U.S. SEC to ramp up hedge fund, private equity fund scrutiny

By Katanga Johnson

WASHINGTON (Reuters) -The U.S. Securities and Exchange Commission (SEC) Wednesday proposed new rules 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, which was introduced following the 2007-2009 financial crisis, is the primary way private funds disclose purchases and sales of securities to the SEC.

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.

“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 increasing the number of treasury trading platforms captured by the agency’s Fair Access Rule, which prohibits platforms from unfairly denying or limiting access to such platforms.

President Joe Biden’s regulators 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 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.

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, and other events associated with withdrawals and redemptions, the SEC said.

Noah Theran of the Washington-based Managed Funds Association, said that the group needed to review 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.

David McGill at Kobre & Kim in Washington said the SEC will undoubtedly use the data to probe individual funds too.

“Ultimately, increased reporting is going to lead to increased investigating, and nothing gets investors to run for the door faster than a government investigation. Those practical realities provide plenty of motivation for funds to push back here,” McGill said.

(Reporting by Katanga Johnson in Washington; Editing by Michelle Price, Chizu Nomiyama and Diane Craft)