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News January 31, 2011 Issue

New Form PF Will Report Private Fund Data On A Confidential Basis

Here comes some of the transparency promised by the Dodd-Frank Act to help U.S. regulators stay on top of systemic risk.

The SEC and CFTC proposed joint rules last week that will require SEC-registered advisers to private funds, including those that are also commodity pool operators and commodity trading advisors registered with the CFTC, to report certain information about their private funds on new Form PF.

All SEC-registered advisers to private funds would report certain basic information on an annual basis. "Large Private Fund Advisers," as defined in the proposed new Rule 204(b)-1, would report more detailed information on a quarterly basis and additional systemic risk information for certain private funds.

The SEC noted that "Form PF would elicit non-public information about private funds and their trading strategies the public disclosure of which, in many cases, could adversely affect the funds and their investors. The SEC does not intend to make public Form PF information identifiable to any particular adviser or private fund, although the SEC may use Form PF information in an enforcement action."

Section 404 of the Dodd-Frank Act requires registered private fund advisers to report information the SEC deems necessary to the new Financial Stability Oversight Councilís (FSOC) mission of assessing systemic risk. It also requires the SEC to work jointly with the CFTC and in consultation with the FSOC to design the form and content of the report.

The SEC will share the information with the FSOC as the FSOC considers necessary. The FSOC will also coordinate with foreign financial regulators to obtain and share, as needed, comparable systemic risk information for private funds. To support the Dodd-Frank mandate of international coordination, the SEC participated in the preparation of a report on hedge fund oversight by the International Organization of Securities Commissions (IOSCO). "The types of information that IOSCO recommended regulators gather from hedge fund advisers is consistent with and comparable to the types of information we propose to collect from hedge funds through Form PF," said the SECís release.

Confidentiality.

The Form PF information is intended to remain confidential. However, the SEC must provide it to Congress upon request, and may provide it to requesting regulators, self-regulators, or the courts "for purposes within the scope of [their] jurisdiction." Congress must abide by a confidentiality agreement. The FSOC is subject to the same confidentiality provisions as the SEC.

So just what information would be flowing in to the SEC?

The amount and types of information varies by type of private fund, separated into three categories Ė hedge funds, liquidity funds, and private equity funds.

"Hedge fund" would be defined as any private fund that

  • has a performance fee or allocation calculated by taking into account unrealized gains;
  • 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
  • may sell securities or other assets short.

The staff believes that any fund meeting this definition "is an appropriate subject for a higher level of reporting even if the fund would not otherwise be considered a hedge fund."

"Liquidity fund" would be defined 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."

The SEC believes the principal risks of these funds are susceptibility to runs, and operation in what investors perceive to be a money market fund-like manner without the protections of regulation.

"Private equity fund" would be defined as any private fund that does not provide investors with redemption rights "in the ordinary course," and that is not a:

  • hedge fund;
  • liquidity fund;
  • real estate fund;
  • securitized asset fund; or
  • venture capital fund.

Generally, less information would be required from private equity funds, said the SEC, because evidence suggests that private equity funds "may present less potential risk to U.S. financial stability."

"Large Private Fund Advisers" are those with $1 billion or more in private fund assets under management. For liquidity funds, such assets under management include registered money market funds aggregated with private liquidity funds. Advisers to hedge and liquidity funds would be required to measure whether theyíve crossed the $1 billion threshold on a daily basis. Private equity funds would measure for crossing the threshold on a quarterly basis.

The SEC believes these thresholds would capture relatively few advisers, but advisers managing a significant portion of the assets in that fund sector. The staff believes Large Private Fund Advisers will encompass about 200 hedge fund advisers controlling about 80 percent of all hedge fund assets, and about 250 private equity fund advisers controlling about 85 percent of all private equity fund assets.

If an adviser is not registered, it will not be required to file a Form PF.

Exempt reporting advisers, for example, will not be required to report systemic risk information on Form PF. The SEC believes that "Congressí determination to exempt these advisers from SEC registration indicates Congressí belief that they are sufficiently unlikely to pose systemic risk."

Form PF

Form PF would be divided into four sections. Most advisers would complete only the basic information requirements of section 1.

Section 1 requests information about -

the adviser:

  • An adviserís name; and
  • The name(s) of any related persons whose information is also reported on the Form PF.

the private funds managed by the adviser, in the aggregate, including:

  • Total and net assets under management for all private funds;
  • Amount of those assets attributable to various types of private funds;

the individual private funds managed by the adviser, including:

  • Gross and net assets
  • Borrowings, identifying certain categories of lenders,
  • Borrowings representing amounts over five percent of the fundís asset owed to individual creditors, including the name of the creditor and amount owed;
  • Number of beneficial owners of the fundís equity;
  • Percent ownership of the fund by its five largest equity holders; and
  • Monthly and quarterly performance information.

Section 2 requires information from private fund advisers that had at least $1 billion in hedge fund assets on any day during a reporting period.

The information requested by Section 2 includes:

  • Market value of assets invested, on a short and long basis;
  • Market value of the assets broken down by asset category;
  • Duration of fixed-income portfolio holdings;
  • Interest rate sensitivity of a portfolio;
  • Turnover rate during the reporting period; and
  • A geographic breakdown of the investments.

Additional information would be required about any single fund with more than $500 million under management.

Section 3 requires information from private fund advisers that had at least $1 billion in liquidity fund assets (both private and registered money market funds) on any day during a reporting period.

The information requested by this section includes, for each fund:

  • Whether the fund uses amortized cost or penny rounding methods of pricing;
  • Whether the fund is managed in accordance with Rule 2a-7;
  • Net asset value;
  • Net asset value per share;
  • Market-based net asset value;
  • Weighted average maturity and weighted average life;
  • Seven-day gross yield;
  • Daily and weekly liquid assets;
  • Secured and unsecured borrowings, broken down by creditor type;
  • Gating and redemption policies and investor liquidity;
  • Good faith estimate of the percentage of the fund purchased using securities lending collateral;
  • Each open position representing five percent or more of the fundís assets; and
  • Amount of assets invested in different types of instruments, broken down by maturity.

Section 4 requires information from private fund advisers that had at least $1 billion in private equity fund assets as of the close of business on the last day of a reporting period.

The information required by Section 4 includes:

  • Individual fund outstanding balances of borrowings and guarantees;
  • Weighted average debt-to-equity ratio of controlled portfolio companies;
  • Maturity profiles of controlled portfolio company debt;
  • Identity of institutions providing bridge financing and the amount of that financing; and
  • A breakdown of the fundís investments by industry and geography.

Form PF will require an independent filing system, which may or may not piggy-back off the current IAPD system, said the SEC. Whatever system is ultimately configured or adopted, filers will pay a fee for the systemís maintenance. The SEC indicated that these determinations would be considered in a separate notice.

Comments on the proposed Form PF reporting requirements are due 60 days after the proposal is published in the Federal Register. Right now, thatís approximately early to mid April.