Private Funds Wrestle with Form PF

Terry Flanagan

Many private fund advisers have begun to grasp the breadth of information required on Form PF—particularly for large private fund advisers—and how it requires a wide swathe of performance, investor, counterparty and portfolio data together with other information concerning fund concentration, risk and liquidity.

The major regulatory pain points for the buy side include the adoption of Rule 204(b)-1 under the Investment Advisers Act of 1940 and the related Form PF filing requirement.

The end of August brought the first filing deadline for large hedge and liquidity funds with assets under management of more than $5 billion for Form PF, whose primary focus is to assist the Financial Stability Oversight Council—the newly created macro-prudential supervisory agency in the U.S.—in monitoring systemic risk in the system.

Meanwhile, all registered investment advisors with $150 million or more under management must file Form PF on an annual basis starting from the end of this year.

“If you’re over $150 million in assets under management, you have to effectively put the Securities and Exchange Commission on notice that you’ll be subject to it next year,” said Thomas Elwood, vice-president and general counsel at Greylock Capital Management, a hedge fund with about $100 million in AUM that invests in distressed debt.

The increased regulatory requirements imposed on buy-side firms as a result of Dodd-Frank and related legislation, and the level of reporting required to comply with these regulations, is causing many buy-side firms to rethink their own requirements for data collection, storage and management.

Greylock is small enough that it can rely on its third-party administrators for most compliance projects.

“We can go to our administrator prime broker and assemble information in a reasonable amount of time,” Elwood said. “If you’re a fund with over $1 billion in AUM, you need a real infrastructure and a dedicated staff to generate the required information.”

Greylock has been registered with the SEC under the Investment Advisers Act since 2006. Subsequently, the requirement to register was overturned by a District of Columbia appeals court in the Goldstein case, but Greylock elected not to de-register.

“In 2006, everyone was required to register,” said Elwood. “We had registered both funds, and then came the lawsuit, but clients didn’t want us to de-register. It’s an enormous marketing plus to be registered as an investment adviser.”

Last month, the SEC reported that 1,504 advisers to hedge funds and other private funds have registered with the agency since the Dodd-Frank Act, which promises significant reform to Wall Street, mandated such registration.

While some private fund advisers previously registered with the SEC voluntarily, mandatory registration has given the SEC its first comprehensive look at advisers to these types of funds.

Including the 2,557 private fund advisers who had registered previously, a total of 4,061 advisers to one or more private funds are now registered with the SEC.

A total of 11,002 investment advisers now are SEC-registered, with 37% advising hedge funds and other private funds. Assets under management at SEC-registered advisers has risen about $5.7 trillion, or 13%, even though the number of advisers fell about 15% as the Dodd-Frank Act in June required mid-sized advisers to move from federal to state oversight.

To date, more than 2,300 mid-sized advisers—those managing less than $100 million of assets—have made the transition to state regulation.

“Registration of private fund advisers requires these important market participants to comply with the Advisers Act and SEC rules and arms the SEC with the authority to examine their operations,” said Norm Champ, director of the SEC’s Division of Investment Management, in a statement.

“Advisers are not just required to file a registration form, they also must take steps to ensure they are acting as fiduciaries, including monitoring their activities for conflicts of interest that can harm investors.”

Last month, the SEC’s National Examination Program launched an initiative to conduct focused, risk-based examinations of newly-registered private fund advisers over the next two years.

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