SEC Mandates Tighter Hedge Fund Rules

(June 23, 2011) — Hedge funds, private equity funds, and venture capital funds are facing added government oversight under new rules mandated under the financial overhaul law passed last year.

The rules — which aim to guard investors from undue risk and ward off another economic crisis — require hedge funds and private equity funds to increase their level of transparency, allowing periodic inspections by the Securities and Exchange Commission (SEC). Additionally, the rules would force hedge funds to disclose information regarding their operations, finances, and investors. Hedge fund and private equity fund advisers newly required to register do not have to do so until March 30, 2012. Meanwhile, the rules regarding exemptions for venture capital funds and certain private fund advisers are effective July 21, 2011.

Under the legislation, about 750 big funds will be subject to the new regulations, which the Dodd-Frank bank reform legislation allowed the SEC to write.

“These rules will fill a key gap in the regulatory landscape,” said SEC Chairman Mary L. Schapiro. “In particular, our proposal will give the Commission, and the public, insight into hedge fund and other private fund managers who previously conducted their work under the radar and outside the vision of regulators.”

Furthermore, the US regulator amended rules to expand disclosure by investment advisers, particularly about the private funds they manage, and revised the Commission’s pay-to-play rule.

Since the financial crisis, the SEC has upped its oversight over large financial institutions. Last month, for example, the SEC adopted rules to create a whistleblower program that rewards individuals who provide the agency with high-quality tips that lead to successful enforcement actions. The new rules, which passed by a vote of 3-2, could urge Wall Street whistleblowers and other industry insiders to come forward more frequently to alert the SEC about securities violations.