SEC approves confidential private fund risk (Form PF) reporting

On Oct. 26, 2011, the Securities and Exchange Commission (“SEC”) voted unanimously to adopt a new rule requiring registered investment advisers to private funds, including hedge funds, to report information for use by the Financial Stability Oversight Council (“FSOC”) in monitoring risks to the U.S. financial system.

The rule, which differs significantly from the proposal that was released in January, requires registered investment advisers with at least $150 million in private fund assets under management (Regulatory Assets Under Management) to periodically file Form PF.

The SEC has segregated these private fund advisers into two broad groups – large advisers and smaller advisers. The amount of information reported and the frequency of reporting depends on the group to which the adviser belongs.

The SEC has defined large private fund adviser as:

• Advisers with at least $1.5 billion in regulatory assets under management attributable to hedge funds.
• Liquidity fund advisers with at least $1 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds.
• Advisers with at least $2 billion in regulatory assets under management attributable to private equity funds. All other respondents are considered smaller private fund advisers.

All other filers will be considered by the SEC to be small private fund advisers.

Reporting obligations

Small private fund advisers will be required to file Form PF only once a year. The filing is to be within 120 days of the end of the fiscal year, and will include only basic information regarding the private funds they advise. This includes:

• Information regarding size, leverage, investor types and concentration, liquidity, and fund performance.
• Small advisers who also manage hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms.

Large private fund advisers must provide more detailed information than smaller advisers. The focus and frequency of the reporting depends on the type of private fund the adviser manages.

The original proposal required that the large hedge fund advisers had to file Form PF to update information regarding the hedge funds they manage within 15 days of the end of each fiscal quarter; the final rule includes a 60 day filing requirement. These advisers must report on an aggregate basis information regarding exposures by asset class, geographical concentration, and turnover by asset class. Additionally -
these advisers are required to report certain information relating to that fund’s exposures, leverage, risk profile, and liquidity for each managed hedge fund having a regulatory net asset value of at least $500 million. As a reprieve from certain disclosures, the SEC is not requiring large hedge fund advisers to report position-level information.

Large liquidity fund advisers are required to file Form PF to update information regarding the unregistered money market funds they manage within 15 days of the end of each fiscal quarter. These advisers are required to provide information on the types of assets in each of the fund’s portfolios, description of the risk profile of the fund and the extent to which the fund has a policy of complying with the Investment Company Act’s rules concerning registered money market funds

Unlike hedge fund or liquidity fund advisers, large private equity fund advisers are required to file Form PF annually within 120 days of the end of the fiscal year and must include information on the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing, and investments in financial institutions.

Reporting Phase-in

Generally private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. However, advisers with at least $5 billion in regulatory assets under management attributable to hedge funds, advisers to Liquidity funds with at least $5 billion in combined regulatory assets under management attributable to Liquidity funds and registered money market funds and advisers with at least $5 billion in regulatory assets under management attributable to private equity funds must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.

For more information

If you have any questions about these issues, please contact Gireesh Chugh at 212.372.1086 or your local McGladrey & Pullen financial services representative.