On October 26, 2011, the Securities and Exchange Commission (the “SEC”) adopted new Rule 204(b)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”). Rule 204(b)-1 requires SEC-registered advisers with at least $150 million in assets under management attributable to private funds to report certain information on Form PF.

The new rule fulfills obligations imposed by Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DoddFrank Act”), which directs the SEC and the Commodity Futures Trading Commission (the “CFTC”) to require investment advisers to private funds to maintain records and file reports containing such information as the SEC and the CFTC deem necessary to assist the Financial Stability Oversight Council (the “FSOC”) in assessing systemic risks to the United States’ financial system. Rule 204(b)-1 implements the applicable Dodd-Frank Act provisions by requiring certain private fund investment advisers to periodically file Form PF with the SEC.

Form PF creates a tiered reporting system based on the types of funds managed and the amount of assets under management. Private fund advisers are divided into two broad groups depending on the amount of assets under management: (1) large private fund advisers and (2) smaller private fund advisers. Generally, large private fund advisers will file more information and do so more frequently than smaller private fund advisers. The SEC anticipates that most private fund advisers will be regarded as smaller private fund advisers, but that the smaller number of large private fund advisers will represent a substantial portion of industry assets under management.

FORM PF REPORTING THRESHOLDS

An adviser will be required to file Form PF if it (a) is registered with the SEC; (b) advises one or more private funds; and (c) has at least $150 million in assets under management (“AUM”) attributable to private funds as of the end of its most recently completed fiscal year. The type and amount of information required to be reported on Form PF will vary depending on the size and types of funds managed by the adviser. Most private fund advisers meeting the threshold requirements of clauses (a)-(c) will be classified as smaller private fund advisers and will report limited information.

Large Private Fund Advisers. Large private fund advisers (“Large Private Fund Advisers”) are defined as any of the following:

• Advisers with at least $1.5 billion in regulatory AUM attributable to hedge funds as of the end of any month in the prior fiscal quarter (“Large Hedge Fund Advisers”);
• Advisers with at least $1 billion in combined regulatory AUM attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter (“Large Liquidity Fund Advisers”); or
• Advisers with at least $2 billion in AUM attributable to private equity funds as of the last day of the adviser’s most recently completed fiscal year (“Large Private Equity Fund Advisers”).

All reporting advisers that are not classified as Large Private Fund Advisers are smaller private fund advisers (“Smaller Private Fund Advisers”).

Aggregation for Purposes of Measuring Threshold Amounts. In determining whether an adviser meets any threshold amount under Form PF, including the $150 million reporting threshold and any Large Private Fund Adviser threshold, the adviser must aggregate the assets of (a) private funds that are part of the same master-feeder structure; (b) private funds that pursue substantially the same investment objective and strategy and invest side-by-side in substantially the same positions (“parallel funds”); (c) managed accounts that pursue substantially the same investment objective and strategy and invest in substantially the same positions as any of the adviser’s private funds (“parallel managed accounts”), provided that an adviser may exclude the value of its parallel managed accounts if the value of such accounts exceeds the value of the corresponding private funds; and (d) any of the funds or accounts described in clauses (a)-(c) that are managed by related persons, where these related persons are required to be identified in Section 7.A of Schedule D to the adviser’s Form ADV.

Advisers to Funds-of-Funds. For purposes of measuring threshold amounts (and responding to questions on Form PF), an adviser may exclude equity investments in other private funds. In addition, if any of the adviser’s private funds invests substantially all of its assets in the equity of other private funds and, aside from those investments, holds only cash, cash equivalents, and instruments intended to hedge currency risk, the adviser may complete only section 1b of Form PF with respect to that fund and otherwise disregard that fund. Further, if an adviser’s principal office and place of business is outside the United States, the adviser may exclude any private fund that, during the adviser’s 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.

CATEGORIES OF PRIVATE FUNDS

For the purposes of Form PF, hedge fund, liquidity fund, and private equity fund are defined as follows:

• A “hedge fund” is generally any private fund (other than a securitized asset fund) that (a) pays a performance fee or allocation that is calculated by taking into account unrealized gains; (b) may borrow in excess of one-half of its net asset value or may have gross notional exposure in excess of twice its net asset value (in each case, including committed capital); or (c) may sell assets short or engage in a transaction resulting in short exposure. The performance fees or allocations referred to in prong (a) of this definition relate only to fees or allocations actually paid to an adviser (or a related person).
• A “liquidity fund” is any private fund that seeks to generate income by investing in short-term obligations in order to maintain a stable net asset value or minimize principal volatility for investors.
• 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 [1], and provides investors with redemption or withdrawal rights in the ordinary course.

