Todd Zaun

Document Type



Hedge funds are one of the fastest growing and most controversial segments of the financial market. Most people know very little about hedge funds other than that they are the investment vehicle of choice for well-heeled investors - the place where the rich put their money in order to get even richer. In fact, hedge funds thrive on the lack of knowledge about what exactly it is that they do. Without the ability to keep their trading strategies confidential, hedge funds argue they would not be able generate the impressive returns that keep them in business. And so when the Securities and Exchange Commission implemented a rule requiring most hedge fund operators to register their names and open their books for inspection, it is no wonder that it triggered cries of outrage in the industry. Many hedge fund managers threatened to simply move their operations offshore (though it is not clear how many were actually prepared to follow through on that threat). Others took the battle to court. The result of one of those legal battles, Goldstein v. SEC was a decision in June 2006 by the United States Court of Appeals for the D.C. Circuit, in which the court ordered the SEC to scrap the new rule. The decision effectively allowed hedge funds to maintain the anonymity they desired. That decision and the developments in the law that led to it, are the subject of this paper. While the decision represents an important victory for hedge funds, the debate about whether hedge funds should be more closely regulated continues in Congress and the popular media. This article outlines recommendations for what the SEC or politicians should do in regard to hedge fund regulation. These recommendations can best be summarized as “do nothing.” However, if courts were inclined to make such recommendations, it would likely be one the Goldstein court would agree with. Although not central to the decision, it is clear that the SEC failed to convince the court that there was much of a compelling reason for the new rule on hedge funds because none of the dangers that the SEC warned about actually materialized. Following a brief introduction to the relevant securities laws, this paper examines the development of the specific law at issue in Goldstein. It then examines the arguments that each side made and analyzes the outcome. The paper concludes with recommendations that I believe stem directly from the court's finding and the logic that underlies it.