US SEC to step up scrutiny of hedge funds and private equity funds

WASHINGTON, Jan 26 (Reuters) – The U.S. Securities and Exchange Commission (SEC) on Wednesday proposed new rules to strengthen disclosure of hedge funds and private equity funds as it seeks to strengthen oversight of the private funds sector and to better monitor systemic risks.

The private funds industry has come under renewed scrutiny after hedge fund deleveraging contributed to the US Treasuries market turmoil in March 2020 and hedge funds once again took center stage. GameStop’s (GME.N) “meme-stock” saga last year.

“We had had issues and challenges with private funds earlier and the transparency available to the US government was insufficient at best,” SEC Chairman Gary Gensler said.

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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, up from the current quarterly or annual requirement, according to the business.

Form PF, which was introduced following the financial crisis of 2007-2009, is the primary means by which private funds disclose purchases and sales of securities to the SEC.

The draft rule, which is subject to public comment 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. dollars to capture more businesses.

“After nearly a decade of experience analyzing the information collected in the PF form, 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 covered 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 concern over the excessive use of leverage by private funds, which increases the risk that companies will not be able to absorb even modest losses when they are hit by adverse shocks.

Last year, the Financial Stability Oversight Council (FSOC) revived a task force on hedge funds, which President Donald Trump’s administration had shut down, to gather better risk data than hedge funds. can pose to the financial system.

In 2013, private funds managed about $5 trillion in assets, but that number had risen to about $11 trillion by the end of 2020, according to an SEC official.

Wednesday’s SEC metrics would not see funds publicly disclose the new data, but would help regulators better spot signs of trouble, such as large losses, large 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 the group needed to review the proposal to ensure it was not asking funds to disclose “routine activity”.

“We support the SEC’s overall goal of obtaining timely and relevant information from market participants in the event of a crisis,” he added.

David McGill of Kobre & Kim in Washington said the SEC will no doubt use the data to probe individual funds as well.

“Ultimately, increased reporting will lead to increased investigations, and nothing drives investors to rush faster than a government investigation. These practical realities provide ample incentive for funds to come back here,” McGill said. .

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

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