Wall Street’s top regulator is set to adopt new rules aimed at bolstering oversight of systemic risk in the burgeoning, multitrillion-dollar world of private equity and hedge-funds.
More than a year in the making, the new policy move from the U.S. Securities and Exchange Commission arrives as global regulators and markets digest this week’s near-death of Credit Suisse, which was among several banks that in 2021 posted staggering losses after lending billions to now-defunct family office Archegos Capital Management.
In an update to regulations first adopted in the wake of the global financial crisis, the SEC is due to vote March 22 on whether to adopt a proposed rule that would require notification from advisers to large privately-managed funds of events indicating “significant stress” or that could signal growing risk in the financial system.
As proposed in January 2022, the rule would require reporting of such events to the SEC within one business day. The SEC has yet to release the final version.
The Commission says it wants to fill “significant information gaps” for privately held assets that remain despite reporting requirements adopted under the 2010 Dodd-Frank Wall Street reform legislation following the 2008 financial crisis. The agency billed the new rule in part as a means of supporting the Financial Stability Oversight Council, a multi-agency risk-monitoring body also created under Dodd-Frank.
In the decade since, the gross value of assets under private management, traditionally subject to less monitoring and oversight than banks and public companies, has more than doubled to $20.1 trillion, according to SEC data, roughly equivalent to 80 percent of the US economy.
Along with the U.S. Commodity Futures Trading Commission, the SEC in August also proposed further amendments that, among other changes, would enhance how hedge funds report their exposures to investments, counterparties, and currencies and would require more detailed information about investment strategies.
Financial reform advocates have broadly endorsed the SEC’s effort, citing historic examples of shocks to the global financial system due to risk-taking by privately managed funds such as Archegos and the highly leveraged Long Term Capital Management. LTCM suffered huge sovereign bond losses in 1998 and reportedly had nearly $1 trillion in undisclosed positions with major investment banks, requiring a multibillion-dollar bailout arranged by the Federal Reserve Bank of New York.
Hester Peirce, a Republican member of the Commission, has opposed the proposal, branding it a needless departure from the SEC’s congressional mandate under Dodd-Frank that was unlikely to achieve its desired effects, a view shared by industry groups pushing for lighter regulation.
The proposal offered “scant evidence” that it would enhance FSOC’s monitoring for systemic risk, she said in dissenting remarks against the proposal, adding that it would likely become a tool “for government to micromanage private fund risk management.”