The SEC finally pulled the registration trigger in 2004. In effect, the SEC changed its rules so that private funds were no longer counted as a single client. Instead, firms had to look-through all of their funds and register if they had 15 or more investors on an aggregate basis. That meant almost all firms had to register, have a CCO and a compliance manual, and get ready for an SEC compliance inspection.
Not surprisingly, the SEC move accelerated a trend in the private fund industry to staff up on legal and compliance talent and to also dedicated resources for legal and compliance programs.
As an aside, the hedge fund industry tepidly supported the SEC’s move, while the private fund industry opposed and successfully fought it. The result was a registration rule that did not require a look-through for funds with at least a two-year lock up. That meant private equity stayed out of registration, as did those hedge fund firms who could command a two-year lock-up from investors.
The SEC’s rule change was later challenged in court and thrown out in 2006. But by that point, a large percentage of the hedge fund industry had already registered and decided to remain so.