Last Friday, the Securities and Exchange Commission published a 41-page report that provides private fund industry statistics and trends. The report aggregates data supplied by more than 2,600 private fund advisers on Form ADV and Form PF. As indicated in the SEC’s press release announcing the report’s publication, “most of the data in the more than 50 separate tables and figures is being made public for the first time.” The report reflects information reported from the first calendar quarter of 2013 through the fourth calendar quarter of 2014.
Form ADV is used by investment advisers to register with, or claim certain exemptions from registration with, the SEC and/or certain state securities authorities. Advisers must report on Form ADV general information about private funds they manage.
Adopted in October, 2011, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Form PF is filed by SEC-registered investment advisers with at least $150 million in private fund assets under management.
Although the plot and character development may be a bit thin for some, others may find the detailed report to be fascinating. It still is not clear, however, what practical purpose the information serves, nor how it will be used and by whom. SEC Chair Mary Jo White, to no surprise, stated her belief that investors evaluating investments in private funds will benefit from access to the additional information provided by the report about private funds and their advisers.
Really? Will investors benefit by learning that derivatives make up a slightly smaller percentage of the total private fund assets than previously had been reported? Or that fewer than 100 private funds for which data is reported claim to use high-frequency trading strategies to manage at least some assets?
Chair White also believes that the statistics should “facilitate constructive feedback and additional analysis that could be used by the Commission and others.” Some industry observers continue to criticize the SEC for trying to impose “prudential-style” bank regulation on the private asset management industry. On the other hand, other industry experts believe that the data shows private funds do not pose systemic or destabilizing threats. So, perhaps, the data may be useful in clearing up misconceptions about the private fund sector and slowing regulatory creep.
The SEC’s report comes as regulators, including the Financial Stability Oversight Council, continue to evaluate the need for even more new regulation of mutual funds and the broader asset management sector, including requiring certain investment advisers to have so-called living wills and be subject to stress tests.
Chair White, appearing at a Managed Funds Association Conference last week in New York, also indicated that the SEC examination staff has uncovered recurring issues regarding private fund marketing materials, including unreliable performance figures or comparisons to benchmarks that lack meaningful explanatory disclosures. Some SEC examiners purportedly discovered advisers who were steering investment opportunities to their own proprietary accounts rather than to client funds or accounts. They apparently also found some advisers who were improperly shifting expenses to their fund clients.
The motto of Faber College, the fictional institution featured in the 1978 comedy classic Animal House, is “Knowledge is Good.” That is, of course, humorous precisely because it is so self-evident. Could anybody disagree with such a banal and benign statement? Is it conceivable, however, that obtaining information for its own sake, or with only vague notions of how such information will be utilized, and by whom, could have unintended and potentially adverse consequences? Perhaps government agencies, including the SEC, should be required to demonstrate with specificity how information will be used and by whom prior to mandating burdensome data reporting requirements.