02/11/2011 Author: Will Wainewright

Room to manoeuvre

Following sustained industry lobbying pressure, the SEC last week announced concessions to the Form PF reporting measures required as part of Dodd-Frank. The changes will buy hedge funds some time, but concerns about compliance costs and confidentiality remain 

For an industry so frequently placed on the back foot by regulators in recent years, the SEC’s decision to grant concessions last week in the final version of its Form PF reporting measures was a refreshing change. Alterations to January’s original proposals had been expected after a concerted lobbying campaign by trade associations and hedge funds themselves, but it was nonetheless a relief to the US industry that they would have more time to prepare.

The headline changes, first anticipated in last week’s issue of HFMWeek, saw the threshold at which firms are classified as larger funds raised from $1bn to $1.5bn. These funds will now have 60 days every quarter to report information on their exposures, as opposed to 15 as originally proposed. Smaller funds, worth $150m or more, only have to report on an annual basis and will have 120 days to do so, and the introduction of these measures has been pushed back to the end of next year for both fund types. Though the process will still prove burdensome, the gains are significant.    

The increase in reporting time granted to larger funds was an expected change, and a common sense one according to former SEC attorney Kevin Duffy, who now works in regulation and compliance at Kinetic Partners. “The 15-day reporting deadline was unrealistic and I think the SEC realised it would have put huge pressure on funds and admins. Sixty days gives them the time to make sure they get it right, especially given the quantity of data required.”

Perhaps as a result of the ambiguity surrounding the initial proposals, the administration industry as a whole has so far been slow to set up its Form PF offerings. GlobeOp and Viteos Fund Services have been first to launch services and will no doubt be frustrated at the delayed introduction. Jonathan White, Viteos’s US business development manager, says the extension to 60 days may encourage other providers to enter the market. “I think some larger admins were put off by the tight deadline as the reporting service required for Form PF needs to be tailored quite individually to each fund.” There is no one-size-fits-all solution that can be rolled out across different funds, he says. “The challenge is the complexity of mapping data and working out how hedge funds are classifying their strategies. It is a matter of bringing business expertise to the form on a case-by-case basis from fund to fund.”

Viteos will still benefit from its early focus on Form PF but it will be interesting to see how the service market develops around it. Duffy of Kinetic says they have spoken with a lot of providers who say they are going to offer Form PF reporting as a part of their existing service. “Whether they are going to charge for it is uncertain,” he told HFMWeek. “They might want to take the hit so they don’t lose any business and then put their prices up during the next contract renewal process.”

Concerns remain. Although SEC chair Mary Schapiro sought to reassure the industry on privacy in her speech last week by stating her commitment to “building the controls necessary to provide appropriate confidentiality,” some aren’t convinced the data will be safe. One market participant spoke of “trepidation” in the industry at having to issue data on exposures and leverage to a public body. “Who knows whether it’s going to fall into the wrong hands?” Question marks also linger over the detail and extent of data required. 

But for all that, the US industry will feel largely satisfied at a rare regulatory advance. Form PF will cause headaches when it is finally introduced but at least the SEC has listened to the concerns expressed by hedge funds. If the anxiety surrounding confidentiality and some of the details of the proposals can also be assuaged, the reporting measures could prove a manageable hit for the industry to absorb.