A federal appeals court dealt a blow Friday to the SEC's hopes for hedge fund registration requirements. The court threw out a rule instituted February 1, on the basis that its exemption of funds with fewer than 15 clients is arbitrary.

In a 19-page opinion, reported Reuters, the U.S. Appeals Court for the District of Columbia judged that while certain metrics, such as assets under management, bear on a fund's importance to national markets, the number of investors does not. The court returned the rule to the Commission for reconsideration.

New York-based hedge fund group Bull Dog Investors brought legal action against the SEC in late 2004, arguing that the proposed rule exceeds the scope of the body's authority. "I hope the SEC will start fresh and determine the problem it is trying to solve and then find the most surgical instruments it needs to do that," said U.S. Chamber of Commerce senior vice president David Hirschmann after the decision.

In response to the ruling, Commission chairman Christopher Cox said on Friday said the agency would reevaluate its approach to the hedge fund industry, and added he had told his staff to promptly look at alternatives to the rejected rule.

"The SEC will use the court's decision as a spur to improvement in both our rule-making process and the effectiveness of our programs," he stated.

Also on Friday, Dow Jones reported the Commission will issue final guidance on soft dollar spending this summer. The imminent clarification will relate to how and what services and products may be paid for through fees incorporated into brokerage and service fees.  

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