The U.S. Securities and Exchange Commission (SEC) Wednesday proposed new rules that aim to boost hedge fund and private equity fund disclosures as it looks to increase oversight of the private funds industry and better monitor systemic risks.
The private funds industry has drawn fresh scrutiny after hedge fund de-leveraging contributed toward turmoil in the U.S. Treasuries market in March 2020 and hedge funds were again at the center of last year’s GameStop “meme-stock” saga. “We’d had issues and challenges in private funds earlier and the transparency the U.S. government had into it was scant at best,” said SEC Chair Gary Gensler.
The proposed changes to the SEC’s “Form Private Fund (PF)” rules would require private funds to disclose details of material events within one business day, compared with the current quarterly or annual requirement, depending on the firm.
Form PF is the primary way private funds disclose purchases and sales of securities to the agency.
The draft rule, which is subject to public consultation before it can be finalized, would also lower the Form PF reporting threshold for private equity funds from $2 billion in assets under management to $1.5 billion to capture more firms.
U.S. regulators under the administration of President Joe Biden have expressed concerns over private funds’ excessive use of leverage, which raises the risk that firms will not have the ability to absorb even modest losses when hit by adverse shocks.
Last year, the U.S. Financial Stability Oversight Council (FSOC) revived a hedge fund working group, which President Donald Trump’s administration had shuttered, to gather better data on risks hedge funds may pose to the financial system.
In 2013, private funds managed approximately $5 trillion in assets but that number grew to approximately $11 trillion by the end of 2020, according to an SEC official, who added that the agency has seen a 70% increase in the number of private funds.
Wednesday’s SEC measures would not see funds publicly disclose the new data, but would help regulators better spot signs of trouble, such as big losses, significant margin and counterparty default events, material changes in prime broker relationships and other events associated with withdrawals and redemptions, the SEC said.
Form PF disclosures were mandated by the 2010 Dodd-Frank financial reform law to allow the SEC and FSOC to monitor risks to the U.S. financial system.
“After almost a decade of experience analyzing the information collected in Form PF, we have identified significant information gaps and situations where we would benefit from additional information,” added Gensler.
Separately on Wednesday, the SEC also proposed new rules that would increase the number of treasury trading platforms captured by the agency’s Fair Access Rule, which prohibits platforms from making unfair denials or limitations of access to such platforms, among other things. The changes, which update a 2020 agency proposal, would see so-called alternative trading systems (ATS) that trade government securities, be more transparent about how their platforms operate.
Noah Theran of the Washington-based Managed Funds Association, said that the group needs to study the details of the proposal to ensure it does not ask funds to disclose “routine activity.”
“We support the SEC’s broad goal of obtaining timely and relevant information from market participants in a crisis,” he added.
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