SEC Won’t Appeal Court Ruling on Hedge Funds

The Securities and Exchange Commission said Monday that it would not appeal a court decision that nullified a rule requiring advisors of most U.S. hedge funds to register with the commission.

The decision came six weeks after an appeals court dealt a blow to the SEC’s attempt to begin overseeing the $1.3-trillion hedge fund industry, forcing the agency to rethink its regulatory strategy.

“Since the appellate court’s decision was based on multiple grounds and was unanimous, further appeal would be futile and would simply delay and distract from our goal of advancing investor protection,” SEC Chairman Christopher Cox said in a statement.

Instead, he said, the SEC is moving aggressively to craft rules and to issue guidelines aimed at encouraging voluntary registration and helping advisors already registered to remain signed up.

Hedge funds are lightly regulated private investment partnerships that use techniques not available to more traditional capital pools, such as mutual funds.

Hedge funds sell short and take complex derivatives positions, for example.

The SEC rule, which went into effect in February, required advisors of most U.S. hedge fund with more than $30 million in assets and 15 or more clients to submit periodic audits, keep better records and follow procedures aimed at discouraging would-be cheaters.

The U.S. Court of Appeals for the District of Columbia, however, ruled June 23 that the SEC hedge fund rule was arbitrary because it exempted funds with fewer than 15 clients.

The agency had until Monday to decide whether to seek review by the Supreme Court.