Gadfly Plans Hedge Fund Lobby

Date: Thursday, April 24, 2008
Author: Edward Hayes, CCH Wall Street

Phil Goldstein, an outspoken critic of some of the SEC’s hedge fund rules, is calling for his fellow hedge fund managers and firms to form a group to fight against current and future rules.

Goldstein initially floated the idea earlier this month at a gathering of securities and hedge fund lawyers in San Francisco. He even pitched a name for the group: The Rational Regulatory Policy Institute. In an interview with CCH Wall Street, Goldstein said the non-profit group would provide anonymity for those who want to combat what they perceive as unjust rules.

“A lot of people are afraid to take on a regulator,” he said. “[With this group] they can act anonymously so they don’t have to worry about retaliation from the regulators.”

While there are already groups such as the Managed Funds Association that are advocacy groups, Goldstein says they don’t do enough to protect hedge fund managers from rules that are on the books.

“MFA will lobby, but lobbying only goes so far,” he said. “When lobbying [fails] they just give up.”

Two years ago, Goldstein challenged the SEC’s hedge fund adviser registration rule. He sued the regulator over it and a U.S. federal appeals court agreed with him and threw the rule out. (See story, click here.) Afterwards, a number of people voiced their support of his lawsuit. But they told him that they were too afraid to join him. That inspired the idea for the group.

There are still issues Goldstein has with some current SEC rules. The first is the 13-F rule, which requires hedge fund managers to disclose their portfolio holdings if their assets exceed a certain level. Goldstein said has not reported that data to the SEC in 18 months out of protest. He is also considering a lawsuit against the SEC over the rule that prohibits unregistered funds from marketing or advertising.

With more potential cases against the SEC pending, the group could be a way to relieve the financial burden of litigation and to give Goldstein more allies in his fight.

Goldstein says the und needn’t limit itself to hedge funds. He said it could be open to other vehicles including mutual funds and exchange traded funds. But the focus most likely would be hedge funds, because according to him, they are the most targeted by regulators.

To Tim Selby, a partner at the law firm of Alston & Bird, the idea of putting together such a non-profit litigation group seems a good idea. But he did question whether or not anyone would be willing to join. He pointed out a number of people may oppose a particular rule proposal or some aspects of that rule. But once the regulator approves it and makes it a real rule, most will use their resources on other things, like complying with the new rule.

“Once they start to comply, their concern over the rule dissipates and then they start to conform,” he said. “They don’t want to spend their money fighting.”

Selby added that if such a group does come to fruition, it could be a tremendous waste of government resources if the group is going to challenge in court every rule a regulator passes. Goldstein did not appear to advocate that amount of litigation.

So far the Rational Regulatory Policy Institute is just an idea. Goldstein is hoping some people show interest in putting it together and financing it. Thus far, no one has. While he brought up the idea, Goldstein said he is far too busy to finance or even run the new group.