SEC Proposes Hedge Fund Reporting Rule

by Glen Shapiro, LawAndTax-News.com, New York

28 January 2011

The United States Securities and Exchange Commission (SEC) has proposed a rule to require advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the US financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established the FSOC for the purpose of monitoring risks to the stability of the US financial system. Working with other regulators, the FSOC will gather information from many sectors of the financial system for this purpose.

In order to assist the FSOC in this process, the Dodd-Frank Act directs the SEC to collect information from advisers to hedge funds and other private funds as necessary for the FSOC's assessment of systemic risk. The SEC’s present proposal therefore creates a new reporting form to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on the form would remain confidential.

"The data collection we propose will play an important role in supporting the framework created by the Dodd-Frank Act and is designed to ensure that regulators have a view into any financial market activity of potential systemic importance," said SEC Chairman Mary L. Schapiro.

Under the proposal, larger private fund advisers managing hedge funds, unregistered money market funds ("liquidity funds") and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with USD1bn or more in hedge fund, liquidity fund or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would not be subject to the heightened reporting requirements.

Although this heightened reporting threshold would apply to only about 200 US-based hedge fund advisers, these advisers manage more than 80% of the assets under management.

The proposed form is the result of extensive consultation and collaboration between the staff of the SEC and other FSOC members. This collaboration followed on earlier work with international regulators, including the United Kingdom’s Financial Services Authority and other members of the International Organization of Securities Commissions, to conform hedge fund regulatory reporting standards.

Smaller private fund advisers would file the form only once a year and would report only basic information regarding the private funds they advise. This would include information regarding leverage, credit providers, investor concentration and fund performance. Smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms.

Large private fund advisers would file the form on a quarterly basis and would provide more detailed information than smaller advisers. They would report on an aggregated basis information regarding exposures by asset class, geographical concentration and turnover. In addition, for each managed hedge fund having a net asset value of at least USD500m, these advisers would report certain information relating to that fund's investments, leverage, risk profile and liquidity.

Large private equity fund advisers would respond to questions focusing primarily on the extent of leverage incurred by their funds' portfolio companies, the use of bridge financing, and their funds' investments in financial institutions.

The US Commodity Futures Trading Commission (CFTC) will also approve similar reporting requirements for private fund advisers that are registered with the SEC and also with the CFTC as commodity pool operators or commodity trading advisors. Such advisers would also be required to file a similar form.

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