Thursday, May 04, 2023

SEC approves amendments to Form PF; expands reporting requirements for fund advisers

By Suzanne Cosgrove

The SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered advisers to private funds. The reporting changes are designed to provide the Financial Stability Oversight Council (FSOC) with more timely information to assess systemic risk, and to boost the Commission’s oversight of private fund advisers and its investor protection efforts, the SEC said.

The amendments passed by a 3-2 vote, with Commissioners Hester Peirce and Mark Uyeda voting against their approval. Commissioner Peirce commented that the expansion of Form PF data collection “is the latest reflection of the Commission’s unquestioning faith in the Benevolent Power of More, a faith that I do not share.”

Arguments for and against. Defending the changes, SEC Chair Gary Gensler noted that in the 12 years since the Commission first adopted Form PF in 2011, “private funds have evolved significantly in their business practices, complexity, and investment strategies.” In addition, private funds “are ever more interconnected with our broader capital markets,” he said. “They also nearly have tripled in size in the last decade.”

Gensler said private funds managed by registered investment advisers currently hold approximately $21 trillion of gross assets, including $20 trillion reported on Form PF – close to the size of the $23 trillion U.S. commercial banking sector. Including exempt reporting advisers, the private fund space is as large as $25 trillion.

Arguing that the form’s amendments were unnecessary, Commissioner Mark Uyeda said that the adoption of the original Form PF fulfilled Dodd-Frank’s statutory directive to the Commission to collect information on behalf of FSOC “in a way that reduces the compliance burden on advisers. Today’s amendments are the first step to reversing those initial, fruitful efforts at effective regulation.”

Peirce also suggested that the expansion of Form PF requirements could backfire. “By demanding almost real-time data about some relatively commonplace events, we send a message to the markets that the government is a back-up risk manager for funds,” she said.

“Far from improving our ability to understand what is going on with private funds in times of stress, requiring funds to provide granular information on a compressed timeline on a government form could impede free-flowing, productive communication between fund advisers and the SEC,” Peirce added.

Investors in private funds are not only well-resourced sophisticated investors, but also pension funds and non-profits, “who deserve the protections of an updated and improved rule that is more effective for assessing potential risks to financial stability,” said Commissioner Jaime Lizárraga, who supported the amendments. “This is precisely the type of update that best serves the public interest.”

“History is replete with times when tremors in one corner of the financial system or at one financial institution spill out into the broader economy,” Gensler said. “When this happens, the American public –bystanders to the highway of finance -- inevitably gets hurt.”

Fund advisers’ requirements. The final form amendments apply to large hedge fund advisers with at least $1.5 billion in hedge fund assets under management; private equity fund advisers with at least $150 million in private equity fund assets under management; and large private equity fund advisers with at least $2 billion in private equity assets under management.

The amendments will require large hedge fund advisers and all private equity fund advisers to file current reports upon the occurrence of certain events that could indicate significant stress at a fund or investor harm. Large hedge fund advisers must file these reports not later than 72 hours from the occurrence of the relevant event.

The SEC said “trigger” events for large hedge funds include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions.

Reporting events for private equity fund advisers include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction. Private equity fund advisers must file these reports on a quarterly basis within 60 days of the fiscal quarter-end.

The amendments also require large private equity fund advisers to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.