US SEC amendments seek more disclosures from private equity and hedge funds

The US Securities and Exchange Commission (SEC) continues to signal that it is expanding oversight of private funds. On January 26, 2022, it announced that it is seeking to impose additional reporting requirements for large hedge fund and private equity advisers. These proposed amendments come on the heels of the SEC's recent announcement that it will more closely scrutinize the transaction costs and fees charged by private equity and hedge funds, which we wrote about in this client alert and in this article. As further evidence of this closer scrutiny, on January 27, the SEC's Division of Examinations published a risk alert detailing compliance issues observed by its staff during their examinations of private fund advisers. These observed compliance issues include: (A) failure to act consistently with disclosures; (B) use of misleading disclosures regarding performance and marketing; (C) due diligence failures relating to investments or service providers; and (D) use of potentially misleading "hedge clauses" (i.e. clauses that seek to limit an adviser's liability). In light of these observations and the recently proposed amendments, private equity and hedge funds should be aware that the SEC remains focused on their conduct and should take proactive measures to ensure compliance with the new requirements stemming from such efforts.

The new amendments proposed by the SEC concern Form PF—the confidential reporting form for certain SEC-registered investment advisers to private funds. If passed, the amendments would impose additional reporting requirements for large hedge fund and private equity advisers. According to the press release, the amendments are "designed to enhance the Financial Stability Oversight Council's (FSOC) ability to assess systemic risk as well as to bolster the Commission's regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry." Chairman Gary Gensler explained that the main goal of the proposals is to allow regulators to better spot risks building up in private markets, stepping up an effort that began after the 2008 financial crisis: "the SEC has now had almost a decade of experience analyzing the information collected on Form PF . . . [w]e have identified significant information gaps and situations where we would benefit from additional information."

As such, the proposed amendments would increase reporting requirements in the following manner:

• Funds would be required to file a report within one business day of "events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system." Potential examples include extraordinary investment losses, large increases in margin requirements or defaults by major counterparties for hedge funds and removal of a fund's general partner or termination of a fund's investment period of PE firms.


• Reduce the reporting threshold for large private equity advisers from US$2 billion to US$1.5 billion in private equity fund assets under management.


• These large private equity advisers would also be required to provide additional information about the private equity funds they advise to enhance the information used by the Financial Stability Oversight Council for risk assessment and the SEC's regulatory programs. Specifically, the SEC proposed tailored amendments to section four in order to gather more information from advisers regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (CPCs) and CPC borrowings, fund investments in different levels of a single portfolio company's capital structure and portfolio company restructurings or recapitalizations.


• Update large liquidity fund advisers' reporting requirements to match the recently proposed money market funds reporting requirements. Specifically, larger liquidity fund advisers would have to report the same information that money market funds would report on Form N-MFP.

The proposed amendments will be open for comment for 30 days following their publication in the Federal Register.

Special thanks to Emma Yeremou-Ngah for her assistance in the preparation of this content.