The Blubber

The U.S. Securities and Exchange Commission (SEC) has adopted a new rule that requires large hedge funds to privately inform regulators within three days of experiencing significant investment losses or major margin events. The regulation, which was approved by a majority of the SEC's five commissioners on Wednesday, enhances oversight of major hedge funds by providing regulators with an almost real-time view of significant events at fund managers overseeing at least $1.5 billion in assets. Additionally, private equity firms will be subject to new reporting requirements.

The move is part of SEC Chair Gary Gensler's broader effort to increase regulatory scrutiny of the rapidly expanding private funds industry. The enhanced reporting is intended to enable the SEC, the Treasury Department, and other government agencies to monitor and respond to fast-moving developments that could pose systemic risks to the financial system. Gensler noted that private funds have become increasingly complex and interconnected with the broader capital market.

The SEC initially proposed in January 2022 that hedge funds should disclose major events within one business day. Such "trigger events" could include substantial losses, significant changes in prime-brokerage relationships, shifts in available cash, or counterparty defaults. Losses exceeding 20% within a short timeframe would meet the criteria, according to the regulator.

The push for increased oversight of private fund managers has been a long-standing policy goal of Democratic lawmakers, including Senator Elizabeth Warren of Massachusetts. The drive to accelerate the current quarterly filings, known as Form PF, gained momentum following the trading volatility caused by the Covid-19 pandemic and the influx of retail investment into stocks like GameStop Corp. in early 2021.

Hedge funds and private equity firms have consistently resisted the SEC's efforts to expand the scope of confidential data disclosure, citing concerns about the potential release of proprietary information through data breaches or other mishaps. The forms contain highly sensitive information and are handled by a limited number of SEC staff.

The new rule also mandates that private equity firms promptly disclose certain trigger events, such as the removal of a general partner and specific fund terminations. Additionally, larger firms with at least $2 billion in assets under management must provide more detailed information about their investment strategies, leverage usage, and general partner compensation.

The rule was approved by the SEC's three Democratic members, while the two Republican members voted against it.

In a separate development, the SEC approved changes to enhance the disclosure requirements for public companies regarding their stock buyback programs. Investors will receive aggregated information on daily repurchase activity on a quarterly or semiannual basis. The SEC believes these changes will enable investors to assess whether stock repurchases are being used to enhance shareholder value or to benefit company executives.