In order to increase transparency within the $20 trillion market activity, the Securities and Exchange Commission (SEC) established new amendments mandating advisers to hedge and private funds to disclose events that could suggest systemic risk or investor harm.
The amendments, which the SEC announced on Wednesday, will mandate that all private fund advisers and large hedge fund advisers with more than $1.5 billion in assets under management submit information on Form PF "upon the occurrence of certain reporting events that could indicate significant stress at a fund or investor harm," according to the SEC. The information provided on Form PF is confidential and is only used by regulators.
Large hedge fund adviser reporting events "include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions," the SEC stated. The rule also mandates that advisers to significant private equity firms disclose information "relating to these firms’ strategies, use of leverage, and clawbacks of a general partner’s performance compensation or a limited partner’s distributions," according to a statement from SEC Chair Gary Gensler.
Gensler noted that under present regulations, advisers to hedge funds and private funds are only required to submit periodic reports to the SEC. According to an SEC fact sheet, the new amendments require private equity fund advisers to file reports within 60 days after the end of each fiscal quarter and major hedge funds to do so within 72 hours of reporting events.
The SEC and the Treasury-led Financial Stability Oversight Council will receive "more timely information about large hedge funds that may indicate investor harm or present systemic risk, as well as about private equity funds that may indicate investor harm," as a result of the disclosures made by the hedge fund and private fund sectors.
After receiving feedback from the sector, the agency revised its initial January 2022 proposal for changes to the Form PF reporting requirements. The SEC agreed to extend the one-business-day reporting deadline for triggering events for both hedge funds and private funds.
The modifications go into effect six months after the adopting release is published in the Federal Register. These changes to Form PF are separate from another set of suggested changes to the same form's requirements that the SEC and Commodity Futures Trading Commission jointly published in August 2022. These changes are still being processed.
According to Gensler, the value of private funds has increased thrice over the past ten years, approaching the size of the U.S. commercial banking industry. Making such monies visible is "ever more important," he said.
The industry's representative, the Investment Adviser Association (IAA), expressed its displeasure with the manner in which the reforms have been implemented, even though it supports the SEC's efforts to monitor and assess systemic risk and strengthen investor protection.
The proposed revisions were deemed "overbroad" by the IAA, which also claimed that authorities were "requesting information that will not meaningfully assist in systemic risk monitoring."
The six-month compliance deadline was challenged by the IAA as being "unreasonably and unrealistically short" in light of the complexity of the new requirements. Additionally, the IAA had urged the SEC to approve all the Form PF requirement amendments at once so businesses could evaluate how they would affect their operations.
In a statement, SEC Commissioner Mark Uyeda referred to the modifications as a "fishing expedition on private funds" and stated that he and colleague Republican Commissioner Hester Peirce opposed their ratification.
"If anything, today's amendments will merely serve as a trigger to initiate enforcement actions or targeted examinations against private funds," he warned.
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