US Regulatory Authorities Look to Increase Hedge Funds’ Transparency and Stability
In early February 2024, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) announced new disclosure rules. These rules will apply to hedge funds and to managers of other private funds, with the aim of increasing their stability and transparency.
The purpose of the rules is to improve the regulatory authorities’ oversight of the private funds market, which has grown exponentially in recent years and currently manages about USD 26 trillion.
Highlights of the New Regulations
The new rules will amend Form PF, the quarterly disclosure form for private funds that has been in effect since 2011. They will take effect one year after their promulgation in the Federal Register.
The company will disclose the new information the rules require confidentially to the regulatory authorities. These disclosure will apply to SEC-registered hedge fund managers who manage at least USD 500 million and to fund managers registered with the CFTC as “commodity pool operators” or as “commodity trading advisers.”
Under the new rules, managers of large hedge funds must disclose information about their activities and strategies and provide additional details about their investments, including with regard to:
- The countries and industries in which they are invested, leverage exposures, counterparty exposures (the risk that the counterparty to a financial transaction will not fulfill its obligations), foreign currency exposure, clearing risks, liquidity, and other risk indicators.
- The hedge funds’ complex corporate structures, i.e., structures in which funds pool US and non-US investors’ funds in a single “master fund” by using various designated “feeder funds.”
Implications of the Regulations
In the private market, stakeholders hold divided opinions about this regulation. On the one hand, there are those who argue this is a reasonable regulation under the circumstances because, due to the enormous volume of these funds, instability in them could affect the entire market.
On the other hand, representatives of the hedge funds argue that the new disclosure requirements will not only not assist regulators in their mission, but will impair the regulators’ ability to monitor systemic risks in the American financial system due to the overload of confusing and irrelevant information.
Although the regulation poses new challenges for the fund industry, its main goal is to enhance transparency and ensure the stability of the financial market. Nevertheless, the opposition from fund managers raises questions about the effectiveness of the new rules and their impact on regulators’ ability to monitor systemic risks effectively.
In addition, it will be interesting to see how this new regulation will affect and be affected by the SEC’s relatively new regulation, the private fund adviser rules.
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Adv. Roy Engel, the head of Barnea Jaffa Lande’s funds practice, is available to answer questions about the new regulation and any other questions.