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Private Fund Disclosures Under the Dodd-Frank Act
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THE EFFECT OF PRIVATE FUND DISCLOSURES
THE EFFECT OF PRIVATE FUND DISCLOSURES UNDER THE DODD-FRANK ACT
> * Associate Professor, University of Saint Thomas School of Law, Minneapolis. The author wishes to acknowledge the assistance of his colleagues, private fund advisers, the Managed Funds Association, and the staff of the Securities and Exchange Commission’s Divisions of Investment Management and Economic and Risk Analysis. Special thanks go to Roberta Romano, John Morley, Tamar Frankel, Bentley Anderson, Stuart Kaswell, Alan Palmiter, the participants at the Midwestern Securities Litigation and Enforcement Forum, and the participants at the 6<sup>th</sup> liechtensteinische Fondstag at the University of Liechtenstein. The author is also grateful for outstanding research assistance from Nadine Ibrahim and Timothy Lacine and research librarian Valerie Aggerbeck.
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# ABSTRACT
Title IV of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to collect sensitive proprietary information from private fund advisers. Prior studies suggest that the SEC’s mandated collection of private fund data in Form PF created several core challenges for the private fund industry and for the SEC. This article presents the results of a survey of SEC-registered investment advisers to private funds after the SEC’s first mandatory collection of private fund data.
The key findings of this study indicate that the majority of private fund advisers responding to the survey incurred less than $10,000.00 to prepare their initial data reporting to the SEC, with the cost of subsequent annual Form PF filings at about half the initial cost. Larger private fund advisers, required to file quarterly, are faced with substantially higher compliance cost, both for their initial data reporting and for subsequent quarterly filings. The data analysis in this study affirms SEC cost estimates for smaller private fund advisers’ Form PF compliance costs. The SEC appears to have overestimated the costs of Form PF compliance for larger private fund advisers.
While the data analysis in this study suggests that the overall effect of private fund disclosure requirements on the private fund industry is moderate, the data analysis also indicates that the data reporting requirements for private funds and the corresponding SEC forms can be further improved. The majority of SEC-registered private fund advisers identified the ambiguity of Form PF data reporting requirements as the most pressing issue. However, the majority of respondents also considered their existing reporting systems adequate for capturing the information required by the SEC and agreed with the SEC’s definitions and instructions for Form PF. Respondents predominantly assessed the best level of guidance available from the SEC staff to assist in private fund advisers’ data reporting efforts as sufficient or good.
**
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# TABLE OF CONTENTS
|I. <br>I<br>|NTRODUCTION................................................................................................................................................
4 <br>|
|---|---|
|II. <br>|PRIVATEFUNDTRANSPARENCY..............................................................................................................
6 <br>|
|III. <br>|METHODOLOGY...........................................................................................................................................
8 <br> <br>|
|_1._ <br>|<br>_Data Sources and Coding
.........................................................................................................................
9_ <br> <br>|
|_2._ <br>|<br>_Sampling Constraints
...............................................................................................................................
10_ <br> <br>|
|_3._ <br>|<br>_Selection Bias
..............................................................................................................................................
10_ <br>|
|IV. <br>|DESCRIPTIVESTATISTICS......................................................................................................................
12 <br> <br>|
|_1._ <br>|<br>_Internal Consistency
.................................................................................................................................
12_ <br> <br>|
|_2._ <br>|<br>_Representativeness of Sample
...............................................................................................................
16_ <br>|
|V. <br>|RESULTS........................................................................................................................................................
17 <br> <br>|
|_1._ <br>|<br>_Form PF Compliance Cost
....................................................................................................................
19_ <br> <br>|
|_2._ <br>|<br>_Shortcomings and SEC Guidance
.......................................................................................................
25_ <br> <br>|
|_3._ <br>|<br>_Reporting Systems and Service Providers
........................................................................................
32_ <br> <br>|
|_4._ <br>|<br>_Investor Relations
......................................................................................................................................
36_ <br>|
|VI. <br>|DISCUSSION ANDCONCLUSION...........................................................................................................
37 <br> <br>|
|_1._ <br>|<br>_Summary of Key Findings
......................................................................................................................
37_ <br> <br>|
|_2._ <br>|<br>_Policy Implications and Future Research
........................................................................................
39_ <br>|
|VII.|APPENDIX: SURVEYINSTRUMENT....................................................................................................
41|
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# **I.** Introduction
Title IV and Securities and Exchange Commission (SEC) rules implementing the requirements under Title IV created a paradigm shift for the regulation of private funds in the United States, increasing the level of regulatory oversight to unprecedented levels. The new regulatory framework for private funds in the United States requires private fund adviser registration and enhanced disclosure of sensitive proprietary information.<sup>1</sup> To facilitate appropriate data collection to assess systemic risks, the Dodd-Frank Act authorized the SEC to promulgate rules requiring registration and enhanced disclosures for private equity and private funds managers.<sup>2</sup> To collect the required data, the SEC Division of Investment Management adopted a new form, Form PF.<sup>3</sup>
Private fund advisers have traditionally opposed enhanced transparency of the funds they manage, arguing that the mandatory private fund disclosure requirements in Form PF could inappropriately burden the private fund industry.<sup>4</sup> Some of the most controversial disclosure requirements in Form PF include the reporting of risk metrics, strategies and products used by the investment adviser and its funds, counterparties and credit exposure, performance and changes in performance, financing information, percentage of assets traded using algorithms, and the percentage of fund assets held in equity and debt instruments.<sup>5</sup>
Prior studies suggest that the SEC’s mandated collection of private fund data in Form PF creates several core challenges for the private fund industry and for the SEC.<sup>6</sup>
1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, §§ 401-402, 124 Stat. 1376, 1570 (codified at 15 U.S.C. §§ 80b-20 nt, 80b-2). 2 _Id_ . §§ 402–408.
> 3 SEC. & EXCH. COMM’N, OMB NO. 3235-0679, FORM PF: REPORTING FORM FOR INVESTMENT ADVISERS TO PRIVATE FUNDS AND CERTAIN COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS (2011) [hereinafter FORM PF], _available at_ http://www.sec.gov/about/forms/formpf.pdf; SEC. & EXCH. COMM’N, OMB NO. 3235-0049, FORM ADV: UNIFORM APPLICATION FOR INVESTMENT ADVISER REGISTRATION AND REPORT BY EXEMPT REPORTING ADVISERS (2011) [hereinafter FORM ADV], _available at_ <u>http://www.sec.gov/about/forms/formadv.pdf.</u>
> 4 SEC. & EXCH. COMM’N, IMPLICATIONS OF THE GROWTH OF PRIVATE FUNDS 90 (2003), _available at_ <u>http://www.sec.gov/news/studies/hedgefunds0903.pdf (“Many of those opposing required registration</u> expressed a strong preference for leaving the private fund industry ‘unregulated.’”); Stephen Brown et al., _Mandatory Disclosure and Operational Risk: Evidence from Private fund Registration_ , 63 J. FIN. 2785, 2789 (2008) (stating that when the SEC tried to change registration rules in 2004, the changes were strongly opposed by private fund managers, “who argued that completing the 35-page form was unnecessarily costly and burdensome.”); Carol J. Loomis, _Hard Times Come to the Private funds_ , FORTUNE, Jan. 1970, at 100 (arguing that the private fund industry viewed the threat of SEC action as a deterrent to growth, and private fund managers in the 1960s and 1970s disliked the thought of SEC regulation, dreading the “prospect of an SEC move that would prevent them from earning their compensation in the traditional way.”); _Private fund Operations: Hearing Before the H. Comm. on Banking & Fin. Servs._ , 105th Cong. 26 (1998) (statement of Alan Greenspan, Chairman, Federal Reserve Board) (repeating Greenspan’s support for continued loose regulation of the private fund industry).
5 Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors [sic] on Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011), 76 Fed. Reg. 71,128 (Nov. 16, 2011), _available at_ http://www.sec.gov/rules/final/2011/ia-3308.pdf; FORM ADV, _supra_ note 3; FORM PF, _supra_ note 3.
> 6 Wulf A. Kaal, _Private fund Manager Registration Under the Dodd-Frank Act,_ 50 SAN DIEGO L. REV. 244 (2013) [hereinafter Kaal, _Private fund Manager Registration_ ]; Wulf A. Kaal, _Private funds’ Systemic Risk Disclosures in Bankruptcy,_ 22 AM. BANKR. INST. L. REV. (forthcoming 2014) [hereinafter Kaal, _Private funds’ Systemic Risk Disclosures_ ]; Wulf A. Kaal, _Private fund Regulation via Basel III_ , 44 VAND. J.
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The SEC appears to be primarily concerned about the collection and evaluation of the private fund data as well as the clarity and understandability of SEC Form PF guidance. The private fund industry has identified other concerns pertaining to its attempts to comply with the data reporting obligations, including: (1) understanding the intended purpose of Form PF, (2) understanding the definitions and instructions in Form PF, (3) the ease of interpreting Form PF questions, (4) investment advisers’ lack of resources (staff, time, vendor costs) for preparing Form PF, (5) the lack of and the nature and extent of SEC guidance and support, (6) the time spent on filing out and filing Form PF, (7) adequacy of existing internal reporting, monitoring, and tracking systems for capturing the information required on Form PF, and (8) ability to provide disclosures regarding counterparty credit exposure and collateral. Anecdotal evidence suggests that the SEC may be working with contradictory, misleading, inaccurate, and incomplete data. Investment advisers claim that the SEC is using industry terms incorrectly and inconsistently. Others allege that many of the disclosure obligations in Form PF do not pertain to their business or cannot be fulfilled other than by guessing or by providing rough estimates. If these allegations should be true, the SEC’s ability to evaluate and assess the data could be compromised. The use of incomplete and misleading data could lead to the development of questionable policies and regulations applicable to the private fund industry.
This article presents the results of a survey of private fund advisers<sup>7</sup> after the SEC’s adoption of Form PF. The survey was disseminated to 3669 private fund advisers who registered with the SEC before the applicable deadline. The author’s research team contacted the entire population via a fax questionnaire and e-mail survey. After multiple attempts to reach the entire population in over five months, respondents ([n=52]) (0.014%) answered questions in several categories designed to identify the effectiveness of Form PF. The categories included: (1) definitions and instructions in Form PF, (2) the need to interpret Form PF questions, (3) priority of problems with Form PF, (4) advisers’ understanding of intended purpose of Form PF, (5) use of a service provider to complete Form PF, (6) resources (staff, time, cost) allocated for filing Form PF, (7) SEC guidance and support, (8) time spent on filing out and filing Form PF, (9) adequacy of existing internal reporting, monitoring, and tracking systems for capturing the information required on Form PF, (10) disclosures regarding counterparty credit exposure and collateral difficulties in identifying counterparties, (11) investors’ requests for copies of an adviser’s Form PF filings, and (12) advisers substituting portions of required CFTC forms with Form PF disclosures.
The survey identifies the core issues pertaining to private fund data collection in Form PF and outlines possible solutions/remedies to address these issues. The author tested all survey questions in several rounds with representatives from the private fund industry. The SEC also provided feedback on draft survey questions. Cross-comparison of the feedback from both the SEC and the private fund industry indicates that the survey questions are highly relevant and succinctly address the main concerns with Form PF.
