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MFA Highlights Significant Concerns with SEC Proposed Rules for Security-Based Swaps and Form PF

Bryan Corbett: “We have significant concern that the SEC is moving forward with its regulatory agenda without regard for the interoperability or consistency of its numerous proposed rules.”

WASHINGTON, DC – Managed Funds Association (MFA), the trade association for the hedge fund and global alternative investment industry, submitted three comment letters to the Securities and Exchange Commission (SEC) today that generally support the overarching goals of the agency while underscoring the significant, negative ramifications of the agency’s approach to the oversight of U.S. capital markets.

“We have significant concern that the SEC is moving forward with its regulatory agenda without regard for the interoperability or consistency of its numerous proposed rules. The comment period deadlines are entirely too short to allow stakeholders to fully collect and analyze the great deal of information necessary for providing full input on proposals that will fundamentally change the private funds industry. As currently written, these rules will have unintended consequences for the U.S. capital markets that will harm investors,” said Bryan Corbett, President & CEO of Managed Funds Association.

Further detail about the comment letters is included below.

SEC Proposed Rule 10B-1

The SEC’s proposal requires market participants to publicly report, in an entirely new regime, security-based swaps positions as low as $150 million in gross notional value on a next-day basis.

In the letter, MFA highlights that public disclosure of security-based swaps positions would harm investors, impair market activity, and impede capital formation without improving the quality of information available to market participants or enhancing the integrity of the markets. From the letter:

“Public disclosure of SBS positions, especially within the time periods and at the relatively low thresholds the Proposal imposes, will further impair price discovery and liquidity in the U.S. equity markets.”

“Proposed Rule 10B-1 will significantly burden market participants, far in excess of any potential benefit, by requiring the public disclosure of proprietary investment positions and trading strategies, and by imposing extraordinary operational compliance requirements, which many market participants will simply be unable to satisfy, particularly in light of the proposed reporting thresholds and timeline requirements.” 

The letter also explains that the current rule would likely result in a significant number of market participants limiting their use of security-based swaps or exiting the security-based swaps market altogether, which will reduce liquidity and undermine our capital markets. From the letter:

“This approach will result in significant costs to market participants and the SBS markets (as well as related securities markets) and could result in a number of market participants exiting the market or significantly reducing their SBS positions. This will, in turn, result in reduced liquidity in SBS markets, increased costs of capital for issuers, and generally increased systemic risks.” 

MFA’s comments to the SEC on the proposed rule 10B-1 can be found here.

SEC Proposed Amendments to Form PF

The SEC’s proposed rule would require large hedge fund advisers and private equity fund advisers to file reports within one business day to the SEC upon the occurrence of certain events, including an investment loss greater than 20% of a fund’s NAV, significant margin and counterparty default events, and changes to prime broker relationships.

In the letter, MFA underscores that, while supporting the broad goal of obtaining timely and relevant information from market participants in a crisis, the breadth and scope of the proposed rule risks inadvertently capturing routine activity and creating an unnecessary and unintended burden on certain asset managers. MFA also stresses that the one-business-day filing requirement is challenging and imposes unnecessary burdens to fund advisers. From the letter:

“We believe such expedited reporting would inadvertently contain a significant amount of misleading and inaccurate information being presented and a high number of ‘false positives,’ in either case greatly diminishing the value of the data for monitoring and assessing risk.”

“The one-business-day reporting will also divert an adviser’s executive, legal, and compliance resources away from addressing the significant event to protect its investors, which is its first obligation as a fiduciary.”

MFA’s full comments to the SEC on the proposed amendments to Form PF can be found here.

SEC Proposed Rule 9j-1

The SEC’s proposed rule seeks to address potential misconduct in securities-based swaps markets, including fraud and manipulation.

In the letter, MFA highlights that, while we support the objective, the broad nature of the proposed rule will inadvertently capture good-faith, legitimate activity. From the letter:

[W]e believe that re-proposed Rule 9j-1 will deter market participants from entering into security-based swap transactions that are necessary or appropriate for their hedging or other portfolio objectives in order to avoid potentially exposing themselves to liability merely for performance of their contractual obligations.

MFA’s comments to the SEC on the proposed rule 9j-1 can be found here.

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About the Global Hedge Fund and Alternative Investment Industry

The global hedge fund and alternative investment industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of $4.3 trillion (Q2 2021). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.

About the Managed Funds Association

Managed Funds Association (MFA) represents the global hedge fund and alternative investment industry and its investors by advocating for regulatory, tax, and other public policies that foster efficient, transparent, and fair capital markets. MFA’s more than 150 member firms collectively manage nearly $1.6 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time. MFA has a global presence and is active in Washington, London, Brussels, and Asia. www.managedfunds.org