Anthony Malakian: A Postscript on Form PF

After months of planning, debate, and more planning, the first wave of hedge funds have finally filed their Form PFs via the Financial Industry Regulatory Authority (Finra). Those firms with $5 billion or more in regulatory assets under management will once again file at the end of November, while most other hedge funds will file next year.

For this issue, Waters spoke with a large number of industry participants in order to paint a picture about what the greatest challenges were facing those initial filers, and what smaller and mid-sized funds should learn from their effort (see page 22).

There are a few points I’d like to make before I call it a night on Form PF. One thing I found quite interesting was the lack of faith that several hedge funds had in the vendor community in following through on their Form PF promises. Judging by the vast number of press releases that have come into my inbox touting Form PF capabilities, it’s probably safe to assume that some of those firms were over-selling.

While it makes sense to use this new regulatory requirement—something that doesn’t demand a massive IT overhaul, but that is strongly underpinned by technology—as a way to introduce products and services to hedge funds panicking about this first round of filings, the reputational damage for non-delivery can be damning. It is clear that the chief compliance and operating officers at these funds are in communication with one another. There isn’t a competitive advantage to be gained from Form PF filings—just headaches. The challenges are largely definitional, which means that in a show of solidarity, they are willing to talk to one another. So you can be sure they are also trading notes about which vendors and consultancies have failed to come through on their claims.

On the technology side, there are benefits that firms can gain from properly attacking the issue of Form PF—from mapping, to audit trails, to data management, to risk management. It’s not about revolutionizing one’s systems—it’s simply about adding efficiency. Compliance reporting is always going to be a pain, but the savviest of firms will use it as an excuse or a driver to improve processes that are often taken for granted.

Demands like Form PF aren’t meant to be exciting, but they don’t have to be a nightmare, either.

Prep, But Not Too Much
In conversations with industry participants, it has became abundantly clear that the amount of data being provided, the number of pages being filed, and the ability to pull all that together, is more difficult than most had initially anticipated. Preparation is vital. Additionally, testing will prove invaluable as the XML filing format for Finra can be quite complex.

Even if your filing date isn’t until April 2013, it would be foolish not to begin the process of vetting vendors and consultancies, setting up internal procedures and figuring out who will be responsible for what, and gaining a deeper understanding of what is being asked for, as many definitions that the Securities and Exchange Commission’s (SEC’s) answers to frequently asked questions may not jibe with your internal definitions.

Furthermore, it’s important to understand that this is not a process that can be solved by one, two or three people. This has to be viewed as a cross-company initiative—IT and operations, the risk department, accounting, treasury, the trading desk, and compliance.

Still, you should be aware that changes will likely come down the pike, sometimes just weeks before the filing deadline. In early August there was a “decimal” change that affected some hedge funds’ strategy and regional exposure fields, according to Phil Christianson of ConvergEx, who says that Finra had already told him more changes would come before the end of September.

It’s highly probable that as the SEC examines the data, more changes will come to help them in their cause of checking for systemic risk. Be adaptable and be patient. Demands like Form PF aren’t meant to be exciting, but they don’t have to be a nightmare, either.