Bryan Corbett: “The Proposal exceeds the SEC’s legal authority and is only supported by inadequate economic analysis that uses flawed data. The Proposal risks driving liquidity out of security-based swap markets, harming alternative asset managers and their investors, including pensions, foundations, and endowments, who rely on these markets to mitigate risk. The SEC should instead align the Proposal with its proposed short sale disclosure rule by introducing an aggregated and anonymized public disclosure regime that would achieve its objectives without harming U.S. capital markets.”
WASHINGTON, DC – Managed Funds Association (MFA) demonstrated how the approach the U.S. Securities and Exchange Commission (SEC) took in its proposal requiring public disclosure of large security-based swap (SBS) positions (Rule 10B-1) is critically flawed in a supplemental comment letter submitted to the SEC today.
MFA’s letter is in response to the SEC reopening the comment period on the Proposal following the release of new analysis from the SEC’s Division of Economic and Risk Analysis (DERA). MFA commissioned an expert analysis by NERA Economic Consulting (NERA) to evaluate the DERA analysis. The NERA report finds that the DERA analysis suffers from serious analytical flaws and does not justify the establishment of a publicly attributed reporting regime for SBS positions as contemplated in the Proposal.
Based on the NERA analysis, MFA concludes that the SEC adopting a final Rule 10B-1 based exclusively on the DERA analysis will fall short of its statutory requirements under the Administrative Procedure Act (APA) and its own guidance for economic analysis in rulemaking. MFA also argues that, as proposed, Rule 10B-1 is prohibited under the major questions doctrine as it would be an unprecedented intervention by the SEC in the SBS market without explicit authorization from Congress.
“The Proposal exceeds the SEC’s legal authority and is only supported by inadequate economic analysis that uses flawed data,” said Bryan Corbett, MFA’s President and CEO. “The Proposal risks driving liquidity out of security-based swap markets, harming alternative asset managers and their investors, including pensions, foundations, and endowments, who rely on these markets to mitigate risk. The SEC should instead align the Proposal with its proposed short sale disclosure rule by introducing an aggregated and anonymized public disclosure regime that would achieve its objectives without harming U.S. capital markets.”
MFA’s letter reiterates the concern from previous comment letters that publicly revealing SBS positions in the short time periods and at very low thresholds required by proposed Rule 10B-1 will hurt price discovery and liquidity in US capital markets. The Proposal will make it more expensive or impossible for market participants to hedge using SBS and would likely cause many market participants to stop participating in the SBS market completely. MFA recommends instead implementing aggregated and anonymized public reporting of positions exceeding reasonable thresholds indicative of large directional exposures. MFA argues this would achieve the SEC’s stated goals while avoiding the detrimental impacts of public disclosure.
More details from the NERA analysis are below:
Adopting the rule based on the DERA analysis would violate the APA because the report does not adequately analyze the rule’s economic impact. From the NERA analysis:
“If the SEC were to adopt a final Rule 10B-1 based on the economic analysis in the DERA Report, it would not fulfill its obligations under the Administrative Procedure Act (“APA”) to assess to the best of its ability the economic consequences of proposed Rule 10B-1. Specifically, the DERA Report is lacking in more robust methods of data analysis, such as statistical testing to evaluate the significance of results and comparative tools that consider the variety of investment strategies and investor types.”
MFA’s comment letter is available here. The NERA analysis is in Appendix B.
About the Global Alternative Asset Management Industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $4 trillion (Q4 2022). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About Managed Funds Association
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 170 member firms, including traditional hedge funds, credit funds, and crossover funds, that collectively manage nearly $2.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
