US private funds face more disclosures under new SEC rule

Hedge funds and private equity firms would be forced to disclose more about potentially risky events to the US Securities and Exchange Commission under a rule set for approval on Wednesday, one of several measures aimed at an industry under intensified regulatory scrutiny.

The five members of the SEC will vote on whether to enact requirements for private fund managers to share additional information about events that may signal stress or systemic risk.

As first drafted last year, the proposal drew opposition from fund industry lobbyists. But SEC chair Gary Gensler said the additional visibility granted by the regulation “will help protect investors and promote financial stability”.

He highlighted the rapid growth of the private fund industry, whose gross assets are collectively valued at up to $25tn, larger than the total assets of US commercial banks at $23tn. The industry was “ever more interconnected with our broader capital markets”, Gensler said.

The vote comes as the SEC has sharpened its focus on risks among private funds, with Gensler seeking more visibility on how bets by hedge funds and other parts of the shadow banking system can bleed into other asset classes and the real economy.

If adopted, the disclosure rule would change a form that certain funds file with the SEC, to force hedge funds with at least $1.5bn in assets under management and private equity firms to report “trigger events”. These disclosures would have to be made within 72 hours of such an event for the former and quarterly for the latter.

The rule was softened from the SEC’s initial proposal, which would have required large hedge funds to report extraordinary losses or margin calls within one day and private equity firms to report developments including removals of general partners at the time the events occurred.

The measure under consideration on Wednesday would also force private equity firms with at least $2bn in assets to provide more information in their annual reports, including on fund strategies. The SEC raised the reporting threshold to $2bn from the $1.5bn initially proposed.

The private fund industry had pushed back against the initial proposal. The Managed Funds Association, the US hedge fund trade group, said in a letter that the proposal would “impose significant new operational burdens” because funds would have to build or tweak systems to gather and monitor information daily.

The MFA also raised concerns that the SEC had not assessed how the proposal would coexist with a separate rule the agency jointly proposed with the Commodity Futures Trading Commission last year, which would broaden disclosure on items such as large hedge funds’ investment exposure or private equity firms’ fund performance.

The SEC has also proposed a rule that would require registered private fund advisers to share quarterly statements with investors, including detailed records of all fees and expenses — a point of contention in the industry — as well as performance.

The SEC on Wednesday will also vote on whether to adopt a measure that would increase disclosure requirements for corporate share repurchases. The draft final rule would force companies to disclose buybacks quarterly or every six months, instead of one day after the purchases as initially proposed, the SEC said.