Form PF Amendments Expand Disclosure Requirements for Large Liquidity Fund Advisers: Are You Prepared?

by K&L Gates LLP
Contact

On July 23, 2014, the Securities and Exchange Commission (“SEC”) adopted final rules governing money market funds in a release adopting amendment to Rule 2a-7 under the Investment Company Act of 1940 and other related changes. The latter include amendments to Form PF that will affect large liquidity fund advisers with at least $1 billion in assets (the “Adopting Release”).[1] [2] The amendments become effective 60 days after their publication in the Federal Register (the “Effective Date”). The deadline for complying with the Form PF amendments is 18 months after the Effective Date.

I. SEC Comments on Purpose of Form PF Amendments
In the Adopting Release, the SEC cited its concern that investors would respond to the SEC’s proposed money market reforms by shifting assets from money market funds to unregistered products, such as liquidity funds. To address this concern, the SEC stated that it was revising Form PF to expand the information that advisers to liquidity funds will be required to report on the liquidity funds they advise.[3] The SEC stated that the amended Form PF disclosures were designed to achieve these two goals: 1) to ensure that the money market fund rule changes do not decrease transparency in short-term financing markets by helping the Financial Services Oversight Council to monitor and address related systemic risks and to enable the SEC to develop effective regulatory policy responses, if investors actually do shift assets from money market funds to liquidity funds; and 2) to enable administration of relevant regulatory programs even if there is no asset-shift resulting from money market reforms, as the increased liquidity-fund transparency, combined with the SEC’s money market fund information from Form N-MFP, will provide the regulators a more complete picture of the short-term financing markets in which liquidity and money market funds both invest. Those amended disclosures are discussed below.

II. Form PF Amendments
Currently, Section 3 of Form PF requires large liquidity fund advisers [4] to report information on their liquidity funds, including on each fund’s portfolio holdings, by disclosing product exposure by maturity date and percentage of net asset value by asset class. The amendments in the Adopting Release eliminate these reporting requirements and replace them with much more detailed portfolio reporting requirements, including disclosures on a security-by-security basis, which are intended to replicate the reporting requirements for money market funds in Form N-MFP. The Adopting Release amendments also require that large liquidity fund advisers identify on Form PF any other money market funds they or an affiliate advises with substantially the same investment objectives and strategies and that invest side-by-side with the reporting liquidity fund.  Large liquidity fund advisers are currently required to file a Form PF quarterly; the Adopting Release amendments did not change that requirement. A breakdown of the Form PF amendments is detailed in the following section.

A. Requirement to Provide Portfolio Information Instead of Information Regarding Product Exposures and Breakdown of NAV
Specifically, the Adopting Release amendments eliminate Form PF’s current Questions 56 and 57, which require a large liquidity fund adviser to report, respectively: a) selected product exposures by maturity date for liquidity fund assets under management (“AUM”), and b) for each month during the reporting period, the position, percentage of net asset value (“NAV”), and sub-asset class, for each of the reporting fund’s open positions that represents 5% or more of its NAV. The SEC indicated that it would be able to derive the information from these eliminated questions from the new Question 63.

The SEC added Question 63 as a single item in Section 3, “Item E. Portfolio Information.” This item is comprised of various subsections that will require large liquidity fund advisers to report the following information for each portfolio security in each liquidity fund they manage, broken down by each month of the quarterly reporting period:

  1. The name of the issuer;
  2. The title of the issue;
  3. Certain security identifiers (i.e., CUSIP, LEI, ISIN, CIK or other unique identifier);
  4. The category of investment that most closely identifies the instrument (e.g., Treasury debt, U.S. government agency debt, asset-backed commercial paper, certificate of deposit, repurchase agreement);
  5. If the rating assigned by a credit rating agency played a substantial role in the liquidity fund’s (or its adviser’s) evaluation of the quality, maturity or liquidity of the security, the name of each credit rating agency and the rating each credit rating agency assigned to the security;
  6. The maturity date used to calculate weighted average maturity;
  7. The maturity date used to calculate weighted average life;
  8. The ultimate legal maturity date;
  9. Whether the instrument is subject to a demand feature, guarantee, or other enhancements, and information about any of these features and their providers;
  10. The yield of the security as of the reporting date;
  11. The value of the fund’s position in the security and, if the fund uses the amortized cost method of valuation, the amortized cost value, in both cases with and without any sponsor support;
  12. The percentage of the liquidity fund’s assets invested in the security;
  13. Whether the security is categorized as a level 3 asset or liability on Form PF;
  14. Whether the security is an illiquid security, a daily liquid asset, and/or a weekly liquid asset, as defined in rule 2a-7; and
  15. Any explanatory notes (including any other information that may be material to other disclosures related to the portfolio security).

B. Identification of Parallel Money Market FundsThe Adopting Release amendments also added Question 64 as a new item in Section 3, “Item F. Parallel Money Market Funds.” Question 64 will require large liquidity fund advisers to provide the EDGAR series identifier of any money market fund advised by the adviser or its related persons that pursues substantially the same investment objective and strategy, and invests side-by-side in substantially the same positions as, a liquidity fund the adviser reports on Form PF.

III. Conclusion
The date to comply with the Adopting Release’s Form PF amendments is more than 18 months away. Yet, those amendments will require an adviser to large liquidity funds to report on each security held by the reporting liquidity fund, instead of the fund’s AUM and NAV more generally. The breadth and detail of these new required disclosures necessitate a liquidity fund adviser’s prompt review of the amendments to ensure the adviser is adequately prepared and staffed to report timely the new Form PF information required.

A link to the SEC’s final release can be found here: http://www.sec.gov/rules/final/2014/33-9616.pdf. Given that the release is 869 pages, please note that the section detailing the Form PF amendments begins on page 454.

Notes:
[1] Money Market Fund Reform; Amendments to Form P-F, Investment Company Act Release No.31166 (July 23, 2014).

[2] On October 31, 2011, SEC issued a joint release with the Commodities Futures Trading Commission (the “CFTC”) in which the SEC adopted Form PF (and the CFTC adopted equivalent Forms CTO-PQR and CTA-PR), which requires all SEC-registered advisers to private funds with at least $150 million in private fund assets under management as of the last day of its most recently completed fiscal year to report information about the private funds they advise. See SEC Release No. IA-3308.

[3] The SEC also originally proposed that large liquidity fund advisers provide lot level information about any securities that their liquidity funds purchased or sold during the reporting period. However, the SEC was persuaded that the costs of reporting lot level information did not justify the potential benefits and that the data may be better collected on a more systematic market-wide basis. Therefore, the SEC did not adopt the proposed amendment to require lot level reporting on Form PF.

[4] Large liquidity fund advisers are those advisers who 1) advise at least one liquidity fund; and 2) manage, collectively with their (non-separately operated) related persons, at least $1 billion in combined liquidity fund and money market fund assets as of the last day of any month in the fiscal quarter immediately preceding the last competed fiscal quarter. See Adopting Release, p. 457. Form PF defines a “liquidity fund” as “[a]ny private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.” See Glossary to Form PF.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP
Contact
more
less

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!