On May 3, 2023, the Securities and Exchange Commission (the “SEC”) adopted amendments to Form PF, which expand the reporting requirements for certain SEC-registered investment advisers to private funds. Form PF was adopted in 2011 through the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and is the non-public, confidential form used by certain investment advisers to private funds to report to the SEC on major events affecting their fund. These amendments are designed to enhance the ability of the Financial Stability Oversight Council (the “FSOC”) to assess systemic risk and bolster the SEC’s oversight of private fund advisers and its investor protection efforts. The amended Form PF (“Revised Form PF”) includes new reporting requirements for large hedge fund advisers, adds event reporting requirements for all private equity fund advisers, and requires large private equity fund advisers to report more detailed information. A copy of the adopting release (the “Adopting Release”) can be found here.
Current Reporting for Large Hedge Fund Advisers to Qualifying Hedge Funds
In its proposing release on January 26, 2022 (the “Proposing Release”), the SEC proposed amendments to Form PF that would have imposed new reporting requirements on “large hedge fund advisers” (i.e., hedge fund advisers with at least $1.5 billion in hedge fund assets under management). In response to comments, the SEC added, removed, or modified some of the proposed amendments. The amendments to Form PF relating to large hedge fund advisers are discussed in further detail below.
Timing of Hedge Fund Current Reports
In its Proposing Release, the SEC proposed requiring large hedge fund advisers to qualifying hedge funds to report on the occurrence of certain events that may indicate significant stress or otherwise serve as signals of potential systemic risk implications within one business day of the occurrence of such event.
New instructions to Revised Form PF require large hedge fund advisers to qualifying hedge funds to report on these significant events as soon as practicable, but no later than 72 hours from the occurrence of an event, rather than within one business day as originally proposed. The 72-hour period begins upon the occurrence of the current reporting event, or the time when the adviser reasonably believes that the event occurred, and the form requires the adviser to respond to the best of its knowledge on the date of the report. Advisers will be able to file an amendment to a previously filed current report to correct information that was not accurate at the time of filing in the event that information in a current report was inaccurate or filed in error. The current reporting events include extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, operations events, and certain events associated with redemptions, each of which is discussed in more detail below.
Extraordinary Investment Losses
Section 5, Item B of the Revised Form PF requires large hedge fund advisers to report if their advised qualifying hedge funds experience extraordinary losses within a short period of time. A current report obligation would be triggered by a loss equal to or greater than 20 percent of a fund’s “reporting fund aggregate calculated value” (“RFACV”) over a rolling 10-business-day period, as opposed to the “fund’s most recent net asset value” (“MRNAV”) as was proposed in the Proposing Release.
RFACV is defined as “every position in the reporting fund’s portfolio, including cash and cash equivalents, short positions, and any fund-level borrowing, with the most recent price or value applied to the position for purposes of managing the investment portfolio” and may be calculated using the adviser’s own methodologies and conventions of the adviser’s service providers, provided that these are consistent with information reported internally. Additionally, the RFACV is a signed value calculated on a net basis and not on a gross basis. The SEC believes RFACV will be a more timely measure and less burdensome to calculate than a daily net asset value figure, as it will rely on systems that many large hedge fund advisers already employ.
Significant Margin and Default Events
Section 5, Item C of Revised Form PF requires large hedge fund advisers that advise qualifying hedge funds, to file current reports of significant margin increases and default events that occur for these funds or their counterparties. A current report is triggered by an increase of 20 percent or more in the reporting fund’s requirements for margin, collateral, or an equivalent incurred over a rolling 10-business day period. As with the calculation of extraordinary investment losses, the Revised Form PF uses average daily RFACV as opposed to the prior MRNAV calculation to measure margin increases.
With respect to significant margin changes, the adviser will be required to report: (1) the dates of the 10 business-day period over which the increase occurred (the “measurement period”); (2) the total dollar amount of the increase; (3) the total dollar value amount of margin, collateral or an equivalent posted by the reporting fund at both the beginning and the end of the measurement period (an addition from the proposal); (4) the average daily RFACV of the reporting fund during the measurement period (an addition from the proposal); and (5) the identity of the counterparty or counterparties requiring the increase(s). In addition, the Revised Form PF contains clearly defined check boxes for this item (largely unchanged from the proposal) that will allow the SEC and FSOC to understand the cause of the margin increase reports that may help distinguish the levels of risk. The item includes an “other” box that, in a change from the proposal, will now require advisers to provide an explanation in the explanatory notes section.
