The Securities and Exchange Commission on January 26, 2022 voted three-to-one to propose amendments to Form Private Fund (Form PF), a confidential reporting form for certain SEC-registered investment advisers to private funds.¹ The amendments would: (1) require current reporting of certain key events for large hedge fund advisers and advisers to private equity funds, to aid in identifying fund distress or market instability; (2) reduce from $2 billion to $1.5 billion the reporting threshold for large private equity advisers, and require additional reporting regarding fund strategies to enhance information accessible to the SEC and FSOC;² and (3) revise reporting requirements for large liquidity fund advisers to be more in line with proposed reporting requirements for money market funds in order to assess short-term financing markets. The amendments would impact large hedge fund advisers, private equity advisers and large liquidity fund advisers. The Release indicates that the amendments “are designed to enhance FSOC’s monitoring and assessment of systemic risk” and to “collect additional data for the [SEC]’s use in its regulatory programs.”³

As background, in the wake of the financial crisis, the SEC adopted Form PF (as required by the Dodd-Frank Act) to gather information on private funds for use by FSOC in monitoring systemic risk, and registrants began filing in respect of their fiscal year-end or quarter-end in 2012.⁴ In the Release, the SEC explained that it now has “almost a decade of experience analyzing the information collected,” and “[b]ased on this experience and in light of these changes, the [SEC] and FSOC have identified significant information gaps and situations where more granular and timely information would improve our understanding of the private fund industry and the potential systemic risk within it, and improve our ability to protect investors.”

Form PF has not been significantly amended since its adoption,⁵ and the proposed amendments to Form PF should be viewed in light of a recent speech by Chair Gensler outlining a potentially more expansive role for the SEC in regulating private funds, including promoting additional financial resiliency through “freshen[ing] up” Form PF.⁶

This Newsflash provides a brief overview of the proposed amendments to Form PF. The Release asks many specific questions of advisers to private funds, and comments are due 30 days from publication in the federal register, which is forthcoming as of this date.

New Current Reporting Requirements for Large Hedge Fund Advisers and Advisers to Private Equity Funds

Currently, Form PF divides private fund advisers into large and small advisers, with small advisers reporting annually, and advisers that meet the definition of “large” providing additional and more frequent quarterly reports. However, the Form does not require current reporting of any information from private fund advisers. At this time, large hedge fund advisers file Form PF quarterly and advisers to private equity funds file annually. The proposed amendments would require large hedge fund advisers and private equity advisers to file a current report within one day after certain events that may signal “significant stress,” “potential systemic risk implications” or “potential areas of inquiry to prevent investor harm.” Referring to “often stale” Form PF data (as forms are filed within a certain number of months after the quarter- or year-end), the Release states that reporting of certain key events of distress “would facilitate a regulatory response if appropriate and potentially mitigate the impact on investors and systemic risk.”⁷

Practically, a one-day timeframe would require an adviser to evaluate and obtain the necessary data to confirm the existence of a reporting event and file the current report within a very tight timeframe (e.g., if a reporting event occurs on Monday, a current report must be filed by the close of business on Tuesday), and the adviser could file an amendment thereafter to correct any inaccuracies. The proposed reporting events “incorporate objective tests,” with some using “quantifiable percentage threshold tests” at varying threshold levels, as well as a “number of temporal periods” intended to minimize the “potential for false positives and multiple unnecessary current reports.” In addition, several reporting events include check boxes with pre-filled descriptions of the event, in order to provide additional context to assist the SEC and FSOC in analyzing and screening for false positives. A current report would include: certain identifying information about the adviser and fund; the reportable event and applicable reporting requirements; and an optional explanatory note field.

The proposal would require large hedge fund advisers to file current reports within one business day after the occurrence of one or more reporting events pertaining to the following:

• Extraordinary investment losses (which generally would be triggered by losses of 20% or more of net asset value over 10 business days);
• Certain margin events (in particular, a 20% or more increase in required margin amounts or a margin default);
• Counterparty defaults (including margin counterparties) of more than 5% of a fund’s net asset value;
• Material changes in prime broker relationships (including restrictions or limits on investments or trading, and termination of the relationship for default or breach);
• Changes in unencumbered cash (generally triggered by a decline of 20% or more of net asset value over 10 business days);
• Events disrupting or degrading key operations events (which include investment, trading, valuation, risk management and regulatory compliance); and
• Certain events associated with redemptions (including redemption requests of more than 50% of net asset value, the inability to meet redemptions and the suspension of or imposition of material limitations on redemptions).

