The Changing Nature of Form PF: Statement on Amendments to Form PF

Thank you, Chair Gensler. This expansion of Form PF data collection is the latest reflection of the Commission’s unquestioning faith in the Benevolent Power of More, a faith that I do not share. We have not explained sufficiently why we need the information we are mandating and why we need it so quickly. The additional information may tempt regulators to intervene in markets in ways that would undermine long-term market resilience and exceed jurisdictional bounds. Accordingly, I cannot support the rule.

The Financial Stability Oversight Council (“FSOC”) and the SEC do need high-quality information about the markets and the firms participating in those markets, but more is not always better. Congress envisioned Form PF primarily as a tool to assist the FSOC in carrying out its systemic risk monitoring role. Today’s amendments to Form PF, despite the release’s generally unconvincing nods to systemic risk, largely appear to be an SEC compliance exercise—part of an effort to recast private fund regulation in the mold of retail fund regulation.[i]Form PF is turning into a compiler of routine events for the purpose of sweeping private fund advisers into examinations and enforcement actions.[ii]The release, for example,highlights that certain disclosures are intended to facilitate the Commission’s policing of potentially conflicted activities, such as adviser-led secondary transactions, the administration of step-downs in fees following an investor election to terminate a fund’s investment period, and clawbacks.A cynical read of this release could even find an intent to discourage certain private advisers from engaging at all in certain activities.[iii]While the SEC has a role to play in protecting private fund investors, the statutory framework intentionally gives broader latitude to private funds vis-a-vis their relationship with investors than it does to registered investment companies. Investors who want more guardrails can invest in registered funds. As we shift retail-oriented rulemaking, examination, and enforcement resources toward protecting investors in private funds, we subtly depart from the statutory model.

The expansion of Form PF requirements ironically could be harmful from a systemic risk perspective. By demanding almost real-time data about some relatively commonplace events, we send a message to the markets that the government is a back-up risk manager for funds. To the extent reporting events are triggered during real periods of stress, private fund managers should focus on managing their risks, not filling out SEC forms. Far from improving our ability to understand what is going on with private funds in times of stress, requiring funds to provide granular information on a compressed timeline on a government form could impede free-flowing, productive communication between fund advisers and the SEC.[iv]

The release hints repeatedly that timely notification of a variety of new triggering events will allow the Commission and FSOC “to assess whether any regulatory action could mitigate the potential for contagion or harm to investors.”[v]The release does not explain what such a response would entail, which is not surprising given that the SEC is neither equipped nor authorized to tell private funds how to manage their risks, let alone to rescue private funds in times of stress. All we can do is respond to discrete calls for relief from regulatory obligations. While other agencies represented at FSOC have a few more arrows in their quivers, the shaft on which they sometimes rely is bailing out private entities that did not manage their risk properly.By definition, the entities from which Form PF seeks information should not be on the bailout list. The private fund industry is dynamic precisely because advisers can enter the industry easily and cannot count on anyone to rescue them if they fail.

In addition to being out of line with its statutory purpose, the newly expanded Form PF raises additional practical implementation problems, including:

• Short and operationally difficult reporting timeline.Abandoning the proposed one business day reporting requirement following certain triggering events is a positive change, but the final rule requires reporting “as soon as reasonably practicable, but no later than 72 hours upon the occurrence of the event.” The tacking on of “as soon as practicable” lessens the benefits of backing off the one-day requirement. Moreover, measuring the reporting timeline in hours instead of days suggests rather unrealistically that the onset of each of these events occurs at a precise hour in time and that funds’ reporting systems are able to capture that precise moment.
• Unnecessarily short compliance period.The release adopts two compliance dates—six months for the new sections of the form and one year for the amended sections of the form—both of which are unnecessarily short given the likely need for systems redesign to capture and report newly required information.[vi]The release does not offer any substantive explanation for why such haste is necessary.
• Lack of coordination with the other Form PF rulemaking.A second rulemaking that we are conducting jointly with the Commodity Futures Trading Commission, if adopted, will also amend Form PF. We should have coordinated the rules’ adoption and compliance dates.[vii]

As always, my inability to support a particular rulemaking is not a criticism of the dedicated people who drafted it.Indeed, the recommendation before us seeks to respond to comments in a number of ways, including the decision not to lower the reporting threshold for large private equity fund advisers from $2 billion to $1.5 billion, the decision not to proceed with a proposed unencumbered cash report,and the decision not to base reporting of extraordinary investment losses and margin increase on outdated NAV figures. Thank you to staff in the Divisions of Investment Management and Economic and Risk Analysis, the Office of General Counsel, and others throughout the Commission who worked on this release. I know that much time went into this release, including many hours over at least one very taxing weekend put in by Melissa Roverts Harke, Robert Holowka, Sirimal Mukerjee, Adele Kittredge Murray, Neema Nassiri-Motlagh, Jill Pritzker, David Stevens, Thomas Strumpf, Sarah ten Siethoff, and Samuel K. Thomas.