SEC Registration Captures More Hedge Fund Advisers

The U.S. Securities and Exchange Commission will oversee hundreds more private advisers at hedge funds and private equity firms than it first predicted, expanding the reach of one of the most controversial requirements of the Dodd-Frank Act.

The managers of such investment funds face a deadline tomorrow to register with the SEC. The agency expects to receive about 1,300 registration applications, according to SEC spokeswoman Judith Burns. That is about a 70 percent increase from the 750 advisers the agency said as recently as July that it expected to register.

The 2010 financial regulatory overhaul included the registration provision for hedge fund and private equity advisers so the SEC could have a better understanding of what had been an opaque corner of finance. The surge in registrations reflects the gaps in the SEC’s knowledge of the sector, said Cornelius Hurley, the director of the Morin Center for Banking and Financial Law at Boston University (43751MF).

“It’s an indication of how much” the SEC “did not know beforehand,” he said in a telephone interview. “It’s pretty big.”

Burns didn’t explain why the number is higher than the agency estimated earlier.

The SEC hasn’t hired new staff to specifically focus on reviewing the registration applications though the office that conducts examinations has made 60 additional hires over the past 18 months.

The U.S. Securities and Exchange Commission will oversee hundreds more private advisers at hedge funds and private equity firms than it first predicted. Photo: Andrew Harrer/Bloomberg Close

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The U.S. Securities and Exchange Commission will oversee hundreds more private advisers at hedge funds and private equity firms than it first predicted. Photo: Andrew Harrer/Bloomberg

The SEC completed the registration rule in June. The final rule that the agency published in the Federal Register on July 19 estimated that 750 advisers would spend almost 38,000 hours and more than $9.6 million to comply with the rule.

Registration Exemptions

The registration requirement applies only to private equity companies and hedge funds that have more than $150 million in assets under management. Foreign advisers without a U.S. business and most venture capital funds are exempt.

Greenlight Capital Inc., BlackRock Capital Management Inc. and Paulson & Co. Inc. are among the hedge funds that are already registered with the SEC. The registration process hasn’t been very difficult for hedge funds, said Jay Gould, a partner at Pillsbury Winthrop Shaw Pitman LLP in San Francisco.

“It’s not a big deal,” he said. “For big managers and funds, this has gone quite well.”

The process has been more complex for private equity companies, said Pamela Hendrickson, the chief operating officer of The Riverside Co., a New York-based firm that has registered with the SEC.

‘Hard to Write’

“It’s a regulation designed for the hedge fund industry and not private equity,” she said in a telephone interview. “Private equity and hedge funds don’t do the same thing so it’s hard to write one set of rules.”

The biggest problem, she said, is the so-called custody rule in the final regulation. That provision, intended to curb fraud, requires most registered firms to direct client assets to an independent custodian.

“Frequently, firms like Riverside hold their securities in a vault at a law firm or other secure locations instead of paying a third-party custodian,” she said. The rule “just doesn’t make sense.”

Representative Robert Hurt, a Virginia Republican, has proposed legislation that would exempt private equity companies from the SEC registration requirement. His bill cleared the House Financial Services Committee in June and hasn’t advanced on the floor. In an e-mail, Hurt said he is still pursuing the exemption and encourages the SEC to use its own authority to shield private equity companies that aren’t highly leveraged from registration.

“The registration requirements in Dodd-Frank for private equity advisers are unnecessary burdens that will hinder small business capital formation and job creation,” he said in the e- mail.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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