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SEC Provides Hedge Fund Data to Congress

In 2010, in response to the 2007–2008 financial crisis, the federal government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank made a number of important changes to financial regulation in the United States, including to reporting requirements of private funds like private equity funds or hedge funds.

Private equity typically involves an investment made directly with a private company and is not quoted on a public exchange. Most but not all investors in private equity are institutional and “accredited” or high net worth investors. A hedge fund is a privately owned company that pools funds, typically received from “accredited” or high net worth investors, and then utilizes aggressive and high-risk investment strategies to outperform the market and generating high returns for its investors.

Form PF

The law instructed the Securities and Exchange Commission to set up certain reporting requirements for these funds, which it did in 2011 with the adoption of Form PF. Generally, Form PF (for “Private Fund”) mandates that certain “registered investment advisers” for private funds report information to the SEC.

Generally, fund advisers file a Form PF once a year. And even then, they need only report basic information, including the types of funds they advise and those funds’ size, leverage, investor-type, liquidity, strategy, and performance.

There are, however, additional reporting requirements placed on so-called “large private fund advisers.” These advisers must submit additional information depending on the circumstances. For example, advisers of at least $2 billion in private equity regulatory assets under management (a term that refers to a fund’s gross assets plus uncalled capital commitments) must submit additional information like “their private equity funds’ use of direct and indirect leverage and investments in financial institutions.”

Annual Reports on Private Funds

The SEC uses the information gleaned from Form PF for its own regulatory purposes, although it is still learning exactly how to do so. Under Dodd-Frank, the SEC must issue an annual report to Congress detailing how it is using the data reported by Form PF filings to further its mission to protect investors and the financial markets. This information, in turn, is passed on to the Financial Stability Oversight Council, which is a government agency charged with assessing risks to the country’s financial stability.

On August 15, 2014, the SEC issued the second such report, in which it described four overarching uses of the learned information: “(i) utilizing Form PF data in examinations and investigations of private fund advisers; (ii) using Form PF data in the Commission’s risk monitoring activities; (iii) providing additional guidance to filers; and (iv) working with other federal regulators and international organizations regarding issues relating to private fund advisers.”

As is clear from the most recent report, the SEC has learned a great deal about these advisers through Form PF. There are a total of 2,661 advisers that fall under Form PF’s umbrella, including 544 with over $1.5 billion in hedge funds and 200 with over $2 billion in private equity. In total, there are over 20,000 relevant funds—split between private equity (7,004), hedge funds (7,790), and others (like liquidity funds, real estate funds, securitized assets, and venture capital funds). And the SEC estimates that the total amount of private fund regulatory assets under management reported under Forms PF by all filers was $8.871 trillion.

If you have legal questions about your investment in hedge funds or private equity or believe that you may have been misled about an investment you made or if you believe you are the victim of financial exploitation of any kind, please contact attorney Gregory Tendrich, P.A. to discuss your legal options today.

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