SEC Expands Regulatory Oversight of Private Fund Advisers - Amendments to Form PF

What are the Amendments?

The form has been a point of emphasis over the last year, having been amended in May 2023 and again in July 2023. The most recent amendments, designed to heighten investor protection, expand the reporting requirements surrounding the operations and strategies of advisers and the private funds they advise and alter the way advisers report on complex structures. Further, the latest amendments remove aggregate reporting requirements previously applicable to large hedge fund advisers, in effort to decrease the burden on such advisers, and to narrow the Form PF reporting focus to more valuable information that can be utilized to perform systemic risk assessments.

Reporting on Complex Structures

The amendments incorporate modifications to the general instructions that all filers must adhere to, with the aim of enhancing data quality, comparability, investor protection efforts, and systemic risk assessment. As articulated in the final rule, private funds frequently use complex structures to invest including parallel fund structures.

Once the new rules take effect, advisers will be required to separately report each component fund of the relevant parallel fund structure. The amendments will also alter how advisers report investments in other funds and require advisers to identify trading vehicles and report on them on an aggregated basis. The hope of this specific element of the amendment is that by prescribing the way by which advisers report parallel fund structures, better insight will be provided to investors in terms of the risks connected to such arrangements.

Additionally, the revised instructions mandate that any filer who files on a quarterly basis must do so on a calendar quarterly basis, as opposed to a fiscal one.

Reporting on Basic Information

The amendments will require all advisers who are required to file a Form PF to disclose additional information about themselves as well as the private funds they manage. This is aimed at enhancing data quality, comparability, reducing reporting errors, and aiding in the identification of trends, including those that could pose a systemic risk.

Advisers will need to provide identifying information including any legal entity identifiers and assets under management, along with an explanation of assumptions. The SEC hopes that this will offer a deeper understanding of advisers’ operations and strategies and assist in trend identification.

For each private fund managed by the adviser, additional identifying information will need to be disclosed. This includes details on withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, and fund performance, base currency, borrowings and types of creditors, fair value hierarchy, beneficial ownership, and fund performance. For each hedge fund managed by the adviser, Form PF will require the disclosure of information regarding investment strategies, counterparty exposures, and trading and clearing mechanisms employed by the hedge fund, while other questions deemed to be redundant will be eliminated from the form.

What is Form PF?

Form PF, initially adopted in 2011 in response to the 2008 financial crisis, is a confidential reporting form that is filed by certain SEC-registered private investment advisers. It provides the Financial Stability Oversight Council (FSCO) with confidential information regarding the basic operations and strategies of private funds and their advisers in order to aid the SEC in systemic risk assessment. The CFTC, in collaboration with the SEC, adopted these amendments and agreed to a memorandum of understanding to facilitate the sharing of data provided on these forms between the agencies. The general purpose of Form PF is to enable the SEC to gather information about the basic operations, strategies, and potential risks associated with these private funds to aid FSOC in monitoring systemic risks within the private fund industry and enhancing investor protection.

Takeaways

Overall, it is no secret that the SEC is more committed than ever to expanding its oversight through regulatory regime over professionals active in the private funds arena. As stated by SEC Chair Gary Gensler, the amendments are meant to promote greater visibility for regulators into capital markets. The SEC and CFTC both hold the view that these amendments are essential for gaining a deeper understanding of the private fund industry and safeguarding investors from systemic risk.

Some industry players and indeed some dissenting SEC Commissioners have voiced concerns in response to these amendments. They argue the extent of required reporting under the amendments lacks sufficient justification and exceeds the SEC’s mandate under the Dodd-Frank Act. Additionally, concerns have been raised about security and confidentiality, with fears that sharing sensitive data could increase cybersecurity risks. Others have also expressed concerns that the compliance costs related to these amendments may be transferred to investors, potentially impacting their returns, and leading to broader economic implications.

Advisers are encouraged to review the increased disclosure requirements that will soon become effective, and to consult counsel as they look to change their approach to managing Forms PF. Though it is crucial to provide required information, advisers should be careful not to disclose more than may be necessary, and to avoid revealing certain protected client information.

The amendments to Form PF will become effective one year after publication in the Federal Register. The ArentFox Schiff Private Funds team will be monitoring further activity that may stem from this recent development and is available to assist private fund advisers at every turn. Please contact your ArentFox Schiff attorney or any alert author with questions related to these Form PF issues.