Form PF FAQs Clarify Just What the SEC Wants
Those seeking answers when they complete Form PF now have another source to consult: a new set of answers to frequently asked questions issued recently by the SEC Division of Investment Management. While perhaps more technical in nature than some previous sets, the new answers will nonetheless be welcome to private fund managers wrestling with how to answer certain Form PF questions – or for those just seeking to know if the answers they are providing, or the way they are providing them, are correct.
The Division staff, in its introduction to the new FAQs, offered another reason the new set was issued. Some of the older FAQs needed to be adjusted to take into account the July 2014 amendments made to Form PF. Those that fall into this category in some instances are "simply renumbering issues because the staff added some new questions when they modified the Form," said Mayer Brown attorney Adam Kanter. Some previous FAQs were simply eliminated.
"All of the FAQs are driving to the same concept: more consistency among filers, removing guesswork so the information is uniform," he said. This makes it easier for SEC staff, whether from Investment Management, Enforcement or the Office of Compliance Inspections and Examinations, or even counterparts at the Financial Stability Oversight Council, to compare apples to apples when reviewing private fund adviser information.
"The staff seems to be taking a practical approach to receiving uniform data from an industry that is anything but uniform," said Perkins Coie partner Jesse Kanach.
Form PF, adopted by the SEC and the CFTC in October 2011, requires advisers managing private funds to provide information about those funds, just as Form ADV requires information from advisers managing registered investment companies.
Requirements for completing the Form differ depending on the amount of hedge fund dollars managed. Advisers with at least $1.5 billion in hedge fund regulatory assets under management typically have to provide the most information and file updates quarterly. Advisers that do not meet that hedge fund threshold (or a large liquidity fund threshold), but manage
$150 million or more in private fund assets, as well as private equity fund advisers, are asked to provide less information and have to submit updates only annually.
The Division staff divided the new FAQs into three categories: new FAQs, updated FAQs and withdrawn FAQs. Here’s how they broke out:
Parallel managed accounts (FAQ A.10). This FAQ relates to how parallel managed accounts should be treated. "My principal office and place of business is outside the United States," the FAQ begins. "For purposes of Form PF, General Instruction 1 allows me to disregard any private fund that, during my last fiscal year, was not a United States person, was not offered in the United States, and was not beneficially owned by any United States person. How should I treat parallel managed accounts?" The Division staff’s answer is that, if an adviser’s principal office and place of business is outside the United States, "you may also disregard any parallel managed accounts that, during your last fiscal year, were parallel to private funds that are disregarded in reliance on General Instruction 1 and were not managed for any United States persons."
Fund audit not completed (FAQ A.11). "If my fund’s auditor has not yet completed its audit of the fund’s financial statements for the fiscal year for which I am reporting Form PF, how should I respond to questions requiring information from those financial statements such as Question 14?" the questions asks. "Should I file information from the previous fiscal year’s completed audited financial statements, or should I make an estimate of the current year’s financial statement information?" Here’s what the Division staff had to say: "You should use the estimated values for the fiscal year for which you are reporting, even if the audit of the financial statement has not yet been completed by the time you file Form PF. You can provide an explanation that the information is an estimate in Question 4. You may, but are not required to, make an amendment to a previously submitted Form PF filing with information from the audited financial statements when the audit is complete." Kanter said he found this answer "probably the most helpful from this new set. The answer is consistent with what most practitioners have been saying."
Private fund identifying numbers (FAQ A.12). This FAQ notes that Instruction 10 requires that private fund identifying numbers be obtained only by filing Form ADV. "A private fund that I managed was launched and liquidated within the course of my most recent fiscal year. Must I report the fund on Form ADV first in order to obtain a private fund identifying number for Form PF?" The Division staff’s answer here is as short as it is succinct: "Yes." "Not many people are faced with this situation, but for those that are, now they know," Kanter said.
Asset breakdowns (FAQ 3.1). Question 3 on Form PF asks for a breakdown of regulatory assets under management and net assets under management. "If I manage a registered investment company (i.e., not a private fund)," the questioner asks, "Do I need to include the regulatory assets under management that I manage for it in response to Question 3?" The Division staff’s answer: "Yes. All of your regulatory assets under management should be accounted for in Question 3. If certain regulatory assets under management are not attributable to the entities enumerated in 3(a)-(g), then such assets should be reported in 3(h) (‘Funds and accounts other than private funds’)."
Portfolio liquidity (FAQ 32.1). Question 32 asks about the liquidity of the report fund’s portfolio. "The instructions to that question state that I should exclude cash and cash equivalents from the response," the questioner notes. "If my reporting fund only holds cash and cash equivalents, however, how should I respond to Question 32?" The Division staff’s answer is that, "If your reporting fund only holds cash and cash equivalents, report that 100 percent of the portfolio is capable of being liquidated within one day or less. You should note in Question 4 that the reporting fund only holds cash and cash equivalents to provide context to your responses."
Liquidity percentage by value (FAQ 32.2). Question 32 also asks for the percentage by value of the reporting fund’s positions that may be liquidated within certain time periods. The FAQ asks what the term "value" means for the purpose of answering Question 32. The Division staff’s answer: "For purposes of Question 32, you should report the percentages of the portfolio’s net asset value that is capable of being liquidated in the time periods set forth in the question."
Exclusion of cash and cash equivalents (FAQ 32.3). The instructions to Question 32 require excluding cash and cash equivalents. "In calculating the percentage of the reporting fund’s positions that may be liquidated within each of the specified time periods, should I exclude cash and cash equivalents from both the numerator and denominator when calculating the percentages?" the questioner asks. "Yes," says the Division staff.
Creditor identification (FAQ 47.1). "In responding to Question 47, how do I indicate that the creditor that is responsive to the question is an affiliate of a group listed in the drop-down menu, but is not an identical legal entity to the group listed?" The Division staff replies that, "When a creditor is an affiliate of a group already listed in the drop down menu in Question 47, select that affiliated creditor group from the drop down menu. Do not enter the creditor’s name in the space for ‘other.’ You may identify the specific creditor within the affiliated group in Question 4."
Investment categories (FAQ 63.1). This FAQ deals with Question 63(f), which asks advisers to identify a category of investment that best describes each security held by the reporting fund. "If the reporting fund holds derivatives, how do I identify which category applies to those securities?" the FAQ asks. "Where the reporting fund holds derivatives, report those securities as ‘Other’ in the categories provided in Question 63(f)," the Division staff says.
Updated and withdrawn FAQs
The remaining FAQs appear to update the FAQ numbering to match Form PF since it was amended.
For instance, prior to this most recent update, the answer to FAQ 20.1, which deals with reporting a good faith estimate of a fund’s investment strategies, made reference to several other questions, including Question 57. The reference to question 57 was removed.
In addition, two FAQs, related to Questions 56 and 57, were removed.