On December 7, 2022, MFA submitted a comprehensive comment letter to the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) in response to their proposed amendments to Form PF. MFA’s letter highlights that the proposed rules represent a fundamental rewrite of Form PF that weakens the SEC, CFTC, and Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk while imposing significant burdens on advisers and commodity pool operators.
MFA notes that the revised Form PF does not achieve its objective and will harm regulators’ ability to accurately assess systemic risk. From the letter:
“We believe the Proposed Rules fail to balance the dual objectives of collecting meaningful, accurate data and collecting data that facilitates comparisons of that data across different advisers, and may ultimately undermine the Commissions’ and FSOC’s ability to accurately identify and assess potential systemic risk. […] That data needs to be meaningful and accurate for it to serve any legitimate policy purpose. Given the diverse and dynamic nature of the private fund industry (as the Commissions acknowledge in the proposing release), the overly prescriptive approach to data collection in the Proposed Rules will not provide data that is well suited to meaningful potential systemic risk assessment.
“In particular, the proposed approach to require reporting on a disaggregated basis for many master-feeder structures and trading vehicles is likely to provide misleading information for the purpose of conducting risk assessments.
“[A] number of the questions added or modified by the Proposed Rules […] do not reflect how investment portfolios are managed and hedged for investment or risk management purposes. […] Such information will have limited utility to regulators and potentially distract valuable resources from other critical risk management tasks or initiatives in addition to increasing costs.”
MFA emphasizes that the proposed amendments to Form PF will capture routine market events that do not help regulators assess systemic risk. From the letter:
“The Proposed Rules instead would require reporting of market factors that the adviser determines are not relevant to the reporting fund, add a new market factor, and propose thresholds that will continue to capture routine market events, without adequately explaining the significance of reporting these events to the assessment of potential systemic risk. Market events which may cause losses to funds and their investors are a fact of investing in capital markets and the Commissions should not mistakenly equate potential investment losses with potential systemic risk. Over the past two decades, despite several financial crises, and significant regulatory focus on hedge funds and other private funds, regulators have not identified hedge fund losses as creating systemic risk by causing contagion or otherwise uniquely exacerbating such crises.”
Consistent with other SEC rulemaking, the Commission underestimates the cost of compliance with the proposed rules. From the letter:
“In the survey of MFA members, all responding members estimated the costs of filing an initial amended Form PF would exceed the Commissions’ estimate […by ] 3.5 times.”