The SEC and the CFTC proposed amendments to Form PF that would increase regulatory oversight of private fund advisers and the funds they advise. The proposed amendments would require advisers to (i) report more detailed data on investment strategies and exposures, and (ii) report separately on a newly defined sub-asset class for digital assets.

The agencies reported that the private fund industry net asset values "more than doubled" and the number of private funds grew by 55 percent since the third quarter of 2021. They noted that credit, digital asset, litigation and real estate investment strategies have become more common as a result. The agencies determined, after a decade of experience with Form PF data, many opportunities to "improve data quality."

Overview

The proposed amendments would:

  • Enhance reporting requirements for large hedge fund advisers on qualifying hedge funds. The amendments would expand requirements for how large hedge fund advisers report investment exposures, including (i) borrowing and counterparty exposure, (ii) market factor effects, (iii) currency exposures, (iv) turnovers, (v) country and industry conditions, (vi) central clearing counterparty reporting, (vii) risk metrics, and (viii) investment performance.

  • Enhance reporting of basic information regarding advisers and the private funds they advise. Additional reporting would include expanded (i) identifying information, (ii) total assets under management, (iii) rights for withdrawal and redemption, (iv) gross asset and net asset values, (v) fund inflows and outflows, (vi) base currency, (vii) borrowings and categories of creditors, and (viii) fair value hierarchy, beneficial ownership and fund performance.

  • Enhance reporting with respect to hedge funds. The amended reporting would collect information on investment strategies and trading and clearing mechanisms employed by hedge funds.

  • Remove aggregate reporting for large hedge fund advisers. The amendments would remove duplicative questions and assist in identifying trends to improve data integrity and cross-agency comparability.

  • Amend how advisers report complex structures. The amendments would require advisers to report separately each component fund in complex fund structures, such as master-feeder arrangements and parallel fund structures. (Currently, Form PF allows advisers to report complex structures either in the aggregate or separately, as long as they do so consistently. The agencies stated that this practice obscures risk profiles and makes comparisons of complex structures difficult.)

Additionally, the agencies proposed to establish a new sub-asset class for digital assets, defined as an asset that is "issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called 'virtual currencies,' 'coins,' and 'tokens.'" The SEC and the CFTC stated that it is important to "collect information on funds' exposures to digital assets in order to understand better their overall market exposures."

Comments on the proposal are due within 60 days of issuance or 30 days after publication in the Federal Register, whichever is longer.

SEC Statements

SEC Chair Gary Gensler supported the proposed amendments, stating that they provide greater visibility for regulators to understand how the large hedge funds interact with the financial services industry as a whole. Mr. Gensler asserted that these amendments expand upon the SEC's recent changes to Form PF by providing even more detail on large hedge funds' (i) investment exposure, (ii) open positions and certain large positions, and (iii) borrowing and financing arrangements through counterparties, including central clearing counterparties.

SEC Commissioner Jaime Lizárraga applauded the improvements to the Form PF data collection, saying that the proposal (i) enhances data collection on private funds' use of trading vehicles and respective leverage, and (ii) requires all private fund advisers to report whether the funds provide investors with withdrawal or redemption rights and how often they are executed.

SEC Commissioner Caroline A. Crenshaw said that the proposal recognizes that "some information collected on Form PF has not been helpful to the Commissions or FSOC" and that these amendments seek to close information gaps and improve the quality of reported data.

SEC Commissioner Mark T. Uyeda expressed concern that the term systemic risk - while referenced heavily throughout - was not defined, which made it difficult to "evaluate the appropriateness of the proposed disclosure." Mr. Uyeda called attention to how changes to Form PF will result in additional costs for private fund advisers and investors, saying the SEC "fail[ed] to consider the cumulative costs of its changes."

SEC Commissioner Hester M. Peirce opposed the proposal, calling the changes an "overreach" with "inadequate and unconvincing" justifications. Ms. Peirce focused on the SEC's request for more "granular" information, saying that the Financial Stability Oversight Council ("FSOC") "does not need to have this kind of detailed knowledge of individual private funds' activities to fulfill its mandate" of identifying and responding to systemic risk. Ms. Peirce agreed with revisiting Form PF and thought elements of the proposal were worth considering, and she called on commenters to help "right-size" Form PF. Ms. Peirce was concerned that the increasingly "bank-like regulation on private funds" would begin to erode their ability to fail when investment decisions do not succeed, which she said was "one of their most important features."

CFTC Statements

CFTC Commissioner Christy Goldsmith Romero supported the proposal, saying that it "marks important coordination with the [SEC] to enhance joint reporting requirements and guard against hidden risks in the U.S. financial system."

CFTC Commissioner Summer K. Mersinger dissented, asserting that regulators should only request specific information from market participants on a "narrowly tailored" basis. She argued that the proposal failed to listen to "constructive input" by market participants on changes to Form PF. Ms. Mersinger said that she would support a proposal that would enable the CFTC to collect data more efficiently while mitigating unnecessary burdens on market participants.

CFTC Commissioner Caroline D. Pham stated that the joint proposal seems to "impose overly broad obligations that would be unnecessarily burdensome and would present potentially significant operational challenges and costs[.]" Ms. Pham cautioned that given the numerous economic challenges currently facing the market, regulators must be careful not to inhibit "positive economic activity."

Commentary

The SEC under current leadership made collecting information from hedge funds and private equity funds a high priority (see related news), and this rulemaking is designed to substantially expand oversight of what is a thriving private funds industry.

According to Mr. Gensler, data collected from Form PF provides "vital insight with respect to private fund[s]." Others in the industry (including my colleague) have commented that the ambiguity of the questions asked in Form PF are such that the data collected cannot possibly provide the SEC with valuable information on industry practices. In the background section of this proposed rule, the SEC acknowledged that its experience with Form PF data revealed opportunities to "improve data quality." The SEC also stated that more detailed data - to include information on investment strategies and exposures - would help FSOC assess systemic risk posed by private funds and their investors. How the industry reacts during the comment period will be important to watch as funds evaluate the impact of this 300-page release on current disclosure obligations.

Form PF has been required for a decade now and still questions remain as to its usefulness and/or purpose other than regulatory flex.