Additionally, Revised Form PF also requires advisers to report a fund’s margin default or inability to meet a call for margin, collateral, or an equivalent (taking into account any contractually agreed cure period). Revised Form PF requires the following information for each counterparty: (1) the date the adviser determines or is notified that a reporting fund is in margin default or will be unable to meet a margin call with respect to a counterparty; (2) the dollar amount of the call for margin, collateral, or equivalent; and (3) the legal name and LEI (Legal Entity Identifier), if any, of the counterparty. Advisers will not be required to file a current report in situations where there is a dispute in the amount and appropriateness of a margin call, provided the reporting fund has sufficient assets to meet the greatest of the disputed amount.
Advisers will also be required to report a margin, collateral or equivalent default or failure to make any other payment in the time and form contractually required by a counterparty. A current report for such “counterparty default” will be triggered if a counterparty (1) does not meet a call for margin or has failed to make any other payment, in the time and form contractually required (taking into account any contractually agreed cure period); and (2) the amount involved is greater than five percent of RFACV. In the event that multiple counterparties to the fund default on the same day, the reporting item will allow an adviser to file a single current report broken out with details for each counterparty default.
Prime Broker Relationship Terminated or Materially Restricted
Revised Form PF requires an adviser to report the termination or material restriction of the reporting fund’s relationship with a prime broker (rather than any material change in the relationship as provided in the Proposing Release). Instructions to this items state that reporting is required when the prime broker terminates the agreement or “materially restricts its relationship with the fund, in whole or in part, in markets where that prime broker continues to be active.” The instructions also state that termination events that are isolated to the financial state, activities, or other conditions solely of the prime broker should not be considered for purposes of this reporting requirement. Accordingly, a termination would need to be fund-specific and would not be reportable if the adviser understands that the termination was a part of a widespread change applicable to other of the prime broker’s clients and isolated to the financial state, activities, or other characteristics solely of the prime broker.
Changes in Unencumbered Cash
In its Proposing Release, the SEC considered adding a significant decline in a fund’s unencumbered cash as a reportable event. The SEC chose not to adopt this rule based on comments that this would require funds to submit a large number of reports that may not be indicative of fund stress but rather attributable to ordinary course trading activity.
Operations Events
Revised Form PF requires an adviser to report when the adviser or reporting fund experiences a “significant disruption or degradation” of the reporting fund’s “critical operations,” whether as a result of an event at the reporting fund, the adviser, or other service provider to the reporting fund. Revised Form PF defines “critical operations” as operations necessary for (1) the investment, trading, valuation, reporting, and risk management of the reporting fund; or (2) the operation of the reporting fund in accordance with the Federal securities laws and regulations. Revised Form PF does not define “significant disruption or degradation” or provide a numeric threshold. However, in the Adopting Release, the SEC stated its belief that, “in circumstances where operations are reasonably measurable, a 20 percent disruption or degradation of normal volume or capacity generally might be indicative of the types of stress for which reporting may be necessary.” The Adopting Release also includes several examples of events that would likely trigger a reporting obligation.
As proposed, the operations event current report will require the date of the operations event (or an estimate of when it occurred), and the date the operations event was discovered. The current report will include, as proposed, check the box reporting to describe its current understanding of the impact of the operations event on the normal operations of the reporting fund and whether the adviser has initiated a disaster recovery or business continuity plan relating to the operations event. The SEC expects this information will provide greater context as to the nature of the operations event and its impact on the adviser and the fund.
Large Withdrawal and Redemption Requests, Inability to Satisfy Redemptions, or Suspensions of Redemptions
Revised Form PF imposes reporting requirements for large withdrawal and redemption requests, inability to satisfy redemptions or withdrawals, and suspensions of redemptions or withdrawals. With respect to withdrawal and redemption requests, an adviser will be required to report if the fund receives cumulative requests for withdrawals or redemptions exceeding 50 percent of the fund’s most recent net asset value (after netting against subscriptions or other contributions from investors received and contractually committed). Under this current report, the adviser is required to report: (1) the date on which the net redemption requests exceeded 50 percent of the fund’s most recent net asset value; (2) the net value of redemptions paid from the reporting fund between the last data reporting date (the end of the most recently reported fiscal quarter on Form PF) and the date of the current report; (3) the percentage of the fund’s net asset value the redemption requests represent; and (4) whether the adviser has notified the investors that the reporting fund will liquidate.
With respect to the inability to satisfy redemptions or suspension of redemptions, Revised Form PF requires advisers to report if a qualifying hedge fund is unable to satisfy redemptions, or suspends redemptions for more than five consecutive business days. The current report includes: (1) the date the reporting fund was unable to pay redemption requests or suspended redemptions; (2) the percentage of redemptions requested and not yet paid; and (3) whether the adviser has notified the investors that the reporting fund will liquidate.
