SEC Expands Scope of Reporting on Private Funds

The SEC adopted final amendments to Form PF, the confidential reporting form for certain investment advisers to private funds.

The final 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 by (i) adding new reporting requirements, (ii) reducing the assets under management threshold for reporting by private equity advisers and (iii) requiring more detailed information from large private equity advisers. (See also, previous coverage.) The SEC adopted the final amendments largely as proposed, with modifications to the reporting requirements for:

• large hedge fund advisers by (i) eliminating the proposed report for changes regarding unencumbered cash and (ii) adjusting the reporting period from one business day to "as soon as practicable upon, but no later than 72 hours after" the occurrence of events that "indicate significant stress" or pose potential systemic risk implications;
• all private equity fund advisers by requiring event reporting on (i) adviser-led secondary transactions, and (ii) partner removals and investor elections regarding the termination of a fund or its investment period; and
• large private equity fund advisers by (i) retaining the current $2 billion reporting threshold, (ii) requiring more detailed information on activities of private equity funds that are "important to the assessment of system risk" as well as investor protection and (iii) implementing "tailored amendments" on fund strategies and the use of leverage.

In addition, the SEC decided not to adopt certain amendments to Form PF which would have required large liquidity fund advisers to "report substantially the same information" that money market funds are required to report on Form N-MFP. Instead, the SEC decided to continue to evaluate comments on the proposed large liquidity fund adviser amendments.

The amendments become effective six months after publication in the Federal Register for current and quarterly reporting and one year after publication in the Federal Register for the remainder of the amendments.

Statements

SEC Chair Gary Gensler said that the final amendments would provide regulators "greater visibility" into private funds which have "nearly tripled in size in the last decade."

SEC Commissioner Caroline A. Crenshaw emphasized that the final amendments would provide regulators with the right information prior to periods of stress and help to prevent investor harm.

SEC Commissioner Jaime Lizárraga said that the final amendments update the reporting framework to "meet the needs of current market realities" by helping regulators to (i) detect potential systemic risks to U.S. capital markets and (ii) take appropriate action if necessary to ensure investor protection regarding market exposure.

SEC Commissioner Mark T. Uyeda called the final amendments "arbitrary and capricious" with "no discernable practical purpose." Mr. Uyeda said that the SEC failed to identify a need for the additional information. Instead of addressing systemic risk and investor protection concerns, Mr. Uyeda argued that the final amendments will create additional costs ultimately borne by investors. Further, he asserted that because the information reported on Form PF is confidential, the increase in information has no useful purpose to investors in assessing a private fund’s risk-return profile.

SEC Commissioner Hester M. Peirce characterized the expansion of Form PF as the latest in the SEC’s "unquestioning faith in the Benevolent Power of More." She said that the additional information provided under the final amendments "may tempt regulators to intervene in markets in ways that would undermine long-term market resilience and exceed jurisdictional bounds." Ms. Peirce criticized the final amendments for being part of an "SEC compliance exercise" to "recast private fund regulation in the mold of retail fund regulation." She warned that the final amendments "ironically could be harmful from a systemic risk perspective" by sending the message to markets that the SEC is a "back-up risk manager for funds" through its demand for real-time data.