Big Hedge Funds need to Report big Losses within 72 hours
The US Securities and Exchange Commission (SEC) has approved a new rule that requires large hedge funds to report significant investment losses to regulators within 72 hours. Prior to the recent rule change, hedge funds were only required to report their positions in quarterly public filings. The move marks a significant shift for the hedge fund industry, which values its privacy. The SEC’s increased reporting requirements aim to improve oversight of private investment funds, whose bets can affect financial markets. The new reporting requirement will apply to hedge funds that manage at least $1.5 billion in assets, allowing regulators to identify systemic risks in a timely manner.
SEC Chair Gary Gensler has proposed the rule as part of a campaign to scrutinise private investment funds, whose business practices, complexity, and investment strategies have evolved significantly. The new rule will require hedge funds to notify regulators of any “trigger events,” which include major investment losses, significant changes to prime-brokerage relationships, available cash, or counterparty defaults. If the losses incurred by a hedge fund exceed 20% in a short amount of time, it would meet the criteria for significant investment losses that must be reported to the SEC within 72 hours or as soon as practically possible.
Industry groups have raised concerns about the rule, stating that it will pose operational challenges and result in shorter deadlines than the initially proposed one-day period. Private funds have been reluctant to expand the type of data they must disclose, arguing that it contains proprietary information that could be vulnerable to data breaches. Nevertheless, the SEC has stated that it is focused on cybersecurity and that confidential market information has been handled since the SEC’s founding.
The SEC’s push to increase reporting requirements has been supported by Democratic lawmakers, including Massachusetts Senator Elizabeth Warren, who has long sought to expand oversight over private fund managers. The trading turmoil after the onset of Covid-19 and the influx of retail investors into stocks such as GameStop Corp. in early 2021 has added urgency to the SEC’s efforts to scrutinise private investment funds.
