January 26, 2022

SEC Proposes Changes to Private Fund Reporting Requirements

Steven Lofchie Commentary by Steven Lofchie

The SEC proposed amendments to Form PF, which is used for reporting by certain SEC-registered investment advisers to private funds. The proposed amendments are meant to enhance the ability of the Financial Stability Oversight Council ("FSOC") to assess systemic risk in light of the growing private fund industry.

Proposed Amendments

The SEC's proposed amendments would do the following:

  • Add new reporting requirements. The proposed amendments would require current reporting by (i) large hedge fund advisers and (ii) private equity fund advisers. Such reporting might indicate stress at a fund that could harm investors or signal risk in the broader financial system.
  • Reduce AUM threshold reporting for private equity advisers. The proposed amendments would reduce the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management ("AUM").
  • Amend Section 4 of Form PF. The proposed amendments would require more detailed information from large private equity advisers with regard to (i) fund strategies, (ii) the use of leverage and portfolio company financings, (iii) controlled portfolio companies and their borrowing practices, (iv) fund investments in different levels of a single portfolio company's capital structure and (v) portfolio company restructurings or recapitalization.
  • Make reporting consistent with Form N-MFP. The proposed amendments would require large liquidity fund advisers to report substantially the same information that money market funds would report on Form N-MFP to provide a complete picture of the short-term financing markets in which money market funds and liquidity funds both invest.

Comments on the proposal are due within 30 days after its publication in the Federal Register.

Commissioner Statements

SEC Chair Gary Gensler supported the proposed amendments, stating that they "would require certain advisers to hedge funds and private equity funds to provide current reporting of events that could be relevant to financial stability and investor protection." He also noted that the private fund industry has expanded to $11 trillion since the adoption of Form PF in 2011.

SEC Commissioner Allison Herren Lee supported the proposed amendments and gave examples of the types of events the proposed amendments are meant to address, including "deep losses, counterparty defaults, or the inability to meet margin calls." She further noted that "[t]hese kinds of events raise not only investor protection concerns, but in some cases may also implicate systemic risks of the type that the FSOC was designed to address."

SEC Commissioner Hester M. Pierce opposed the proposed amendments and stated that "[a] regulator's desire for data is insatiable, but more data is not always better. Before we seek additional information through Form PF, we must show what we have done with the information we already require and show that it is insufficient to allow FSOC to monitor for systemic risk. I do not think we have done that. Merely citing gaps in data is not enough."

SEC Commissioner Caroline A. Crenshaw supported the proposed amendments, noting that "[t]his proposal is an important step that seeks to put the Commission and FSOC in a better position to understand, assess, and take action regarding significant developments at private funds, potential stresses to the broader financial markets, and practices that raise potentially significant investor protection concerns."

Commentary

Form PF is worthless. (See, e.g., comments in 2012; comments in 2013; more comments in 2013; comments in 2014; more comments in 2014; comments in 2015; more comments in 2015; comments in 2016; comments in 2018; more comments in 2018; and so on.)

In the decade since Form PF was required, there has not been a single public report analyzing the data and demonstrating its value. That is not because the data must be kept a secret. Any lawyer knowledgeable about the issues as to which Form PF is intended to elicit information can tell, without seeing the responses, that the questions asked by the report are completely ambiguous and badly stated. There is no way that the responses to the Form PF questions could yield significant results across the industry.

Responses to badly drafted and ambiguous questions do not provide useful information. Rather than insisting upon the collection of more useless information, the SEC should take some time and really revisit the Form, and either get it right or throw it away.

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