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SEC drafting new hedge fund rules after court rejects advisor registration plan

[JURIST] The US Securities and Exchange Commission [official website] said Monday that it will not appeal a federal appeals court decision [PDF text] that invalidated an SEC rule [PDF text] regulating hedge funds, opting instead to focus on drafting new rules and staff guidance for the hedge fund industry. In June, the US Court of Appeals for the District of Columbia Circuit struck down [JURIST report] the rule that 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. The Court said that the rule was arbitrary and also reasoned 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."

In a statement [text] Monday, SEC Chairman Christopher Cox said the SEC will work on drafting alternative rules to oversee hedge fund activity instead of appealing the decision because the decision was based on many different factors. Cox added that the SEC will move "aggressively on an agenda of rulemaking and staff guidance...to address the legal consequences from the invalidation of the rule," including a new anti-fraud rule and a possible increase in the minimum asset and income requirements for people seeking to invest in hedge funds. New SEC staff guidance could be released by the end of the week. Reuters has more.

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