SEC’s Gary Gensler eyes disclosure from hedge funds, private equity

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, July 30, 2013.

Andrew Harrer | Bloomberg | Getty Images

Securities and Exchange Commission Chair Gary Gensler has kicked off an ambitious regulatory agenda — and his agency is pushing forward with key measures focused on hedge funds and private equity.

The federal agency is meeting on Wednesday to consider three new rules: more disclosure from hedge funds and private equity funds, more disclosure regarding cybersecurity risks and attacks, and shortening the date on which stock transactions must be settled, a fallout from the GameStop saga. 

There are more than 50 proposed rules that Gensler is considering this spring, one of the largest regulatory pushes by the SEC in decades.

More disclosure from hedge funds and private equity funds

Gensler wants more disclosure from private funds (hedge funds and private equity funds). In a speech in November, he noted that private funds (mainly private equity and hedge funds) had gross assets under management of $17 trillion and that many of the investors were state government pension plans, nonprofits and university endowments. As a provision of the Dodd-Frank Act of 2010, many private fund advisors were required to register with the SEC and to report information about their holdings through a so-called Form PF filing.

Gensler has said he wants to “freshen up” that Form PF filing and require additional disclosures, saying more information on what private funds are doing was critical to the SEC’s role of protecting investors. For example, he wants funds that have had “significant stress” (i.e., big losses) to report what has happened within one business day.  

The proposal also would decrease the reporting threshold for large private equity advisors from $2 billion to $1.5 billion in private equity fund assets under management

Gensler also wants more transparency around fees and expenses. He has noted that there has been little change in private fund expenses even as mutual fund and ETF costs have come down significantly, and that the average private equity fees were estimated to be 1.76% in annual management costs and 20.3% in performance fees in 2018 and 2019.

The SEC chair wants a quarterly statement to investors with a detailed accounting of all fees and expenses paid by the private fund during the reporting period; he also wants investors to be provided information regarding the private fund’s performance. Such information would not be available to the public.

The gist of this is that the changes would help to shine more light on fund performance and on whether private funds really do outperform public funds when all expenses are considered.

The proposal would also require an audit at least annually to check on private fund advisors’ valuation of the fund’s assets.

Cybersecurity risk management  

The SEC also wants more disclosure from companies regarding cybersecurity risks and attacks. Proposed changes would require advisors and funds to adopt written policies that are “reasonably” designed to address cybersecurity risks. They must also report significant cybersecurity incidents and maintain cybersecurity-related books and records.

The regulatory agency has said for years that significant cybersecurity incidents need to be disclosed, but it is getting more aggressive enforcing that requirement. Separately, the SEC has signaled it will also go after companies that are misleading investors about the extent of cybersecurity breaches. 

In 2021, for example, British publishing company Pearson PLC paid a $1 million fine to settle charges that it misled investors after a 2018 breach, in which millions of student records were stolen. Real estate services company First American Financial Corp. also paid a nearly $500,000 penalty for lack of disclosure after a vulnerability in its system exposed Social Security numbers and financial information.

Shortening the settlement-transaction date

Reducing the time between the execution of a trade and its settlement reduces risk. In 2017, the SEC shortened the date on which stock transactions must be settled from three business days after the trade date — known as T+3 — to two business days, or T+2. 

The SEC is now considering shortening the settlement cycle further, to one business day, or T+1. 

This became an issue during the GameStop saga in January 2021, when wild price swings in that stock caused clearinghouse deposit requirements to skyrocket for Robinhood. The retail broker halted purchases of the stock, causing a huge controversy.  

“It’s time for T+2 to go,” Robinhood CEO Vlad Tenev tweeted shortly after that incident almost brought the company down. 

The broad theme: more disclosure from everyone

Surveying the more than 50 rules that are currently proposed or being finalized by the SEC, Shane Swanson, senior analyst at Coalition Greenwich, expressed amazement at their breadth.

“This is an aggressive agenda from the SEC,” he told me.

Swanson noted a common thread: “The broad theme is more disclosure and more reporting — it’s driving across all these issues.”

He also noted that part of the aggressive agenda — such as the focus on payment for order flow and shortening the settlement cycle — is a result of the GameStop controversy, and that it is understandable for Gensler to want to move on these issues while they are still fresh in the public mind.

“They have a lot of ideas that have been kicked around for a while, and in particular they want to act while there is focus on some of these issues [because of GameStop], like moving the settlement cycle,” Swanson said. 

“So there’s a bit of ‘let’s make things happen’ while they still have the public’s attention,” he added.

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