The proposal would require advisers to private equity funds to file current reports within one business day after the occurrence of one or more reporting events pertaining to the following:

• Completion of an adviser-led secondary transaction (defined to include both sales of fund interests and conversions/exchanges into interests in another fund);
• Implementation of a general partner clawback of any size or a limited partner clawback (or clawbacks) of more than 10% of a fund’s aggregate capital commitments; and
• Receipt of notice that limited partners have removed a fund’s adviser or general partner, elected to terminate a fund’s investment period, or elected to terminate a fund.

Advisers filing current reports would continue to do so in the Private Fund Reporting Depository (PFRD) by filing a new section 5 in respect of large hedge fund advisers or new section 6 in respect of private equity advisers. Filing a current report would not trigger the filing of any other sections of Form PF; however, a filing fee would be established in a separate SEC action.

Large Private Equity Adviser Reporting

Currently, a “large private equity adviser” is an adviser with $2 billion in private equity fund assets under management as of the last day of its most recently completed fiscal year.⁸ Assets managed on behalf of a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund where investors do not have redemption rights in the ordinary course count towards this threshold.⁹

The proposed amendments would reduce this threshold to $1.5 million. Citing industry growth and an increase in the number of advisers below the current threshold,¹⁰ the Release explains that a reduction would result in “a similar proportion of the U.S. private equity industry based on committed capital” reporting as when Form PF initially was adopted.

Further, the proposal would amend section 4 of Form PF to require more information regarding the “activities of private equity funds, certain of their portfolio companies and the creditors involved in financing private equity transactions.” The additional and amended questions would collect information on:

• Fund strategies;
• Portfolio company restructurings or recapitalizations;
• Different funds’ investments in different levels of a single portfolio company’s capital structure;
• Fund-level borrowings and leverage;
• Financing or credit provided to portfolio companies by the adviser and its related persons;
• Floating rate borrowings of controlled portfolio companies (CPCs) and the number of CPCs owned by a reporting fund; and
• More specific information about events of default, bridge financing provided to CPCs and the geographic breakdown of a fund’s investments.

The Release states that the additional data would allow FSOC to analyze whether “private equity funds or their advisers pose systemic risk” and provide the SEC further information for its regulatory programs.

Large Liquidity Fund Adviser Reporting

The proposed amendments would require large liquidity fund advisers to report “substantially the same information that money market funds would report on Form N-MFP,” as the SEC proposed to amend such Form to improve the resiliency and transparency of money market funds.¹¹ These amendments would revise or add to how large liquidity fund advisers report on:

• Operational information regarding whether the fund seeks to maintain a stable price per share;
• Assets and portfolio information (including reporting cash positions separately, and providing gross subscriptions and redemptions and more specific position-level information);
• Financing information regarding the identity of the fund’s creditors;
• Investor information;
• The disposition of portfolio securities (i.e., information regarding the specific instruments sold or disposed of during the reporting period); and
• Weighted average maturity and weighted average life (a change in the formulae for calculating WAM and WAL).

The Release states that this additional data will enhance the SEC’s and FSOC’s ability to assess and oversee the short-term financing markets and their participants, and that it will improve data quality and comparability with categories used in reports and analysis of the Federal Reserve Board.

Next Steps

The Release sets forth a number of requests for comment regarding each of the proposed form changes. Industry participants should carefully consider the implications of the definitional changes and the newer information requirements, and consider submitting feedback to the SEC on these proposed changes. The public comment period will remain open for 30 days after the proposal is published in the federal register, which at the time of publication of this NewsFlash has not yet taken place. This comment period follows the SEC’s recent practice of departing from the more typical 60- or 90-day comment periods of past proposals.

Additional amendments to Form PF may be forthcoming. After the open meeting on January 26, 2022, Chair Gensler noted that he had directed the SEC Staff to work with the CFTC to consider amending the joint portions of Form PF.

