SEC proposes new Form PF reporting

Rule proposals open private funds' year of living dangerously.

Private equity and hedge fund advisers will have one business day to tell regulators about their disasters under new proposed rules the US Securities and Exchange Commission has just approved for public comment.

If the proposed rules are adopted as-is, large hedge fund advisers would have to update their Forms PF within a day of “certain extraordinary investment losses, significant margin and counterparty default events, material changes in prime broker relationships, changes in unencumbered cash, operations events, and events associated with withdrawals and redemptions”, the Commission said.

“The proposal also would require advisers to private equity funds to file current reports within one business day of the occurrence of one or more reporting events pertaining to the execution of adviser-led secondary transactions, implementation of general partner or limited partner clawbacks, removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund,” the Commission said in a new fact sheet accompanying the rule proposal.

Among other things, the proposed rules would:

  • Lower the assets under management threshold that require large private equity funds to file a Form PF from $2 billion in AUM to $1.5 billion in AUM;
  • Amend section 4 of Form PF to ask private equity advisers questions “regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations”;
  • Require large liquidity fund managers to “report substantially the same information that money market funds would report on Form N-MFP”.

Year of living dangerously

The Commission voted to approve the rulemaking notice 3-1 at its first open meeting of the year on 26 January. If adopted, the rules would be the first major changes to private fund reporting requirements since regulators put Dodd-Frank rules in place.

The vote also opens what may well be a year of living dangerously for private funds: SEC Chairman Gary Gensler and his Democratic allies Allison Herren Lee and Caroline Crenshaw have made clear that it’s time to rein the industry in. The Commission is also weighing changes to Form D, the definition of accredited investors, and a suite of “enhanced disclosures” for advisers from venture capital funds to family offices.

‘The wrong angle’

Private fund advocates and the popular press have written much of Gensler’s reform ambitions off as a kind of entrenched hostility to the industry. Former SEC exam chief Carlo di Florio sees things a little differently.

“I think that’s probably the wrong angle,” he told affiliate Regulatory Compliance Watch. “I hear the chairman saying that these funds – private equity, venture capital and hedge funds – are an essential and ever-growing part of our economy and therefore the SEC has an obligation to monitor them carefully, ensure adequate transparency and manage conflicts of interest.”

Now chief services officer with ACA Group, di Florio says that Gensler’s ambitions are both simpler and several orders of magnitude greater than they seem. Ever since the meme stock “raid” knocked world markets off their axes, di Florio says, Gensler has talked openly and repeatedly about reorganising the very structure of capital markets themselves. Private funds are “a key participant” in those markets, he said.

A target-rich environment

In a speech to Washington, DC’s Exchequer Club just four days before the Form PF vote, Gensler said he wants staff to look “up and down the capital markets” to find ways “we can drive towards greater efficiency through competition and transparency”.

The private funds industry, Gensler said, is a target-rich environment.

“These funds hold about $17 trillion in gross assets under management,” he said. “If we can use our authorities to bring greater transparency and competition into that market, that helps portfolio companies on the one hand, and the pensions and endowments that are investing in that space on the other. Similarly, if we can drive efficiencies across other key sectors of the capital markets, that too would help issuers and investors.”

‘We owe the public’

The notion seems to have struck Republican Commissioner Hester Peirce similarly. The sole “nay” in the 26 January vote, Peirce said she was mystified by the proposed rules.

She said she couldn’t understand the rationale behind the proposed reporting deadlines (“What are the metrics we’re using?” she asked). She also said it was ludicrous to lower reporting thresholds more than a decade after Dodd-Frank and in an inflationary economy at that.

“We owe the public a clearer understanding,” she said.

The comment period for the proposed roles will be open for 30 days after publication in the Federal Register.

– This story first appeared in affiliate publication Regulatory Compliance Watch