[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Proposed Rules]
[Pages 8068-8155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2175]



[[Page 8067]]

Vol. 76

Friday,

No. 29

February 11, 2011

Part V





Commodity Futures Trading Commission





-----------------------------------------------------------------------



17 CFR Part 4



-----------------------------------------------------------------------





Securities and Exchange Commission





-----------------------------------------------------------------------

17 CFR Parts 275 and 279



 Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF; 
Proposed Rule

  Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 / 
Proposed Rules  

[[Page 8068]]


-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3145; File No. S7-05-11]
RIN 3235-AK92


Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF

AGENCIES: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION: Joint proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or 
the ``Commissions'') are proposing new rules under the Commodity 
Exchange Act and the Investment Advisers Act of 1940 to implement 
provisions of Title IV of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. The proposed SEC rule would require investment 
advisers registered with the SEC that advise one or more private funds 
to file Form PF with the SEC. The proposed CFTC rule would require 
commodity pool operators (``CPOs'') and commodity trading advisors 
(``CTAs'') registered with the CFTC to satisfy certain proposed CFTC 
filing requirements by filing Form PF with the SEC, but only if those 
CPOs and CTAs are also registered with the SEC as investment advisers 
and advise one or more private funds. The information contained in Form 
PF is designed, among other things, to assist the Financial Stability 
Oversight Council in its assessment of systemic risk in the U.S. 
financial system. These advisers would file these reports 
electronically, on a confidential basis.

DATES: Comments should be received on or before April 12, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

CFTC

     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    ``Form PF'' must be in the subject field of comments submitted via 
e-mail, and clearly indicated on written submissions. All comments must 
be submitted in English, or if not, accompanied by an English 
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the CFTC to consider information that 
may be exempt from disclosure under the Freedom of Information Act, a 
petition for confidential treatment of the exempt information may be 
submitted according to the established procedures in 17 CFR 145.9.
    The CFTC reserves the right, but shall have no obligation, to 
review, prescreen, filter, redact, refuse, or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, including, but not limited to, obscene 
language. All submissions that have been redacted or removed that 
contain comments on the merits of the rulemaking will be retained in 
the public comment file and will be considered as required under the 
Administrative Procedure Act and other applicable laws, and may be 
accessible under the Freedom of Information Act, 5 U.S.C. 552, et seq. 
(``FOIA'').

SEC

Electronic Comments

     Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-05-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-11. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The SEC will post all comments on the SEC's Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web 
site viewing and printing in the SEC's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549 on official business days between the 
hours of 10 a.m. and 3 p.m. All comments received will be posted 
without change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Daniel S. Konar II, Attorney-
Advisor, Telephone: (202) 418-5405, E-mail: [email protected], Amanda L. 
Olear, Special Counsel, Telephone: (202) 418-5283, E-mail: 
[email protected], or Kevin P. Walek, Assistant Director, Telephone: 
(202) 418-5405, E-mail: [email protected], Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; SEC: 
David P. Bartels, Attorney-Adviser, Sarah G. ten Siethoff, Senior 
Special Counsel, or David A. Vaughan, Attorney Fellow, at (202) 551-
6787 or [email protected], Office of Investment Adviser Regulation, 
Division of Investment Management, U.S. Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The CFTC is requesting public comment on 
proposed rule 4.27(d) [17 CFR 4.27(d)] under the Commodity Exchange Act 
(``CEA'') \1\ and proposed Form PF. The SEC is requesting public 
comment on proposed rule 204(b)-1 [17 CFR 275.204(b)-1] and proposed 
Form PF [17 CFR 279.9] under the Investment Advisers Act of 1940 [15 
U.S.C. 80b] (``Advisers Act'').\2\
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 1a.
    \2\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the 
Advisers Act, or any paragraph of the Advisers Act, we are referring 
to 15 U.S.C. 80b of the United States Code, at which the Advisers 
Act is codified, and when we refer to Advisers Act rule 204(b)-1, or 
any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1 
of the Code of Federal Regulations in which this rule would be 
published. In addition, in this Release, when we refer to the 
``Advisers Act,'' we refer to the Advisers Act as in effect on July 
21, 2011.
---------------------------------------------------------------------------

I. Background

A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ 
While the Dodd-Frank Act provides for wide-ranging reform of financial 
regulation, one stated focus of this legislation is to

[[Page 8069]]

``promote the financial stability of the United States'' by, among 
other measures, establishing better monitoring of emerging risks using 
a system-wide perspective.\4\ To further this goal, Title I of the 
Dodd-Frank Act establishes the Financial Stability Oversight Council 
(``FSOC''), which is comprised of the leaders of various financial 
regulators (including the Commissions' Chairmen) and other 
participants.\5\ The Dodd-Frank Act directs FSOC to monitor emerging 
risks to U.S. financial stability and to require that the Board of 
Governors of the Federal Reserve System (``FRB'') supervise designated 
nonbank financial companies that may pose risks to U.S. financial 
stability in the event of their material financial distress or failure 
or because of their activities.\6\ In addition, the Dodd-Frank Act 
directs FSOC to recommend to the FRB heightened prudential standards 
for designated nonbank financial companies.\7\
---------------------------------------------------------------------------

    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ See S. Conf. Rep. No. 111-176, at 2-3 (2010) (``Senate 
Committee Report'').
    \5\ Section 111 of the Dodd-Frank Act provides that the voting 
members of FSOC will be the Secretary of the Treasury, the Chairman 
of the FRB, the Comptroller of the Currency, the Director of the 
Bureau of Consumer Financial Protection, the Chairman of the SEC, 
the Chairperson of the Federal Deposit Insurance Corporation, the 
Chairperson of the CFTC, the Director of the Federal Housing Finance 
Agency, the Chairman of the National Credit Union Administration 
Board and an independent member appointed by the President having 
insurance expertise. FSOC will also have five nonvoting members, 
which are the Director of the Office of Financial Research, the 
Director of the Federal Insurance Office, a state insurance 
commissioner, a state banking supervisor and a state securities 
commissioner.
    \6\ Section 112 of the Dodd-Frank Act.
    \7\ Id.
---------------------------------------------------------------------------