> TRANSNAT’L L. 389 (2011) [hereinafter Kaal, _Basel III_ ]; Wulf A. Kaal, _Private fund Valuation – Retailization, Regulation, and Investor Suitability_ , 28 ANN. REV. BANKING & FIN. L. 581 (2009) [hereinafter Kaal, _Private fund Valuation_ ].
> 7 This article predominantly considers SEC-registered investment managers to private funds and private equity advisers but less so venture capital pools.
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Cross-comparison of SEC and industry feedback also shows that both groups independently identified the same pertinent issues with Form PF. In addition, both groups suggested improvements for various survey questions. Accordingly, the survey addresses concerns of both the private fund industry and the SEC.
While the majority of private fund advisers identified the ambiguity of Form PF and the inefficiency of data reporting requirements as the most pressing issues pertaining to Form PF, the majority of advisers also agreed with the definitions and instructions that the SEC uses and advisers generally appreciate SEC guidance and flexibility. The majority of respondents also assessed the best level of guidance available from the SEC staff to assist in their data reporting efforts as sufficient or good. The majority of respondents reported that they incurred additional expenditures of less than $10,000.00 to prepare and file their initial Form PF submission, and that the cost of subsequent annual filings was about half the initial cost. Larger investment advisers to private funds, however, incur substantially larger compliance cost in fulfilling the quarterly filing requirements under Form PF.
Part I of this article introduces the history and summarizes the debate over the creation of private fund disclosure requirements. Part II describes the legal requirements and private fund managers’ data collection obligation under the Dodd-Frank Act and SEC Form PF. The author provides anecdotal evidence from prior surveys suggesting that the data that private funds report on Form PF creates several challenges for the SEC and the private fund industry. Part III outlines the methodological approach of the survey, introducing the survey instrument, data sources, sampling, coding, and coding constraints. The author also evaluates possible selection bias issues. Part IV discusses the results of the survey with descriptive statistics. Part V presents the substantive results of the study in summary graphs. Part VI summarizes the key findings and examines implications for private fund policy. That part also evaluates the survey’s limitations and possible implications for future research.
# **II.** Private Fund Transparency
Title IV of the Dodd-Frank Act established rules and regulations for the registration of private funds with the SEC in 2010.<sup>8</sup> Title IV of the Dodd-Frank Act and SEC rules implementing the requirements under Title IV<sup>9</sup> increased the level of regulatory oversight of private funds to unprecedented levels _._<sup>10</sup> Prior to the enactment of Title IV, the private fund industry was largely exempt from regulatory oversight, provided private fund advisers complied with safe harbour requirements under federal securities laws.<sup>11</sup>
> 8 H.R. REP. NO. 111-517, at 866–67 (2010) (Conf. Rep.), _available at_ <u>http://www.gpo.gov/fdsys/pkg/CRPT-111hrpt517/pdf/CRPT-111hrpt517.pdf.</u>
> 9 _See_ Dodd-Frank Act §§ 401–416, 124 Stat. 1376, 1570-79 (incorporating the PFIARA in Title IV).
> 10 _Id_ .; _Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and Amending Directives 2004/39/EC and 2009/…/EC_ , COM (2009) 207 final (Apr. 30, 2009); _Alternative Investments_ , EUROPEAN COMMISSION,
> <u>http://ec.europa.eu/internal_market/investment/alternative_investments_en.htm</u> (last updated Mar. 24, 2014) (providing additional materials on AIFM).
> 11 SEC proposed amending Regulation D, noting that inflation might have eroded the significance of a $1 million net worth as a proxy for investor sophistication. _See_ Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles; Accredited Investors in Certain Private Investment Vehicles, 72 Fed. Reg.
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Title IV increased the disclosure obligations for private fund advisers to unprecedented levels by requiring registered investment advisers to file periodic reports<sup>12</sup> via SEC Form PF.<sup>13</sup> All registered investment advisers holding more than $150 million in assets under management (AUM) attributable to private funds at the end of their most recently completed fiscal year, are required to file Form PF with the SEC.<sup>14</sup> Form PF requires investments managers to disclose information about themselves, about the funds they manage, and about their investors.<sup>15</sup>
Important Form PF disclosure requirements include a breakdown of the net asset value (NAV) that the investment manager manages,<sup>16</sup> including the percentage of the reporting fund’s net asset value was managed using high-frequency trading strategies.<sup>17</sup> Form PF requires investment advisers to disclose the five trading counterparties to which the reporting fund has the greatest net counterparty credit exposure,<sup>18</sup> including the dollar amount owed to each creditor.<sup>19</sup> Other important Form PF disclosures include the requirement that the manager identify changes in market factors and their effect on the
400, 405 (Jan. 4, 2007) (to be codified at 17 C.F.R. pt. 275) (proposing two steps for determining whether an investors would be accredited: (1) whether the individual meets the test in rule 501(a) or rule 215 and (2) whether the individual “owns at least $2.5 million in investments”.). _But see_ Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, 72 Fed. Reg. 44,756, 44,756 n.2 (Aug. 9, 2007) (to be codified at 17 C.F.R. pt. 275) (deferring consideration of proposed change to definition of “accredited investor”). Before the enactment of the Dodd-Frank Act in 2010, private funds and their investment advisers were able to remain exempt from the securities laws as long as they limited the resale of their securities, limited the sale of their securities to a limited number of accredited investors, and did not advertise or otherwise hold themselves out to the public. _See_ Kaal, _Basel III_ , _supra_ note 6 (summarizing private fund regulation requirements before the Dodd-Frank Act).
12 Dodd-Frank Act § 404(b), 124 Stat. 1376, 1571; 17 C.F.R. § 275.204(b)-1 (2013); Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. 71,128, 71,140 (Nov. 16, 2011) (to be codified at 17 C.F.R. pts. 275 & 279), _available at_ http://www.gpo.gov/fdsys/pkg/FR-2011-11-16/pdf/2011-28549.pdf.
> 13 FORM PF, _supra_ note 3; _See also_ 17 C.F.R. § 275.204(b)-1(requiring private fund advisers to file Form PF with the SEC periodically); Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. at 71,129, 71,239; 17 C.F.R. § 4.27 (2013) (requiring private fund advisers to file Form PF if they are registered as commodity pool operators or commodity trading advisers).
14 17 C.F.R. § 275.204(b)-1; Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. at 71,132 (listing three criteria for filing Form PF that represent an initial threshold for the minimal Form PF requirements and stating that most private fund advisers who meet these three criteria will only be required to file Section 1 of Form PF while “large private fund advisers” will be required to file the remaining sections of Form PF); _id_ . at 71,133(explaining that there are three types of “large private fund advisers:” (1) “[a]ny adviser having at least $1.5 billion in [RAUM] attributable to private funds as of the end of any month in the prior fiscal quarter;” (2) “[a]ny adviser managing a liquidity fund having at least $1 billion in combined [Regulatory Assets Under Management] attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter;” and (3) “[a]ny adviser having at least $2 billion in [RAUM] attributable to private equity funds as of the last day of the adviser’s most recently completed fiscal year.” 15 _See_ 17 C.F.R. § 279.9 (2013) (establishing filing requirements for Form PF); FORM PF, _supra_ note 3, § 1a–b.
> 16 FORM PF, _supra_ note 3, §1a, Item B.3 (including the following private fund categories: (a) private funds, (b) liquidity funds, (c) private equity funds, (d) real estate funds, (e) securitized asset funds, (f) venture capital funds, (g) other private funds, (h) funds and accounts other than private funds).
> 17 _Id._ § 1c, Item B.21.
> 18 _Id._ § 1c, Items B.22–23.
> 19 _Id._ § 2b, Item D.47.
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long and short components of the portfolio as a percentage of NAV,<sup>20</sup> any information about the counterparties’ collateral and other credit support posted to the respective reporting funds,<sup>21</sup> as well as trading and clearing mechanisms subject to liquidity constraints and the duration of those constraints.<sup>22</sup>
Form PF is also intended to improve the SEC’s understanding of reporting funds’ liquidity, exposure, and assets. Accordingly, Form PF requires investment advisers to disclose the time increments it would take to liquidate a certain percentage of the reporting funds’ portfolio,<sup>23</sup> the dollar value of long and short positions in each asset class,<sup>24</sup> the value of turnover by asset class,<sup>25</sup> the types of creditors including the market value of borrowings,<sup>26</sup> and the aggregate value of all derivative positions for each advised fund.<sup>27</sup> Finally, Form PF requires disclosure of the reporting fund’s restrictions (if any) on investor withdrawals and redemptions<sup>28</sup> and other information pertaining to investor liquidity, such as the percentage of NAV.<sup>29</sup>
In light of the highly sensitive nature of these required disclosures and the complexity of the reporting requirements, Form PF created substantial challenges for the private fund industry. For instance, the disclosure of counterparty credit exposure is sensitive information that can often not readily be determined by the individual fund managers. While prior studies have acknowledged that the SEC’s mandated collection of private fund data via Form PF created several core challenges for the private fund industry, these studies do not sufficiently clarify the impact of Form PF disclosure requirements on managers.<sup>30</sup> Anecdotal evidence suggests that the SEC may be working with contradictory, misleading, inaccurate, and incomplete data in Form PF, which impacts the SEC’s ability to evaluate and assess the data. The use of incomplete and misleading data could lead to questionable policy and regulatory decisions for the private fund industry.
# **III. Methodology**
The author analyzed a sampling of individual investment advisers from a population of investment advisers registered in the United States. The author made statistical inferences about the population using the sample. The data was collected via e- mails with electronic surveys and faxes with survey questionnaires.<sup>31</sup> No respondent received a financial incentive to participate in the survey. The only (nonfinancial) incentive for private fund advisers’ participation was the author’s promise to share the
> 20 _Id._ § 2b, Item C.42.
> 21 _Id._ § 2b, Item B.36.
> 22 _Id._ § 1c, Item B.24.
> 23 _Id._ § 2b, Item B.32.
> 24 _Id._ § 2a, Item B.26; _id._ § 2b, Item B.30 (pertaining to investment advisers that advise more than one private fund).
> 25 _Id._ § 2a, Item B.27.
> 26 _Id._ § 2d, Item D.43.
> 27 _Id._ § 2b, Item D.45.
> 28 _Id._ § 2b, Item E.49.
> 29 _Id._ § 2b, Item E.50.
> 30 Kaal, _Private fund Manager Registration, supra_ note 6; Kaal, _Private funds’ Systemic Risk Disclosures_ , _supra_ note 6 _;_ Kaal, _Basel III, supra_ note 6; Kaal, _Private fund Valuation_ , _supra_ note 6.
> 31 Mode effects are insignificant because each data collection method was based on the same questionnaire and the author and his team of research assistants asked respondents the same sequence of questions.
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# findings of the survey.
To ensure the pertinence and accuracy of the survey instrument, the author tested and retested the survey instrument in over twenty test runs. After each test phase, the author integrated substantial substantive feedback from SEC representatives, academics, and registered private fund advisers. Throughout the test phase, the author trained a team of research assistants to engage respondents and code responses. The author doublechecked coding for accuracy and internal consistency.
# _1. Data Sources and Coding_
To provide quantifiable support for specific issues with Form PF that allows further empirical investigation, the author surveyed private fund advisers in the United States who are subject to Form PF filing requirements. The SEC’s Investment Adviser Registration Depository (IARD) contains data pertaining to registered investment advisers who are subject to the Form PF filing requirement.<sup>32</sup> To identify the relevant population, the author downloaded from the IARD website a dataset comprising investment adviser firms registered with the SEC and applied a predefined set of filters.
