At a Glance:
- The Securities and Exchange Commission adopted Amendments to Form PF in order to “enhance visibility into private funds and help protect investors and promote financial stability.”
- The Amendments address reporting obligations for large hedge fund advisers, private equity fund advisers and large private equity fund advisers.
The U.S. Securities and Exchange Commission (the SEC) adopted Amendments to Form PF (the Amendments) in a three-to-two vote on May 3, 2023, over a decade after Form PF’s initial adoption. SEC Chair Gary Gensler predicted that these Amendments “will enhance visibility into private funds and help protect investors and promote financial stability.” The Amendments address reporting obligations for three categories of investment advisers, as summarized below.
Investment Adviser Category
Large Hedge Fund Advisers
Private Equity Fund Advisers
Large Private Equity Fund Advisers
Form PF Parameters
Hedge fund advisers with at least $1.5 billion in hedge fund assets under management.
Investment advisers with at least $150 million in private equity fund assets under management.
Private equity fund advisers with at least $2 billion in private equity assets under management.
Current Reporting for Large Hedge Fund Advisers to Qualifying Hedge Funds
Effective and Compliance Date: Six-months after date of publication in the Federal Register.
Reporting: As soon as practicable, but no later than 72 hours after the occurrence of the triggering events summarized below, or at the time when the large hedge fund adviser reasonably believes that the event occurred. Reporting on the triggering events should be to the best of the large hedge fund adviser’s knowledge, but amendments to a current report to correct information that was not accurate at the time of filing are allowed.1
- Extraordinary Investment Losses – a loss equal to or greater than 20% of a fund’s reporting fund aggregate calculated value (RFACV)2 over a rolling 10-business-day period. The calculation period is backward looking.3
- Increases in Margin – required increases in margin4 deposits where (i) the total dollar value of margin posted by the reporting fund at the end of a rolling 10-day business period less (ii) the total dollar value of margin posted by the reporting fund at the beginning of such period is greater than or equal to 20% of the average daily RFACV during the period.5
- Fund Margin Default or Inability to Meet Margin Call – margin default becomes reportable at the end of the cure period agreed to with the counterparty, if any, unless the fund does not expect to be able to meet the margin call during such cure period. If a margin call is disputed, there is no obligation to file provided that the reporting fund can meet the greatest of the disputed amount.6
- Counterparty Defaults – a counterparty’s failure to meet a call for margin, or failure to make any other payment, in the time and form contractually required (including any cure period) if the amount involved is greater than 5% of RFACV.7
- Material Changes in Prime Broker Relationships:
- When a prime broker materially restricts8 its relationship with the fund in markets where the prime broker continues to be active.
- When either party terminates the relationship for a fund-specific reason.
- Instances where there is a fund termination event (as specified in the prime broker agreement).9
- Operations Events – significant disruption or degradation of the reporting fund’s critical operations.10
- Withdrawal and Redemption Requests – if the fund receives cumulative requests for withdrawals or redemption exceeding 50% of the most recent NAV (after netting against subscriptions or other contributions from investors received and contractually committed).11
- Inability to Satisfy Redemption or Suspension of Redemptions – a fund is unable to satisfy redemptions, or suspends redemptions, for more than five consecutive business days.12
Quarterly Event Reporting for all Private Equity Fund Advisers
Effective and Compliance Date: Six-months after date of publication in the Federal Register.
Reporting: Quarterly reporting of any of the following occurrences within 60 days after the end of the private equity fund adviser’s fiscal quarters.
- Execution of Adviser-Led Secondary Transactions – an adviser-led secondary transaction refers to “any transaction initiated by the [Private Equity Fund Adviser] or any of its related persons that offers private fund investors the choice to (1) sell all or a portion of their interests in the private fund, or (2) convert or exchange all or a portion of their interests in the private fund for interests in another vehicle advised by the [Private Equity Fund Adviser] or any of its related persons.”13
- Investors’ Election to Remove a Control Person of the Fund – the investors’ notification to the Private Equity Fund Adviser of their election to remove the private equity fund adviser or an affiliate from serving as a control person of the fund, such as a general partner.14
- Investors’ Election to Terminate the Fund’s Investment Period – the investors’ notification to the private equity fund adviser of their election to terminate the fund’s investment period, as provided in the fund documents.15
- Investors’ Election to Terminate the Fund – the investors’ notification to the Private Equity Fund Adviser of their election to terminate the fund, as provided in the fund documents.16
Annual Reporting for Large Private Equity Fund Advisers17
Effective and Compliance Date: 365 days after date of publication in the federal register.
