Increased Reporting by Hedge Funds to Regulators Coming Soon

Judy Gross

Jun. 2 2011 - 7:55 am

The Securities and Exchange Commission, in conjunction with the Commodity Futures Trading Commission, has proposed a new “Form PF” reporting requirement, which, if implemented as proposed, represents a substantial increase in the amount of information required to be reported in to these regulators by hedge funds.

Form PF is a statutory mandate stemming from the Dodd-Frank Act’s goal of promoting the financial stability of the US by supervising non-bank financial companies that may pose systemic risks. The information gathered from the Form PF will be shared with the Financial Stability Oversight Council (FSOC). The SEC believes the Form PF is beneficial not only in monitoring systemic risks, but also in providing information that will enhance the SEC’s ability to formulate regulatory policies. The FSOC will use the data obtained from the Form PF to gain a broad view of the financial system and to gauge interconnectedness of financial players.

All SEC or CFTC registered investment advisers to private funds must file a Form PF. There are two types of proposed filers of the Form PF – those advisers with assets over $1billion, and those under $1billion.The under $1b group files annually, the over $1b group, quarterly. The annual filers have an abbreviated form, while the larger ones have an extended version to complete. Broadly speaking, the information requested falls into the categories of: amount of assets under management, use of leverage, counterparty credit risk exposure, and trading and investment positions/performance for each fund. The extended form includes additional information involving stress testing and exposure analyses.

We believe that the Form PF will present significant challenges to hedge funds in three areas:
1. Time/Cost Burden: The proposed rule estimates that the burden for the smaller advisers will be 10 hours to prepare an initial report, and 3 hours for each subsequent report. The estimated burden for the larger advisers is 75 hours for the initial report, and 35 hours for each subsequent quarterly report. The SEC notes that it believes some or all reporting will be outsourced, or, if not, will require both compliance and IT programmers to develop internal reporting systems. We believe that the time and cost burden may be even more significant than estimated by the SEC and that advisers need to begin to focus now on how they will address actually prepare the report.

2. Timetable: The implementation dates for the first filing are relatively soon. The first filing date may be as soon as the first quarter of 2012, although an extension of this date seems likely at this point . The quarterly filers must file thereafter within 15 days of each quarter end. We believe that if this timetable is adopted as proposed, it is offering an extremely small window for quarterly filers, who will need to have expert systems in place very soon in order to fulfill these obligations.

3. Confidentiality: The proposal states that all information collected in Form PF will not be made public, although the information collected may be shared in an enforcement action or with Congress (upon agreement of confidentiality). The SEC may also share the information with other government agencies or SRO’s, most particularly the FSOC. While seemingly reasonable, we are concerned that the collected information, which is the cornerstone of a hedge fund’s business, may be made, through circuitous sharing within the government and Congress, unintentionally available publicly.

The proposed Form PF reporting regulation is available at http://www.sec.gov/rules/proposed/2011/ia-3145.pdf.

http://blogs.forbes.com/judygross/2011/06/02/increased-reporting-by-hedge-funds-to-regulators-coming-soon/