Comment Text:
Secretary, Securities and Exchange Commission 100 F Street NE, Washington, DC 20549-1090
From: Rohan Sharma, Submitted in an individual expert capacity
Aspen Institute Civic AI Leader
U.S. Delegate to ISO/IEC (SC42)
OECD AI Expert- Risk & Accountability Member
ACM Technology Policy Committee
Re: Release No. IA-6959; File No. S7-2026-13, Form PF; Reporting Requirements for All Filers.
Executive Summary
This comment evaluates the structural and operational mechanics of the proposed amendments to Form PF. The Commissions’ intent to recalibrate reporting thresholds and eliminate prescriptive burdens correctly recognizes the maturity of the private fund ecosystem since 2011. However, certain proposed mechanisms—specifically the "reasonable estimates" standard for indirect exposures and the gross asset value de minimis threshold for feeder funds—introduce data heterogeneity that compromises the Financial Stability Oversight Council’s (FSOC) statutory mandate to assess systemic risk. To ensure the final rule functions as written and survives judicial review, this comment provides operationally grounded redlines and technical alternatives.
Procedural & Statutory Considerations The Administrative Procedure Act (APA) requires agency rulemakings to demonstrate a rational connection between the facts found and the choices made. Under 15 U.S.C. 80b-4(b)(3), the Commissions are authorized to collect information "necessary and appropriate... for the assessment of systemic risk". The shift in General Instructions 7 and 8 from a prescriptive "look-through" requirement to reliance on "reasonable estimates" risks generating an asymmetrical dataset. If the collected data cannot be aggregated or compared across filers due to subjective internal methodologies, the collection mechanism may fail to satisfy the statutory nexus required by the Advisers Act. Furthermore, in a post-Loper Bright interpretive environment, agencies must ensure regulatory flexibilities do not decouple from the clear textual mandate of the authorizing statute. Establishing standardized safe harbors, rather than open-ended operational flexibility, will cure this vulnerability.
Section-by-Section Technical Analysis: I. General Instructions 7 and 8 (Indirect Exposures)
Agency Proposal: The Commissions propose to eliminate the prescriptive "look through" requirement and "allow filers to report indirect exposures based on reasonable estimates that are consistent with their internal methodologies and the conventions of service providers."
Operational Friction & Issue: Permitting filers to use undefined "internal methodologies" introduces irreconcilable data heterogeneity. If Adviser A uses a delta-adjusted notional methodology for an ETF exposure and Adviser B uses a gross nominal methodology, the resulting data submitted to FSOC cannot be aggregated. This ambiguity shifts the compliance burden from quantitative analysis to qualitative legal determinations of what constitutes a "reasonable estimate," thereby complicating the cost-benefit calculus.
Proposed Redline/Fix: Do not leave "reasonable estimates" unbounded. Create a hierarchy of acceptable estimation methodologies. Redline: "Advisers may rely on reasonable estimates consistent with their internal methodologies, provided such methodologies align with standardized industry mapping (e.g., GICS) or mathematically map to the reporting fund’s audited financial statements. If internal methodologies deviate from standard conventions, advisers must disclose the variance in Question 4."
Implementation Safeguard: This alternative provides operational flexibility while preserving the Commissions' ability to conduct apples-to-apples systemic risk aggregation, thus safeguarding the rule against arbitrary and capricious challenges.
Section-by-Section Technical Analysis: II. General Instruction 6 (Disregarded Feeder Funds)
Agency Proposal: The proposal permits advisers to treat a feeder fund as "disregarded" if "it invests not more than five percent of its gross asset value in investments that are not in a single master fund, U.S. treasury bills, and/or cash and cash equivalents."
Operational Friction & Issue: Using Gross Asset Value (GAV) as the sole denominator for the 5% de minimis threshold is technically flawed in the context of systemic risk assessment. A feeder fund might hold 96% of its GAV in a master fund, but the remaining 4% could be allocated to highly leveraged or counterparty-dense derivatives. Because GAV does not account for off-balance-sheet leverage, the 5% sleeve could represent a massive unmonitored counterparty risk, defeating the purpose of the 2024 amendments' focus on interconnectedness.
Proposed Redline/Fix: Introduce a risk-weighted or notional cap to supplement the GAV threshold. Redline: "...invests not more than five percent of its gross asset value, and not more than five percent of its gross notional exposure, in investments that are not in a single master fund..."
Implementation Safeguard: Adopting a dual-trigger threshold ensures that highly leveraged tail-risk positions cannot be hidden within a de minimis GAV carve-out. This aligns with the statutory intent to monitor off-balance-sheet leverage under the Advisers Act, making the Final Rule legally resilient and operationally watertight.
Section-by-Section Technical Analysis: III. Section 5 Current Reporting Deadline
Agency Proposal: The SEC proposes to "modify the reporting trigger by removing the requirement to report as soon as practicable," affording large hedge fund advisers the full 72 hours to file a current report.
Operational Friction & Issue: The removal of "as soon as practicable" successfully eliminates a subjective trap that forces advisers to expend resources on outside counsel during a crisis. However, a hard 72-hour deadline across all events fails to differentiate between a localized operations event (e.g., internal IT failure) and a systemic contagion event (e.g., counterparty default).
Proposed Redline/Fix: Support the removal of "as soon as practicable" for standard operational events, but bifurcate the timeline for extreme counterparty events. Redline: "Advisers must file a current report no later than 72 hours after the occurrence of a reportable event, except for events under Item E (Counterparty Default), which must be reported no later than 24 hours if the defaulting counterparty is a designated G-SIB."
Implementation Safeguard: This targeted approach balances the agency's need for immediate systemic contagion indicators with the industry's need for operational certainty. It is highly quotable for the Final Rule's preamble to justify the cost-benefit analysis.
Operational Impact Assessment The overarching goal of Form PF is to furnish FSOC with actionable, aggregatable data. The proposed shift towards threshold increases—$150 million to $1 billion for standard filers, and $1.5 billion to $10 billion for large hedge fund advisers—appropriately concentrates regulatory scrutiny on entities capable of generating systemic friction. The SEC's data demonstrates that the new thresholds capture 94% and 81% of gross asset values, respectively. This satisfies the cost-benefit requirements of the APA. However, compliance failure remains likely if the final rule adopts "internal methodologies" without a standardized mapping hierarchy. Good-faith filers will submit fragmented data, forcing the SEC to issue post-hoc guidance to normalize the data.
The foregoing recommendations are offered to reduce ambiguity and litigation exposure by improving administrative predictability. They are intended as implementation guidance rather than critiques of agency authority or intent. They are intended to ensure the statutory framework functions as written.
Rohan Sharma
Aspen Institute Civic AI Leader Member,
U.S. Technical Advisory Group to ISO/IEC (AI Standards)
Member, ACM Technology Policy Committee
Author, AI & the Boardroom (Springer)
Submitted in an individual expert capacity. All views expressed are my own and do not represent any institution or organization.
