Proposed Additional Amendments to Form PF

Jessica Forbes and Philip Heimowitz are partners and Mark Highman is special counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Forbes, Mr. Heimowitz, Mr. Highman, and Conor Almquist.

On August 10, 2022, the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) proposed additional amendments (the “Proposed Amendments”) [1] to Form PF, the periodic report filed by registered investment advisers that manage private funds. [2]

The Proposed Amendments significantly expand the scope of information to be reported by private fund advisers and would, among other things, (1) require more detailed information as to hedge fund investment strategies, counterparty exposures, and investment performance, (2) include separate reporting regarding digital assets such as cryptocurrency, and (3) change how advisers report complex fund structures. The Proposing Release also seeks comment on whether to change the definition of hedge fund.

Some of the more significant aspects of the Proposed Amendments are summarized below.

I. Background

Form PF was introduced in 2011, when the SEC adopted Rule 204(b)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) requiring SEC-registered investment advisers with private fund assets under management of at least $150 million to file and periodically update Form PF. Form PF is a confidential filing required to be made on an annual basis, unless the investment adviser is a large hedge fund adviser or a large liquidity fund adviser, in which case the filing must be made quarterly. Information required to be reported on Form PF includes information regarding the adviser’s identity and assets under management, and information regarding the size, leverage, and performance of private funds managed by the adviser. Advisers with hedge fund, liquidity fund, or private equity fund assets under management exceeding certain specified thresholds are required to report additional information regarding those funds. The SEC proposed other amendments to Form PF on January 26, 2022. [3] Those proposed amendments have not yet been adopted.

II. The Proposed Amendments

A. Additional information regarding qualifying hedge funds.

  1. Sub-asset classes. The Proposed Amendments would make a number of changes to reportable sub-asset classes, including to:
    1. expand equity exposure reporting to add sub-asset classes for (a) listed equity securities (including new sub-asset classes for certain single name listed equities and indices on listed equities), and (b) American depository receipts (“ADRs”);
    2. add additional sub-asset classes for reporting repo and reverse repo positions, based on term (g., overnight, other than overnight, and open term);
    3. add additional sub-asset classes for asset backed securities (“ABS”) and other structured products;
    4. add new sub-asset classes and revise existing sub-asset classes that capture certain derivatives, including certain credit derivatives, volatility derivatives and variance derivatives;
    5. specify sub-asset classes for investments in cash and cash equivalents and commodities; and
    6. add a new sub-asset class for digital assets.
  2. The Proposed Amendments would require advisers to report additional information on a number of topics, including: (i) investment exposures and instrument types within sub-asset classes, (ii) positions held physically, synthetically or through derivatives and indirect exposure, (iii) adjusted exposures, (iv) certain interest rate risks, (v) open and large positions, [4] (vi) borrowings and counterparty exposure, (vii) significant counterparties, [5] (viii) market factor effects, (ix) currency exposure, (x) turnover, (xi) country and industry exposure, (xii) central clearing counterparty (“CCP”) exposure, (xiii) risk metrics, (xiv) investment performance by strategy, [6] (xv) portfolio correlation, (xvi) portfolio liquidity, and (xvii) financing liquidity.

B. Digital assets.

  1. The Proposed Amendments would establish a new sub-asset class of digital assets, defined as an asset that is “issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’”
    1. The Proposing Release requests comment as to the granularity of reporting digital assets, namely whether there should be further sub-classes, including central bank digital currencies, stablecoins, and security tokens, and whether digital assets require detailed reporting and should be reported by name or reference to specific characteristics.
    2. As proposed, the term digital assets is extremely broad. It is notable that digital assets can fall within a number of regulatory categories, including securities and commodities, which may make this reporting confusing or misleading when viewed in conjunction with other reporting items. It is also notable that digital assets, including central bank digital currencies, are explicitly excluded from cash and cash equivalents, despite many market participants viewing them as such.

