The Securities and Exchange Commission (SEC) at the end of the year proposed two new rules for hedge funds and pooled investment vehicles, one of which could dramatically affect the number of people qualified to invest in hedge funds.
The SEC has proposed adding a new category of accredited investor called “accredited natural person,” which would require individual investors in certain pooled vehicles to own $2.5 million in investments in addition to the accredited investor threshold of a net worth of $1 million and an annual income of $200,000.
The rule also excludes from the calculation the investors’ primary residence and real-estate held in connection with a trade or business.
J.P. Bruynes, partner at law firm Arnold & Porter LLP, says, “The rules are less burdensome than having to register as an investment advisor, but they shrink to a significant degree the pool of eligible investors in the United States and require amendments to [the hedge funds] offering documents.”
Jack Gaine, president of the Managed Funds Association (MFA), says the
MFA is still looking at the proposal but is in favor of a higher threshold for accredited investors and had proposed the SEC increase the threshold for accredited investor several years ago as an alternative to its hedge fund registration rule, which was eventually struck down in Goldstein vs. SEC. The accredited investor standards were set in 1982 and the MFA suggested they be adjusted for inflation. The new rule will adjust for inflation every five years.
While Gaine is in favor of a higher standard for accredited investors, he says that this is considerably higher than the existing threshold and adds, “this might be particularly onerous for start-ups.”
Bruynes says accredited investors who do not meet the new threshold would not be able to make any further investments in private investment vehicles, including vehicles in which they are currently invested.
The SEC also is proposing a rule that would prohibit advisers to pooled investment vehicles from making false or misleading statements or otherwise defrauding investors or prospective investors in those pooled investment vehicles. While the SEC acknowledges that the prohibited conduct is already unlawful in most cases, it adds the rule is “intended to provide the Commission with clear enforcement authority under the Advisers Act.”
Correction
The correct November 2006 monthly estimated returns and estimated year-to-date returns as of Nov. 30 for the following Marathon funds are: Marathon Currency & Financials Portfolio, +4.47 and +4.70; Marathon Plus Portfolio, +4.05 and +1.78; and Marathon FX Portfolio, +2.60 and -1.42. Futures regrets the error.
