On January 26, 2011, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) jointly released a significant proposal relating to certain rulemaking initiatives under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The proposed rule would implement Sections 404 and 406 of the Dodd-Frank Act, which authorize the SEC to implement reporting requirements for federally registered investment advisers (or investment advisers that are required to be federally registered) with respect to the private funds1 that they manage. The information that would be collected pursuant to the proposed rule would be made available on a confidential basis through a new Form PF to the Financial Stability Oversight Council, the supervisory body created by the Dodd-Frank Act and chaired by the Secretary of the Treasury. As currently contemplated, the reporting requirements described in the proposed rule would be effective as of December 15, 2011.

Investment Advisers Required to Report; Frequency of Reporting

Under the proposed rule, the SEC would authorize the creation of a new reporting form (Form PF), which would be completed by federally registered investment advisers that manage one or more private funds (“Registered Private Fund Advisers”). Form PF would be filed with the SEC periodically by such Registered Private Fund Advisers. Those Registered Private Fund Advisers that are also registered with the CFTC as either a commodity pool operator (“CPO”) or a commodity trading advisor (“CTA”) would be required to file Form PF with respect to any advised commodity pool that is a “private fund.”2

The proposed rule would divide Registered Private Fund Advisers into two reporting groups, which would determine the content and frequency of any reporting requirements. Larger Registered Private Fund Advisers would be required to file Form PF on a quarterly basis and would be required to include more detailed information on the form, as further described below. Larger Registered Private Fund Advisers are described in the proposed rule as those Registered Private Fund Advisers with $1 billion or more in hedge fund, liquidity fund (i.e., an unregistered money market fund) or private equity fund assets under management. Smaller Registered Private Fund Advisers (i.e., those Registered Private Fund Advisers with less than the $1 billion threshold described above) would be required to file Form PF on an annual basis and would be required to report less detailed information on the form.

In calculating a Registered Private Fund Adviser’s assets under management for the purposes of determining the $1 billion threshold, the proposed rule would require the Registered Private Fund Advisers to include (i) assets of managed accounts that pursue substantially the same investment objective and strategy and invest in substantially the same positions as the private fund and (ii) assets of that type of private fund advised by any of the adviser’s related persons.

Information Collected

The proposed rule would require all Registered Private Fund Advisers to report on Form PF the following:

  • Certain basic identifying information regarding the Registered Private Fund Adviser, such as its name and the name of any of its related persons whose information is also included on the form.
  • Certain basic information relating to all private funds managed by the Registered Private Fund Advisers (e.g., total and net assets under management (including the total gross notional value of derivative positions)).
  • Certain basic information relating to all such private funds’ borrowings.
  • Certain information relating to the concentration of private funds’ investor bases, such as the number of beneficial owners of the fund’s equity and the percentage of the fund’s equity held by the five largest equity holders.
  • Certain information relating to the private funds’ investment strategies, use of computer-driven trading algorithms, significant trading counterparty exposures (including identity of counterparties), and trading and clearing practices.

The proposed rule would require larger Registered Private Fund Advisers to report on Form PF (in addition to the information discussed above) the following:

  • For larger Registered Private Fund Advisers that manage hedge funds, information regarding exposures by asset class, geographical concentration and turnover.
  • With respect to each hedge fund with a net asset value of at least $500 million, information relating to the value of such funds’ investments, leverage, risk profiles and liquidity.
  • For larger Registered Private Fund Advisers that manage “liquidity funds,” information relating to the value of fund portfolios, risk profile and the extent to which the managed funds have a policy of complying with all or any aspects of Rule 2a-7 under the Investment Company Act of 1940.3
  • For larger Registered Private Fund Advisers that manage private equity funds, information relating to leverage incurred by portfolio companies, the use of bridge financing and investments in financial institutions.

Confidentiality of Provided Information

Pursuant to Section 404 of the Dodd-Frank Act, the proposed rule notes that the information reported on Form PF will not be made publicly available (such information may be disclosed only to Congress, to federal regulators or self-regulatory organizations, or pursuant to a federal court order in an action brought by the United States or the SEC).