The Securities and Exchange Commission (the “SEC”) recently adopted Advisers Act rule 204(b)-11 (the “Rule”), a new final rule under the Investment Advisers Act of 1940 (the “Advisers Act”). The Rule adopts the new Form PF, requiring registered investment advisers advising one or more “private funds”2 with at least $150 million of private fund assets under management to make periodic informational filings with the SEC.3
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) created a new regulatory agency, the Financial Stability Oversight Council (the “FSOC”), tasked with monitoring risks to the US financial system. In creating the FSOC, Congress reasoned that because of the aggregate size of the private fund industry and the frequent use of complex derivative products in the trading strategies of many large private funds, these types of funds could present a system-wide financial risk under certain conditions. Thus, included in the FSOC’s broad mandate is the responsibility to monitor the private funds industry, including hedge funds, liquidity funds and private equity funds.
In Sections 404 and 406 of the Dodd-Frank Act, Congress required the SEC and the CFTC to promulgate by rulemaking an information disclosure framework by which the FSOC can access the information necessary for it to monitor the private funds industry. Form PF is the result of this mandate.
Because Form PF is intended to be used only by federal regulators (and not by individual investors), the information disclosed on the Form will be kept confidential. However, federal financial regulators may use the information for a number of purposes, including for examinations, investigations and enforcement proceedings. Form PF does not require a certification under penalty of perjury.
The Form PF Reporting Framework
Only registered investment advisers with over $150 million of assets under management in private funds will be required to report on Form PF (with assets under management being calculated in accordance with the instructions to Form ADV). The Rule divides those investment advisers meeting this $150 million threshold into two categories—smaller private fund advisers and large private fund advisers—each with different reporting timeframes and requirements.
Smaller Private Fund Advisers
Smaller private fund advisers include all private fund advisers exceeding the $150 million assets under management threshold but which do not qualify as large private fund advisers (discussed below).
Smaller private fund advisers are required to file Form PF annually (within 120 days of the end of the fiscal year) and are only required to complete Section 1 of the form. Section 1 requests relatively basic information on each adviser and each advised fund, including size, leverage, investor types, concentration, liquidity and fund performance. Certain additional disclosures in Section 1c will be required for smaller private fund advisers advising hedge funds (including fund strategy, percentage of funds managed via high-frequency trading, counter-party risk, etc.).
Large Private Fund Advisers
Like smaller private fund advisers, large private fund advisers also are required to complete Section 1. However, Form PF also requires additional information from these institutions based on the categories into which they fall. Large private fund advisers are divided into the following three categories based on the types of funds they advise4:
- Hedge Fund Advisers—Advisers with at least $1.5 billion in assets under management attributable to hedge funds;
- Liquidity Fund Advisers—Advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds; and
- Private Equity Fund Advisers—Advisers with at least $2 billion in assets under management attributable to private equity funds.
For each of these three categories of large private fund advisers, Form PF provides for different reporting timeframes and different types of required disclosure, commensurate with the FSOC’s view as to the relative systematic risks posed by the different categories.
- Hedge Fund Advisers—Large hedge fund advisers are required to file Form PF quarterly within 60 days of the end of each fiscal quarter. These advisers must provide information regarding asset class, geographical concentration and turnover by asset class. Additional disclosure is required with respect to any individual hedge fund advised by the adviser with a NAV greater than $500 million. Position-level information (i.e., detailed information on specific holdings) is not required.
- Liquidity Fund Advisers—Large liquidity fund advisers must file Form PF quarterly within 15 days of the end of each fiscal quarter. These institutions must provide information with respect to asset types held within portfolios and certain information relating to the fund’s risk profile.
- Private Equity Funds—Large private equity funds must file Form PF annually within 120 days of the end of the fiscal year. Private equity fund disclosure focuses primarily on the assets held by the fund, the fund’s financing (including portfolio company leverage), bridge financing and the fund’s investments in financial institutions.
In many cases, the disclosures required by Form PF are quite detailed. However, in some contexts, Form PF permits reporting institutions to utilize their own internal reporting/accounting methodologies, which is intended to lessen the burdens of compliance.
First Filing Due Date
Most private fund advisers required to report on Form PF will make their first filings following their fiscal quarter or fiscal year closing after December 15, 2012. However, the largest institutions (large private fund advisers with over $5 billion in assets under management in each of the three large private fund adviser classes) will be required to report following the fiscal quarter or fiscal year closing after June 15, 2012.
For many advisers, Form PF will require significant new compliance efforts. Thus, we recommend that all advisers meeting (or likely to meet) the $150 million threshold review the Release and Form PF with their counsel to ensure an efficient initial filing in either late 2012/early 2013 (for most advisers) or in the third quarter of 2012 (for the largest advisers).