By Chris Matthews
The agency is voting on Wednesday to ask for private funding to improve reporting
Securities and Exchange Commission Chairman Gary Gensler said Tuesday that the growing importance of hedge funds and private equity funds to the U.S. economy requires tighter federal oversight of the sector, a day before the SEC announces adoption of a corresponding proposal, private funds should vote to report important market events immediately.
“The private fund industry plays an important role in every sector of capital markets,” Gensler said in a speech to the Managed Funds Association, which represents wealth managers. He noted that these funds now manage $25 trillion in assets, making the industry larger than the entire $23 trillion banking industry.
“History is replete with times when shocks in one corner of the financial system or at one financial institution spill over into the broader economy,” he added. “When that happens, the American public – bystanders on the financial highways – will inevitably be hurt.”
Gensler also noted that recent tensions in the regional banking sector (RRE) show that systemic risk can lurk in places regulators don’t anticipate, further increasing the need for timely information on market dynamics.
The speech comes a day before the SEC is scheduled to vote on whether to pass new rules that would require hedge funds and private equity funds to quickly report events that indicate significant strains on the fund that harm investors or could pose a risk to the wider financial system.
It also follows a recent vote by the Financial Stability Oversight Council, made up of the heads of the top US financial regulators and chaired by US Treasury Secretary Janet Yellen, to propose new regulations that would make it easier for the FSOC to treat a non-bank entity like a private company designate funds as “systemically important” and are therefore subject to stricter oversight by the Federal Reserve.
Read more: Yellen proposes tougher rules for non-banks that could ‘threaten the financial system’
Citing the example of Long Term Capital Management, a hedge fund that went bust in 1998 while serving at the Clinton Treasury Department, Gensler pointed to the difficulties he and Federal Reserve officials faced, the potential systemic impact of his Failure to understand because it lacked reporting requirements.
“The range of private funds today is 25 times bigger” than it was in 1998 when LTCM failed, Gensler said. “It is closely linked to the commercial banking system.”
The Dodd-Frank financial reform legislation, passed after the 2008 financial crisis, required the SEC to collect information about the private funds industry and share that information with the FSOC, as part of the government’s effort to improve coordination among financial regulators to promote the identification of finance stability risks.
The FSOC rule passed last month opens the door for the government to designate a hedge fund or private equity fund as systemically important, although the industry would likely challenge such a move in court.
“Alternative money managers do not pose systemic risk and are already subject to the SEC’s robust regulatory framework,” said Brian Corbett, president and CEO of the Managed Funds Association, in a statement following the FSOC announcement.
“The MFA is carefully reviewing the proposed analytical framework and legal entity nomination process presented today to ensure that systemic risk is properly considered and non-systemic risk legal entities are not consulted.”
– Chris Matthews
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
(ENDS) Dow Jones Newswires
05-02-23 1440ET
Copyright (c) 2023 Dow Jones & Company, Inc.
Comments are closed.