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Statement on Proposed Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers

Jan. 26, 2022

I want to begin by offering my thanks to the staff of the Divisions of Investment Management and Economic and Risk Analysis, and the Offices of the Chief Accountant and General Counsel.  Although I am unable to support today’s proposal, I appreciate all of the work and effort staff put into the proposal, including fielding numerous comments and questions from me.

My objections to the proposed changes to Form PF, however, are fundamental.  As we described at the time of its adoption in 2011, Form PF “is primarily intended to assist [the Financial Stability Oversight Counsel (also known as FSOC)] in its monitoring obligations under the Dodd-Frank Act.”[1]  As the Commission made clear in the release accompanying Form PF’s finalization, the Commission’s use of Form PF information in conducting its regulatory program is ancillary to the underlying purpose of facilitating FSOC’s monitoring for systemic risk.[2]  Congress did not conceive of Form PF to facilitate the Commission’s desire to inoculate well-heeled investors against downturns, losses, or fund failures.  Today’s proposal disregards these facts and represents a fundamental shift in Form PF’s scope and purpose.

Although the release cites monitoring and, where possible, mitigating or forestalling, market-wide disruptions as rationales for the proposed changes in reporting, the release provides scant evidence that the amendments to Form PF would enhance FSOC’s ability to monitor for systemic risk.  Rather, the enhanced reporting seems intended primarily to provide the Commission with additional information to support its regulatory and enforcement programs.  A regulator’s desire for data is insatiable, but more data is not always better.  Before we seek additional information through Form PF, we must show what we have done with the information we already require and show that it is insufficient to allow FSOC to monitor for systemic risk.  I do not think we have done that.  Merely citing gaps in data is not enough.  There will always be gaps—or at least I hope there will always be gaps—in just what information the government can access on private activities.  But we must ask: is our desire to fill these gaps born of necessity or curiosity?  I judge it to be the latter.

If finalized, large hedge fund advisers and all advisers to private equity funds would have one business day to report to the Commission the particulars surrounding certain “key events.”  These reportable events include: extraordinary investment losses; significant margin and default events; and large withdrawals and redemptions for large hedge fund advisers; and, in the case of private fund advisers, the execution of an adviser-led secondary transaction, implementation of general or limited partner clawbacks, and the removal of a fund’s general partner.

Requiring almost immediate reporting of localized events would distend Form PF into a tool for government to micromanage private fund risk management.  A hedge fund suffering losses equal to or greater than 20 percent of its net asset value over the course of ten days is unquestionably a significant turn of events for that hedge fund and its investors, but why is it appropriate or even wise for the Commission to insist on being notified of this within one business day?  Surely the fund adviser will have its hands full in such a fraught period and will have little time to spare to fill out government forms.  What makes this information so critical to us at the Commission, let alone FSOC?  If the losses are localized to a single fund, or even a handful of funds, why involve either government entity on a real-time basis? 

Form PF’s purpose is to facilitate FSOC’s monitoring of system-wide stability, not to inform the Commission about isolated trigger events affecting individual private funds.  Sure, isolated events can be indicative of systemic or potentially broader downstream disruptions, but what is the limiting principle here?  Merely asserting that isolated particular events could potentially indicate system-wide vulnerabilities, without any hard data-driven analysis, seems inadequate to justify the enhanced reporting.  Will FSOC and the Commission really be blind to system-wide threats absent these real-time reports of one-off events? 

Whether it is twenty percent losses or general or limited partner clawbacks, what does the record tell us concerning the correlative links between certain noteworthy events at one or a handful of funds and the wider market?  We owe the public a clearer understanding of the objective or subjective calculus or metric we have in mind when we say that contemporaneous reports from advisers concerning one or a handful of key events are significant enough to justify this added reporting burden for hundreds of advisers.  Saying that an otherwise isolated problem in a hedge fund could be indicative of a more global concern just is not good enough.  What will FSOC and the SEC do with this information?  Jump in to protect private fund investors from losses?

We are also proposing to change the reporting threshold for large private equity advisers.  But rather than raise a threshold that is now more than a decade old, we are proposing to reduce it from the current $2 billion to $1.5 billion private equity assets under management.  The reasoning behind this proposed reduction is unsatisfying and potentially harmful.  

When the current threshold was established, approximately 75% of the private equity market based on committed capital was covered.  In the intervening years, the private equity market has grown, such that with the increased number of smaller private equity funds operating below the $2 billion threshold, only 67% of that market is represented.  By this logic, if the industry continues to grow, we have set the precedent that we will continue to reduce the threshold again and again as the addition of smaller advisers means a smaller percentage of advisers meet the reporting threshold.  What is so magical about 75% of the industry falling within the ambit of Form PF?  Was the current $2 billion threshold chosen to reach 75%, or was 75% nothing more than the result of a $2 billion dollar threshold? 

Moreover, reducing the threshold seems to fly in the face of the Commission’s thinking in 2011, when we said that “[t]hese thresholds are designed so that the group of Large Private Fund Advisers filing Form PF will be relatively small in number, but represent a substantial portion of the assets of their respective industries.”[3]  By anyone’s definition, a form that continues to gather data on the activities of 67% of the private equity market based on committed capital is substantial, so what has changed?  Why are we no longer concerned about costs to smaller private fund advisers and, relatedly, are we in danger of putting the brakes on an otherwise dynamic and competitive industry?  Changing the threshold is a good idea: but I urge my fellow Commissioners to put their support behind increasing it, not reducing it.

I look forward to hearing from commenters as they evaluate the merits of this proposal.  Thank you in advance, commenters, for your insights and wisdom, which will inform my determination about how to vote on any adopting release.  Again, my thanks go to the agency’s staff who worked so hard on this proposal. 


[1] See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)] (“2011 Form PF Adopting Release”) at p.17. also, Advisers to Hedge Funds and Other Private Funds,

[2] See 2011 Form PF Adopting Release at p.17. (“Form PF is primarily intended to assist FSOC in its monitoring obligations under the Dodd-Frank Act, but the Commissions may use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers.”).

[3] Id at p.31.

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