    The Dodd-Frank Act anticipates that FSOC will be supported in these 
responsibilities by various regulatory agencies, including the 
Commissions. To that end, the Dodd-Frank Act amends certain statutes, 
including the Advisers Act, to authorize or direct certain Federal 
agencies to support FSOC. Title IV of the Dodd-Frank Act amends the 
Advisers Act to generally require that advisers to hedge funds and 
other private funds \8\ register with the SEC.\9\ Congress required 
this registration in part because it believed that ``information 
regarding [the] size, strategies and positions [of large private funds] 
could be crucial to regulatory attempts to deal with a future crisis.'' 
\10\ To that end, Section 404 of the Dodd-Frank Act, which amends 
section 204(b) of the Advisers Act, directs the SEC to require private 
fund advisers \11\ to maintain records and file reports containing such 
information as the SEC deems necessary and appropriate in the public 
interest and for investor protection or for the assessment of systemic 
risk by FSOC.\12\ The records and reports must include a description of 
certain information about private funds, such as the amount of assets 
under management, use of leverage, counterparty credit risk exposure, 
and trading and investment positions for each private fund advised by 
the adviser.\13\ The SEC must issue jointly with the CFTC, after 
consultation with FSOC, rules establishing the form and content of any 
such reports required to be filed with respect to private fund advisers 
also registered with the CFTC.\14\
---------------------------------------------------------------------------

    \8\ Section 202(a)(29) of the Advisers Act defines the term 
``private fund'' as ``an issuer that would be an investment company, 
as defined in section 3 of the Investment Company Act of 1940 (15 
U.S.C. 80a-3) (``Investment Company Act''), but for section 3(c)(1) 
or 3(c)(7) of that Act.'' Section 3(c)(1) of the Investment Company 
Act provides an exclusion from the definition of ``investment 
company'' for any ``issuer whose outstanding securities (other than 
short-term paper) are beneficially owned by not more than one 
hundred persons and which is not making and does not presently 
propose to make a public offering of its securities.'' Section 
3(c)(7) of the Investment Company Act provides an exclusion from the 
definition of ``investment company'' for any ``issuer, the 
outstanding securities of which are owned exclusively by persons 
who, at the time of acquisition of such securities, are qualified 
purchasers, and which is not making and does not at that time 
propose to make a public offering of such securities.'' The term 
``qualified purchaser'' is defined in section 2(a)(51) of the 
Investment Company Act.
    \9\ The Dodd-Frank Act requires such private fund adviser 
registration by amending section 203(b)(3) of the Advisers Act to 
repeal the exemption from registration for any adviser that during 
the course of the preceding 12 months had fewer than 15 clients and 
neither held itself out to the public as an investment adviser nor 
advised any registered investment company or business development 
company. See section 403 of the Dodd-Frank Act. See also infra note 
11 for the definition of ``private fund adviser.'' There are 
exemptions from the registration requirement, including exemptions 
for advisers to venture capital funds and advisers to private funds 
with less than $150 million in assets under management in the United 
States. There also is an exemption for ``foreign private advisers,'' 
which are investment advisers with no place of business in the 
United States, fewer than 15 clients in the United States and 
investors in the United States in private funds advised by the 
adviser, and less than $25 million in assets under management from 
such clients and investors. See sections 402, 407 and 408 of the 
Dodd-Frank Act. See also Exemptions for Advisers to Venture Capital 
Funds, Private Fund Advisers With Less Than $150 Million in Assets 
Under Management, and Foreign Private Advisers, Investment Advisers 
Act Release No. IA-3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10, 
2010) (``Private Fund Exemption Release''); Rules Implementing 
Amendments to the Investment Advisers Act of 1940, Investment 
Advisers Act Release No. IA-3110 (Nov. 19, 2010), 75 FR 77,052 (Dec. 
10, 2010) (``Implementing Release''). References in this Release to 
Form ADV or terms defined in Form ADV or its glossary are to the 
form and glossary as they are proposed to be amended in the 
Implementing Release.
    \10\ See Senate Committee Report, supra note 4, at 38.
    \11\ Throughout this Release, we use the term ``private fund 
adviser'' to mean any investment adviser that (i) is registered or 
required to register with the SEC (including any investment adviser 
that is also registered or required to register with the CFTC as a 
CPO or CTA) and (ii) advises one or more private funds. We are not 
proposing that advisers solely to venture capital funds or advisers 
to private funds that in the aggregate have less than $150 million 
in assets under management in the United States (``exempt reporting 
advisers'') be required to file Form PF.
    \12\ While Advisers Act section 204(b)(1) could be read in 
isolation to imply that the SEC requiring private fund systemic risk 
reporting is discretionary, other amendments to the Advisers Act 
made by the Dodd-Frank Act (such as Advisers Act section 204(b)(5) 
and 211(e) suggest that Congress intended such rulemaking to be 
mandatory. See also Senate Committee Report, supra note 4, at 39 
(``this title requires private fund advisers * * * to disclose 
information regarding their investment positions and strategies.'').
    \13\ See section 404 of the Dodd-Frank Act.
    \14\ See section 406 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    This joint proposal is designed to fulfill this statutory mandate. 
Under proposed Advisers Act rule 204(b)-1, private fund advisers would 
be required to file Form PF with the SEC. Private fund advisers that 
also are registered as CPOs or CTAs with the CFTC would file Form PF to 
satisfy certain CFTC systemic risk reporting requirements.\15\ 
Information collected about private funds on Form PF, together with 
information the SEC collects on Form ADV and the information the CFTC 
separately has proposed CPOs file on Form CPO-PQR and CTAs file on Form 
CTA-PR, will provide FSOC and the Commissions with important 
information about the basic operations and strategies of private funds 
and will be important in FSOC obtaining a baseline picture of potential 
systemic risk across both the entire private fund industry and in 
particular kinds of private funds, such as hedge funds.\16\
---------------------------------------------------------------------------

