Repeated Failures to File Form PF Lead to Censure and Fines from the SEC
The SEC is making no bones about it. When it requires registrants to complete and file a new form, it expects those requirements to be acted on. Form PF is a case in point. The agency on June 1 made an example of 13 private fund advisers that, it said, repeatedly "failed to provide required information" by being "delinquent" in their Form filings over multiple years.
The 13 private fund advisers, which range in size from $216 million in assets under management to $2.69 billion in AUM and are based from Massachusetts to California, were, as part of their settlements, each charged with violating Rule 204(b)-1 of the Advisers Act. That Rule requires advisers to private funds with assets of at least $150 million to file Form PF and periodic updates.
Each adviser, apparently without regard to respective differences in size, was fined $75,000 and censured. Each also "remediated their failures" by making the Form PF filings, the agency said.
"The advisers’ repeated reporting failures deprived the SEC of important information they were required by law to provide," said SEC Division of Enforcement Asset Management Unit co-chief Anthony Kelly. "We encourage investment advisers to take a fresh look at whether they are meeting their reporting obligations and adjust their compliance programs accordingly."
The broken windows question
The settlements "are both a yawn and interesting," said Morgan Lewis consultant attorney Steven Hansen. While charges for not properly filing may not tell us anything we didn’t already know about the filing requirements, he said, the interesting part is that bringing charges over relatively less serious allegations like this seems to show that "broken windows" might not be dead, after all.
"Broken windows" was part of the enforcement philosophy followed when under former SEC chair Mary Jo White, who had previously served as U.S. attorney for the Southern District of New York. Under that philosophy, the agency’s Division of Enforcement went after both small and large violations, taking the position that if small violations were left unenforced, they would encourage larger ones. When Jay Clayton took over as SEC chairman in 2017, the Enforcement Division said they did not share the same view on "broken windows."
"There has been a suggestion that ‘broken windows’ has been a thing of the past," said Hansen, "but these settlements have a bit of that look. Of course, ‘broken windows’ may mean different things to different people, but these settlements involved non-scienter based violations, and no investor was alleged to have been harmed." However, he added, "the fact that these violations persisted presumably was a significant consideration in the decision to bring the cases."
Latham & Watkins partner Nabil Sabki said that the SEC "said they wouldn’t be pursuing ‘broken windows,’ but then these settlements came out." The reason behind the settlements, he said, was most likely that "the Division of Enforcement wanted to send a message that advisers cannot ignore fundamental filings for multiple years."
The SEC appears to take private fund advisers’ requirement to file Form PF about as seriously as it takes the requirement of advisers to other funds to file Form ADV. Both provide a window into the financial state of their respective advisers and funds, as well as their investments, performance and more. Form PF was adopted by the SEC and the CFTC in October 2011. While advisers to funds with more than $150 million in AUM must file updates annually, advisers with at least $1.5 billion in hedge fund AUM must provide additional information and file their updates quarterly.
According to the settlements, most of the private fund advisers required to report on Form PF have to provide "only certain basic information regarding private funds they advise in addition to information about their private fund assets under management, their funds’ performance and use of leverage."
The agency does make use of the information it receives, including for enforcement. "The SEC uses Form PF data to monitor industry trends, inform rulemaking, identify compliance risks, and target examinations and enforcement investigations," the agency said in announcing the settlements.
It also uses the information contained in the Forms PF to publish quarterly reports with aggregated information and statistics to keep the public informed about private funds, and to provide private fund data to the Financial Stability Oversight Council "to help it evaluate systemic risks posed by hedge funds and other private funds," the SEC said.
The agency, in its 2015 annual report, also made clear the enforcement uses to which it puts Form PF data. In that report, it said that, "during the past year, the Commission primarily used Form PF data in examinations of registered advisers to private funds. In addition, the Commission used Form PF data in its enforcement program regarding private fund advisers."
Advisers can expect the agency to look for discrepancies between their Form PF filings and other filings or documents they provide to fund investors.
Most of the settlements contain the same wording. Here is what one settlement with one of the largest advisers that settled, San Antonio-based Biglari Capital, an investment adviser since 2013 with approximately $1.3 billion in AUM, had to say:
"Biglari was registered with the Commission as an investment adviser and managed private fund assets of at least $150 million as of the end of its fiscal years 2013, 2014, 2015 and 2016. As a result, Biglari was required to file a report on Form PF and annual updates thereto for its fiscal years 2013, 2014, 2015 and 2016. However, Biglari failed to do so."
The advisory firm was found to have willfully violated Rule 204(b)-1 under the Advisers Act, which requires Form PF filings and updates from private fund advisers with at least $150 million in assets.
The SEC did credit Biglari, as it did all 13 advisory firms that settled, with remedial efforts, which were the filings of any necessary reports, as well as cooperation with agency staff.
Settlements for advisers on the smaller side of the asset scale were not significantly different. New York City-based HEP Management Corporation, also registered with the Commission as an adviser since 2013, but with approximately $218 million in AUM, "failed to file or update a report on Form PF" from 2013 through 2016, even though it was required to do so, the agency said. As part of its settlement, the adviser, like the advisers in the other 12 settlements, was censured and ordered to pay a $75,000 civil money penalty.
The SEC credited HEP with taking remedial action, such as the filing of necessary Forms PF, and with cooperating with the agency staff.
Neither an attorney for Biglari, nor one for HEP Management, responded to a voice mail or email seeking comment.