08/02/2012 Author: Will Wainewright

Disclosure gets closer

Ahead of the upcoming deadline that will see the SEC expand its hedge fund registration requirements, HFMWeek looks at which funds the new process will affect, and whether the sector is prepared

The expansion of SEC registration to cover hedge fund firms with US interests officially takes effect at the end of this quarter. The first deadline, however, comes into play next week. Private fund advisors with $150m or more in AuM must submit their registration forms by 14 February to give the watchdog time to review in advance. The limit is just $25m for firms based outside the US.

“The SEC was not getting much market colour on what was out there,” says Robert Quinn, who runs a regulatory consultancy that advises hedge funds on Financial Services Authority (FSA) and SEC compliance matters. “Now, many more hedge funds fall under the regulator’s purview, meaning they will get a much better idea of what is going on in the market.”

There had been speculation that the US watchdog would struggle with the sheer volume of paperwork triggered by the registration process. Quinn, who hasn’t noticed “anything different” in the SEC’s ability to cope in recent weeks, suggests that the more difficult task will come after the deadline, when the organisation has to collate the data and build a profile of systemic risk.

But have funds themselves been prepared? Bill Mulligan, managing partner and CEO at San Francisco-based HedgeOp Compliance, says the process has not been a rushed one for most funds, who had been working initially to a timetable of likely implementation last June. However, he adds that the last month has been busy as a result of latecomers to the process.

“You are always going to have people who get round to completing it late,” he told HFMWeek. “It has not been an easy process. Although the requirements are not too onerous, you have to give a lot of time to it. The process can be approached in a number of different ways and you have to get it right first time.”  

In practice, SEC registration is not a convoluted process. It requires the completion of a Form ADV, which involves moderate disclosure about certain operational aspects. Those who don’t qualify as big enough to register are classed as exempt reporting advisers (ERA) and have to give up less information. The deadline for ERAs is 30 March, as the SEC does not require the advance completion.

HedgeOp has around 60 hedge funds on its books, primarily based in the US, and has also worked on the process with about 20 ERAs. “ERA status is the most likely outcome for funds based in London or Hong Kong, as they don’t have a US base and will therefore not manage the requisite asset size from a US office.” He expects business to continue to be busy up to the 30 March deadline as more ERAs who had not realised they were affected come forward.

Jonathan Wilson, director at compliance firm the IMS Group, which last month merged with HedgeOp, says it was seeing more activity among its existing clients as the deadline draws near. “We are getting requests from the UK, India, Switzerland…” he says. “Most of our clients are ERAs, which means the bulk of the information is disclosure about the firm and its controllers. Many of the details can come out of due diligence questionnaires but needs representing to the SEC in readiness of public disclosure.”

He adds that the expansion of SEC registration is not a surprise. “The SEC is catching up with the FSA, which has been collecting data on systemic risk and hedge funds for years. It is a process that will continue in the US with Form PF registration. The future seems to be more disclosure, not less.”