    \15\ For these private fund advisers, filing Form PF through the 
Form PF filing system would be a filing with both the SEC and CFTC. 
Irrespective of their filing a Form PF with the SEC, all private 
fund advisers that are also registered as CPOs and CTAs with the 
CFTC would be required to file Schedule A of proposed Form CPO-PQR 
(for CPOs) or Schedule A of proposed Form CTA-PR (for CTAs). 
Additionally, to the extent that they operate or advise commodity 
pools that do not satisfy the definition of ``private fund'' under 
the Dodd-Frank Act, private fund advisers that are also registered 
as CPOs or CTAs would still be required to file proposed Form CPO-
PQR (for CPOs) and proposed Form CTA-PR (for CTAs), as applicable.
    \16\ The information reported through the various reporting 
forms is designed to be complementary, and not duplicative. 
Information reported on Form ADV would be publicly available, while 
information reported on Form PF and proposed Forms CPO-PQR and CTA-
PR would be confidential to the extent permitted under applicable 
law. Form ADV and Form PF also have different principal purposes. 
Form ADV primarily aims at providing the SEC and investors with 
basic information about advisers (including private fund advisers) 
and the funds they manage for investor protection purposes, although 
Form ADV information also will be available to FSOC. Information on 
Form ADV is designed to provide the SEC with information necessary 
to its administration of the Advisers Act and to efficiently 
allocate its examination resources based on the risks the SEC 
discerns or the identification of common business activities from 
information provided by advisers. See Implementing Release, supra 
note 9. In contrast, the Commissions intend to use Form PF primarily 
as a confidential systemic risk disclosure tool to assist FSOC in 
monitoring and assessing systemic risk, although it also would be 
available to assist the Commissions in their regulatory programs, 
including examinations and investigations and investor protection 
efforts relating to private fund advisers.

---------------------------------------------------------------------------

[[Page 8070]]

    Information the SEC obtains through reporting under section 404 of 
the Dodd-Frank Act is to be shared with FSOC as FSOC considers 
necessary for purposes of assessing the systemic risk posed by private 
funds and generally is to remain confidential.\17\ Our staffs have 
consulted with staff representing FSOC's members in developing this 
proposal. We note that simultaneous with our staffs' FSOC consultations 
relating to this rulemaking, FSOC has been building out its standards 
for assessing systemic risk across different kinds of financial firms 
and has recently proposed standards for determining which nonbank 
financial companies should be designated as subject to FRB 
supervision.\18\
---------------------------------------------------------------------------

    \17\ See section 404 of the Dodd-Frank Act; infra note 39 and 
accompanying text.
    \18\ See, e.g., Authority to Require Supervision and Regulation 
of Certain Nonbank Financial Companies, Financial Stability 
Oversight Council Release (Jan. 18, 2011); Advance Notice of 
Proposed Rulemaking Regarding Authority to Require Supervision and 
Regulation of Certain Nonbank Financial Companies, Financial 
Stability Oversight Council Release (Oct. 1, 2010), 75 FR 61653 
(Oct. 6, 2010) (``FSOC Designation ANPR'').
---------------------------------------------------------------------------

B. International Coordination

    In assessing systemic risk, the Dodd-Frank Act requires that FSOC 
coordinate with foreign financial regulators.\19\ This coordination may 
be particularly important in assessing systemic risk associated with 
hedge funds and other private funds because they often operate globally 
and make significant investments in firms and markets around the 
world.\20\ As others have recognized, ``[g]iven the global nature of 
the markets in which [private fund] managers and funds operate, it is 
imperative that a regulatory framework be applied on an internationally 
consistent basis.'' \21\ International regulatory coordination also has 
been cited as a critical element in facilitating financial regulators' 
formulation of a comprehensive and effective response to future 
financial crises.\22\ Collecting consistent and comparable information 
is of added value in private fund systemic risk reporting because it 
would aid in the assessment of systemic risk on a global basis and thus 
enhance the utility of information sharing among U.S. and foreign 
financial regulators.\23\
---------------------------------------------------------------------------

    \19\ See section 175 of the Dodd-Frank Act.
    \20\ See Damian Alexander, Global Hedge Fund Assets Rebound to 
Just Over $1.8 Trillion, Hedge Fund Intelligence (Apr. 7, 2010) 
(``HFI'').
    \21\ Group of Thirty, Financial Reform: A Framework for 
Financial Stability (Jan. 15, 2009).
    \22\ See U.S. Department of the Treasury, Financial Regulatory 
Reform: A New Foundation (2009), at 8; and Equipping Financial 
Regulators with the Tools Necessary to Monitor Systemic Risk, Senate 
Banking Subcommittee on Security and International Trade and 
Finance, Feb. 12, 2010 (testimony of Daniel K. Tarullo, member of 
the FRB). See also Group of 20 and the International Monetary Fund, 
The Global P Crisis for Fure Regulation of Financial Institutions 
and M arkets and for Liquidity Management (Feb. 4, 2009).
    \23\ The Commissions expect that they may share information 
reported on Form PF with various foreign financial regulators under 
information sharing agreements in which the foreign regulator agrees 
to keep the information confidential.
---------------------------------------------------------------------------

