Hedge Fund Alert, Institutional Investor Quote Brian Daly on Proposed SEC Disclosure Requirements

Akin Gump investment management partner Brian Daly was quoted by Hedge Fund Alert for its article “SEC Eyes Stouter, More Frequent Reports” on new disclosures proposed by the Securities and Exchange Commission on Form PF, the Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors.

According to the publication, the new proposals would increase the amount of confidential information and the timeliness of certain disclosures required to be reported via Form PF by some hedge fund managers and private equity businesses.

Daly spoke on the one-day reporting requirements: “The biggest issue for hedge fund managers is the timing of the disclosures. We are hearing from clients that a one-business-day requirement to report what are termed ‘extraordinary losses’ is unreasonable or unworkable with current systems in place.”

He added that the reality is not every portfolio valuation is what he termed a “press the button” matter, with even a straightforward long/short fund taking days to finalize its performance calculations, which can be further complicated by other instruments.

Daly said that this proposal, if implemented, will result in considerable industry-wide expenditures for new systems, programming and consultants. He offered as an example many managers not having “daily unencumbered cash” reports that utilize the Form PF definition, noting, “They have other liquidity tools, of course, but this will require new coding and monitoring,”

He added that an unintended consequence of the rule is that, in crisis conditions, a manager might “shift resources from resolving a problem to quantifying it for reporting purposes.”

Daly was also quoted by Institutional Investor for its article “The SEC Is Tightening Its Grip on Private Markets — But It May Be Disappointed” on the same topic.

Discussing the SEC’s proposal that large hedge funds and PE firms report, within a day, events that indicate “significant stress at a fund that could harm investors or signal risk in the broader financial system,” he said that immediate disclosure may not give the Commission the “early warning signal” it is hoping to get. He said that such events could mean, for example, that the fund engaged in a GP-led secondary transaction.

Daly said that the filing process could be time-consuming and could pull management’s attention to regulatory compliance rather than to addressing the reported issues. He added that, if regulators find only idiosyncratic risks unlikely to affect the market as a whole, fund managers may resent the regulator’s second-guessing of their every decision.