Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Private Fund Systemic Risk Reporting
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
October 26, 2011
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on October 26, 2011.
Today, the Commission will consider adoption of a joint SEC/CFTC form to collect critical systemic risk data about hedge funds and other private funds. This data will assist the Financial Stability Oversight Council (FSOC) in assessing the systemic risk that these funds may pose. This private fund data collection is mandated by the Dodd-Frank Act.
The data collection form we are adopting today — termed “Form PF” for “private fund” — was the result of extensive and collaborative consultation with fellow FSOC members as well as coordination with international regulators. As a result, we have produced a document that will address the dramatic lack of private fund information available to regulators today while easing the burden on private fund managers producing the data, so that the same data collection approaches and protocols apply cross-border where appropriate.
This private fund data collection initiative follows from the lessons learned during the financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system.
The Dodd-Frank Act sought to address this issue, in part, by creating the FSOC to carry out this monitoring role and by requiring the SEC to collect information from private fund advisers, to inform the Council in its assessment of systemic risk. Form PF data will give the FSOC new insight into private fund activities and greatly enhance the FSOC’s risk-monitoring mission.
Form PF data will be utilized by regulators to assess systemic risk. It will be complemented by the new Form ADV data about private funds, which provides both regulators and the investing public information about a private fund’s size, its managers, and the entities that serve critical “gatekeeper” functions, such as auditors and custodians.
For hedge funds, private equity funds, and liquidity funds, the information required on Form PF would be “tiered” so that we would receive more detailed information from larger private fund advisers, rather than imposing the same reporting requirements for all private funds. In addition, in a change from the proposal, we are adopting a minimum reporting requirement of $150 million so that smaller private fund advisers would not be required to file Form PF at all, in part because these smaller advisers would have a minimal impact on a broad-based systemic risk analysis.
While the group of large private fund advisers is relatively small in number, it represents a large majority of private funds’ assets under management. For instance, the rule would require heightened reporting from hedge fund advisers managing at least $1.5 billion in hedge fund assets. And, although this heightened reporting threshold would apply to only about 230 U.S.-based hedge fund advisers, these advisers manage more than an estimated 80 percent of the assets under management.
Reporting by Large Private Equity Managers
Similarly, SEC staff estimates that approximately 155 U.S.-based private equity fund advisers managing over $2 billion in private equity fund assets would be subject to the heightened private equity reporting. In response to commenters, we have increased the private equity fund manager thresholds to target those advisers that have the most influence over the private equity market.
At the same time, however, we believe that we still will receive heightened reporting from managers representing 75 percent of the private equity market. This will provide FSOC members the information they need to monitor the leveraged loan and private equity markets.
In addition, in general, the data collection form will 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, we believe private equity funds have less potential to pose systemic risks than other types of private funds.
Timing and Frequency of Reporting
The private fund data collection we are implementing will play an important role in supporting the framework created by the Dodd-Frank Act. It is designed to ensure that regulators have a view into financial market activities of potential systemic importance. At the same time, however, and in consultation with FSOC, we are making several changes at adoption that we believe address issues raised by commenters, while still preserving the utility of the data collection for FSOC.
The strongest concerns voiced on the proposal related to the timing and frequency of the reporting. We want the information that will be reported to regulators on Form PF to be useful. It will not be useful if it is rushed or incomplete. As a result, we are extending the filing deadlines from 15 days to 60 days for larger hedge fund advisers. In addition, for smaller advisers and for large private equity advisers, we are extending the deadlines from 90 days to 120 days. We believe data quality will improve and reporting burden will decrease with these changes, but FSOC will still obtain sufficiently timely data.
The deadline for private equity fund advisers is designed to allow these advisers to obtain financial statements from their funds’ portfolio companies. In addition, unlike the proposal, large private equity fund managers will only file Form PF once a year, as opposed to the quarterly requirement for large hedge fund and liquidity fund managers.
In consultation with FSOC staff, we are adopting this reduced filing frequency for private equity managers because the private equity business model is based on purchasing a select group of companies and working with management to strengthen them over time. Thus, trends emerge more slowly in private equity investing.
In addition, we took heed of comments related to the costs that attach to reclassifying, recalculating or reprogramming data and systems for reporting purposes. In fine-tuning Form PF, we have balanced the usefulness that comes from standardization of data reporting, where necessary, with the benefit of relying on advisers’ own internal calculation methodologies where appropriate.
I also know that the confidentiality of the information reported on Form PF is very important to those filing the information. The data is sensitive and proprietary and — by Congressional design — non-public. The Dodd-Frank Act contains strong protection for the information filed on Form PF. In addition, we are committed to building the controls necessary to provide appropriate confidentiality and limit the availability of proprietary hedge fund and other private fund information to those who have a regulatory need to know.
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Before hearing more details from the staff, I would like to thank those who worked hard to put this proposal together.
Within the SEC, this rulemaking was led by the exceptionally bright and capable team of Sarah ten Siethoff and David Bartels, along with Eileen Rominger, Bob Plaze, Keith Kanyan, Alpa Patel, and Parisa Haghshenas from the Division of Investment Management.
They were assisted by a number of others from across the agency.
From the Division of Trading and Markets: Gregg Berman. From the Division of Risk, Strategy and Financial Innovation: Craig Lewis, Harvey Westbrook, Chris Arnold, and Mathew Kozora. From the General Counsel’s Office: Mark Cahn, Meridith Mitchell, Lori Price, and Jill Felker. From the Office of Compliance Inspections and Examinations: Jim Reese. From the Enforcement Division: Robert Kaplan, Bruce Karpati, Brian Fitzpatrick, and Igor Rozenblit. And from the Office of International Affairs: Troy Beatty.
Now I’ll turn to the staff to hear more about their recommendation.