An upcoming Dechert OnPoint will provide further and more detailed analysis of these matters.

Footnotes

1) Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, SEC Proposed Rule, SEC Rel. No. IA-5950 (January 26, 2022) (Release).

A private fund adviser: (i) is an SEC-registered investment adviser or required to be so registered (including any adviser that also is registered or required to register with the CFTC as a commodity pool operator (CPO) or commodity trading advisor (CTA)); and (ii) advises an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that act (private fund). See Form PF: Glossary of Terms (defining private fund adviser and private fund). A private fund adviser must file a Form PF if the adviser and its “related persons” that are not separately operated have at least $150 million in private fund assets under management as of the last day of the most recently completed fiscal year. Generally, private fund advisers that must file are only required to complete section 1 of Form PF annually; however, “large private fund advisers” are required to provide additional data, and “large hedge fund advisers” and “large liquidity fund advisers” are required to file quarterly. See Form PF: General Instructions at Instruction 1. Quotations in this OnPoint refer to the Release unless otherwise noted.

2) There are three types of “large private fund advisers” that currently complete additional information on Form PF, and only the threshold for a “large private equity adviser” is proposed to be lowered. However, it should be noted that an adviser becomes: a “large hedge fund adviser” at $1.5 billion in regulatory assets under management attributable to hedge funds as of the end of any month in the prior fiscal quarter; or a “large liquidity fund adviser” at $1.0 billion in regulatory assets under management attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter. Once a private fund adviser meets the applicable threshold for “large,” a large hedge fund adviser must complete section 2 of Form PF, a large liquidity fund adviser must complete section 3 of Form PF and a large private equity adviser must complete section 4 of Form PF. See Form PF: General Instructions.

3) The Release explains that the SEC consulted with FSOC to gain input on this proposal. The proposal seeks only to amend sections 3 and 4. However, because Form PF is a “joint form” with the Commodity Futures Trading Commission with respect to sections 1 and 2, Chair Gensler has instructed the SEC staff to work with the CFTC to consider additional amendments to these portions, as discussed at the meeting approving the proposal.

4) SEC Approves Confidential Private Fund Reporting, SEC Press Release (Oct. 26, 2011). At the time of the initial rulemaking, it was anticipated that “most private fund advisers will be regarded as smaller private fund advisers.” Private fund advisers with $5 billion in private fund assets began reporting following the end of their first fiscal year or quarter ending on or after June 15, 2012, with other advisers filing in respect of their fiscal year or quarter ending on or after December 15, 2012.

5) Form PF’s section 3 was amended in 2014 in connection with certain money market reforms. Money Market Fund Reform; Amendments to Form PF, SEC Rel. No. IA-3879 (July 23, 2014).

6) SEC Chair Gary Gensler, Prepared Remarks at the Institutional Limited Partners Association Summit (Nov. 10, 2021). For further information, please refer to Dechert OnPoint, SEC Chair Gensler Signals Increased SEC Scrutiny of Private Funds.

7) All advisers file their annual updates within 120 calendar days after their fiscal year-ends. Additionally, large hedge fund advisers file within 60 calendar days after their first, second and third fiscal quarters, and large liquidity fund advisers must file within 15 calendar days after their first, second and third fiscal quarters. Form PF: General Instructions at Instruction 9.

8) Private equity fund assets under management are an adviser’s regulatory assets under management attributable to private equity funds. These advisers are required to complete section 4 of Form PF with respect to each private equity fund advised. The assets of an advisers’ related persons would count towards that amount unless the adviser is separately operated.

9) Form PF: Glossary Terms.

10) The Release states that the “private equity space has grown substantially since Form PF was initially adopted. There were 6,910 funds with $1.60 trillion in gross assets in first quarter of 2013 and 15,584 funds with $4.71 trillion in gross assets in the fourth quarter of 2020,” based on private fund statistics released by the Division of Investment Management in August 2021.

11) See Money Market Fund Reforms, SEC Proposed Rule, SEC Rel. No. IC-34441 (Dec. 15, 2021). For further information, please refer to Dechert OnPoint, SEC Proposes New Round of Money Market Fund Reforms in Response to March 2020 Redemptions.