Form PF disclosure time begins in July for managers

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Ron Papanek

As federal regulators hunt for systemic risk to financial markets in new reports required of private fund managers, institutional investors are likely to start demanding some of the same information, industry analysts say.

This summer starts a new era of disclosure for managers of hedge funds and private equity, which for the first time have to report closely held information to the Securities and Exchange Commission in the new “Form PF.” The information will be shared with the Financial Stability Oversight Council as it checks for systemic risk in financial markets.

Hedge fund firms managing at least $1.5 billion must report quarterly. Private equity managers with more than $2 billion under management and all others with AUM of more than $150 million must file annually.

Managers exclusively in venture capital funds or firms with less than $150 million, and foreign managers without a U.S. corporate office, are exempt.

“Investors are well aware (of), and many investors have requested to see,” the submitted reports, said Ron Papanek, executive director, alternative investments, at MSCI Inc., New York, a provider of portfolio risk and performance analytics. “It offers useful information like stress testing and sensitivity to global risk factors.” He wouldn't identify the investors.

Mr. Papanek predicts investor demand for such information will result in broader dissemination, once managers and regulators get comfortable with the new reporting.

Gurvinder Singh is CEO of Indus Valley Partners, a New York portfolio management technology firm, which is helping its alternative asset manager clients prepare for Form PF. He is already seeing funds of funds asking for similar data, and he expects sovereign wealth fund and endowment clients to follow.

“If they are smart, they are going to be asking for it,” said Mr. Singh, whose clients include 15 of the top 25 largest global hedge funds representing $400 billion in assets under management.

“This could be a positive for firms that don't spend enough time on risk management and risk metrics,” said Jim Volk, chief accounting and compliance officer with SEI Investments (SEIC) Co.'s investment manager services division in Oaks, Pa.

Larger firms have reassigned staff to get ready, while many smaller firms are still figuring out whether to tackle the data gathering and reporting themselves, Mr. Volk said. Regardless of which path is taken, “people are going to have to change their habits.”

Mr. Singh agrees the new reporting demands could help different divisions of a firm think more holistically. “It does force them to collaborate, perhaps for the first time.”

SEC officials are also figuring out how they will handle what Karen Barr, general counsel of the Investment Adviser Association, Washington, calls “a treasure trove of information ... that they didn't have before.”

Worried managers

Along with the prospect of client pressure for more disclosure, managers are worried about how the information is going to be used. SEC officials say data security is a top priority as they prepare to process the new information and to exchange it with the oversight council. While the information is protected from Freedom of Information Act requests from media or other parties, it could be turned over to Congress.

SEC officials readily admit the new information will also help them identify targets for examinations and investigations, and could lead to policymaking changes.

Anxious managers are hoping that after receiving the first batch of information, the SEC will provide more guidance on what it is looking for and how it should be reported, particularly when it comes to risk. An SEC official who did not want to be identified said there are plans to issue a “frequently-asked-questions” document later this year, and the commission will make further adjustments after the first round. “We understand that this is a new form and, like most forms, this will be a learning process, for a lot of people,” the official said.

Despite that uncertainty, managers are ready, more or less. The first reports are due in mid-July from managers in all strategies of $5 billion or more. Hedge fund managers with more than $1.5 billion must start reporting by next March. Private equity managers must file 120 days after the end of their fiscal year.

But not all managers are happy. “They have been working hard, with inside and outside advisers, but they are finding the regulations expensive and burdensome,” said a private equity official who did not want to be identified.

In comments to a private equity gathering recently, Carlo V. di Florio, director of the SEC's Office of Compliance Inspections and Examinations, said as his group moves to a more risk-based approach, it will be looking at a firm's process for detecting and handling problems and conflicts of interest, and how well established - and followed - those policies and procedures are. Questions for private equity will include how straightforward the fund's strategy and valuation process are, how much control the fund has in portfolio companies, and whether there are clear disclosures to investors about fees and compliance procedures.

The key, he said, is to be proactive in identifying potential conflicts, instead of having the SEC discover them first.