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News October 31, 2011 Issue

SEC Adopts Form PF

New Rule 204(b)-1 and Form PF have arrived.

In the brief SEC open meeting on October 26 that saw unanimous approval of the rule, Commissioner Troy Paredes summed up what he described as a "substantially" improved final rule:

"In short, Ö advisers will be allowed more time to file Form PF; the threshold that delineates a large private equity fund adviser has doubled; large private equity fund advisers will have to file less frequently; advisers will generally have to report less information; fewer advisers will have to file the Form; and advisers will have more flexibility to use their existing methodologies and recordkeeping practices to comply with the rule."

Section 404 of the Dodd-Frank Act has been fulfilled, in a slightly trimmer version than proposed that aligns slightly better with European reporting standards to allow for better global comparability of data.

Hereís how the final rule shaped up.

Who must file?

Advisers registered or required to be registered with the SEC that advise one or more private funds representing at least $150 million in regulatory assets under management (regulatory AUM) as of the end of the adviserís most recently completed fiscal year must file Form PF.

Commodity pool operators (CPOs) and commodity trading advisers (CTAs) that are registered or required to be registered with the SEC and satisfy the conditions just described must file Form PF for any commodity pool that is a private fund, and may file Form PF for other commodity pools.

Large private fund advisers.

The private fund data required by Form PF will be "tiered" so that the SEC receives more detailed information from larger private fund advisers rather than imposing the same reporting requirements on all private fund advisers. Most private fund advisers must complete only section 1 of Form PF.

Three types of "large private fund advisers" must each complete an additional section of Form PF that requests further data tailored to the specific type of fund:

  • Hedge fund advisers with at least $1.5 billion regulatory AUM as of the end of any month in the prior fiscal quarter;
  • Liquidity fund advisers with at least $1 billion regulatory AUM attributable to liquidity funds AND registered money market funds as of the end of any month in the prior fiscal quarter; and
  • Private equity fund advisers with at least $2 billion in regulatory AUM attributable to private equity funds as of the last day of the adviserís most recently completed fiscal year.

Aggregation of assets under management.

Large private fund advisers must aggregate:

  • Assets of "parallel managed accounts," those advised by the firm that pursue substantially the same investment objective and strategy and invest in substantially the same positions as private funds advised by the firm Ė unless the value of the parallel managed accounts is larger than the value of the private funds; and
  • Assets of private funds advised by any of the adviserís "related persons" other than related persons that are separately operated.

To avoid duplicative reporting, advisers may exclude assets invested in the equity of other private funds. An adviserís private-fund-of-private-funds, that "aside from those investments holds only cash, cash equivalents and instruments intended to hedge currency risk" may also be disregarded.

An adviser can report for its own private funds "comingled" with a related personís private funds. Sub-advised funds however, should only be reported once, by either the adviser or the sub-adviser, but not by both.

The definitions.

"Hedge funds" are generally any private fund having any one of three common characteristics:

  • A performance fee that takes into account market value (instead of only realized gains);
  • High leverage; or
  • Short selling (except to hedge currency exposure or manage duration).

"Solely for purposes of Form PF, a commodity pool that is reported or required to be reported on Form PF is treated as a hedge fund," said the release.

The SEC expressly excluded "vehicles established for the purposed of issuing asset backed securities" from the definition of hedge fund.

The SEC also specified that two practices of private equity and other private funds will not trigger the hedge fund definition. Private funds that do not allow for the payment of performance fees or allocations, such as private equity funds, but must nonetheless accrue or allocate such fees for financial reporting purposes will not be considered to be hedge funds.

The SEC clarified in the final rule that the performance fee characteristic "relates only to fees or allocations that may be paid to an investment adviser (or its related person)." Similarly, a private equity or other private fund that takes into account unrealized gains in a fee calculation for the purpose of reducing the fee or allocation will not be considered a hedge fund.

A "liquidity fund" is any private fund that seeks to generate income by investing in a portfolio of short term debt obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.

Liquidity fund managers must aggregate registered money market fund assets with liquidity fund assets solely for the purposes of calculating the reporting threshold. A liquidity fund adviser is only required to report information about unregistered liquidity funds on Form PF.

A "private equity fund" is any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course. Form PF includes a glossary of terms that describes real estate and venture capital funds, which are unchanged from the proposed rule.

Certification requirement abandoned.

Commenters successfully persuaded the staff that certifying that the information is true and correct under penalty of perjury was an inappropriate standard for Form PF "because the Form requires advisers to provide estimates and exercise significant judgment in preparing responses."

Except for regulatory AUM, advisers may rely on their own methodologies when reporting on Form PF.

The staff found an "appropriate balance" between permitting advisers to use the same methodologies used to report to their investors and the need for the Financial Stability Overisght Council (FSOC) to receive comparable data across the industry. The staff noted this should ease the reporting burden on advisers.

Frequency of reporting.

The timing and frequency of the initial and regular reporting have been extended. The rule as proposed would have required daily monitoring by hedge and liquidity funds and quarterly monitoring by private equity funds. "We want the information that will be reported to regulators on Form PF to be useful," said SEC Chairman Mary Schapiro in her statement at the open meeting. "It will not be useful if it is rushed or incomplete."

