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Private Funds May Soon be Mandated to Disclose Digital Asset Holdings and Performance

The Securities and Exchange Commission (SEC) and Commodity Futures Trade Commission (CFTC) have issued a joint proposal to better “assess systemic risk” of private fund advisors. The proposal includes language that would require reporting of cryptocurrency positions and performance measures of large hedge funds.

What is Form PF?

The form is a jointly adopted requirement used by both the SEC and CFTC. It’s a regulatory filing that mandates private fund advisers report regulatory assets under management to the Financial Stability Oversight Council (FSOC). The purpose is to monitor risks to the US financial system. Form PF affects SEC-registered managers of private equity funds, real estate funds, hedge funds, and liquidity funds with at least US$150 million in private fund assets.

The Proposal

Both Commissions settled on the proposed inclusion after consulting with the Treasury Department and Federal Reserve on potential financial-stability risks in the private-funds industry. SEC Chairman Gary Gensler noted that private funds’ total assets are nearing the size of the banking sector’s assets. “In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds. Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity, and investment strategies,” said SEC Chair Gary Gensler.

The SEC/CFTC Proposed Amendments to Form PF include a number of amendments designed to enhance the FSOC’s ability to monitor systemic risk and bolster regulatory oversight of private fund advisors. Beyond crypto, the proposal would require hedge funds with more than $500 million of net assets to report more information on Form PF about their investment exposures, portfolio concentrations, and borrowing arrangements.

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The proposal on Wednesday (August 10) would add “digital assets” for the first time on Form PF. It also defines what a digital asset is in the eye of the regulators. It has opened a 60-day comment period on whether funds should report detailed information about the cryptocurrencies they hold. This includes identifying specifically or describing their characteristics.

The proposal notes that many hedge funds have been formed recently to invest in crypto, while some other existing funds have added the asset class to portfolios.

Expected Benefit

The recent drop in the prices of digital tokens like bitcoin and Ether has not spread to other asset classes. But the implosion of a crypto-focused hedge fund earlier this summer created a chain reaction that dragged a number of its creditors into bankruptcy.

Regulators want to get ahead of any chain reaction that could extend into traditional markets if mainstream financial institutions increase their adoption of cryptocurrencies before additional guardrails are put in place. “Gathering such information would help the commissions and [financial-stability regulators] better to observe how large hedge funds interconnect with the broader financial services industry,” Mr. Gensler said.

Paul Hoffman

Managing Editor, Channelchek

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