More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The SEC told Congress Friday that it is using the information it has gleaned from Form PF in its examinations and enforcement efforts regarding private fund advisors, including hedge funds, and plans to “enhance” how it uses the data.
Section 404 of the Dodd-Frank Act directed the SEC to establish reporting requirements for investment advisors to private funds and for assessment of systemic risk by the Financial Stability Oversight Council (FSOC). The SEC complied by adopting Form PF in 2011; the form must be completed by RIAs that manage $150 million or more in assets attributable to private funds.
As of May 7, 2014, the SEC’s Division of Investment Management told Congress, it had gathered data on 21,542 private funds submitted by 2,661 advisors to hedge funds, private equity funds, venture capital and real estate funds and securitized asset funds with a total of $8.87 trillion in regulatory assets under management (RAUM).
The advisors who filed were in different categories by amount of assets they advised in 7,790 hedge funds; 7,004 private equity funds; 3,680 “other" private fund types; 1,397 real estate funds; 1,209 securitized asset funds; and 393 venture capital funds.
Most advisors are required to file Form PF once a year, and report only basic information regarding the private funds they advise. However, the report notes that large private fund advisors must provide more detailed information, with the “content and frequency” of the more detailed reporting depending on the type of private funds the large advisor manages.
For example, advisors with at least $1.5 billion in hedge fund RAUM must file Form PF quarterly and provide aggregate information on their hedge funds’ exposures, geographical concentration and turnover by asset class (but not position-level information). In addition, for each Qualifying Hedge Fund (i.e., $500 million or more in net assets), advisors provide additional information.
The SEC said in its annual Form PF report that it has been using the Form PF information to support its own regulatory programs, including exams, investigations and investor protection efforts relating to private fund advisors.
The Commission’s staff has focused its efforts on using Form PF data in examinations and investigations of private fund advisors and in the SEC's risk monitoring activities; providing additional guidance to filers; and working with other federal regulators and international organizations on issues related to private fund advisors.
The report states that the SEC’s Division of Economic Risk Analysis uses Form PF data “to identify advisors engaging in activities implicating particular areas of examination focus” such as exposures, valuation, and high-frequency trading and to identify “red flags” that may trigger examinations.
Form PF data principally is used by the Office of Compliance Inspections and Examinations, the Division of Economic and Risk Analysis, the Division of Enforcement and the Division of Investment Management. Because “staggered filing dates” tailored to the size of an investment advisor dictate when an advisor must file its Form PF, the Commission has only received “two full sets” of data from its filing population, the report says. “As the data continues to be filed, Commission staff anticipates enhancing its usage of Form PF data.”
Enforcement staff also obtains and reviews the Form PF filings of certain advisors in connection with ongoing investigations, the report says. Among other Enforcement staff, the Asset Management Unit utilizes Form PF data in investigations of private fund advisors.
The SEC’s final money market fund rules, adopted in late July, amends Form PF to require a large liquidity fund advisor (a liquidity fund advisor managing at least $1 billion in combined money market fund and liquidity fund assets) to report substantially the same portfolio information on Form PF as registered money market funds are required to report on Form N-MFP. A liquidity fund is essentially an unregistered money market fund.