Hedge funds would have to start giving US regulators significantly more information about how they’re set up and their investment strategies under a Securities and Exchange Commission proposal set to be introduced on Wednesday.
The expansion of confidential filings that big managers must file quarterly with the SEC would mark one of the biggest increases in regulation for the private-fund industry in a decade. The SEC says the Commodity Futures Trading Commission will also consider the changes in a joint bid by the watchdogs to get a grip on possible risks to the financial system.
The effort is the latest move by Biden administration regulators to clamp down on a corner of finance they say is too opaque -- a dramatic reversal of fortune for hedge funds after years of fending off tougher Washington oversight. In January, the SEC took a step toward requiring large hedge funds and private-equity firms to more quickly report major losses and redemptions. The regulator is also already considering ways to make fees more transparent.
The proposal that the SEC will debate on Wednesday could be the most controversial yet as it touches on the specific strategies that firms use. While specific data included on the so-called Form PF isn’t made public, regulators can use it in enforcement actions and to assess broader market risks.
Under the plan, big firms would have to start separately reporting each component included in complex structures, such as master-feeder arrangements and parallel funds. The current practice of aggregated reporting on those structures “obscures risk profiles and makes comparisons of complex structures difficult,” the SEC said in a statement ahead of a meeting to consider the changes. Existing reporting by advisers may not fully identify the potential risks hedge funds and private-equity are taking on, the SEC said.
The additional information would help agencies, as well as the Financial Stability Oversight Council, which includes banking regulators, gain a better understanding of the industry’s potential as a source of systemic risk, the agency said. The proposals would apply to hedge funds with net asset values of at least $500 million, the SEC said. Confidential information that funds file already can reveal the amount of debt piled onto the companies in buyouts, as well as where firms are investing.
However, industry lobbyists have argued that the data gathered is of limited utility to regulators. What’s more, they say, it can reveal proprietary information behind investment strategies and pose a data security risk. As a result, access to the forms are very limited within the SEC, a restriction the agency didn’t intend to change.
In the decade since the confidential disclosures were introduced in the wake of the 2008 financial crisis, “the private fund industry has grown in gross asset value by nearly 150% and evolved in terms of its business practices, complexity, and investment strategies,” SEC Chair Gary Gensler said in a statement.
Once the agency votes to propose the rule on Wednesday, it will take public comment for at least 60 days and consider feedback it receives. The SEC may then revise the proposal before holding a second vote to finalize the regulation several months from now.
This article was provided by Bloomberg News.