WASHINGTON – The United States Securities and Exchange Commission (SEC) wants to be let in on some of Wall Street’s most confidential information – and quickly.
In a first, the SEC is going to require big hedge funds to share with regulators major investment losses in near real time.
The rule, approved on Wednesday, marks a significant shift for an industry that tends to prize its secrecy. It also promises to add to businesses’ administrative headaches. Until now, funds have generally had to report positions in quarterly public filings.
The investing public, in theory, will not be any wiser. Only the SEC will be notified, privately, when significant losses occur. Just how that is going to work remains to be seen. Large hedge funds will have no more than 72 hours, or “as soon as practicable”, to tell the agency about extraordinary investment losses and major margin events.
The rule is part of a campaign by SEC chairman Gary Gensler to scrutinise private investment funds, whose wagers – both winning and losing – can reverberate through financial markets. SEC says the stepped-up reporting by hedge funds that oversee at least US$1.5 billion (S$2 billion) in assets will let Wall Street’s main regulator, as well as the Treasury Department and other agencies in Washington, get a handle on swift-moving events that may pose systemic risks.
“Private funds have evolved significantly in their business practices, complexity and investment strategies,” Mr Gensler said. “Private funds today are ever more interconnected with our broader capital market.”
SEC proposed in January 2022 allowing just one business day for hedge funds to disclose major events. The agency has dubbed these “trigger events” and, in addition to big losses, they can include things such as significant changes to prime-brokerage relationships, available cash or counterparty defaults. Losses exceeding 20 per cent in a short period would qualify, the regulator said.
Industry groups are already flagging concerns that the requirement to quickly report major events will pose its own operational challenges and could result in a deadline even shorter than the one-day period initially proposed.
Mr Bryan Corbett, president and chief executive of the Managed Funds Association, a trade group representing hedge funds, said in a statement: “While alternative asset managers do not pose systemic risk, we are sympathetic to efforts seeking to monitor risk throughout the financial system.”
He added that the group is concerned that the new rules may “exacerbate stress on funds, harm investors, and increase market volatility without commensurate benefit”.
Ms Jennifer Wood, global head of asset management regulation at the Alternative Investment Management Association, said in a statement: “Some triggering events will be difficult to pinpoint to a specific time from which the 72 hours will begin tolling, and the lack of a deadline on a business day increases the likelihood of filing deadlines occurring out of regular business hours or over weekends.”
Others lauded the SEC’s move.
Mr Stephen Hall, legal director and securities specialist at Better Markets, a Washington-based group that advocates tougher regulation, said in a statement: “The importance of this reform is clear.” Private funds “are investing in more diverse types of assets, with more interconnections to the financial markets”, he added.