SEC wants more from hedge funds, private equity

In an effort to enhance investor protection and systemic risk oversight, the U.S. Securities and Exchange Commission (SEC) is proposing to increase regulatory reporting requirements on hedge funds and other private fund advisers.

If the SEC’s proposed rule amendments are implemented, advisers with large hedge funds and private equity funds would have to start filing reports following events that signal “significant stress” for the fund, or pose risks to the financial system.

The revisions would also lower the reporting threshold for private equity advisers from US$2 billion in assets under management to US$1.5 billion. They would also increase the reporting requirements on the sector in order to give the SEC greater insight into systemic risk.

The private fund industry has grown and evolved since the existing reporting requirements were first introduced, SEC chair Gary Gensler said, commenting on the proposals. Gensler added the SEC, along with the U.S. Financial Stability Oversight Council, now have almost 10 years experience analyzing the information collected under the existing reporting requirements.

“We have identified significant information gaps and situations where we would benefit from additional information,” he said.

“Among other things, today’s proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events,” he said.

Conservative SEC commissioner Hester Peirce, criticized the proposal as a fundamental shift from the purpose of the reporting requirements. Peirce said there’s no evidence that it will enhance regulators’ ability to monitor for signs of systemic risk.

“A regulator’s desire for data is insatiable, but more data is not always better,” she said in a statement.

“Merely citing gaps in data is not enough. There will always be gaps — or at least I hope there will always be gaps — in just what information the government can access on private activities. But we must ask: is our desire to fill these gaps born of necessity or curiosity? I judge it to be the latter,” she said.

However, commissioner Caroline Crenshaw defended the proposal, calling it “… an important step that seeks to put the commission and FSOC in a better position to understand, assess, and take action regarding significant developments at private funds, potential stresses to the broader financial markets, and practices that raise potentially significant investor protection concerns.”

The proposals will go out for a 30 day comment period once they are formally published.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.