July 11 (Bloomberg) -- The U.S. Securities and Exchange Commission's top market-regulation official said Bear Stearns Cos. probably will sell assets and reduce leverage in an ``orderly fashion'' at its two hedge funds that almost collapsed last month.

``Although the situation remains in flux, it appears'' that the Bear Stearns funds will ``be able to unwind in an orderly fashion, with limited impact on the broader market,'' Erik Sirri, the Washington-based SEC's director of market regulation, told the House Financial Services Committee today.

The funds' near-meltdown sparked concern that Bear Stearns would be forced to unload billions of dollars of securities at fire-sale prices. The New York-based firm eventually bailed out one of the funds with $1.6 billion in emergency financing. Bear Stearns said yesterday the second fund cut its debt in half to $600 million after negotiating with creditors and selling assets.

Shares of Bear Stearns, which dropped 4.1 percent yesterday on concern it may face losses on mortgage bonds, rose 7 cents to $138.03 in New York Stock Exchange composite trading.

The debacle began after the funds, run by Bear Stearns Asset Management, bet on securities tied to subprime mortgage bonds and banks demanded more collateral to back up the loans. At least one of the funds blocked investors from withdrawing money.

`No Guarantee'

Sirri likened the situation to the collapse last year of Amaranth Advisors LLC, whose losses on energy trades didn't spread to other markets because of ``ample liquidity and tight credit spreads.''

``But there is no guarantee that such favorable conditions will persist, and we must be prepared to assume that they will not,'' he said. ``Thus, the regulatory community must continue to engage with the systemically important banks and securities firms encouraging additional efforts to improve and expand risk- management capabilities.''

President George W. Bush's administration has endorsed a hands-off approach to regulating hedge funds. In February, a panel of officials including representatives from the Federal Reserve and Treasury Department, as well as the SEC, issued a statement arguing that it was best to rely on market pressures to deal with the risks posed by hedge funds and other private investment pools.

Robert Steel, a Treasury undersecretary, said at a House Financial Services Committee hearing today that the sell-off in subprime securities ``does not seem to be a systemic issue.'' Fed Governor Kevin Warsh told the same panel that the losses ``don't appear to be raising, to this point, systemic risk issues.''

Potential Problem

Representative Barney Frank, a Massachusetts Democrat and chairman of the Financial Services Committee, said the existing regulatory structure may be inadequate.

``There is a potential problem here that we wish we were more sure about how to approach,'' he said.

Separately, the SEC today adopted new rules ensuring it can sue hedge funds for misleading investors, after a court ruling last year cast doubt on the regulator's authority. The rule bars funds from lying about strategies, performance, a manager's experience and the risks of trusting money to them.

Hedge funds are private pools of capital that allow managers to participate substantially in investment gains.

To contact the reporter on this story: David Scheer in Washington at dscheer@bloomberg.net.

Last Updated: July 11, 2007 16:17 EDT