedge funds managing more than $25 million register with the SEC, requiring them to submit to periodic audits and provide detailed information about their trading, among other steps. SEC Chairman Christopher Cox recently signaled that the changes will go into effect, as planned, in February. A recent spurt of alleged fraud at hedge-fund firms such as Bayou Management, Wood River Capital Partners and KL Financial Group has added to calls for more oversight. But the SEC's rule only applies to advisors that permit investors to redeem their interests in a hedge fund within two years of purchasing their stakes. The agency concluded that the average "lockup" period for hedge funds is 12 months, so the 12-month period is the time frame covered by the rule. "We're aware that some hedge-fund advisers are planning to extend their lockup period and we'll evaluate the situation when we have a better picture of the situation in February," said Robert Plaze, associate director of the SEC's investment-management division. However, the SEC's registration rule proved quite contentious, even within the agency, so in the near term it may be difficult for the SEC to adjust the rules to capture the lockup extenders. Some of the largest firms, like SAC, with $6.5 billion under management, and Kingdon, are in the process of instituting longer-term lockups. Others, such as Lone Pine, which manages $6.9 billion, aren't open to new investors and don't need to register. Citadel, a $12 billion firm, and Eton Park, which manages $3 billion, have always featured long-term lockups for the bulk of their money, so the SEC's rules don't apply. Some of these funds say they are wary of registration because they fear an SEC audit will tie up traders and senior management for weeks, and they worry that SEC examiners won't fully understand their trading strategies, which can be complex. Others say they expect the SEC to be aggressive in its oversight in the early months of the registration process, to demonstrate that it is serious about tracking down problems. Still others are wary of the cost of complying with the SEC's registration requirement, which could cost more than $500,000 for many funds. Kingdon, a $4.6 billion hedge fund in New York that will impose a two-year lockup in February and avoid registration, has told its investors that even though the firm meets the SEC's registration requirements for almost all aspects of its operations, the firm won't register. "SEC registered advisors will face a time-consuming SEC audit process and an onerous email retention requirement," the 22-year old firm told investors in a September letter explaining its decision. "The additional administrative burden of SEC registration may result in a distraction to senior management with no discernible benefit to our investors. Accordingly, we have decided not to register with the SEC at this time." New York-based hedge fund manager Atticus Capital LLC has informed its investors that it will stop accepting new money on Jan. 1 and won't be registering with the SEC, according to a person familiar with the firm. Atticus, which manages more than $7 billion, has also told investors that if it accepted new investments in the future, its current plan would be to launch a new class of shares that had two-year lockups or other parameter that would exclude the firm from registration requirements. Two-year lockups also allow firms to capture client assets for a longer stretch of time. "We have seen a rise in the number of firms asking for two-year lockups and the driver of that is probably the SEC requirements," says Thomas Schneeweis, director of the Center for International Securities and Derivatives Markets at the University of Massachusetts. "If you can pull it off, let's face it, you'd do it." So far, the anticipated flood of new registered investment advisers has yet to materialize. An estimated 5,000 or so of the approximately 8,000 existing hedge funds aren't yet registered. So far this year, however, new registrations average about 100 a month, according to SEC data, not much more than last year's 80-a-month pace. "There have been many attorneys and people like me out there with bullhorns talking about registration," says Emmett Ryan, director of hedge-fund services at New York compliance consultant Buchanan Associates. "We haven't quite seen quite the response we expected." A firm's registration typically isn't official until 45 days after its application is filed, according to SEC rules. So, firms have a Dec. 15 deadline if they wanted to be registered by Feb. 1. Funds that need to comply and don't comply could face fines or other penalties. Just as many taxpayers put their returns in the mail at the last minute, a pickup in registration applications could take place in the next month or so. Funds remain subject to securities laws that apply to the entire marketplace, and most are registered with the Commodity Futures Trading Commission. Some hedge-fund investors say they aren't overly concerned by the rash of funds avoiding registration. "Just avoiding registration because the manager prefers to avoid the hassle has to be looked at less favorably," says Charles McNally, a managing director at Lyster Watson & Co., which allocates money to hedge funds on behalf of wealthy families and institutional investors. But he says that he wouldn't be concerned about some funds that avoid registration because they are locking up their capital for a longer term, if it helps their investment strategy
I have a suggestion. Why not make registration optional? The stated reason for requiring it is investor protection. Issues like possible market manipulation are already illegal. If investors are comfortable investing with a non-registered fund, eg SAC, why force them to bear that cost? Conversely, new funds might find it to their advantage to register and thereby provide an additional level of comfort for potential investrors.