Backlash against Form PF

The SEC’s proposed ‘Form PF’, designed to measure private funds’ systemic risk, is a classic example of overregulation.

The US Securities and Exchange Commission is proposing, under the guise of the Dodd-Frank Act, that firms registered as investment advisors electronically submit a new “Form PF” which would be held on a “confidential basis” and only shared with other government agencies for the purposes of assessing systematic risk.

Is this additional layer of compliance necessary?

Under the SEC’s Form PF proposal, registered firms would have to submit information on funds’ creditors, investor concentration and monthly performance data. Large firms (those managing $1 billion or more) will need to submit further information on a range of items including bridge loans, leverage placed on portfolio companies and a breakdown of funds’ investments by industry.

The SEC argues that bridge loans and over-leveraging portfolio companies to drive returns are two of private equity’s potential risks to the economy. However, bridge loans are a small segment of leveraged buyout financings.

“Focusing on bridge loans places a disproportionate emphasis on a small segment of leveraged buyout financings,” the Private Equity Growth Capital Council wrote during the consultation period over the proposals which ended last week. Several buyout firms agree and are working closely with the industry group on lobbying against Form PF.

It's also questionable whether Congress' focus is misplaced in equating leveraged buyouts with systemic risk. LBOs have in numerous past academic studies been shown, on the whole, to foster economic growth and job creation. A past PEGGC-backed study, too, found investments made by private equity firms were not subject to the same risks as firms with higly leveraged holdings of mortgage-backed securities and derivatives, which were key components of the financial crisis prompting today's flurry of financial regulation. “Modern private equity funds present little if any realistic prospect of triggering cascading losses and systemic problems in US capital markets,” the study's authors concluded.

Form PF, furthermore, in many ways is a repeat of the current Form ADV required of registered investment advisors. Form ADV's “Part 1” is filed with the SEC and contains information about the advisor, including business affiliations and portfolio company information. “Part 2” discloses more detailed information about the advisor, its potential conflicts, its business practices and the background of its key executive officers. Repeating information on form after form is not a constructive use of time or resources.

While most would agree that embracing a culture of disclosure is a positive, increasingly necessary move, it seems we're getting to the point where regulators are simply adding on more and more requirements for private fund mangers that aren't truly necessary.