SEC Increases Disclosure Requirements for Private Equity, Hedge Funds

The SEC has finalized rules enhancing reporting requirements for hedge funds and private equity. The latest rule proposal process, which started in January 2022, means that private fund managers will have to deliver in greater detail and on shorter timelines information that might indicate risk or even danger to the financial system.

Hedge funds with at least $1.5 billion in assets under management will have 72 hours at most to report “certain events that we believe may indicate significant stress or otherwise serve as signals of potential systemic risk implications or as potential areas for inquiry so as to mitigate investor harm,” the SEC wrote. Such events include “extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, operations events, and certain events associated with redemptions.”

Private equity funds would have 60 days after the end of a quarter to report secondary market transactions and “general partner removals and investor elections to terminate a fund or its investment period.” Funds of more than $2 billion will also have additional annual reporting requirements, including strategies and use of leverage.

The deadlines are scaled back from the original proposal that would have required hedge funds to report within 24 hours and for private equity firms to report immediately on an event.

This follows on the heels of an action by the Treasury Department’s Financial Stability Oversight Council—the top financial regulators in government. The group has started its own rule process for increasing oversight on non-bank financial institutions.

Prompting these moves by regulators are growing concern that financial institutions weren’t paying attention to risk management—and also by expanding criticism of the regulators themselves.

“Regulators view ‘risk complacency’ by financial service companies as a potential threat to both stakeholder trust and safety and soundness,” wrote Amy Matsuo, principal and national leader of regulatory insights for KPMG US. “Companies must deliberately ensure that they are guarding against overconfidence—particularly during times of business, M&A, and innovative growth—by raising risk and compliance investment and voice.”

Ironically, KPMG was the auditor for Silicon Valley Bank, Signature Bank, and First Republic Bank and apparently “gave the banks’ financial statements a clean bill of health as recently as the end of February,” reported the Financial Times. The results were bigger than the 25 banks that collapsed in 2008, according to the New York Times. KPMG is particularly active in the banking world and bank audits accounted for 14% of its fees from public clients in 2021.

As for criticism of regulators, here is a recent example via the New York Times: “For years, federal regulators overseeing Silicon Valley Bank pointed out its many flaws using language whose impact appeared heavily blunted by technical jargon. They identified a slew of problems, but their findings lacked urgency. They gave the bank’s leaders long timelines to fix things, delivered overall safety and soundness ratings at a plodding pace and seemed unwilling to draw big conclusions about the many accumulating problems.”