First, the author filtered the data set by Form ADV item 7.B, “Are you an adviser to any _private fund_ ?” That filter decreased the dataset to 4,045 “Yes” responses and 11 firms that did not answer the question for a total of 4,056 firms. Thereafter, the author organized the data by “Main Office” location response on Form ADV of the investment advisers by country. While the data set was arranged in order of “Main Office Country,” the author also ascertained that the main office was in the United States by filtering main office phone and main office fax numbers, respectively, and removing the investment adviser firms with non-US phone and fax numbers and any firms with phone or fax numbers with more than 10 digits. Through this process of elimination, the author identified 3,728 advisers who were located in the US and had responded affirmatively to the SEC as advising private funds. Subsequently, the author filtered for firms that completed the latest version (October 2012) of Form ADV, identifying 3,669 firms. Thus, the filtered and final dataset of 3,669 firms includes investment adviser firms that: 1) advise private funds, 2) have US contact information, and 3) completed the October 2012 version of Form ADV.
The author used several different coding methodologies. For example, the author used close-ended survey questions only to quantify items. Close-ended questions were dichotomous and continuous, and the response options for close-ended questions were mutually exclusive and exhaustive _._ For those questions that allowed a “Yes” and “No” response, the author used a binary code of “1” for “Yes” and “0” for “No.” The author also used open-ended survey questions to assess several technically demanding Form PF issues. The author coded responses to open-ended survey questions into response clusters by assigning identification numbers to the respective response, thus, combining binary and clustered responses in one coding sheet. The combined coding sheet facilitated a cross comparison of survey responses in separate categories and with other Form PF and
> 32 _Historical Archive of Investment Adviser Reports_ , U.S. SEC. & EXCH. COMM’N, <u>http://www.sec.gov/foia/iareports/inva-archive.htm (last modified May 1, 2014);</u> _see also Division of Investment Management: Electronic Filing for Investment Advisers on IARD_ , U.S. SEC. & EXCH. COMM’N, <u>http://www.sec.gov/divisions/investment/iard.shtml (last modified Aug. 9, 2013) (providing information on</u> the IARD and how to register or obtain information on investment advisers).
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Form ADV data. The author and his research assistants approached all respondents using the same methodology. All respondents volunteered their participation and the author had no control over the selection of the sample.
# _2. Sampling Constraints_
Empirical researchers analyzing private funds face many limitations when conducting surveys.<sup>33</sup> Because of the private fund industry’s particular interest in confidentiality and privacy and decades-old regulations that allowed the industry to remain exempt from registration and transparency requirements, high quality private fund data are rather limited. One promising way to overcome this limitation involves the collection of the required data. However, private fund advisers’ privacy, performance, and idiosyncratic concerns also limit the researcher’s ability to collect data for a substantial effective sample size.<sup>34</sup> The SEC’s efforts to keep the e-mail contact information of filing entities and their representatives private also complicates the survey approach to collecting private fund data.<sup>35</sup>
Accordingly, data collection for this study proved difficult. The overwhelming majority of the population did not participate in the survey. In addition to the aforementioned privacy and performance-related limitations, the data collection for this study required private fund adviser respondents to recall technical details and their individual filing history on Form PF. In only the rarest of circumstances did respondents revisit their filing history to respond to the survey questions that required such additional expertise. Several respondents voiced concern and/or uncertainty about possible SEC enforcement measures pertaining to their Form PF filings, which may also have affected the response rate of this study.
# _3. Selection Bias_
Selection bias in survey studies is the subject of a long-lasting and ongoing debate in the literature.<sup>36</sup> Generally speaking, sample selection bias exists if, rather than using randomly selected cases to explain phenomena, researchers select cases because they display and share the trait the researcher hopes to explain.<sup>37</sup> Several factors such as the
> 33 Kaal, _Private fund Manager Registration_ , _supra_ note 6, at 278-80 _._
> 34 _Id_ . at 278 (“Private fund managers have a tendency to disfavor any form of public exposure for a variety of economic, performance, privacy-related, and idiosyncratic reasons. Given the particular concern in the private fund industry regarding confidentiality and privacy, obtaining a substantial effective sample size for this study proved difficult.”).
> 35 _Id_ . at 279 (“The author and his team of researchers encountered a number of problems during the process of collecting survey responses. The identity and contact information for the chief compliance officer and chief legal officer of the firms were not publicly available. Although Form ADV requires advisers to disclose the contact information for their chief compliance officer, the dataset provided by the SEC did not list this information and did not include e-mail addresses. The filed copy of Form ADV on the IARD website also did not contain chief compliance officer information. The dataset obtained from the SEC did not include the e-mail addresses, and neither did the individual Form ADVs on the IARD website.”).
> 36 _See_ Thomas W. Hall et al., _The Effectiveness of Increasing Sample Size to Mitigate the Influence of Population Characteristics in Haphazard Sampling_ , 20 AUDITING: J. PRAC. & THEORY 169, 169 (2001).
> 37 _See_ Barbara Geddes, _How the Cases You Choose Affect the Answers You Get: Selection Bias in Comparative Politics_ , 2 POL. ANALYSIS 131, 140 (1990).
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non-random selection of cases<sup>38</sup> and the drawing of inferences that are not statistically representative of the population result in selection bias.<sup>39</sup>
Despite the drawbacks of selection biases, some scholars argue that sample selection bias is merely a generic problem in social science research designs involving a non-random sample of a population of interest.<sup>40</sup> Selection bias is considered a generic problem because human behavior determines selection<sup>41</sup> and the assumptions about how selection occurs are important for selection bias models.<sup>42</sup> In fact, several social science research traditions rely on empirical designs that are subject to sample selection biases.<sup>43</sup> There is some evidence that significant findings with substantial policy implications can be ignored if researchers rely exclusively on observational schemes that are free from selection bias.<sup>44</sup> Several studies used simulation techniques to review the effectiveness of techniques used to prevent selection bias. These studies suggest that under ordinary circumstances many of the techniques used to prevent selection bias problems skew results, have mixed success rates, and can actually worsen rather than improve
> 38 _See_ PETER JONES, STATISTICAL SAMPLING AND RISK ANALYSIS IN AUDITING 11–12 (1999); DONALD A. LESLIE ET AL., DOLLAR-UNIT SAMPLING: A PRACTICAL GUIDE FOR AUDITORS 36–37 (1980); ARTHUR J. WILBURN, PRACTICAL STATISTICAL SAMPLING FOR AUDITORS 4–6 (1984); Herbert Arkin, _Statistical Sampling in Auditing_ , 27 N.Y. CERTIFIED PUB. ACCT. 454, 457 (1957); W. Edwards Deming, _On the Contributions of Standards of Sampling to Legal Evidence and Accounting_ , 19 CURRENT BUS. STUD. 14, 18–21 (1954); Thomas W. Hall et al., _The Use of and Selection Biases Associated with Nonstatistical Sampling in Auditing_ , 12 BEHAV. RES. ACCT. 231, 232–33 (2000); Clive S. Lennox et al., _Selection Models in Accounting Research_ , 87 ACCT. REV. 589, 611 (2012); Jennifer Wu Tucker, _Selection Bias and Econometric Remedies in Accounting and Finance Research_ , 29 J. ACCT. LITERATURE 31, 32 (2010); Neal B. Hitzig, _Statistical Sampling Revisited_ , CPA J., May 2004, at 30, _available at_ http://www.nysscpa.org/cpajournal/2004/504/essentials/p30.htm; Tom Hall et al., _Haphazard Selection: Is It Time to Change Audit Standards?_ 1, 3–4 (Working Paper, 2010), _available at_ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1687443.
> 39 Richard A. Berk, _An Introduction to Sample Selection Bias in Sociological Data_ , 48 AM. SOC. REV. 386, 391 (1983); David Collier, _Translating Quantitative Methods for Qualitative Researchers: The Case of Selection Bias_ , 89 AM. POL. SCI. REV. 461, 462 (1995).
> 40 _See_ Christopher Winship & Robert D. Mare, _Models for Sample Selection Bias_ , 18 ANN. REV. SOC. 327, 328 (1992).
> 41 _See generally_ Reuben Gronau, _Wage Comparisons—A Selectivity Bias_ , 82 J. POL. ECON. 1119 (1974); James J. Heckman & Guilherme Sedlacek, _Heterogeneity, Aggregation, and Market Wage Functions: An Empirical Model of Self-Selection in the Labor Market_ , 93 J. POL. ECON. 1077 (1985); James J. Heckman & Guilherme L. Sedlacek, _Self-Selection and the Distribution of Hourly Wages_ , 8 J. LAB. ECON. S329 (1990); James J. Heckman & Bo Honoré, _The Empirical Content of the Roy Model_ , 58 ECONOMETRICA 1121 (1990); H. Gregg Lewis, _Comments on Selectivity Biases in Wage Comparisons_ , 82 J. POL. ECON. 1145 (1974); A.D. Roy, _Some Thoughts on the Distribution of Earnings_ , 3 OXFORD ECON. PAPERS 135 (1951); Robert J. Willis & Sherwin Rosen, _Education and Self-Selection_ , 87 J. POL. ECON. S7 (1979).
> 42 _See generally_ DRAWING INFERENCES FROM SELF-SELECTED SAMPLES (Howard Wainer ed., 1986); NONPARAMETRIC AND SEMIPARAMETRIC METHODS IN ECONOMETRICS AND STATISTICS: PROCEEDINGS OF THE FIFTH INTERNATIONAL SYMPOSIUM IN ECONOMIC THEORY AND ECONOMETRICS (William A. Barnett et al. eds, 1991); Arthur S. Goldberger, _Abnormal Selection Bias_ , _in_ STUDIES IN ECONOMETRICS, TIME SERIES, AND MULTIVARIATE STATISTICS 67 (Samuel Karlin et al. eds., 1983); Lung-Fei Lee, _Some Approaches to the Correction of Selectivity Bias_ , 49 REV. ECON. STUD _._ 355 (1982); Abbas Arabmazar & Peter Schmidt, Note, _An Investigation of the Robustness of the Tobit Estimators to Non-Normality_ , 50 ECONOMETRICA 1055, 1055 (1982).
> 43 _See_ RICHARD L. RATLIFF ET AL., INTERNAL AUDITING: PRINCIPLES AND TECHNIQUES 628 (2d ed. 1996).
> 44 _Id._
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estimates.<sup>45</sup> Increasing the sample size does not necessarily compensate for the potential selection bias of non-statistical techniques or guarantee the representativeness of the sample.<sup>46</sup>
For purposes of this study, the author identified the population of private fund advisers who were subject to the disclosure requirements of the Dodd-Frank Act using the SEC’s IARD database. To ensure a representative sample, the author chose respondents who were private fund advisers and registered with the SEC as identified on the IARD database.
The author had no control over the selection of the sample and did not use probabilistic randomizing aids for purposes of the sample selection. It would not have been feasible to further randomize the sample by including respondents from outside of the private fund industry or respondents other than private fund advisers because those non-adviser respondents would not have been exposed to the new disclosure requirements. Each member of the identified population of private fund advisers had a known, nonzero chance of being selected as part of the sample. All respondents were approached using the same methodology and were volunteer participants. While the author recognizes that obtaining information through voluntary responses can create an inherent bias because people with a special interest are more likely to respond, no indicia exist that respondents who did respond to the survey were different from individuals who did not respond. The dispersion of responses suggests that respondents did not have a special interest in responding. Common characteristics of respondents include experience with private fund disclosure requirements in Form PF and a willingness to share their experiences.
