Connecticut Moves to Regulate Hedge Funds

Unwilling to wait for Congress to act, the Connecticut House has passed a bill that would impose heightened requirements for investor accreditation as well as hedge fund disclosure and assurance. The bill entitled, "An Act Concerning Hedge Funds" (Raised Bill No. 953), is pending in the Connecticut Senate, where it is expected to reach final consideration soon, and may become effective as early as October 1, 2009.

The bill's provisions apply to hedge funds located in Connecticut, that is, funds having an office in Connecticut from which employees regularly conduct business on behalf of the hedge fund. The bill comprehensively defines a "hedge fund" as any investment company, as defined by the Investment Company Act of 1940, which claims an exemption under 3(c)(1) or 3(c)(7) of the 1940 Act and makes an exempted private offering under Rule 506 of Regulation D of the Securities Act of 1933.

The Connecticut bill also contains heightened restrictions as to who may invest in hedge funds.

• starting in 2011, hedge funds may not have individual investors who do not have $2.5 million in “investment assets” (different than net worth)
  
  
• starting in 2011, hedge funds may not have institutional investors who do not have $5 million in “investment assets”

Further, the bill contains some additional disclosure and assurance provisions:

• Hedge funds will be required to disclose certain conflicts of interest of the manager
  
  
• Hedge funds will be required to disclose the existence of side letters
  
  
• Beginning in 2010, an annual audit will be required

A companion bill, Raised Bill No. 6477, would impose a requirement that all hedge funds operating in Connecticut register with the state.

The full text of the Connecticut hedge fund bill is available at: http://www.cga.ct.gov/2009/TOB/S/2009SB-00953-R00-SB.htm

The text of the companion bill is available at: http://www.cga.ct.gov/2009/TOB/H/2009HB-06477-R00-HB.htm