Increased regulation of alternative fund managers and their funds has arguably had the benefit of making alternatives more mainstream and has allowed for greater integration of alternatives into the broader financial market. The result has been significant growth in the alternatives fund industry in the past 10 years in the United States and Europe, with significant investment particularly in real estate and credit investment strategies. For example, according to the Securities and Exchange Commission (SEC) as reported on Form PF, the private fund industry (hedge funds, private equity funds, liquidity funds) has seen 150% growth in gross asset values since the SEC began collecting data on private funds in 2013.1
As investment in the alternatives fund industry continues to grow, the ripple effect of any bumps or stresses within it can have a greater knock-on impact to broader financial markets. This is precisely what regulators in the United States and Europe are seeking to prevent through, among other things, the collection of more accurate, timely and qualitative data. This data will provide regulators with enhanced metrics to observe trends, monitor the markets and ultimately help mitigate risks to the financial markets, investors and consumers. There’s more to this, though, than risk mitigation and monitoring. Regulators, particularly in Europe, acknowledge a need to better streamline data reporting across various regulations, for example, the Alternative Investment Fund Managers Directive (AIFMD), the European Market Infrastructure Regulation (EMIR), as well as underlying statistical reporting.
Of course, streamlining data takes time. No flick of the switch will enable this data to flow immediately in the formats and frequency required. In the EU, the European Parliament is close to finalizing amendments to the AIFMD which are expected to include provisions which will allow National Competent Authorities (NCAs) to request more data from alternative fund managers. Moreover, the proposals published in November 2021 seek to amend AIFMD and make changes to the current reporting template (Annex IV). Aside from the normal course of action to draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), the European Securities and Markets Authority (ESMA) will be requested to draft a report on recommending ways to improve reporting to NCAs. While not the subject of this article, a similar type of reporting could also be extended to Undertakings for Collective Investment in Transferable Securities (UCITS) funds.
In the United States, similar rulemaking is occurring where the SEC has published two rounds of proposals to make amendments to the SEC Form PF filing, which is the confidential reporting form for investment advisers to private funds that provides the SEC and the Financial Stability Oversight Council (FSOC) with information on the operations and strategies of hedge funds and private equity funds.
The latest round of proposals published on 1 September 20222 (1st round published 17 February 20223) are designed to enhance the FSOC’s ability to monitor systemic risk as well as strengthen the SEC’s regulatory oversight of private fund advisers and investor protection efforts.
While more is still to be finalized in both the United States and Europe in terms of what these changes will mean, the direction of travel appears to be that alternative fund managers and their service providers can expect enhanced obligations to provide more data to their NCAs. While this is expected to be solidified in the next 12-24 months, in-scope entities should monitor developments closely to ensure they plan for the resourcing and technology changes that will inevitably be required to address the final reporting requirements.