(Reuters) — The U.S. Securities and Exchange Commission on Wednesday proposed a rule to improve the quality of disclosures it receives from large hedge funds about their investment strategies and leverage.
The rule, which was proposed in conjunction with the Commodity Futures Trading Commission, is part of a broader regulatory effort to increase the transparency of private funds amid concerns that the industry is a growing source of systemic risk.
The proposal confirmed a Reuters report on Tuesday.
It would expand the reporting requirements for advisers and large hedge funds with a net asset value of at least $500 million when filing so-called Form PF with the SEC.
Introduced after the 2007-2009 global financial crisis, Form PF is the primary method used by private equity funds to confidentially disclose to the SEC purchases and sales of securities.
The new rule would require funds to provide more information about their investment strategy and exposure, including borrowing and financing arrangements, open positions and certain large positions. It would also require large hedge funds to report their cryptocurrency exposure, said the SEC̵7;s Democratic chairman, Gary Gensler.
“We’ve tried to take a measured approach, but add the details associated with systemic risk,” he told reporters.
The securities regulator — made up of five voting members including Gensler — voted 3-2 to propose the measure, which is subject to public consultation before it can be adopted.
The proposal follows a draft rule in January to improve other form PF disclosures.
Regulators became concerned about risk in the private equity fund industry after hedge fund cuts contributed to the turmoil in the US Treasury market in March 2020. Hedge funds also played a role in last year’s meme stock saga involving GameStop Corp. and other companies.
Critics argue that while the sector exploded after the 2007-2009 financial crisis, regulatory scrutiny of private equity funds – which are heavy users of debt financing – has not kept pace.
The International Organization of Securities Commissions, which is made up of regulators worldwide, said in a January report that some leverage in private funds is being hidden.
SEC Commissioner Hester Peirce, a Republican, on Wednesday criticized the proposal, saying the information was unnecessary and that private fund investors — insurance companies, hedge funds, pension funds and high-net-worth individuals — were capable of assessing their own risks.
“Why we need the new information and what we plan to do with it are questions left to the reader’s imagination,” Peirce said in a statement prepared for the open meeting.
Industry groups, including the Alternative Investment Management Association and the Managed Funds Association, said the proposed changes were burdensome and could duplicate existing reports.
“The SEC should focus on making better use of (existing) information rather than placing new burdens on fund managers,” UD Executive Director Bryan Corbett said in a statement Wednesday.