SEC Proposes Private Fund Systemic Risk Reporting Rule
FOR IMMEDIATE RELEASE
Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today proposed a rule to require advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system.
The proposed rule would implement Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal creates a new reporting form (Form PF) to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on Form PF would remain confidential.
"The data collection we propose will play an important role in supporting the framework created by the Dodd-Frank Act and is designed to ensure that regulators have a view into any financial market activity of potential systemic importance," said SEC Chairman Mary L. Schapiro.
Under the proposal, larger private fund advisers managing hedge funds, "liquidity funds" (i.e., unregistered money market funds), and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, liquidity fund, or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would not be subject to the heightened reporting requirements.
Although this heightened reporting threshold would apply to only about 200 U.S.-based hedge fund advisers, these advisers manage more than 80 percent of the assets under management.
Proposed Form PF is the result of extensive consultation and collaboration between staff of the SEC and other FSOC members. This collaboration followed on earlier work with international regulators to conform hedge fund regulatory reporting standards.
The SEC's public comment period on the proposed reporting requirements will last 60 days.
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Private Fund Systemic Risk Reporting
The Dodd-Frank Act established FSOC for the purpose of monitoring risks to the stability of the U.S. financial system.
Working with other regulators, FSOC will gather information from many sectors of the financial system for this purpose. In order to assist FSOC in this process, the Dodd-Frank Act directs the Commission to collect information from advisers to hedge funds and other private funds as necessary for FSOC's assessment of systemic risk.
To implement this requirement, the Commission is proposing a new reporting form (Form PF) that would be filed periodically by investment advisers that are registered under the Advisers Act and manage one or more private funds. Information reported on Form PF would remain confidential.
In formulating this proposal, the Commission collaborated with the U.K.'s Financial Services Authority and other members of the International Organization of Securities Commissions. The resulting form is similar in many respects to surveys of large hedge fund advisers conducted by foreign financial regulators. In addition, the Commission consulted extensively with staff representing the other members of FSOC.
The CFTC is scheduled to vote tomorrow on jointly proposing these reporting requirements. If the CFTC approves the joint proposal, private fund advisers that are also registered with the CFTC as commodity pool operators or commodity trading advisors would file Form PF to comply with certain reporting obligations that the CFTC would impose.
Proposed Reporting Requirements
Under the proposed reporting requirements, private fund advisers would be divided by size into two broad groups — large advisers and smaller advisers. The amount of information reported and the frequency of reporting would depend on the group to which the adviser belongs.
Large private fund advisers would include any adviser with $1 billion or more in hedge fund, "liquidity fund" (i.e. unregistered money market fund), or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers.
The Commission anticipates that most private fund advisers would be regarded as smaller private fund advisers but that the relatively limited number of large advisers providing more detailed information would represent a large majority of industry assets under management. As a result, this threshold would allow FSOC to monitor a significant portion of private fund assets while reducing the amount of reporting for private fund advisers.
Smaller Private Fund Advisers
Smaller private fund advisers would file Form PF only once a year and would report only basic information regarding the private funds they advise. This would include information regarding leverage, credit providers, investor concentration and fund performance. Smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms.
Large Private Fund Advisers
Large private fund advisers would file Form PF on a quarterly basis and would provide more detailed information than smaller advisers. The focus of the reporting would depend on the type of private fund that the adviser manages:
Large hedge fund advisers would report on an aggregated basis information regarding exposures by asset class, geographical concentration and turnover. In addition, for each managed hedge fund having a net asset value of at least $500 million, these advisers would report certain information relating to that fund's investments, leverage, risk profile and liquidity.
Large liquidity fund advisers would provide information on the types of assets in each of their liquidity fund's portfolios, certain information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or aspects of the Investment Company Act's principal rule concerning registered money market funds (Rule 2a-7).
Large private equity fund advisers would respond to questions focusing primarily on the extent of leverage incurred by their funds' portfolio companies, the use of bridge financing, and their funds' investments in financial institutions.
The Commission is seeking public comment on the proposed reporting requirements. Comments should be received by the Commission within 60 days after publication of the proposing release in the Federal Register.