On January 25, 2011, the Securities and Exchange Commission (the “SEC”) proposed new Rule 204(b)-1 (the “Proposed Rule”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), that would implement various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) by creating a new Form PF for use by the Financial Stability Oversight Council (the “FSOC”) and other regulatory agencies in assessing systemic risks posed to the U.S. financial system. The Proposed Rule would require advisers to hedge funds, private equity funds and liquidity funds periodically to report certain information with the SEC on new Form PF.

Scope of the Proposed Rule

Under the Proposed Rule, SEC-registered investment advisers that advise one or more private funds1 (“Private Fund Advisers”) would be required to file Form PF electronically with the SEC.2 A commodity pool operator (a “CPO”) or commodity trading adviser (a “CTA”) that is also registered with the SEC as an investment adviser and manages one or more private funds also would be required to file Form PF with respect to an advised commodity pool that is a private fund.3 The content of information required to be reported and the frequency of the reporting requirements would vary based on the assets under management of the Private Fund Adviser and the types of private funds advised by such Private Fund Adviser. The information reported on Form PF generally would remain confidential except in very limited circumstances.

All Private Fund Advisers would be required to complete Section 1 of Form PF. In addition, “Large Private Fund Advisers” would be required to complete additional sections of Form PF. “Large Private Fund Advisers” generally would be defined as:

  • advisers managing hedge funds4 that collectively have at least $1 billion in assets as of the close of business on any day during the most recently completed calendar quarter;
  • advisers managing liquidity funds5 that have combined liquidity fund and registered money market fund assets of at least $1 billion as of the close of business on any day during the most recently completed calendar quarter; or
  • advisers managing private equity funds6 that collectively have at least $1 billion in assets as of the close of business on the last day of the most recently completed calendar quarter.

For purposes of determining whether it is a Large Private Fund Adviser, a Private Fund Adviser generally would be required to aggregate (i) assets of managed accounts that pursue substantially the same investment objectives and strategies and invest in substantially the same positions as the applicable private funds and (ii) private fund assets advised or managed by any of the adviser’s related persons.7

Frequency of Reporting Requirements

Newly registering Private Fund Advisers would be required to submit their initial Form PF within 15 days of the end of the next occurring calendar quarter after registering with the SEC. Large Private Fund Advisers would be required to complete and file a Form PF within 15 days of the end of each calendar quarter. All other Private Fund Advisers would be required to complete and file a Form PF on an annual basis, within 90 days of the end of their fiscal year.

Overview of Reporting Requirements

All Private Fund Advisers. All Private Fund Advisers would be required to complete Sections 1(a) and 1(b) of Form PF. Section 1(a) would require reporting of the Private Fund Adviser’s name, the name of certain of its related persons, its total and net assets under management and the amount of assets attributable to certain types of funds.

Section 1(b) would be completed with respect to each private fund and would require reporting of gross and net assets, the aggregate notional value of derivative positions, basic information about borrowings, basic information about the concentration of the investor base and monthly and quarterly performance information.

Hedge Fund Reporting Obligations. Hedge fund managers also would be required to complete Section 1(c) of Form PF with respect to each hedge fund, which would require reporting of investment strategies, percentage of assets managed using computer-driven trading algorithms, significant trading counterparty exposures and trading and clearing practices.

Large Private Fund Adviser Reporting Obligations.

Hedge Funds. Large Private Fund Advisers with aggregate hedge fund assets under management in excess of $1 billion would be required to complete Sections 2(a) and 2(b) of Form PF. Section 2(a) would require reporting of aggregate information about hedge funds advised by the Large Private Fund Adviser, including the market value of assets invested in different types of securities and commodities, the duration of fixed income portfolio holdings, the turnover rate of the adviser’s aggregate portfolios during the reporting period and a geographic breakdown of to “qualifying hedge funds.”8

Liquidity Funds. Large Private Fund Advisers with aggregate liquidity fund and registered money market fund assets under management in excess of $1 billion would be required to complete Section 3 of Form PF. Section 3 would require reporting of certain information with respect to each liquidity fund.

Private Equity Funds. Large Private Fund Advisers with aggregate private equity fund assets under management in excess of $1 billion would be required to complete Section 4 of Form PF. Section 4 would require reporting of certain additional information with respect to each private equity fund, including among other things:

  • the outstanding balance of borrowings and guarantees;
  • weighted average debt-to-equity ratio of controlled portfolio companies in which the fund invests and the range of that debt-to-equity ratio among portfolio companies;
  • maturity profile of portfolio companies’ debt, for the portion of the debt that is payment-in-kind or zero coupon;
  • whether the fund or any of its portfolio companies experienced an event of default on any of its debt during the reporting period;
  • the identity of the institutions providing bridge financing to portfolio companies and the amount of financing; and
  • a breakdown of investments by industry and by geography.

Confidentiality of Form PF

The SEC would make information collected through Form PF available to the CFTC (with respect to commodity pools operated or managed by CPOs and CTAs) and the FSOC. The Dodd-Frank Act generally precludes the SEC and CFTC from being compelled to reveal information obtained from Form PF; however, information collected through Form PF would be made available if requested by Congress upon agreement of confidentiality. Furthermore, nothing would prevent the SEC from providing Form PF information to any other federal department or agency or any self-regulatory organization or pursuant to a court order.

Conclusion

The SEC is currently seeking public comment on the Proposed Rule until April 12, 2011. Promptly following the completion of this public comment period, the SEC is expected to consider any comments and adopt final rules. The SEC currently anticipates that the proposed Form PF will have an initial compliance date of December 15, 2011, which would result in Form PF filing deadlines as early as January 15, 2012 for Large Private Fund Advisers and March 31, 2012 for all other Private Fund Advisers.