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Federal appeals court strikes down SEC hedge fund rule

[JURIST] The US Circuit Court of Appeals for the District of Columbia Circuit on Friday struck down a US Securities and Exchange Commission [official website] rule [PDF text; JURIST report] regulating hedge funds. The rule required hedge fund advisors responsible for at least $30 million in assets to register with the SEC, thus subjecting them to legal scrutiny for potential fraud. In a unanimous decision [PDF text] Friday in Goldstein v. SEC, Judge A. Raymond Randolph wrote that hedge funds escape SEC regulation under the Investment Company Act of 1940 [PDF text] because "investment vehicles that remain private and available only to highly sophisticated private investors have historically been understood not to present the same dangers to public markets as more widely available public investment companies."

Responding to the decision, SEC Chairman Christopher Cox said the SEC will work on drafting alternative rules [press release] to oversee hedge fund activity to "protect investors, maintain fair and orderly markets, and promote capital formation." The Managed Funds Association [advocacy website], a trade organization of hedge funds, has previously criticized the SEC rule [MFA comment paper] as overburdensome in cost and unnecessary given other reporting requirements already imposed by other regulatory bodies on hedge funds. Bloomberg has more.

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