Broken Engagement? SEC uses data against advisers

By
David Kinnear

chicago

Much hype has surrounded the outreach efforts of the Securities and Exchange Commission (SEC) to “engage” the private fund industry. The campaign supposedly is an altruistic one, providing the industry with the tools necessary to help it comply with its regulatory obligations — a hedge fund “continuing education” course, if you will. The SEC is co-sponsoring just such a “Getting to Know You” event — officially billed as a Compliance Outreach Program — along with the Municipal Securities Rulemaking Board (MSRB) and Financial Industry Regulatory Authority (FINRA) in Chicago in early November complete with a discussion forum with regulators. But at the same time as the engagement campaign proceeds, another SEC effort is underway that takes advantage of mandatory reporting requirements to increase the number of enforcement actions against private funds.

Form PF

Form PF was designed to obtain detailed investment and operational information from private funds. The form, part of the Dodd-Frank Act, requires private fund advisers to report on “Regulatory Assets Under Management” (RAUM). Investment advisers who are registered with the SEC — having at least $150 million in private funds under management — must file the form, and the SEC, the Commodities Futures Trading Commission (CFTC) and the Financial Stability Oversight Council (FSOC) oversee enforcement of the reporting regime.

What Gets Reported?

Form PF is comprehensive in terms of the information it requires, and filers must provide information about types of funds advised, size of funds, use of leverage, types of investors the fund caters to, fund liquidity, performance, fund strategy, counterparty credit risk and the use of trading and clearing mechanisms — in sum, the adviser’s entire investment strategy.

Confidential — but Not Privileged

Although the Dodd-Frank Act provides that the information submitted via Form PF be treated confidentially — and, in fact, the SEC has designed controls to safeguard the proper handling of Form PF data — nothing in the act prohibits its use by the SEC as a tool for gathering evidence helpful in the furtherance of an enforcement action against the very party supplying the data. Furthermore, “confidentiality” in this context does not mean that the data cannot be shared with co-regulators such as the Commodity Futures Trading Commission, which also scrutinizes the submissions as part of its own examination and enforcement responsibilities. The SEC recently acknowledged that although the primary aim of Form PF is to assist the FSOC in assessing systemic risk to the economy, the SEC also is “using the information to support its own regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers” (Source: SEC Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports, August 15, 2014).

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