# **IV. Descriptive Statistics**
# _1. Internal Consistency_
To ensure the accuracy of the results and internal consistency, the author integrated several survey questions to ascertain the expertise of respondents as well as questions that could be internally verified by comparison with other survey questions that asked the same question in a different context.
> 45 _See_ Ross M. Stolzenberg & Daniel A. Relles, _Tools for Intuition About Sample Selection Bias and Its_
> _Correction_ , 62 AM. SOC. REV. 494, 494 (1997).
> 46 _See_ DAN M. GUY ET AL., PRACTITIONER’S GUIDE TO AUDIT SAMPLING 160 (1998).
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Did you assist in completing and/or file Form PF? (Q1)<br>92.31%<br>7.69%<br>Yes No<br>50<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 1: Respondents’ Familiarity with Form PF.
Figure 1 shows the percentage value of respondents who answered the question concerning whether they assisted in preparing and/or filing Form PF. The overwhelming majority of respondents (92.31%) were involved with the preparation or filing of Form PF. Because the identities of respondents were not disclosed, the author was not able to remove responses from respondents who were not directly involved in completing and/or filing Form PF. However, responses from people who were not directly involved in preparing, completing, or filing Form PF but were otherwise involved with Form PF (7.69%; e.g. respondents who were involved with policy decisions, lobbying efforts etc.), can also yield valuable insights into the inner-workings of Form PF, the interpretation of Form PF questions, and the preparation of the document.
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What section(s) of Form PF did you complete? (Q2)<br>95.83%<br>56.25%<br>10.41% 8.33%<br>2.08% 4.17% 0<br>1a & 1b 1c<br>2a 2b<br>3 4<br>5<br>50<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 2: Sections of Form PF Completed.
Figure 2 shows the percentage of respondents in the sample who completed various sections of Form PF. Form PF requires all private fund advisers to complete Section 1a (types of private funds advised) and 1b (information regarding the private funds advised). Section 1c, on the other hand, requests information regarding the private funds that an investment adviser manages. Sections 2a and 2b pertain to large private
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fund advisers; Section 3 relates to the liquidity of fund advisers; and Section 4 deals with large private equity funds.
In this survey, out of a total of 52 respondents, 48 responded to survey question 2. A majority of respondents (46 of the 48) indicated that they completed Sections 1a and 1b (95.83%). More than half of the respondents (56.25%) also completed Section 1c, suggesting that a majority of respondents also advise private funds. Only a minority of respondents completed Sections 2a (10.41%) and 2b (8.33%) of Form PF, pertaining to large private fund advisers (defined as having “at least $1.5 billion in private fund assets under management as of the last day of any month in the fiscal quarter immediately preceding [the] most recently completed fiscal quarter.”). An even smaller percentage of respondents completed Section 3 (2.08%) and Section 4 (4.17%), which pertains to large private equity fund advisers (defined as having “$2 billion in private equity fund assets under management as of the last day of [their] most recently completed fiscal year”).
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Are you required to file Form PF? (Q3)<br>85.71%<br>14.29%<br>Annualy Quarterly<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 3: Annual and Quarterly Filing of Respondents.
Figure 3 identifies the percentage of respondents who file Form PF annually (suggesting these filers are smaller private fund advisers), and those who file quarterly (suggesting these respondents are larger private fund advisers who are required to complete Sections 2-5 of Form PF). Only 14.29% of respondents file quarterly and are, thus, self-identified as larger private fund advisers. The overwhelming majority of private fund advisers (85.71%) in the survey are filing annually and are, thus, self-identified as smaller private fund advisers.
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Q2-Q3 Internal Consistency<br>95%<br>86%<br>25%<br>14%<br>Q2: Sec. 1 Q3: Annually<br>Q2: Sec. 2-5 Q3: Quarterly<br>50<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 4: Internal Consistency of Questions 2 and 3.
A 2% difference in the response rate exists between Questions 2 and 3 (see Figure 6). Figure 4 compares the internal consistency of responses to Questions 2 and 3, as the "annual" responses in Question 3 near equal the Section 1a-c responses in Question 2. Similarly, respondents who checked Sections 2-5 in Question 2 near equal those respondents checking "quarterly" in Question 3. The legal requirement that precipitates the preparation and filing of Sections 2-5 of Form PF means that respondents are required to file quarterly. The comparison of Questions 2 and 3 thus illustrates that the responses to both questions are internally consistent. The internal consistency of these responses suggests that the survey responses have an above average reliability.
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What type of private fund does your investment advisor firm manage? (Q4)<br>56%<br>30% 30%<br>12%<br>8%<br>6%<br>2%<br>Hedge Fund Liquidity Fund<br>Private Equity Fund Real Estate Fund<br>Securitized Asset Fund Venture Capital<br>Other Private Fund<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 5. Type of Private Funds in Survey.
Figure 5 shows the type of private funds that the respondents advise. The overwhelming majority of survey respondents advise private funds (56%), followed by private equity funds (30%). Venture capital funds, securitized asset funds, liquidity funds, and real estate funds are overall less represented in the sample. The 30% of respondents who suggested that neither of the categories applied to their investment adviser firm
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suggests that these respondents may take issue with the SEC’s categorization of their adviser firm.
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100%<br>96% 96%<br>94% 94% 94%<br>92% 92% 92% 92%<br>90% 90%<br>88%<br>85%<br>81%<br>67%<br>92%<br>54%<br>48%<br>46%<br>40%<br>38%<br>Q1 Q2 Q3Q4Q5Q6Q7aQ7bQ8Q9Q10 Q11Q12Q13aQ13bQ14aQ14bQ15Q16Q17Q18Q19<br>50<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 6. Response Summary for Survey Questions.
Figure 6 shows the number of responses to each question in the survey instrument. Overall, very few participants completed the entire survey. Questions 5, 8, 9, 13b, 14a, and 14b, which were open-ended survey questions that required additional analysis and/or an explanation of the collected Form PF data, show a much lower response rate (e.g. between 38% and 67%). Other factors that could potentially have influenced the lower response rate for these questions include the need to revisit some of the more complex questions in Form PF.
# _2. Representativeness of Sample_
To ensure the representativeness of the sample of private fund advisers in this survey, the author created cross-comparisons between the sample and the population of 3669 investment adviser firms. Cross-comparisons were limited by the availability of comparable data. Figures 7 and 8 suggests that, under the examined parameters, the sample of private fund advisers who responded to this survey (n=52) is representative of the population of 3669 investment adviser firms.<sup>47</sup>
> 47 Because of privacy concerns, most respondents declined to disclose their identity to the author. A crosscomparison of the sample with the population of 3669 private fund advisers was therefore only limitedly possible.
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Sample v. Population: Types of Funds<br>45.0%<br>40.0%<br>35.0%<br>30.0%<br>25.0%<br>20.0%<br>15.0%<br>10.0%<br>5.0%<br>0.0%<br>Hedge Fund Liquidity Fund Private Equity Real Estate Securitized Venture Capital Other Private<br>Fund Fund Fund Fund<br>Sample Population<br><!-- End of picture text -->
Figure 7: Types of Funds Sample vs. Population.
Figure 7 shows another important measure to examine the representativeness of the sample. By comparing the types of funds managed in the population (via the SEC’s IARD database) with the types of funds managed in the sample, the author can assess the representativeness of the sample. Figure 7 suggests that overall the sample appears to be representative of the population in terms of the types of funds.
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Comparison of Size of Funds<br>86%<br>8 78%<br>22%<br>2<br>14%<br>0 Annually Quarterly<br>Population Sample<br><!-- End of picture text -->
Figure 8: Comparison of Size of Funds.
Figure 8 shows a comparison of the size of funds in the population and in the sample. The sample appears to be generally representative of the population in terms of the size of funds and the corresponding annual or quarterly filing frequency.
# **V. Results**
The results of this study identify and quantify core issues pertaining to the SEC’s private fund data collection through Form PF. The survey presents what the private fund industry considers to be the most pressing concerns with Form PF. By identifying, clarifying, quantifying, and outlining possible remedies for open issues with mandatory private fund disclosures in Form PF, the survey also provides essential feedback for the
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SEC and helps it address outstanding issues with Form PF. The survey results could help create a consensus between the SEC and the private fund industry on required disclosures and thereby increase cooperation between the two parties. The results may also help identify sustainable solutions for the regulation of the private fund industry.
The results can be structured into several categories: (1) the intended purpose of Form PF, (2) understanding of definitions and instructions in Form PF, (3) the need to interpret Form PF questions, (4) investment adviser allocation of resources (staff, time, cost) for filing Form PF, (5) SEC guidance and support, (6) time spent completing and filing Form PF, (7) adequacy of existing reporting, monitoring, and tracking systems for capturing the information required on Form PF, and (8) disclosures regarding counterparty credit exposure and collateral.
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What is the purpose of Form PF? (Q10)<br>25.42% 25.42%<br>22.03%<br>20.34%<br>5.93%<br>.85%<br>Ease the burden on private funds Assess systemic risk<br>Allow FSOC and OFR to monitor risks Address lack of private fund info<br>Collection of risk exposure info Other<br>25<br>20<br>15<br>10<br>5<br>0<br><!-- End of picture text -->
Figure 9: Purpose of Form PF.
Figure 9 illustrates, in cluster categories, advisers’ responses to survey Question 10: “What is the purpose of Form PF?” Most advisers assert that the purpose of Form PF is to assess systemic risk and address the lack of information regarding private funds. Other responses highlight the importance of allowing the Financial Security Oversight Council (FSOC) and the Office of Financial Research (OFR) to monitor risk and the need to collect risk exposure information. Three commenters stated the purpose of Form PF is to provide a roadmap for advisor examinations.
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THE EFFECT OF PRIVATE FUND DISCLOSURES
# _1. Form PF Compliance Cost_
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Estimate total amount of funds spent to complete Form PF for the first time (Q12c)<br>59.18%<br>18.37%<br>8.16%<br>4.82%<br>Under $10,000 $10,000 to $20,000<br>$20,001 to $30,000 Over $30,000<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 10: Estimated Amount Spent to Complete Form PF. Figure 10 shows the estimated total amount of funds in dollars that investment advisers spent to complete Form PF for the first time. The majority of respondents (59.18%) indicated that the total estimated cost of first time Form PF completion was under $10,000.00. A minority of respondents suggested their cost of first-time Form PF completion was somewhere between $10,000.00 and $20,000.00. Some respondents, however, stated that their cost was over $30,000.00.
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Average cost to complete Form PF<br>$155,286<br>120, 0 0 150, 0 0<br>Do l ars<br>3 0 , 0 6 0 , 0 9 0 , 0<br>$9,520<br>0<br>Small Funds (Annually) Large Funds (Quarterly)<br><!-- End of picture text -->
Figure 11: Estimated Amount Spent to Complete Form PF – Small vs. Large Advisers. Figure 11 shows the estimated total amount of funds in dollars that smaller and large investment advisers spent to complete Form PF for the first time. Quarterly filing large funds spent on average $155,286 for the initial filing of Form PF. By contrast, annually filing smaller funds only spend on average $9,520 for the first time filing of Form PF.
