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Wall Street watchdog unveils rule to improve quality of private, hedge fund disclosures

The seal of the US Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, DC, US, May 12, 2021. REUTERS/Andrew Kelly/File Photo

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WASHINGTON, Aug 10 (Reuters) – The US Securities and Exchange Commission (SEC) will vote to propose a rule that seeks to elevate the quality of disclosures it receives from large private and hedge funds, the agency said on Wednesday, confirming what a source previously told Reuters. read more

The rule, aimed to boost disclosures around leverage and investment strategies, will be proposed in conjunction with the Commodity Futures Trading Commission (CFTC), and forms part of ongoing scrutiny of the fund industry. read more

The measure would expand reporting requirements for advisors and large hedge funds with a net asset value of at least $500 million, the SEC said.

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It would also see such funds and their advisors spell out their investment strategy and exposure, including details around borrowing and financing arrangements with counterparties, open

positions and certain large positions, among other details.

“Such concentration or exposure may increase the risk of amplified losses for investors and gathering additional data … would help regulators to protect investors and monitor systemic risk,” SEC Chair Gary Gensler said in a statement.

The proposal is part of a broader effort by the SEC to boost transparency of the private fund industry amid worries the industry is a growing source of systemic risk, and follows a January draft rule that boosted other Form PF disclosures.

Form PF, which was introduced following the 2007-2009 global financial crisis, is the primary way private funds disclose purchases and sales of securities to the SEC.

Regulators have grown concerned over risk in the private industry after hedge fund de-leveraging contributed towards turmoil in the US Treasuries market in March 2020. Hedge funds were again at the center of last year’s GameStop (GME.N) “meme-stock” saga , analysts say. read more

Critics argue that while the sector has ballooned following the 2007-2009 financial crisis, regulatory scrutiny of private funds – which are heavy users of leverage – has not kept up.

The International Organization of Securities Commissions, which includes regulators across the world, said in a January report that some private fund leverage is being hidden from view.

The SEC’s proposal is subject to public consultation before it can be adopted.

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Reporting by Katanga Johnson in Washington; Edited by David Holmes

Our Standards: The Thomson Reuters Trust Principles.

Katanga Johnson

Thomson Reuters

Washington-based reporter covering US regulation at the Securities and Exchange Commission and the Consumer Financial Protection Bureau, previously in Ecuador, alumnus of Morehouse College and Northwestern University’s Medill School of Journalism.


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