    Recognizing this benefit, our staffs participated in the 
International Organization of Securities Commissions' (``IOSCO'') 
preparation of a report regarding hedge fund oversight.\24\ Among other 
matters, this report recommended that hedge fund advisers provide to 
their national regulators information for the identification, analysis, 
and mitigation of systemic risk. It also recommended that regulators 
cooperate and share information where appropriate in order to 
facilitate efficient and effective oversight of globally active hedge 
funds and to help identify systemic risks, risks to market integrity, 
and other risks arising from the activities or exposures of hedge 
funds.\25\ The types of information that IOSCO recommended regulators 
gather from hedge fund advisers is consistent with and comparable to 
the types of information we propose to collect from hedge funds through 
Form PF, as described in further detail below.\26\
---------------------------------------------------------------------------

    \24\ Technical Committee of the International Organization of 
Securities Commissions, Hedge Funds O (June 2009), available at 
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD293.pdf (``IOSCO 
Report'').
    \25\ Id. at 3.
    \26\ See IOSCO Report, supra note 24, at 14; Press Release, 
International Regulators Publish Systemic Risk Data Requirements for 
Hedge Funds (Feb. 25, 2010), available at https://www.iosco.org/news/pdf/IOSCONEWS179.pdf. The IOSCO Report states that systemic 
risk information that hedge fund advisers should provide to 
regulators should include, for example: (1) Information on their 
prime brokers, custodian, and background information on the persons 
managing the assets; (2) information on the manager's larger funds 
including the net asset value, predominant strategy/regional focus 
and performance; (3) leverage and risk information, including 
concentration risk of the hedge fund adviser's larger funds; (4) 
asset and liability information for the manager's larger funds; (5) 
counterparty risk, including the biggest sources of credit; (6) 
product exposure for all of the manager's assets; and (7) investment 
activity known to represent a significant proportion of such 
activity in important markets or products. Some of this information 
would be collected through the revised Form ADV, as proposed by the 
SEC in the Implementing Release, rather than Form PF.
---------------------------------------------------------------------------

    In addition, our staffs have consulted with the United Kingdom's 
Financial Services Authority (the ``FSA''), which has conducted a 
voluntary semi-annual survey since October 2009 by sampling the largest 
hedge fund groups based in the United Kingdom.\27\ Because many hedge 
fund advisers are located in the United Kingdom and subject to the 
jurisdiction of the FSA, this coordination has been particularly 
important.\28\ UK hedge fund advisers complete this survey on a 
voluntary basis, and the survey collects information regarding all 
funds managed by the particular hedge fund adviser as well as for 
individual funds with at least $500 million in assets. The information 
the survey collects is designed to help the FSA better understand hedge 
funds' use of leverage, ``footprints'' in various asset classes 
(including concentration and liquidity issues), the scale of asset/
liability mismatches, and counterparty credit risks.\29\ In addition, 
for more than five years the FSA has been conducting a semi-annual 
survey of hedge fund counterparties to assist it in assessing trends in 
counterparty credit risk, margin requirements, and other matters.\30\ 
Our staffs' consultation with the FSA as they designed and conducted 
their hedge fund surveys has been very informative, and we have 
incorporated into proposed Form PF many of the types of information 
collected through the FSA surveys.
---------------------------------------------------------------------------

    \27\ The survey canvasses approximately 50 FSA-authorized 
investment managers. See, e.g., Financial Services Authority, 
Assessing Possible Sources of Systemic Risk from Hedge Funds: A 
Report on the Findings of the Hedge Fund as Counterparty Survey and 
the Hedge Fund Survey (Jul. 2010), available at http://www.fsa.gov.uk/pubs/other/hf_report.pdf (``FSA Survey'').
    \28\ According to Hedge Fund Intelligence, U.K.-based advisers 
manage approximately 16% of global hedge fund assets. This 
concentration of hedge fund advisers is second only to the United 
States (managing approximately 76% of global hedge fund assets). See 
HFI, supra note 20.
    \29\ FSA Survey, supra note 27.
    \30\ Id.
---------------------------------------------------------------------------

    SEC staff also has consulted with Hong Kong's Securities and 
Futures Commission regarding hedge fund oversight and data collection 
because Hong Kong is an important jurisdiction for hedge funds in 
Asia.\31\ This consultation also has proven helpful in designing 
proposed Form PF.

[[Page 8071]]

Collectively, hedge fund advisers based in the United States, the 
United Kingdom, and Hong Kong represent over 92 percent of global hedge 
fund assets, and thus a broad consistency among these jurisdictions' 
hedge fund information collections, including our own, will facilitate 
the sharing of consistent and comparable information for systemic risk 
assessment purposes for most global hedge fund assets under 
management.\32\ Finally, in connection with the IOSCO report, IOSCO 
members (including the SEC and CFTC) agreed, on a ``best efforts'' 
basis, to conduct a survey of hedge fund reporting data as of the end 
of September 2010 based on the guidelines established in the IOSCO 
report and the FSA survey. This internationally coordinated survey 
effort has also informed our proposed reporting.
---------------------------------------------------------------------------

    \31\ According to Hedge Fund Intelligence, Hong Kong-based 
advisers manage approximately 0.54% of global hedge fund assets, 
which is the largest concentration of hedge fund advisers in Asia. 
See HFI, supra note 20.
    \32\ See HFI, supra note 20.
---------------------------------------------------------------------------

    International efforts also have focused on potential systemic 
considerations arising out of other types of private funds, such as 
private equity funds. For example, an International Monetary Fund 
(``IMF'') staff paper has focused on ``extending the perimeter'' of 
effective regulatory oversight to capture all financial activities that 
may pose systemic risks, regardless of the type of institution in which 
they occur.\33\ The IMF paper proposed that these financial activities 
be subject to reporting obligations so that regulators may assess 
potential systemic risk and emphasized the need to capture all 
financial activities conducted on a leveraged basis, including 
activities of leveraged private equity vehicles.\34\ Others also have 
recognized a need for monitoring the private equity sector because 
having information on its potentially systemically important 
interactions with the financial system are an important part of 
regulators' obtaining the complete picture of the broader financial 
system that is so vital to effective systemic risk monitoring.\35\ We 
have taken these international efforts relating to systemic risk 
monitoring in private equity funds into account in the proposed 
reporting discussed below.
---------------------------------------------------------------------------

