What Do Private Equity Firms and Hedge Funds Think of SEC’s Push for more Data Disclosure

In today’s world, speed is the primary catalyst for business success. Across domains, verticals, and processes, rapid and transparent progress denotes an upward trajectory towards growth, and this stands true even in the world of compliance reporting.

US SEC seeking more Data Disclosure

In a new set of proposed rules, the SEC is looking to expand the amount of confidential information large funds must share with regulators, increase the speed with which they must share it, and boost the number of funds that fall under the reporting requirements. It feels that these rules are needed to enhance its ability to detect systemic risk, regulate the private funds industry and protect investors.

As opposed to reporting quarterly on annually, the new rules require Large PE funds to:

–     report any secondary transaction initiated by a fund’s adviser

–     certain general or limited partner clawbacks

–     the removal of a GP

–     termination of a fund’s investment period

–     the termination of a fund

–     provide information on fund strategies, use of leverage and portfolio company financings, controlled portfolio company borrowings, fund investments in different levels of portfolio company capital structures, and portfolio company restructurings or recapitalizations.

Among other significant events, large hedge funds are required to report:

–     if their net asset value drops 20% over 10 days,

–     if their margin increases 20% over 10 days

–     if they are unable to meet a margin or collateral call, and

–     if there is a redemption call that exceeds 50% of a fund’s value

For decades, regulators have been concerned about potential problems such as a fund not meeting margin calls. They expect this to start a chain of redemption calls resulting in a scramble by opposing parties to raise capital by selling assets. Instances of this happening before, such as Long Term Capital Management in 1998 and Archegos Capital Management in 2021stand as a testimony for potential problems to have ripple effects through the global financial system.

SEC believes that the new disclosure rules will cover events that could signal stress in the market, and accurate, timely reporting would facilitate easy containment of fallouts by regulators.

The SEC plans to use intel of a problem at one fund as an indication of problems at other funds in the same investment space indicating secondary effects such as increasing margin or redemption calls in other parts of the financial markets.

Similarly, for PE funds, the SEC said that being aware of GP clawbacks could give authorities time to intervene and be weary of systemwide failures.

While trade groups representing the private equity and hedge fund industries are not happy, they support SEC’s broad goal of obtaining timely and relevant information from market participants in a crisis.

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