U.S. regulators have begun moving to bring more transparency to private equity, hedge funds and the sprawling derivatives market, all dimly lit corners of the financial world getting more scrutiny, Reuters reported.
Private equity funds and hedge funds would be subject to increased supervision under rules being considered by the U.S. Securities and Exchange Commission.
“They are not going to be hard to comply with,” said Ron Geffner, who works with hedge funds as a partner at the New York law firm 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.
Proposed rules issued by the Securities and Exchange Commission and the Commodity Futures Trading Commission showed regulators stepping cautiously as they implement hundreds of new regulations mandated in July by Congress.
Shining a brighter light on derivatives was one of the key goals of the landmark Dodd-Frank reforms, pushed through by Democrats and President Barack Obama over the resistance of most Republicans and a host of Wall Street lobbyists.
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 also proposed, under another Dodd-Frank mandate, requiring hedge funds and private equity firms with more than $150 million in assets under management to register with the agency.
The European Parliament on Nov. 11 approved new rules to regulate managers of hedge funds and private equity beginning in 2013. EU member-states had already approved the package.
The implementation deadline for the SEC rule on hedge fund and private equity firm registration is April 2011.
This rule is designed to help the SEC root out fraud and abuse in the $1.65-trillion hedge fund business.
The agency unveiled its initial rules days before the FBI raided three hedge funds as part of a widening probe into suspected insider trading in the $1.7 trillion hedge fund industry.
The raids came as federal prosecutors prepare to unveil a series of new insider trading cases as soon as this year against hedge fund traders, consultants and Wall Street bankers.
Two of the raided funds are Diamondback Capital Management LLC and Level Global Investors LP, each based in Connecticut and run by former managers of Steven Cohen’s SAC Capital Advisors, one of the best-known U.S. hedge funds.
A Boston-based firm, Loch Capital Management, was also raided, a person familiar with the matter said. Loch has close ties with a witness who pleaded guilty in an insider trading probe centered on hedge fund Galleon Group.
“The Justice Department promised a more muscular approach to white-collar crime, and is delivering,” said Eugene O’Donnell, a professor at the City University of New York’s John Jay College of Criminal Justice.
“The end game is deterrence,” O’Donnell said. “The number of prosecutions will always be small, but deterrence can have a multiplier effect that stops untold numbers of other people.”
Rachelle Younglai and Dave Clarke are Reuters corrrespondents in Washiington, D.C.