SEC Proposes Major Amendments to Form PF

On Jan. 26, 2022, the Securities and Exchange Commission (SEC) proposed certain amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, with the goal of enhancing its oversight and investor protection efforts. As discussed in greater detail below, the proposed amendments would (i) require reporting within one business day for certain events for large hedge fund advisers and all advisers to private equity funds, (ii) reduce the reporting threshold dollar amount for large private equity fund advisers and require additional reporting from such advisers regarding fund strategies and investments and (iii) revise reporting requirements for large liquidity fund advisers.

Reporting Events for Large Hedge Fund Advisers^[1] and All Private Equity Fund Advisers

Form PF currently requires large hedge fund advisers to file Form PF quarterly, while advisers of private equity funds are required to file annually. The proposed amendments would require large hedge fund advisers and advisers to private equity funds to file Form PF upon the occurrence of certain reporting events within one business day of the event. Such reporting events vary depending upon whether the event relates to a hedge fund or a private equity fund. 

Reporting Events for Large Hedge Fund Advisers (New Section 5 of Form PF)

For large hedge fund advisers, such reporting events include:

• If a qualifying hedge fund experiences a loss equal to or greater than 20% of the fund’s most recent net asset value over a rolling 10-business-day period
• If a qualifying hedge fund (i) experiences a cumulative increase in margin of more than 20% of the fund’s most recent net asset value over a rolling 10-business-day period or (ii) defaults on margin or is unable to meet a call for margin or collateral
• If a counterparty to a qualifying hedge fund does not meet a call for margin (or fails to make any other payment) and the amount involved is greater than 5% of the most recent net asset value of the fund
• If a qualifying hedge fund has a material change in its prime brokerage relationship, such as a material change to the fund’s ability to trade or an outright termination of the relationship due to breach or default
• If a qualifying hedge fund experiences a decline of unencumbered cash by more than 20% of the fund’s most recent net asset value over a rolling 10-business-day period
• If a qualifying hedge fund experiences a significant disruption or degradation to its key operations. “Key operations” refers to (i) the investment, trading, valuation, reporting and risk management of the fund, as well as (ii) the operation of the fund in accordance with the federal securities laws and regulations. A “significant disruption or degradation” would include a 20% disruption or degradation of normal volume or capacity, for example due to a cybersecurity event that disrupts the fund’s trading volume by 20%.
• If a large hedge fund adviser receives cumulative requests for redemption exceeding 50% of the most recent net asset value of the fund (after netting against subscriptions and other contributions from investors received and contractually committed), or if the fund cannot satisfy or suspends redemptions for more than five consecutive business days

Reporting Events for Advisers to Private Equity Funds (New Section 6 of Form PF)

For all advisers to private equity funds, such reporting events include:

• The completion of an “adviser-led secondary transaction,” defined as any transaction initiated by the adviser or any of its related persons offering the fund’s investors the choice to either sell all or a portion of their interests in the fund or convert or exchange all or a portion of their interests in the fund for interests in another vehicle advised by the adviser or any of its related persons
• The implementation of a general partner clawback[2] pursuant to the fund’s governing agreements
• The implementation of a limited partner giveback[3] (or multiple givebacks) pursuant to the fund’s governing agreements if the aggregate amount of the giveback(s) is equal to or greater than 10% of the fund’s aggregate capital commitments
• If the fund’s investors (i) remove the adviser or an affiliate as the general partner or similar control person of the fund, (ii) elect to terminate the fund’s investment period or (iii) elect to terminate the fund, in each case, as contemplated by the fund documents

Reporting Threshold for Large Private Equity Fund Advisers^[4] and Other Amendments to Section 4 of Form PF

The proposed rule would reduce the regulatory assets under management that would obligate a private equity fund adviser to file Section 4 of the Form PF to $1.5 billion from the current $2.0 billion.

The SEC is also proposing amendments to Section 4 that would require large private equity fund advisers to disclose additional information with respect to (i) the fund’s investment strategies, (ii) any restructurings or recapitalizations of the fund’s portfolio companies following the fund’s investment period, (iii) any investments in a single portfolio company by two or more funds advised by an adviser (or a related person) where the funds do not hold the same classes, series or types of securities of the portfolio company (e.g., investments by related funds at different levels of the portfolio company’s capital structure), (iv) whether the fund can borrow at the fund level or if the adviser or related persons provide financing or otherwise extend credit to any of the fund’s portfolio companies, (v) the percentage of the aggregate borrowings of the fund’s controlled portfolio companies that are at a floating rate and (vi) how many controlled portfolio companies a reporting private equity fund owns. 

The proposal also amends some existing questions in Section 4 to require (i) more details about default events that relate to the reporting private equity fund or any of its controlled portfolio companies, (ii) additional counterparty identifying information with respect to any bridge financing provided to a controlled portfolio company by a counterparty and (iii) disclosure of all countries where the fund has exposure of 10% or more of its net asset value.

Amended Reporting Requirements for Large Liquidity Fund Advisers (Section 3 of Form PF)

The SEC’s proposed amendments also update the required information that large liquidity fund advisers[5] have to disclose. The amendments would include revising how such advisers report the fund’s (i) operational information, (ii) assets and portfolio information, (iii) financing information, (iv) investor information, (v) disposition of portfolio securities and (vi) weighted average maturity and weighted average life. 

The SEC will publish the proposed amendments in the Federal Register and has solicited comments on the proposed amendments. The comment period remains open for 30 days after the date of publication in the Federal Register. 

The full text of the proposing release may be found here. 

^[1] _{A large hedge fund adviser is any investment adviser having at least $1.5 billion in regulatory assets under management attributable to hedge funds as of the end of any month in the prior fiscal quarter.}

^[2] _{The proposed amendments define this as “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 agreements.”}

^[3] _{The proposed amendments define this as “any obligation of a fund’s investors to return all or any portion of a distribution made by the fund to satisfy a liability, obligation, or expense of the fund pursuant to the fund’s governing agreements.”}

^[4] _{A large private equity fund adviser is currently any investment adviser having at least $2 billion in regulatory assets under management attributable to private equity funds as of the last day of the adviser’s most recently completed fiscal year.}

^[5] _{A large liquidity fund adviser is any adviser managing a liquidity fund and having at least $1 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter.}