This past week, the SEC and CFTC jointly adopted rules regarding the new Form PF that certain fund managers with AUM in excess of $150M will need to file under the Investment Advisers Act. The form will require advisers to disclosure detailed information about their funds’ holdings and investments to federal regulators. We’ve summarized the reporting requriements previously.
Some litigators are now weighing in with potential issues raised by the new filing requriements. Courtesy of DLA Piper’s Perrie Weiner, Jeffrey Coopersmith, Nicolas Morgan and Andrew Escobar, here are some particular concerns raised by the new filing requirements:
Risks posed by the new rule
1. Exposure to increased enforcement activity
The vastly increased transparency required by the rule opens the door to more robust enforcement activity by fund regulators. The highly detailed disclosures for large funds create potential exposure for failure to comply with the rule. The Form PF disclosures could also encourage the SEC and other regulators to explore previously unconsidered areas of inquiry and facilitate their investigations into fund activities.
2. Determining whether an adviser’s funds will trigger the reporting thresholds
The rule requires monthly testing by every fund adviser to determine whether the adviser’s funds trigger the US$1.5 billion threshold for quarterly reporting (rather than annual reporting). If the threshold is satisfied in any given month, then the adviser must file the quarterly report on Form PF. This monthly testing not only adds another administrative burden on fund advisers, but also increases compliance risk for advisers that fail to conduct monthly tests or accurately calculate total fund assets as specified in the rule.
3. Although certification is not subject to penalty of perjury, accurate information must still be disclosed
The SEC and CFTC initially proposed that advisers affirm each Form PF “under penalty of perjury” that the statements contained therein are “true and correct.” This requirement was eliminated in response to numerous objections. Under the approved version of the rule, advisers will be required to sign the Form PF and confirm that it was filed with proper authority. Despite the elimination of the perjury certification, fund advisers should still take care not to misrepresent any facts or data when completing the Form PF to minimize potential enforcement liability.
4. Roadmap for discovery in civil cases
Although the rule claims that the information disclosed by fund advisers on the new Form PF will be kept confidential, it does not contain any protections against discovery of the form in civil litigation. As a result, it is likely that the disclosures will quickly become the target of discovery requests or subpoenas directed to the fund adviser, the SEC or the CFTC. Litigants as well as fund competitors or traders may also attempt to secure copies of the Form PFs through FOIA requests.
These discovery tactics could be especially problematic for large funds that are required under the rule to report the most detailed level of information. Given the commercial sensitivity of the information disclosed on their Form PFs, fund advisers should only produce the forms in civil discovery after the entry of an appropriate protective order. While not perfect, this measure will reduce the risk that the fund adviser’s competitors will acquire the forms and use the information contained therein to their advantage.