Tuesday, August 19, 2014

IM Staff Reports on Use of Form PF Data

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

The staff of the SEC’s Division of Investment Management has issued its second annual report relating to the use of data collected from private fund advisers on Form PF. Under the Dodd-Frank Act, the Commission must report annually to Congress on how it has used the data regarding the operations and strategies of private funds to protect investors and the integrity of the markets. According to the report, during the past year, the SEC staff has used Form PF data to assist in examinations and investigations of private fund advisers, to enhance the Commission’s risk-monitoring activities, to provide guidance to filers, and to work with other regulators concerned with the activities of private fund advisers.

Background. Under the Dodd-Frank Act, the Commission must direct investment advisers to report information regarding the hedge funds and private funds they advise in order to provide a source of data for the Financial Stability Oversight Council (FSOC) to use in monitoring systemic risk. This information must include total assets under management (AUM), use of leverage, counterparty credit risk exposure, and trading practices. The Dodd-Frank Act also provides specific confidentiality protections for proprietary information collected.

In 2011, in consultation with FSOC members, the Commission adopted Form PF and Investment Advisers Act Rule 204(b)-1 to establish filing requirements for private fund advisers. Reporting content and frequency varies based on the amount of the adviser’s AUM and the types of private funds it manages. Most advisers are required to file Form PF once a year and report only basic information regarding the private funds they advise, such as the types of private funds advised and each fund’s size, leverage, liquidity, and performance. Hedge fund advisers also must report information about fund strategy, counterparty credit risk, and trading and clearing activities. Large private fund advisers must report more frequently and provide more detailed information, including data on exposures, geographical concentration, turnover by asset class, and use of leverage, among other things. The Commission has controls and systems in place for the proper handling of confidential Form PF data.

Commission uses of Form PF data. In its report, the staff notes that, in addition to providing Form PF data to FSOC for use in its systemic-risk-monitoring obligations, the Commission itself uses Form PF information in its regulatory programs and investor-protection efforts. Specifically, the report states, Form PF data is used in the SEC examinations and enforcement investigations of investment advisers that manage private funds. The staff will review an adviser’s Form PF filing as a part of a preliminary evaluation and will use the data to track inconsistencies and discrepancies with other documentation, especially those items provided to investors, according to the report.

In addition, the staff observes, the Commission has increased the use of Form PF data in its ongoing risk monitoring and rulemaking activities, particularly in the form of reports generated by the Division of Economic and Risk Analysis (DERA). Examiners use the DERA database to identify advisers engaging in particular activities and to identify red flags, and the Division of Investment Management uses Form PF information to inform policy and rulemaking initiatives with regard to private funds. The staff continues to provide guidance to Form PF filers regarding a variety of filing issues, the report states.

Finally, the report explains, the Commission staff uses Form PF data in conjunction with other agencies and groups during collaborative efforts regarding private funds and advisers. Not only is the data used in connection with FSOC’s systemic risk efforts, the staff adds, but it is also included and addressed in discussions with other federal regulators. The staff has also provided aggregated, non-proprietary Form PF data to the International Organization of Securities Commissions (IOSCO) to provide the organization with a more comprehensive view of the global hedge fund market, according to the report.