SEC rule 203(b) (3)-2 took effect on February 10 and subjects US hedge fund managers to significantly higher standards of reporting and compliance. In an attempt to combat increasing hedge fund fraud in the US, managers have to register as investment advisers. This requirement affects domestic fund managers if they run a fund with more than 14 US investors but the SEC has exempted non-US managers from some of the more onerous aspects, such as detailed record-keeping, to prevent conflicts with domestic regulation. Berwin Leighton Paisner Investment Funds Group partner Timothy Spangler thinks it is likely that if fund of hedge fund managers are registered as investment advisers in the US, the underlying managers they select will also need to be SEC-registered. He says: “Hedge fund managers here have to consider their obligations under US law to the extent that they take in US investors. If a fund of hedge fund manager is registered, the underlying managers will have to consider the extent of their own US obligations before considering whether to take their money.” Spangler believes UK hedge fund managers will need US legal advice but feels the increase in costs as a result of the rule is less important than gaining access to the US market. “In exchange for legal advice and the costs relating to SEC registration, managers with US investors are getting access to the most sophisticated market in the world for hedge funds,” he says.