According to interviews conducted by MarketWatch.com, some hedge funds are planning to side-step the planned Februaru 2005 registration deadline with the SEC - either by declining new investments after the end of January or by taking advantage of other exemptions for money already under their control (hedge funds routinely lock-down investor funds for a lengthy term - up to two years).

Of course, no one wants expanded federal regulation in their operating space, and it should be entirely expected that hedge funds would take advantage of whatever lee-way the new SEC regs allow. As to the law itself questions remain, and court challenges are still pending as to its efficacy.

Via MarketWatch.com:

Hedge funds avoid new SEC rule - At least 25% aren't registering, hedge fund, lawyers say

By Alistair Barr
MarketWatch
December 15, 2005

SAN FRANCISCO - How do you regulate an industry when a quarter of the firms remain outside your reach? That may be a question nagging the Securities and Exchange Commission as the first, unofficial deadline of the agency's new project to oversee the hedge fund industry is reached on Thursday.

Hedge funds have traditionally been lightly regulated investment pools for rich investors and institutions. But the industry has grown rapidly in recent years and there are now an estimated 8,000 funds overseeing more than $1 trillion. That encouraged the SEC to introduce new rules this year that require hedge fund advisers to register with the agency as investment advisers.

Managers have to sign up by Feb. 1, but because the SEC needs time to process documents, hedge funds need to file by Dec. 15 to make sure they're registered. (Those that miss Thursday's deadline need not despair: the agency suggested earlier this month that it would try to process registrations that arrive as late as Jan. 9.)

The SEC hopes the project will give it a better insight into the hedge fund world, help it detect and prevent fraud in the industry and monitor the increased availability of these funds to less-sophisticated investors. But those goals - already the subject of much debate -- may be compromised by the fact that many hedge funds aren't signing up.

Hedge fund lawyers interviewed by MarketWatch said that at least 25% of their clients aren't registering. Some managers aren't accepting any new investments after the end of January to avoid the new rules. Many are locking up investors' money for two years to take advantage of an exemption. See full story on lockups.

"If SEC doesn't pick up a lot of the industry, it will certainly raise questions about whether the new rule is going to meet its intended purpose," said Barry Barbash, a partner at Shearman & Sterling and a former director of the agency's Division of Investment Management.

The SEC "invited" problems like this by including the two-year lockup exemption in its hedge fund rule, Barbash added. Originally intended to apply to private-equity funds, it has ended up exempting many hedge funds too, he explained.

About a quarter of Barbash's hedge fund clients aren't registering with the SEC, he said. Some managers are introducing two-year lockups and others already had them in place, he said.

That might not be a disaster though, Barbash noted. If the SEC manages to register between 75% and 50% of hedge funds, that may encourage the rest of the industry to register over the long term, he said...

Much more, here, in the full article.

-- MDT