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SEC steps up oversight of private funds
June 22, 2011 / 4:20 PM / 6 years ago

SEC steps up oversight of private funds

WASHINGTON (Reuters) - Regulators expanded their oversight of the roughly $2 trillion hedge fund industry as a split Securities and Exchange Commission voted to require private fund advisers to register with the agency.

The rules force advisers to hedge funds and private equity funds with more than $150 million under management to supply organization details, provide ownership data and identify suppliers of key services like auditing.

It will give the SEC a long-coveted window into the industry, but will likely increase fund costs. Advisers have until March 30, 2012 to comply.

The registration rule was adopted on a 3-2 vote on Wednesday. Both Republicans on the commission objected to a provision that would subject some venture capital managers and smaller private fund managers to reporting rules, even though they would not have to formally register.

It is estimated that 750 private advisers to hedge funds and private equity funds will have to register with the SEC.

Richard Baker, the president of the Managed Funds Association, said his trade group supports registration of private fund investment advisers. He welcomed long lead time for the industry to comply.

Advisers to venture capital funds can avoid registration under an exemption. Managers of private funds with fewer than $150 million of assets under management can also opt out of SEC registration.

An estimated 2,000 of these venture capital fund and smaller private fund advisers, however, would still be subject to certain, less-stringent, reporting rules designed to help the SEC’s enforcement operations.

States, meanwhile could impose their own registration requirements for these advisers, and the SEC said it could conduct examinations if it suspects problems.

Republican commissioner Troy Paredes said he was troubled the SEC was designing a regulatory framework for exempted advisers that in essence would closely resemble the regime for registered advisers.

Such a regime, he said, “will come at the expense of capital formation.”


In a move that frees resources at the SEC for its hedge fund monitoring, the agency is passing responsibility for a bigger swath of smaller fund advisers to state regulators.

Under the rule, the threshold for investment advisers to register with the SEC would be raised from $25 million to $100 million, in a move expected to shift 3,200 advisers to state supervision. States would be in charge of overseeing these advisers as long as they have registration laws in place and have the ability to conduct examinations.

Requiring hedge fund advisers to register is a power that eluded the SEC until the enactment of the Dodd-Frank financial oversight law of last year. The agency tried to require it in 2006, but a federal appeals court tossed out the rule.

Bulldog Investors co-founder Phillip Goldstein, who successfully challenged the SEC previously, said on Wednesday he still believes registration is unnecessary, but he does not anticipate taking the SEC to court a second time.

“The legal basis is not there anymore to challenge it, and we are not going to challenge it,” Goldstein told Reuters.

Jay G. Baris, a New York attorney who heads the investment management practice of Morrison & Foerster LLP, said the new rules could have a dramatic impact on some smaller private fund advisers used to keeping a low profile.

“The costs could be prohibitive for smaller advisers, like the two guys and a dog now running a hedge fund over a garage,” said Baris.

Many fund advisers had already voluntarily registered with the SEC, but others relied on an exemption applying to those with fewer than 15 clients. Wednesday’s rule closes that loophole.

More scrutiny of hedge funds is to come.

A separate proposal being weighed by the SEC would greatly increase the amount of data the agency receives, to help regulators determine if large hedge funds and private equity funds pose a systemic risk to the broader marketplace.

Reporting by Sarah N. Lynch; Additional reporting by Ross Kerber in Boston; Editing by Tim Dobbyn

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