Business

U.S. SEC to propose new rule boosting hedge, private fund leverage disclosures

The U.S. Securities and Exchange Commission (SEC) will propose a new rule on Wednesday aimed at boosting hedge and private fund leverage disclosures, among other details, according to a source familiar with the agency’s thinking.

The proposal by the Wall Street regulator would require funds to provide more information on leverage as part of their confidential “Form-PF” disclosures, the person said, adding that the measure would also apply to fund advisers who operate as commodity investors and traders under Commodity Futures Trading Commission rules, the person said.

The proposal is part of a broader effort by the SEC to boost transparency of the private fund industry amid worries the industry is a growing source of systemic risk, and follows a January draft rule that boosted other Form PF disclosures.

Form PF, which was introduced following the 2007-2009 global financial crisis, is the primary way private funds disclose purchases and sales of securities to the SEC.

Regulators have grown concerned over risk in the private industry after hedge fund de-leveraging contributed toward turmoil in the U.S. Treasuries market in March 2020 and hedge funds were again at the center of last year’s GameStop (GME.N) “meme-stock” saga, analysts say.

Critics argue that while the sector has ballooned following the 2007-2009 financial crisis, regulatory scrutiny of private funds — which are heavy users of leverage — has not kept up.

Wednesday’s rule is expected to boost the level of detail large private-fund and hedge advisors must spell out around their use of leverage, the same source said.

The SEC declined to comment. Reuters could not immediately determine what further changes the SEC rule would include.

Leverage is a financial technique generally used to increase investment exposure and ramp up returns, but it can also exacerbate losses.

The International Organization of Securities Commissions, which comprises regulators across the world, said in a January report that some private fund leverage is being hidden from view.