    \33\ See Ana Carvajal et al., The Perimeter of Financial 
Regulation, IMF Staff Position Note SPN/09/07 (Mar. 26, 2009), 
available at http://www.imf.org/external/pubs/ft/spn/2009/spn0907.pdf.
    \34\ Id., at 8.
    \35\ See, e.g., Lorenzo Bini Smaghi, Member of the Executive 
Board of the European Central Bank, Going Forward--Regulation and 
Supervision after the Financial Turmoil, Speech by at the 4th 
International Conference of Financial Regulation and Supervision 
(Jun. 19, 2009), available at http://www.bis.org/review/r090623e.pdf 
(stating ``macro-prudential analysis needs to capture all components 
of financial systems and how they interact. This includes all 
intermediaries, markets and infrastructures underpinning them. In 
this respect, it is important to consider that at present some of 
these components, such as hedge funds, private equity firms or over-
the-counter (OTC) financial markets, are not subject to micro-
prudential supervision. But they need to be part of macro-prudential 
analysis and risk assessments, as they influence the overall 
behaviour of the financial system. To gain a truly ``systemic'' 
perspective on the financial system, no material element should be 
left out.''); Private Equity and Leveraged Finance Markets, Bank for 
International Settlements Committee on the Global Financial System 
Working Paper No. 30 (Jul. 2008), available at http://www.bis.org/publ/cgfs30.pdf (``BIS Private Equity Paper'') (``Going forward, the 
Working Group believes that enhancing transparency and strengthening 
risk management practices [relating to private equity and leveraged 
finance markets] require special attention. * * * The recent market 
turmoil has demonstrated that a number of the risks in the leveraged 
finance market are likely to materialise in combination with other 
financial market risks in stressed market conditions. * * * In the 
public sector, there is a stronger case for developing early warning 
indicators and devoting more research efforts to modelling the 
dynamic relationships between risk factors with a view to 
understanding the interrelationships across markets and their impact 
on the financial sector.''). See also Macroeconomic Assessment Group 
established by the Financial Stability Board and the Basel Committee 
on Banking Supervision, Interim Report: Assessing the Macroeconomic 
Impact of the Transition to Stronger Capital and Liquidity 
Requirements (Aug. 2010), at section 5.2, available at http://www.financialstabilityboard.org/publications/r_100818b.pdf.
---------------------------------------------------------------------------

II. Discussion

    The SEC is proposing a new rule 204(b)-1 under the Advisers Act to 
require that SEC-registered investment advisers report systemic risk 
information to the SEC on Form PF if they advise one or more private 
funds.\36\ For registered CPOs and CTAs that are also registered as 
investment advisers with the SEC and advise a private fund, this report 
also would serve as substitute compliance for a portion of the CFTC's 
proposed systemic risk reporting requirements under proposed Commodity 
Exchange Act rule 4.27(d).\37\ Because commodity pools that meet the 
definition of a private fund are categorized as hedge funds for 
purposes of Form PF as discussed below, CPOs and CTAs filing Form PF 
would need to complete only the sections applicable to hedge fund 
advisers, and the form would be a joint form only with respect to those 
sections.\38\
---------------------------------------------------------------------------

    \36\ See proposed Advisers Act rule 204(b)-1.
    \37\ See proposed Commodity Exchange Act rule 4.27(d), which 
provides that these CPOs and CTAs would need to file other reports 
as required under rule 4.27 with respect to pools that are not 
private funds. For purposes of this proposed rule, it is the CFTC's 
position that any false or misleading statement of a material fact 
or material omission in the jointly proposed sections (sections 1 
and 2) of proposed Form PF that is filed by these CPOs and CTAs 
shall constitute a violation of section 6(c)(2) of the Commodity 
Exchange Act. Proposed Form PF contains an oath consistent with this 
position.
    \38\ Thus, private fund advisers that also are CPOs or CTAs 
would be obligated to complete only section 1 and, if they met the 
applicable threshold, section 2 of Form PF. Accordingly, Form PF is 
a joint form between the SEC and the CFTC only with respect to 
sections 1 and 2 of the form.
---------------------------------------------------------------------------

    Form PF would elicit non-public information about private funds and 
their trading strategies the public disclosure of which, in many cases, 
could adversely affect the funds and their investors. The SEC does not 
intend to make public Form PF information identifiable to any 
particular adviser or private fund, although the SEC may use Form PF 
information in an enforcement action. Amendments to the Advisers Act 
added by the Dodd-Frank Act preclude the SEC from being compelled to 
reveal the information except in very limited circumstances.\39\ 
Similarly, the Dodd-Frank Act exempts the CFTC from being compelled 
under FOIA to disclose to the public any information collected through 
Form PF and requires that the CFTC maintain the confidentiality of that 
information consistent with the level of confidentiality established 
for the SEC in section 404 of the Dodd-Frank Act. The Commissions would 
make information collected through Form PF available to FSOC, as is 
required by the Dodd-Frank Act, subject to the confidentiality 
provisions of the Dodd-Frank Act.\40\
---------------------------------------------------------------------------

