SEC and CFTC Propose Amending Hedge Fund Reporting Rules to Include ‘Crypto Exposure’

US financial regulators are considering amending reporting rules for large hedge funds to include data on their crypto exposure. Prompted by the recent collapse of the crypto market, the US Securities and Exchanges Commission (SEC) and Commodity Futures Trading Commission (CFTC) on Wednesday issued a proposal to “enhance private fund reporting” by making changes to Form PF.  The form, created after the 2008 economic downturn, provides regulators with the information needed to spot potential stability risks in the investment world.

The regulators proposed that investment advisors to private funds of $500 million and above have their reporting form amended. This would require that hedge funds report exposure to digital assets under a specific category other than “cash and cash equivalents”. The commissions cited the increase in hedge funds since the introduction of the form as the reason for the proposed amendment. Key among the changes in the industry has been investing in digital assets prompted by the mainstream adoption of cryptocurrencies. Access to the strategies employed and the level of exposure of hedge funds to these assets could aid the Financial Stability Oversight Council (FSOC) in better assessing potential economic risks.

“In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds. Since then, though, the private fund industry has grown in gross asset value by nearly 150 per cent and evolved in terms of its business practices, complexity, and investment strategies,” said SEC Chair Gary Gensler. “I am pleased to support the proposal because, if adopted, it would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers. That will help protect investors and maintain fair, orderly, and efficient markets.”

According to a Fact Sheet attached to the proposal, since the introduction of Form PF, the number of private funds has increased by almost 55% as of Q3 of 2021.  Market research firm IBISWorld reports that there are 3,841 hedge funds based in the United States as of this year. According to the PwC Global Crypto Hedge Fund Report for 2022, 38% of traditional hedge funds surveyed revealed that they have invested in digital assets, an increase from 21% a year ago. The report also states that there are currently over 300 crypto hedge funds worldwide whose total assets under management (AuM) were $4.1 billion in 2021. While 57% of traditional hedge funds surveyed had less than 1% of their AuM in digital assets, it is worth noting that 20% of digital assets represent between 5% and 50% of their AuM. Additionally, about 67% of those with investments in digital assets revealed intentions of investing more in the asset class by the end of this year.