As a result, Form PF as adopted extends the filing deadlines as follows:

Annual filings by smaller private fund advisers and large private equity fund advisers must be made within 120 days after the adviserís fiscal year end. This provides additional time for private equity fund advisers to receive information from portfolio companies, and additional time past the filing deadline for Form ADV annual updates.

Private equity fund advisers will only file Form PF annually and have been relieved of a quarterly filing requirement as originally proposed. Because private equity funds purchase a select group of companies and work with management to strengthen them over time, trends emerge more slowly in private equity investing, said Schapiro. This makes a reduced filing frequency for private equity fund advisers appropriate.

Large hedge fund advisers and large liquidity fund advisers must update their Form PF report as of the end of each fiscal quarter. Large hedge fund advisers will have 60 days after a quarter-end, and large liquidity fund advisers will have 15 days after a quarter-end, to submit quarterly reports on Form PF.

The staff noted in the release that newly registering advisers are subject to the same Form PF reporting deadlines as currently registered advisers. However, advisers are not required to file Form PF with respect to any period that ended prior to the effective date of their registration.

Therefore, a smaller private fund adviser that registers during its 2013 fiscal year would not be required to file Form PF until 120 days after that fiscal year end. Similarly, a large hedge fund adviser registering during its third fiscal quarter must file a Form PF report within 60 days after that quarterís end.

When those initial filings are due.

Large hedge funds with $5 billion or more in assets under management as of the last day of the fiscal quarter most recently completed prior to June 15, 2012, must file Form PF within 60 days after the first fiscal quarter completed after that date.

Large liquidity funds with $5 billion or more in assets under management attributable to liquidity funds and registered money market funds as of the last day of the fiscal quarter most recently completed prior to June 15, 2012, must file Form PF for the liquidity funds within 60 days after the first fiscal quarter completed after that date.

Large private equity fund advisers with $5 billion or more in assets under management as of the last day of its first fiscal year end that occurs on or after June 15, 2012, must file Form PF within 120 days after that fiscal year end.

Other private fund advisers must file Form PF beginning with the first fiscal year end that occurs on or after December 15, 2012. "As a result, most advisers must file their first Form PF based on information as of December 31, 2012," said the release.

How to file.

Form PF will be filed through the Investment Adviser Registration Depository (IARD) system that is maintained by FINRA. The data will be maintained on a confidential basis for secure use by the FSOC and other regulators as permitted by the Dodd-Frank Act.

The SEC approved a filing fee schedule last week. The filing fee due with each annual report and each quarterly report filed on Form PF is $150.

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

Exempt reporting advisers and venture capital fund 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."

A peek inside Form PF.

Brace yourselves, Form PF is 42 pages long (not including the instructions), and asks for a lot more information than is highlighted here.

Form PF is divided into four sections. Most advisers will submit only the basic information requirements of section 1.

Section 1 requests information about -

the adviser:

  • An adviserís name;
  • The name(s) of any related persons whose information is also reported on the Form PF; and
  • The advisers large trader identification number (LTID), if any.

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

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

the individual private funds managed by the adviser.

The private funds managed by the adviser, on an individual basis, including:

  • Gross and net assets;
  • Value of the reporting fundís investments in equity of other private funds;
  • Value of all parallel managed accounts related to the reporting fund;
  • Borrowings, identifying certain categories of lenders, such as US and foreign bank and non-bank creditors;
  • Borrowings representing amounts over five percent of the fundís asset owed to individual creditors, including the name of the creditor and amount owed;
  • The beneficial owners of the fundís equity, by various categories, such as broker-dealer, insurance companies, pension plans, etc.;
  • 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 $1.5 billion in hedge fund assets as of the end of any month in the prior fiscal quarter.

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 (somewhat fewer than proposed);
  • Duration of fixed-income portfolio holdings;
  • Interest rate sensitivity of a portfolio;
  • Turnover of certain asset classes (versus the entire fund, as proposed) during the reporting period, expressed as the value of transactions during the period and not a rate;
  • A geographic breakdown of the investments;
  • The fundís base currency, for ease in interpreting foreign exchange exposures; and
  • The fundís collateral practices with counterparties.

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) as of the end of any month in the prior fiscal quarter.

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

  • Portfolio valuation and its valuation methodology;
  • Whether the fund uses amortized cost or penny-rounding to value assets;
  • 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;
  • Amount of assets invested in different types of instruments, broken down by maturity; and
  • Concentration of the fundís investor base and the liquidity of its ownership interests.

Section 4 requires information from private fund advisers that had at least $2 billion in private equity fund assets as of the end of its most recently completed fiscal year.

The information required by Section 4 includes:

  • Whether the fund or any related persons guarantee obligations or outstanding balances of any portfolio company;
  • Highest, lowest, and weighted average debt-to-equity ratios of controlled portfolio companies;
  • Current and long-term liability characteristics of controlled portfolio company debt; and
  • A breakdown of the fundís investments by industry and geography.