The Hedge Fund Report: Registration Battle Lines

Much has been written about hedge funds' last-minute attempts to avoid registration with the Securities and Exchange Commission. One widely reported tactic has been to increase the length of time in which investors' money is "locked" into a fund beyond two years. But an ambiguity recently arose over whether such restrictions apply to partners' money.

"You would be surprised by the number of managers who thought they wouldn't be locked up," says one industry veteran. "They don't see their participation as an investment."

Now, the SEC has spoken. In a response to letters from two lawyers, Paul Roth, partner at Schulte Roth & Zabel, and Todd Lang of Weil, Gotshal & Manges, the SEC has unequivocally stated that in order to avoid registration, funds invested by general partners, managing partners and their families must be locked up.

Fees earned by a manager, on the other hand, are deemed part of compensation and won't be subject to the two-year lockups under the SEC's pronouncement. That should be a relief and may even work as an incentive: better performance means access to an ATM near you.

Philip Goldstein is emerging as David to the SEC's Goliath in the registration drama. Goldstein, who manages Opportunity Partners in Pleasantville, N.Y., is suing the SEC for enacting the rules. He spoke optimistically after a court date earlier this month. "I don't want to get overconfident, but I believe we are now a favorite to win. One never knows for sure, but I think anyone on that courtroom [...] including the SEC lawyers, if you put them on truth serum, thinks we will win," Goldstein says.

Managers fear registration because they don't want to be sued by their clients. "As more regulation is put in place, it will create a road map for private civil litigation," says Scott Meyer, president of Financial Institutions Group, a unit of AIGAIG.