Statement by Commissioner Uyeda on Proposed Joint Amendments to Form PF

Mark T. Uyeda is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Commissioner Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Chair Gensler. Who benefits from investments in private funds and alternative investments? In many cases, they are the pensioners in a retirement plan or a university student who benefits from an endowment. In other words, Americans of all types benefit from a robust market for private funds that is diverse and provides sophisticated institutional investors and their advisers with choices to address different risk tolerances, investment strategies, and time horizons.

Since the enactment of the Dodd-Frank Act, advisers to private funds have been required to file Form PF, [1] which was adopted in 2011 and amended in 2014. As the title of Section 404 of that Act indicates, the requirement was to facilitate the “Collection of Systemic Risk Data.” [2] Yet today’s proposed amendments to Form PF, which come on the heels of an existing proposal to amend Form PF issued earlier this year [3] — would impose additional and more granular disclosures, with effects that could potentially reshape an industry that is already dominated by large fund advisers [4]

Form PF is intended to assist the Financial Stability Oversight Council (FSOC) in assessing systemic risk in the U.S. financial system. [5] When we consider a rulemaking proposal, one of the key steps is to identify the need for the rulemaking and explain how the proposed rule will meet that need. [6] Although the 303 page draft release, encompassing 103,223 words, sent to the Commissioners on Monday evening references “systemic risk” a total of 118 times, plus two additional references to “system risk,” the release largely does not describe or define what is meant by that term. [7] Merely stating over and over that the proposed amendments will help to monitor and assess systemic risk and provide additional information does not make it so. This shortcoming makes it difficult to evaluate the appropriateness of the proposed disclosures.

I am also concerned with footnote 156 of the proposing release, which asserts that exchange-traded funds present systemic risks, when it states, without any supporting references or explanation, that “we believe that activity in exchange traded products may present different systemic risks than traditional listed equities and other instruments that might be used to obtain exposure to underlying assets owned within an ETF.” [8] This is a rather bold statement and a conclusion that should have been subject to robust discussion and evaluation, rather than merely dropped into a footnote.

Each change to Form PF imposes additional costs on private fund advisers. The Commission fails to consider the cumulative costs of its proposed changes. According to the release, “[t]he SEC anticipates that the proposed amendments aimed at improving data quality and comparability would impose limited direct costs on advisers given that advisers already accommodate similar requirements in their current Form PF reporting.” [9] While costs may be limited when viewed in isolation, they can be significant when considered along with the costs of complying with pending rules that will affect private fund advisers.

Unfortunately, I fear the 60-day comment period for a proposal of such significance is too short to permit a thorough assessment of the costs of today’s proposal, when considered collectively with the costs imposed on private fund advisers by the other proposals. I am concerned that the effects of the cumulative costs will predominantly fall on the smaller private fund advisers. [10] The result will be an industry that becomes concentrated in large private fund advisors because they are the ones that can bear the increased regulatory costs.

Investors are likely to bear some, if not all, of these costs. The release acknowledges this when it states that “[a]ny portion of these costs that is not borne by advisers would ultimately be passed on to private funds’ investors.” [11] If there are fewer competitors as a result of higher costs, the remaining funds are more likely to pass these costs on to investors. Small pension funds and other cost-sensitive investors may be foreclosed from investing in private funds altogether.

Today’s proposal to require increasingly granular information from the private fund advisers with respect to their private funds raises additional dangers as well. The information to be collected on Form PF is proprietary and highly confidential in nature. Inadvertent disclosure of such information could cause significant damage. [12] In addition, it is simply not possible for the many employees of the Commission, Office of Financial Research, and member agencies of the FSOC who have access to Form PF data to unlearn what they have seen when they leave federal employment and pursue positions in the private sector. [13] An extensive collection of granular information by the Commission means that even if limited information is publicly disclosed, a fund strategy could be compromised.

Today’s proposal further blurs the line between the regulation of public and private funds and I am unable to vote in favor of it. Nevertheless, I look forward to the public’s comments on the proposed Form PF amendments and also on the impact of this proposal when considered together with the pending rulemaking targeting private funds. I thank the staff in the Divisions of Investment Management, Economic and Risk Analysis, Examinations, Enforcement, and Trading and Markets, the Offices of the General Counsel and International Affairs, and the Strategic Hub for Innovation and Financial Technology for their efforts on this proposal. I also appreciate the efforts from the CFTC, Treasury, and other member agencies of FSOC that contributed to this proposal. I do not have any questions for the staff.

Endnotes

117 CFR 279.9.(go back)

2Public Law No. 111-203 (2010).(go back)

3Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Release No. IA-5950, 87 FR 9106 (Feb. 17, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-02-17/pdf/2022-01976.pdf.(go back)

4U.S. Securities and Exchange Commission Annual Staff Report Relating to the Use of Form PF Data (Dec. 3, 2021), at 22, available at https://www.sec.gov/files/2021-pf-report-congress.pdf (Annual Staff Report).(go back)

5Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Release No. IA-3145, 76 FR 71127 (Nov. 16, 2011), available at https://www.govinfo.gov/content/pkg/FR-2011-11-16/pdf/2011-28549.pdf.(go back)

6RSFI and OGC, Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), at 1, available at https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.(go back)

7The proposal does describe specific systemic risk concerns with counterparty exposures of hedge funds with the broader financial services industry as well as trading and clearing mechanisms. Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers, Release No. IA-6083 (Aug. 10, 2022), at 59, 67, 169, available at https://www.sec.gov/rules/proposed/2022/ia-6083.pdf (Proposal).(go back)

8Id. at 85, n. 156.(go back)

9Id. at 172.(go back)

10Investment Adviser Association Comment Letter on Proposed Amendments to Form PF (Mar. 21, 2022), at n. 7, available at https://investmentadviser.org/resources/iaa-comment-letter-on-proposed-amendments-to-form-pf/ (IAA Letter).(go back)

11Proposal at 171.(go back)

12IAA Letter at IV.B.(go back)

13See, e.g., Annual Staff Report, at 8 (“Before beginning an examination of an investment adviser, staff reviews applicable regulatory filings, such as Form ADV. For advisers that manage private funds, Form PF filings may also be reviewed as part of a routine pre-examination evaluation for risk identification and scoping.”).(go back)

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