SEC regulatory blitz begins with proposals to tighten rules on hedge funds and private equity

The Securities and Exchange Commission has voted to propose new regulations requiring private investment advisers, like private equity and hedge funds, to report more frequently to the government when they experience significant 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 unseen sectors. financial services industry and to require public companies to disclose risks. related to climate change, workforce diversity and management, and cybersecurity.

See also: The SEC’s next regulatory target could be index providers

The proposed rule would require private funds to report within one business day when they experience “certain extraordinary investment losses” and “significant margin and counterparty default events,” according to a fact sheet from the SEC. The rule would also require reporting of changes in cash levels, changes in relationships with a prime broker, and large withdrawals or redemptions.

Current rules require private funds to report this information only on an annual or quarterly basis, depending on the size of the fund.

The rules aim to bolster the capabilities of the Financial Stability Supervisory Board, 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 COVID-related market turmoil of March 2020 and stock volatility even in January of last year, “highlighted the importance of receiving current and solid information from market participants. ”

The SEC report on the January 2021 volatility of meme stocks like GameStop GME,
and AMC Entertainment Holdings AMC,
said hedge funds “were not significantly affected by investments in [GameStop] and other meme stocks” and that the private funds have not encountered liquidity or counterparty issues.

Read more: SEC proposes tougher rules on insider trading and stock buybacks

“I support this proposal because, if passed, it would help federal regulators assess systemic risk,” Gensler, a Democrat, said in a statement. “It would also strengthen 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 communications platforms that facilitate off-exchange securities transactions, typically used in the bond and some derivatives markets.

Companies like MarketAxess Holdings Inc. MKTX,
and Tradeweb Markets Inc. TW,
offer services that allow users to communicate the prices at which they will buy and sell securities, but these services do not fall under the same regulatory oversight 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 series of new regulations the SEC will seek to implement this year, according to Owen Tedford, research analyst at Beacon Policy Advisors.

“These rules are just the tip of the iceberg for Gensler,” he wrote in a note to clients on Wednesday. Gensler “clarified that he has a more ambitious to-do list he hopes to achieve in 2022, including changes to when investors must report that they have acquired 5% or more of a public company’s stock and bring cryptocurrency exchanges under the regulatory jurisdiction of the SEC,” Tedford added.

The SEC regulatory program also indicates that the agency could decide to regulate index providers like S&P Global Inc. SPGI,
and MSCI Inc. MSCI,
requiring companies to disclose climate change, workforce management and cybersecurity risks and updating rules on special purpose acquisition companies.

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