SEC Issues No-Action Letter Suggesting Hedge Fund Advisers Are Exempt From Cash Solicitation Arrangement Disclosure Requirements

On Tuesday, July 15, 2008, the SEC Division of Investment Management issued a no-action letter stating that “[w]e believe that Rule 206(4)-3 generally does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser.” Even though the letter appears to be a positive development for hedge fund managers that contract with third-party solicitors to solicit fund investors, managers should still be cognizant of the actual or potential conflicts of interest that may be inherent in solicitation arrangements. Advisers Act Rule 206(4)-3(b) may still provide useful guidance as to the content and substance of appropriate disclosure of solicitation arrangements.

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