Speech by SEC Chairman:
Opening Statement — SEC Open Meeting: Private Fund Systemic Risk Reporting
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
January 25, 2011
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on January 25, 2011.
Today, the Commission will take up three matters.
First, we will consider a proposal requiring investment advisers to private funds, to provide information to assist the Financial Stability Oversight Council in assessing the systemic risk that these funds may pose.
Second, we will consider a proposal to conform the existing definition of “accredited investor” to recent legislative changes.
And third, we will consider adopting new rules concerning shareholder votes on executive compensation and “golden parachute” arrangements.
All three of these items stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Systemic Risk Reporting
We begin by considering whether to propose for comment, rules that would require registered investment advisers to private funds to provide the SEC with information to be shared with the Financial Stability Oversight Council. The Council would use that information in assessing the systemic risk profile of those advisers and the funds they manage.
The Commission would propose this rule jointly with the CFTC, which will be considering it at an open meeting tomorrow.
Today’s proposal stems from the lessons learned during the recent financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure will cascade through the entire financial system.
The Dodd-Frank Act sought to address this issue, in part, by creating the Financial Stability Oversight Council to carry out this role and by requiring the SEC to collect information from private fund advisers, to inform the Council in its assessment of systemic risk.
For hedge funds, private equity funds and liquidity funds, the information required would be “tiered” so that we would receive more detailed information from larger private fund advisers, rather than imposing the same reporting requirements on all private funds.
While the group of large private fund advisers is relatively small in number, it represents a large majority of private funds’ assets under management. For instance, the rule would require heightened reporting from hedge fund advisers managing at least $1 billion in hedge fund assets. And, although this heightened reporting threshold would apply to only about 200 U.S.-based hedge fund advisers, these advisers manage more than 80 percent of the assets under management.
Similarly, SEC staff estimates that there are approximately 250 U.S. based private equity fund advisers managing over $1 billion in private equity fund assets, representing approximately 85 percent of the U.S. private equity fund industry.
In addition, under the proposal, we would require less information from advisers managing large private equity funds than the large hedge fund and liquidity funds advisers. This is because, after a review of available literature and consultation with staff representing FSOC members, it appears that the activities of private equity funds likely present less potential risk to U.S. financial stability than hedge funds. However, information about those activities could be important to the assessment of systemic risk in the broader financial system.
Today’s proposal would also create a new form — Form PF — for collecting the information intended to give regulators new insight into private fund activities that have the potential to create systemic risk.
The data collection we propose will play an important role in supporting the framework created by the Dodd-Frank Act and is designed to ensure that regulators have a view into any financial market activity of potential systemic importance.
Proposed Form PF is the result of extensive consultation with staff of the other FSOC members. And, it grew out of the close collaboration between the SEC, FSOC members and international regulators, including those from the United Kingdom and Hong Kong, as well as with IOSCO.
Such coordination is important because, collectively, hedge fund advisers based in the U.S., the U.K. and Hong Kong are estimated to represent over 92 percent of global hedge fund assets. As a result, consistency among these jurisdictions will facilitate the sharing of consistent and comparable information for systemic risk assessment purposes, and minimize the burdens on the hedge fund industry.
Much of the information to be collected on Form PF tracks questions contained in the surveys of large hedge fund advisers currently conducted by the U.K.’s Financial Services Authority and other IOSCO members.
While this proposal builds on past thinking and international regulatory efforts, it lays out a new form of information collection for the SEC, and as such, public comment will be particularly important in refining any final private fund systemic risk reporting requirements. As such, the public comment period will remain open for 60 days to give industry participants, economists, academics, investors and others, time to assess the proposal and consider the numerous questions on which we solicit input.
Before hearing more details from the staff about this proposal, I would like to thank those who worked hard to put this proposal together. This rulemaking had a truly cross-divisional core team: from the Division of Investment Management, Bob Plaze, David Vaughan, Sarah ten Siethoff, and David Bartels; from the Division of Trading and Markets, Chris Arnold; and from the Division of Risk, Strategy and Financial Innovation, Harvey Westbrook. This group was assisted by Jennifer McHugh, Tram Nguyen, Daniele Marchesani, Dan Kahl, Keith Kanyan, Rick Sennett, and Jaime Eichen in the Division of Investment Management; David Becker, Meridith Mitchell, David Blass, Lori Price, and Jill Felker in the Office of the General Counsel; Bruce Kraus in the Division of Risk, Strategy, and Financial Innovation; Gene Gohlke and Jim Reese in the Office of Compliance Inspections and Examinations; Robert Kaplan, Bruce Karpati, Brian Fitzpatrick, and Igor Rozenblit in the Division of Enforcement; Gregg Berman in the Division of Trading and Markets; and Troy Beatty and Shauna Steele in the Office of International Affairs.
I also want to thank my colleagues on the Commission and our counsels for their contributions.
Now I’ll turn to the staff to hear more about their recommendation.