Regulators are considering easing a proposed rule so that fewer hedge fund advisers would have to hand over troves of confidential data to the government, according to people familiar with the deliberations.

The Securities and Exchange Commission is due to vote on a final rule on Wednesday on the threshold that would trigger extensive reporting requirements for advisers to large hedge funds and other private funds.

The rule is required by last year's Dodd-Frank financial oversight law and would give the SEC for the first time a direct window into massive funds' investment concentrations and trading strategies.

The information is designed to help the new Financial Stability Oversight Council determine whether a fund's trading may pose any risks to the broader marketplace.

In addition to possibly raising the dollar threshold so that fewer advisers will be captured by the expansive reporting rules, the SEC is also planning to grant some relief for advisers to large private equity funds by only requiring them to file reports with the SEC annually, instead of quarterly as previously proposed.

The sources spoke anonymously because the final rule is not yet public and negotiations were continuing Tuesday on the details.

While advisers to large hedge funds will still be required to submit more extensive information to regulators about things such as their funds' exposures to various asset classes, the SEC's final rule will clarify that hedge fund advisers will not be forced to hand over detailed position-level data, one of the sources said.

Private funds have been nervous about handing over sensitive financial information to regulators over concerns their positions or trading strategies could be exposed. Private funds, lawmakers and some former SEC commissioners have also raised concerns about the cost of the reporting requirements.

In its original January plan, the SEC had proposed a tiered regulatory approach whereby advisers to hedge funds, liquidity funds and private equity funds with more than $1 billion in regulatory assets under management would face heightened and more detailed reporting requirements every quarter.

Under the final rule expected to emerge on Wednesday, advisers to smaller funds will still only be required to file a report with the SEC once a year with basic data such as fund strategy, leverage and credit risk.

Advisers to smaller funds will be captured by the rule as long as they are registered with the SEC and advise private funds with at least $150 million in regulatory assets under management, sources said.

Critics of the hedge fund measure had accused the SEC of failing to adequately weigh the costs and benefits of the rule, a flaw that recently caused the overturning of an SEC rule on how shareholders can nominate candidates to company boards.

I suspect that this rule, like the one the District of Columbia Circuit recently struck down, likely results from a flawed cost-benefit analysis process, Congressman Darrell Issa wrote in a September 20 letter to the SEC. The benefits of Form PF are too narrow and create a potential for fraud and abuse. Meanwhile the cost in terms of jobs and capital are ignored.

(Reporting by Sarah N. Lynch; Editing by Tim Dobbyn)