WASHINGTON — Large hedge funds, the very private investment outfits that borrow money to magnify their big financial bets, will be required for the first time to report detailed information on their investments and borrowings under a rule adopted by the Securities and Exchange Commission on Wednesday.
But hedge funds and their advocates, after intense lobbying, won several important concessions from the commission’s earlier proposal. The changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.
The data gathered from the new reporting will not be public; only regulators will have access to it.
The filings will come two months after the close of a quarter, instead of the originally proposed 15 days after a quarter’s end. The most detailed information will be required of funds with more than $1.5 billion in assets, rather than $1 billion as originally proposed. Hedge funds will not have to report on individual holdings in their portfolio, as originally contemplated. Instead they will have to report only on aggregate holdings in different types of assets, by the geographic location of their investments and describe how active the fund is in trading its portfolio. Small hedge funds, with less than $150 million in assets, will not have to report any detailed information on their holdings.
The required reporting, which grows out of the financial crisis three years ago, is meant to allow financial regulators to monitor the risks that the funds may pose to the nation’s overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the crisis.
For now, even the details of what the S.E.C. approved on Wednesday will be confidential. Because the new rules are a joint release with the Commodity Futures Trading Commission, the S.E.C. won’t make public the form that it approved in a public meeting until after the C.F.T.C. approves it. The commodity commission is expected to vote “within the next week,” the S.E.C. said. The commission could approve the rule in private. A C.F.T.C. spokesman declined to comment.
The data will be visible only to regulators including the Financial Stability Oversight Council, a panel of the top federal financial regulators led by the Treasury secretary, which was created by the Dodd-Frank regulations.
The data collection “follows the lessons learned during the financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system,” Mary L. Schapiro, the S.E.C. chairwoman said.
The commission, which now has four sitting members, voted unanimously to approve the rule.
Regulators passed a separate set of requirements this year for hedge funds to provide some information that would be made public. Those regulations required limited disclosures, however, detailing only general information about a fund’s size, its largest investors and the fund’s “gatekeepers,” including its auditors, the brokerage firms that help to execute its trades and the marketers that service the fund.
An S.E.C. official said that the commission might aggregate and publish some data on the size and scope of the hedge fund industry based on the confidential information, but it would not identify individual funds or advisers.
While anonymous information has some benefits, analysts will not have a chance to call attention to specific parts of the industry or individual firms that pose potential risks to themselves, their counterparties or segments of the entire industry.
Still, the new data could highlight industry-wide problems like an over-concentration in one type of investment. Had this data been more widely available before the financial crisis, regulators might have seen the risks posed by a concentration of mortgage-backed securities investments and related instruments that led to the 2008 crisis.
Under the new rules, all hedge funds with more than $500 million or more in assets must disclose how leveraged their investments are — that is, the degree to which the size of the investments are enhanced using borrowed money. It would also look at how liquid, or quickly sold and converted into cash, they are.
Smaller hedge funds, with $150 million to $500 million in assets, will report their general fund strategy, what firms handle their trading and clearing operations, and their counterparty risk — that is, what financial firm is on the other side of complicated bets like derivatives and which could stand to lose if the fund was unable to honor its obligations.
No funds will be required to report “position information,” or details on individual investment holdings, S.E.C. officials said, a change that was made in part because of comments received from hedge funds and others. Hedge funds with less than $150 million will not be required to file the new reports approved Wednesday.
Ms. Schapiro said only about 230 American-based hedge fund advisers would be subject to the strictest reporting rule. But those advisers handle more than an estimated 80 percent of the assets under management among all hedge funds.
Richard Baker, the president of the Managed Funds Association, a trade group representing hedge funds, said the group was “disappointed that the commission was not able to focus the scope of the form to a more targeted set of data points.” He also noted that considerable uncertainty would remain until fund managers knew if they faced different reporting requirements for portfolios overseen by the C.F.T.C.
Fund managers also expressed concern about whether the S.E.C. and other regulators would be able to keep their portfolio information confidential. Hedge funds closely guard their trading and investment strategies, fearing that rivals might try to anticipate and run ahead of the fund’s trading. Alternatively, if a hedge fund held an illiquid investment, or one not easily sold, other traders might gang up to drive the price lower and force the fund to sell at a loss.
If approved as expected by the C.F.T.C., the largest hedge funds, those with more than $5 billion in assets, would be required to report the new information beginning at the end of next June. Smaller funds would be allowed until early 2013 to begin the reports. Industry lobbyists also sought to delay when the rules would take effect.
The S.E.C.’s rules also detail some disclosure requirements for private equity funds and “liquidity funds,” which generally are short-term or money-market funds. Liquidity fund managers with more than $1 billion in assets must follow rules similar to the large-firm reporting requirements for hedge funds, while private equity funds with more than $2 billion in assets are considered large funds.
The two types of funds have different reporting frequencies, however. Because money-market funds are short-term in nature and therefore turn over their investments frequently, the largest funds in that group must report within 15 days of the end of each quarter. Private equity funds, which generally take large stakes in companies and often act as part of a company’s management, are only required to report annually, within 120 days of the end of the fiscal year.
Azam Ahmed contributed reporting from New York.