On May 3, 2023, the SEC adopted amendments to Form PF, the confidential reporting form filed by certain SEC-registered investment advisers. The amendments are an effort to improve the ability of the Financial Stability Oversight Council (“FSOC”) to monitor systemic risk in the financial industry, and enhance the SEC’s oversight of private fund advisers. The Form PF Amendments require (i) large hedge fund advisers[1] to file “current reports” within seventy-two (72) hours of the occurrence of specified events; (ii) all private equity fund advisers to file quarterly reports in connection with certain changes; and (iii) large private equity fund advisers[2] to provide enhanced information in their annual Form PF reporting.
Current Reporting by Large Hedge Fund Advisers
Arguably the most significant change adopted in the Form PF amendments requires large hedge fund advisers to file current reports “as soon as practicable” but no later than 72 hours after the occurrence of a current reporting event affecting any of its qualifying hedge funds.[3] Such “current reporting events” occur when a qualifying hedge fund experiences (i) extraordinary investment losses, (ii) certain margin events, (iii) material changes in its prime broker relationships, (iv) a significant disruption or degradation of critical operations, and (v) enumerated redemption-related events. The SEC added a section 5 to Form PF which includes several “check the box” options for a large hedge fund adviser to indicate the applicable current reporting event and provide any additional information as required by the form. The Form PF will also include an explanatory notes section wherein large hedge fund advisors can provide additional context on a reporting event to the SEC and FSOC.
(i) Extraordinary Investment Losses – “Extraordinary Investment Losses” with respect to qualifying hedge fund are defined as losses greater than or equal to 20% of its reporting fund aggregated calculated value[4] (“RFACV”) over a rolling 10 business day period. The current reporting event would capture instances in which a qualifying hedge fund loses 2% of its RFACV per day for 10 consecutive business days, and instances in which a qualifying hedge fund loses 20% or more of its RFACV in one business day.
(ii) Margin Events – Significant increases in a qualifying hedge fund’s margin requirements, the inability of a qualifying hedge fund to meet a margin call, a qualifying hedge fund’s margin default, and default by the qualifying hedge fund’s counterparty all trigger a current report filing.
(iii) Prime Broker Relationship – Large hedge fund advisers must file prime broker current reports in the event a prime broker places material restrictions on the qualifying hedge fund’s relationship with the prime broker, such as refusing to conduct certain trades on behalf of the fund, or in the event that such prime brokerage relationship is terminated in full by either the qualifying hedge fund or the prime broker (other than termination due to breaches by the prime broker of the prime broker agreement or termination decisions made in the ordinary course of business).
(iv) Critical Operations Events – A current report filing is triggered in the event a large hedge fund adviser or its qualifying hedge fund experiences a “significant disruption or degradation” of the fund’s “critical operations,” whether as a result of an event at the fund level or an event experienced by the adviser or a service provider to the fund. “Critical operations” are defined as the operations necessary for (i) the investment, trading, valuation, reporting, and risk management of the fund, or (ii) the operation of the fund in accordance with federal securities laws and regulations.
(v) Redemption Events – Withdrawal and redemption current reporting obligations are triggered when a qualifying hedge fund receives requests for investor redemptions in excess of 50% of the most recent net asset value of the fund. In the adopting release, the SEC acknowledged that some funds have pre-existing restrictions on the amount an investor can redeem at any time, but nevertheless asserted the importance of monitoring these significant redemption requests, even if they are not fulfilled. Large hedge fund advisers will also need to file current reports when a qualifying hedge fund is unable to satisfy redemptions or suspends redemptions for more than five consecutive business days.
Quarterly Reporting by Private Equity Fund Advisers
In the adopting release, the SEC acknowledged that, as a result of certain material distinctions between private equity funds and hedge funds, including with respect to asset classes and the withdrawal rights of investors, analyzing the systemic risk and investor-protection concerns in private equity funds can be accomplished over an extended period of time. Private equity advisers therefore will be required to file a report within sixty (60) days of their fiscal quarter-end if at any point during such prior fiscal quarter the private equity fund (i) participated in an adviser-led secondary transaction or (ii) was the subject of the election by investors in the private equity fund to remove the fund’s general partner, to terminate the fund’s investment period or to terminate the fund.
Enhanced Annual Reporting by Large Private Equity Fund Advisers
The final notable change to Form PF requires large private equity fund advisers to provide information regarding material events that the SEC believes are indicative of systemic risk and investor protection concerns. The SEC elected not to lower the assets under management threshold to $1.5 billion for large private equity advisers, so these enhanced reporting standards will apply only to private equity fund advisers with $2 billion or more in private equity fund assets under management.
The amended Form PF will include a new question for large private equity fund advisers to report whether there have been any clawbacks with respect to distributions made either to a fund’s general partner or to the fund’s limited partners. In its adopting release, the SEC noted that an upward trend in either type of clawback may be indicative of larger distress in the markets and therefore, monitoring the occurrence of these events on an annual basis is an important tool for regulators. This section of Form PF also includes new questions on the type of strategy pursued by private equity funds and information on fund-level borrowings, as well as revisions to existing questions regarding default events, bridge financing to adviser controlled portfolio companies, and the geographical breakdown of private equity fund investments.
Effective Date
The effective date for the Form PF amendments is six (6) months after publication in the Federal Register for the current reporting and quarterly event reporting amendments and one (1) year after publication in the Federal Register for the annual reporting amendments. The adopting release can be found here.
Conclusion
The SEC has continued its rulemaking emphasis on the private funds industry, consistent with its position that private funds are an important component of broader financial markets and therefore require increased oversight. Private fund advisers should review the Form PF Amendments and evaluate their systems to ensure they can comply with the changes when they become effective.
[1] A “large hedge fund adviser” is defined as a hedge fund adviser with at least $1.5 billion in hedge fund assets under management.
[2] A “large private equity fund adviser” is defined as a private equity fund adviser with at least $2 billion in private equity assets under management.
[3] A “qualifying hedge fund” is defined as any hedge fund with a net asset value (individually or in combination with any feeder funds, parallel funds and/or dependent parallel managed accounts) of at least $500 million as of the last day of any month in the fiscal quarter immediately preceding the hedge fund’s most recently completed fiscal quarter.
[4] “Reporting fund aggregated calculated value” 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.
