Many hedge fund managers who are registered as investment advisors with the SEC have experienced losses this year as well as investor redeptions. For some managers the losses combined with investor redemptions may have the effect of decreasing an advisor’s assets below the $25million threshold for SEC investment advisor registration. Generally an investment advisor is not allowed to be registered with the SEC if the manager’s assets under management do not exceed $25 million.
This would obviously cause many complications for a hedge fund manager. Not only would the manager need to go through the SEC investment advisor withdrawal process, the manager may also need to be registered as an investment adviser at the state level. (This is especially true if the hedge fund has any ERISA assets which require that the investment manager be to be registration at either the SEC or state level.)
This creates a tricky situation for the manager because while SEC withdrawal should be done as soon as assets fall below $25 million, state investment advisor registration typically takes at a minimum of 2 to 4 weeks to complete. If the hedge fund manager were to withdraw from SEC registration and is also not registered as an investment advisor at the state level, the manager would be out of compliance with the state and thus possibly subject to sanctions and fines at the state level. Accordingly a manager in this position will need to talk to an attorney or a compliance firm which means added costs and time pressures on the manager.
Of course, there are some things a manager can possibly do stall the withdrawal of the hedge fund’s assets. Depending on the provisions in the hedge fund’s offering documents, the manager may be able to institute a gate provision to limit redemptions or in certain cases halt redemptions. Additionally, the manager’s attorney will probably be able to help with the registration issue by engaging in discussions with both the SEC and the state securities commission. Usually a compromise can be reached as long as all groups understand that the manager is trying to maintain compliance with all applicable rules. Please contact us if you would like to discuss this issue with a hedge fund attorney.
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