Hedge fund investors are demanding greater liquidity where liquidity is practicable.  See “What Do Hedge Fund Investors Want in Terms of Liquidity and Transparency?,” Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011).  Some managers are addressing such demands by launching more liquid funds.  See our recent interview with Dechert Partner George Mazin (question on bifurcation in post-crisis hedge fund launches along liquidity lines).  Other managers are addressing such demands by launching moderately liquid hedge funds but granting certain investors preferential redemption rights, often via side letters.  See “Are Side Letters Granting Preferential Transparency and Liquidity Terms to One Investor Ipso Facto Illegal?,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  The former approach passes regulatory muster.  To an increasing degree, the latter approach does not.  Regulators are concerned that any asymmetry in the redemption rights granted to hedge fund investors that otherwise are getting the same material terms may conflict with the manager’s uniform fiduciary duty to all fund investors.  See “Delaware Chancery Court Opinion Clarifies the Scope of a Hedge Fund Manager’s Fiduciary Duty to a Seed Investor,” Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).  Top SEC officials have expressed this concern with increasing volume of late, most recently at this week’s Practising Law Institute program on hedge funds.  A recent enforcement action illustrates a factual scenario in which the SEC’s legal concern may give rise to causes of action against a hedge fund manager.  Practically, this action will help hedge fund managers define the scope of accommodation that permissibly may be granted to a significant investor that demands greater liquidity than other investors.  See “How Can Liquid Hedge Funds Be Structured to Accommodate Investments in Illiquid Assets?,” Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).  Theoretically, this action is part of a growing body of regulatory statements and authority suggesting that uniform liquidity for similarly situated hedge fund investors is in the nature of an inalienable investor right.  This article details the factual and legal allegations in the order and discusses the implications of the order for hedge fund liquidity, brokerage activity by hedge fund managers and principal transactions.