    \39\ See section 404 of the Dodd-Frank Act stating that 
``[n]otwithstanding any other provision of law, the Commission [SEC] 
may not be compelled to disclose any report or information contained 
therein required to be filed with the Commission [SEC] under this 
subsection'' except to Congress upon agreement of confidentiality. 
Section 404 also provides that nothing prevents the SEC from 
complying with a request for information from any other federal 
department or agency or any self-regulatory organization requesting 
the report or information for purposes within the scope of its 
jurisdiction or an order of a court of the U.S. in an action brought 
by the U.S. or the SEC. Section 404 of the Dodd-Frank Act also 
states that the SEC shall make available to FSOC copies of all 
reports, documents, records, and information filed with or provided 
to the SEC by an investment adviser under section 404 of the Dodd-
Frank Act as FSOC may consider necessary for the purpose of 
assessing the systemic risk posed by a private fund and that FSOC 
shall maintain the confidentiality of that information consistent 
with the level of confidentiality established for the SEC in section 
404 of the Dodd-Frank Act.
    \40\ See section 404 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    We propose that each private fund adviser report basic information 
about the operations of its private funds on Form PF once each year. We 
propose that a relatively small number of Large Private Fund Advisers 
(described in section II.B below) instead be required to submit this 
basic information each quarter along with additional systemic risk 
related information required by Form PF concerning certain of their

[[Page 8072]]

private funds.\41\ In the sections below, we describe the principal 
reasons we believe that FSOC needs this information in order to monitor 
the systemic risk that may be associated with the operation of private 
funds.
---------------------------------------------------------------------------

    \41\ See proposed Instructions to Form PF. Our proposed 
reporting thus complies with the Dodd-Frank Act directive that, in 
formulating systemic risk reporting and recordkeeping for investment 
advisers to mid-sized private funds, the Commission take into 
account the size, governance, and investment strategy of such funds 
to determine whether they pose systemic risk. See section 408 of the 
Dodd-Frank Act. The Dodd-Frank Act also states that the SEC may 
establish different reporting requirements for different classes of 
fund advisers, based on the type or size of private fund being 
advised. See section 404 of the Dodd-Frank Act.
---------------------------------------------------------------------------

A. Purposes of Form PF

    The Dodd-Frank Act tasks FSOC with monitoring the financial 
services marketplace in order to identify potential threats to the 
financial stability of the United States.\42\ It also requires FSOC to 
collect information from member agencies to support its functions.\43\ 
Section 404 of the Dodd-Frank Act directs the SEC to support this 
effort by collecting from investment advisers to private funds such 
information as the SEC deems necessary and appropriate in the public 
interest and for the protection of investors or for the assessment of 
systemic risk.\44\ FSOC may, if it deems necessary, direct the Office 
of Financial Research (``OFR'') to collect additional information from 
nonbank financial companies.\45\
---------------------------------------------------------------------------

    \42\ See section 112(a)(2)(C) of the Dodd-Frank Act.
    \43\ See section 112(d)(1) of the Dodd-Frank Act.
    \44\ Section 404 of the Dodd-Frank Act requires that reports and 
records that the SEC mandates be maintained for these purposes 
include a description of certain categories of information, such as 
assets under management, use of leverage, counterparty credit risk 
exposure, and trading and investment positions for each private fund 
advised by the adviser.
    \45\ See sections 153 and 154 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Commissions are jointly proposing sections 1 and 2 of Form PF, 
and the SEC is proposing sections 3 and 4 of Form PF, to collect 
information necessary to permit FSOC to monitor private funds in order 
to identify any potential systemic threats arising from their 
activities. The information we currently collect about private funds 
and their activities is very limited and is not designed for the 
purpose of monitoring systemic risk.\46\ We do not currently collect 
information, for example, about hedge funds' primary trading 
counterparties or significant market positions. The SEC also does not 
currently collect data to assess the risk of a run on a private 
liquidity fund, a risk that could transfer into registered money market 
funds and into the broader short term funding markets and those that 
rely on those markets.\47\ While we are proposing to collect 
information on Form PF to assist FSOC in its monitoring obligations 
under the Dodd-Frank Act, the information collected on Form PF would be 
available to assist the Commissions in their regulatory programs, 
including examinations and investigations and investor protection 
efforts relating to private fund advisers.\48\
---------------------------------------------------------------------------

    \46\ We note that the SEC has proposed amendments to Form ADV 
that also would require private funds to report certain basic 
information, such as the fund's prime broker and its gross and net 
asset values. See Implementing Release, supra note 9.
    \47\ See section II.A.3 of this Release for a discussion of 
liquidity funds and their potential risks.
    \48\ See SEC section VI.A of this Release for a discussion of 
how the SEC could use proposed Form PF data for its regulatory 
activities and investor protection efforts.
---------------------------------------------------------------------------

    We have designed Form PF, in consultation with staff representing 
FSOC's members, to provide FSOC with such information so that it may 
carry out its monitoring obligations.\49\ Based upon the information we 
propose to obtain from advisers about the private funds they advise, 
together with market data it collects from other sources, FSOC should 
be able to identify whether any private funds merit further analysis or 
whether OFR should collect additional information. We have not sought 
to design a form that would provide FSOC in all cases with all the 
information it may need to make a determination that a particular 
entity should be designated for supervision by the FRB.\50\ Such a 
form, if feasible, likely would require substantial additional and more 
detailed data addressing a wider range of possible fund profiles, since 
it could not be tailored to a particular adviser, and would impose 
correspondingly greater burdens on private fund advisers. This type of 
information gathering may be better accomplished by OFR through 
targeted information requests to specific private fund advisers 
identified through Form PF, rather than through a general reporting 
form.\51\
---------------------------------------------------------------------------

