The deadline for completing an initial filing on Form PF is fast approaching for many investment advisers to private funds. Hedge fund firms with between $1.5 and $5 billion in gross assets under management must submit their first quarterly report on Form PF by March 1, 2013, while private equity firms with a fiscal year ending on December 31 and smaller hedge fund firms with between $150 million and $1.5 billion in gross assets under management must file their first annual report on Form PF by April 30, 2013.
Form PF is a complicated form that, depending on how large and diverse a private fund adviser's business is, can require a very significant coordinated effort from a firm's financial, compliance, administrative and legal support functions. To avoid wasting time and effort, it is necessary to begin the process by answering several key interpretive questions in order to determine which sections of the Form apply and how the data required by the Form should be presented. Unfortunately, the technical requirements of Form PF are not necessarily consistent with an intuitive understanding of a private fund adviser's business. As such, it is important to conduct this analysis carefully so as to avoid issues down the road.
Form PF requires all registered investment advisers with more than $150 million in gross assets under management attributable to private funds to submit extensive financial data regarding their private fund investment activities to the SEC on a quarterly or annual basis (depending on the size and type of private funds that the firm manages). The stated purpose of this massive data-gathering exercise is to enable the Financial Services Oversight Counsel (FSOC) to monitor "systemic risks" to the U.S. financial system.
In general, any registered investment adviser that advises one or more private funds and has at least $150 million in gross assets under management attributable to those private funds (a Reporting Adviser) will be required to complete Form PF and file it with the SEC on an annual basis. However, the reporting requirements for certain large Reporting Advisers will be more frequent and/or more extensive. In particular:
- Reporting Advisers with at least $1.5 billion in gross assets under management attributable to hedge funds (Large Hedge Fund Advisers) will be subject to more comprehensive quarterly reporting requirements regarding the investment activities of their hedge funds as a whole, as well as the investment activities of any individual “qualifying hedge funds” (those with more than $500 million in gross assets under management).
- Reporting Advisers with at least $1.0 billion in gross assets under management attributable to private liquidity funds and registered money market funds (Large Liquidity Fund Advisers) will be subject to more comprehensive quarterly reporting requirements regarding their private liquidity fund investment activities.
- Reporting Advisers with at least $2.0 billion in gross assets under management attributable to private equity funds (Large Private Equity Fund Advisers) will be subject to more comprehensive annual reporting requirements relating to their private equity fund investment activities.
Key Preliminary Interpretive Questions
Given the structure of Form PF, there are two key preliminary interpretive questions that must be resolved before a Reporting Adviser can begin gathering the data necessary to complete its Form PF reporting obligations: First, the Reporting Adviser's private funds that are subject to Form PF reporting requirements must be identified, and the categories each private fund falls into for reporting purposes must be determined. Second, the Reporting Adviser must determine how the firm's gross assets under management must be aggregated, both for the purpose of determining which reporting thresholds apply and for the purpose of determining how to answer the applicable sections of the Form.
Private Fund Categories
The first step in the analysis is to identify a Reporting Adviser's "private funds." For Form PF reporting purposes, a "private fund" is defined as any fund that is exempt from registration under the Investment Company Act of 1940 in reliance on either section 3(c)(1) (privately offered funds with no more than 100 beneficial owners in the fund) or section 3(c)(7) (privately offered funds whose securities are owned exclusively by "qualified purchasers"). Most private funds that are marketed to U.S. investors fall within the scope of this definition, but there are several key exclusions. These include real estate funds that are able to rely on the section 3(c)(5)(C) exemption from registration under the Investment Company Act and offshore funds that are exempt from the Investment Company Act because they are neither offered to nor held by U.S. investors.
Once a Reporting Adviser's inventory of private funds has been identified, the next step is to determine into which categories each of these private funds fall for Form PF reporting purposes. There are seven potential categories that may apply: (i) hedge fund, (ii) securitized asset fund, (iii) liquidity fund, (iv) private equity fund, (v) real estate fund, (vi) venture capital fund, and (vii) other private fund.
Of these categories, the definition of a "hedge fund" is the first and most important to understand and apply. A "hedge fund" is defined very broadly under Form PF as any fund, other than a securitized asset fund (discussed below), that:
- pays a performance fee or allocation, the calculation of which may take into account unrealized gains;
- may borrow an amount in excess of 50% of its net asset value (including any uncalled committed capital) or which may have a gross notional exposure in excess of twice its net asset value (including any uncalled committed capital); or
- may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).
