On January 26, 2022, the Securities and Exchange Commission (SEC) proposed amendments to private fund reporting rules that would increase the information required to be reported to the SEC on Form PF and the frequency of reporting for advisers to certain hedge funds, and substantially expand reporting for advisers to certain private equity funds.1
- Most notably, the proposed amendments would add a one-business-day reporting requirement for purportedly “key events” applicable to hedge funds and/or private equity funds managed by large private fund advisers.
- The proposed amendments would also reduce the assets under management for a private equity fund adviser to qualify as a “large private equity fund adviser” subject to reporting on Form PF and substantially expand the periodic reporting required for such funds (in addition to adding the one-business-day reporting).
- Finally, the proposed amendments would expand the reporting obligations applicable to large liquidity fund advisers.
A more detailed summary is set forth below.
This alert provides details regarding the SEC’s proposal. The release spans 236 pages and contains 120 questions, many of which include multiple subparts. Nevertheless, the SEC has set an aggressive, 30-day comment period. Parties interested in commenting should begin preparing responses as soon as possible.
I. One-Business-Day Reporting Requirements
Currently, Form PF is a periodic filing required on a quarterly or annual basis depending on the type of filer. Advisers having at least $1.5 billion in “regulatory assets under management” attributable to hedge funds (“large hedge fund advisers”) file quarterly reports within 60 calendar days of their first, second and third fiscal quarters. All other advisers, including private equity fund advisers, file their annual updates within 120 calendar days after their fiscal year ends.
According to the SEC, the proposal is designed to allow the SEC and the Financial Stability Oversight Council (FSOC) to “receive more timely information about certain events that may signal distress at qualifying hedge funds and private equity funds or market instability.” Nevertheless, it is unclear how the SEC or FSOC would utilize such information in practice. We do expect Form PF data will be shared with the SEC’s divisions of Enforcement and Examinations, and the SEC acknowledges the use of Form PF data in examinations and enforcement investigations in the proposal.2
The proposed rule would require large hedge fund advisers and all private equity advisers to file Form PF within one business day of the occurrence of certain “reporting events” described in the proposed new form.
Large Hedge Fund Advisers:
Proposed One-Business-Day Reporting Events
| Reporting Event |
Proposed Trigger |
| 1. Extraordinary Investment Loss |
The reporting fund experiences a cumulative loss equal to or greater than 20% of the most recent net asset value over a rolling 10-business-day period. |
| 2. Margin, Collateral or Equivalent Increase |
There is a cumulative increase in the total dollar value of margin, collateral or an equivalent posted by the reporting fund of more than 20% of the reporting fund’s most recent net asset value over a rolling 10-business-day period. |
| 3. Notice of Margin Default or Determination of Inability to Meet a Call for Margin, Collateral or Equivalents |
(1) The adviser receives notification that the reporting fund is in default on a call for margin, collateral or an equivalent, resulting in a deficit that the reporting fund will not be able to cover or address by adding additional funds3 or (2) you determine that the reporting fund is unable to meet a call for increased margin, collateral or an equivalent, including in situations where there is a dispute regarding the amount or appropriateness of the margin call. |
| 4. Counterparty Default |
If a counterparty to the reporting fund (1) does not meet a call for margin, collateral or equivalent or fails 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 5% of the most recent net asset value of the reporting fund. |
| 5. Material Change in Relationship With Prime Broker |
The relationship between the reporting fund and any of its prime brokers undergoes a material change. |
| 6. Changes in Unencumbered Cash |
The value of the reporting fund’s unencumbered cash declines by more than 20% of the reporting fund’s most recent net asset value over a rolling 10-trading-day period. |
| 7. Operations Event |
There is an “operations event.” An operations event is defined as a “significant disruption or degradation of the reporting fund’s key operations, whether as a result of an event at a service provider to the reporting fund, the reporting fund, or the adviser.” The term “key operations” is defined as “operations necessary for (i) the investment, trading, valuation, reporting and risk management of the reporting fund; and (ii) the operation of the reporting fund in accordance with the federal securities laws and regulations.” |
| 8. Withdrawals and Redemptions |
The adviser receives cumulative requests for redemption from the reporting fund equal to or more than 50% of the most recent net asset value (after netting against subscriptions and other contributions from investors received and contractually committed).
|
| 9. Unable to Satisfy Redemptions or Suspension of Redemptions |
(1) The reporting fund is unable to pay redemption requests, or (2) suspended redemptions; and the suspension is in place for more than five consecutive business days. |
Private Equity Fund Advisers:
Proposed One-Business-day Reporting Events
| Reporting Event |
Proposed Trigger |
| 1. Adviser-Led Secondary Transactions |
The reporting fund completes an adviser-led secondary transaction. |
| 2. General Partner or Limited Partner Clawback |
The reporting fund effectuates (1) a general partner clawback or (2) a limited partner clawback or clawbacks in excess of an aggregate amount equal to 10% of the fund’s aggregate capital commitments. |
| 3. General Partner Removal, Termination of Investment Period or Termination of Fund |
The reporting fund or its adviser or affiliate receives notification that fund investors have removed the adviser or its affiliate as the general partner or similar control person of the reporting fund, have elected to terminate the reporting fund’s investment period or have elected to terminate the reporting fund. |
II. Lower AUM Threshold for Large Private Equity Adviser Reporting
The SEC is proposing to reduce the threshold for reporting as a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management.
III. Additional Reporting for Large Private Equity Advisers
Additionally, the proposal contains an expansion of reporting obligations for private equity sponsors at the portfolio level. Specifically, the amendments would require large private equity advisers to provide more information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies and controlled portfolio company borrowing, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations. According to the SEC, the proposed amendments are designed to “provide useful empirical data to FSOC to better assess the extent to which private equity funds or their advisers may pose systemic risk and to inform the [SEC] in its regulatory programs for the protection of investors.”
IV. Large Liquidity Fund Adviser Reporting
The SEC is also proposing to require large liquidity fund advisers (i.e., advisers to combined money market and private money-market-like liquidity funds with $1 billion in assets under management) to report additional information regarding the liquidity funds they advise. In particular, the proposal would revise how large liquidity fund advisers report operational information and assets, as well as portfolio, financing and investor information. The proposal would also require new information regarding the disposition of portfolio securities.
V. Conclusion
The substantive changes in the proposal would represent significant departures from prior practice. We expect that the information provided on the amended Form PF would be used more often in conjunction with the SEC’s enforcement program, rather than FSOC’s monitoring of systemic risks. As discussed above, given the brevity of the comment period, we encourage affected firms to consider responses sooner rather than later. Please contact us to learn more or to discuss a strategy for preparing a comment submission.
Footnotes -
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Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Investment Advisers Act Rel. No. 5950 (Jan. 26, 2022) (Proposal).
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See Proposal at 93, 124–25.
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In situations where there is a contractually agreed-upon cure period, an adviser would not be required to file a current report until the expiration of the cure period unless the fund would not expect to be able to meet call during such cure period.
