The Securities and Exchange Commission's proposed rule on hedge fund adviser registration is already having a chilling effect on the hedge fund industry, despite the fact that the rule has not yet been approved, according to lawyers. Hedge fund lobbying groups such as the Managed Funds Association have for some time argued that requiring hedge fund adviser registration would create a burden and will threaten competitiveness and innovation. Now lawyers are saying these effects can already be seen in the form of augmented legal expenses and lost opportunity costs. "We're having conversations with [hedge funds] who are compliance oriented over compliance procedures that involve a lot of legal fees and substantial opportunity costs," said Paul Roth, partner at Schulte Roth & Zabel in New York.
Robert Leonard, partner at Bryan Cave in New York, said many of his hedge fund clients are effectively forced to spend time holding discussions with counsel on the impending rule. "In actual meetings we're having more discussions on the proposed rule and its impact than we are on the fund's actual strategy and risk," he said. Leonard explained funds' legal fees are escalating as a result, which has already raised the barrier to entry.
Jack Gaine, MFA president, said he wasn't surprised hedge fund advisers are already increasing their costs as a result of the proposed rule. "Part of the arguments we've made is that there will be a chilling effect for existing hedge funds and startups alike," he said.