The extremely broad scope of this definition, which has been interpreted quite rigidly by the SEC, can lead to some surprising results. In particular, the element of this definition that essentially defines a hedge fund as any fund that has the potential to engage in short sale activities has proven to be particularly controversial. In the adopting release for Form PF, the SEC considered but expressly rejected requests to apply the hedge fund definition based on actual or contemplated use of shorting strategies, rather than potential use. Consistent with this position, the SEC has issued interpretive guidance stating that private equity funds whose governing documents allow the fund to engage in short sales should be categorized as hedge funds, even if the fund does not engage in short sale activities and has no intention of engaging in such activities. The SEC also has advised that venture capital funds that may on occasion use short sales to hedge positions in publicly-traded securities in the fund's portfolio (for example, as part of an exit strategy for a successful investment) must be classified as hedge funds for Form PF reporting purposes, even if the venture capital fund meets all of the requirements to be treated as a venture capital fund pursuant to Rule 203(l)-1 under the Investment Advisers Act.
Once a Reporting Adviser's hedge and non-hedge private funds have been indentified, the next step is to analyze which other categories of private funds may apply. For funds that have already been classified as hedge funds, it is necessary to determine whether the fund also may fall into the securitized asset fund or liquidity fund category. A "securitized asset fund" is defined as any private fund whose primary purpose is to issue asset-backed securities and whose investors are primarily debt holders. Securitized asset funds are excluded from the definition of a hedge fund and need not be reported on Form PF as such. On the other hand, the definition of liquidity fund is not mutually exclusive from the definition of a hedge fund. Consequently, the SEC has advised that a hedge fund that also meets the definition of a liquidity fund must complete all sections of the Form that apply to both types of private funds. 
For those funds that do not fall into the hedge fund classification, the next step is to analyze which of the following five categories apply. For purposes of this analysis:
- A "liquidity fund" is defined as any 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.
- A "real estate fund" is defined as any private fund that is not a "hedge fund," that does not provide investors with redemption rights in the ordinary course, and that invests primarily in real estate and real estate-related assets.
- A "venture capital fund" is defined as any private fund meeting the definition of a venture capital fund under Rule 203(1)-1 under the Investment Advisers Act.
- A "private equity fund" is defined as any private fund (i) that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund, and (ii) that does not offer redemption rights in the ordinary course.
- "Other Private Fund" is defined as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund, venture capital fund or private equity fund.
Aggregation of Assets
The next step in the analysis is to determine how the Reporting Adviser's gross assets under management attributable to its private funds must be aggregated for purposes of determining which reporting thresholds under Form PF apply.
Form PF provides that an adviser must calculate its gross assets under management attributable to private funds in accordance with the requirements for calculating "regulatory assets under management" under Part 1A of Form ADV. In general, this requires advisers to include as assets under management the gross value of all assets in a private fund (regardless of the nature of those assets), plus any uncalled capital commitments to the fund. In addition, Form PF requires a Reporting Adviser to aggregate its private fund assets under management with the private fund assets of all of its "related persons," unless such related person is "separately operated." Related persons whose assets under management must be aggregated for Form PF reporting purposes have the option of submitting a single Form PF covering multiple related persons or filing separately. If such related persons elect to file separately, however, they must complete each section of the Form that applies based on their aggregated assets under management. Thus, for example, if the hedge fund assets attributable to a group of related persons exceed the $1.5 billion threshold for reporting as a Large Hedge Fund Adviser, then each related person in the group must complete Section 2 of the Form, even if the assets attributable to an individual member of the group would not exceed the $1.5 billion threshold.
For purposes of Form PF, various types of private fund structures also must be aggregated together for purposes of determining the applicable reporting thresholds. In particular, a Reporting Adviser generally must aggregate the assets of any parallel fund structures (including any "dependent managed parallel accounts") and master-feeder fund arrangements. However, private fund assets invested in other private funds may be disregarded for this purpose. In addition, a Reporting Adviser whose principal office and place of business is located outside the United States generally may disregard any private fund that during the last fiscal year was not: (i) a U.S. person, (ii) offered to a U.S. person, or (iii) beneficially owned by a U.S. person. Finally, fund-of-fund assets count towards determining whether a Reporting Adviser's assets under management exceed the initial $150 million reporting threshold, but generally may be disregarded for all other purposes under the Form.
One final principle to keep in mind when applying these aggregation rules under Form PF is that, with the exception of determining whether a private fund adviser exceeds the initial $150 million filing threshold, each of the reporting thresholds applies on a category-by-category basis. Thus, it is not necessary for a Reporting Adviser to aggregate assets across private fund categories in order to apply the large fund adviser reporting thresholds. For example, if a Reporting Adviser manages $1.4 billion in hedge fund assets and $1.9 billion in private equity fund assets, the Reporting Adviser will not be subject to either the Large Hedge Fund Adviser or the Large Private Equity Fund Adviser reporting obligations, even though the firm's total assets under management exceeds both large fund adviser reporting thresholds.
Completing Form PF is an exercise for which it definitely will pay to "measure twice and cut once." As such, it is important to resolve the preliminary interpretive questions carefully in order to determine accurately which sections of Form PF will apply and how the data required by the Form should be presented. There are, of course, many other issues that Reporting Advisers will encounter as they work through the process of gathering the data and completing each of the specific items under the Form. Nevertheless, getting these initial questions right early in the process will help to avoid wasting time and effort.