SEC OKs Hedge Fund, Private Equity Disclosure Mandate

The Securities and Exchange Commission (SEC) approved a rule that mandates hedge fund and private equity managers to register with the agency and be subject to unannounced examinations.

A MarketWatch news report said the SEC proposal grew out of the recent financial services reform law and would also impose new reporting and disclosure requirements on fund managers.

“The enhanced information will better enable regulators and the investing public to assess the risk profile of an investment adviser and its funds,” SEC Chairwoman Mary Schapiro said, according to the news account.

The new rule would require hedge-fund managers with more than $100 million in assets to register with the agency. Fund managers with less than that would be subject to state authority. The proposal would exempts foreign fund managers that do not have a “place of business in the U.S.” from the registration rule.

The proposal also requires hedge-fund and private-equity-fund managers provide the SEC with organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund and the types of investors in the fund, MarketWatch said.

The agency is required by Dodd-Frank to have the rules adopted by July 2011, but Schapiro said she hopes to approve the rules well in advance of the deadline.

The SEC in late 2004 adopted a similar rule under the oversight of William Donaldson, who chaired the agency between 2003 and 2005, which required hedge funds to register and open up their books to periodic examinations. However, a federal court threw it out in 2006.

MarketWatch said currently, many hedge-fund and private-equity managers are not required to register and open up their books for periodic examinations because they advise fewer than 15 private funds. However, a large number of hedge-fund managers voluntarily register, in part, because many institutional investors wouldn’t invest their funds with them without the additional security of knowing the agency is checking their books periodically.

While the financial services reform bill exempted venture-capital funds from the registration requirement, the SEC introduced a proposal seeking to define what a venture-capital fund is in order to make sure that some hedge funds and private-equity firms don’t pass themselves off as venture capitalists to escape oversight, MarketWatch reported.

According to the proposal, venture-capital funds are only defined as entities that invest in equity securities of private operating companies to provide primarily operating or business expansion capital.

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