Lastly, the Revised Form PF includes an explanatory notes item in Section 5 that will allow an adviser to provide a narrative response if it believes that additional information would be helpful in understanding the information that is reported.
Quarterly Private Equity Event Reports for All Private Equity Fund Advisers
Revised Form PF will affect all “private equity fund advisers” (i.e., investment advisers with at least $150 million in private equity fund assets under management). Section 6 Item B of Revised Form PF will require private equity fund advisers (as so defined) to report, on a quarterly basis, the execution of an adviser-led secondary transaction or an investor election to remove a fund’s general partner or to terminate a fund or a fund’s investment period (each, a “private equity event”).
An “adviser-led secondary transaction” is any transaction initiated by the adviser or any of its related persons that offers private fund investors the choice to: (1) sell all or a portion of their interests in the private fund; or (2) convert or exchange all or a portion of their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. Only transactions initiated by a private equity fund’s adviser or a related person of the adviser are subject to reporting. The report is triggered by the closing of the transaction and must include the transaction closing date and a brief description of the transaction
Advisers must also report when a fund’s investors have: (1) removed the adviser or an affiliate as the general partner or similar control person of a fund; (2) elected to terminate the fund’s investment period; or (3) elected to terminate the fund, in each case as contemplated by the fund documents. This reporting requirement is triggered upon an adviser receiving notification of the investors’ election. The effective date of the applicable removal or termination event and a description of such event must be included in the report.
These Section 6 quarterly reports are due within 60 days of the end of the fiscal quarter in which the private equity event occurred. If a private equity event did not occur during a particular quarter, then an adviser would not be required to file a Section 6 report for that quarter. As with the new reporting requirements by large hedge fund advisers to qualifying hedge funds, Section 6, Item D of Revised Form PF will allow an adviser of a private equity fund to provide an optional narrative response if it believes that additional information is helpful in explaining the circumstances of events reported in Section 6.
Section 4 of Revised Form PF will also require “large private equity fund advisers” (i.e., private equity fund advisers with at least $2 billion in private equity assets under management) to report annually on the implementation of: (1) any general partner clawback or (2) a limited partner clawback (or clawbacks) in excess of an aggregate amount equal to 10 percent of a fund’s aggregate capital commitments. Revised Form PF defines a “general partner clawback” as “any obligation of the general partner, its related persons, or their respective owners or interest holders to restore or otherwise return performance-based compensation to the fund pursuant to the fund’s governing agreements” regardless of the amount. A “limited partner clawback” (sometimes referred to as a limited partner “giveback”) is defined as “an obligation of a fund’s investors to return all or any portion of a distribution made by the fund to satisfy a liability, obligation, or expense of the fund pursuant to the fund’s governing agreements,” and reporting is triggered when the aggregate limited partner clawbacks over the course of a fund’s life exceed 10 percent of such fund’s aggregate capital commitments at such time. The required report includes the effective date of the clawback and the reason for the clawback.
Filing Fees and Format for Reporting
The current reports by large hedge fund advisers and quarterly private equity event reports by private equity advisers will be filed through the same non-public filing system advisers use to file the rest of Form PF, the Private Fund Reporting Depository (“PFRD”). Advisers filing reports on Sections 5 and 6 of Form PF will be required to pay PFRD fees that have been approved by the SEC. The SEC indicated in the Adopting Release that it would approve such filing fees in a separate action (which has not yet occurred at the time of writing).
Large Private Equity Fund Adviser Reporting
Large private equity fund advisers will now be required by the SEC to answer new questions included in Section 4 of Form PF that will allow the SEC and FSOC to evaluate material changes in market trends at the reporting funds and improve data collection. Such questions request additional information regarding: a private equity fund’s investment strategies, any fund-level borrowing, events of default, the identity of the institutions providing bridge financing to the adviser’s controlled portfolio companies and the amount of such financing, and a private equity fund’s greatest country exposures based on a percent of net asset value.
Large Liquidity Fund Advisers
The Proposing Release also included amendments that would have required large liquidity fund advisers to report substantially the same information that money market funds report on Form N‑MFP. The SEC did not include these proposed amendments in the Adopting Release, but stated that it is continuing to consider comments relating to the proposed large liquidity fund adviser amendments and the proposed amendments to Form N-MFP on which they are based.
Effective and Compliance Dates
For the new Sections 5 and 6 of Revised Form PF, the effective/compliance date is 180 days after publication in the Federal Register (which has not yet occurred at the time of writing).
For the amended, existing sections affected by the Adopting Release, the effective/compliance date is 365 days after publication in the Federal Register.
For additional information related to anything contained in this Client Alert, please contact one of the authors listed or any member of our Securities Law Practice Group.