Alert November 15, 2011

SEC and CFTC Adopt Joint Final Rules for Confidential Reporting of Private Fund Information by SEC-Registered Advisers and Certain Jointly Registered Advisers

The SEC and the CFTC adopted joint rules and new Form PF (collectively, the “Private Fund Reporting Rules”) that implement a mandate under the Dodd-Frank Act to gather information from federally registered investment advisers regarding their private funds (i.e., funds that rely on Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940) for use by the Financial Stability Oversight Council in assessing and monitoring systemic risk.  The Private Fund Reporting Rules will require periodic, confidential submission of private fund information to the SEC in electronic form on Form PF by SEC-registered advisers whose private fund assets under management exceed certain thresholds (discussed in greater detail below).  The Private Fund Reporting Rules do not apply to exempt reporting advisers (e.g., advisers that rely on the registration exemption for venture capital fund advisers, see the June 30, 2011 Goodwin Procter Alert for more on exempt reporting advisers). 

The Private Fund Reporting Rules direct CFTC-registered commodity pool operators (CPOs) and commodity trading advisers (CTAs) that are also registered with the SEC to file any required private fund information with the SEC on Form PF.  The joint rules also allow jointly registered advisers to use Form PF to report information to the SEC with respect to commodity pools that would otherwise have to be reported to the CFTC.  (The CFTC has proposed, but taken no further action on, its own systemic risk reporting requirements.)

Frequency and Substance of Reports.  A registered adviser with more than $150 million in assets under management attributable to private funds will be required to file Form PF (see “Calculating Private Fund Assets under Management” below).  However, the content and frequency of an adviser’s reports on Form PF will depend in large part on whether the adviser is a “large private fund adviser” or a “smaller private fund adviser.”  Large private fund advisers are divided into the following three categories, each with its own particular reporting requirements:

  • A large hedge fund adviser (at least $1.5 billion in assets under management attributable to “hedge funds”) must make quarterly Form PF filings.  Each filing is due within 60 days of the adviser’s fiscal quarter‑end.  The information to be provided in these filings regarding hedge funds the adviser manages includes (1) aggregate information regarding exposures by (i) asset class, (ii) geographical concentration, and (iii) turnover by asset class and (2) for each hedge fund with a net asset value of $500 million or more, information relating to (A) exposures, (B) liquidity, (C) risk metrics, (D) borrowings and derivatives positions, (E) side pockets and (F) investor withdrawals/redemptions (but no position-level information).
“Hedge fund” as defined in Form PF sweeps more broadly than the term on its face suggests.  A “hedge fund” is any private fund (other than a securitized asset fund as defined below) that (i) with respect to which one or more advisers (or their related persons) may be paid 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 or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration). 

The joint adopting release notes that a private fund is not a “hedge fund” solely because its organizational documents do not “prohibit the fund from borrowing or incurring derivative exposures in excess of the specified amounts or from engaging in short selling so long as the fund in fact does not engage in these practices (other than, in the case of clause [(iii) above], short selling for the purpose of hedging currency exposure or managing duration) and a reasonable investor would understand, based on the fund’s offering documents, that the fund will not engage in these practices.”

  • Large liquidity fund advisers (at least $1 billion in combined assets under management attributable to “liquidity funds” and registered money market funds) must make quarterly Form PF filings.  Each filing is due within 15 days of the adviser’s fiscal quarter-end.  These filings must provide information for each liquidity fund with respect to (1) types of assets, (2) risk profile‑related matters, and (3) the extent to which the liquidity fund complies with conditions in Rule 2a-7 under the Investment Company Act of 1940 governing registered money market funds.
A “liquidity fund” is 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.

  • Large private equity fund advisers (at least $2 billion in assets under management attributable to “private equity funds”) must make annual Form PF filings within 120 days of their fiscal year-ends responding to questions focused primarily on portfolio company leverage and industry and geographical breakdowns.

A “private equity fund” is any private fund that is not a hedge fund, liquidity fund, venture capital fund, real estate fund or securitized asset fund (each as defined in Form PF) and does not provide investors with redemption rights in the ordinary course. 

Venture capital fund” has the same meaning as in Rule 203(l)-1 under the Advisers Act, which defines the term for purposes of the new venture capital fund adviser exemption created by the Dodd-Frank Act (as discussed in the June 30, 2011 Goodwin Procter Alert).

A real estate fund is any private fund that is not a “hedge fund” (as defined above), that does not provide investors with redemption rights in the ordinary course and that invests primarily in real estate and real estate related assets. 

A securitized asset fund is any private fund whose primary purpose is to issue asset backed securities and whose investors are primarily debt‑holders.

Any other adviser required to file Form PF is a “smaller private fund adviser” that will have to file Form PF annually within 120 days of its fiscal year-end, reporting only limited information for the adviser’s private funds including (a) fund type (selected from among those noted above and an “other private funds” category), (b) size, (c) borrowings, (d) derivatives positions, (e) investor types and concentration and (f) performance.  A smaller private fund adviser managing hedge funds will also have to report information for those funds regarding (1) fund strategy, (2) counterparty credit risk and (3) use of trading and clearing mechanisms

Calculating Private Fund Assets under Management.  In determining whether any of the reporting thresholds discussed above is met, Form PF requires a private fund adviser to use the new “regulatory assets under management” calculation that will be mandatory for amendments to Form ADV Part 1A beginning January 1, 2012 (as discussed in the June 28, 2011 Financial Services Alert).  In broad terms, regulatory assets under management include all “securities portfolios” (i.e., those portfolios at least 50% of whose total value consists of securities) for which an adviser provides continuous and regular supervisory or management services, without any deduction for leverage or other accrued but unpaid liabilities, but including uncalled capital commitments. 

In determining whether Form PF reporting thresholds are met, a private fund adviser must also aggregate with its private funds its managed accounts that pursue substantially the same investment objective and strategy and invest in substantially the same positions (“parallel managed accounts”) unless the value of those accounts exceeds the value of the private funds with which they are managed.  An adviser must also treat assets of private funds and parallel managed accounts advised by each of its “related persons” as if they were the adviser’s own unless the related person is separately operated.  “Related person” is defined as in Part 1A of Form ADV and includes an adviser’s control persons.  

A related person is separately operated if (1) the adviser has no business dealings with the related person in connection with the adviser’s advisory business; (2) the adviser and related person do not conduct shared operations; (3) there is no referral of clients or business between the adviser and related person; (4) the adviser and related person do not share premises or supervised persons; and (5) the adviser has no reason to believe that its relationship with the related person otherwise creates a conflict of interest with the adviser’s clients.

Compliance Dates. The following advisers are required to begin filing Form PF following their first fiscal year or fiscal quarter, as applicable, ending on or after June 15, 2012:

  • Advisers with at least $5 billion in assets under management attributable to hedge funds
  • Advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds
  • Advisers with at least $5 billion in assets under management attributable to private equity funds

All other private fund advisers are required to begin complying with Form PF requirements following the end of their first fiscal year or fiscal quarter, as applicable, ending on or after December 15, 2012.

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Form PF is a substantial new reporting obligation.  This article conveys only a very broad sense of the kinds and amount of information Form PF requires, which can vary significantly depending on a private fund adviser’s particular circumstances.  Given the potential complexities of producing the required information in a timely manner, each private fund adviser should carefully review Form PF with an eye towards developing (i) procedures to monitor its filing obligations on an ongoing basis and (ii) if needed, a plan for collecting/generating appropriate data for its Form PF filings.