The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Transparency demands and regulatory requirements force managers to seek help from their administrators

By Michael Regan, General Counsel, Citco Fund Services


Q4 2012 edition

The ever-changing hedge fund regulatory environment together with the continued rise of institutional investors in the hedge fund space has significantly increased the reporting burden on investment managers to both regulators and investors. In this environment, driven by regulators and investors, managers are increasingly turning to fund administrators to assist them in meeting their regulatory and investor reporting requirements. Fund administrators in turn must expand their service offerings and develop sophisticated data management and reporting capabilities to properly service their clients.


Regulatory demands

There is no doubt that the regulatory burden on hedge fund managers is more onerous than ever. In the US for example, the SEC’s Office of Compliance Inspections and Examinations (OCIE) recently sent a letter to senior management of newly-registered investment advisers alerting them to upcoming OCIE examinations of newly-registered advisers to be conducted within the next two years. Earlier this year, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers which development will require many hedge fund managers to register as CPOs and operate their funds in compliance with various disclosure, recordkeeping and periodic reporting obligations set forth in the CFTC Rules. All this means managers who register as CPOs and with the SEC face up to 40 filings annually in the US alone! Coupled with the ever-changing filing rules relating to trading activity such as Form 13F filings in the U.S. and short sale reporting in certain mainly European markets, the cost of compliance for hedge fund managers is undoubtedly significantly more than ever before.


Form PF/ Form CPO-PQR

It is not surprising that managers are therefore looking to fund administrators to assist where administrators have access to the data required by regulators. Designed to assist the Financial Stability Oversight Council in monitoring systemic risk, Form PF is the most recent new burdensome filing requirement which requires SEC registered advisers to provide portfolio, performance and risk information about their funds.

Administrators are undoubtedly well placed to assist managers gather, compile and scrub the fund data required for Form PF but, in order to be in a position to assist multiple clients with the same filing dates, administrators need to ensure they invest in systematic processes for both data aggregation and data storage (e.g. a data warehouse) and develop tools to handle the XML filing format requirements. Registered CPOs will need to complete Form CPO-PQR, which is effectively the CFTC’s version of the Form PF. Form CPO-PQR is filed electronically with the NFA through its website and consists of three Schedules A, B and C. SEC-registered investment advisers reporting on Form PF need only complete Schedule A, which schedule must be completed by all registered CPOs. Schedule B must be completed only by CPOs with assets under management attributable to commodity pools (AUM) equal to or exceeding $150 million but less than $1.5 billion (Mid-Size CPOs) and Schedule C must be completed only by CPOs with AUM equal to or exceeding $1.5 billion (Large CPOs). Given the overlap with Form PF reporting, only administrators with automated processes for gathering, accumulating and storing relevant source data (from multiple sources), together with experienced, specialist regulatory reporting teams can reasonably be expected to assist clients meet these reporting obligations.



Notwithstanding the recent announcement from the US Treasury and IRS extending the implementation of the withholding and reporting obligations of FATCA to various dates in 2014 and 2015, FATCA remains a significant extraterritorial piece of legislation which will impose extra due diligence and reporting obligations on hedge funds. Very generally, FATCA will require offshore hedge funds to enter into Foreign Financial Institution agreements (“FFI Agreements”) with the IRS to identify their US investors or otherwise be subject to 30% withholding on certain U.S.source income. The FFI Agreement will require offshore hedge funds to perform additional investor due diligence to identify investors that are US “accounts”, report account information on US accounts to the IRS and withhold on investors that are noncompliant with document requests. Again, administrators are best placed to provide a service offering to help managers categorize investors in client funds as required by FATCA and to document the due diligence procedures performed. Administrators undertaking this service will need to enhance their transfer agency systems and update investor KYC procedures to be able to capture and record the data in accordance with the FATCA obligations. Administrators looking to provide a comprehensive FATCA service offering will also need to ensure their accounting systems can calculate the 30% withholding on redemption “pass-through” payments attributable to a fund’s U.S. source income. Furthermore, administrators will need to develop reporting capabilities to provide reports which include the relevant data required for IRS reporting on any identified U.S. accounts. FATCA services will be best provided by administrators with dedicated US tax expertise who can work with managers to oversee all aspects of complying with FATCA from the initial investor due diligence analysis to any calculation and reporting obligations.


Investor Transparency/Reporting

Whether managers choose to share the increased information provided to regulators in Form PF and other new regulatory filings with investors remains to be seen. It is certainly conceivable that investors will amend their due diligence protocols to ask managers questions that concentrate on information in the filing such as borrowing and financing, counterparty exposures, derivative positions or risk analytics.

In any event, there is little doubt that the increased allocations by institutional investors to alternative investments has resulted in the investor community demanding greater cooperation from managers in supplying information. Investors are insisting on transparency in geography, issuer, sector, credit and liquidity to avoid the mistakes of the credit crisis, when their view of concentration was limited or they maintained a disproportionate allocation to illiquid assets as other investors redeemed. Investors also want to such receive transparency reports based on consistent methodologies so they can plug the data into their risk systems.

Ultimately, fund administrators who want to be valuable partners to both fund managers and investors need to continue to evaluate and develop their service offerings to ensure they have the right technology and expertise which will enable them to help managers meet the increasing regulatory and investor reporting requirements.


Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA Annual Reports
    2. AIMA Governance
    3. AIMA Logo
      1. Policy note
    4. AIMA Members' List
    5. AIMA Review of the Year
    6. Committees and Working Groups
    7. Weekly News
    8. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Algorithmic and High Frequency Trading
        1. EU Automated Trading
        2. US Automated Trading
      2. Benchmarks
      3. Capital Markets Union
      4. Derivatives/Clearing
        1. BCBS - IOSCO
        2. EMIR
        3. Dodd-Frank Act Title VII
        4. Hong Kong
        5. MiFID II / MiFIR - Derivatives
        6. Singapore
      5. Market Abuse
      6. MiFID II / MiFIR
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Recovery and Resolution
        1. EU
        2. CPSS-IOSCO
        3. Financial Stability Board
      9. REMIT
      10. Securities Settlement
      11. SFT reporting & transparency
      12. Short Selling
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
    11. Cyber Security Resources
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
        2. AIMA 25th Anniversary Dinner
        3. 2015 Videos
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contacts
    5. Press Materials
    6. Photos of Jack Inglis