Among the Risk Alert useful insights, is how firms’ advertisements handle net fees (page 6). The SEC reports that, instead of actual client fees, some firms have been “using lower fees in calculations for net of fees performance returns than were offered to the intended audience”.

Take the time to review the Risk Alert, as well as your firm’s performance return calculations:

(1) Are the fees representative of the current fee structure?

(2) Are the share classes in performance returns disclosed?

(3) Is all material information provided?

Meanwhile, activity around Marketing Rule exam findings has been prolific, which our own Kyrstin Ritsema, Executive Director of Confluence Compliance Solutions Strategies, will discuss in NSCP Currents (regarding “Trends in SEC Marketing Rule Examinations”).

Keep in mind that to comply properly with the Marketing Rule, investment advisers’ implementation of measures such as risk assessments and mock SEC exams should take into account the recent Risk Alert and any further SEC guidance.

While the decision is not a complete surprise (see our analyses in February and May), it abruptly puts to rest adviser concerns about the Rule’s nearing compliance dates in September 2024 and March 2025. (Even in a scenario where the SEC appeals successfully, those compliance dates should anyway be delayed.)

Meanwhile investor groups who favored the Rule are disappointed, but will maintain their push for more transparency. The Institutional Limited Partners Association (ILPA), for example, will continue its efforts to encourage detailed quarterly reporting from advisers and funds.

For more insight on the decision’s implications, including a possible SEC appeal, see Sidley’s piece “U.S. Fish Circuit Court of Appeals Vacates Private Funds Rules: What’s Next?”.

In our March edition we looked at how an incoming Trump administration could affect financial regulation in the US. We now turn to the UK, where Prime Minister Rishi Sunak has requested a snap election for 4 July 2024 (granted by the King under the revived royal prerogative).

Perhaps it’s now a trend, as French President Macron has just called his own snap election, a similarly risky gamble albeit in much different circumstances. But that story is perhaps for another RegTech Report edition.

The UK election

Sunak’s Conservative Party has faced gaping deficits in polls, averaging about 20% behind Labour during his 19 months as PM, following the historically brief and disastrous tenure of his Tory predecessor Liz Truss. Hence Sunak’s call for an immediate general election — which otherwise could have waited until January 2025 upon expiry of Parliament’s 5-year term — has some observers scratching their heads.

Whatever its rationale, the July 4th election is generating predictions of a large Parliamentary majority for Labour, with Opposition leader Keir Starmer as the new occupant of 10 Downing and Shadow Chancellor Rachel Reeves moving into Number 11 as head of HM Treasury. If the polling bears out, putting Labour in power for the first time in 14 years, what would it mean for financial regulation?

Labour’s position

Following Labour’s heavy defeat in 2019 when led by socialist Jeremy Corbyn, the party no longer appears eager to embrace its roots, according to some. Indeed on May 28th Reeves proclaimed, at a Rolls Royce factory, “I want to lead the most pro-growth, the most pro-business Treasury that our country has ever seen.” Statements like this have formed part of Labour’s “charm offensive” on the City, much to the annoyance of Conservatives.

Regarding Brexit, which Starmer strongly opposed while serving as Labour’s “Brexit spokesman” under Corbyn, Labour’s current position is that it would not seek to revisit that divisive issue. (In any case the UK could not unilaterally decide to re-join the EU. It would essentially need to show up with its tail between its legs, with re-accession needing the approval of all 27 EU countries — a feat further complicated by Brexit’s burned bridges.)

As for regulatory reforms recently enacted or in development, such as the landmark Financial Services and Markets Act 2023, Labour’s Plan for Financial Services published in January noted that it would leave the reforms in place and instead “take a forward-looking approach”. The Plan details Labour’s policy priorities (growth and competitiveness, consumer protection, sustainability, fintech) and new initiatives (such as a streamlined FCA Handbook, a regulatory sandbox to develop products for underserved communities, and incentives for bonds secured by green assets). But it largely supports the current, ongoing work of UK financial authorities like the FCA, the Bank of England and the PRA. And so on its face, Labour’s Plan doesn’t threaten the wide-ranging Edinborough reforms and Mansion House reforms for financial services, already set in motion under Conservative Chancellor Jeremy Hunt.

