SEC, CFTC propose large hedge funds provide more financial disclosure

On Wednesday, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jointly proposed large hedge funds (with net asset value of $500 million or more) provide more detailed and granular financial information on Form PF than they have been required to since the form was established in 2011 by the Dodd-Frank Act.

The information collected on Form PF provides regulators with insights into the private fund industry, which had an estimated net asset value of $20 trillion in the fourth quarter of 2021, per the SEC. Those required to file would be SEC-registered investment advisers to large hedge funds, as well as entities registered to the CFTC as commodity pool operators or commodity trading advisers.

The information on large hedge funds collected through Form PF is not made public but is provided to the Financial Stability Oversight Council, which uses it to protect investors and monitor systemic risk.

In its press release, the SEC said it proposed hedge funds disclose information on “investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure reporting, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio correlation, portfolio liquidity, and financing liquidity to provide better insight into the operations and strategies of these funds and their advisers and improve data quality and comparability.”

Hedge funds would have to disclose basic information on the advisers and private funds they advise, as well as information on the “investment strategies, counterparty exposures, and trading and clearing mechanisms employed by hedge funds,” the SEC said.

The joint proposed rules said over 10 years of assessing the data provided by Form PF, the regulators have “identified information gaps and situations where revised information would improve our understanding of the private fund industry and the potential systemic risk within it.”

The rules would not apply to family offices like Archegos Capital Management, infamous for its March 2021 meltdown in which the fund suffered $8 billion in losses in two weeks. Archegos, operated by billionaire Bill Hwang, fell into an exempted category of hedge funds because it provided investment advice about securities to family members and was wholly owned and exclusively controlled by family members or entities. Such firms have not been required to file Form PF, and that does not change under the new proposal.

SEC Chair Gary Gensler, in a statement about the proposal, said the new rules would “bring greater visibility for regulators into an important part of our capital markets. That will help protect investors and maintain fair, orderly, and efficient markets.”

CFTC Commissioner Christy Goldsmith Romero said in a statement the rules would “increase the usefulness of the data collected; to ensure that it is actually used as Congress intended to bring transparency to risk previously hidden.”

The regulators have allotted a 60-day comment period that starts when the proposed rules are published in the Federal Register.

In February, the SEC separately proposed hedge funds and private equity funds provide detailed information on fees, expenses, and performance on a quarterly basis.

Opposition to Wednesday’s proposed rules is expected to be fierce, particularly among the hedge fund industry and Republican regulators.

SEC Commissioner Hester Peirce said in a dissenting statement the information the two regulatory bodies seek falls into the “nice to know, rather than need to know variety.” She added, “Acquiring every missing piece of data about private funds is not necessary for us to do our jobs.” Peirce wondered whether the proposal was “simply part of a larger effort to ramp up regulation of the private markets.”

In a dissenting statement, CFTC Commissioner Caroline Pham called the proposed rules “overly broad obligations that would be unnecessarily burdensome and would present potentially significant operational challenges and costs without a persuasive cost-benefit analysis.”