The Securities and Exchange Commission voted to approve a rule requiring certain private (hedge) fund advisers to register with and provide certain information to the SEC by March 30, finally subjecting them to some regulatory scrutiny. The vote was 3 to 2 with Republican commissioners Kathleen Casey and Troy Paredes voting “no.” The hedge funds will be required to disclose data regarding their investors, employees, managed assets, potential conflicts of interest, and their activities outside of fund advising, which will be made public.
At the same time, the Republican-controlled House Financial Services Committee approved legislation that would, if enacted, undo the SEC registration requirement for hedge funds, according to the article.
Hedge funds and their spokesmen on the SEC, Casey and Parades, oppose the registration rule saying it will harm innovation and capital formation while giving “no meaningful relief” to advisers who qualify for an exemption.
Ironically, hedge funds had pushed for the registration requirement earlier, in order to avoid regulations being imposed on banks, arguing that hedge funds should not be heavily regulated because they did not cause the financial crisis.
The information provided to the SEC will “aid investors and assist our regulatory and examination efforts without requiring any disclosure that could inadvertently harm the interests of private fund investors,” SEC Chairman Mary Schapiro was quoted as saying, adding: “Many of these private fund advisers will now not only register with the commission, but be subject to its rules, its regulatory oversight and its examination program. Today’s rules will fill a key gap in the regulatory landscape.”
The rule partially exempts venture capital fund advisers, foreign advisers without a U.S. business, and advisers with less than $150 million in assets under management; however, they must still file a portion of the information required of the registered advisers.
According to the article, firms qualify for the “venture capital” exemption if they invest mostly in private companies, with minimal leverage, no redemption rights for investors, and no more than 20 percent of capital in non-qualifying investments, or are funds that started raising money before this year.
In a separate rule, the SEC approved a regulatory exemption for organizations that advise only family clients, are controlled exclusively by family members, and do not hold themselves out publicly as investment advisers.
In addition, as hedge fund advisers are being added to the SEC’s oversight responsibilities, approximately 3,200 investment advisers with $25 million to $100 million under management will be moved from federal oversight to state-based regulation by June 28, 2012. However, states will have the option to decline to oversee them, as New York, Minnesota and Wyoming already have done, according to the article. In that case, the SEC will continue to regulate those investment advisors.
Many of the largest hedge fund firms are already registered with the SEC. One such firm is Paulson & Co. Inc., which allegedly helped build a CDO named Abacus to fail so that Paulson’s hedge fund could profit from the failure, which it did. Last July, Goldman paid $550 million to settle SEC charges that it misled its clients in the sale of Abacus. Paulson & Co. Inc. was not charged.
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