WASHINGTON – Hedge funds will face closer scrutiny under rules being approved Wednesday that seek to protect investors from risky trades and prevent another financial crisis.
The rules were mandated under the financial overhaul law passed last year. They require hedge funds and private equity funds to open their books to periodic inspections by the Securities & Exchange Commission. They also force the funds to disclose information about their operations, finances and investors.
Hedge funds are lightly regulated investment pools that collect money from pension funds, endowments and wealthy individuals. They use complex trades to seek big returns. Private equity funds focus on buying and reselling companies.
The SEC is expected to adopt the rules at its meeting on Wednesday. The funds will be required to register by early 2012.
Groups representing hedge funds and private equity funds have expressed support for the registration requirement. Many hedge funds have already registered voluntarily, according to industry groups.
Until now, hedge funds have been able to avoid registering with the SEC because of an exemption for investment groups that have fewer than 15 clients. Nearly all hedge funds qualify for the exemption because they are a collection of funds that count each individual fund as one client. In reality, a large hedge fund could have hundreds of individual investors.
The hedge fund industry commands trillions of dollars in assets and invests in anything from commodities to real estate. They account for an estimated 20 percent of all stock trading and have grown dynamically in recent years. At the same time, there has been a rise in fraud among hedge funds, according to regulators.
During the 2008 financial crisis, private funds had to come up with money when their capital was put at risk. That contributed to the strain on financial markets, regulators said. Some hedge funds suffered huge losses, notably from investments backed by high-risk mortgages.
The requirements vary in accordance with the size and complexity of a fund's business. For example, funds with more than $1 billion in assets under management will have to provide fuller details. Private funds with less than $150 million in assets under management in the U.S. will be exempt from the registration requirement. So will venture capital funds, which invest in startup companies that are run by entrepreneurs.