SEC to Weigh Hedge Fund Rule on Systemic Risk Data Analysis

Date: Friday, October 21, 2011
Author: Jesse Hamilton, Bloomberg

Hedge funds and private-equity funds will be asked to deliver “extraordinary amounts” of new data to the U.S. Securities and Exchange Commission under a rule set for a vote next week, said SEC Chairman Mary Schapiro.

Under the version of the rule proposed by the SEC on Jan. 26, firms managing more than $1 billion would have to file quarterly information on fund assets, leverage, investment positions, valuation and trading practices on a new Form PF. That added oversight would also come with routine inspections.

“We have high hopes for the Form PF data,” Schapiro said today at a Managed Funds Association meeting in New York. The form was a requirement in last year’s Dodd-Frank Act, and Schapiro said the information will help her agency and the Financial Stability Oversight Council “understand where the risks are in the financial system.”

The January proposal described how the regulators will use the new data to assess whether a firm threatens to destabilize the financial system, as in the 1998 collapse of Long Term Capital Management LP. The SEC is set to vote on the final version of the Form PF rule Oct. 26.

Separately, Dodd-Frank requires the SEC to set up registration rules for private fund advisers. The registration, adopted in June, requires the reporting of “census-like data” on employees, investors and assets they manage. Unlike the registration data, the Form PF information wouldn’t be public.

Short-Selling

Also today, Schapiro said the SEC wouldn’t consider short- selling bans such as those being weighed in Europe. So-called naked short selling, in which traders bet on an investment’s decline but don’t borrow shares as in regular shorting, was temporarily limited by the SEC in the 2008 credit crisis.

“I can’t envision the SEC doing another short-selling ban,” she said.

Schapiro also cautioned hedge funds to make sure they have “robust compliance policies” in light of recent insider- trading cases involving funds’ dealings with expert networks, such as in the conviction and July sentencing of former SAC Capital Advisors LP portfolio manager Donald Longueuil to a 30- month prison sentence.

“We’re right in the middle of so many cases and investigations,” Schapiro said, adding that funds should be “extraordinarily careful.”

She said there is a “pretty bright line” between legitimate research and insider information and crossing it “absolutely undermines confidence in the integrity of our marketplace.”

--Editors: Lawrence Roberts, Maura Reynolds

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.