Wall St cops want hedge funds to register

Bruce Karpati, the Assistant Regional Director of the SEC's New York Regional Office speaks on at the Reuters Private Equity and Hedge Funds Summit in New York, March 2, 2010.

NEW YORK (Reuters) - Forcing hedge fund advisers to register with U.S. regulators will give Wall Street cops more ways to access information and root out fraud in the secretive $1.5 trillion industry, a U.S. Securities and Exchange Commission official said on Tuesday.

Blasted for missing Bernard Madoff's $65 billion fraud, the SEC has taken dramatic steps to sharpen its enforcement division. But the SEC says it still needs more resources to properly police markets, companies and individuals.

The White House and many lawmakers want hedge fund advisers to register with the regulator. Legislation to shed light on the industry is winding its way through Congress just as more pension funds are investing Americans' nest eggs with the loosely regulated portfolios.

Hedge funds were briefly required to register with the SEC a few years back but a lawsuit overturned the rule.

Bruce Karpati, co-chief of the SEC's asset management unit, thinks registration is a good idea that will give the agency significantly more information to crack down on abuses.

"When you have more (hedge fund advisers) that are registered, we will have more access to information," Karpati said at the Reuters Private Equity and Hedge Funds Summit in New York. For example, SEC lawyers and accountants are particularly interested in what may sound like ultra successful hedge funds where the returns have been consistently strong and even.

Karpati and other SEC officials including Chairman Mary Schapiro believe the regulator needs more resources to supervise the some 11,000 registered investment advisers.

SEC REACHES OUT TO INDUSTRY

Karpati's unit and some of the SEC's other specialized teams are focused on institutional insider trading rings. They are looking at the type of trading that can occur across all issuers, instruments and markets.

They are also seeking to identify patterns of institutional traders and are probing relationships between broker dealers, hedge funds and other third parties.

Karpati, who is based in New York, will lead the new unit together with Robert Kaplan, who is in Washington. Karpati said the SEC is trying to stay ahead of the curve by looking at fraud from all angles, picking away at every aspect of the asset management space and getting to know how the funds operate.

The traditionally tight-lipped SEC enforcement staff is reaching out to industry with surprising results. "We've seen a willingness on the part of the industry to try to assist us," said Karpati.

Some hedge funds are more than happy to comply. The chief executive of Pine River Capital Management, a hedge fund with $1.6 billion in assets, said he tries to take any opportunity to interact with regulators. "We have tried to be proactive," Brian Taylor said at the Reuters Private Equity and Hedge Funds Summit.

Improving the flow of information is paramount to the SEC. Earlier this year, the regulator announced plans to encourage greater cooperation by individuals under investigation through cooperation agreements and deferred and nonprosecution pacts.

"We've had lawyers calling us, and some are suggesting that they have clients who are appropriate candidates for (the cooperation agreements)," said George Canellos, a former federal prosecutor and now head of the SEC's New York office, at the Reuters Summit.

(Reporting by Rachelle Younglai and Svea Herbst-Bayliss, editing by Leslie Gevirtz)