    \49\ Industry participants (in response to FSOC Designation 
ANPR, supra note 18) acknowledged the potentially important function 
that such reporting may play in allowing FSOC to monitor the private 
fund industry more generally and to assess the extent to which any 
private funds may pose systemic risk more specifically. See, e.g., 
Comment Letter of the Managed Funds Association (Nov. 5, 2010) 
(``the enhanced regulation of hedge fund managers and the markets in 
which they participate following the passage of the Dodd-Frank Act 
ensures that regulators will have a timely and complete picture of 
hedge funds and their activities''), Comment Letter of the Coalition 
of Private Investment Companies (Nov. 5, 2010) (``the registration 
and reporting structure for private funds subject to SEC oversight 
will result in an unprecedented range and depth of data to the 
Council, its constituent members and the newly created Office of 
Financial Research. From this information, in addition to the 
information gathered by the Council, the Council should be able to 
assemble a clear picture of the overall U.S. financial network and 
how private investment funds fit into it, both on an individual and 
overall basis''), Comment Letter of the Private Equity Growth 
Council (Nov. 5, 2010) (``regulators also now have the authority to 
require all private equity firms and private equity funds to provide 
any additional data needed to assess systemic risk'') (``PE Council 
Letter''). Comment letters in response to the FSOC Designation ANPR 
are available at http://www.regulations.gov.
    \50\ See section 113 of the Dodd-Frank Act for a discussion of 
the matters that FSOC must consider when determining whether a U.S. 
nonbank financial company shall be supervised by the FRB and subject 
to prudential standards.
    \51\ Recordkeeping requirements specific to private fund 
advisers for systemic risk assessment purposes will be addressed in 
a future release pursuant to our authority under section 404 of the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    The amount of information a private fund adviser would be required 
to report on the proposed form would vary based on both the size of the 
adviser and the type of funds it advises. This approach reflects our 
initial view after consulting with staff representing FSOC's members 
that a smaller private fund adviser may present less risk to the 
stability of the U.S. financial system and thus merit reporting of less 
information.\52\ It also reflects our understanding that different 
types of private funds could present different implications for 
systemic risk and that reporting requirements should be appropriately 
calibrated.\53\ As discussed in more detail below, Form PF would 
require more detailed information from advisers managing a large amount 
of hedge fund or liquidity fund assets. Less information would be 
required regarding advisers managing a large amount of private equity 
fund assets because, after a review of available literature and 
consultation with staff representing FSOC's members, it appears that 
private equity funds may present less potential risk to U.S. financial 
stability. The principal reasons for Form PF's proposed reporting 
specific to hedge funds, liquidity funds, and private equity funds are 
discussed below.
---------------------------------------------------------------------------

    \52\ We discuss the information we propose requiring smaller 
private fund advisers report in section II.D.1 of this Release.
    \53\ Congress recognized this need as well. See supra note 41.
---------------------------------------------------------------------------

1. Hedge Funds
    We believe that Congress expected hedge fund advisers would be 
required to report information to the Commissions under Title IV of the 
Dodd-Frank Act.\54\ After consulting with

[[Page 8073]]

staff representing FSOC's members, our initial view is that the 
investment activities of hedge funds \55\ may have the potential to 
pose systemic risk for several reasons and, accordingly, that advisers 
to these hedge funds should provide targeted information on Form PF to 
allow FSOC to gain a better picture of the potential systemic risks 
posed by the hedge fund industry. Hedge funds may be important sources, 
and users, of liquidity in certain markets. Hedge funds often use 
financial institutions that may have systemic importance to obtain 
leverage and enter into other types of transactions. Hedge funds employ 
investment strategies that may use leverage, derivatives, complex 
structured products, and short selling in an effort to generate 
returns. Hedge funds also may employ strategies involving high volumes 
of trading and concentrated investments. These strategies, and in 
particular high levels of leverage, can increase the likelihood that 
the fund will experience stress or fail, and amplify the effects on 
financial markets.\56\ While many hedge funds are not highly leveraged, 
certain hedge fund strategies employ substantial amounts of 
leverage.\57\ Significant hedge fund failures (whether caused by their 
investment positions or use of leverage or both) could result in 
material losses at the financial institutions that lend to them if 
collateral securing this lending is inadequate.\58\ These losses could 
have systemic implications if they require these financial institutions 
to scale back their lending efforts or other financing activities 
generally.\59\ The simultaneous failure of several similarly positioned 
hedge funds could create contagion through the financial markets if the 
failing funds liquidate their investment positions in parallel at 
firesale prices, thereby depressing the mark-to-market valuations of 
securities that may be widely held by other financial institutions and 
investors.\60\ Many of these concerns were raised in September 1998 by 
the near collapse of Long Term Capital Management, a highly leveraged 
hedge fund that experienced significant losses stemming from the 1997 
Russian financial crisis.\61\
---------------------------------------------------------------------------

