In Push for Greater Disclosure, SEC Implements New Rules for Hedge Fund Managers

The agency's provisions would implement provisions to the recently-enacted Dodd-Frank financial regulation reform law, which requires advisers to hedge funds and other private funds to register with the SEC.

(November 22, 2010) — In a 4-1 vote, the Securities and Exchange Commission (SEC) has issued new proposals for hedge fund registration.

The SEC’s proposed rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that, among other things:

  • Facilitate registration of advisers to hedge funds and other private funds with the SEC.
  • Implement the Dodd-Frank Act’s mandate to require reporting by certain advisers that are exempt from SEC registration.
  • Increase the asset threshold for advisers to register with the SEC.
  • Define “venture capital fund” and provide clarity regarding certain exemptions to investment adviser registration.

Partly in response to the $50 billion Ponzi scheme carried out by money manager Bernie Madoff, the SEC also proposed amendments to rules that would require disclosure of greater information by investment advisers and the private funds they manage, requiring information about assets, types of investors in their funds, and the services provided by the managers. Advisers will be forced to provide details about their employees, potential conflicts of interest, and advisory activities. To guard against such ponzi abuses, the SEC proposal requires fund managers to identify their auditors, prime brokers, custodians and administers, while forcing hedge-fund and private-equity managers to register and open their books to surprise examinations by the SEC.

“The enhanced information envisioned by these proposed rules would better enable both regulators and the investing public to assess the risk profile of an investment adviser and its private funds,” SEC Chairman Mary L. Schapiro said in a statement. The SEC is seeking public comment on the proposed rules for a period of 45 days following their publication in the Federal Register. While Shapiro said adequately examining fund managers would be challenging with the SEC’s limited resources, she argued that the provision in the statute raising the asset threshold to $100 million for registration would help the agency fulfill its responsibilities.

Under the new rule, hedge-fund managers with more than $100 million in assets would need to register with the agency, and fund managers with less than that amount would need to abide by state authority. However, the SEC specifically exempted venture capital funds and offshore investment advisers from the rules. The SEC proposals would also revise the Commission’s pay-to-play rule, following allegations of scandal at the New York State Common Retirement Fund.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742