The Securities and Exchange Commission proposed new regulations Wednesday that would increase the amount of information and frequency that some private investment firms would be required to report.
The proposal would amend certain aspects of Form PF, a document private equity and hedge funds use to confidentially report financial performance metrics, which the federal regulators said would give them more information to assess market events and protect investors.
One of the amendments requires large hedge funds and private equity funds to file a Form PF within one day of major business events, significantly increasing the timeliness and frequency from the previous quarter- or year-end deadline. Additionally, the proposal adds more reporting requirements for private equity funds.
“The blockbuster aspect of this proposal involves the near-real-time disclosure requirements of certain reporting events,” said Scott Mascianica, a Dallas-based partner at law firm Holland & Knight, who is on the firm’s white-collar defense and investigations team and securities enforcement defense team. “Near-real-time disclosure requirements for a litany of events, many of which could be the result of a variety of market forces, would be a significant burden for private fund advisors subject to the proposal.”
Dallas-based corporate lawyer Mike Laussade, who represents Texas-connected private investment funds at Jackson Walker, said Form PFs are already a more challenging document to work on because it isn’t made public, unlike many other disclosure forms, such as 8-Ks or Form Ds. He added the one-day reporting requirement could cause firms to accidentally become non-compliant, though it’s unclear what potential fines or sanctions would follow.
Large hedge funds would need to file with the federal regulators within one business day after the occurrence of a major event, including extraordinary investment losses, material changes in prime broker relationships and operations events, among others. Private equity funds’ triggering events include adviser-led secondary transactions, removal of a fund’s general partner or termination of a fund.
“From the perspective of lawyers and their clients on the fund side, (filing a Form PF) goes from a once-a-year exercise to ongoing monitoring process to make sure that we’re not missing a filing obligation,” Laussade said. “It seems like there might be some sort of compromised period in there for these things that gets the SEC much more timely information than they were getting before, but still some breathing room so that fund managers don’t find themselves having violated a rule because they’re a day late reporting an event.”
In addition to the frequency amendment, the proposal would decrease the reporting threshold for large private equity firms from $2 billion to $1.5 billion in assets under management and require those firms to submit additional information about fund strategies, use of leverage and portfolio company financings and other portfolio company information. Local private equity firms with more than $2 billion in assets under management include Trive Capital, Tailwater Capital and Highlander Partners.
Though Form PF disclosures are confidential, the commission uses responses to aggregate public reports and inform policy decisions. The agency said the onset of the COVID-19 pandemic in March 2020 and the January 2021 market volatility have increased the importance of obtaining ample information. Laussade said he thought some of the required reporting factors could actually be a result of large market events, rather than a leading factor.
SEC Chair Gary Gensler said the private fund industry has changed significantly in size and practice since Form PF was adopted in 2011, and the Commission and Financial Stability Oversight Council, which monitors Form PFs, has more experience analyzing the information. The private fund industry has more than doubled in the last decade to $11.7 trillion in net assets, per SEC data.
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