The latest Form PF amendments – the second set of substantive additions within a year – further expand the scope and granularity of information that private funds must report.  The comment file is replete with substantive criticism of the expanded reporting requirements.  Administrative agencies like the Commission have an obligation to consider and respond to significant comments received during the period for public comment.[1] Regrettably, the Commission dismisses those concerns with assumptions and unsupported conclusory statements. 

For example, commenters expressed concern about disaggregating each component fund of a master-feeder arrangement and parallel fund structure.[2]  One commenter explained that disaggregated information would be “misleading and difficult to analyze,” and that it is “not the type of information that the Commissions likely would be able to readily and accurately re-aggregate.”[3]  The Commission simply “disagree[s],” that the information would be misleading, and notes that it “could, if necessary, aggregate the data to understand the overall fund.”[4]  There is no analysis or evidence to support this response.  The response’s “could, if necessary” language does not even imply that the Commission needs this information in the first place.

These form amendments also appear to exceed the authority granted to the Commission by Congress.  The Investment Advisers Act of 1940 – as amended by Title IV of the Dodd-Frank Act – authorizes the Commission to require private fund advisers to file reports only if “necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by [FSOC].”[5]  In this manner, Congress limited the Commission’s authority to require private fund advisers to report information on Form PF.  However, the Commission only pays lip service to this limitation.

The Commission justifies the various reporting burdens on private fund advisers with a version of the following statement: the new reporting requirement will “[improve] systemic risk assessment and regulator programs to protect investors.”[6]  In many cases, the SEC does not even bother to claim that the additional reporting will satisfy the statutory standard, but instead settles for claiming that the reporting may do so.[7]

Apparently, every burden the Commission can possibly conjure is necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by FSOC.  A limitation is meaningless if no regulatory action would ever run afoul of it.  As the Supreme Court has approvingly cited, “[a] statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant. . .”[8] 

The SEC’s interpretation of Title IV of the Dodd-Frank Act has the practical effect of ignoring the limitation imposed by the statute.  Adding conclusory references to “systemic risk” and “investor protection” does not satisfy the authority constraints imposed by statute.

The increasing granularity of the Form PF obligations raises important questions about what measures are being taken to protect the investors in the private funds reporting information on Form PF.  These investors seem to have been all but forgotten in the Commission’s quest for ever more detailed and faster reporting of private fund information.

As then-Chair Mary Schapiro stated in 2011 when Form PF was first adopted;

I also know that the confidentiality of the information reported on Form PF is very important to those filing the information. The data is sensitive and proprietary and — by Congressional design — non-public. The Dodd-Frank Act contains strong protection for the information filed on Form PF. In addition, we are committed to building the controls necessary to provide appropriate confidentiality and limit the availability of proprietary hedge fund and other private fund information to those who have a regulatory need to know.[9]

Unauthorized disclosure of Form PF information could cause significant damage.  Despite the assurances of then-Chairman Schapiro, raw Form PF data is now being widely distributed throughout the Federal government.  Federal agencies are under constant threat of cybersecurity incidents.  But even with strong cybersecurity and confidentiality protections, it is not possible for the employees, contractors, and third parties who have access to Form PF data to unlearn what they have observed should they leave federal employment and pursue positions in the private sector, such as competitors in the private funds industry.[10]

The Form PF amendments also represent a shocking deficiency in economic analysis.  Two days ago, the Commission adopted rules that scope certain private funds into the definition of “dealer” or “government securities dealer” under the Securities Exchange Act of 1934.[11]  In declining to exempt private funds from the definition, the Commission stated that “[a]lthough. . .the [SEC] collects some information about certain private funds through Form PF, this reporting alone is not a sufficient substitute for the comprehensive dealer requirements because, it is not as comprehensive.”[12] 

Yet the Adopting Release for these Form PF amendments contains no analysis as to whether the new Form PF reporting obligations are appropriate in light of the newly-imposed overlapping dealer registration regime, with its own reporting requirements.[13]  Failure to consider these overlapping obligations makes it impossible for the agency to act on a rational basis as required by the Administrative Procedure Act in considering these amendments. 

Finally, I am troubled by the Commission’s approach towards smaller asset managers.  The Adopting Release acknowledges the possibility that increased compliance costs will cause “smaller advisers to either exit or forgo entry.”[14]  The Commission’s assertion that “the final amendments reduce many of the costs of compliance relative to the proposal. . ., [so] these effects may be mitigated, but may nonetheless occur”[15] is not compelling given that the final amendments make only minor changes from the proposal.[16]

The Commission’s war on private funds continues.[17]  While I am unable to support today’s amendments, I thank the staff in the Divisions of Investment Management and Economic and Risk Analysis, as well as the Office of the General Counsel, for their efforts.