The Securities and Exchange Commission (SEC) has recently implemented new registration requirements for hedge funds and high-frequency traders in an effort to better monitor the market for U.S. government debt. This move by regulators aims to protect the public, promote market integrity, and facilitate capital formation. However, it has sparked a confrontation with the industry, with concerns being raised about potential instability and investment companies fleeing the market.
The new rules require many private funds to register with the SEC as dealers, subjecting them to various laws and rules. SEC Chair Gensler emphasized the importance of meeting minimum capital requirements and reporting data to ensure market stability. These requirements are part of a broader effort by the Biden administration to stabilize the Treasury market, following another rule adopted in December that mandates more government-debt trades to be centrally cleared.
However, the private funds industry, high-frequency trading firms, and their allies in Congress have expressed concerns about the potential consequences of these rules. They fear that investment companies may choose to leave the market for U.S. Treasuries, leading to greater instability. In a letter to Gensler, Sen. Bill Hagerty and Rep. French Hill expressed their worries that the new rule could worsen liquidity strains in the market for U.S. government debt.
This confrontation between the SEC and the private fund industry has become increasingly combative. The Managed Funds Association (MFA), representing alternative asset managers, has filed two lawsuits against the SEC for rules related to short sale disclosures and the disclosure of quarterly performance, fees, and expenses for private equity and hedge funds. While the SEC did make some changes to the initial proposal, such as removing a provision that would have required registration as a broker-dealer based on trading volume, concerns remain about the potential impact on alternative asset managers.
MFA CEO Bryan Corbett praised the SEC for dropping the quantitative trigger but expressed concern about potential harm to his members’ investment activities. He stated that alternative asset managers are not dealers and questioned whether the rule adequately excludes them and private funds from being regulated as dealers.
The SEC estimates that the new rule will require over 43 entities to register as dealers. However, the crypto industry is also raising concerns about the potential consequences of a change in the legal definition of securities “dealer.” They argue that this change could encompass a wide range of crypto traders who provide liquidity on decentralized digital asset exchanges.
In conclusion, the SEC’s implementation of new registration requirements for hedge funds and high-frequency traders has sparked a confrontation with the industry. While regulators believe these rules will enhance market monitoring and stability, concerns have been raised about potential instability and companies leaving the U.S. Treasury market. The private fund industry and the crypto industry are both voicing their concerns and seeking clarity on the impact of these rules. The outcome of this confrontation will likely have significant implications for the regulation and operation of these sectors in the future.
