SEC may require disclosure of hedge fund exposure

A company so-positioned can create risks for others with which it has dealings


May 07, 1999|By BLOOMBERG NEWS

WASHINGTON -- The U.S. Securities and Exchange Commission is considering a rule that would require all public companies to disclose their exposure to hedge funds, banks and other institutions that rely heavily on credit, an SEC official said yesterday.

"The material financial exposure of one market participant can create risks for those with which it has financial dealings," SEC market-regulation director Annette Nazareth told the U.S. House Banking Committee.

The SEC proposal is expected to have its biggest impact on banking companies and securities firms. The commission's efforts follow a recommendation in a report last week by an inter-agency group of federal regulators that examined the near-collapse of the Long-Term Capital Management LP hedge fund. That report called for stricter limits on leverage and greater disclosure by banks, brokerages and hedge funds.

Nazareth, who has been the SEC's top markets regulator since March, said the commission's proposal would require public companies to detail their exposure to "highly leveraged entities" in quarterly and annual regulatory filings.

The SEC plan "should help impose private market discipline on public companies," she said. This discipline, in turn, "could indirectly curb potentially risky exposures of unregulated entities, such as hedge funds, that borrow from or trade with those companies," Nazareth testified.

Nazareth was among several U.S. regulators who asked Congress yesterday for legislation giving them more power over hedge funds and affiliates of securities firms. U.S. Treasury Under Secretary Gary Gensler said Congress should expand regulators' authority to require reporting by hedge funds that aren't currently regulated, and by the unregulated affiliates of broker-dealers.

Regulators have been trying to limit the amount of lending between large financial institutions, which they blame for the size of Long-Term Capital's problems. They haven't called for direct regulation of hedge funds, which are largely unregulated investment companies that rely heavily on leverage and cater to the wealthy and institutional investors.

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