I write to dissent from the latest unwarranted expansion of Form PF. These revisions stem from the Commission’s unbridled curiosity rather than from a legitimate regulatory objective. In 2010, Congress established the Financial Stability Oversight Council (“FSOC”) and charged it with, among other things, “identify[ing] risks to the financial stability of the United States.”[2] Congress directed the Securities and Exchange Commission (“SEC” or “Commission”) and the Commodity Futures Trading Commission (“CFTC”) (collectively, “Commissions”) to provide some of the information FSOC would need to fulfill its duties, and so in 2011 Form PF was born.[3]

At its inception, the Commissions acknowledged that, while Form PF data could be used for their own regulatory purposes, Form PF’s primary function was “to collect information . . . to assist FSOC in its monitoring obligations.”[4] Since that time, however, respect for Form PF’s primary purpose has given way to curiosity. We pair as co-equal FSOC’s use of Form PF data to “monitor[] and assess[] systemic risk” with our own desire “to collect additional data and make data more useful for the Commissions’ use in their respective regulatory programs.”[5] Relying on both these purposes, we are expanding dramatically the information Form PF collects.

In the Form’s early days, we were comfortable with its limitations. We stated clearly, for instance, that “[w]e have not sought to design a form that would provide FSOC in all cases with all the information it may need to make a determination that a particular entity should be designated for supervision by the [Federal Reserve Board].”[6] We recognized that the cost of demanding more information from all fund advisers would outweigh the benefits. Our sensibilities have changed in the intervening thirteen years, and Form PF is being amended to accommodate them.[7] 

Despite this attitudinal shift, we continue to provide occasional lip service to the idea that these amendments have been made largely in pursuit of improving the identification and monitoring of systemic risk. As one commenter correctly highlighted, however, neither we nor the CFTC “describe[s] the types of activities that may give rise to systemic risk, nor do [we] describe how the proposed reporting requirements are specifically tailored to identify and effectively monitor these activities.”[8] Form PF has not-so-subtly morphed into an all-purpose means to gather information from the private market under the seemingly limitless rubric of systemic risk. Through strained logic, we manage to transform one-off reports describing the idiosyncrasies of individual private funds into harbingers of market-wide contagion. 

Our apparent inability to articulate a rationale for compelling more data has in no way blunted our craving for it—in fact, it appears to have stoked it. Absent any discernible limiting features, we have seemingly decided that all gaps are created equal and filling them provides its own justification. Even a partial list of the additional data we will now collect with these revisions is dizzying.[9] As one commenter put it, “the Commissions appear to believe that monitoring for systemic risk and protecting investors may only be conducted by having access to every piece of fund-related data.”[10] A systemic risk regulator does not need to know everything about every entity.

Boundless curiosity is wonderful in a small child; it is a less attractive trait in regulatory agencies. As diligent regulators we should want to know why market disturbances occur, or even prevent them if we can do so without exceeding our statutory mandates. But we chase a white whale if we believe we are but one discrete piece of information away from being able to prevent the next Flash Crash or Global Financial Crisis. 

We insist, for instance, that each component fund in a master-feeder arrangement be reported separately. We ignored commenters who pointed out that disaggregation makes little sense in light of how private funds manage risk[11] and that the information submitted will be of little use to the Commission.[12] We dismiss these concerns by stating that this fund-level data “allows for a clearer understanding of the reporting fund’s structure, including its portfolio liquidity.”[13] And besides, we say, “the disaggregated data can still be aggregated by FSOC and the Commissions if necessary to understand and assess the risk of the fund.”[14] The Commissions similarly reject a commonsense request for an exception to allow disregarded feeder funds to invest a de minimis amount in something other than a single master fund, U.S. treasury bills, or cash and cash equivalents.[15] Even a ten percent exception could cloud “our understanding of these funds and the risks they may pose.”[16] We likewise said no to calls to carve out certain private funds from the definition of hedge fund—such as private funds that can short or use leverage, but do not engage in those activities for a specified period of time.[17] Allowing carveouts from the definition, we determined, among other problems, would mean that we “would not receive important reporting on these activities which may contribute to systemic risk, particularly in the event of a fund that has the ability to engage in borrowing or short selling activities.”[18]

We do not have the better argument here. We have failed to explain why we must collect a small, unrepresentative component of the whole in order to fulfill Form PF’s purpose. Systemic risk involves the forest—trying to monitor the state of every individual tree at every given moment in time is a distraction and trades off the mistaken belief that we have the capacity to draw meaning from limitless amounts of discrete and often disparate information. Unbridled curiosity seems to be driving this decision rather than demonstrated need. 

In our never-satisfied hunger for more particularized information, we too casually ignore concerns about cost, utility, and data protection. Form PF contains highly proprietary information. Unless we need it, we should not collect it. The leakage of such confidential business information could have serious competitive repercussions. What we put forward as streamlining of Form PF’s data gathering effort—say the drop-down menus to assist a filer in identifying its investment strategy,[19] or the introduction of sub-asset classes—commenters rightly see as costly fact-gathering endeavors of little value that create an increasingly tempting target for cyberthieves.[20] Our curiosity could have serious consequences—“an intrusive path into the proprietary workings of fund managers under the guise of regulatory ‘need to know’.”[21] Ensuring that the data we collect are used only for their intended regulatory purposes is a very weighty responsibility—so weighty that it ought to have us thinking twice about collecting data that is not needed for systemic risk assessment.

Moreover, as one commenter suggests, perhaps we should ensure that we have fully used the information we already receive before adding to private funds’ reporting burden.[22] Given that the last amendments are less than a year old, private funds might justifiably be feeling Form PF fatigue.[23]

The final rule does incorporate some commenter suggestions to reduce the costs and burdens and duplication associated with some of the proposal’s features,[24] which could indicate that the notice and comment process has worked as designed. Far from it. The Commissions dismissed far too many comments calling for revisions or relief, but more troubling, countless numbers of similar pleas likely were never submitted. By my count, we acknowledge that the Commissions received no comment on an element of the proposal more than 40 times in this release. Overburdened commenters are forced to pick and choose among hundreds of questions posed in this and other releases. They concentrate their limited time and strained resources on those matters they believe will be particularly disruptive.[25] With so many questions going unaddressed, we cannot be confident that we have a clear understanding of what the true costs of these amendments will be, let alone whether they are justified. For these reasons and others, I cannot support this rule.

Commenters are not alone in being overburdened. I am grateful to the hardworking staff of the Securities and Exchange Commission and the CFTC. Form amendments can be particularly challenging, especially with respect to a joint form such as this one and without the benefit of comment on many sections of the proposal. I commend the staffs of both agencies for their diligence and professionalism.