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Annual&cost&of&ini-al&Form&PF&filing<br>$250,000!<br>$208,700!<br>$200,000!<br>$155,286!<br>$150,000!<br>$100,000!<br>$50,000!<br>$13,600! $9,520!<br>$0!<br>Small!Fund! Large!Fund!<br>SEC!Es<mates! Survey!results!!<br><!-- End of picture text -->
Figure 12: Cross-Comparison of Initial Form PF Filing – Kaal 2014 vs. SEC. Figure 12 shows a cross-comparison of SEC cost estimates<sup>48</sup> pertaining to the initial Form PF filing and the estimates provided by this study. The cross-comparison suggests that the SEC may be marginally overestimating the cost of Form PF filings for both annually filing smaller private fund advisers and quarterly filing larger private fund advisers. However, the data for the larger fund advisers’ cost of filing Form PF is based on a small sample.
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Estimate annual cost for subsequent Form PF filings (Q12d)<br>57.14%<br>16.32%<br>10.20%<br>6.12%<br>Under $5,000 $5,000 to $10,000<br>$10,001 to $20,000 Over $20,000<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 13: Estimated Annual Cost of Subsequent Form PF Filing. Figure 13 shows the estimated annual cost of subsequent Form PF filings. The majority of respondents (57.14%) indicated that their cost for annual Form PF filings would be under $5,000. A minority of respondents opined that their cost would be below $5,000. Some respondents, however, indicated that their cost may be between $10,000 and $20,000 and several others maintained it would be over $20,000.
> 48 Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. 71128-01 (Nov. 16, 2011).
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Average estimated annual cost for future Fom PF filings<br>80,000 $72,143<br>60,000<br>40,000<br>20,000<br>$5,262<br>Small Funds (Annually) Large Funds (Quarterly)<br><!-- End of picture text -->
Figure 14: Estimated Annual Cost of Subsequent Form PF Filing – Small vs. Large Adviser. Figure 14 shows the estimated annual cost of subsequent Form PF filings – broken down by smaller and larger private fund advisers. Quarterly filing large fund advisers on average pay $72,143 for subsequent Form PF filings. Smaller private fund advertiser, on the other hand, spent only on average $5,262 for subsequent Form PF filings.
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Es-mated&annual&cost&for&subsequent&Form&PF&<br>filings&<br>$180,000!<br>$160,000! $155,200!<br>$140,000!<br>$120,000!<br>$100,000!<br>$80,000! $72,143!<br>$60,000!<br>$40,000!<br>■<br>$20,000!<br>$4,200! $5,262!<br>$0!<br>Small!Fund! Large!Fund!<br>SEC!Es<mates! ■ Survey!results!!<br><!-- End of picture text -->
Figure 15: Cross-Comparison of Subsequent Form PF Filing – Kaal 2014 vs. SEC. Figure 15 shows a cross-comparison of SEC cost estimates<sup>49</sup> pertaining to the subsequent Form PF filings and the estimates for subsequent Form PF filings as provided by this study. The cross-comparison suggests that the SEC may be marginally underestimating the cost of Form PF filings for annually filing smaller private fund advisers. With regards to quarterly filing larger private fund advisers, however, the SEC appears to be substantially overestimating the cost of subsequent Form PF filings. The cost estimates in this study for subsequent Form PF filings by larger private fund advisers are at about half the cost the SEC estimates. However, the data in this study pertaining to larger fund advisers’ cost of filing Form PF is based on a small sample.
> 49 _Id._
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Estimate the number of people who worked to complete Form PF for the first time (Q12a)<br>67.35%<br>22.45%<br>10.20%<br>1 to 3 4 to 6<br>7 or more<br>80<br>60<br>40<br>20<br>0<br><!-- End of picture text -->
Figure 16: Number of People to Complete Form PF.
Figure 16 shows the nu mber o f people that res pondents relied upon to complete Form PF. The majority of resp ondent s (67.35%) used only one to three individuals to complete Form PF. A minority of respondents (22.45%) used between four and six people to complete Form PF, and 10.20% of respondents stated they relied on 7 or more individuals to compl ~~et~~ e Form PF.
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Estimate the total number of hours to complete Form PF for the first time (Q12b)<br>69.39%<br>14.29%<br>8.16% 8.16%<br>0 to 49 50 to 99<br>100 to 150 150 or more<br>80<br>60<br>40<br>20<br>0<br><!-- End of picture text -->
Figure 17: Estimated Hours To Complete Form PF.
Figure 17 shows the estimated total number of hours that were required to complete Form PF. The majority of respondents (69.39%) indicated that it took them between 0 to 49 hours to complete Form PF. A minority of respondents (14.29%) indicated that it took more than 50 hours to complete Form PF. Some respondents (8.16%) stated that completing and filing Form PF required over 150 hours. Figures 14 and 15 show that respondents who saw higher costs associated with completing and filing Form PF were mostly larger private fund advisers. This is consistent with Figures 18 and
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19, showing that respondents who saw longer timing requirements for Form PF compliance were also mostly larger private fund advisers.
Average time spent on Form PF (in hours)
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200<br>169.3<br>150<br>Hours100<br>50 40.8<br>0<br>Small Fund (Annually) _ Large Fund (Quarterly)<br><!-- End of picture text -->
Figure 18: Estimated Hours To Complete Form PF – Small vs. Large Advisers. Figure 18 shows the estimated total number of hours that were required to complete Form PF broken down by smaller and larger advisers. Larger fund advisers on average spend more than four times the time on filing Form PF required for smaller private fund advisers.
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Annual&-me&required&for&ini-al&Form&PF&Filing<br>!800!!<br>!720!!<br>!700!!<br>!600!!<br>!500!!<br>!400!!<br>!300!!<br>!200!! 169!<br>!100!!<br>!40!! 41! _____<br>!A!!!! _ _<br>Small!Fund! Large!Fund!<br>SEC!Es<mates! Survey!results!!<br>Hours!<br><!-- End of picture text -->
Figure 19: Estimated Hours To Complete Form PF – Kaal 2014 vs. SEC.
Figure 19 shows a cross-comparison of SEC estimates<sup>50</sup> pertaining to the annual time required for the initial Form PF filing. Pertaining to annually filing smaller private fund advisers, the data in this study suggests that the SEC estimates are correct. However, the relatively small sample of quarterly filing larger private fund advisers in this study suggest that the SEC may be overestimating the time requirements of Form PF filings for larger private fund advisers. The SEC overestimates pertaining to time requirements are consistent with the SEC overestimates pertaining to the initial and subsequent filing costs for larger private fund advisers.<sup>51</sup>
> 50 _Id._
> 51 _See supra_ Figures 15 and 19.
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Please list the three most time consuming items on Form PF (Q14a)<br>42.9%<br>25% 25%<br>17.9%<br>14.3% 14.3% 14.3% 14.3% 14.3%<br>10.7% 10.7% 10.7% 10.7% 10.7% 10.7%<br>7.1% 7.1%<br>PFQ3: RAUM PFQ7: Related Persons<br>PFQ8: Gross Asset Vlaue PFQ9: Net Asset Value<br>PFQ10: Value of Investment in Equity PFQ11: Value of Parallel Accounts<br>PFQ12: Value of Borrowings PFQ13: Outside Derivatives<br>PFQ14: Categotize Assets and Liabilities PFQ15: Beneficial Equity<br>PFQ16: Types of Investors PFQ17: Performance<br>PFQ22: Counterparties as % of Net Assets PFQ23: Counterparty Exposure<br>Use of Trade PFQ26: Hedge Fund Exposure<br>Other<br>15<br>10<br>5<br>0<br><!-- End of picture text -->
Figure 20: Most Time Consuming Form PF Items.
Figure 20 shows respondents’ assessment of the most time-consuming items on Form PF. Among all Form PF questions that were identified as time-consuming, respondents indicated that Form PF Question 16 (types of investors) took the most time to answer, followed by Form PF Question 17 (performance), and Form PF Question 7 (related persons). Other Form PF questions respondents identified as time consuming included Form PF Questions 3, 8, 9, 10, 11, 12, 13, 14, 15, 16, 22, 23, 24, and 26.
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10 Why were these items time consuming? (Q14b)<br>36%<br>8<br>9<br>20%<br>16% 16%<br>4<br>12%<br>8% 8%<br>2<br>0<br>Too many funds Understanding definitions<br>Data not tracked to required level Data not readily available<br>Catergorizing data Delta options<br>Calcuation Data gathering<br>Ambiguous questions/instructions<br><!-- End of picture text -->
Figure 21: Reasons for Time Consumption.
Figure 21 shows respondents’ answers to the open-ended question addressing why certain questions on Form PF were time-consuming. The majority of respondents (36%) identified “Data Gathering” as the task on which they spent the majority of their time, followed by references to “Delta Options” and “Ambiguous questions / unclear instructions”. Several responses did not justify a cluster category but are still worth identifying. These un-clustered respondents made references to the time spent taking margin costs into account, having to reach out to separately managed account managers, finding agreement on assumptions, additional reviews by internal compliance teams, breaking down of performance monthly and quarterly, factoring in derivatives and shorts
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to overall exposure, netting of counterparty exposure to calculate RAUM in accordance with GAAP, and establishing the parameters for completing Form PF.
# _2. Shortcomings and SEC Guidance_
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What is the most pressing issue the SEC should address in Form PF? (Q9)<br>25%<br>12.5%<br>8.33% 8.33% 8.33% 8.33%<br>Form is burdensome/inefficient Clarifying ambiguity<br>Exposure No issues<br>Large burden on large firms Determining advisor risk<br>6<br>4<br>2<br>0<br><!-- End of picture text -->
Figure 22: Most Pressing Issue With Form PF.
Figure 22 illustrates respondents’ answer to Question 9, “What is the most pressing issue the SEC should address in Form PF?” Respondents identified the burdensome nature and inefficiency of Form PF as their most pressing concern with Form PF, followed by the exposure that Form PF generates for them. Other issues that respondents raised include the ambiguity of Form PF, the difficulty in determining advisor risk, and the significant burden Form PF imposes on larger investment adviser firms. Interestingly, separate responses that justified a cluster category also suggested that there was no issue with Form PF.
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Which of the questions in Form PF required the greatest level of interpretation? (Q5)<br>14.29% 14.29% 14.29%<br>11.43%<br>8.57% 8.57%<br>Performance (Q17) RAUM (Q3)<br>Leverage (Q30) Counter parties (Q22/23)<br>Investor classification (Q16) Issues with form itself<br>8<br>7<br>6<br>5<br>4<br>3<br>2<br>1<br>0<br><!-- End of picture text -->
Figure 23: Form PF Interpretation Requirements.
Figure 23 shows the majority of clustered responses pertaining to the level of interpretation required when completing Form PF. Aside from concerns with Form PF
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itself, the level of interpretation required to answer Form PF precipitated several particular concerns pertaining to performance measures in Form PF Question 17 and counterparties and definitions of counterparties in Form PF Questions 22 and 23.
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Are there definitions or instructions in Form PF that you disagree with? (Q6)<br>59.18%<br>40.82%<br>No Yes<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 24: Assessment of Form PF Definitions and Instructions.
Figure 24 shows that a majority of respondents (59.18%) did not disagree with the definitions or instructions in Form PF. However, a significant minority of respondents (40.82%) indicated that they did in fact disagree with definitions or instructions in Form PF.
