SEC Proposes Reporting Changes for Private Equity, Hedge Fund Advisers

In a move intended to strengthen its regulatory oversight of the private fund industry, the Securities and Exchange Commission has voted to propose amendments to the confidential reporting form for certain registered private fund investment advisers. The SEC said the proposed amendments would provide it and the Treasury Department’s Financial Stability Oversight Council with more timely information to analyze and assess risks to investors and the markets.

Form PF is meant to provide the SEC and the FSOC with key information about the basic operations and strategies of private funds, and it has been used to establish a baseline picture of the private fund industry for use in assessing systemic risk.

The proposed amendments to Form PF would require large hedge fund and private equity advisers to report within one business day an event that indicates significant stress at a fund that could harm investors or signal risk in the broader financial system. This includes 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 proposed changes also include decreasing the reporting threshold for large private equity advisers in private equity funds to $1.5 billion in assets under management from $2 billion. The SEC said reducing the threshold would provide robust data on a large swath of the private equity industry. The proposal would also require more information about large private equity funds and large liquidity funds to improve the information used for risk assessment and the SEC’s regulatory programs.

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“Since the adoption of Form PF in 2011, a lot has changed,” SEC Chair Gary Gensler said in a statement. “The private fund industry has grown in size to $11 trillion and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures.”

The SEC said recent market events, such as the March 2020 COVID-19-related market crash, and the January 2021 market volatility in certain stocks have highlighted the importance of receiving current and robust information from market participants.

However, Commissioner Hester Peirce objected to the amendment proposals, saying in a statement that “Congress did not conceive of Form PF to facilitate the commission’s desire to inoculate well-heeled investors against downturns, losses, or fund failures,” and added that the “proposal disregards these facts and represents a fundamental shift in Form PF’s scope and purpose.”

Peirce also said she thought it was unreasonable to expect hedge fund and private equity advisers to report to the SEC about certain key events within one day.

“A hedge fund suffering losses equal to or greater than 20% of its net asset value over the course of 10 days is unquestionably a significant turn of events for that hedge fund and its investors,” she said. “But why is it appropriate or even wise for the commission to insist on being notified of this within one business day? Surely the fund adviser will have its hands full in such a fraught period and will have little time to spare to fill out government forms.”