On March 8, 2013, the Division of Investment Management of the Securities and Exchange Commission (the “SEC”) issued additional responses (the “Responses”) to frequently asked questions regarding Form PF. For details on previously posted SEC responses to frequently asked questions regarding Form PF, please see the July 16, 2012 Investment Management Regulatory Update, the August 22, 2012 Investment Management Regulatory Update and the December 20, 2012 Investment Management Regulatory Update.
Investment advisers registered or required to register with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) that advise one or more private funds (i.e., 3(c)(1) or 3(c)(7) funds) and that have at least $150 million in private fund assets under management (“private fund advisers”) are required to file Form PF with the SEC for the purpose of reporting systemic risk information to the SEC. Additionally, private fund advisers that are also registered with the Commodity Futures Trading Commission (the “CFTC”) as commodity pool operators (“CPOs”) or commodity trading advisors (“CTAs”) and are required to file Form PF under the Advisers Act must file Form PF with the SEC to satisfy certain CFTC filing requirements with respect to their commodity pools that are private funds. Such CPOs and CTAs may file Form PF with the SEC to satisfy certain CFTC filing requirements with respect to their commodity pools that are not private funds. Please see the November 18, 2011 Investment Management Regulatory Update for a discussion of the final Form PF rules and the June 19, 2012 Investment Management Regulatory Update for a discussion of the initial Form PF deadlines.
The Responses provided guidance on a number of Form PF topics including, among other things:
General Filing Information. The Responses clarified that, in response to Question 1(b), private fund advisers are not required to identify their related persons unless information with respect to such related persons is being reported on the adviser’s Form PF.
“Regulatory assets under management” and “gross asset value.” The Responses provided guidance on how to treat short positions, derivatives, repurchase agreements, total return swaps, and other financial instruments for purposes of calculating regulatory assets under management in Question 3 and for purposes of calculating a reporting fund’s gross asset value in Question 8. The Responses explained that if a private fund has a balance sheet, a private fund adviser may rely on the fund’s gross assets, as shown on the fund’s balance sheet, to calculate “regulatory assets under management” and “gross asset value.” According to the Responses, a private fund adviser does not need to calculate the value of such financial instruments differently than is required by the applicable accounting standard.
Master-Feeder Arrangement. The Responses explained that if a private fund adviser reports private funds in a master-feeder arrangement on an aggregated basis for purposes of Form ADV, then it must also report such private funds on an aggregated basis on Form PF. Further, according to the Responses, if funds in a master-feeder arrangement are being reported on an aggregated basis, then in accordance with Instruction 6, a private fund adviser must treat the aggregated funds as if they are all one private fund. Therefore, according to the Responses, the master-feeder structure should be collapsed and all investors in the master-feeder arrangement should be aggregated (while not counting the feeder funds themselves as investors) for purposes of reporting information on investors in the master-feeder structure.
Liquidity Terms. The Responses noted that the instructions to Questions 49 and 63 require a private fund adviser to make a “good faith determination” of the withdrawal and redemption provisions applicable to an investor that would likely be triggered during conditions that the adviser views as “significant market stress.” In responding to the above-mentioned questions, according to the Responses, a private fund adviser does not need to take into account every material liquidity restriction but rather only the “discretionary restrictions that the adviser or fund governing body may impose on the reporting fund above any baseline liquidity restrictions an investor is already subject to in the ordinary course as terms of its investment in the fund.” Ordinary course restrictions of this type, according to the Responses, such as an initial lock-up period or notice requirements prior to any withdrawal or redemption, should be accounted for separately in response to Question 50. The Responses also noted that assets in side pockets should not be included when responding to Questions 49 and 63 (although such assets should be included in the response to Question 48(a)). The Responses further indicated that side-letter terms should be taken into account in responding to Questions 50 and 64, which ask for a breakdown of the percentage of a fund’s net asset value that is subject to a lock-up for different periods of time.
Derivatives Trade Volume. The Responses explained that when reporting the trade volume percentage of derivatives trades for purposes of Questions 24(b) and 24(c), a private fund adviser should use the weighted-average of the notional amount of the aggregate derivatives transactions (except for options and interest rate derivatives, in which cases the delta adjusted notional value and the 10-year bond equivalent, respectively, should be used) entered into by the private fund during the reporting period.
Open Positions. The Responses noted that when reporting a private fund’s open positions in response to Question 35, a short position that represents more than 5% of the private fund’s net asset value should be reported as a negative value. The Responses also noted that a private fund adviser may not report a negative number when reporting the aggregate value of all derivatives positions of a private fund in either Question 13(b) or Question 44. Instead, according to the Responses, the responses to such questions should report the absolute value of outstanding derivatives positions.