Global Risk Management Advisors (“GRMA”) is pleased to provide a Form PF update based
upon our most recent experience working with major funds and advising major law firms, primes,
administrators and the regulators.
Where Do Funds Currently Stand re: Form PF?
• Continued Difficulty with Interpretation and Assumptions: we are finding that both “first
filers” that have now completed their third filing and “second filers” that filed their initial
filing in March are uncertain about whether the interpretations they used in answering Form
PF questions are all correct and in line with what the regulators view as reasonable. For
example, funds continue to struggle to understand which Form PF questions require notional
value of derivatives positions and which require market value. Also funds are unsure for
which Form PF questions to provide written assumptions in Question 4 and how to word
these assumptions so that they do not trigger any regulatory “red flags.”
• Manual Form PF Process: many first filers continue to utilize a largely manual Form PF
process that is riddled with “cut and pasting” to extract and transform data and generate the
final XML upload file. Such manual processes are costly and introduce significant
operational risk. We have seen that second filers are even more likely to rely on mostly
manual Form PF processes because they generally have fewer resources to devote to their
Form PF program.
• Significant Mistakes Found: we have found from our work with a broad spectrum of
clients and service providers that many funds do not realize that they have material mistakes
in their filings. These mistakes were driven mainly by invalid interpretations and
assumptions or improper methodology and are causing funds to inadvertently file materially
inaccurate responses with the SEC/CFTC.
• “Playing Chicken” With the SEC: finally, we have observed a number of funds “playing
chicken” with the regulators by not answering some of the risk questions that they deem to
be difficult to calculate or not applicable for their fund. One of the main objectives of Form
PF is to collect information on aggregate systemic risk from hedge funds, for which
regulators need responses to Questions 41 and 42 from a substantial majority of Form PF
filers. The regulators cannot meet their aim of assessing systemic risk if funds opt not to
answer some of the questions in Form PF. Also, we believe that not providing this
information raises doubts about the quality of a fund’s risk management process. Therefore,
GRMA advises our clients that failing to provide risk data such as durations, stress test
results and VaR in their Form PF filing casts a fund in an unfavorable light to the regulators
and may contribute to moving a fund to the “front of the line” for regulatory examination.
• More FAQs to Come: The SEC has indicated that it plans to issue FAQs on a regular basis
to help clarify issues around interpretation. On March 8, it released new FAQs for
Instructions A.5, F.4, G.2 and H.2 and Questions 24, 26, 35, 44, 49 and 50 (see GRMA’s
attached compilation of just the FAQs issued in March).
GRMA’s Focus for Form PF
GRMA has been working with both funds that have already completed several filings as well as
funds that made their initial filing in March. Currently, our value-added Form PF advisory and
implementation services focus on four principal areas:
1. Interpretation/Assumptions: ensuring that our clients are using correct interpretations
and assumptions as the basis for their answers in Form PF.
2. Review, Check and Audit: reviewing and checking a client’s filings to ensure that they
are an accurate portrayal of a fund’s risk profile and that there are no glaring regulatory
or investor “red flags” in the filing.
3. Sound, Cost-Effective and Sustainable Process: ensuring that our clients have in place a
sound, efficient, repeatable cost-effective program for Form PF.
4. Proper Documentation/Regulatory Audit Trails: ensuring that our clients have proper
documentation of their Form PF process, such as a Form PF manual that establishes clear
roles and responsibilities for each Form PF team member; and ensuring that our clients
have proper regulatory audit trails so that they can fully explain and justify how they
developed their answers to the regulators and their investors.
Why GRMA?
What sets GRMA apart is that we combine our extensive risk management expertise and thought
leadership on Form PF with extensive hands-on experience to provide our clients with:
• Complete and Cost-effective Solution – provide a complete and cost-effective Form PF
solution that is sound, repeatable and sustainable.
• Interpretation – provide much needed expertise to properly interpret the questions in
Form PF.
• Assumptions and Risk Methodologies – evaluate and/or develop key assumptions, risk
methodologies and complex calculated answers for a proper filing and to minimize the
risk of regulatory and investor “red flags” in your filing.
• Enhanced Risk Management – enhance your risk management program as it relates to
Form PF.
• Consistency – ensure more consistent risk representation across all fund documents.
• Essential Review – perform independent final review, check and audit of your Form PF
filing before submission to the SEC.
• Independence – provide substantive and optical value for investors and regulators
through our well-recognized status as independent risk and Form PF experts.
We have attached a copy of our most recent “Form PF Advisory and Implementation Services”
two-pager that fully describes how we work with funds to ensure that they have a sound,
sustainable and repeatable Form PF process, as well as GRMA’s compilation of the FAQs issued
by the SEC on March 8, 2013.
We would be happy to discuss in more detail how we can assist you to improve your own Form
PF process.
To view the full PDF of the update as well as the Form PF two-pager, please click here.