C. Additional information regarding advisers and the private funds they advise.

  1. Withdrawal or redemption rights. The Proposed Amendments would require advisers to report information regarding withdrawal or redemption rights for all reporting funds.
    1. If a reporting fund provides withdrawal or redemption rights in the ordinary course, the adviser must indicate how often this is permitted from the following options: (1) any business day, (2) at intervals of at least two business days and up to a month, (3) at intervals longer than monthly up to quarterly, (4) at intervals longer than quarterly up to annually, and (5) at intervals of more than one year. [7]
    2. Additional information about fund inflows and outflows, including contributions to the fund, all withdrawals, redemptions, and other distributions of any kind to investors must also be reported. [8]
  2. Gross asset value and net asset value. The Proposed Amendments would require advisers filing quarterly updates to report gross asset value and net asset value as of the end of each month of the reporting period, rather than only reporting the information as of the end of the reporting period.
    1. The value of unfunded commitments included in gross asset value and net asset value must be separately reported.
  3. Borrowings and types of The Proposed Amendments expand the definition of borrowings to include synthetic long positions and other types of credit transactions. [9]
    1. In reporting information regarding creditors, the adviser would be required to indicate whether a creditor is U.S. based and whether it is a S. depository institution. [10]
  4. Beneficial ownership. The Proposed Amendments would require advisers to provide more detailed information as to certain groups of beneficial owners. This would include:
    1. Indicating whether beneficial owners that are broker-dealers, insurance companies, non-profits, pension plans, and banking or thrift institutions are United States persons or non-United States persons;
    2. Indicating whether beneficial owners that are private funds are internal private funds or external private funds; [11] and
    3. Providing an additional explanation if information as to the types of investors is reported in the catch-all “other” category.
  5. Fund performance. The Proposed Amendments would require additional information if an adviser calculates market value on a daily basis for any position in the reporting fund’s portfolio. [12]
    1. If a reporting fund’s performance is reported to customers as an internal rate of return since inception, the adviser should report performance as an internal rate of return, rather than reporting gross fund performance and net fund performance for specified periods in tabular form. [13]

D. Amendments to the general instructions addressing separate entity reporting, fund of funds reporting and hedge fund

  1. Separate reporting. The Proposed Amendments would generally require advisers to report components of master-feeder arrangements and parallel fund structures separately, rather than in aggregate. [14]
    1. To account for separate reporting, identifying information and additional detail regarding master-feeder arrangements and parallel private funds, including internal private funds and external private funds, must be provided.
  2. Private funds that invest in other funds.
    1. Funds of funds. The Proposed Amendments would require advisers to a fund of funds to include the value of a reporting fund’s investments in other internal private funds or external private funds when responding to questions on Form PF (g., gross asset value and net asset value of the fund of funds). Advisers generally would not otherwise “look through” a fund of fund’s investments in internal private funds or external private funds. [15]
    2. Subsidiaries of private funds. For a reporting fund using a “trading vehicle,” [16] (such as a tax blocker or special purpose borrower) that is wholly-owned by that reporting fund, the adviser would either (1) identify the trading vehicle and aggregate the reporting fund and trading vehicle or (2) report the trading vehicle as a separate reporting fund. The trading vehicle would have to be reported separately if it is owned by more than one reporting fund.
    3. Investments in entities that are not private funds. Advisers would continue to include the value of the reporting fund’s investments in funds and other entities that are not private funds when determining reporting thresholds. When responding to questions, however, advisers generally would not “look through” a reporting fund’s investments in other funds or entities. [17]
  3. Definition of hedge fund. The Proposing Release provides a number of questions relating to the definition of “hedge fund” and requests comment on whether the definition of “hedge fund” should be amended. Two particularly important questions are:
    1. Should the definition of hedge fund be amended to exclude private equity funds which are currently reported as hedge funds by virtue of fund documents permitting borrowing and short selling activity if the fund has not engaged in borrowing or short selling?
    2. Should qualification as a hedge fund under the leverage prong or short selling prong require the fund to have actually engaged in such activities during the past 12 months? [18]

E. Additional information regarding all hedge funds.

  1. Investment strategies. The Proposed Amendments would require advisers to indicate which investment strategies best describe the reporting fund’s strategies on the last day of the reporting period (rather than as of the data reporting date or throughout the reporting period).
    1. The Proposed Amendments would establish more granular categories of strategies to select from when reporting (e.g. equity, factor driven; equity, statistical arbitrage; equity, emerging markets; credit, litigation finance; credit, emerging markets; credit, asset-backed/structured products; real estate; digital assets).
  2. Counterparty exposures. The Proposed Amendments would create a new table concerning exposures that (1) the reporting fund has to creditors and counterparties, and (2) creditors and other counterparties have to the reporting fund.
    1. The report would include (i) borrowing and collateral received by a fund and (ii) lending and collateral posted by a fund aggregated across all counterparties, including CCPs, as of the end of the reporting period. Such information would be categorized by type and governing legal agreement.
    2. Creditors and counterparties owed an amount equal to or greater than 5% of net asset value or $1 billion must be identified. If there are more than five such counterparties, only the five largest would be identified.
  3. Trading and clearing mechanisms. The Proposed Amendments would also require advisers to report additional information regarding trading and clearing mechanisms, including as to derivatives, repos, and sponsored repos.

