Investors will likely remember January 2021 when GameStop (NYSE:GME) soared to atmospheric heights, fueled by r/WallStreetBets. As a result of the short squeeze, funds like Melvin Capital were forced to cover their short positions and realize massive losses. After last year’s fiasco, the U.S. Securities and Exchange Commission is now proposing more transparent disclosures from hedge funds and private equity funds.
Yesterday, the SEC voted 3-1 to issue a proposal that would increase the amount and timeliness of information that is filed through a Form PF. Large hedge funds and private equity funds file a Form PF on an annual or quarterly basis. These filings currently have a 60-day lag. Furthermore, the SEC implemented the form after the 2008 financial crisis. It contains information such as “net assets, borrowings and derivative holdings.”
“We have identified significant information gaps and situations where we would benefit from additional information,” SEC Chair Gary Gensler said. “For example, we would benefit from more timely information during fast-moving market events.”
Hedge funds and institutional investors are largely against the proposal. Trillion-dollar money management firm BlackRock has already voiced its concerns. Furthermore, Jennifer Han of Managed Funds Association claimed that the proposal could create unnecessary volatility, “leading to situations similar to the GameStop market event.” A separate spokesperson for the Managed Funds Association voiced support for the SEC’s objectives with the proposal.
So, what else should investors know about the SEC’s latest proposal? Let’s jump right in.
SEC Form PF Proposal: 7 Things to Know
- During the first quarter of 2021, net assets managed by private funds rose to $11.7 trillion. In 2013, that figure was $5.3 trillion. Private funds are only accessible to institutional or other accredited investors.
- The SEC’s new proposal would require large hedge funds to file reports within one business day if the fund incurs certain incidents. These incidents include “extraordinary investment losses, large increases in margin requirements or defaults by major counter-parties.”
- Furthermore, private equity funds would have to file a report within one business day if the fund incurs a significant change, such as the removal of a fund’s general partner.
- The SEC’s proposal also includes increased short-selling transparency. Muddy Waters founder Carson Block is largely in favor of the proposal.
- Block added that the proposal would “mak[e] it easier to gauge skepticism about a company and its propensity to be driven upward in a short squeeze, GameStop being the modern day poster child.”
- Additionally, the SEC only requires short interest for individual stocks to be reported twice a month. Therefore, there is often a lag in this information.
- Finally, the new proposal would reduce the threshold that defines a large private-equity advisor from $2 billion to $1.5 billion.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.