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What definitions or instructions do you disagree with? (Q6bi)<br>8.16% 8.16%<br>6.12% 6.12%<br>4.08%<br>General definitions of funds Performance information<br>Instructions generally need clarification RAUM/AUM definition<br>Other<br>4<br>3<br>2<br>1<br>0<br><!-- End of picture text -->
Figure 25: Disagreement with Definitions of Instructions.
Question 6bi was directed towards respondents who had previously indicated that they disagreed with Form PF definitions or instructions; it asked them to answer the follow-up question, “What definitions or instructions do you disagree with.” Figure 25 illustrates respondents’ answers to the question. A large proportion of respondents (8.33%) indicated that they generally disagreed with the definition of funds in Form PF. Other response clusters included the need to clarify performance information, the fact
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that instructions generally needed clarification, and the need to improve the definitions for RAUM/AUM for purposes of completing Form PF.<sup>52</sup>
Another follow-up question asked “Why do you disagree with the definition or instruction?” Several respondents suggested that the definition of leverage is inappropriately constructed and can include funds that don't use leverage or any derivative securities. Pertaining to the definition of RAUM, one response stated that “the definition of RAUM does not necessarily mean anything in terms of risk.” Other respondents suggested that the definitions or instructions in Form PF do “not reflect real world practice” and can be “very broad and difficult to obtain and track across a portfolio.” Respondents advising private equity funds suggested that the SEC’s apparent objective was to utilize information from private equity firms in the same model used for hedge fund and broker dealer audits. Other respondents stated that asking for notional value in trade volumes may not work for most respondents because trade volumes are typically based on quantity of shares and contracts or transaction counts.
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Does reporting Regulatory AUM require interpretation? (Q19)<br>50% 50%<br>No Yes<br>50<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 26: Interpretation for RAUM Reporting.
Figure 26 shows that respondents are equally split on whether RAUM reporting in Form PF<sup>53</sup> requires filers’ interpretation. Follow up Survey Question 19b(i) asked “If [RAUM reporting did require interpretation], why was this the case?” Several respondents suggested that the definition of RAUM and the SEC’s interpretation of that term was narrow or unclear. More specifically, several respondents appear to have struggled with the definition of RAUM (especially contrasting RAUM with the different interpretation of AUM that is commonly used), causing some respondents to create their own definition of assets under management to account for the bulk of their advisory practice. Others struggled with the valuation of derivatives, the SEC guidance that requires RAUM to be in line with GAAP, the difference between gross asset value and
> 52 Other responses that did not justify a cluster included: “Form PF Question 56, Not clear that either 0 or a negative number is unacceptable until after you save the form;” “Section 1b, Item B, #8 - Gross asset value of reporting fund;” “Form PF Question 24b - calculation of volume in 2nd set of FAQs;” “Form PF Question 42 - risk metrics;” “Different meanings of "value" for different products - gross vs. delta adjusted.”
> 53 For purposes of this article, the term “RAUM” is used as in Form PF _see_ FORM PF, _supra_ note 3,
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RAUM and other perceived conflicts between Form ADV instructions and advisers’ calculations.
Follow up Survey Question 19b(ii) asked “If [you had to interpret the meaning of RAUM], how did you interpret the meaning of "Regulatory AUM"?” Respondents employed different strategies to interpret the meaning of RAUM, including (1) summarizing assumptions for consistency with internal and external reporting requirements, (2) applying RAUM online definitions, and (3) relying on advice of external counsel.
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Rate the best level of guidance available from the SEC staff to assist you in completing Form PF? (Q13)<br>39.58%<br>25%<br>22.92%<br>8.33%<br>4.17%<br>Excellent Good<br>Sufficient Insufficient<br>No guidance<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 27: Quality of SEC Guidance on Form PF.
Figure 27 shows the responses to Survey Question 13 “On a scale of 1 – 5, how would you rate the best level of guidance available from the SEC staff to assist you in completing Form PF?” The majority of respondents (39.58 %) suggested that the SEC guidance on Form PF was “sufficient.” Twenty-five percent of respondents (25%) thought tha ~~t~~ SEC guidance was “good.” However, the third largest group of respondents (22.92%) stated that SEC guidance was “insufficient.”
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Which Form PF Sections/Items were not adequately caputred by SEC guidance? (Q13b)<br>20%<br>15%<br>10% 10% 10% 10%<br>Fund Performance (Section 1b, Item C) Definitions in general<br>Reporting Fund identifying info (Section 1b, Item A) Info regarding reporting fund (Section 1c, Item B)<br>More guidance generally No issues<br>4<br>3<br>2<br>1<br>0<br><!-- End of picture text -->
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Figure 28: Form PF Sections/Items not Captured by SEC Guidance.
Figure 28 shows the number of respondents who responded to the follow-up question to Survey Question 13, Survey Question 13b: “Which Sections / Items on Form PF were not adequately captured by SEC guidance?” While the responses were widely dispersed and did not always justify a cluster category, a majority of respondents indicated that SEC guidance was insufficient with respect to reporting funds, specifically Section 1c, Item B. The next largest cluster of respondents suggested that there were no issues with Form PF itself, followed by clusters stating that SEC guidance was inadequate for Form PF Section 1b, Item C (reporting fund performance) and Form PF Section 1b, Item A (reporting fund identifying information). Other clusters of respondents made reference to the lack of guidance in Form PF generally, and the lack of guidance for the definitions in Form PF. Several responses to Survey Question 13b did not justify response clusters. These responses included references to how difficult it was to find guidance in April, problems regarding technology and the ability to record negative numbers, and issues with reporting for securitized vehicles requiring reliance on assumptions.
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Is the flexibility provided by the SEC in filling out Form PF helpful? (Q7a)<br>72.92%<br>27.08%<br>Yes No<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 29: SEC Flexibility for Form PF Completion.
Figure 29 shows that a majority of respondents (72.92%) believes that the SEC’s flexibility when it comes to answering questions in Form PF is helpful. Only a minority of respondents (27.08%) stated that the SEC was not sufficiently flexible when responding to registrants’ requests for guidance.
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Why was the flexibility in filling out Form PF helpful? (Q7ai)<br>14.5% 14.58%<br>6.25% 6.25%<br>4.16% 4.16% 4.16%<br>Allows for greater interpretation Articulating assumptions<br>Better than nothing Somewhat helpful but needs clarification<br>Ability to use internal methodologies It was simple/easy<br>Other<br>8<br>6<br>4<br>2<br>0<br><!-- End of picture text -->
Figure 30: Benefits of SEC Flexibility for Form PF Completion.
Figure 30 illustrates the responses to the follow-up question, “Why was the flexibility in filling out Form PF helpful?” According to respondents, the most significant benefits of SEC flexibility were that respondents believed they were authorized to use their internal methodologies to interpret and respond to questions, and to articulate their assumptions, and that generally they could simplify the completion of Form PF.
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Why was the flexibility not helpful? (Q7aii)<br>6.25% 6.25% 6.25%<br>2.08%<br>No flexibility it's not clear<br>Flexibility is not useful Other<br>4<br>3<br>2<br>1<br>0<br><!-- End of picture text -->
Figure 31: Negative Properties of SEC flexibility with Form PF. Figure 31 assesses why SEC flexibility regarding Form PF is not helpful. The overall response rate to this question was low. Responses that justified a cluster included references to the SEC’s lack of flexibility or the insufficient usefulness of SEC flexibility. Another category of responses indicated that the flexibility provided by the SEC is not useful because it is not clear and creates confusion.
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Are you using Form PF as a substitute form for required CFTC forms? (Q18)<br>87.5%<br>12.5%<br>No Yes<br>80<br>60<br>40<br>20<br>0<br><!-- End of picture text -->
Figure 32: Form PF as Substitute for Required CFTC Forms.
Figure 32 shows that the majority of respondents (87.5%) are not using Form PF as a substitute for required CFTC forms. Responses to follow-up Survey Question 18b(i), “If [you are using Form PF as a substitute for required CFTC forms], why [are you doing so]?” suggest that some investment advisers are using Form PF to coordinate the myriads of forms that they are required to file. Other respondents are still not sure if they will be able to use Form PF as a substitute – if so, they may use it as a substitute.
Several additional survey questions pertained to optimizing Form PF. For instance, Survey Question 8a asked, “What question in Form PF should not have been asked and why not?” The responses were widely dispersed and did not justify clustering. Individual responses, however, may help clarify specific areas of concern for the private fund industry. Several respondents mentioned Form PF Item C., Question 17 (Reporting Fund Performance), suggesting that existing Form PF fund performance metrics are not accurate because the reporting entities employ different calculation methodologies.<sup>54</sup> Another respondent suggested that assessing the risk profile could have been done with significantly less detail and effort by employing the due diligence processes utilized by many institutional investors when considering whether to allocate capital to a private fund manager. The aggregation of data in Form PF Question 2a also raised concerns.<sup>55</sup> One respondent suggested that if a fund does not employ leverage, then the fund’s manager should not have to provide further data. Other items that were marked as problematic and difficult to measure include Section 1b, Item B, #8, 7.B.(1), Form PF Questions 20, 24, and 28.
The follow-up question to Question 8a, Question 8b, asked ”What questions should have been asked instead and why?” Responses in this category were also widely dispersed and did not justify clustering. Several respondents, however, made comments
> 54 More specifically, one respondent opined that “we (does he mean his firm? Him as an adviser?) don't usually calculate this information for our investors in this manner - so we had to calculate it specifically for the form,” and “this is not an accurate indicator of anything - in fact it is entirely possible that the reporting entity is not able to provide such information as it is not useful to their investors - who are far more concerned about the performance of the Fund net any costs that under USGAAP cannot be included.”
> 55 One respondent suggested that “2a requires that the information be aggregated, and later the information is required to be provided separately for certain funds. Why not just require the information to be provided by fund, and then the SEC can aggregate the data as they deem necessary.”
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in the context of limiting systemic risk via Form PF. These respondents suggested that the SEC’s objective of limiting systemic risk could have been better more strongly advanced by asking questions in Form PF with an emphasis on open derivatives positions,<sup>56</sup> total market exposure of the entity, and total underlying capital.<sup>57</sup> Other responses included a reference to risks of smaller asset managers involves the stability of the management company, particularly as the fund gets past the investment period and the management fee are being reduces. Another respondent suggested that “the SEC should ask for data that is maintained by the funds. For example, why not just require each fund to provide a holdings report, and indicate what type of security each holding is by using a common code. Or perhaps file a balance sheet, in a prescribed format which corresponds to a GAAP presentation.” One respondent argued that Form PF Question 20, pertaining to a reporting fund’s investment strategies, could have been categorized better as some managers have multiple strategies and sub-strategies. This respondent, emphasizing the importance of conforming Form PF to widely accepted investor reporting, suggested that the Form should provide a “breakout of assets by product type, geography, counterparty, sectors - similar to widely accepted investor reporting.” Finally, one respondent suggested that the SEC should have emphasized qualifications of investment managers.
# _3. Reporting Systems and Service Providers_
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Did your existing reporting systems adequately capture the information required on Form PF (Q15)<br>65.22%<br>34.78%<br>Yes No<br>80<br>60<br>40<br>20<br>0<br><!-- End of picture text -->
Figure 33: Adequacy of Existing Reporting Systems.
