In 2022, the SEC updated its rules and amendments to impose new, significant reporting and transparency requirements for U.S. private funds. Financial firms that are not prepared for these new requirements may face an uphill battle in transitioning to workflows that support these new functions.
Fortunately, high-tech hedge funds, quant funds, and other private funds can partner with private cloud providers to enhance their reporting and compliance functions in response to both these recent and any future changes. In this guide, we provide straightforward assessments of the SEC’s recent updates, with recommendations on how private fund leaders can respond.
The SEC Responds to an Increasingly Complex Market
The gross asset value of the private fund industry has grown by nearly 150%, according to an August 2022 statement from the SEC. The SEC has made amendments to Form PF as a result, which already imposes confidential reporting requirements on SEC-registered private fund investment advisers.
According to the SEC, the changes will improve the Financial Stability Oversight Council’s (FSOC) oversight and risk assessment capabilities, helping to protect both investors and the market from otherwise unseeable dangers. According to their rationale, the private funds market now impacts so much of all economic activity that universal economic stability is at stake.
The changes began in January 2022, when new amendments to the SEC’s Investment Advisers Act of 1940 sought to “protect private fund investors by increasing transparency, competition, and efficiency,” according to a February 2022 statement from the SEC. In addition to the increased complexity of the private funds market, its growth now “touch[es] so much of our economy” that “it’s worth asking whether we can promote more efficiency, competition, and transparency in this field,” SEC Chair Gary Gensler said at the time.
Five Key Reasons for the SEC’s New Form PF Requirements
Upon reviewing the new requirements, Option One Technologies’ leadership team identified 5 key elements of the SEC’s rationale for the changes. Here we consider those elements, followed by recommendations as to how private funds—such as hedge funds, quant funds, and private equity firms—can proceed in the years to come.
1. Improving how the SEC and FSOC regulate the private funds industry. The SEC seeks to understand the new activities and trends among private funds and advisers. The new reporting mechanisms are designed to provide both the SEC and the FSOC with a deeper understanding of the industry’s recent and ongoing transformation.
2. Creating greater transparency for investors. In addition to improving their understanding of the private funds industry, the SEC aims to improve the quality of information available to investors to “maintain fair, orderly, and efficient markets,” as they describe in their August 2022 statement. Their January 2022 requirements also call for quarter statements issued to investors “dealing with certain information regarding funds, fees, expenses, and performance” to this end.
3. Improving “data quality and comparability.” With thousands of unique registered private fund investment advisers and different data standards among them, the SEC has struggled to draw comparisons between them and identify new trends. Gensler and other leaders at the SEC hope that new reporting requirements will allow for more comprehensive, robust data collection in standardized formats.
4. Identifying and eliminating systemic risk. SEC leaders are concerned with risks posed to private fund investors, the entire private funds market, and the economy more broadly. Through increased reporting and transparency, they hope to better understand these risks—and take measures to mitigate them.
5. Improving competition by making data available for analysis and dissemination. The SEC wants to make private funds information readily accessible not only to SEC regulators, but also to private fund investors, academic researchers, and market analysts. This will help boost competition in the private funds market by encouraging innovation and allowing for more diversified investment options.
The SEC also has imposed new and unique prohibitions and requirements that might prevent private fund advisers from seeking preferential treatment among investors and engaging in other self-serving activities, such as changing fees and seeking reimbursements.
How Private Fund Advisers Can Respond
Leaders at private funds may struggle with the SEC’s new requirements, as they entail significant operational changes. However, there are several steps private fund advisers can take to streamline and effectively implement these changes:
- Review SEC guidance on the new reporting requirements and seek advice from compliance analysts or other experts. This will help ensure that you fully understand the requirements and how they may affect your firm’s operations. You can operationalize regular reporting requirements (e.g., quarterly reports for investors) and even identify automated solutions that make reporting easier and less labor-intensive, once you understand.
- Communicate with investors about the changes and what they mean for them. By keeping investors informed of any new regulations, reporting requirements, or other changes that may impact their investments, you can help allay any potential concerns and keep them engaged in the process. The SEC prioritizes protecting investors as part of its new requirements; document every interaction with investors that contribute to that end.
- Start preparing for SEC inspections now. Rather than waiting until 2023, begin working on your documentation and regulatory compliance today to make the SEC inspection process as smooth as possible when they arrive. Prioritize solutions that improve data quality and reporting accuracy so that you can demonstrate compliance in as clear a way as possible.
- Explore new compliance technologies and software to simplify your reporting processes. With advances in technology, there are several tools available that can help automate SEC compliance tasks and reduce the administrative burden on your team. Consider deploying these tools to better manage SEC reporting requirements and other compliance processes moving forward.
An Industry-Specific Managed Services Provider Can Help
Creating a long-term data management, reporting, and compliance strategy is a big undertaking, and it may be difficult to know where to start. By working with a dedicated, finance-specific cloud-native managed services provider, private funds can streamline compliance and reporting to meet today’s SEC requirements; but also, set themselves up for future regulatory changes in the future.
For example, managed services from Option One Technologies are designed with private funds in mind. Our financial industry experts stay abreast of the latest regulatory changes, ensuring our solutions simplify compliance and reporting processes with no heavy lifting or IT expertise required on the part of your team. Our compliance analysts and developers already have extensive experience working with SEC regulations and reporting, now, we are ready to assist your private fund firm in the long term.
Choose the easy approach to reporting, compliance, and IT infrastructure for your firm. Contact one of our compliance and reporting experts today for a brief consultation.