A source previously told Reuters that the U.S. Securities and Exchange Commission SEC will vote on Wednesday to propose a rule that seeks to elevate the quality of disclosures it receives from large private and hedge funds.
The rule will boost disclosures around leverage and investment strategies and will be proposed in conjunction with the Commodity Futures Trading Commission CFTC, and will be part of ongoing scrutiny of the fund industry.
The SEC said that the measure would expand reporting requirements for advisors and large hedge funds with a net asset value of at least $500 million.
It would be nice to 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, amongst other details.
Such concentration or exposure could increase the risk of amplified losses for investors, and gathering additional data would help regulators protect investors and monitor systemic risk, SEC Chair Gary Gensler said in a statement.
The proposal is part of the SEC's effort to increase transparency of the private fund industry amid concerns that the industry is a growing source of systemic risk, and follows a January draft rule that boosted Form PF disclosures.
Form PF, introduced after the 2007 -- 2009 global financial crisis, is the primary way private funds disclose purchases and sales of securities to the SEC.
After hedge fund de-leveraging contributed to the turmoil in the U.S. Treasuries market in March 2020, regulators have grown concerned about the risks in the private industry. The GameStop meme-stock saga last year had hedge funds at the center of it, analysts say.
Critics argue that while the sector has ballooned after the financial crisis in 2007 -- 2009, regulatory scrutiny of private funds has not kept up.
In January of this year, the International Organization of Securities Commissions said in a January report that private fund leverage is being hidden from view.
Before it can be adopted, the SEC's proposal is subject to public consultation.