The Securities and Exchange Commission adopted amendments to Form PF on May 3 after regulators took a 12-year hiatus from substantial changes in disclosure requirements.
SEC Chair Gary Gensler said in a statement: “Private funds today are ever more interconnected with our broader capital markets. They also nearly have tripled in size in the last decade. This makes visibility into these funds ever more important. Today’s amendments to Form PF will enhance visibility into private funds and help protect investors and promote financial stability.”
The amendments are designed to enhance the ability of the Financial Stability Oversight Council to assess systemic risks and to bolster the Commission’s oversight of private fund advisers and its investors protection efforts, officials in Washington said.
“While alternative asset managers do not pose systemic risk, we are sympathetic to efforts seeking to monitor risk throughout the financial system,” said Managed Funds Association President and CEO Bryan Corbett. “We appreciate that the SEC has incorporated some of our suggestions, but we are concerned this final rule has the potential to exacerbate stress on funds, harm investors, and increase market volatility without commensurate benefit. It is disappointing that the SEC didn’t move both Form PF rules together to help reduce the implementation burden on managers.”
The new requirements outlined
● Require current reporting by large hedge fund advisers regarding certain events that may indicate significant stress at a fund that could harm investors or signal risk in the broader financial system;
● Require quarterly event reporting for all private equity fund advisers regarding certain events that could raise investor protection issues; and
● Require enhanced reporting by large private equity fund advisers to improve the ability of the Financial Stability Oversight Council (FSOC) to monitor systemic risk and improve the ability of both FSOC and the Commission to identify and assess changes in market trends at reporting funds.
For large hedge fund and private equity fund advisers will need to report certain events that could indicate ‘significant stress’ or ‘investor harm’
Large hedge fund advisers, defined as having $1.5 billion or more in hedge fund assets under management, will need to report events including certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events and events associated with withdrawals and redemptions.
Managers will have no more than 72 hours from the occurrence of the relevant event.
Wayne Davis, a partner at New York law firm Tannenbaum Helpern Syracuse and Hirschtritt LLP, pointed out the compliance complications that hedge funds may face with the new reporting requirements.
“While the SEC’s interest in promoting timely and therefore actionable reporting is entirely understandable, requiring reporting by large hedge fund advisers within 72 hours of the identified triggering events will undoubtedly present many advisers with significant operational issues,” Davis said. “Particularly as certain triggering events will be difficult to relate back to a specific time from which the 72-hour period begins running, which itself is likely to result in considerable uncertainty regarding compliance.”
In its March 2022 response to the original proposal, industry organization AIMA noted the lack of cost/benefit analysis by the SEC and the overall lack of clarity. around this is noteworthy.
Reflecting on the final rule from yesterday, AIMA CEO Jack Inglis, said: “AIMA welcomes the extension of the reporting deadline from one business day to 72 hours, which we flagged as a core concern with the original proposal. However, the new terms bring their own operational challenges and could in some cases be a shorter deadline than was first proposed. Specifically, the shift measuring the compliance period from business days to hours will increase the likelihood of filing deadlines occurring outside of regular business hours or over weekends. This will create considerable compliance uncertainty for AIMA members, especially registered advisers outside of the U.S.”
Private equity firms, meanwhile, are provided a longer reporting lead time.
Reporting events for private equity fund advisers (those with $150 million or more in assets) include the removal of a general partner, certain fund termination events and the occurrence of an adviser-led secondary transaction. Private equity firms would have to file such reports on a quarterly basis within 60 days of the fiscal quarter end.
The amendments will also require large private equity fund advisers (those with $1.5 billion or more in private equity assets under management) to report information on general partner and limited partner clawbacks on an annual basis as well as additional information on their strategies and borrowings as a part of their annual filing.