SEC, CFTC Propose New Private Fund Industry Reporting Changes

Regulators cite the increased complexity of the private fund industry and rapid growth for need to amend confidential filing rules.

The Securities and Exchange Commission and the Commodity Futures Trading Commission have jointly voted to propose amendments to Form PF, a confidential reporting form for certain investment advisers to private funds.

Press releases from the SEC and the CFTC say the amendments to Form PF are intended to improve the Financial Stability Oversight Council’s ability to assess systemic risk, and enhance the oversight of private fund advisers.

The move is in response to the rapid growth of the private fund industry since Form PF was adopted in 2011, as well as the increasing complexity of the industry’s investing practices, according to the releases. They also note that certain investment strategies, including credit, digital asset, litigation finance and real estate strategies, have become more common.

“In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds,” SEC Chair Gary Gensler said in a statement. “Since then, though, the private fund industry has grown in gross asset value by nearly 150% and evolved in terms of its business practices, complexity, and investment strategies.”

Gensler said that if adopted, the proposed changes would improve the quality of the information the SEC and CFTC receive from Form PF filers, with a particular focus on large hedge fund advisers. “That will help protect investors and maintain fair, orderly, and efficient markets,” he added.

The proposed amendments include:

  • Enhancing how large hedge fund advisers report investment exposures, borrowing and counterparty exposure, market factor effects, currency exposure reporting, turnover, country and industry exposure, central clearing counterparty reporting, risk metrics, investment performance by strategy, portfolio correlation, portfolio liquidity and financing liquidity;
  • Requiring additional basic information about advisers and the private funds they advise, including identifying information, assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, base currency, borrowings and types of creditors, fair value hierarchy, beneficial ownership and fund performance;
  • Requiring more detailed information about the investment strategies, counterparty exposures and trading and clearing mechanisms employed by hedge funds, while also removing duplicative questions; and
  • Removing the aggregate reporting requirement for large hedge fund advisers, as according to the SEC this information can obscure the data about hedge funds, including by masking the directional exposures of individual funds.  

While the proposal is supported by Gensler, along with Commissioners Caroline Crenshaw and Jaime Lizárraga, Commissioners Hester Pierce and Mark Uyeda both issued statements expressing concerns with the proposed amendments and said they would not vote in favor of the changes.

Pierce said that while she believes Form PF needs to be updated, the proposal “stretches a very limited data collection tool beyond its intended purpose.” She said the FSOC “does not need to have this kind of detailed knowledge of individual private funds’ activities to fulfill its mandate to identify risks to financial stability, promote market discipline, and respond to emerging financial stability threats.”

Uyeda took issue with the intent of the proposed changes to address the assessment of systemic risk, saying that the draft release  mentions “systemic risk” 118 times without describing or defining the term.

“Merely stating over and over that the proposed amendments will help to monitor and assess systemic risk and provide additional information does not make it so,” Uyeda said. “This shortcoming makes it difficult to evaluate the appropriateness of the proposed disclosures.”