Figure 33 shows respondents’ assessment of the adequacy of their existing reporting systems to capture the information required on Form PF. The majority of respondents (65.27%) believe that their existing internal reporting systems adequately capture the information required on Form PF. However, a significant minority of
> 56 One respondent stated that “the first question that should have been asked is #13 on Section 1(b), Does the fund have open derivatives positions? If they answer is no, Form PF should not have to be completed. Without derivative positions, I don't see how the SEC can link firms to a systemic collapse.”
> 57 One respondent opined that “the Form should have simply approached the ultimate question in a different way. If the goal was to determine exposure/leverage in the market and thus systemic risk associated with these entities, simply ask the total market exposure of the entity and the total underlying capital.”
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respondents (34.78%) thought that their existing internal reporting systems are not adequately capturing the information required on Form PF.
Several follow-up questions to Survey Question 15 investigated respondents’ reasoning as to why their existing reporting systems do not adequately capture required information. Survey Question 15b asked “If no, why not?” Responses to this follow-up question did not justify cluster categories but they merit further discussion. For example, several respondents suggested that extracting information that is relevant for Form PF from existing datasets required further analysis and calculation. This seems to suggest that existing fund information had to be recalculated for purposes of completing Form PF. For some, trade information was not easily available. Others used different definitions and captured the data in categories different from the ones that the SEC uses, or they maintained the data in different operating areas where no one place or system supplied the required data. For smaller investment fund advisers, the work had to be completed mostly manually. Some advisers suggested that their existing internal reporting systems did not require the same level of detail as Form PF.
Follow up Survey Question 15c asked “If your existing reporting systems did not adequately capture the information required on Form PF, how did you obtain the information necessary to report the data to the SEC?” Several respondents suggested that they concluded a manual review and analysis, and manual calculations to obtain the information necessary to complete Form PF. Respondents also reported that they worked with their custodian or administrator to obtain and compile the data, polled investors for more details on their identity, and purchased new add-ons to their reporting tools and/or used multiple systems to calculate data.
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How did you identify the relevant counterparties? (Q16a)<br>15.63% 15.63%<br>12.5%<br>9.38%<br>6.25%<br>Already track it By name via trading/legal records<br>Few counterparties Via reporting accounting systems<br>Other<br>5<br>4<br>3<br>2<br>1<br>0<br><!-- End of picture text -->
Figure 34: Identification of Counterparties.
Form PF Questions 22 and 23 ask about reporting funds’ counterparty credit exposures. Figure 34 shows how respondents identified relevant counterparties. While many respondents (15.63%) had very few counterparties and thus did not encounter issues with the identification of counterparties, other respondents (15.63%) identified counterparties by name via their trading and/or legal records. Some respondents already tracked counterparty credit exposure (9.38%) or identified counterparties via their existing internal reporting or accounting systems (6.25%).
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Did you encounter any difficulties in identifying counterparties to answer Form PF questions about counterparty credit exposure? (Q16B)<br>93.75%<br>6.25%<br>No Yes<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 35: Issues with the Identification of Counterparties.
Figure 35 shows that the overwhelming majority of respondents (93.75%) did not encounter difficulties in identifying counterparties to answer Form PF questions about counterparty credit exposure.
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Are you using a service provider to complete Form PF? (Q11)<br>72.92%<br>27.08%<br>No Yes<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 36: Use of Service Provider to Complete Form PF.
Figure 36 illustrates that a majority of respondents (72.29%) did not use a serviceprovider to complete Form PF. However, 27.08% of respondents who answered this question used service providers. This seems to suggest that concerns over service providers (over)interpreting required Form PF data on behalf of filers, among other concerns over service providers’ completing Form PF, may not be justified.
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If no, why are you not using a service provider? (Q11a)<br>20.83%<br>16.67%<br>12.5%<br>10.42%<br>4.16% 4.16%<br>Not worth the expense Small firm<br>Can be completed in-house Providers don't know more than us<br>Only file annually Other<br>10<br>8<br>6<br>4<br>2<br>0<br><!-- End of picture text -->
Figure 37: Reasons for Not Using Service Provider.
Figure 37 shows the responses to the follow-up question to Question 11, Question 11a, “If no, why are you not using a service provider?” The majority of respondents (20.83%) suggested that Form PF can be completed in-house. Others respondents (16.67%) mentioned “small firm”, suggesting that smaller firms may not use service providers and will try to complete Form PF themselves. Another significant category of responses (12.5%) suggested that completing Form PF would not justify the expense of hiring a service provider.
Cluster responses of less significance indicate that the respondents did not use a service provider because they filed only annually and the service-providers did not have more experience and/or expertise with the Form than the filer. Several commenters made reference to a desire to understand the form (presumably because the filing will be required in future years and costs savings may be possible if in-house counsel is completing the Form). Finally, some respondents opined that it would be difficult for a single service provider to harvest the appropriate data.
Contrasting with Survey Question 11a, Survey Question 11b(i) asked “If yes, why are you using a service provider?” The responses to this question did not justify clustering but several respondents commented on the difficulty of aggregating the data and entering it directly without having a system to assist in the process, the serviceproviders’ knowledge and its insights into answer methodology, a desire to ensure consistency in preparation, and the comparatively long time it would take to complete Form PF in-house. Some commenters believed that service providers were able to fill the information gaps with information they track more consistently than the filer, and service-providers performed about 80% of the relevant tasks pertaining to Form PF completion, which the filer later internally verified. Smaller firms seemed to utilize service-providers more than large firms because they lack experience. Many respondents also mentioned the need to standardize Form PF to simplify the completion process.
Respondents who addressed follow- up Survey Question 11b(ii), “If you are using a service provider to complete Form PF, are there any issues with using a service provider?” indicated that challenges included developing a process for interacting with a service provider to transfer relevant data, the amount of work required to provide service-
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providers with the necessary information, and the very high comparative cost for smaller firms.
# _4. Investor Relations_
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Have your investors asked to obtain your Form PF filing? (Q17)<br>74.47%<br>25.53%<br>No Yes<br>40<br>30<br>20<br>10<br>0<br><!-- End of picture text -->
Figure 38: Investor Demands for Form PF Filings.
Figure 38 shows that a majority of respondents (74.47%) in the sample have not been asked by their investors to provide a copy of their Form PF filing. However, more than 25% of respondents reported that they received requests from investors to provide a copy of the investment advisers’ Form PF filings.
Responses to follow-up Survey Question 17b, “If [investors asked for your Form PF filing], are you providing your Form PF filing to investors?” suggest that some investment advisers allow investors to review their Form PF filings in-house, while others limit the number of investor requests with regards to Form PF filings. Similarly, responses to follow-up Survey Question 17b(i), “If [investors asked for your Form PF filing and you are providing your form PF filing to investors] – why are you providing investors with your Form PF filings?” suggest that many investment advisers provide their Form PF filings to investors because they consider equal and full disclosure to all parties important. Investment advisers who are raising capital for a new fund seem to have a particular incentive to provide existing investors with Form PF.
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If you are not providing investors with your Form PF, why not? (Q17bii)<br>12.77%<br>8.51%<br>6.38% 6.38%<br>4.26%<br>2.13% 2.13%<br>Not required/necessary Confidentiality<br>Not useful They didn't ask<br>Would cause confusion It's not industry standard<br>Info available in annual report<br>6<br>4<br>2<br>0<br><!-- End of picture text -->
Figure 39: Reasons for not Sharing Form PF Filing with Investors.
Figure 39 shows the clustered responses from respondents who answered Survey Question 17b(ii) “If [investors asked for your Form PF filing but you did not disclose your Form PF Filing] – why not?” The majority of respondents (12.77%) did not provide the form to current prospective investors because investors did not ask for the document. Other respondents did not share their Form PF filings with investors because they deemed that it was not useful. Some commenters did not provide the Form to investors because it was not required or necessary, or cited concerns over confidentiality as a reason. Some investment advisers did not make Form PF information independently available because their Form PF filing was attached to their annual report.
# **VI. Discussion and Conclusion**
The SEC’s mandatory initial collection of private fund data raised many concerns for the private fund industry. This article presents the results of a survey with private fund advisers intended to ascertain the effects of the mandated private fund disclosures.
# _1. Summary of Key Findings_
The key findings of this study quantify, evaluate, and clarify many core open issues with respect to the SEC’s efforts to collect private fund data through Form PF, including in relation to: (1) the required resources for completing Form PF, (2) shortcomings of and SEC guidance on Form PF (3) adequacy of filers’ reporting systems and service providers, and (4) issues associated with investor relations.
# **Purpose and Required Resources**
Respondents identified the SEC’s objective of assessing systemic risk and the historical lack of private fund information provided by the industry to the SEC as primary purposes of Form PF disclosure requirements. Commenters also argued that FSOC and OFR monitoring of risk, investment adviser examinations, and the collection of risk exposure information were important purposes in the enactment of Form PF.
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The completion and filing of Form PF requires the commitment of resources from and expenditures by the private fund industry. A majority of respondents (59.18%) stated that the additional expenditures required to complete and file Form PF for the first time were under $10,000.00. A majority of commenters (57.14%) identified the cost of subsequent annual Form PF filings at about half of the first-time filing cost, i.e. around $5,000.00. A breakdown of respondents by assets under management suggests that larger private fund advisers, required to file quarterly, are faced with substantially higher compliance cost, both for their initial data reporting and for subsequent quarterly filings. The data does not identify the long-term costs for the private fund industry of having to complete and file Form PF on an annual or quarterly basis.
The overall expenses necessary to complete and file Form PF correspond with resource requirements, such as the staff required to file Form PF and the total number of hours it took to complete Form PF. A majority of respondents (67.35%) used only one to three individuals to complete Form PF. Similarly, a majority of respondents (69.39%) indicated that it took staff less than 50 hours to complete Form PF.
Quoting data gathering efforts as well as the data options and the ambiguity of the respective Form PF questions, respondents identified several Questions on Form PF as particularly time-consuming, including, Form PF Question 16 (types of investors), followed by Form PF Question 17 (performance), and Form PF Question 7 (related persons).
# **Shortcomings and SEC Guidance**
The survey may help policy-makers optimize Form PF and the relevancy of the guidance they provide, as the survey identifies shortcomings in the design, definitions, and guidance of Form PF. Respondents identified the burdensome nature and the ambiguity of Form PF as the most pressing issues with Form PF. While a majority of respondents (59.18%) agreed with the definitions or instructions in Form PF, respondents nevertheless argued that performance measures in Form PF Question 17, and counterparties and definitions of counterparties in Form PF Questions 22 and 23, required a level of interpretation. The minority of respondents (40.82%) who disagreed with the definitions or instructions in Form PF generally disagreed with the definition of the term “funds” in Form PF. Commenters were equally split on whether Form PF questions pertaining to calculating RAUM required filers to interpret RAUM for purposes of completing Form PF.
Most respondents appreciated both SEC guidance and SEC flexibility in responding to questions regarding Form PF. A majority of respondents assessed the best level of SEC guidance in the context of their Form PF completion as sufficient or good. The majority of the commenters who believed that SEC guidance was inadequate indicated that SEC guidance was particularly unclear with respect to Form PF Section 1c, Item B (regarding Reporting Funds). This is consistent with the responses that disagreed with the definition of funds in Form PF. Most respondents (72.92%) agreed that the SEC’s flexibility in answering questions with respect to Form PF was helpful. Commenters stated that SEC flexibility was valuable because it enabled respondents to interpret Form PF, it increased respondents’ ability to use their own internal
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methodologies, it helped them articulate their own assumptions, it clarified a lot of questions, and it simplified the completion of Form PF.
