SEC publishes Form PF data
Private funds’ Regulatory Assets under Management (RAuM) totals $8.8 trillion, of which hedge funds and private equity vehicles comprise $4.04 trillion and $1.9 trillion respectively, according to the Securities and Exchange Commission’s (SEC) annual report summarising all of its Form PF data.
This represents an increase from $7.3 trillion in May 2013. The SEC data said there were 2,661 advisers submitting Form PFs. It added large hedge funds, defined as having more than $1.5 billion in RAuM accounted for 544 of these filers while the number of large private equity houses with more than $2 billion in RAuM stood at 200. In total, these advisers managed 21,542 funds, according to the SEC report.
Dodd-Frank requires investment advisers to submit a Form PF to the SEC on either an annual or quarterly basis depending on RAuM. This data will then be shared with the Financial Stability Oversight Council (FSOC), the body mandated under Dodd-Frank to monitor potential systemic risks to the US financial system.
The SEC said it would use Form PF data to assist it with its examinations of private fund advisers, and assess whether there are inconsistencies between Form PF and information supplied to regulators during examinations. Any irregularities in Form PF would certainly be taken account of during any enforcement actions. The SEC also confirmed it would be analysing Form PF to identify discrepancies between Form PF and publicly available documentations such as Form ADV, also provided to the SEC.
In addition, the SEC said it would be sharing some of the Form PF data not just with domestic regulatory agencies, but with global bodies including the International Organisation of Securities Commissions (IOSCO) “so IOSCO has a more complete overview of the global hedge fund market for a report that was shared with the Financial Stability Board (FSB).”
While the SEC does aggregate this data and make it public, the reports are copiously lacking in detail. Jiri Krol, head of government and regulatory affairs at the Alternative Investment Management Association (AIMA), said the industry would benefit if regulators such as the SEC and European Securities and Markets Authority (ESMA) followed the UK Financial Conduct Authority’s (FCA) precedent and published more thorough analyses of the data they collect on hedge funds.
Annex IV submissions, as required under the European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) will also face similar regulatory scrutiny as Form PF filings. Comments made by senior figures at the FCA and ESMA appear to back this up. It is likely regulators in the US and Europe will compare data provided to them in their respective regulatory reports to identify any errors or inconsistencies.
There are fears regulatory reports such as Form PF and Annex IV could inadvertently inflate RAuM at private funds. Annex IV, for example, incorporates the gross notional value of outstanding derivatives and leverage into the RAuM calculation, which is a stark deviation from the traditional AuM managers supply to clients in investor reports and prospectuses.
A fund manager might deliver an investor report stating its AuM is $2 billion but the methodology prescribed by ESMA could put the RAuM as high as $10 billion. Form PF faces similar challenges in that it too incorporates leverage into RAuM.
“There is a possibility that the inflated RAuM numbers being digested by regulators could facilitate further regulation if the authorities deem certain fund managers to be systemically more risky and important than they actually are,” said Grant Lee, director at PricewaterhouseCoopers (PwC) in London.
This comes following a consultation paper by IOSCO and the FSB which recommended “materiality thresholds” to identify asset managers deemed to be systemically important financial institutions (SIFIs). The FSB and IOSCO set a threshold of $100 billion in assets and an alternative threshold of between $400 billion and $600 billion gross notional exposure for hedge funds that it believed constituted SIFIs.
This SIFI designation earned a reprieve from industry groups including AIMA and the Hedge Fund Standards Board, which argued that the methodology employed by IOSCO and the FSB was flawed. Asset managers including Blackrock and Brevan Howard have also made public their dissatisfaction with the FSB/IOSCO consultation.
The FSOC recently announced it would explore the idea of designating certain asset managers as being SIFIs, with a particular emphasis on Blackrock and Fidelity. However, there has been a recent reprieve with the FSOC stating it would direct its staff to move away from evaluating the systemic risks posed by large asset managers with a renewed focus instead on the products they offer clients and the activities they undertake.
Should regulatory bodies deem asset managers to be SIFIs, they could be subjected to tighter regulation including bank-style capital, leverage, liquidity and reporting rules, in what could make it prohibitively expensive for some asset managers to operate their businesses.