Hedge Funds’ Systemic Risk Disclosures in Bankruptcy
Wulf A. Kaal · 2013
Hedge fund advisers' systemic risk disclosure obligations under Title IV of the Dodd-Frank Act and SEC implementation rules may have unanticipated future applications and knock-on effects on other areas of the law and hedge fund practices. Federal Bankruptcy Rule 2019 (Rule 2019) has been the subject of intense professional and scholarly debate in the last several years. The federal bankruptcy bench, practitioners, and academics have debated the importance of the purported purpose of Rule 2019, the necessity for hedge funds to protect trading strategies and proprietary information, and the role of creditors and groups of creditors in the bankruptcy process. This paper adds another element to the debate by evaluating possible implications of systemic risk disclosures by hedge fund managers under Title IV of the Dodd-Frank Act and SEC implementation rules in the bankruptcy context. The author provides evidence of a substantial overlap between systemic risk disclosure requirements under Title IV and the disclosure requirements under the fully-revised version of Bankruptcy Rule 2019 (Revised Rule 2019). In the current regulatory framework, the threat of public disclosure of systemic risk filings by hedge funds via the bankruptcy process may only marginally affect hedge funds' tactics and their role in distressed investing. Hedge funds' disclosure obligations under the Dodd-Frank Act are still rather generic, the SEC has not yet standardized the requirements, and it is unclear if the SEC will expand the systemic risk disclosure obligations for hedge funds investing in distressed securities. The hedge fund industry's continuous, expanding, and increasingly assertive presence in distressed securities investments could change this evaluation in the future. * Associate Professor, University of Saint Thomas School of Law (Minneapolis). The author wishes to thank Judge James M. Peck, Keith Sharfman, G. Ray Warner, Edward I. Altman, Michelle Harner, Steve Adams, and several representatives of the hedge fund industry whose investment strategies focus on distressed debt investments. The author is grateful for outstanding research assistance from research librarian Valerie Aggerbeck. 195 196 ABI LAW REVIEW [Vol. 22: 195
Cite: Wulf A. Kaal, Hedge Funds’ Systemic Risk Disclosures in Bankruptcy (2013). SSRN: https://ssrn.com/abstract=2348463
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