Prospective investors are clamping down on who bears
heightened Dodd-Frank related regulatory costs in fund
prospectuses. The statutes new filing requirements are
also causing private equity (PE) managers to scrutinise the
activities permitted within fund formation documents.
June 15 was the initial compliance date for the first wave
of funds needing to report to the Securities & Exchange
Commission (SEC) under the new Form
PF. In combination with earlier amendments to Form ADV, the
changes represent the most significant and comprehensive
reporting expansion for investment advisors in decades.
As fund advisors become accustomed to this new level of
transparency, investors want to know whether the associated
compliance and regulatory expenses will be borne by management
or the fund.
Weve heard that for new fundraisings, investors
today are focused on that issue, and its being discussed
and negotiated, said Robin Bergen, partner at Cleary
Gottlieb Steen & Hamilton in Washington DC.
The preparation by large hedge and liquidity fund advisors
for their first Form PF filing in mid-August has brought the
expense allocation issue into sharp focus.
The upcoming deadline has also spurred PE managers to
reassess the description of funds activities in formation
Form PF imposes less stringent and less frequent reporting
requirements on PE funds compared to hedge funds. However the
rule and accompanying FAQS
(that the SEC issued on June 8) cast a wide net for hedge
Of particular concern is that the definition catches funds
that borrow amounts in excess of half their net asset value, or
engage in shorting
There is a concern that if a funds formation
documents permit shorting activity or leveraged borrowing at
the fund level, even if the fund doesnt engage or intend
to engage in these activities, this could force funds to
register as hedge funds for the purposes of Form PF, said
Jason Mulvihill, general counsel of the Private Equity Growth
And the fact this was put out by the SEC in the FAQS
raised further reference to this, he added.
It has caused many firms to look through their PPM (private
placement memorandum) and LPA (limited partnership agreements)
documents to figure out if the fund allows these activities
This should be a concern for regulators as the way
they have drafted this portion of the rule and tried to clarify
it could set up a situation where many PE firms are forced to
register as hedge funds for the purposes of the rule even
though they are not hedge funds, Mulvihill said.
The expense and hassle of this for funds is clear, but
Mulvihill believes this should also have the SEC worried.
To the extent regulators want accurate information
regarding hedge funds, and not have that information polluted
with private equity data, this should be a concern for
them, he said.
This definitional question is just one of many
interpretation issues arising as funds are collating data to
present in Form PF. It [the form] is not all that user
friendly, and I expect that most funds will spend their time on
the interpretive questions trying to get it right, Bergen
The market is also looking beyond the reporting stage and
querying how the data will be used. Form PFs stated
purpose is to assist the Financial Stability Oversight
Councils assessment of systemic risk, and the SECs
But reported data will not be used simply to commence new
Ive heard that the exam staff is focused not
only on risk assessment, but also trying to use the information
for examinations they had already planned, to help focus their
questions and areas of enquiry, Bergen said.
Its also thought that the Commissions
enforcement staff will collate the data to identify and follow
up on unusual activity.
My expectation is that, at least in the short term, they
would be doing a comparative analysis to find outliers,