Not Much Love for California Registration Proposal

Date: Monday, December 24, 2007
Author: Christopher Faille, HedgeWorld

SACRAMENTO, Calif. (HedgeWorld.com)—A proposal under consideration by the California Corporations Commissioner that would require registration by hedge funds is having a hard time finding supporters.

The proposal would register nearly every investment adviser doing business in the state, excepting only those that limit themselves to providing investment advice to venture capital clients or entities, and it has drawn several comments since it was first promulgated. So far, though, none of those comments favor it as it stands.

Many are from advisers who agree that hedge funds should be required to register but who say, in effect, that their own operations are not hedge funds and so the proposal should be re-written to exclude it.

The first comment the Corporations Department received on this subject was precisely of that sort. Craig Ehlenberger, the principal of Abalone Cove Advisors, wrote, "I certainly recognize and share the concerns related to the unregulated hedge fund industry, and completely agree such entities require some kind of oversight to protect those who may unwittingly invest inappropriately in these funds."

But Abalone Cove Advisers, he wrote, shouldn't become enmeshed in that web, since his clients are primarily California counties and other cash management institutions that invest entirely within the fixed income/debt markets.

California's county treasurers went through their own high-profile embarrassing period after Orange County declared bankruptcy in 1994; it was the largest municipal bankruptcy in U.S. history. Mr. Ehlenberger's comment references that incident and he writes that Orange County treasurer and tax collector Robert Citron's unwise use of derivatives to place large bets on the county's behalf was allowed by certain statutory "loopholes and issues" that the California legislature has since addressed.

Adding Department of Corporations supervision of his role advising treasurers on a monthly-fee basis just "does not make sense," in Mr. Ehlenberger's view.

Nor do family offices seem to think that it makes much sense in their situations, either. A representative of one of these, Jen Luh, wrote, "Family offices are in no way similar to hedge fund managers. Our business is very transparent to our family owner/investors and we work closely with the family in every aspect of the business, which is very different than how hedge funds work."

There are, as one might expect, some commenters who oppose mandatory registration on a broader basis. They argue not that the proposal should be narrowed but that it should be abandoned. One of these is the business law section of the State Bar of California Previous HedgeWorld Story, which has submitted a 15-page letter written on its behalf by the San Francisco law firm Shartsis Friese LLP.

Another broad-based critique came jointly from the Managed Funds Association and the Coalition of Private Investment Companies, which reasoned: "In sum, if the proposal is adopted, the [Corporations] Department will be required to assign staff, time, and resources to monitor advisers that cater to sophisticated investors who are demonstrably more than capable of defending their own interests, and take those resources away from protecting those investors who cannot be presumed to have the financial wherewithal or sophistication to protect themselves from fraudulent tactics or unscrupulous hucksters."

CFaille@HedgeWorld.com