Reporting: Annually on a large private equity fund adviser’s routine Form PF filing.
- General Partner Clawback – any obligation of the general partner, its related persons, or their respective owners or interest holders to restore or otherwise return performance-based compensation to the fund pursuant to the fund’s governing documents.18
- Limited Partner Clawback – an obligation of a fund’s investors to return distributions made by the fund to satisfy a liability, obligation or expense of the fund pursuant to the fund’s governing documents. If the amount to be returned exceeds 10% of a fund’s aggregate capital commitments, large private equity fund advisers should file for each additional clawback.19
- Investment Strategies – investment strategies will be reportable by percent of deployed capital (using a good faith estimate) from an established list of categories (even if the categories do not precisely match the characterization of the reporting fund’s strategies).20
- Fund-Level Borrowing – (1) information on each borrowing or other cash financing available to the fund, (2) the dollar amounts available, and (3) the average amount borrowed over the reporting period.21
- Events of Default under Borrowing Agreements – classify the nature of the default event as either “(1) payment default of the fund, (2) a payment default of a controlled portfolio company, or (3) a default relating to a failure to uphold terms under the applicable borrowing agreement, other than a failure to make regularly scheduled payments.”22
- Bridge Financing to Controlled Portfolio Companies – with respect to a controlled portfolio company of the Fund that has a bridge loan, the bridge financing counterparty’s LEI, any affiliations with major financial institutions and the name of such institution.23
- Geographic Breakdown of Investments – rather than continuing to report on the geographic breakdown of investments by private equity funds, large private equity fund advisers will now report all countries (by ISO country code) to which a reporting fund has exposure of 10% or more of its NAV.24
While the effective date for these Amendments has not yet been established by their publication in the Federal Register as of the date of this article, private fund advisers should take prompt action to ensure there are internal systems and processes in place to track and timely report the newly required information. Large hedge fund advisers, in particular, will need to react quickly in response the triggering events summarized in above in Section II.
- Amendments to Form PF to Require Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers and to Amend Reporting Requirements for Large Private Equity Advisers, SEC Rel. No. IA-6297 (May 3, 2023), at 16.
- Id. At 20. RFACV is defined as “every position in the reporting fund’s portfolio, including cash and cash equivalents, short positions, and any fund-level borrowing, the most recent price or value applied to the position for purposes of managing the investment portfolio.” “[RFACV] may be calculated using the adviser’s own methodologies and conventions of the adviser’s service providers, provided that these are consistent with information reported internally.”
- Id. At 17.
- Id. At 23. As used throughout, “margin” refers to margin, collateral, or equivalents.
- Id. At 25.
- Id. At 28-30.
- Id. At 33.
- Id. At 39. A material restriction is one that “significantly limits the fund’s ability to operate under the terms of the original agreement, or significantly impairs the fund’s ability to trade.”
- Id. At 36-39.
- Id. At 46. “Critical Operations” are operations necessary for (1) the investment, trading, valuation, reporting and risk management of the reporting fund; or (2) the operation of the reporting fund in accordance with the Federal securities laws and regulations.
- Id. At 49.
- Id. At 53.
- Id. At 61.
- Id. At 64.
- Id. At 67.
- Id. At 70. The proposed rule had contemplated lowering the assets under management threshold for a large private fund adviser to $1.5 billion in the proposed rule, but the SEC ultimately decided to keep the $2 billion threshold.
- Id. At 76.
- Id. At 77.
- Id. At 80. Selection of “other” as a strategy requires the adviser to provide additional information.
- Id. At 81.
- Id. At 83 and Form PF Question 77.
- Id. At 83.