August 9, 2022

DealBook: S.E.C. Approves New Reporting Requirements for Hedge Funds

A divided Securities and Exchange Commission approved new rules on Wednesday 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 to regulators.

“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.

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 S.E.C. first proposed the rules.

“The rules at the end of the day are not enormously onerous,” said Laura Corsell, a former S.E.C. lawyer who now represents investment advisers as a partner at the law firm Montgomery McCracken.

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

The S.E.C. also approved a definition for the venture capital industry, offering those entities 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 do provide regulators a rare peek into venture capital funds. Exempt funds will have to file periodic reports that provide basic information, like the name of its owner, potential conflicts of interest and disciplinary problems.

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 S.E.C. unanimously agreed on the definition of venture capital funds, but the agency was split 3 to 2 on broader reporting requirements for money managers.

Kathleen L. Casey, a Republican commissioner, said the rule “pays lip service” to the exemption.

While the new rules will not begin until next March, many hedge funds say they are ready to register in July when the rules were originally 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, which represents hedge funds.

Azam Ahmed contributed reporting.

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