The Proposing Release includes 216 questions seeking comments on the Proposed Amendments. Comments will be due October 11, 2022 or 30 days after publication of the Proposing Release in the Federal Register, whichever is later.

Endnotes

1Amendments to Form PF to Amend Reporting Requirements for All Filers and Large Hedge Fund Advisers, Release No. IA-6083 (Aug. 10, 2022) (“Proposing Release”).(go back)

2Terms italicized in this post are defined terms in Form PF. See Form PF: Glossary of Terms and the proposed amended Form PF: Glossary of Terms found on pages 280-298 of the Proposing Release.(go back)

3See Fried Frank memorandum SEC Proposes Amendments to Form PF; Division of EXAMS Publishes Observations from Examinations of Private Fund Advisers (Jan. 31, 2022).(go back)

4This would require advisers to report (1) the total number of reference assets to which a fund holds long and short netted exposure, (2) the percentage of net asset value represented by the aggregated netted exposures of reference assets with the top five long and short netted exposures, and (3) the percentage of net asset value represented by the aggregate netted exposures of reference assets representing the top ten long and short netted exposures.(go back)

5Advisers would be required to identify and provide certain information about all creditors and counterparties (including CCPs) where the amount a fund has borrowed (including any synthetic long positions) before posted collateral or to which the fund has a net mark-to-market counterparty credit exposure after collateral equals or is greater than either (1) 5% of the fund’s net asset value or (2) $1 billion.(go back)

6The Proposed Amendments would require advisers that indicate more than one investment strategy for a fund to report monthly gross investment performance by strategy if the adviser calculates and reports this data for such fund, whether to current and prospective investors, counterparties, or otherwise (this is not required if the adviser reports performance for the fund as an internal rate of return).(go back)

7This information would be reported regardless of notice requirements, gates, lock-ups or other restrictions.(go back)

8Quarterly filers would provide this information for each month of the reporting period.(go back)

9“Borrowings” would continue to be defined as secured borrowings and unsecured borrowings, collectively. However, the definition of borrowings would be expanded to include (i) cash and cash equivalents received with an obligation to repay; (ii) securities lending transactions (count cash and cash equivalents and securities received by the reporting fund in the transaction, including securities borrowed by the reporting fund for short sales); (iii) repo or reverse repo (count the cash and cash equivalents and securities received by the reporting fund); (iv) negative mark-to-market of derivative transactions from the reporting fund’s point of view; and (v) the gross notional value of synthetic long positions.(go back)

10Advisers would not be required to distinguish between non-U.S. creditors that are depository institutions and those that are not.(go back)

11Internal private funds” would be defined as private funds that the adviser or any of its related persons advise. “External private funds” would be defined as private funds that neither the adviser nor its related persons advise. Investments in cash management funds would no longer be excluded from these definitions.(go back)

12This would include specific details as to the daily rate of return and volatility of the daily rate of return. In addition, if a reporting fund has one or more days with a negative daily rate of return during the reporting period, the adviser would report (1) the most recent peak to trough drawdown, and indicate whether the drawdown was continuing on the data reporting date, (2) the largest peak to trough drawdown, (3) the largest single day drawdown, and (4) the number of days with a negative daily rate of return in the reporting period.(go back)

13Internal rate of return” would be defined as the discount rate that causes the net present value of all cash flows throughout the life of the fund to be equal to zero.(go back)

14Such structures would still be aggregated for purposes of determining reporting thresholds.(go back)

15Advisers would not “look through” to the creditors of or counterparties to underlying private funds in responding to questions that ask about a reporting fund’s borrowings and counterparty exposures. However, certain questions would require advisers to report indirect exposure resulting from positions held through other private funds, and advisers would “look through” the reporting fund’s investments in internal private funds and external private funds in responding to those questions.(go back)

16Trading vehicle” would be defined as “a separate legal entity, wholly-owned by one or more reporting funds, that holds assets, incurs leverage, or conducts trading or other activities as part of a reporting fund’s investment activities but does not operate a business.”(go back)

17However, certain questions would require advisers to “look through” a reporting fund’s investments in funds and other entities when providing information regarding indirect exposures resulting from such positions.(go back)

18The “leverage prong” refers to a private fund having the right to borrow an amount in excess of one-half of its net asset value (including any committed capital) or have gross notional exposure in excess of twice its net asset value (including any committed capital). The “short selling prong” refers to a private fund having the right to sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).(go back)

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