WASHINGTON — Federal regulators proposed measures that would significantly increase their visibility in private equity funds and some hedge funds, the first in a series of plans to expand supervision of private markets.
The Securities and Exchange Commission voted 3-1 to issue a proposal on Wednesday that would increase the amount and timeliness of confidential information that private equity and hedge funds report to the agency on a document known as Form PF. The main goal, chairman of the board Gary Gensler, is to allow regulators to better detect risks that are building up in private markets, and to step up an effort that started after the financial crisis in 2008.
The commission, in a meeting on Wednesday, also voted 3-1 to propose extended supervision of some trading platforms that match buyers and sellers of US government securities. The agency will seek comments on the proposals before completing the rules, a process that can take at least several months.
Hester Peirce, the commission̵[ads1]7;s sole Republican, voted against both proposals.
Net assets managed by private funds, which are only available to institutional investors or relatively wealthy individuals, rose to $ 11.7 trillion in the first quarter of last year from $ 5.3 trillion in 2013, SEC data shows. With the growth, there have been concerns from some decision-makers about the potential for invisible risks to accumulate in a corner of the market that is far less transparent than equity funds or listed companies.
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The SEC adopted Form PF as part of a regulatory overhaul following the financial crisis in 2008. It is currently filed by private equity funds and large hedge funds on an annual or quarterly basis with a 60-day lag. The form contains information such as net assets, loans and derivative holdings. The SEC and federal financial stability regulators then collect this confidential data in government reports.
“We have identified significant information gaps and situations where we would benefit from additional information,” Gensler said in a written statement, adding that regulators have nearly a decade of experience with Form PF data. “For example, we will benefit from more relevant information during rapid market events.”
Among other changes, Wednesday’s proposal will require large hedge funds to report within one business day on events such as extraordinary investment losses, large increases in margin requirements or defaults by large counterparties. Private equity funds will have to submit reports within one business day following events such as the removal of a fund’s general partner or the end of a fund’s investment period.
In addition, the proposal will reduce the threshold that triggers reporting as a major private equity adviser to $ 1.5 billion from $ 2 billion in total assets. It will also require such entities to provide more information about their use of leverage and their portfolio companies.
Peirce said the proposed changes would make Form PF a “tool for the government to micro-manage” private funds.
“A hedge fund that suffers a loss equal to or greater than 20% of its net asset value over the course of 10 days is undoubtedly significant for that hedge fund and its investors,” Peirce said. “But why is it appropriate or even wise for the Commission to insist on being notified of this within one working day? The fund adviser is guaranteed to have his hands full during such a hectic period, and will have little time left over to fill out public forms. “
The Managed Funds Association, which runs hedge funds in Washington on behalf of hedge funds, said it supports the SEC’s goal of gathering relevant data from market participants in a crisis.
“We want to study the details to ensure that this proposal is calibrated to gather information at the right interval and granularity without inadvertently capturing routine activity,” spokesman Noah Theran said in an email.
Gensler, who was nominated last year by President Biden, said Finance Minister Janet Yellen and Governor Jerome Powell highlighted the need for more up-to-date information on private funds during their first meetings with these officials.
“When I took office in April last year, it was very much on everyone’s minds,” he said, noting the rapid deterioration in the financial markets that had occurred at the start of the Covid-19 pandemic in March 2020. “There were dysfunctions. across different markets at the time. ”
The SEC chief has outlined several ways to address some Democrats’ concerns that private markets have become too large and risky over the past decade or so.
Last year, he said, the SEC is considering new rules to increase the disclosure of private equity firms and hedge funds to their investors about their conflicts of interest and sometimes opaque fee structures.
The agency is also working on a plan to require more private companies to routinely disclose information about their finances and operations, and potentially increase the amount of information that some non-public companies have to submit to the agency.
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