Gary Gensler, SEC Chair, seeks additional information on hedge funds and private equity activities.

• Gary Gensler, the SEC Chair, is driving forward with significant measures concerning hedge funds and private equity.
• The SEC is currently considering over 50 rules this spring, which represents one of the largest regulatory initiatives in recent history.
• The agency also wants more disclosure from companies regarding cybersecurity risks and attacks.

Gary Gensler, the Securities and Exchange Commission Chair, has commenced a comprehensive regulatory plan, with a focus on hedge funds and private equity.

On Wednesday, the federal agency will discuss three potential rules: increased transparency from hedge funds and private equity funds, enhanced cybersecurity risk and attack disclosure, and accelerated stock transaction settlement dates, resulting from the GameStop scandal.

The SEC is currently considering over 50 rules this spring, which represents one of the largest regulatory initiatives in recent history.

More disclosure from hedge funds and private equity funds

Private funds, including hedge funds and private equity funds, have gross assets under management of $17 trillion, with many investors being state government pension plans, nonprofits, and university endowments. As per the Dodd-Frank Act of 2010, private fund advisors are required to register with the SEC and report information about their holdings through a Form PF filing.

Gensler has stated that he intends to revise Form PF filing and request additional disclosures, emphasizing the importance of providing more information on private funds' activities to aid the SEC in safeguarding investors. Specifically, he wants funds that have experienced "significant stress" (i.e., substantial losses) to disclose what transpired within one business day.

The proposal aims to lower the reporting threshold for large private equity advisors from $2 billion to $1.5 billion in private equity fund assets under management.

Gensler has observed that private fund expenses have remained relatively unchanged, despite a significant decrease in the costs of mutual funds and ETFs. The average annual management fees for private equity were estimated to be 1.76% and 20.3% in performance fees in 2018 and 2019, respectively.

The SEC chair requires a quarterly statement from private funds that includes a comprehensive accounting of all fees and expenses paid during the reporting period, as well as details on the fund's performance. This information would not be accessible to the general public.

To provide more insight into the performance of private funds and their ability to outperform public funds when all costs are taken into account, the changes would be beneficial.

An audit of private fund advisors' valuation of the fund's assets should be conducted annually as part of the proposal.

Cybersecurity risk management

The SEC is proposing changes that would require companies to disclose more information about their cybersecurity risks and attacks. These changes would require advisors and funds to adopt written policies that are designed to address cybersecurity risks, report significant cybersecurity incidents, and maintain cybersecurity-related books and records.

The regulatory agency has long required significant cybersecurity incidents to be disclosed, but is now becoming more strict in enforcing this requirement. Meanwhile, the SEC has indicated that it will also investigate companies that mislead investors about the extent of cybersecurity breaches.

In 2021, Pearson PLC, a British publishing company, paid a $1 million fine to settle charges of misleading investors following a 2018 data breach that exposed millions of student records. Meanwhile, First American Financial Corp., a real estate services company, paid nearly $500,000 in penalties for failing to disclose information after a vulnerability in their system exposed Social Security numbers and financial information.

Shortening the settlement-transaction date

Shortening the time between the execution and settlement of stock transactions reduces risk. In 2017, the SEC reduced the settlement date from T+3 to T+2, which means that stock transactions must be settled two business days after the trade date.

The SEC is considering shortening the settlement cycle to one business day, or T+1.

In January 2021, the GameStop saga resulted in a surge in clearinghouse deposit requirements for Robinhood, prompting the retail broker to halt purchases of the stock, sparking a significant controversy.

Robinhood CEO Vlad Tenev tweeted that it was time for T+2 to end shortly after the incident that almost destroyed the company.

The broad theme: more disclosure from everyone

Shane Swanson, senior analyst at Coalition Greenwich, was astonished by the extensive range of more than 50 rules currently being proposed or finalized by the SEC.

He informed me that the SEC's agenda was hostile.

Swanson observed a recurring pattern: "The overarching theme is increased disclosure and reporting, which is influencing all the issues."

Gensler's focus on payment for order flow and shortening the settlement cycle is a result of the GameStop controversy, and it is understandable for him to want to address these issues while they are still fresh in the public mind.

Swanson stated that they have several ideas that have been discussed for a while, and specifically, they want to take action on certain issues, such as moving the settlement cycle, due to the attention brought by GameStop.

He added, "Let's seize the moment while the public is still paying attention."