The Securities and Exchange Commission (SEC) voted Wednesday to issue a pair of proposals that would increase the volume and timeliness of information that certain segments of the market must disclose, in order to provide more transparency and a deeper understanding of potential risks.
One proposal would require private equity funds and some hedge funds to report more information about their finances more frequently, an effort to increase transparency in a sector of the market worth an estimated $11 trillion. The other proposal would require more platforms that bring buyers and sellers together to trade securities to register with the SEC as either exchanges or broker-dealers.
Changes to Form PF as part of the first proposal would allow the SEC and the Treasury-led Financial Stability Oversight Council to better understand the risks major disruptions in the private markets might pose to the U.S. financial system, according to the agency.
“Among other things, today’s proposal would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection, such as extraordinary investment losses or significant margin and counterparty default events,” said SEC Chair Gary Gensler in a press release.
Proposed amendments to the requirements for Form PF include lowering the threshold of hedge funds that must file the form to those controlling $1.5 billion in assets (as opposed to $2 billion) and dramatically increasing the number of times private funds must provide financial disclosures to regulators.
As it stands, private funds are currently required to file Form PF “months after their quarter- and year-ends, depending on the size and type of private funds they advise,” according to an SEC fact sheet. The proposed rule would require private funds to file Form PF within one business day following the occurrence of certain events, including “extraordinary investment losses, significant margin and counterparty default events, material changes in prime broker relationships, changes in unencumbered cash, operations events, and events associated with withdrawals and redemptions.”
Other events that would trigger filing Form PF include “adviser-led secondary transactions, implementation of general partner or limited partner clawbacks, removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund,” the fact sheet said.
The SEC would also amend Form PF to require private funds to provide “more information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations,” the fact sheet said.
Hester Peirce, the SEC’s lone Republican commissioner, was the only one to oppose the proposal. She criticized the changes as government’s attempt to “micromanage private fund risk management.”
“A hedge fund suffering losses equal to or greater than 20 percent of its net asset value over the course of  days is unquestionably a significant turn of events for that hedge fund and its investors, but why is it appropriate or even wise for the Commission to insist on being notified of this within one business day?” she asked in a statement explaining her opposition. “Surely the fund adviser will have its hands full in such a fraught period and will have little time to spare to fill out government forms.”
Gensler said the way the Form PF reporting regime is currently structured creates “significant information gaps and situations where we would benefit from additional information.”
“For example, we would benefit from more timely information during fast-moving market events such as the March 2020 dysfunction in the Treasury market,” he said in a statement.
The second proposal would bring more alternative trading systems (ATS) that trade Treasuries and other government securities under the regulatory umbrella, building on a proposal first put forward in September 2020.
Regulation ATS currently exempts alternative trading systems that limit securities activities to government securities from having to register with the SEC, according to an agency fact sheet. The new rule proposes to eliminate that exemption, requiring such trading platforms to register with the SEC as either exchanges or broker-dealers.
Requiring these platforms to register with the SEC would also bring them under Reg SCI, which is geared to strengthen the technology marketplace of the U.S. securities markets. The rule currently applies to stock exchanges, clearinghouses, self-regulatory organizations, and more.
The newly registered platforms would also be required to comply with the Fair Access Rule, “which provides for fair access to platforms and would prohibit platforms from making unfair denials or limitations of access,” the SEC said.