In one of the most significant changes to private fund regulation in a decade, the US Securities and Exchange Commission (SEC) has suggested new measures that would require hedge funds to hand over more information about their investment strategies including their crypto exposure.
According to the SEC, the new approach, which would apply to funds with at least $500 million in assets, would give it the “ability to assess systemic risk as well as to bolster [its] regulatory oversight of private fund advisers and its investor protection efforts.”
The amendments to Form PF — the mechanism that requires fund advisers to report assets under management to the Financial Stability Oversight Council — follow January’s proposal from the SEC to beef up hedge fund and private equity fund disclosures. This was prompted after de-leveraging caused chaos in the US treasuries market in 2020, and hedge funds were front and center during last year’s GameStop controversy.
As outlined in a press release, the new SEC proposal would, amongst other things:
- Improve how large hedge fund advisers report investment exposures, market factor effects, turnover, risk metrics, investment performance by strategy, and portfolio liquidity. It’s hoped that this would present the SEC with better quality data and comparability.
- Require advisers to provide additional basic information about private funds, including identifying information, assets under management, gross asset value, and fund performance. Regulators say this will assist in identifying trends, including those that could create systemic risk.
- Provide it with more detailed information about the investment strategies, counterparty exposures, and trading and clearing mechanisms employed by hedge funds.
Speaking about the proposal, which is also being backed by the Commodity Futures Trading Commission (CFTC), SEC chair Gary Gensler said:
“In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds. Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity, and investment strategies.”
“If adopted, [the proposal] would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers. That will help protect investors and maintain fair, orderly, and efficient markets,” (our emphasis).
Critics say hedge funds can look after themselves
While those in favor of the proposal say private fund regulation has failed to keep up with rapid growth in the sector, there are those within the SEC itself who are more critical of the new rules.
In a statement issued on Wednesday, SEC Commissioner Hester Peirce called the demand for further information unnecessary and suggested that private fund investors were capable of assessing their own risks.
“Perhaps the blossoming of Form PF into a tool to scrape detailed information about private funds is simply part of a larger effort to ramp up regulation of the private markets,” said Peirce.
“As a result, costs for private fund advisers — and their investors — will increase and barriers to entry will grow higher, to the detriment of potential innovation, would-be new entrants, and investor returns.
She also criticized the idea that “a systemic risk shadow lurks behind every hedge fund activity.”
“The Commission should reject this narrative not to protect its regulatory prerogatives, but because the narrative is false and because any new authority exercised at the behest of the FSOC would likely look a lot like bank regulation,” suggested Peirce.
“Increasing bank-like regulation on private funds would impair their ability to serve the broader economy and eat away at one of their most important features — their ability to fail when the investment decisions they make do not pan out,” (our emphasis).