Delay to Dismantle: How the SEC is Gutting Its Own Systemic Risk Early Warning System
By Oscar Valdés Viera
On June 11, the Securities and Exchange Commission (SEC) quietly postponed a long-delayed and critical deadline to monitor shadow banking. The agency delayed—for the second time—the compliance date for its updated Form PF rule, giving large private fund advisers a few more months to begin reporting the kind of basic data regulators need to monitor systemic risk. This isn’t a mere scheduling hiccup; it’s a strong signal that the rule—and the transparency it aims to deliver—is under real threat.
The SEC created the Form PF in the wake of the 2008 financial crisis to give regulators a clearer view into the activities of an important sector of the financial marketplace: large hedge funds, private equity firms, and other private fund advisers. The Dodd-Frank Act mandated that the SEC and the Commodity Futures Trading Commission (CFTC) to establish reporting requirements for private funds precisely because the opaque and unregulated non-bank financial institutions played a key role in the crisis which warranted better monitoring of emerging risks from a system-wide perspective.
Fast forward a decade. These private funds exploded in size since the form PF was created, tripling the assets under management to $31 trillion, surpassing the $24.3 trillion total assets of commercial banks in the United States. Now these shadow banks are deeply intertwined with the rest of the financial system. So if things go wrong, the ripple effects can spill out to the broader economy.
The swelling risks, complexity, and interconnectedness of these dark funds can imperil the entire financial system. For example, as University of Massachusetts, Amherst Prof. Lenore Palladino recently described:
Consider, for instance, the fact that private credit funds often finance private equity buyouts of nonfinancial companies. While private equity firms have always used debt to buy operating companies, which they then either sell for capital gains or bankrupt after stripping them for parts, they used to have to obtain the debt from the regulated banking system. Now, with private credit funds making these loans, neither the deals nor the loans are ensured of due diligence, the interest rates are floating, and regulators do not monitor the deals or require a safety net in the form of reserve requirements. What could go wrong?
But while the financial industry, particularly private funds, grew in scale and complexity, the basic reporting required under Form PF did not keep pace. That’s why the SEC updated the reporting rules in 2023 and set a compliance date to begin collecting more timely and granular data that can help regulators spot instability before a cataclysmic systemic event hits.
The updates were meaningful. The improvements included reporting of significant stress events that could impact financial stability and investor protection—such as serious liquidity stress, margin calls, or counterparty defaults. It also upgraded the tracking of interconnectedness, investment strategies, leverage, and redemption terms. These updates would provide regulators—including the Financial Stability Oversight Council—more detailed data to identify concentrations of risk, track leverage in the system, and understand when a fire in one part of the financial sector might spread to others. And as we saw in the 2008 crisis and during the early months of the pandemic, informational gaps when monitoring financial stability can be devastating and ultimately require public intervention to extinguish the fires.
Yet from the start, the private funds industry pushed back against the reforms. Large fund managers and their trade associations lobbied hard to weaken or stall the rule. And now, with the SEC’s second delay, it appears those efforts are working. As Commissioner Caroline Crenshaw noted in her dissent against the extension, the practical impact of this delay is to prevent this rule from going into effect “until we [the Commission] have significantly revised or undone this rule.”
Commissioner Crenshaw’s warning sounds even more pressing given that the new SEC Chair, Paul Atkins, has repeatedly minimized the systemic risks posed by non-bank financial institutions (which includes private funds), a stance he has held since before the 2008 financial crisis. Recently, he went so far as to claim (here at 37:00) that “non-bank financial institutions don’t pose systemic risk to our markets.” Atkins said a similar thing in the summer of 2008, quipping that “what goes on in Wall Street does not necessarily translate to Main Street,” just weeks before Wall Street imploded, taking down the economy and wiping out over $19 trillion in household wealth, 16 million homeowners, and over 8 million jobs. Atkins’s perspective remains dangerously misguided today.
That’s why the industry’s effort to roll back these disclosures isn’t just a regulatory turf war, it’s a broader threat to market stability. Without timely, consistent, and comparable data, regulators will once again be forced to play catch-up in a crisis. They’ll be left flying blind, relying on anecdote, backward-looking reports, or voluntary disclosures from market participants with every incentive to downplay risk. And investors, workers, and communities will pay the price when the next blow-up triggers losses that spread far beyond the shadowy world of private finance.
Moreover, delaying the Form PF compliance date comes as the private funds industry pressures the SEC and the Department of Labor to weaken longstanding safeguards that restrict retail investors from gambling on risky and opaque private equity investments and that prevent retirement-plan sponsors from offering them to workers. This potential influx of trillions of dollars from retirement savers (401k(s) alone hold almost $9 trillion) would turbocharge the private funds industry but harm small investors and retirement savers—while the SEC chooses to ignore the systemic risk implications.
The delay implementing the Form PF amendments may seem technical or arcane. But it’s another warning sign, part of a broader pattern of the SEC caving to industry pressure and retreating from its responsibility to protect investors and financial stability. The tools for monitoring systemic risk are only effective if regulators are willing to use them. Right now, it looks like they’re putting them back on the shelf.
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