Bates Research  |  09-09-22

Private Funds: New Reporting Proposals from Regulators

Private Funds: New Reporting Proposals from Regulators
Image © [Aspi13] /Adobe Stock

As the size of the private funds market has grown, regulators have been increasingly concerned about the risk posed to investors. In its 2022 annual Report, the SEC Examinations Division prioritized focusing on the “heightened risk to investors, registrants and the markets” of investing through private funds (see previous Bates coverage). In the Report, the Division estimated that 35% of registered investment advisers manage about $18 trillion in private hedge funds, private equity funds, and real estate funds. The sheer size of the market—and the state of the current disclosure framework covering it—has motivated regulators from both the SEC and CFTC to propose additional rule amendments to increase the regulatory oversight of private fund advisers and the funds they advise.

On August 10, 2022, the agencies jointly proposed to amend Form PF, a form they originally adopted in 2011, for reporting confidential information by SEC-registered investment advisers, as well as those registered with the CFTC as a Commodity Pool Operator (“CPO”) or Commodities Trading Adviser (“CTA”). The information collected on Form PF is intended to provide the Financial Stability Oversight Council (“FSOC”), an agency of the Treasury Department established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the necessary insight needed to assess systemic financial risks from private fund activity. The proposal, at 300 pages, is directed toward enhancing the FSOC’s abilities and to “bolster” the SEC’s regulatory oversight. Here are the highlights.

Proposal to Amend Form PF

Key features of the SEC/CFTC proposal include: (i) enhanced reporting from investment advisers seeking more information on the private funds they advise, (ii) enhanced reporting by hedge fund advisers and on hedge funds themselves, and (iii) changing the way advisers report complex structures. In an accompanying Fact Sheet to the proposal, the SEC summarized these major provisions.

On general reporting enhancements for investment advisers, the SEC explained that the proposal will expand the information collected to include more from the advisers and their private funds. This would include additional identifying information, assets under management, rights for withdrawal and redemption, gross asset and net asset values, fund inflows and outflows, base currency, types of creditors, fair value hierarchy, beneficial ownership, and fund performance. The SEC that has proposed the amendments “improve data quality and enhance the usefulness of reported data without imposing undue reporting burden.”

As to hedge funds, there are numerous changes. Advisers would have additional requirements on hedge funds with a net asset value of at least $500 million. These would include additional reporting on investment exposures, borrowing and counterparty exposures, market factors and their effects, currency exposures, turnover, country and industry exposures, central clearing counterparty exposures and information on risk metrics. In addition, the SEC is seeking to collect information on investment performance “by strategy, portfolio correlation, portfolio liquidity, and financing liquidity.” The proposal also calls for information on the trading and clearing mechanisms used by hedge funds.  

The SEC states that it is soliciting information in a form that would not “obscure risk profiles,” or “make comparisons of complex structures difficult.” To this end, the proposed amendments remove “duplicative questions,” in an effort “to provide greater insight [for FSOC and the SEC] into hedge funds’ operations and strategies, assist in identifying trends, and improve data quality and comparability.”  Simultaneously, the proposal would require advisers to elaborate on their reporting of complex funds. In particular, advisers under the proposal would be required to report on the components of a complex fund structure separately (such as master feeder arrangements and parallel fund structures.) In so doing, the proposal removes existing aggregate reporting requirements.

The proposal solicits comment on all these changes asking for specific responses to hundreds of questions. The comment deadline has set on or before October 11, 2022

Conclusion

The SEC/CFTC proposal to amend Form PF to require private and hedge fund advisers to provide substantial additional information on their activities is a significant step toward expanding the regulation of private funds. Whether that information will enable the FSOC to achieve its mission to identify risks and respond to emerging threats to financial stability is unknown. The increase in compliance responsibility and cost for investment advisers under the proposed revisions to Form PF, however, is self-evident. Expect robust commentary in response to this proposal. Bates will keep you apprised.

For more information concerning Bates Group's practices and services, please visit:

Bates Compliance

Reg BI Services and Support

RIA Compliance Services

Broker-Dealer Compliance Services

Bates Investor Risk Assessment for Vulnerable and Senior Investors

Bates AML and Financial Crimes

MSB, FinTech and Cryptocurrency

Regulatory and Internal Investigations

Retail Litigation and Consulting

Institutional and Complex Litigation

Alert

Get Bates Group News and Alerts in your Inbox

Sign Up Now

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

Contact Bates Group