SEC to step up supervision of hedge funds

Date: Friday, November 19, 2010
Author: Rachelle Younglai, Reuters

Hedge funds and private equity funds would be subject to supervision under a plan being considered by the Securities and Exchange Commission.

The SEC meets later on Friday to vote on a proposal that would require the registration of advisers to hedge funds and private equity funds with more than $150 million in assets under management.

The increased oversight is expected to help the SEC root out fraud in the $1.6 trillion hedge fund industry, although players do not believe the new rules will burdensome.

"They are not going to be hard to comply with," said Ron Geffner, who works with hedge funds as a partner at Sadis & Goldberg LLP. "If people have adopted policies and procedures and try to live with them before they register, it will be less of a going concern."

The SEC tried to regulate the private pools of capital a few years ago, but a lawsuit overturned the rule.

Now, the agency has the power to impose such rules with the enactment of the Dodd-Frank financial reform bill in July.

At the same time, the SEC is required to craft a rule that will shift the oversight of thousands of smaller investment advisers to the states.

As required by the Dodd-Frank bill, investment advisers with more than $100 million in assets will be supervised by the SEC instead of advisers with $25 million in assets.

The SEC will decide whether to advance that proposal on Friday.


The SEC and fellow market regulator the Commodity Futures Trading Commission are writing dozens of rules for the estimated $600 trillion over-the-counter derivatives market.

On Friday, both regulators are expected to start to define the parameters of the warehouses or repositories that will store the swaps trade data.

They also are both expected to start determining what kind of information and how quickly the trades must be reported to the so-called swaps data repositories.

Market participants must report swap trades in "real-time," -- a requirement under the new law that has upset users of the derivatives also known as "end users."

The off-exchange derivatives are used by companies, municipalities and others to hedge risk such as fluctuations in commodity prices and interest rates.

The Swap Financial Group, which advises non financial corporations on derivatives strategy, said there should be a delay in the real-time reporting of block trades or large deals for end users.

"There is competing public good between an entity like the city of Los Angeles and an entity like a hedge fund and a speculative trader seeking to get price discovery," said Peter Shapiro, managing director with the Swap Financial Group.

The SEC has already proposed rules to mitigate conflicts of interests at venues that will handle the swaps and a plan to prohibit fraud and manipulation in the derivatives market.

The agency must write more than 100 rules for financial players before mid-July 2011.