The Securities & Exchange Commission (SEC) is proposing an amendment to a rule that would require private equity funds and hedge funds to disclose more information about their investments and assets to better surveil systemic risks.
The proposal would require certain advisers to hedge funds and private equity funds to report key events, and enhance reporting requirements for large private equity and liquidity fund advisers.
“With this final rule, regulators will gain transparency into an important sector of the financial marketplace to better assess risk to the overall system,” SEC Chair Gary Gensler said.
Specifically, the SEC proposal would expand reporting requirements for large hedge funds’ investment exposure and open investment positions, including reporting on exposures to different types of assets in order to offer insight into a fund’s portfolio concentration and large exposures to any specific assets. In particular, authorities are looking for funds to break out digital asset strategies.
In addition, the proposal would expand reporting requirements on large hedge funds’ borrowing and financing arrangements with counterparties, including central clearing counterparties.
The amendments, which are being proposed jointly with the Commodity Futures Trading Commission (CFTC), are a reporting tool used by these agencies and the Financial Stability Oversight Council (FSOC) to monitor systemic risk in the financial system.
'Far better transparency'
The action comes after Congress mandated the SEC and the CFTC following the Financial Crisis to consult with FSOC to create reporting requirements for advisers to private funds to offer more transparency for regulators to protect against systemic risks.
The SEC is taking action in this specific area of the financial sector as private funds have grown some 90% since 2010 to $20 trillion worth of assets, and are poised to surpass the size of the commercial banking system, which weighs in at $23 trillion.
Gensler said that if trends continue, then the private funds sector will become larger than the commercial banking sector.
According to the chair, the SEC was also moved to take action on this now rather than later given the uncertainty in the markets in the first six months of this year following Russia's attack on Ukraine and central banks around the world beginning to raise interest rates. The SEC is focused on the relationship between hedge funds and their brokers or banks and what the risks are right now given that uncertainty, he added.
Crypto is a key area where regulators would gain visibility and oversight should the proposal be signed into legislation.
"We don't currently have the visibility that we would if we had this proposal,” Gensler told reporters on Wednesday. “If we were able to finalize and adopt [this], we would get far better transparency, though not to the level that a bank examiner would have.”
Additionally, the SEC has deemed it appropriate to break out exposure to crypto and crypto assets on any balance sheet and liability side as a separate category, and not for funds to account for crypto under cash and cash equivalents on the balance sheet.
“We know Bitcoin is very different than cash, than U.S. dollars,” Gensler said.
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