On January 25, 2011, the Securities and Exchange Commission (the “Commission”) proposed the adoption of a rule requiring advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system. The proposed rule would implement Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank”), which created the FSOC and requires the Commission to collect information from advisers to hedge funds and other private funds as necessary for FSOC’s assessment of systemic risk.
The proposed rule creates a new reporting form, Form PF, to be filed periodically by investment advisers that are registered under the Investment Advisers Act of 1940 and manage one or more private funds. Under the proposed rules, information reported on Form PF would remain confidential.
Proposed Reporting Requirements
The proposed reporting requirements would divide private fund advisers by size into two broad groups: large private fund advisers and smaller private fund advisers. Membership in one of these groups would in turn determine the amount of information reported and the frequency of the reporting by the adviser.
Under the proposed rules, large private fund advisers would include any adviser with $1 billion or more in hedge fund, “liquidity fund” (i.e., unregistered money market fund) or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers.
In proposing the new rule, the Commission stated that it anticipates that most private fund advisers would be regarded as smaller private fund advisers. However, the Commission noted, while the number of large advisers providing more detailed information would be limited, it would actually represent a large majority of industry assets under management. According to the Commission, this would allow FSOC to monitor a significant portion of private fund assets while reducing the amount of reporting for private fund advisers.
Large Private Fund Advisers
The proposed rule would require large private fund advisers to file the proposed Form PF on a quarterly basis and would provide detailed information regarding the private funds they advise. The information disclosed would be determined by the type of private fund that the adviser manages.
Large hedge fund advisers would report, on an aggregated basis, information regarding exposures by asset class, geographical concentration and turnover. In addition, advisers for a managed hedge fund having a net asset value greater than $500 million would report certain information relating to that fund’s investments, leverage, risk profile and liquidity.
Large liquidity fund advisers would provide information on the types of assets held by each of their liquidity funds, as well as certain information relevant to the risk profile of the fund and the extent to which the fund has a policy of complying with some or all aspects of the Investment Company Act of 1940’s principal rule concerning registered money market funds.
Large private equity fund advisers would respond to questions focusing primarily on the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing and their fund’s investments in financial institutions.
Smaller Private Fund Advisers
Smaller private fund advisers would file the proposed Form PF annually and would report only basic information regarding the private funds they advise. This would include information regarding:
- credit providers,
- investor concentration, and
- fund performance.
Under the proposed rules, smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms.
The Commission stated that, in formulating this proposal, it had collaborated with the U.K.’s Financial Services Authority and other members of the International Organization of Securities Commissions. As a result, the proposed Form PF is similar to the reporting obligations imposed on large hedge fund advisers by foreign financial regulators.
The full text of the proposed rule is not yet available, so the descriptions provided in this special alert are based on the statements made by the Commissioners and the staff at the open meeting. Once the proposing release is made available, a more detailed advisory will follow.
Also on January 25, 2011, the Commission proposed rules required under Dodd-Frank and related to the definition of accredited investors, as well as final rules implementing Dodd-Frank’s say-on-pay and golden parachute provisions.