In the US, regulators increase pressure on hedge funds

• Hedge Funds
• Insights

Not since the introduction of the Dodd-Frank Act in the aftermath of the financial crisis have hedge funds faced such deep regulatory opprobrium. New proposals from the US Securities and Exchange Commission (SEC) released in October are expected to ramp up the pressure on the industry even further, as Linear Investments explains:

The industry faces yet another squeeze

The SEC is taking a notably tougher stance on hedge funds and has been for several years now. In 2022, the SEC tightened up its Form PF reporting rules by forcing hedge fund (and private equity) managers to disclose information about key events (i.e. major losses, sudden modifications to prime brokerage relationships, etc) to the regulator within one business day of them happening.

The SEC is taking action on the industry once again, with the introduction of new transparency obligations around short selling and securities lending.

So what does this mean in practice?

Under the SEC’s proposals, hedge funds (plus other major investors) will need to provide details about their gross short positions every month, if their shorts go above a certain threshold. Reporting will be triggered if a hedge fund reaches a $10 million average short position during an individual reporting month, or a 2.5% gross short position relative to the total shares outstanding.

Once the SEC has received the information, it will aggregate the data and publish it on a delayed basis. Although industry bodies are not against the idea of making aggregated short position data publicly available, they argue the requirements will add to the already substantial workloads at hedge funds.

Securities lending is also coming under SEC scrutiny

Under the SEC’s proposals, institutions which lend out their securities (i.e. large investors, brokers, money managers, etc.) will need to provide information about these transactions (e.g. time of loan, fees, the company whose securities are out on loan, etc.) to a Registered National  Securities Association (RNSA).  Once received, the RNSA will then publish the data. The SEC believes this will improve transparency and efficiency in the securities lending market.

With mounting regulation, funds need more outsourced support

While these disclosure requirements are coming from the US regulator, their impact is felt globally during a sensitive time for hedge funds, as their operating costs continue to rise, amid challenging return conditions.

Working with an experienced prime broker – which has extensive understanding of regulation and its implications for the industry – will be vital if managers are to grow their businesses and raise capital, wherever they are transacting business across the globe.

The Linear team has global experience at a local level and can support and guide our clients to be agile, working to support transactional needs efficiently and effectively. Contact one of the team at www.linearinvestment.com to discuss your requirements and how we can support you.

References:
Bloomberg – October 13, 2023 – Hedge funds get new SEC mandate for reporting short sales