The US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have jointly approved new regulations which will require hedge funds to confidentially disclose more information about their investment strategies to watchdogs on a quarterly basis, including on investments, borrowing and counter-party exposure, according to a report by Bloomberg.
The rules regarding Form PF, which mostly applies to hedge funds with net asset values of at least $500m, were first proposed in 2022. Information collected via Form PF can be used as part of enforcement actions and to assess broader market risks, and will contribute to the efforts of the Financial Stability Oversight Council, according to the SEC.
Hedge funds will be required to disclose more information about operations and strategies and to report separately on each component of a fund.
They must also separately report details on their crypto investment strategies, which the regulators have set apart from reporting on cash and cash equivalents.
The new regulation also outlines more “granular” categories for credit strategies including litigation finance, which are investments that involve funding lawsuits.
Finally, the requirement for large managers to report aggregated information about the hedge funds they advise, which the SEC said “can obscure the data about hedge funds, including by masking the directional exposures of individual funds”, has been dropped.
Just days before, the new regulation had encountered a legal obstacle in the form of a lawsuit — National Association of Fund Managers v Securities and Exchange Commission, 23-60471, US Fifth Circuit Court of Appeals (New Orleans) — filed by industry groups including the American Investment Council.
The SEC’s Chair, Gary Gensler, has overseen an unprecedented drive for transparency in an industry known for its secrecy, the need for which he has attributed to funds having grown much larger and their structures more complex since the confidential filings were first required after the 2008 financial crisis.
In a statement, Gensler said that regulators “have identified gaps in the information we receive from private fund advisers. The adoption also furthers investor protection efforts.”
The Managed Funds Association (MFA), which represents hedge funds, described the new regulation as “misguided” in the belief that it would counterintuitively harm regulators’ ability to monitor risks.
The MFA’s President and CEO, Bryan Corbett, said: “The broad, undisciplined request for data will put sensitive proprietary investment strategies at risk, drive industry consolidation, and increase the cost of investing for the beneficiaries of alternative asset managers, including pensions, foundations, and endowments.”
The new regulation has also attracted criticism from Republicans at both the SEC and CFTC. Caroline Pham, a Commissioner at the CFTC, said that the joint rule will “create a flood of new information of dubious utility that will generate too much noise” and make it difficult to assess real risk. Pham and a Commissioner at the SEC, Mark Uyeda, also expressed concern about the scope and security measures of the data-sharing arrangement between the two regulators.