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The court's decision today voiding the SEC's hedge fund registration rule is a victory for all shareholders. Hedge funds have been a major force in holding corporate CEOs accountable, ensuring they deliver value to investors. This market force for practical corporate governance benefits not just hedge fund customers, but the entire investing public. Hedge funds, like all market participants, will still be subject to a number of rules that govern all market participants to protect investors from fraud. But they will not be forced into the cumbersome registration process in this rule, which also included limits on fees.
The rule threatened to restrain the ability of hedge funds to provide liquidity to the market and to hold CEOs of public companies accountable. Congress clearly never intended the registration process for retail investment vehicles to apply to entities such as hedge funds that have a limited number of wealthy investors. This rule also threatened to ensnare venture capital and private equity funds in the registration net. The two decisions by the D.C. Circuit Court against the SEC, on the hedge fund rule and on the requirement of independent chairmen for mutual funds, should lead to a rethinking by the commission of its sweeping regulatory approach.