Regulatory reporting and the role of the administrator


Regulatory reporting and the role of the administrator

Many hedge fund administrators now understand that the services they provide to their clients extend beyond just the calculation of the net asset value and shareholder services. Brian Burkholder explains.

Regulatory reporting is one of those areas that administrators are being called upon by their clients to assist with. In the wake of the global financial crisis of 2008, the scale of regulatory reporting is increasing and becoming more complex, and while it continues to evolve and develop, one of the hot topics at the moment is Form PF.

In the US, Form PF (private fund) has been introduced by the Securities and Exchange Commission (SEC), in conjunction with the Commodity Futures Trading Commission (CFTC), and will increase the quantity of information reported by hedge funds in the future. While Form PF will have an impact on both single manager and multi-manager clients, much of the reporting burden will fall to the single manager funds. The Financial Services Authority in the UK has introduced similar voluntary reporting requirements for hedge funds.

Form PF must be filed by investment advisors that are, or are required to be, registered with the SEC, that manage one or more private funds and have $150 million in private assets under management. The reporting is further broken down so that many investment advisors will be impacted by the large advisor reporting requirement if they manage more than $1.5 billion in regulatory assets. Regulatory assets are defined as gross assets under management, so clients with net assets of $1 billion could be caught if they use leverage of $500 million as part of their investment strategy.

The reporting by large advisors is more extensive and occurs quarterly; for other advisors annual reporting is all that is needed. The first reporting deadline for Form PF for large advisors with regulatory assets of $5 billion or more is August 29, 2012, based on the June 30 quarter end.

While many clients will not be affected by every section of Form PF, the overall document is broken down into five sections over a total of 42 pages. It is difficult to provide a concise summary of the information required, but the level of information to be reported by investment advisors will be substantial. An administrator’s clients may be required to disclose detailed information about the assets they have under administration at a very granular level. Calculations such as risk metrics may also be required.

The information contained in Form PF is meant to be confidential and is to be used to determine how systemic risk—and potential systemic risk—should be assessed in the financial system. The SEC and CFTC may also use Form PF to support examination and enforcement activities. While Form PF is meant to be confidential, it is possible that large institutional investors of a client may want to see the investment advisor’s filings as part of their due diligence activities. Should this occur, the administrator’s role will be even more important, as institutional investors prefer to receive information independently of the investment advisors they are evaluating.

In addition to Form PF, there is the continued roll-out of FATCA (Foreign Account Tax Compliance Act) by the US Treasury Department and Internal Revenue Service (IRS). While not regulatory reporting per se, FATCA will also have an impact on hedge fund administrators and their clients. Most offshore hedge funds that have US source income will need to enter into an FFI (Foreign Financial Intermediary) agreement with the IRS. The hedge fund will then be responsible for:

• Identifying US account holders within the fund;

• Reporting certain information to the IRS regarding US accounts;

• Verifying its compliance with its obligations pursuant to the agreement;

• Ensuring that a 30 percent tax on certain payments of US source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information; and

• Calculating and reporting a pass-through payment percentage figure.

If the fund itself does not enter into an FFI agreement, or is not otherwise compliant with FATCA, it could be subject to a 30 percent withholding tax on gross sales proceeds. FFI registration with the IRS by hedge funds will commence on January 1, 2013, and to ensure additional withholding taxes are not levied against the hedge fund in the future, this process must be completed by June 30, 2013. A hedge fund actually has until December 31, 2013, to register as an FFI, but the IRS will not guarantee the agreement will be in place to avoid certain tax withholdings which take effect on January 1, 2014.

“While the responsibility for regulatory reporting such as Form PF and FATCA will rest with the hedge fund, the fund administrator will need to be involved.”

While the responsibility for regulatory reporting such as Form PF and FATCA will rest with the hedge fund, the fund administrator will need to be involved. If you have visited your hedge fund clients recently, the question “What is your solution for Form PF and FATCA reporting?”, invariably comes up. Hedge fund administrators will need to address these questions, and rather quickly, given the upcoming reporting deadlines.

Hedge funds will be looking to their hedge fund administrator to assist them with compliance with these new regulatory reporting requirements. For example, Form PF has many data points that

need to be completed. A fund administrator may need to conduct reviews of its systems to determine which parts of Form PF can be sourced from existing data currently maintained by the administrator. A secondary review may need to be done to determine whether there are external solutions that can be implemented to source data for Form PF based on existing information maintained by the administrator, such as risk reporting elements. Finally, the administrator and the client need to agree which data will be produced by each of them respectively. Ultimately, the completion of Form PF should be a collaborative effort between a fund administrator and its clients.

In the case of FATCA, the most significant impact for the fund administrator will be on shareholder systems, which may need to be updated so that they identify US investors properly, based on

the information that is available in the current records. This might seem straightforward, but a fund will be required to look for indicia, or evidence that an investor is a US person. For example, an investor from Europe who sent a subscription from a US bank account would need to be further investigated to determine whether s/he is, or is not, a US person.

FATCA includes a list of prescribed information that may need to be included in your shareholder system to keep track of the status of investors. The shareholder systems may also need adjustment to be able to track recalcitrant investors (investors who do not provide sufficient information to reveal whether they are a US person). For such investors, cash systems may also need to be adjusted to ensure any future payments are subject to withholding.

As with Form PF, a partnership approach for FATCA compliance is recommended. One approach is for the fund administrator to affirm to the fund that specified procedures have been applied to the records of the fund as maintained by the fund administrator. The fund can then take this representation and incorporate it into its records to come to an overall conclusion with respect to FATCA compliance.

Form PF and FATCA reporting may both require an element of IT investment on the part of the administrator, and both will take time. It has been estimated that it will take up 75 hours for a large advisor to develop the initial reporting, and 35 hours for each subsequent report. The SEC has noted that it expects some, or all, of Form PF reporting to be outsourced, or internal reporting systems developed. Clearly, there will be a view on the part of many clients that administrators should bear some of this reporting burden.

In the case of FATCA, the cost of implementation is even more significant. It has been estimated that the cost for each multinational bank to implement FATCA will be $100 million. While it will not be as much for individual fund administrators, it gives an idea of the scale and impact of this legislation.

Now is the time for fund administrators, if they haven’t already done so, to conduct a review of their systems and start working with clients to support their regulatory and FATCA reporting requirements. There will be a level of time and IT investment, but this should pay off for the fund administrators so that they can increase the scope of value-added services they offer to clients. Depending on the level of value-added services offered, additional revenues should be available to the fund administrator. Finally, enhanced regulatory and FATCA reporting to clients will make them more connected to the administrator through greater integration and dependencies.

Brian Burkholder is head of the single manager division of UBS Fund Services Americas. He can be contacted at:


Brian Burkholder is based in the Cayman Islands. He is a Canadian chartered accountant.

Cayman Funds