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News September 19, 2011 Issue

Form PF Is Coming - How to Get Ready

No one knows what the final requirements will be, but itís a safe bet that advisers will be ponying up a core set of information about the private funds they manage pretty soon.

The final rule that will require reporting of certain private fund information is expected to arrive before the end of the year.

Form PF is a joint rulemaking effort by the SEC and CFTC to gather information on a confidential basis for use in systemic risk analysis by the Financial Stability Oversight Council (FSOC). Division of Investment Management deputy director Robert Plaze said last month that the final rule would likely issue mid- to late-fourth quarter of this year. Thatís right around the corner.

Form PF will require all advisers registered or required to be registered with the SEC to report certain basic information on an annual basis about any private funds they manage. "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.

Assets, borrowings, fund ownership and performance information are among the items that will be submitted on Form PF. Advisers managing at least $1 billion in hedge fund assets will also report information such as market value by asset category, a portfolioís interest rate sensitivity, turnover rate, and a geographic breakdown of the investments. Liquidity and private equity funds of $1 billion or more have additional laundry lists of information to be produced.

"Itís time to start figuring out where [Form PF] information is housed in your firm, and how to get your hands on it," said New Mountain Capital CCO Paula Bosco. Bosco participated on a panel discussing what may be in store regarding Form PF at the ACA Compliance Group/ACA Insight Fall Compliance Conference last week.

Bosco, along with Sidley Austin partner Jonathan Miller and Hirschler Fleischer shareholder Brian Farmer, offered some practical advice ahead of the new rule.

Thereís a lot of information requested and some of the threshold matters, such as what is a "hedge fund" under the rule, give rise to ambiguities, observed the panel. Miller said he did not expect that the SEC would make an example of anyone who, in trying to comply with Form PF requirements, didnít understand some of the "150 or so" questions on the form. Yes, with all the new rulemakings coming from the Dodd-Frank Act, it is difficult to focus on all the moving parts, said Bosco.

Private equity funds, for example, must look through to their portfolio companies and report information such as debt, said Bosco. It is very difficult to get companies to provide this information, even where the fund is a majority equity holder. With the new requirements, Bosco said she believes advisers will see a trend toward "baking" disclosure and other requirements into the deal documents, as a contingency of the relationship. Incorporating disclosure obligations into agreements with creditors is also a good idea, said Farmer.

Advisers should also check to ensure they are not violating confidentiality provisions of existing agreements when providing information to the SEC. That is another issue for review, said Farmer.

Form PF requires each private fund managed by a reporting adviser to have its own unique identification number. A private fund ID is assigned after an adviser identifies the fund in a Form ADV amendment to Schedule D.

Make sure the adviserís Form PF disclosures align with its Form ADV disclosures, said Farmer. Also, make sure Form PF information is consistent with any other documents provided to limited partners as well, said Bosco.

Leverage off other information that must be gathered, such as Foreign Corrupt Practices Act information, she said.

A good way to tackle Form PF requirements is to create a responsibility matrix for each part of Form PF, said Farmer. Memorialize what the information item is, where the information comes from, and who will produce or provide it.

Firm sizes and operations vary, but donít underestimate the time it will take to prepare and file Form PF, said Bosco. She has begun the process, and at about three quarters of the way through, sheís already logged about 220 hours, she said.

What information can be gathered now?

The panel offered some helpful suggestions to focus the task.

Right now, all private fund advisers can be collecting the following information:

  • A determination of related and excluded funds and accounts;
  • Names and addresses of fund creditors;
  • Number of beneficial owners of each fund;
  • Percentage of the fund owned by the five largest beneficial owners.

Hedge fund advisers can be collecting information on:

  • A short narrative of the fundís investment strategy;
  • Percentage of the portfolio traded using computer-driven algorithms;
  • Prime brokers and other significant counterparties;
  • Trading and clearing practices (exchanges, OTC, etc.); and
  • Side pocket, gating, lockup and similar provisions/policies affecting liquidity.

Large hedge fund advisers can be collecting information on:

  • The identification of qualifying hedge funds for reporting purposes;
  • Collateral practices with significant counterparties; and
  • Risk metrics and market factors considered in risk management.

Large liquidity fund advisers can be collecting information on:

  • The fundís method of calculating NAV;
  • Whether the fund follows Investment Company Act Rule 2a-7; and
  • Data regarding investors, gating, redemptions, and liquidity.

Large private equity fund advisers can be collecting information on:

  • Outstanding borrowings and/or guarantees;
  • Descriptions of portfolio company debt and/or defaults;
  • Identification of bridge financing lenders;
  • Identification of portfolio companies in the financial industry;
  • Related person investments in portfolio companies; and
  • A breakdown of portfolio companies by industry and geography.

Issues for all reporting advisers to consider:

  • Supporting the Form PF certification with appropriate documentation and recordkeeping;
  • Covering the increased costs of compliance with Form PF through increases to AUM fees, treating as a fund expense, or something else; and
  • Confidentiality concerns Ė maintaining portfolio company and investor confidentiality, and protecting the confidentiality of the fundís information.

CFTC joint surveillance.

The objective of the proposed rule is to inform the FSOC of potentially systemically risky activity. Because redundant information would only frustrate that purpose, the SEC and CFTCís proposed rulemaking has sought to avoid duplicating the reporting of information by regulated entities.

The CFTC has proposed that advisers dually registered with the SEC and CFTC would satisfy CFTC requirements by filing Form PF with the SEC. Private fund advisers that are also registered as commodity pool operators (CPOs) or commodity trading advisers (CTAs) also would be required to file a Schedule A to proposed Form CPO-PQR and Form CTA-PR, as applicable. Registered CPOs and CTAs, depending on their size and the size of any funds they operate or advise, will also be required to file other portions of the proposed CFTC reporting forms for any fund that is not a private fund.

Search "Form PF" on ACA Insight for details on the proposed rule, information gathered by the SEC from the public comment process, and more.