The Securities and Exchange Commission voted to propose new regulations requiring private investment advisers, like private equity and hedge funds, to more frequently report to the government when they suffer large investment losses or redemptions and other adverse events.
The new proposal is the first in what analysts expect to be a busy year of rulemaking for the markets regulator, with Chairman Gary Gensler eager to expand the agency’s oversight to previously unregulated corners of the financial services industry, and to require public company disclosure of risks related to climate change, workforce diversity and management and cybersecurity.
The proposed regulation would require private funds to report within one business day when they suffer “certain extraordinary investment losses” and “significant margin and counterparty default events,” according to an SEC fact sheet. The rule would also require reporting of changes in cash levels, changes to relationships with a prime broker and major withdrawals or redemptions.
Current rules require private funds to report such information only on an annual or quarterly basis, depending on the size of the fund.
The rules are meant to enhance the capabilities of the Financial Stability Oversight Council, a consortium of financial regulators tasked with monitoring the overall health of the U.S. financial system. According to the fact sheet, the SEC’s “experiences with recent market events,” including the March 2020 COVID-related market turmoil and meme stock volatility in January of last year, “have highlighted the importance of receiving current and robust information from market participants.”
The SEC’s report on January 2021 volatility in meme stocks like GameStop GME, +4.94% and AMC Entertainment Holdings AMC, +1.81% said that hedge funds “were not significantly affected by investments in [GameStop] and other meme stocks” and that private funds didn’t experience liquidity or counterparty issues.
“I support this proposal because, if adopted, it would help federal regulators to assess systemic risk,” Gensler, a Democrat, said in a statement. “It would also bolster the commission’s oversight of private fund advisers and the protection of investors in those funds.”
The SEC also voted to propose a rule that would increase oversight of communication platforms that facilitate off-exchange securities trades, typically used in the markets for bonds and some derivatives.
Companies like MarketAxess Holdings Inc. MKTX, -2.93% and Tradeweb Markets Inc. TW, -2.30% offer services that enable users to communicate prices at which they will buy and sell securities, but these services don’t fall under the same regulatory scrutiny as national exchanges or alternative trading systems, and the new rule, if adopted, would eliminate this loophole.
Wednesday’s proposals are likely just the first in a slew of new regulations the SEC will seek to implement this year, according to Owen Tedford, research analyst at Beacon Policy Advisors.
“These rulemakings are just the tip of the iceberg for Gensler,” he wrote in a Wednesday note to clients. Gensler has “made clear that he has a more ambitious to-do list he is hoping to achieve in 2022, including changes to when investors have to report that they have acquired 5% or more of a public company’s stock and bringing cryptocurrency exchanges under the SEC’s regulatory purview,” Tedford added.
The SEC’s rulemaking agenda also indicates the agency could move to regulate index providers like S&P Global Inc. SPGI, +1.44% and MSCI Inc. MSCI, +2.92%, require companies to disclose risks related to climate change, workforce management and cybersecurity and to update rules on special purpose acquisitions companies.