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Hedge fund deadline fast approaching
The SEC requires hedgies to register early next year, but the cutoff is sooner than managers think.
November 2, 2005: 3:44 PM EST
by Amanda Cantrell, CNN/Money staff writer

NEW YORK (CNN/Money) - The deadline for hedge fund registration in the United States isn't officially until early next year, but managers may have less time than they think they do to deliver the paperwork.

That's because the Securities and Exchange Commission, with whom hedge fund managers will have to register by Feb. 1 of next year, has up to 45 days to process the required paperwork, according to hedge fund attorneys.

Because of that 45-day leeway, managers who want to be on the safe side will need to turn in their completed registration applications to the commission by Dec. 15, a month and a half ahead of the official deadline.

There is no indication that the SEC will defer the Feb. 1 deadline or offer a grace period, said Michael Tannenbaum, a founding partner at New York law firm Tannenbaum, Helpern, Syracuse & Hirschritt LLP, at a discussion in New York on hedge fund registration.

While the SEC generally processes applications in less than 45 days, Tannenbaum said, he is encouraging his clients to finish their applications by Dec. 15 to be on the safe side.

For managers who don't meet the deadline, the consequences could be tough. Any violation of a provision of the registration rule carries penalties of up to $10,000 in fines and five years in prison, Tannenbaum said. But failing to register on time means that managers would be violating more than one provision of the rule.

For example, if the managers have not turned in their registration application on time, chances are they haven't met other requirements, such as having the proper compliance manuals on the firm's premises, said Ricardo Davidovich, a partner who works with Tannenbaum in the firm's financial services and capital markets practice.

Also, because hedge funds are counter parties to many different types of derivative agreements, such as credit default swap contracts and agreements that extend credit to counter parties, failing to register on time means these contracts would be rendered null and void, according to Tannenbaum, which means funds would have to sell out of certain positions in their portfolio or settle them for less than favorable terms.

This doesn't mean the SEC is going to send out a SWAT team of enforcers on Feb. 1 to catch fund managers who didn't make the deadline, but Tannenbaum feels the SEC will probably make an example out of at least one firm that missed it.

Industry experts have pegged the number of hedge funds under management at 8,000, but Tannenbaum estimates the number is much higher. He believes there are around 15,000 hedge fund managers currently applying to register with the SEC.

While managers with $25 million or more under management are allowed to register with the SEC, the official cutoff number at which managers must register is $30 million, according to Tannenbaum.

As part of the application, managers have to file a form with the commission that includes basic information about a manager's business, education and disciplinary history within the last 10 years. Managers also have to show that they have designated a chief compliance officer and have the proper compliance manuals on the firm's premises.

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