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SEC Proposal Would Require More Transparency From Hedge Funds and Private Equity

January 27, 2022 Blog

After a hedge fund blows up or a private equity fund tanks, many investors are left wondering what happened to their investment.

For example, burned Long Term Capital Management, Bernie Madoff and the Bear Stearns Hedge Fund investors were left wondering for years about the cause of their investment losses.

Investors will now get more daylight on these investments thanks to the Securities and Exchange Commission (SEC).

The SEC’s Proposal

This week, the SEC voted 3-1 to issue a proposal 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. According to SEC Chairman Gary Gensler, their main goal is to allow the securities regulator to better understand the operations and strategies of private funds for purposes of gauging their implications for financial stability.

According to a Wall Street Journal report, net assets managed by private funds, which are accessible only to institutional and high net worth individuals, rose to $11.7 trillion in the first quarter of last year from $5.3 trillion in 2013, SEC data show. This unprecedented growth has raised concerns from some policymakers about the potential for unseen risks to accumulate in a corner of the market that is far less transparent than mutual funds or publicly traded companies.

Chairman Gensler said in a written statement that the SEC “identified significant information gaps and situations where we would benefit from additional information,” adding that regulators have nearly a decade of experience with Form PF data. “For example, we would benefit from more timely information during fast-moving market events.”

Among other changes, the SEC’s proposal would require large hedge funds to file reports within one business day of incidents such as extraordinary investment losses. Private-equity funds would have to file reports within one business day of events such as removal of a fund’s general partner or termination of a fund’s investment period. Further, the proposal would reduce the threshold that triggers reporting as a large private-equity adviser to $1.5 billion from $2 billion in assets under management. It would also require such entities to provide more information about their use of leverage and their portfolio companies.

Providing more information to investors in real-time is a much-needed improvement and could potentially help them avoid some of the pitfalls of the past.