SEC approves tightened rules for hedge funds

June 23, 2011|By Ben Protess and Evelyn M. Rusli, New York Times

SEC chief Mary Shapiro said the new rules give the public and commission…

A divided Securities and Exchange Commission approved new rules yesterday that would impose sweeping disclosure requirements on large hedge funds and other private investment advisers, a first for an industry that has long eluded Washington oversight.

The rules will require hedge funds, private equity shops, and other advisers that manage more than $150 million to register with the agency and turn over crucial information, including the funds they oversee and their investors. Venture capital funds and some small hedge funds are excused from the rules, although these firms will still have to report some basic information.

“Today’s rules will fill a key gap in the regulatory landscape,’’ Mary L. Schapiro, the agency’s chairwoman, said at a public meeting in Washington. “In particular, our proposal will give the commission, and the public, insight into hedge fund and other private fund managers who previously conducted their work under the radar and outside the vision of regulators.’’

The new oversight came as no surprise to the industry. The long-awaited rules were outlined in the Dodd-Frank act, the financial regulatory law enacted last year, and largely spelled out in November when the SEC first proposed the rules.

Still, regulators agreed to delay the start date of the rules until March 30, 2012, a reprieve of nearly nine months.

The SEC also approved a definition for the venture capital industry, offering it relief from some reporting requirements. A venture capital fund, according to the new description, is one that invests in “qualifying investments,’’ mainly shares in private companies. But it may invest up to 20 percent of its capital in “nonqualifying investments’’ and have some short-term holdings.

The rules provide regulators a rare peek into venture capital funds. Exempt funds will have to file periodic reports that provide basic information, such as the name of its owner, potential conflicts of interest, and disciplinary problems. If the SEC spotted a problem, it could examine a venture capital fund’s books.

Larger firms that manage more than $150 million will disclose the size of their funds and the type of clients who invest in them. The funds will also name their “gatekeepers’’ — the auditors, prime brokers, and marketers that service the funds.

The requirements are a sharp change for most hedge funds and private equity firms. Until now, federal regulators kept tabs only on firms with 15 or more funds.

The SEC unanimously agreed on the definition of venture capital funds, but was split 3 to 2 on broader reporting requirements for money managers.

While the new rules will not kick in until March 2012, many hedge funds say they are ready to register in July when the rules were supposed to take effect.

“Given that this deferral just happened today, most firms were prepared several weeks ago to press the button to file,’’ said Steve Nadel, a partner at the law firm Seward & Kissell.