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SEC may loosen 'quiet period' rules

WASHINGTON — Federal regulators proposed Tuesday to loosen restrictions on executives' comments in the weeks before their company goes public in a stock sale, a move that could bring the first significant changes in 70 years to a traditional fixture known as the quiet period.

At the same meeting, the Securities and Exchange Commission voted in a split decision to mandate new oversight for hedge funds — largely unregulated investment pools traditionally for the wealthy that have become popular with small investors in recent years.

The high-risk, potentially high-return funds have an estimated $750 billion to $1 trillion in assets and are growing. Oversight is needed to head off potential blowups that could hurt ordinary investors, SEC officials say.

On a 3-2 vote at a public meeting, the SEC commissioners formally adopted the requirement that most hedge fund managers register with the agency. It will not take effect until February 2006, an interlude that supporters said would give the industry ample time to adjust to the new regime.

As occurred when the agency proposed the move in July, SEC Chairman William Donaldson and the two Democratic commissioners opted for stricter regulation of hedge funds while the two Republican members opposed it. Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow also oppose tighter regulation, and industry opponents are hinting at legal challenges.

One of the Republican commissioners, Paul Atkins, said before the vote that the proposal had been rushed out, overlooking numerous comments submitted to the SEC in opposition to it. He cited "a groundswell of principled opposition."

Furthermore, Atkins contended, there are "serious questions" concerning the agency's legal authority to impose the regulations.

The hedge fund move will open the funds' books to SEC examiners and make them subject to an array of regulations including accounting and disclosure requirements. The agency could, for example, conduct inspection "sweeps" of groups of hedge funds, something it now lacks legal authority to do.

Companies could disseminate more information to investors in the weeks before an initial public offering — using, for example, online updates to the prospectus. Company executives could give interviews to the media and conduct "road shows" for a wide audience of prospective investors.

"We are in an age where . . . our current framework and restrictions are outmoded," Alan Beller, director of the SEC's corporation finance division, said before the vote. The current system, he told the SEC commissioners, "has had the effect of chilling communications" from companies to investors.

The quiet period, also called the "waiting period," begins when a company files a statement with the SEC to register new stock and ends when the agency approves the registration statement. During that time, Depression-era securities laws limit the information that company executives and investment bankers underwriting the stock offering can release publicly, other than through the prospectus.

Under the new proposal, public statements that tend to hype the new stock would continue to be prohibited, and company executives would be held liable for any misstatements.