One of the key elements of the Framework for Regulatory Reform outlined by Treasury Secretary Timothy Geithner in his testimony to Congress on March 26 was greater regulation of hedge funds and other private investment pools, including private equity and venture capital funds.
The Treasury Department recommends that all advisors of private investment funds with assets under management above a certain threshold be required to register with the SEC and the funds managed by such registered advisors should be subject to investor and counterparty disclosure requirements and heightened regulatory reporting requirements. The additional regulatory reporting would include a requirement to report on a confidential basis information necessary to assess whether the fund is so large or highly leveraged that it poses a threat to financial stability. The SEC would share such reports that it receives with the proposed systemic risk regulator. If a fund were deemed to pose a systemic threat, it would then become subject to capital and risk management requirements and other “prudential regulation” standards of the systemic risk regulator.
Treasury suggests a number of factors that should be considered in determining when an firm is “systemically important,” including (i) the financial system’s interdependence with the firm, (ii) size, (iii) leverage, and (iv) importance as a source of credit and a source of liquidity for the financial system. The determinations would be based on function rather than form. If implemented as laid out, the proposals could lead to significantly increased regulation of large private funds and their advisors.