As the deadline fast approaches for Form PF to be filed with the Securities and Exchange Commission — August 29 for hedge funds with more than $5 billion in regulated assets — hedge fund managers worry that the disclosures will end up outside of SEC hands.
Form PF is designed to assist the Financial Stability Oversight Council (FSOC), a new regulatory body drawn from the Federal Reserve, the SEC and the Treasury, among others, which was mandated by Dodd-Frank. Although Form PF data is furnished confidentially to the SEC, the regulator is permitted to share the data with the Commodity Futures Trading Commission and the Financial Stability Oversight Council. The form is designed to help the FSOC identify and measure risk in the U.S. financial system. Says John Sampson of the financial services office at Ernst & Young, “It’s an attempt by regulators for data on a regular basis that heretofore wasn’t available.”
Investors cannot help but look forward to getting access to any information contained in Form PF to learn more about their investments. “For the first time, they’ll get numbers prepared in a uniform way,” says Sampson.
The information is private and exempt from the Freedom of Information Act. But hedge fund managers still have cause for concern, says Richard Heller, a partner at Thompson Hine Investment Management Group.
Heller notes that the U.S. regulators may share Form PF with foreign governments that do not offer the same privacy protections.
Other experts say that fear is overblown, at least in Europe. Notes Harry Stahl, a partner in Sungard’s alternative investments consulting group: “The other primary jurisdiction is the European Union and what you find there is not discouraging. The SEC and EU demands are convergent and harmonize.”
Of course, institutional investors may succeed in demanding that hedge funds release the form. Says Simpson, “Smaller funds that need the money will supply it.”
Then there are the politicians. “A member of Congress can ask an agency for whatever he or she wants,” he says. “The concern is that information may become mixed with other things, so either individually or aggregated, it could leak out.”
But how crucial would the information that leaks out be?
Sampson notes that the form breaks down holdings of longs and shorts by type of financial institution and says such information could give competitors an advantage.
While much of Form PF asks for information that is sufficiently aggregated to prevent that from happening, Sampson says questions 26 and 30, which ask for assets by types of securities, would be of concern to hedge fund managers if made public. Also, the form asks for dollar values of such positions, which Stahl says “in itself is very close to the bone.”
But Bob Miller, chief technology officer at VistaOne Solutions, a data management services provider based in New York, notes that hundreds of millions of dollars in such positions are already reported to companies such as RiskMetrics so that it can make Value-at-Risk (VaR) calculations, without consequence to date. “Everyone understands that this is considered intellectual property,” he says, noting that there are formal agreements stipulating there will be no disclosure of those positions.
Apart from disclosure fears, managers are experiencing confusion about the lack of clarity for certain demands, such as on borrowings and counterparty exposure. “What consists of borrowings?” Sampson asks. He adds that the SEC has tried to address this in its answers to frequently asked questions on its web site but notes there are still questions as to whether to net everything or show data in a disaggregated fashion. He says demands for information about risk exposure may also dog managers, as the SEC is asking for them to explain their exposure to shifts in interest rates, default rates and currency rates. “Obviously, it takes time and effort to answer all the items in the form,” he says.
At least managers have two more days to do so.
