Alert February 01, 2011

SEC and CFTC Propose Rules Requiring Registered Advisers of Private Funds to File Form PF with SEC

The SEC and the CFTC proposed joint rules (the “Proposed Rules”) that would implement provisions of the Dodd-Frank Act by creating a new Form PF, which is designed to gather information regarding the private fund industry for use by the Financial Stability Oversight Council in monitoring systemic risk. 

Advisers Required to Report.  The Proposed Rules would require periodic Form PF filings by any investment adviser registered with the SEC that advises one or more funds (each a “private fund”) that would be an “investment company” under the Investment Company Act of 1940 (the “1940 Act”) but for the exclusions from the definition of “investment company” under Section 3(c)(1) (the 100 beneficial owners exception) or Section 3(c)(7) (the “qualified purchaser” exception) of the 1940 Act.  For commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) registered with the CFTC that are also registered as investment advisers with the SEC and advise a private fund, the proposed Form PF would replace a portion of the CFTC’s proposed systemic risk reporting requirements under proposed Commodity Exchange Act Rule 4.27(d) which are discussed elsewhere in this issue.  Information reported on Form PF would generally remain confidential.

Frequency and Substance of Reports.  Under the Proposed Rules, an adviser to private funds with less than $1 billion in assets under management (a “smaller private fund adviser”) would be required to file Form PF annually and would report basic information regarding the private funds it advises, including details regarding assets under management, borrowings and leverage, derivatives, credit providers, investor concentration and fund performance.  A smaller private fund adviser managing a “hedge fund” (as defined below) would also be required to report information about the hedge fund’s strategy, counterparty credit risk and trading and clearing practices.

An adviser to private funds with $1 billion or more in assets under management (a “large private fund adviser”) would be required to file Form PF on a quarterly basis and would provide the same information required for a smaller private fund adviser, plus additional information based on the type of private funds that the large private fund adviser manages.  A large private fund adviser to a hedge fund would also be required to report on an aggregated basis details regarding the hedge fund’s exposure by asset class, geographical concentration and turnover.  In addition, a large private fund adviser to any hedge fund having a net asset value of at least $500 million would report details relating to the hedge fund’s investments, including long and short exposure by asset class, as well as leverage and collateral practices, counterparty exposure, risk profile, portfolio liquidity and redemption restrictions.  A large private fund adviser to a “private equity fund” (as defined below) would be required to report information relating to the private equity fund’s finances and investments, including borrowings, guarantees and leverage of portfolio companies and use of bridge financing.  A large private fund adviser would also be required to file certain information relating to any “liquidity fund” (as defined below) that it advises.

Definitions – Hedge Fund, Private Equity Fund and Liquidity Fund.  Form PF would define “hedge fund” as any private fund that (i) has a performance fee or allocation calculated by taking into account unrealized gains; (ii) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or (iii) may sell securities or other assets short.  Form PF would define a “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund (each as defined in the Proposed Rules) and does not provide investors with redemption rights in the ordinary course.  Form PF would define a “liquidity fund” as any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.

Estimated Burden of Reporting Obligations.  By the SEC’s own estimates, the burden imposed by the proposed reporting requirements could be significant (i.e., approximately one month of a full-time employee’s business time during each of the first three years after Form PF is adopted).

Public Comment.  Comments on the Proposed Rules are due no later than 60 days after their publication in the Federal Register.