Hedge funds and private equity firms will have to disclose more about potentially risky events to the US Securities and Exchange Commission under a rule drawn up for approval on Wednesday, one of several actions aimed at an industry under intense regulatory scrutiny.
The five members of the Securities and Exchange Commission will vote on whether to enact requirements for private fund managers to share additional information about events that could indicate stress or systemic risk.
As it was first drafted last year, the proposal has met opposition from lobbyists in the money industry. But SEC Chairman Gary Gensler said the additional visibility the regulation gives “will help protect investors and enhance financial stability.”
He highlighted the rapid growth of the private fund industry, which collectively estimates total assets at up to $25 trillion, larger than the $23 trillion total assets of US commercial banks. The industry was “more interconnected than ever with our broader capital markets,” Gensler said.
The vote comes as the Securities and Exchange Commission has sharpened its focus on risk among private funds, as Gensler seeks more clarity about how bets from hedge funds and other parts of the shadow banking system could leak into other asset classes and the real economy.
If adopted, the disclosure rule would change the way certain funds file with the Securities and Exchange Commission, to force hedge funds with at least $1.5 billion in assets under management and private equity firms to report “catalysts.” Such disclosure must be made within 72 hours of such event for the former and quarterly for the latter.
The rule was relaxed from the SEC’s initial proposal, which would have required large hedge funds to report unusual losses or margin calls within one day and private equity firms to report developments including general partner removals in real time.
The measure under consideration on Wednesday would also force private equity firms with assets of at least $2 billion to provide more information in their annual reports, including fund strategies. The SEC raised the reporting threshold to $2 billion from the $1.5 billion initially proposed.
The private fund industry had opposed the initial proposal. The Association of Managed Funds, a trade group for US hedge funds, said in a letter that the proposal would “impose significant new operational burdens” because funds would have to build or modify systems to collect and monitor information on a daily basis.
The State Department also raised concerns that the SEC did not assess how the proposal would coexist with a separate rule the agency proposed jointly with the CFTC last year, which would expand disclosure on items such as exposure to large hedge fund investments or private equity. corporate fund performance.
The SEC also proposed a rule that would require registered private fund advisors to share quarterly data with investors, including detailed records of all fees and expenses — a point of contention in the industry — as well as performance.
The Securities and Exchange Commission will also vote Wednesday on whether to adopt a measure that would increase disclosure requirements for corporate stock buybacks. The SEC said the final draft rule would force companies to disclose buybacks every three months or every six months, instead of one day after purchase as initially proposed.