Creditor Committees Forced To Disclose Holdings In Bankruptcy?A panel of bankruptcy judges and other bankruptcy professionals have drafted a proposed rule that would require distressed-debt investors forming creditor committees during bankruptcy to disclose the details of their holdings.

…the new rule would make investors disclose their “economic interest” in bankruptcy cases, including debt, equity or short positions such as credit-default swaps, which act as insurance against debt when it defaults. Judges have expressed concern that investors banding together on court committees have at times revealed their underlying debt holdings but failed to disclose their CDS positions.

Investors on committees will have to disclose the quarter and the year in which their positions were acquired. Disclosures are waived for positions acquired more than a year before the company’s bankruptcy filing. If hedge funds make arguments in court or solicit votes for confirmation of a bankruptcy plan, additional disclosures will be required if investment positions have changed since a previously filed statement.

Hedge funds and investors oppose the new rule because it will require that they disclose their identities; but because they successfully lobbied to alter the original language of the proposed rule, they would not be required to disclose the purchase dates or the prices paid for bankruptcy claims. Currently, hedge fund investors and their powerful allies are arguing that these disclosures during bankruptcy run the risk of revealing proprietary trading strategies.  And some hedge fund investors have threatened to pull their money out of a bankruptcy case if they are forced to disclose too much information.  Right now the proposed rule is making its way through a federal judiciary committee and will eventually go to the Supreme Court for review.  However, even if the Supreme Court approves the changes to the bankruptcy disclosure rule, Congress will have the power to overturn it.