Background

In October 2011, the Securities and Exchange Commission (“SEC”) and Commodities Futures Trading Commission (“CFTC”) jointly adopted rules requiring some investment advisers to periodically report detailed information about private funds that they manage on new Form PF (Rule 204(b)-1 under the Investment Advisers Act of 1940 and Rule 4.27 under the Commodity Exchange Act). Although Form PF is a non-public filing, the information reported may be shared with other federal departments or agencies or self-regulatory organizations and used in examinations, investigations and enforcement proceedings. Broadly speaking, Form PF is intended to provide the Financial Stability Oversight Council, SEC and CFTC with a baseline of empirical data to assess and monitor systemic risks to U.S. financial markets posed by private funds and their advisers. While the final rules and Form PF are less oppressive than originally proposed, Form PF still imposes a significant burden on advisers to collect and report data about their funds to regulators. Although the regulators dropped the requirement that Form PF be certified “under penalty of perjury,” the antifraud provisions of the Advisers Act still apply.

Who Files Form PF?

Registered investment advisers with $150 million in “regulatory assets under management” (“RAUM”) from one or more private funds (issuers that would be investment companies but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940) must file Form PF. The frequency of the filing, and the extent of detail, varies based on the assets under management. Large private fund advisers have the greatest burdens and include, among others, advisers to “hedge funds” with at least $1.5 billion in RAUM and advisers to “private equity funds” with at least $2 billion in RAUM.

To determine whether a registered adviser meets the $150 million minimum reporting threshold or the large private fund adviser threshold for purposes of the Form PF reporting, the adviser must aggregate:

  • “parallel managed accounts” (assets of managed accounts advised by the adviser that pursue substantively the same investment objective and strategy and invest side by side in substantially the same positions as the private funds advised by the adviser), unless the value of those accounts is above the value of the private funds;
  • parallel funds (managed side by side, pursuing substantially the same objectives, strategy and positions);
  • private fund assets advised by “related persons” of the reporting adviser other than related persons that are “separately operated” (as defined in the Instructions to Section 7.A. of Schedule D to Form ADV); and
  • private funds in the same master-feeder structure.

Reporting Obligations

Form PF is broken into the following sections, for:

  • All Reporting Advisers — Sections 1(a), 1(b), and 1(c)
    • Section 1a — Information about the reporting adviser and related persons
    • Section 1b — Information about the private funds advised by the reporting adviser (completed separately for each fund, unless the adviser elects or is required to aggregate)
    • Section 1c — Information about the hedge funds advised by the reporting adviser
  • Large Advisers to Hedge Funds — Sections 2(a) and 2(b)
    • Section 2a — Aggregated information about hedge funds advised by the reporting adviser
    • Section 2b — Information about “qualifying hedge funds” (hedge funds having a net asset value greater than $500 million)
  • Large Advisers to Liquidity Funds — Section 3 (quantitative data, provided separately for each fund)
  • Large Advisers to Private Equity Funds — Section 4 (quantitative data, provided separately for each fund)

Clearly State Your Assumptions

Form PF has numerous instructions and definitions, calls for substantial information and, unfortunately, has some ambiguities. Advisers should review the form’s extensive glossary, which reflects the SEC’s interpretation of terms commonly used in the private fund sector. After carefully reviewing Form PF and assessing filing and data obligations, reporting advisers may need to amend their subscription documentation, alter their approach to recordkeeping, and/or consider revisions to their compliance manuals in order to create a system that appropriately accounts for this critical new regulatory demand. In addition, some portions of Form PF allow for discretion and, for example, permit an adviser to voluntarily aggregate data for reporting purposes. Reporting advisers should clearly set out, in the “miscellaneous” section provided in the form, the assumptions they make and methodologies they adopt in responding to any questions in Form PF. These assumptions and methodologies must be applied consistently throughout the form and be consistent with any instructions or guidance relating to the form.

Click here to view the table Adviser Timeline: Some advisers have a filing due August 29, 2012