August 15, 2023 | Amanda Khatri
Estimated reading time: 4 minutes
Form PF changes: what’s new for the fund sector?
Form PF was drawn up in 2011 following the global financial crisis to identify risks in the private fund sector and increase the visibility of data. It aims to provide issuing bodies with vital insight into the nuts and bolts of private funds, a previously loosely regulated industry.
“Private funds today are ever more interconnected with our broader capital markets,” said SEC Chair, Gary Gensler.
“In the last 12 years since the Commission first adopted Form PR, private funds have evolved significantly in their business practices, complexity, and investment strategies” and the private funds market has nearly “tripled in size,” making “visibility into these funds even more important.”
Bringing greater transparency into the private fund industry, enhanced protection for investors and to “promote financial stability,” the rule mandates large firms like Blackstone and Millennium to disclose more information to regulators. This includes reporting on the following:
- Extraordinary investment losses
- Specific margin and counterparty events
- Terminations of, or material restrictions, on prime broker relationships
- Significant disruption or degradations of a hedge fund’s “critical operations”
- Events regarding withdrawal or redemption requests
“The inherent subjectivity of some of the new reporting requirements in the amended Form PF is another potential concern for some large hedge fund advisers,” said Scott Cogar, attorney at Robinson Bradshaw. He said the guidance isn’t entirely obvious in regard to which incidents which would trigger a report.
“Some instances of ‘material restriction’ are clear, such as if the prime broker decides to no longer execute certain trades on behalf of a reporting fund in a given market,” he added.
The intricacies of Form PF amendments
The rule applies to all hedge fund advisers and private equity fund advisers. When an event that could potentially cause stress at a fund, harm investors or signal wider risk in the financial system arises, private fund firms need to report these to the regulator “as soon as practical, but no later than 72 hours” after the event.
On a quarterly basis and 60 days before a quarter ends, private fund advisers must also report instances of removing a general partner, specific fund terminations and adviser-led secondary transactions.
Annually, any general partner and limited partner clawbacks, and insight into strategies and borrowings are to be reported too.
What are extraordinary investment losses?
If a hedge fund incurs investment losses that are equal to or more than 20 percent of a fund’s reporting fund aggregate calculated value (RFACV), the firm must notify regulators.
According to the SEC, an RFACV refers to “every position in the reporting fund’s portfolio, including cash and cash equivalents, short positions, and any fund-level borrowing, with the most recent price or value applied to the position for purposes of managing the investment portfolio.”
5 ways to ensure Form PF compliance
Navigating the regulatory landscape can be a challenging task for firms. Here are 5 ways to help your business get started on achieving Form PF compliance:
- Understand Form PF – Read the SEC’s regulatory requirements as per Form PF and identify what is expected of your business.
- Map these policies to internal controls – Once the correct compliance obligations are identified, implement these into your current regulatory frameworks.
- Establish reliable data trails – Collect the necessary data and ensure its accuracy across reports to showcase compliance to regulators.
- Employee training – Educate your compliance, legal and risk teams on Form PF requirements and provide timely reporting,
- Look ahead for further changes – Form PF came into effect in 2011, and the recent amendments imply that there could be further future changes. Stay vigilant and ahead of these changes to ensure compliance.
Global financial markets are adopting a more transparent way of banking and greater levels of accountability. The implementation of certain regulations has demonstrated this. For example, the Consumer Duty, the Senior Managers Accountability Regime (SMCR) and various enforcement actions against individual wrongdoers to ensure compliance from the top down.
However, events such as COVID-19, rising interest rates and Russia’s war on Ukraine have affected economic stability and increased the need for improved oversight over financial risks. The SEC’s amendments to Form PF aim to address similar risks in the private fund industry and strengthen its ability to supervise private fund firms by improving the quality of the information provided by private fund firms. The new requirements enhance visibility in the market, enabling regulatory intervention should there be significant risks which prevent a domino reaction of failures. The more it can see, the more it understands and the better equipped it is to regulate.
The end goal of transparency may be noble; however, the volume and velocity of regulatory change are becoming increasingly difficult to manage for compliance, risk, and legal professionals. To ensure your business is alerted to further amendments to Form PF, find out how CUBE’s horizon scanning capabilities can help you stay ahead of regulatory change. Benefit from automated reporting, with all your compliance obligations in one place.
To ensure your firm complies with private fund regulations, speak to CUBE.