US private funds face more disclosures under new SEC rule

Hedge funds and private equity firms would be forced to disclose more potentially risky events to the U.S. Securities and Exchange Commission under a rule set for approval Wednesday, one of several measures targeting an industry subject to intensified regulatory scrutiny.

The five members of the SEC will vote on whether to require private fund managers to share additional information about events that may signal stress or systemic risk.

As first drafted last year, the proposal drew opposition from fund industry lobbyists. But SEC Chairman Gary Gensler said the additional visibility afforded by the settlement “will help protect investors and promote financial stability.”

He pointed to the rapid growth of the private equity industry, whose gross assets are collectively valued at up to $25 billion, more than the total assets of US commercial banks at $23 billion. The industry was “increasingly interconnected with our broader capital markets,” Gensler said.

The vote comes as the SEC has sharpened its focus on risks among private funds, with Gensler seeking more visibility on how bets by hedge funds and other parts of the shadow banking system may spill over to other classes. of assets and the real economy.

If passed, the disclosure rule would modify a form that some funds file with the SEC, to force hedge funds with at least $1.5 billion in assets under management and private equity firms to report “triggering events”. These declarations should be made within 72 hours following such an event for the former and quarterly for the latter.

The rule was relaxed from the original SEC proposal, which would have required large hedge funds to report extraordinary losses or margin calls within one day and private equity firms to report developments , including general partner withdrawals at the time the events occurred.

The measure being considered Wednesday would also require private equity firms with at least $2 billion in assets to provide more information in their annual reports, including on fund strategies. The SEC raised the reporting threshold to $2 billion from the originally proposed $1.5 billion.

The private fund industry had pushed back against the original proposal. The Managed Funds Association, the US hedge fund trade group, 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 MFA also raised concerns that the SEC had not assessed how the proposal would co-exist with a separate rule the agency proposed jointly with the Commodity Futures Trading Commission last year, which would expand disclosure of things like exposure to large hedge fund investments or private equity. performance of corporate funds.

The SEC also proposed a rule that would require registered private fund advisers to share quarterly statements with investors, including detailed records of all fees and expenses — a point of contention in the industry — as well as performance.

On Wednesday, the SEC will also vote on whether to pass a measure that would increase disclosure requirements for corporate stock buybacks. The proposed final rule would require companies to disclose redemptions quarterly or every six months, instead of one day after purchases as originally proposed, the SEC said.

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