August 11, 2022

Proposed Form PF Amendments: Hedge Funds to Come Clean on Crypto Holdings?

Yesterday, the SEC announced that it was proposing amendments to Form PF, which is a confidential reporting form that certain SEC-registered investment advisers to private funds are required to file. Here’s the 298-page proposing release and here’s the more manageable 2-page fact sheet. The SEC’s press release says that the proposed amendments, which are being proposed jointly with the CFTC, “are designed to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk as well as to bolster the SEC’s regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry.”

This isn’t the type of SEC action we typically cover. Investment adviser regulation isn’t a high-priority topic for most of our members and – more importantly – what I know about it could fit inside a thimble. So, I wasn’t planning on blogging about the proposal until Liz flagged this WSJ article for me. The article says that, if adopted, the amendments would shed light on just how much exposure to crypto hedge funds have. That makes the proposal a little more interesting. Here’s an excerpt from the WSJ piece:

The collapse in cryptocurrency prices this year has left U.S. regulators scrambling to understand the risks that digital-asset markets could pose to the broader economy. They may soon enlist hedge funds in the effort.

The Securities and Exchange Commission issued a proposal Wednesday that would require large hedge funds to report their cryptocurrency exposure through a confidential filing known as Form PF. Created after the 2008 financial crisis, Form PF was designed to help regulators spot bubbles and other potential stability risks in the otherwise opaque ecosystem of private funds that manage money for wealthy individuals and institutions.

The potential addition of cryptocurrency data to the reporting requirements for hedge funds comes as the SEC and its sibling agency, the Commodity Futures Trading Commission, weigh a broader set of updates that would expand the scope of Form PF.

The proposing release suggests that currently, some filers apparently report crypto holdings as “cash or cash equivalents,” which makes no sense to me. The proposal would amend the term “cash and cash equivalents” to direct advisers to not include any digital assets under that category. Instead, the SEC proposes to define “digital assets” and require advisers to report them separately from other types of assets.  Comments are due by the later of 30 days after the proposal is published in the Federal Register or October 11, 2022.

John Jenkins