A US federal appeals court has dealt a blow to regulators' attempts to gain tighter control over the hedge fund industry by rejecting a rule requiring the registration of funds.
The rule, introduced by the US Securities and Exchange Commission (SEC) in February this year, required all investment funds controlling $30 million or more in assets from at least 15 investors to register with the SEC, leaving them open to possible regulator inspections.
Widely seen as the first step in regulating the $1.3 trillion industry, the rule was unanimously rejected by the court, with questions raised over the commission's approach to the hedge fund industry and regulation.
This means that the 14,000 funds currently registered with the SEC now have the option to de-register themselves.
Commenting on the ruling, Christopher Cox, head of the SEC, said that the ruling meant that other ways would be sought to provide hedge fund regulation, protecting investors.
"The court's finding that, despite the commission's investor protection objective, its rule is arbitrary and in violation of law, requires that going forward we re-evaluate the agency's approach to hedge fund activity," he said.
"I have instructed the SEC's professional staff to promptly evaluate the court's decision and to provide to the commission a set of alternatives for our consideration."