2015 Report: Form PF Data Used by SEC for Examinations, Investigations
Advisers managing private funds might be excused for wondering whether the Form PF data they provide to the SEC could be used against them in examinations, investigations and other enforcement activities. As the agencyís 2015 annual report on how it uses Form PF data makes clear, those concerns are well placed.
"During the past year, the Commission primarily used Form PF data in examinations of registered advisers to private funds," the SEC said in its third "Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports,"†issued last month. "In addition, the Commission used Form PF data in its enforcement program regarding private fund advisers."
"The SEC is looking for discrepancies between an†adviserís Form PF filings and other filings or documents provided to fund investors, using the data as an examination tool and as an enforcement tool," said Sidley Austin partner Jonathan Miller.
While advisers should be aware that the information they provide is used this way Ė as well as for other SEC activities, such as monitoring risk activities, informing rulemaking and more Ė they should also be aware that the SEC staffís use of the data in this way is not a change. The 2014 and 2013 reports said much the same thing in terms of how Form PF data would be used.
While the report is "open and honest in terms of how the SEC uses Form PF data," there are sections where†advisers would be wise to "read between the lines a bit," said Mayer Brown attorney Adam Kanter. For†instance, when the SEC states in the section on risk monitoring that it analyzes data across a wide spectrum of filers to identify trends, advisers should be aware that if their own data shows it to be an outlier to what the market is experiencing, the SEC may want to examine that further.
The report, which the SEC is required by the Dodd-Frank Act to issue annually, divides its use of Form PF data into four areas:
Examinations and investigations
Regulatory initiatives and guidance
Working with other federal regulators and international organizations
Examinations and investigations
The SECís Office of Compliance Inspections and Examinations uses Form PF data in a variety of ways, according to the report. Its goal is to use the data to:
Understand the adviserís business. The OCIE staff reviews an adviserís Form PF filing as part of a routine pre-examination evaluation. "This review, in conjunction with other data sources, provides OCIE staff with an understanding of the nature of an adviserís business and investment strategy," the agency said.
Search for inconsistencies. OCIE staff will also search for "inconsistencies with other information obtained from an adviser during an examination, such as due diligence reports, pitch books, offering documents, operating agreements, and books and records." Discrepancies between an adviserís Form PF filing and its Form ADV and brochure, or any publicly available documents related to the adviser, are also sought. "These are easy for SEC staff to find, low-hanging fruit," said Kanter, as the staff can simply lay out both Form PF and Form ADV on a flat surface and compare them.
Confirm investment strategies. OCIE staff will want to confirm that the investment strategies disclosed to investors match the information contained in the adviserís Form PF filing, particularly with respect to holdings, leverage, liquidity, derivatives and counterparties. "After completing this analysis, OCIE staff requests additional documentation from registrants to substantiate or explain any inconsistency or red flag," the SEC said. "In some cases, this process may lead to an examination deficiency letter."
The SECís Division of Enforcement staff reviews the Form PF filings of certain advisers "in connection with ongoing investigations," the report said. It noted that the Divisionís Asset Management Unit uses Form PF data when it investigates private fund advisers.
Advisers should take the report as a reminder that they "need to take Form PF seriously," said Kanter. "Sit down with your documents and make sure everything is consistent across all forms." If an inconsistency is found that is legitimate, enter a note on Form PF explaining the reason for it, he said.
This is where the SECís Division of Economic and Risk Analysis takes a good, hard looks at the Form PF data. "SEC staff in Washington, DC and in the regional offices access reports generated by DERA that use Form PF data and also access Form PF filings directly to assist in risk monitoring activities," according to the report.
DERA has developed a reputation as being, along with Enforcementís Asset Management Unit and Center for Risk and Quantitative Analytics, one of the more technologically proficient sections of the SEC. Form PF data is very much part of the data it analyzes. "Last year, DERA continued to develop its suite of proprietary analytical tools (DERA database), including the incorporation of certain data from Form PF, to assist staff in risk monitoring activities," the SEC said. As an example, the report cites how some OCIE staff queried the DERA database to identify advisers engaged in activities "implicating particular areas of examination focus (exposures, valuation, high-frequency trading, etc.) and to identify possible red flags at firms that may trigger examinations."
"OCIE, DERA and [Division of Investment Management] staff are also developing periodic reports that analyze data across a wide spectrum of filers to help identify trends and possible emerging risks in the private fund industry," the agency said. "In particular, as part of their ongoing monitoring of the money market fund industry, DERA and [the Division of Investment Managementís] Risk and Examinations Office staff have been monitoring data reported by private liquidity funds (an alternative to money market funds) on Form PF."
The Asset Management Unitís aberrational performance inquiry, which looks to identify hedge fund advisers that report errant returns relative to certain benchmarks for further investigation or examination, has already been a source of several enforcement†actions. The Asset Management Unit works with OCIE, Investment Management, DERA and the Center for Risk and Quantitative Analytics in accessing Form PF data as part of this program.
These programs are not the only ways in which Form PF data may be used. The various offices and divisions of the SEC "continue to work to develop additional analytical tools and reports focusing on different types of Form PF data as their familiarity and experience with Form PF data grows."
As the Commission continues to receive Form PF data over a longer period of time, "they will be able to†develop better tools for sniffing out statistical anomalies, and then determining which of those anomalies are significant," Miller said.
Regulatory initiatives and guidance
Staff from the Division of Investment Management use Form PF data in their policy and rulemaking initiatives for both the entire asset management industry and for private funds in particular, the report said. This is true even in terms of improving Form PF itself. "For†example, [Investment Management] staff found Form PF data regarding private liquidity funds informative when analyzing the money market fund reforms and amendments made to the liquidity fund section of Form PF to collect more granular data on liquidity fund holdings," the SEC said.