I Private Fund Systemic Risk Reporting
On January 25, 2011, the US Securities and Exchange Commission (the “SEC”) proposed new Rule 204(b)-1 (the “Proposed Rule”)1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).2 The Proposed Rule would require SEC-registered investment advisers that advise one or more “private funds”3 to file a new reporting form with the SEC, Form PF, which would require the reporting of, among other things, performance-related information, counterparty exposure and borrowings. The information contained in Form PF is designed primarily to assist the Financial Stability Oversight Council (the “FSOC”) in assessing systemic risk in the U.S. financial system; however, the information would also be available to assist the SEC in its regulatory programs, including examinations, investigations, enforcement actions and investor protection efforts relating to private fund advisers. The information would be reported electronically on Form PF and would remain confidential except in very limited circumstances, as discussed below.
Comments on the Proposed Rule are due within 60 days after its publication in the Federal Register (the estimated due date is March 28, 2011).
A. Reporting Requirements
Section 404 of the Dodd-Frank Act, which amends Section 204(b) of the Advisers Act, directs the SEC to require private fund advisers to maintain records and file reports containing such information as the SEC deems necessary and appropriate in the public interest and for investor protection or for the assessment of systemic risk by the FSOC. The records and reports must include certain information about private funds, such as the amount of assets under management, use of leverage, counterparty credit risk exposure, and trading and investment positions for each private fund advised by the private fund adviser. Form PF is designed to fulfill this statutory mandate.
Under the Proposed Rule, the amount and type of information reported, as well as the frequency of reporting, would vary based on both the size of the private fund adviser and the type(s) of private funds it advises. In general, small private fund advisers would be required to complete only Section 1 of Form PF by providing information about their private fund assets under management and their funds’ performance and use of leverage, as well as certain information regarding any hedge funds4 they advise. Certain large private fund advisers would be required to complete additional sections of Form PF, which require more detailed information, the focus of which varies depending on the type of private fund that the adviser manages. “Large Private Fund Advisers” would include any private fund adviser with $1 billion or more in hedge fund, “liquidity fund” (i.e., unregistered money market fund)5 or private equity fund6 assets under management.7 These assets under management thresholds should be measured daily for hedge funds and liquidity funds and quarterly for private equity funds. All other private fund advisers would be regarded as small private fund advisers. Large Private Fund Advisers would be required to file Form PF on a quarterly basis, while small private fund advisers would be required to file Form PF on an annual basis.
The following chart summarizes by type of private fund adviser the sections to be completed on Form PF, key information to be reported and frequency of reporting.
To see table please click here.
Importantly, if the private fund adviser’s principal office and place of business is outside the United States, the adviser could exclude any private fund that during the last fiscal year was neither a U.S. person nor offered to, or beneficially owned by, any U.S. person. This aspect of the proposed form is designed to allow a private fund adviser to report with respect to only those private funds that are more likely to implicate U.S. regulatory interests.
The SEC is precluded from being compelled to reveal information reported on Form PF, except in very limited circumstances. Specifically, Section 404 of the Dodd-Frank Act states that the SEC shall make available to the FSOC copies of all reports, documents, records and information filed with or provided to the SEC by a private fund adviser under Section 404 of the Dodd-Frank Act as the FSOC may consider necessary for the purpose of assessing the systemic risk posed by a private fund and that the FSOC shall maintain the confidentiality of that information consistent with the level of confidentiality established for the SEC in Section 404 of the Dodd-Frank Act. In addition, Section 404 of the Dodd-Frank Act states that the SEC “may not be compelled to disclose any report or information contained therein required to be filed with the Commission under [Section 404],” except that the SEC must, upon request, disclose the information to: (i) Congress upon an agreement of confidentiality; (ii) another federal department or agency or any self-regulatory organization requesting the report or information for purposes within the scope of its jurisdiction (which is required to keep the information confidential to the same extent as the SEC); or (iii) comply with an order of a court of the United States in an action brought by the United States or the SEC. Section 404 further provides that information reported on Form PF will be exempt from requests for information under the Freedom of Information Act (“FOIA”) and will be protected from disclosure in non-FOIA litigation.
C. Exempt Reporting Advisers
The Dodd-Frank Act created exemptions from SEC registration under the Advisers Act for investment advisers solely to venture capital funds and for investment advisers solely to private funds that in the aggregate have less than $150 million in assets under management in the United States (such investment advisers, “Exempt Reporting Advisers”).9 Under the Proposed Rule, Exempt Reporting Advisers would not be required to file Form PF.
II. Net Worth Standard for Accredited Investors
On January 25, 2011, the SEC also proposed amendments to the “accredited investor” standards set forth in the rules under the Securities Act of 1933, as amended (the “Securities Act”), to reflect the requirements of Section 413(a) of the Dodd-Frank Act. These standards delineate investors to whom issuers may sell securities in specified private and other limited offerings without registration under the Securities Act. Section 413(a) of the Dodd-Frank Act requires the definition of “accredited investor” to exclude the value of a person’s primary residence for purposes of determining whether a natural person qualifies as an “accredited investor” on the basis of having an individual net worth (or joint net worth with the spouse of that person) in excess of $1 million.
The proposed amendments clarify that “the value of the primary residence” — which must be excluded from the individual net worth calculation — is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property. The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the SEC is required to review the definition of the term “accredited investor” in its entirety every four years and engage in further rulemaking to the extent it deems appropriate. The SEC also proposed technical amendments to Form D and a number of other rules to conform them to the language of Section 413(a). Comments on the proposed rule amendments are due by March 11, 2011.