SEC Finalises Hedge Fund Reporting Rules
Tuesday, November 01, 2011

The Securities and Exchange Commission (SEC) has adopted new rules requiring certain advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risks to the United States financial system.

The rules, which implement certain stipulations of the Dodd-Frank Act, require SEC-registered investment advisers with at least USD150m in private fund assets under management to periodically file a new confidential reporting form (Form PF) - a joint effort of the SEC and the Commodity Futures Trading Commission (CFTC).

Private fund advisers are to be divided by size into two broad groups – large advisers and smaller advisers. The amount of information reported and the frequency of reporting depends on the group to which the adviser belongs. The SEC anticipates that most private fund advisers will be regarded as smaller private fund advisers.

Large private fund advisers will be those with at least USD1.5bn in assets under management attributable to hedge funds; liquidity fund advisers with at least USD1bn in combined assets under management attributable to liquidity funds and registered money market funds; or advisers with at least USD2bn in assets under management attributable to private equity funds.

It is believed that a relatively limited number of large advisers providing more detailed information will represent a substantial portion of industry assets under management. While the SEC has increased the private equity fund manager thresholds over its original proposals of USD1bn over all fund types, they should still allow the FSOC to monitor a significant portion of private fund assets, while reducing advisers’ reporting burdens.

Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year (rather than the 90 days included in the initial proposals), and report only basic information regarding the private funds they advise. Smaller advisers managing hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms.

Large private fund advisers must provide more detailed information than smaller advisers, with the focus and frequency of the reporting depending on the type of private fund the adviser manages.

In addition, Form PF will generally require substantially less information from advisers managing large private equity funds than the large hedge fund and liquidity funds advisers. This is because, after consultation with staff representing FSOC members, the SEC believes private equity funds have less potential to pose systemic risks than other types of private funds.

Large hedge fund advisers must file Form PF to update information regarding the hedge funds they manage within 60 days of the end of each fiscal quarter, rather than the 15 days stipulated in the SEC’s original proposals. However, the SEC considers that it will still mean that data quality will improve, while reporting burden will decrease, with this change.

In addition, while the advisers of each managed hedge fund having a net asset value of at least USD500m are required to report certain information relating to that fund’s exposures, leverage, risk profile, and liquidity, large hedge fund advisers will still not be required to report position-level information.

“The data collection form that we have adopted will address the dramatic lack of private fund information available to regulators today while easing the burden on private fund managers producing the data,” said SEC Chairman Mary L. Schapiro.

There will be a two-stage phase-in period for compliance with Form PF filing requirements. Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. Those with USD5bn or more in private fund assets must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.

In designing the Form PF, the SEC and CFTC consulted extensively with staff from the Treasury and the Federal Reserve, as well as the UK’s Financial Services Authority and other members of the International Organization of Securities Commissions. The resulting Form PF is similar in many respects to the European Securities and Markets Authority’s proposed private fund reporting template and surveys of large hedge fund advisers conducted by foreign financial regulators.