The new disclosure rules for hedge funds proposed by the CFTC and SEC this week are much better than I would have expected.
For one thing, it's nice to see the Commodity Futures Trading Commission and the Securities and Exchange Commission jointly drafting rules, instead of creating their own sets of regulations that would inevitably conflict in the details. This is a much harder task than you might think, since the rules had to be vetted by the staffs of every commissioner on the CFTC and the SEC, and then approved by a majority of the commissioners at each agency. As it turns out, every single commissioner at the SEC and the CFTC approved the rules.
The rules make a decent attempt to not burden smaller funds with too much red tape. Funds under $1 billion will only have to file annual reports containing basic information about their strategy, performance, counter-party credit risk and leverage. While these filings no doubt will be initially expensive for smaller funds, I'm sure that the various hedge-fund compliance groups will be able to more or less commoditize the practice of filing the new Form PF.
The largest funds — those with over $1 billion under management — will be required to make quarterly filings, including details of their trading and investment positions. While it will no doubt irk some of hedge fund managers to have to make this kind of disclosure to anyone, this really isn't too onerous a task. Any well-managed fund should already be able to easily and accurately document its trading and investment positions. If they cannot do this, something is wrong with the way the fund is being managed.
The only real objection I have is that I doubt the information will be used intelligently. The regulators won't be able to share the information with the public, which means that they will have to rely on internal experts to evaluate whether a fund or group of funds is creating a systemic risk. There is zero evidence that regulators have any competence in doing this.
I'm afraid that this will be another exercise in the government assuming that the collection of data will lead to better understanding, when in fact it does nothing of the sort. That, in turn, might lead to the illusion that regulators are keeping an eye on systemic risk while it bubbles up right beneath their noses.
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