August 17, 2022 | Amanda Khatri
Estimated reading time: 5 minutes
The financial industry is embracing a more transparent way of investing and banking and with that comes a greater level of accountability. Transparency also comes hand in hand with taking a long, hard look in the mirror and accepting responsibility for the shortfalls in the system.
Regulations are constantly evolving and changing to identify and repair failures in the system that don’t protect consumers. For example, cryptocurrency protections are under the spotlight all over the world, the Financial Conduct Authority’s (FCA) Consumer Duty aims to place consumers at the heart of all financial service decisions, and Buy Now Pay Later is also coming under scrutiny. The times of operating beneath the cracks of the surface are coming to an end…the water levels are rising.
On 10th August, the US Securities and Exchange Commission (SEC), together with the Commodity Futures Trading Commission (CFTC), voted to recommend amendments to Form PF, which would increase the reporting requirements for certain private fund advisers. Aiming to improve the quality of information supplied by Form PF, enhancing investor protection and maintaining fair, orderly and efficient markets.
What is Form PF & why does it matter?
Form PF was implemented by the SEC and CFTC in 2011. It provides vital information about the operations and strategies of private funds, striving to improve data quality and identify potential risks for an industry that operates with little to no regulation. The data found could be used for regulatory programs like examinations, investigations and investor protection efforts.
Private funds refer to “pooled investment vehicles” that are excluded from the definition of “investment company” under the Investment Company Act of 1940. Otherwise known as hedge funds, private equity funds and liquidity funds.
In the last decade since the adoption of Form PF, regulators have gained valuable insight into the nuts and bolts of private funds. However, SEC Chair, Gary Gensler has cited that “the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity, and investment strategies.” Certain investments like credit, digital assets, litigation finance and real estate strategies have become more common and qualifying hedge fund exposures to repurchase agreements, reverse repurchase agreements and US treasury securities have increased.
To keep up with this growth and level out the playing field, the SEC along with the CFTC is proposing to amend Form PF. The main purpose is to enhance reporting by large hedge fund advisers on qualifying hedge funds, improving data quality and reducing reporting errors whilst also gaining greater insight into private funds’ strategies, which largely operate behind closed doors – no hedge fund adviser wants to give their secrets away!
What are the proposed amendments?
In summary, the amendments will enhance how large hedge fund advisers, with a net asset value of $50 million minimum report:
- Investment exposures
- Borrowing and counterparty exposure
- Market factor effects
- Currency exposure reporting
- Country and industry exposure
- Central clearing counterparty reporting
- Risk metrics
- Investment performance by strategy
- Portfolio correlation
- Portfolio liquidity
- Financing liquidity
In particular, the amendments introduce four key changes:
- Advisers are required to report additional information about themselves and their private funds including, but not limited to, identifying information, assets under management, withdrawal and redemption rights, asset values and fund performance.
- It will remove duplicative questions and ask for more information on hedge fund investment strategies, counterparty exposures, and trading and clearing mechanisms.
- The proposal generally 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 asks large hedge fund advisers to report aggregated information about the hedge funds they advise. The proposal would remove this reporting requirement.
The proposal will be published on SEC.gov and in the Federal Register.
The proposed amendments look to improve the regulator’s understanding and regulation of the private fund industry as well as provide knowledge on which of the private fund activities could lead to systematic risks.
This all ties into a sea-change in financial services towards a more transparent, ethical and ‘seeing the bigger picture’ way of doing business.
Recently, we’ve seen new regulations and changes left, right and centre – from crypto being slowed down in its tracks with emerging regulations, to changes that hold chief compliance officers accountable, to a new UK Consumer Duty. Compliance teams have faced a bumpy ride, but all for a greater cause – achieving a culture of compliance that serves to protect consumers and create long-lasting market stability.
The next stop on the long road to transparency is the private fund industry. The SEC’s recent amendments to enhance private fund reporting aim to gather detailed reporting for large hedge fund advisers, advisers of private funds and hedge funds themselves. The SEC is looking to gain the entire perspective of the short-term financing markets. The more it can see, the more it understands, and the better equipped it is to regulate.
With transparency, however, comes greater responsibility and obligations for the compliance teams. Regulatory reporting is no mean feat, and the SEC’s latest changes will place an extra burden on the desks of compliance executives. While the end goal is noble, the ever-increasing compliance burden is becoming increasingly difficult to manage, especially when considered alongside broader regulatory changes for emerging areas.
At CUBE, we strive to ensure our customers take centre stage in a smoothly operating financial industry. We help you achieve well-run, compliant business processes that follow all current regulations and keep you aware of emerging changes on the horizon.
With CUBE’s products, businesses can be prepared for regulatory filings and compliance issues for an SEC examination – with automated reporting and all your regulatory obligations in one place.
Get in touch to see if CUBE’s solution can help your business.