## Facts

- The Investment Advisers Act of 1940 (IAA) exempted certain investment advisers from registration if, in the preceding 12 months, they had fewer than 15 clients and met other conditions.
- For decades, the SEC and industry practice generally treated a pooled investment vehicle (e.g., a hedge fund limited partnership) as the adviser’s single “client,” rather than counting each underlying investor.
- In 2004, the SEC adopted a rule requiring many hedge fund advisers to “look through” the fund and count each fund investor (shareholder, limited partner, member, or beneficiary) as a “client” for the 15-client exemption.
- The rule’s effect was to require many previously exempt hedge fund advisers to register with the SEC and comply with related regulatory obligations.
- Phillip Goldstein and affiliated entities petitioned for review, arguing the SEC exceeded its statutory authority and acted unlawfully in redefining “client.”

## Issues

1. Whether the SEC had statutory authority under the IAA to define “client” for the 15-client exemption to include each investor in a hedge fund.
2. Whether the SEC’s rulemaking was unlawful under administrative law principles, including whether the redefinition of “client” was arbitrary and capricious.

## Decision

- The court granted the petition for review.
- The court vacated the SEC’s hedge fund adviser registration rule and remanded.
- The court held the SEC could not, for purposes of the IAA’s 15-client exemption, equate a hedge fund adviser’s “client” with the fund’s investors.

## Legal Principles

- An agency may not reinterpret a central statutory term in a way that conflicts with the statute’s structure and usage to expand regulatory coverage beyond what the statute permits.
- For purposes of the IAA’s former 15-client exemption, the “client” of an adviser to a pooled investment vehicle is generally the entity receiving the advice (the fund), not each beneficial owner or investor.
- A regulatory definition that creates tension with the statute’s overall conception of the adviser–client relationship, and with the agency’s own related framework, may be set aside as unlawful agency action.

## Conclusion

The D.C. Circuit invalidated the SEC’s attempt to require widespread hedge fund adviser registration by redefining “client” to mean each fund investor, concluding that the IAA’s structure treats the fund itself as the adviser’s client for the 15-client exemption and that the SEC’s contrary approach could not stand.


Goldstein v. Sec. & Exch. Comm'n, 451 F.3d 873 (D.C. Cir. 2006)