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US regulation targets hedge funds

Date: Thursday, June 18, 2009
Author: HedgeFunds Review

Hedge fund managers in the US will be required to register with the SEC and provide the regulator with information on the funds they manage under the Obama administration's plans to overhaul the US regulatory system.

The White House said Securities and Exchange Commission (SEC) registration was required because the regulator needed more information about hedge funds in order to assess their impact on the market.

The administration argued the lack of reliable hedge funds data meant regulators were left in the dark about the leverage employed by the industry and the potential strain on the financial markets caused by deleveraging.

The White House also said there was a compelling investor protection rationale for the registration requirements.

SEC registered hedge funds will be subject to record keeping and reporting requirements and rules on disclosure. They will also be asked to provide the SEC with details about their assets under management, borrowings and off-balance sheet exposures on a confidential basis.

The SEC could share this information with the Federal Reserve. It will also have the power to conduct examinations of registered hedge funds.

The data collected by the SEC will be used to assess whether individual hedge funds pose a systemic risk to the financial system due to their size, interconnectedness or levels of leverage. Those who do will face additional supervision and regulation by the Federal Reserve.

The White House also instructed the Fed to tighten its supervision of potential conflicts of interest between banks and hedge funds.

The SEC registration rules will apply to all private pools of capital, including private equity and venture capital funds.

The Obama administration proposes to give the Fed wide powers to monitor and address systemic risks in the financial system. The Fed will focus on overseeing large bank holding companies but will also have powers to supervise other financial companies deemed to pose a systemic risk.

The package includes reforms to the securitisation market and changes to executive compensation rules.

The administration is also seeking to bolster its powers to manage the failure of financial institutions or break up large companies whose failure could pose a systemic risk.