Of course for investment managers, the UK’s existing regulatory landscape already gives them plenty to consider. From SDR (see our February edition) to UK EMIR (see our April edition) and much more, compliance and operations departments are busy adjusting their workflows, and should expect those plans to continue under a Labour government.

For anticipating what else may come next, additional persons to watch include Reeves as well as Tulip Siddiq, the current Shadow City Minister (i.e., Shadow Economic Secretary to the Treasury). Note also that Labour’s manifesto is to be released within the month, and can be requested here.

The FCA’s next moves

It will be interesting to see whether decision-makers at the FCA, which is an independent body like the PRA and the Bank of England, nevertheless feel they could take more liberties under a Labour government. For example, with respect to enforcement. Already with Conservatives in power, controversially the FCA has proposed to publicly name firms it is investigating in certain cases, even before the outcome of such investigations. In response to a letter of concern about the proposal, from a House of Lords committee, the FCA had to acknowledge, among other things, that two-thirds of its investigations result in no action taken. Following a comment period that ended in April, the FCA reportedly will spend a few months thinking over its plans. (Would Labour coming to power give the FCA political cover for sticking to the proposal?)

In addition to vexing Conservatives and the City, this “naming and shaming” row has also renewed concerns about protecting FCA independence. While the FCA reports to the Treasury, which appoints the FCA’s board, the FCA is also “an independent public body funded entirely by the fees we charge”. An example of where that delicate line sits was perhaps seen in 2022, when the Government tried to introduce a “call-in power“. It would have allowed Treasury to create, change or revoke financial regulators’ rules if deemed in the public interest. When a barrage of criticism followed, including from FCA Chief Executive Nikhil Rathi, that call-in power was quickly scrapped.

So more recently when, in what was described as a “rare regulatory intervention”, Chancellor Hunt expressed to the Financial Times his concern over the FCA’s name-and-shame proposal, in fact it felt somewhat familiar. What has even been described as a long-running war between Westminster and the FCA.

For financial firms, the takeaway seems to be that under a government run by Labour, which is currently making all the right noises for the City, regulators like the FCA will nevertheless remain active as they continue to exercise their independence. This is supported in recent statements made by FCA Chair Ashley Alder on May 22nd and by Chief Executive Rathi on June 5th, in which they describe the FCA’s path forward across many areas including private finance, retail investments, sustainable disclosures and innovation.

Meanwhile, the FCA is staying very busy regarding the wide swathe of EU-derived laws, including AIFMD, MiFID/MiFIR, MMFR, PRIIPs, the Short Selling Regulation and more, being dealt with in a post-Brexit UK. A handy table of the FCA’s updated plans, for each such regime, can be found here
And of course, if you’re eligible to vote in the UK’s general election, don’t forget to register by June 18th.

Confluence is a leading global technology solutions provider committed to helping the investment management industry solve complex data challenges across the front, middle, and back offices. From data-driven portfolio analytics to compliance and regulatory solutions, including investment insights and research, Confluence invests in the latest technology to meet the evolving needs of asset managers, asset owners, asset servicers, and asset allocators to provide best-of-breed solutions that deliver maximum scalability, speed, and flexibility, while reducing risk and increasing efficiency. Headquartered in Pittsburgh, PA, with 750+ employees in 15 offices across the United Kingdom, Europe, North America, South Africa, and Australia, Confluence services over 1000 clients in more than 40 countries. For more information, visit confluence.com

In SEC’s third and most substantial set of changes to Form PF in under 12 months, Sections 1 and 2 are given a major makeover, and with a March 2025 compliance deadline, Form PF filers need to move quickly to respond.

So, why the big change? The SEC, CFTC, and Financial Stability Oversight Council (FSOC) want a clearer picture of the systemic risk associated with private funds’ activity in markets. In working with the data submitted on Form PF over the course of the form’s first decade, FSOC has identified areas where the existing form results in blind spots or ambiguity, and the recently adopted changes are aimed at addressing those shortfalls.

In this post, we take a closer look at the adopted Form PF revisions, dig into the challenges that they represent, and consider how Form PF filers can start to prepare for the fast-approaching compliance date.

