The Securities and Exchange Commission released a staff report, Implications of the Growth of Hedge Funds (the "Report"), on September 29, 2003. As has been widely reported in the press, the Report provides a number of recommendations regarding regulation of the hedge fund industry. One of the most significant recommendations would require virtually all hedge fund managers to register with the SEC as "investment advisers" under the Investment Advisers Act of 1940 (the "Advisers Act").

Most unregistered hedge fund managers currently rely on Rule 203(b)(3)-1 under the Advisers Act, which provides an exemption from registration for advisers who have had fewer than 15 clients in the preceding year. Under Rule 203(b)(3)-1, each hedge fund (regardless of the number of investors in the fund) is generally counted as one client. The Report recommends that Rule 203(b)(3)-1 be amended so that each hedge fund investor would be counted as a client. This would render the exemption unavailable to most hedge fund managers and subject them to registration with the SEC and regulation under the Advisers Act.