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SEC increases reporting requirements for biggest hedge funds
Jan 26, 2011 by Charles Gubert
Advisers to the biggest hedge funds will face even more reporting requirements as the US Securities and Exchange Commission (SEC) continues to toughen up its regulatory oversight.
These most recent proposals will hit hedge fund, private equity and other private investment fund advisors working with assets of more than $1 billion.
The rules as stipulated by the Dodd-Frank Act will force advisors to give details on fund assets, leverage, investment positions, valuation and trading practices. Firms will be required to file this information to regulators on a quarterly basis.
The data acquired by the SEC will also be shared with the Financial Stability Oversight Council (FSOC) – the body tasked with monitoring potential systemic risks to the markets. This heightened reporting threshold will apply to approximately 200 US-based hedge fund advisors – however, the SEC said these individuals manage more than 80% of the assets under management.
“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 Schapiro
However, the move has been criticised by some industry experts claiming the SEC has been far too arbitrary in how it identifies the hedge funds supposedly posing a systemic risk to the markets. “I do not think hedge funds as an asset class pose a systemic risk,” said Holland West (pictured), a partner at Dechert law firm in New York.
While it is not theoretically impossible for a hedge fund to pose a systemic risk, the SEC’s $1 billion threshold does seem rather broad.
This requirement is also just another additional burden confronting the alternative asset management industry. The proposals outlined this week will most likely lead to further bureaucracy being imposed on fund managers.
“This is going to result in fund managers needing more infrastructure and an increase in compliance costs. There will also be people costs and systems and controls needed. This all adds to the cost of doing business and it increases the barriers to entry,” added West.
These latest costs will undoubtedly prompt continued consolidation among some of the smaller players in the hedge fund industry, he said.
However, West doubted the SEC would bother extending this regulation to incorporate the smaller managers because the government neither has the staff nor the resources to monitor all of these individuals. “They should not bite off more than they can chew,” warned West.
Furthermore, the renewed presence of the Republicans in the House of Representatives has certainly not helped the SEC’s cause – it is not a quiet secret that many oppose increasing the funding the regulatory body receives. This could potentially derail some of the SEC’s more ambitious plans.
