Summer 2012 will go down in history for the industry’s largest hedge fund managers, who were forced to spend the season agonising over Form PF, a newly implemented part of the Dodd-Frank Act. For the first time ever, private fund advisers registered with the SEC are required to file exhaustive annual and quarterly reports containing intimate fund information about everything from trade data to risk exposure, from treasury information to investor relations details. The cause is to give regulators insight into systemic risk and regulatory oversight of individual firms, and to help them focus examinations and detect fraud. The effect is a painful operational burden for firms.
August 29, 2012, marked the deadline for the biggest hedge fund advisers in the industry — those with $5 billion or more in regulatory assets under management — to file the form for the first time. Regulatory reporting is increasing globally, and the successful completion of the first wave of Form PF filers was just the beginning — in the end most private funds will have to file. Next up are registered investment advisers that manage at least $150 million (regulatory assets under management) in private funds who will need to file either 60 or 120 days after year end depending on fund size.
These firms can learn from those who went before them, as the first filing proved the task is a painful one. As this is a new rule with so many moving parts, there is still a great deal of confusion in the market about what it means to different participants. Investment advisers tasked with filing Form PF have struggled with interpretation of the nebulous 63-page document — 20 pages are instructions and glossary alone. The SEC released FAQs designed to clarify certain elements of the form — and then released additional FAQs on top of the original FAQs, further complicating the process. Now three rounds of FAQs deep, this dynamic process leaves much open to debate on the parts of both regulators and fund advisers. Firms have had to reinterpret data and re-configure calculations on several occasions after previously determining what they had thought would be their final interpretations.
Another challenge comes from the arduous task of aggregating and normalising data. This means that firms are required to not only gather all of the necessary information, but to then convert it into the format required to file. This entails collating data from a variety of prime brokers and fund administrators, a spider web of spreadsheets and any number of internal systems. Next is the need to compile it into the single format that is consistent with the SEC mandate.
These compliance deadlines beg the question of who at a firm should actually be responsible for handling the filing. On one hand, it’s certainly not advisable to ask the lead investment manager to give up on the quest for alpha to spend months on data entry. But this isn’t something to entrust to an intern or temp either — the future of the firm depends on this data being correct. So who can be trusted with that kind of weight?
Some firms have looked to their existing partnerships with prime brokers or fund administrators. But those firms are just learning how to deal with these challenges themselves, and can be prone to error, in addition to the high cost of outsourcing the onerous task.
A completely new industry of software solutions has emerged to automate and simplify this process. Some of the new solutions feature error checking, workflow, standard and custom reports, multiple means of data entry, audit trail, data storage, and electronic form submission — all with the aim of relieving the pain of filing. This streamlines the process to ensure reporting can be done on time and in compliance.
Form PF coincides with a broad trend led by investor demand that private fund managers institutionalise their processes and systems. A comprehensive regulatory reporting solution is the most efficient way to meet that demand and ensure consistent, reliable reporting with proper processes and controls, both the first time funds need to file and for every instance in the future.
Hedge funds now face an unprecedented level of reporting requirements under new regulations created under the Dodd-Frank Act and its counterparts in Europe and Asia. Form PF is today’s challenge, to be followed soon behind by CFTC reporting and similar requirements in Europe and Asia in the coming year. With regulations growing in complexity and number, the industry can’t afford to ignore the problem, and needs to invest in solutions that will allow it to comply so advisers can continue to grow their business for the future.
Hannah Correll is a director at Advise Technologies, LLC, a provider of proven software solutions that facilitate global regulatory compliance for the investment management community.