The Securities and Exchange Commission Friday proposed requiring hedge funds and private-equity funds to submit to inspections and new disclosure requirements, aiming to expand oversight as required by the Dodd-Frank law.
SEC commissioners voted 4-1 to approve a preliminary rule requiring most hedge fund managers, who now operate with limited government scrutiny, to register with the agency. The rule will improve what regulators know about the funds, including their size and auditors, SEC Chairman Mary Schapiro said during a meeting in the agency's offices.
Such information can "serve as a red flag to regulators," she said.
Until Dodd-Frank required that the new rules be drafted, hedge funds had been "out of sight and were unknown to financial regulators and the public," Schapiro said. The proposal will be subject to a comment period before the final rules are adopted.
The rules would revise the Investment Advisers Act of 1940, creating different tiers to classify private investment pools by size. At the highest level, advisers managing more than $150 million in U.S. assets would have to register, requiring them to hire compliance officers and submit to periodic inspections by SEC examiners.
The funds also would face broader reporting requirements. They would be required to identify crucial "gatekeepers," including each fund's auditors, prime brokers, custodians, administrators and marketers, in addition to reporting basic information about their operations, types of clients and business practices that could lead to conflicts of interest.
Some private funds would be exempt from registration: venture capital, foreign and those with assets of less than $150 million.
The final tier specified under Dodd-Frank and detailed in the SEC proposal is a bigger swath of smaller hedge fund advisers, with less than $100 million of assets — a list the SEC estimated is in the thousands — that would be swept into regulation by state securities authorities.
