INVESTMENT ADVISERS—SEC proposes to amend reporting requirements for all filers and large hedge fund advisers - 12 August 2022

The SEC and CFTC proposed amendments to Form PF to enhance information collected from private fund advisers.

The SEC proposed amendments to Form PF to amend reporting requirements for all filers and large hedge fund advisers. The amendments, which passed the Commission by a 3-2 vote, are also being considered by the CFTC. The amendments are intended to enhance the FSOC's monitoring of systemic risk and to collect additional, and more useful, data for use in the Commission's regulatory programs. Comments to the SEC or CFTC are due 30 days after publication in the Federal Register or October 11, 2022, which is 60 days after issuance (Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers, Release No. IA-6083, August 10, 2022).

According to the SEC, the proposed amendments are designed to provide greater insight into private funds’ operations and strategies, assist in identifying trends, including those that could create systemic risk, improve data quality and comparability, and reduce reporting errors. The SEC and CFTC ("the Commissions") are jointly proposing amendments to Form PF's general instructions, and section 1 of the form, which would apply to all filers. Proposed amendments to section 2 of the form would apply to large hedge fund advisers advising qualifying hedge funds (hedge funds having a net asset value of at least $500 million). The SEC says that the proposed amendments would:

• Enhance reporting by large hedge fund advisers on qualifying hedge funds. The proposal would enhance how large hedge fund advisers report investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure reporting, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio correlation, portfolio liquidity, and financing liquidity to provide better insight into the operations and strategies of these funds and their advisers and improve data quality and comparability.

• Enhance reporting on basic information about advisers and the private funds they advise. Advisers would be required to report additional basic information about themselves and the private funds they advise including identifying information, assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, base currency, borrowings and types of creditors, fair value hierarchy, beneficial ownership, and fund performance to provide greater insight into private funds’ operations and strategies, assist in identifying trends, including those that could create systemic risk, improve data quality and comparability, and reduce reporting errors.

• Enhance reporting concerning hedge funds. The proposal would require more detailed information about the investment strategies, counterparty exposures, and trading and clearing mechanisms employed by hedge funds, while also removing duplicative questions, to provide greater insight into hedge funds’ operations and strategies, assist in identifying trends, and improve data quality and comparability.

• Amend reporting of complex structures. The general instructions would be amended to require advisers to report separately each component fund of master-feeder arrangements and parallel fund structures. Currently, some advisers report in aggregate and some separately, which can make it difficult to compare complex structures and undermines the usefulness of the data collected.

• Aggregate reporting. The current requirement that large hedge fund advisers report certain aggregated information will be removed. The Commissions have found data to be less meaningful for analysis while more burdensome for advisers to report.

Form PF. Adopted by the CFTC and SEC in 2011, Form PF is used by certain SEC-registered investment advisers, to report confidential information about the funds they advise. The form is also used by advisers registered with the CFTC as a commodity pool operator ("CPO") or commodity trading adviser ("CTA"). These "private funds" are pooled investment vehicles that are excluded from the definition of "investment company" and generally include funds commonly known as hedge funds, private equity funds, and liquidity funds. The data collected is also used by the Financial Stability Oversight Council ("FSOC"), which was consulted for its input on the proposal, as part of its mandate to monitor systemic risk. The SEC proposed amendments to the SEC-only portions of Form PF in January 2022 that would, among other changes, require reporting within one day if an event signals risk to the broader financial system.

The SEC says that since the form's adoption, the private fund industry has grown and evolved into a $20 trillion industry. Experience with reporting on the form has identified ways to improve data quality as well as information gaps and situations in which information could be revised to improve understanding of systemic risk. Improved information would assist the FSOC in its mission and improve the ability of the Commissions to protect investors.

Commissioners' reactions. Chairman Gensler and Commissioners Crenshaw and Lizárraga voted to approve the proposal. In his first open meeting, Commissioner Lizárraga observed that the proposal would be essential to a more comprehensive evaluation of the implications for the integrity of the financial markets, particularly for retail investors. Chair Gensler, who chaired the CFTC when Form PF was jointly adopted said: " I am pleased to support the proposal because, if adopted, it would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers." He added: "I believe that these proposed amendments would bring greater visibility for regulators into an important part of our capital markets. That will help protect investors and maintain fair, orderly, and efficient markets."

Commissioners Peirce and Uyeda did not support the proposal. Calling the amendments "overreach," Commissioner Peirce said that the proposal "stretches a very limited data collection tool beyond its intended purpose" by "by adding questions of the nice to know, rather than need to know variety." According to Peirce, the main purpose of gathering information on Form PF is to facilitate the FSOC's monitoring of systemic risk. Observing that the release repeatedly uses the word "granular," Peirce said that every missing piece of information is not needed and wondered: "what specifically do we intend to do with the information we are so eager to have?" She also noted that this mass of information could be a target for cybersecurity threats and that stolen data could itself be a systemic threat, a concern shared by Commissioner Uyeda. Peirce nonetheless admitted that some of the proposed amendments "might be worthwhile," such as changes that would streamline the form and eliminate redundancies; to that end, she encouraged commenters " to suggest other ways to right-size Form PF."

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