FORM PF REPORTING REQUIREMENTS AND REPORTING FREQUENCY

Reporting advisers will complete section 1 of Form PF. Section 1a requires identifying information about the adviser, as well as the adviser’s gross and net AUM in total and the adviser’s gross and net AUM attributable to certain types of private funds. Advisers must complete a separate section 1b for each private fund advised by a reporting adviser. This section requires information regarding net asset value, leverage, creditors, derivatives positions, investor concentration, and monthly and quarterly performance.

Advisers to hedge funds have additional reporting requirements under section 1c, which requires information related to each hedge fund’s investment strategy, significant counterparty exposure (including the identity of large counterparties), trading and clearing practices, and the percentage of assets relating to transactions conducted outside of traditional trading and clearing markets.

Smaller Private Fund Advisers. Smaller Private Fund Advisers are required to complete only section 1 of Form PF and must file annually within 120 days after the end of each fiscal year.

Large Private Fund Advisers. In addition to completing section 1, Large Private Fund Advisers must complete additional sections of Form PF. The focus and the frequency of the reporting depend on the type of fund managed:

Large Hedge Fund Advisers must complete section 2 of Form PF, which requires information (on an aggregated basis) regarding exposures by asset class, geographical concentration, and turnover by asset class. If a Large Hedge Fund Adviser manages a fund with a net asset value of at least $500 million, it must report additional information relating to that fund’s risk profile, leverage, liquidity, and exposures. Large Hedge Fund Advisers will not be required to disclose position-level information. Their Form PF is due within 60 days following the end of each fiscal quarter.

Large Liquidity Fund Advisers must complete section 3 of Form PF, reporting on the types of assets in each of their liquidity fund’s portfolios, information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or part of Investment Company Act Rule 2a-7 (dealing with registered money market funds). Their Form PF is due within 15 days following the end of each fiscal quarter.

Large Private Equity Fund Advisers must complete section 4 of Form PF by providing information on the extent of leverage incurred by their portfolio companies, the use of bridge financing, and investments in financial institutions. They must file Form PF annually within 120 days after the end of each fiscal year.

Related Persons. An adviser and its “related persons” may (but are not required to) report on a single Form PF. To prevent duplicative reporting with respect to sub-advised funds, only one adviser is required to report with respect to any one private fund. Specifically, if an adviser is required to identify a private fund as an advisory client in Section 7.B.1 of Schedule D to Form ADV, then that same adviser is required to complete and file Form PF for that private fund. If an adviser is required to identify a private fund as an advisory client in Section 7.B.1 but is not required to file Form PF, and another adviser to the fund is required to complete and file Form PF for that fund, then such other adviser must report that fund on Form PF. If none of the advisers to a private fund is required to file Form PF, then the fund need not be reported on any Form PF.

Aggregation for Purposes of Reporting. For Form PF reporting purposes, an adviser may provide information regarding master-feeder arrangements and parallel fund structures in the aggregate or separately, provided that it does so consistently throughout the Form. This rule differs from the rule for aggregating to qualify as a Form PF reporter, discussed above, which requires aggregation. Advisers must, however, report the total amount of parallel managed accounts related to each reporting fund.

CONFIDENTIALITY

The SEC recognizes the confidential nature of Form PF disclosures and does not intend to make any Form PF information identifiable to a particular adviser or private fund (although the SEC may use Form PF information in an enforcement action). While Form PF information will not generally be available to the public, reported information will be available to the FSOC and may be available to Congress and federal departments, agencies, and self-regulatory organizations on request and subject to confidentiality provisions of the Dodd-Frank Act. The SEC, as well as any federal agency, department, or self-regulatory organization with which it shares Form PF information, cannot be compelled to disclose Form PF information by a Freedom of Information Act request. The SEC intends to implement certain controls to safeguard the confidentiality of Form PF information.

FILING PROCEDURES

Form PF will be filed electronically on a filing system developed and maintained by the Financial Industry Regulatory Authority (“FINRA”), as an extension of the existing Investment Adviser Registration Depository (“IARD”). The filing system will be programmed to reflect the heightened confidentiality protections afforded Form PF data. Each Form PF filing (both quarterly and annual) will be subject to a $150 filing fee.

COMPLIANCE DATES

The SEC has implemented a two-stage phase-in period for private fund advisers to comply with Rule 204(b)-1:

• Advisers with at least $5 billion in AUM attributable to (1) private equity funds, (2) hedge funds, or (3) liquidity funds and money market funds must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, ending on or after June 15, 2012; and
• All other private fund advisers must file Form PF following the end of their first fiscal quarter or fiscal year, as applicable, ending on or after December 15, 2012.

Newly registered advisers will not be required to file Form PF with respect to any fiscal quarter or fiscal year prior to the effective date of their registrations. Failure to file or update Form PF is a violation of SEC rules and could lead to revocation of an adviser’s SEC registration.