While supporting the joint SEC-CFTC proposal to collect information from registered private fund managers and commodity trading advisors through periodic, confidential reports on Form PF, the hedge fund industry asked that the threshold for enhanced reporting for large managers be increased from $1 billion to $5 billion of hedge fund assets under management. In a letter to the Commissions, the Managed Funds Association urged that the frequency of filing Form PF should be changed from quarterly to semi-annually and fund managers should have at least 120 calendar days, not the proposed 15 days, from the end of the reporting period to submit the Form.
Also, fund managers should be required to certify that they have completed the Form after reasonable inquiry and to the best of their knowledge, and based on consistent internal procedures for each question, provided that the Form does not explicitly specify a methodology. Further, fund managers should have flexibility to provide information about funds and accounts in a manner that best represents their activities.
The MFA strongly emphasized that the proposed 15-day period is simply inadequate for hedge fund managers to value illiquid securities. Anything less than a 120-day reporting period would severely limit the ability of fund managers to properly value illiquid assets, would diverge significantly with industry practice, would conflict with periods for other reports by investment advisers, financial companies, and public companies, and could ultimately result in less meaningful information provided on Form PF.
Hedge funds frequently invest in illiquid assets that are not listed on any exchange or traded regularly in an active market, lack transparent pricing information, and are offered and sold through private transactions. Many of the illiquid assets held by hedge funds are categorized under GAAP as having Level 2 or Level 3 inputs. Level 2 inputs are observable but do not include quoted prices in active markets for the illiquid securities and Level 3 inputs, which are unobservable, with little, if any, market activity for the asset.
Fund managers depend on brokers, valuation agents and others to compile information on illiquid securities. While the length of time each manager will need to complete this process will depend on the valuation methodology, the type of illiquid assets, and the fund’s investment strategy, noted the MFA, fund managers would not be able to obtain the necessary information within 15 days.
The MFA opposed the proposed quarterly reporting on Form PF for large hedge funds, suggesting that semi-annual reporting would be more consistent with the purpose of the Form to enable the Council to identify whether any private funds merit further analysis. Information about private funds investments, use of leverage and collateral, counterparty exposures, and portfolio management practices provided semi-annually would provide the Council with meaningful data to monitor and assess the extent to which large private funds could have systemic effects. As an alternative, the Commissions could start this new reporting on a semi-annual basis, and then re-evaluate the process after two years to determine if more frequent reporting would add substantial value.
Under the proposal, a manager would be deemed a large private fund manager, and a hedge fund would be deemed a “qualifying fund,” if the manager or fund exceeds the applicable threshold (i.e., for a manager, $1 billion in hedge fund assets under management, and for a fund, a net asset value of $500 million) as of the close of business on any day during the most recent calendar quarter. The MFA is concerned that such a standard could lead to uncertainty for hedge fund managers, and recommended that the Commissions adopt a standard that would allow a manager to determine with more precision whether it, or a hedge fund it manages, has exceeded a reporting threshold.
In completing Form PF, an individual would need to certify, under penalty of perjury, that the information and statements made in the Form are true and correct. While recognizing that regulators have provided detailed instructions and definitions, the MFA fears that the subjectivity of some information, the difficulty in providing precise data, and the volume of data requested will inevitably lead to a level of uncertainty that would be inconsistent with such a broad and unprecedented certification.
Thus, the MFA recommended that managers make the following certification, which is based on the certification provided on Schedule 13G: “After reasonable inquiry and to the best of my knowledge and belief, I certify on behalf of [registrant] that the information set forth in this statement is true, complete and correct in all material respects.’’ The certification should also indicate that managers should complete the Form based on their internal procedures for each question that does not provide an alternative methodology