While the adopted Final Rule makes at least small adjustments to virtually all parts of Form PF and impacts all filers (we identified over 50 distinct changes across Sections 1 and 2!), the changes are particularly impactful for large hedge fund advisors. Focusing in on this group of filers, there are a few areas where the changes pose a particularly potent compliance challenge:

1. Changes to Fund Structure Reporting
   One of the significant changes involves how funds report their structures, particularly concerning master-feeder and parallel fund arrangements. Previously, firms could report master-feeder and parallel fund structures in aggregate, but the new requirements mandate separate reporting of these entities. Feeder funds investing only in the master fund, cash, cash equivalents, and U.S. Treasuries can be disregarded from reporting, providing a bit of respite. But, on the other hand, filers will now have to submit a separate Section 2 for feeders to hedge funds that don’t meet the requirements to be disregarded and that have over $500 million in net assets—a major new burden.
2. More Detailed Investment Exposure Reporting for Qualifying Hedge Funds
   For Qualifying Hedge Funds (those with over $500 million in net assets), the amendments also introduce more granular reporting requirements for investment types and asset classes. First, the asset type exposure breakout has been restructured, with an increased focus on reference assets: in calculating gross exposures, each investment in a fund’s portfolio must be classified by the asset class of the underlying security and filers must now also identify the instrument type of each investment, specifying whether the exposure to the underlying security is achieved directly, synthetically in a derivative transaction, or indirectly through investment in a fund. Additionally, a new adjusted exposure breakout requires funds to net offsetting positions in the same reference asset across instrument types, and large concentrations in a single reference asset must be reported on a security-by-security basis.
3. More Detailed Counterparty Exposure Reporting for All Hedge Funds
   The updated Sections 1 and 2 also introduce new consolidated counterparty exposure tables. On one hand, these tables simplify reporting by bringing previously disparate questions about borrowings, counterparty credit exposure, and margin/collateral into a single central location. On the other hand, the level of detail that must be reported is increased. This is especially true for Qualifying Hedge Funds, which must complete a separate consolidated counterparty exposure table for each of a fund’s five largest debtor and creditor counterparties.
4. New Look-through Requirements
   New look-through requirements bring an additional dimension of complexity to the updated investment and counterparty exposure questions. Filers will now be required to look through trading vehicles (defined as legal entities that hold assets, incur leverage, or conduct trading on behalf of a fund but do not operate a business), meaning that all underlying investment and counterparty exposure obtained through such vehicles must be reported as if the activity is in the fund itself. For large counterparty exposures, filers will have to separate direct exposures and those obtained through trading vehicles by identifying the exposed entity. In addition, Qualifying Hedge Funds will be expected to look through investments in other funds, including unaffiliated funds, and at least estimate asset class exposure based on the investee fund’s asset allocation.

• Data Source SOS The increased granularity in reporting requirements will demand enhanced data sourcing capabilities. You’ll likely need to upgrade your data gathering systems to handle the amplified reporting detail. You may also need to invest in technology and processes that can handle the required detailed data collection and reporting. Think of it as an investment in future-proofing your compliance.
• Time is Ticking The deadline for these new rules is March 2025, presenting firms with a tight timeline to adjust their reporting processes. Don’t wait until the last minute—start reviewing your current practices now and get ready to adapt. This short window is a challenge, especially when coupled with other competing compliance requirements in the industry.
• Operational Transformation Be prepared to adjust your internal operations to meet the new requirements. Technology upgrades, staff training, and potential restructuring might be on the horizon. Evaluate your current operations and make necessary adjustments to meet the new mandates. Operational transformation involves not only technological upgrades, but also training and possibly restructuring within your organization to handle the new reporting demands effectively.
• Preparing for the Changes The SEC’s amendments to Form PF reflect a continued push towards greater transparency and risk management in the private fund space, bringing about significant challenges for firms. Funds must now focus on upgrading their reporting and data management systems to comply with these new requirements, ensuring they remain compliant and competitive in a rapidly evolving regulatory landscape—all within a tight timeline.

  What’s the best path forward? Begin preparations immediately by conducting impact analyses specific to your operations and structures. Then, establish robust data management processes and engage with technology providers to ensure your systems can handle the new reporting requirements.