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SEC eases hedge, PE reporting burdens

by Ira Teinowitz | Published October 27, 2011 at 9:33 AM

The Securities and Exchange Commission on Wednesday, Oct. 26, approved investment fund reporting rules that are significantly less burdensome than what the agency had proposed in January.

The final rule narrowed the number of hedge fund and private fund advisers that must report their report financial activity to the government. It also reduced how often some funds will have to make filings to the agency. The rules implement the Dodd-Frank Act's new private fund reporting requirement.

In June the SEC spelled out which fund advisers must register with the agency. Wednesday's rules spell out which registered advisers must make regulator reports to the agency and what they have to disclose. The reporting requirements are meant to provide the Financial Stability Oversight Council, a Treasury Department-led group of financial regulators, data that will help the council assess potential systemic risks created by private funds. Broad opposition to its original reporting proposal prompted the SEC to take a step back.

While contending its earlier proposal was "widely misunderstood" and would not have required any fund or adviser to report exact positions, as some critics said, the SEC gave advisers more time to file information and took a series of steps to narrow the new rule's impact.

The agency exempted private fund advisers with under $150 million in assets from having to report at all. It said large private equity managers have to file yearly -- not quarterly as originally proposed. Finally it limited the most detailed reporting to even larger fund advisers.

The SEC originally proposed that the most detailed reporting would apply to hedge fund advisers with $1 billion in assets. The final rule raised the level to $1.5 billion. Private equity advisers face the most reporting if they have $2 billion under management. Liquidity fund advisers face the most if they have $1 billion under management.

The SEC said 230 hedge fund advisers, 155 private equity advisers and about 80 liquidity fund advisors will face the highest level reporting.

The SEC also took provided more time after the end of a quarter or fiscal year for firms to file the reports.

The SEC is promulgating the new requirement with the Commodity Futures Trading Commission, which is to vote on its requirement next week. Both agencies will publish a joint "PF" form, for private fund systemic risk reporting.

None of the detailed information provided will be public.

The highest level of reporting must include detail on holdings along with indications of exposures, leverage, counterparties, investor liquidity and concentration. Advisers will have to start filing the information next summer. Information from individual filings will not be made public, but the SEC said aggregated data may be made available.

SEC Chairwoman Mary Schapiro said the filings "will address the dramatic lack of private fund information available to regulators while easing the burden on private fund regulators producing the data."

She said getting information about private funds is vital to monitoring and reducing the possibility of sudden shocks to the financial system.

Democratic Commissioner Luis A. Aguilar said the data to be gathered was vital to evaluating risks.

"To monitor systemic risk is a herculean task. To do it blindly is impossible," he said.

Some critics of the original rule on Wednesday praised the SEC for easing it but suggested the agency may not have gone far enough.

The narrower scope of the reporting requirements is "a step in the right direction," said Ron Geffner, vice president of the The Hedge Fund Association, and a partner in Sadis & Goldberg LLP.

He said the real question is whether the information is of any value or instead imposes a cost burden on companies to provide information of little value.

"It reminds me of the last scene in 'Raiders of the Ark,' where the ark goes into a warehouse where there are thousands of other [crates]. Given the limited staff of the SEC, couldn't they make better use of their time?" he asked.

Tim Cameron, managing director of the Securities Industry and Financial Markets Association's Asset Management Group, commended the SEC's move to annual reporting for private equity fund advisers.

"It seems the commission produced a much more palatable requirement for the industry," he said.

He said SIFMA remains concerned about the sensitivity of the information and plans to use the Financial Industry Regulatory Authority, which is putting together a secure site to collect the information.

Steve Judge, interim president of the Private Equity Growth Capital Council, called the SEC's revision "a more realistic approach." He said, "We appreciate the SEC response to our concerns that the proposed rule would have imposed undue burdens on private equity investment advisers without providing useful information."

Other interested parties weren't as happy. The AFL-CIO was disappointed that the measures weren't more stringent.

"When this rule was initially proposed, the AFL-CIO urged the SEC to strengthen the reporting requirements to insure that the financial regulators will have sufficient information to detect and prevent systemic risks. We are disappointed that the SEC instead chose to weaken the reporting requirements," said an AFL-CIO spokeswoman.

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