Thomson Reuters has warned private fund advisors that they must be able to source substantial amounts of accurate data and automate reporting if they are to meet the regulatory challenge of Form PF. In an industry briefing published this month – titled Form PF: Data Takes Center Stage – Thomson Reuters global head of evaluated pricing Jayme Fagas warns that failure to meet filing deadlines or inaccurate reporting could spark regulatory investigation and lead to financial penalties and reputational damage.
The Form PF rule requires registered investment advisers to submit information on the operations and strategies of the private funds they manage and is designed to increase transparency and understanding of exposure in capital markets.
The rule stems from the 2010 Dodd-Frank Act and has been adopted by the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). Its primary aim is to augment the supply of information to the Financial Stability Oversight Council established under Dodd-Frank so than it can better assess and monitor systemic risk in the financial system.
The rule applies to advisers to hedge funds, private equity funds and liquidity funds. The deadline for advisors to register with the SEC was March 31, ahead of the Form PF rule taking effect on June 15 for advisers with more than $5 billion of assets under management. In July, liquidity funds with more than $5 billion of assets under management had to make their first Form PF filing, while this was followed in August with first Form PF filing for hedge funds of a similar size. The next major deadline is December 15, when the rule will become effective for all other filers with assets under management over $150 million.
According to Thomson Reuters’ Fagas, “To meet Form PF obligations, advisors will have to provide regulators with an unprecedented assortment of information on either a quarterly or annual basis, depending on the size of their funds. This has profound operational and cultural implications in the private fund adviser arena, as for the first time, the market will be subject to consistent levels of transparency.”
At a minimum, the information requirements of Form PF include data covering: regulatory and net assets under management by type of fund; gross and net asset value of each fund; value of investments in the equity of other private funds; value of each fund’s derivative positions; a breakdown of the assets and liabilities of each fund by fair value price; and monthly or quarterly gross and net performance details.
For larger advisors the requirements become more burdensome, with large hedge fund advisors, by way of example, also required to provide information covering: aggregate market value of different asset types; duration, weighted average tenor, or 10-year bond equivalent for fixed income holdings; long and short exposures by asset class for each qualifying hedge fund; liquidity in the portfolio; collateral management practices; and value of derivatives positions, including net mark-to-market value of uncleared positions.
Fagas notes that the objective and content of Form PF resembles the industry-led Open Protocol Enabling Risk Aggregations (Opera) initiative that was introduced in 2010 by Thomson Reuters and Albourne Partners, and designed to improve transparency by standardising the way in which hedge funds collect, collate and report risk and performance information. Similarly, Form PF standardises the way private fund advisors report on their businesses and risks, offering regulators enhanced transparency and investors access to information that can help them make better investment decisions.
Filling and filing Form PF will be driven by effective data sourcing and management, with Fagas pointing particularly to the need for pricing and valuation data, as well as the ability to collate and manage data from different jurisdictions accurately. For this she recommends the use of a data provider with global reach. Correct legal entity identification, nomenclature, collateral valuation and validation, and settlement and clearing data is also required.
“The challenge is to populate the form with accurate information and do so in the permitted timeframe. This depends on robust and efficient data sourcing, collection, verification and collation processes. Further, the SEC and CFTC intend to leverage Form PF submissions for their investor protection activities, using the information to support examinations, investigations and any resulting enforcement actions,” says Fagas.
While the burden of Form PF is substantial and adds to already growing regulatory requirements, Fagas suggests firms that view data challenges as opportunities could benefit from the implementation of regulations such as Form PF. She explains: “With the right approach to Form PF adoption firms have an opportunity to promote their marketability. Advisors that institute a robust reporting service and use the data to enhance their risk management and performance capabilities will be best placed to improve their investor relationships and attract more inflows.”