On January 26, 2022, the U.S. Securities and Exchange Commission (SEC) issued proposed amendments to Form PF, which is the confidential reporting form for certain registered investment advisers to private funds. The proposed amendments seek to (i) require timely reporting of certain events for large hedge fund and private equity fund advisers, (ii) decrease the reporting threshold for large private equity advisers, and (iii) recast reporting requirements for large private equity advisers and large liquidity fund advisers.
Since its adoption in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Form PF has been used by the SEC to assess systematic risk in the private fund industry, which has grown in size and complexity over the past decade. With these proposed Form PF changes, the SEC is seeking to enhance the Financial Stability Oversight Counsel’s (FSOC) ability to monitor systematic risk, to bolster the SEC’s oversight of private fund advisers, and to provide better protection to investors.
Timely Reporting by Large Hedge Fund Advisers and Advisers to Private Equity Funds
Under current rules, certain advisers typically file Form PF on delayed basis, well after the relevant reporting period ends. This leads to the potential for stale information being provided to the SEC, particularly in times of high volatility, which may hinder the FSOC’s ability to monitor systematic risk. The proposed amendments would “allow the SEC and FSOC to receive more timely information about certain events that may signal distress at qualifying hedge funds and private equity funds or market instability.”
This proposed amendment would require certain large hedge fund advisers to file a current report within one business day of the occurrence of one or more of several “reporting events” relating to a qualifying hedge fund through a new section on Form PF. The proposal identifies several “reporting events,” all of which may cause distress at a particular fund or signal more general systematic risk. Reporting events for large hedge fund adviser would include (a) extraordinary investment losses (i.e., a loss equal to or greater than 20% of a fund's most recent net asset value over a rolling 10 business day period), (b) significant margin and counterparty default events, (c) material changes in a reporting fund’s prime brokerage relationships, (d) significant declines in holdings of unencumbered cash (i.e., more than 20% of the reporting fund’s most recent net asset value over a rolling 10 business day period), (e) a “significant disruption or degradation” of the reporting fund’s “key operations,” and (f) large redemption requests, suspensions of withdrawals/redemptions, material restrictions on withdrawals/redemptions, and an inability to satisfy redemptions.
An item would also be added for the large hedge fund adviser to provide additional information, in narrative form, concerning the “reporting event” involved. This is consistent with the SEC’s approach with other current report filings.
In addition to large hedge fund advisers, the proposal would also require all advisers to private equity funds to file a current report within one business day of a “reporting event.” Regarding advisers to private equity funds, the “reporting events” include: (1) execution of an adviser-led secondary transaction, (2) implementation of a general partner or limited partner claw back, and (3) removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund. Like the new narrative item for large hedge fund advisers, a new item would require the private equity adviser to provide additional information in a narrative response if it believes that additional information would shed more light on the circumstances of its report(s).
Large Private Equity Adviser Reporting
The SEC is proposing to reduce the threshold for reporting as a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management. In 2011, when Form PF was proposed, the $2 billion reporting threshold captured 75% of the U.S. private equity industry based on committed capital. A decade later, that $2 billion threshold only captures 67% of the U.S. private equity industry. Reducing the threshold to $1.5 billion would capture closer to 75% of the U.S. private equity industry.
In addition to lowering the reporting threshold, the SEC is also proposing to add new questions and modify existing questions on Form PF to enhance its understanding of certain practices of private equity advisers and amend certain existing questions to improve data collection.
These changes and additions are meant to collect data on (a) private equity fund strategies, (b) portfolio company restructurings and recapitalizations, (c) investments in different levels of a single portfolio company’s capital structure by related funds, (d) fund-level borrowings, (e) financing of portfolio companies, (f) floating rate borrowings of controlled portfolio companies (CPCs), (g) CPCs owned by private equity funds, and (h) events of default, bridge financing to CPCs, and geographic breakdown of investments.
Large Liquidity Fund Adviser Reporting
The SEC is also proposing to overhaul the reporting requirements for large liquidity fund advisers concerning operational information and assets, as well as portfolio, financing, and investor information. Furthermore, the proposal would add a new item concerning disposition of portfolio securities. The proposed amendments would bring Form PF in line with the Form N-MFP, as the reporting requirements would mirror the information that money market funds report on Form-MFP.
According to the rule proposal, these changes would enhance the SEC’s and FSOC’s ability to assess short-term financing markets and facilitate market oversight. It is proposed that the consistency and improved data quality would enhance investor protection efforts and systemic risk assessment.
The proposed amendments to Form PF come amid a larger push by SEC Chair Gary Gensler to overhaul disclosure requirements in private funds. The public comment period will remain open for 30 days after publication of the proposed rule in the Federal Register.