# **Reporting Systems and Service Providers**
The survey identifies the adequacy of private funds’ existing reporting systems utilized to capture the information required in Form PF. A majority of respondents (65.22%) stated that their existing internal reporting systems adequately capture the information required by Form PF. More specifically, the majority of respondents did not encounter difficulties in identifying data responsive to questions about counterparty credit exposure, by using counterparties’ names on trading and/or legal records. Several respondents (34.78%) opined that their existing internal reporting systems were insufficient to respond to questions on Form PF because they require further analysis and calculations.
Respondents not only predominantly believed that their existing internal reporting systems sufficed to complete Form PF, they also largely (72.92%) abstained from employing a service-provider to complete Form PF. Firms’ ability to use existing internal reporting systems to complete Form PF is consistent with firms’ preference for completing Form PF in-house. A majority of respondents actually suggested that Form PF can be completed in-house. Others opined that completing Form PF would not justify the expense of hiring a service-provider. Commenters identified several challenges in working with a service-provider, including the investment of time and expenses to develop processes, and the burden of providing service-providers with the required information. The minority of respondents who hired a service-provider stated they did so because of difficulties in aggregating the data and entering it directly without having an internal system to assist in the process; the service providers’ knowledge and their industry insight into answer methodology; a desire to ensure consistency in preparation; and the burden of how long it would take to complete Form PF in-house.
# **Investor Relations**
For a variety of reasons, investors in private funds may ask for a copy of the investment adviser’s Form PF filings. The majority of respondents (74.47%) in the sample had not been asked to provide a copy of their Form PF filing to their investors. While investment advisers may not volunteer the information, the survey results indicate that they tend to allow investors to review their Form PF filings in-house.
# _2. Policy Implications and Future Research_
The findings of this study suggest that the overall effect of Form PF data reporting requirements on the private fund industry may be less severe than widely expected. In light of the cost data provided by this study (for both smaller and larger private fund advisers),<sup>58</sup> the industry’s concerns that mandatory private fund adviser registration and disclosure requirements could inappropriately burden investment advisers<sup>59</sup> seem to be mostly unfounded. The results of this study complement findings in earlier studies
> 58 _See supra_ Figures [___].
> 59 _See supra_ note 4 and accompanying text.
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suggesting that “the private fund industry seems to be adjusting well, and the impact of the registration and disclosure rules appears to be much less intense than the industry initially anticipated.”<sup>60</sup>
Nevertheless, the data analysis and the findings of this study indicate that there are several areas of concern with existing Form PF questions and requirements. Important issues include the ambiguity of several key questions in Form PF; the time constraints required to answer certain questions, such as Question 16 (types of investors), Question 17 (performance), and Question 7 (related persons); respondents’ disagreement with the definition of funds, the lack of adequate SEC guidance for Section 1c, Item B (information regarding reporting fund). Other issues identified in this study pertain to the insufficiency of existing reporting systems for some firms; difficulties in aggregating the required Form PF data and entering it directly without the availability of a system to assist in the process; and challenges in working with a service-provider, including process development and the burden of providing service-providers with the required information.
By examining these shortcomings in the existing framework for private fund advisers’ data reporting, policy makers may be able to identify possible policy improvements. Most of the problems may be addressed over time as the SEC provides additional and improved guidance on Form PF or revises core questions and/or definitions pertaining to core questions that have been identified as problematic.
Another possible remedy to the shortcomings that advisers identified would be to standardize private fund adviser reporting obligations. Standardization may help address the ambiguities and inefficiencies that currently exist in the reporting requirements and help simplify and streamline the disclosure requirements for the private fund industry. To adequately address the competing needs of different types of private fund advisers, policy-makers should consider different models for standardization of Form PF reporting requirements.
The primary limitations for this study were (1) the availability of data and (2) the somewhat narrower timeframe to complete the study after the introduction of private fund reporting requirements. The author collected the data during a six month time period after the effective date of the initial filing requirement applicable to private funds. Further research may be needed to determine if the long-term impact of private fund adviser disclosure obligations is as moderate as this study suggests. More specifically, while the cost implications for some advisers in preparing Form PF seem reasonable at under $10,000.00 (for most smaller advisers but not for larger private fund advisers) and with the cost for those smaller advisers of subsequent annual Form PF filings at less than $5,000.00, the data does not identify the long-term cost of Form PF filings for the private fund industry.
> 60 Kaal, _Private fund Manager Registration_ , _supra_ note 6, at 316.
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**VII. Appendix: Survey Instrument**
# **To: Chief Legal / Compliance Officer To Whom It May Concern**
**Private fund**
July 15, 2013
# **<u>RE: Participant Understanding of Participation in the Survey</u>**
Dear Sir or Madame,
The purpose of this survey is for Professor Wulf A. Kaal at the University of St. Thomas School of Law in Minneapolis to learn more about your experiences in dealing with recent private fund registration and disclosure requirements under the Dodd-Frank Act and in particular your experiences in providing the SEC with required information under Form PF.
As you may know, the Dodd-Frank Act authorized the SEC to promulgate rules requiring registration and enhanced disclosure for private fund managers. As part of the new rules, the SEC introduced a reporting obligation under Form PF. The effects of private fund registration and disclosure requirements in the United States are unclear and this survey study hopes to evaluate and clarify possible effects.
To ensure that we reduce any risks in your participation, we will not in any form identify you or your firm in any of our reports. Responses to this survey will be used by Professor Kaal in several academic publications, which will be made available to academics, industry experts (including survey respondents), and regulators as well as to the general public at the time of publication. Respondents' identities will not be disclosed and particular responses to this survey will not be linked to particular respondents.
We would be happy to share the survey results with you, as they may prove to be informative in the administrative management of your fund(s). The collected cost data in the aggregate form will allow respondents to compare costs. If deemed desirable and only with your consent, we would also be happy to share the results of this survey with your investors.
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Answering the survey questions below will take approximately ten to fifteen minutes. We do very much appreciate your support. Please do not hesitate to get in touch with any questions.
With best regards,
Wulf A. Kaal Associate Professor of Law
1. Did you assist in completing and/or file Form PF on behalf of the investment adviser firm with the Securities and Exchange Commission (SEC)?
- a. Yes ___
- b. No ___
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2. Please check which section(s) of Form PF you completed: a. 1a & 1b – All _private fund_ advisers ____ b. 1c – All _private fund_ advisers that advise private funds ____ c. 2a - Large _private fund_ advisers (>$1.5 bil. AUM) ____ d. 2b - Large _private fund_ advisers (>$1.5 bil. AUM) ____ e. 3 – Large _liquidity fund_ advisers (>$1 bil. AUM) ____ f. 4 – Large _private equity_ advisers (>$2 bil. AUM) ____ g. 5 – Temporary hardship exemption ____
3. Are you required to file Form PF?: a. Annually ____ b. Quarterly ____
4. Please check all of the types of private funds that your investment adviser firm manages (please only check those that apply best to you): a. Private fund ____ b. Liquidity Fund ____ c. Private Equity Fund ____ d. Real Estate Fund ____ e. Securitized Asset Fund ____ f. Venture Capital ____ g. Other Private Fund ____
5. Which, if any, of the questions in Form PF required the greatest level of interpretation? _____________________________________________________________________ _______
6. Are there definitions or instructions in Form PF that you disagree with? a. No ____ b. Yes ____ i. If yes - What definitions or instructions do you disagree with? _________________________________________________________ _______
ii. Why do you disagree with the definition or instruction? _________________________________________________________ _______
7. Please comment on the SEC guidance pertaining to Form PF:
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- a. Is the flexibility provided by the SEC in filling out Form PF helpful? i. Yes ____If Yes, why? _______________________________________________
- ii. No ____If No - why not? ____________________________________________
- b. When the SEC is prescriptive in its Form PF guidance do you agree with the stance the SEC is taking? i. Yes ____
- ii. No ____If No – why not? ___________________________________________
8. Please comment on specific questions in Form PF:
- a. What question in Form PF should not have been asked and why not? _______________________________________________________________ _______
- b. What questions should have been asked instead and why?
_______________________________________________________________ _______
9. What is the most pressing issue the SEC should address in the context of Form PF? _____________________________________________________________________ ___
10. In your opinion, what is the purpose of Form PF? Please check all that apply and/or provide additional comments:
- a. Ease the burden on private fund managers to produce data ___
- b. Assess systemic risk posed by the private fund industry ___
- c. Allow the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to monitor risks to the U.S. Financial System ___
- d. Address the lack of private fund information available to regulators ___
- e. Collection of risk exposure information of individual private fund advisers
- ___
- f. Other __________________________________________________________
11. Are you using a service provider to complete Form PF (Y/N)? _________________
- a. If No – why not? ___________________
- b. If Yes ___ i. Why are you using a service provider? _____________________
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- ii. Are there any issues with using service providers? Please explain:
___________________
12. Please estimate the following pertaining to your investment adviser firm:
- a. Total number of people who worked to complete Form PF for the first time (including external consultants) __________________
- b. Total number of hours to complete Form PF for the first time
____________________
- c. Total amount of funds spent to complete Form PF for the first time $____________________
- d. Please estimate the annual cost for subsequent Form PF filings (after the first time filing) $___________________
13. SEC guidance and support:
- a. On a scale of 1 – 5, how would you rate the best level of guidance available from the SEC staff to assist you in completing Form PF?
- i. Excellent ____
- ii. Good ____
- iii. Sufficient ____
- iv. Insufficient ____
- v. No Guidance ____
- b. Which Sections / Items on Form PF were not adequately captured by SEC guidance? Please list all relevant Sections / Items:
_______
14. Which question(s) on Form PF were most time consuming to answer? a. Please list the three most time consuming items on Form PF:
i. _________________________________________________________
_______ ii. _________________________________________________________ _______ iii. _________________________________________________________ _______
- b. Please state shortly why these items proved time consuming (in order of priority): i. _________________________________________________________ _______
- ii. _________________________________________________________ _______
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iii. _________________________________________________________
_______
15. Did your existing reporting, monitoring, and tracking systems adequately capture the information required on Form PF?
- a. Yes ____
- b. No ____ If no, why not?
- __________________________________________________
- c. If your existing reporting systems did not adequately capture the information required on Form PF, how did you obtain the information necessary to report the data to the SEC?
__
16. Form PF requires disclosures regarding counterparty credit exposure and collateral [(Section 1(b) Item B, Numbers 22, 23, and Section 2(a) Numbers 36, 37, and 38)].
- a. How did you identify the relevant counterparties?
_____________________________
__________________________________________________________________ _______
- b. Did you encounter any difficulties in identifying counterparties? i. No ____
- ii. Yes ____ If yes, what difficulties did you encounter?
_______
17. Have your investors asked to obtain your Form PF filing?
- a. No ____
- b. Yes ____ If yes – are you providing your Form PF filing to investors? i. Yes ____ If yes – why are you providing investors with your Form PF filings? _________________________________________________________ _______
- ii. No ____ If no – why not? _________________________________________________________ _______
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18. To the extent permissible, are you using Form PF as a substitute form for required CFTC forms?
- a. No ____
- b. Yes ____ If yes – why?
____________________________________________________
19. Did reporting “Regulatory AUM” as required in Form PF require a level of interpretation from you?
- a. No ____
- b. Yes ____
- i. If yes – why?
- __________________________________________________
- ii. If yes – how?
__________________________________________________
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