    \54\ See Senate Committee Report, supra note 4, at 38 (``While 
hedge funds are generally not thought to have caused the current 
financial crisis, information regarding their size, strategies, and 
positions could be crucial to regulatory attempts to deal with a 
future crisis. The case of Long-Term Capital Management, a hedge 
fund that was rescued through Federal Reserve intervention in 1998 
because of concerns that it was ``too-interconnected-to-fail,'' 
shows that the activities of even a single hedge fund may have 
systemic consequences.'').
    \55\ See section II.B of this Release for a discussion of the 
definition of ``hedge fund'' in proposed Form PF. To prevent 
duplicative reporting, commodity pools that meet the definition of a 
private fund would be treated as hedge funds for purposes of Form 
PF. CPOs and CTAs that are not also registered as an investment 
adviser with the SEC would be required to file proposed Form CPO-PQR 
(for CPOs) and proposed Form CTA-PR (for CTAs) reporting similar 
information as Form PF requires for private fund advisers that 
advise one or more hedge funds. See Commodity Pool Operators and 
Commodity Trading Advisors: Amendments to Compliance Obligations, 
CFTC Release (Jan. --, 2011). Deeming commodity pools that meet the 
definition of a private fund to be hedge funds for purposes of Form 
PF, therefore, is designed to ensure that the CFTC obtains similar 
reporting regarding commodity pools that satisfy CFTC reporting 
obligations by the CPO or CTA filing proposed Form PF.
    \56\ See President's Working Group on Financial Markets, Hedge 
Funds, Leverage, and the Lessons of Long Term Capital Management 
(Apr. 1999), at 23, available at http://www.ustreas.gov/press/releases/reports/hedgfund.pdf (``PWG LTCM Report'').
    \57\ See FSA Survey, supra note 27, at 5 (showing borrowings as 
a multiple of net equity ranging from 100% in strategies such as 
managed futures to 1400% in the fixed income arbitrage hedge fund 
strategy).
    \58\ See, e.g., Id.; Ben S. Bernanke, Hedge Funds and Systemic 
Risk, Speech at the Federal Reserve Bank of Atlanta's 2006 Financial 
Market's Conference (May 16, 2006), available at http://www.federalreserve.gov/newsevents/speech/bernanke20060516a.htm 
(``Bernanke''); Nicholas Chan et al., Systemic Risk and Hedge Funds, 
National Bureau of Economic Research Working Paper 11200 (Mar. 
2005), available at http://www.nber.org/papers/w11200.pdf; Andrew 
Lo, Regulatory Reform in the Wake of the Financial Crisis of 2007-
2008, 1 J. Fin. Econ. P. 4 (2009); and John Kambhu et al., Hedge 
Funds, Financial Intermediation, and Systemic Risk, FRBNY Econ. P. 
Rev. (Dec. 2007) (``Kambhu'').
    \59\ Kambhu, supra note 58; Financial Stability Forum, Update of 
the FSF Report on Highly Leveraged Institutions (May 19, 2007).
    \60\ See Bernanke, supra note 58; David Stowell, An Introduction 
to Investment Banks, Hedge Funds & Private Equity: The New Paradigm 
259-261 (2010).
    \61\ See PWG LTCM Report, supra note 56.
---------------------------------------------------------------------------

    Accordingly, proposed Form PF would include questions about large 
hedge funds' investments, use of leverage and collateral practices, 
counterparty exposures, and market positions that are designed to 
assist FSOC in monitoring and assessing the extent to which stresses at 
those hedge funds could have systemic implications by spreading to 
prime brokers, credit or trading counterparties, or financial 
markets.\62\ This information also is designed to help FSOC observe how 
hedge funds behave in response to certain stresses in the markets or 
economy. We request comment on this analysis of the potential systemic 
risk posed by hedge funds. Does it adequately identify the ways in 
which hedge funds might generate systemic risk? Are there other ways 
that hedge funds could create systemic risk? Are hedge funds not a 
potential source of systemic risk? Please explain your views and 
discuss their implications for the reporting we propose on Form PF.
---------------------------------------------------------------------------

    \62\ See section II.D.2 of this Release.
---------------------------------------------------------------------------

2. Liquidity Funds
    ``Liquidity funds'' also may be important to FSOC's monitoring and 
assessment of potential systemic risks, and the SEC believes 
information concerning them, therefore, should be included on Form 
PF.\63\ The proposed Form PF would define a liquidity fund as a private 
fund that seeks to generate income by investing in a portfolio of 
short-term obligations in order to maintain a stable net asset value 
per unit or minimize principal volatility for investors.\64\ Liquidity 
funds thus can resemble money market funds, which are registered under 
the Investment Company Act of 1940 and seek to maintain a ``stable'' 
net asset value per share, typically $1, through the use of the 
``amortized cost'' method of valuation.\65\
---------------------------------------------------------------------------

    \63\ Form PF is a joint form between the SEC and the CFTC only 
with respect to sections 1 and 2 of the form. Section 3 of the form, 
which would require more specific reporting regarding liquidity 
funds, would only be required by the SEC.
    \64\ See section II.B of this Release for a discussion of the 
definition of ``liquidity fund'' in proposed Form PF.
    \65\ Under the amortized cost method, securities are valued at 
acquisition cost, with adjustments for amortization of premium or 
accretion of discount, instead of at fair market value. To prevent 
substantial deviations between the amortized cost share price and 
the mark-to-market per-share value of the fund's assets (its 
``shadow NAV''), a money market fund must periodically compare the 
two. If there is a difference of more than one-half of 1 percent 
(typically, $0.005 per share), the fund must re-price its shares, an 
event colloquially known as ``breaking the buck.'' See Money Market 
Fund Reform, Investment Company Act Release No. 28807 (June 30, 
2009), 74 FR 32688 (July 8, 2009), at section III (``MMF Reform 
Proposing Release'').
---------------------------------------------------------------------------

    A report recently released by the President's Working Group on 
Financial Markets (the ``PWG MMF Report'') discussed in detail how 
certain features of registered money market funds, many of which are 
shared by liquidity funds, may make them susceptible to runs and thus 
create the potential for systemic risk.\66\ The PWG MMF Report 
describes how some investors may consider liquidity funds to function 
as substitutes for registered money market funds and the potential for 
systemic risk that

[[Page 8074]]

results.\67\ During the financial crisis, several sponsors of 
``enhanced cash funds,'' a type of liquidity fund, committed capital to 
those funds to prevent investors from realizing losses in the 
funds.\68\ The fact that sponsors of certain liquidity funds felt the 
need to support the stable value of those funds suggests that they may 
be susceptible to runs like registered money market funds.
---------------------------------------------------------------------------

    \66\ Report of the President's Working Group on Financial 
Markets: Money Market Fund Reform Options (Oct. 2010), available at 
http://treas.gov/press/releases/docs/10.21%20PWG%20Report%20Final.pdf. The PWG MMF Report states that the 
work of the President's Working Group on Financial Reform relating 
to money market funds is now being taken over by FSOC. The SEC has 
discussed previously registered money market funds' susceptibility 
to runs. See MMF Reform Proposing Release, supra note 65, at section 
III.
    \67\ PWG MMF Report, supra note 66, at section 3.h (``These 
vehicles typically invest in the same types of short-term 
instruments that MMFs hold and share many of the features that make 
MMFs vulnerable to runs, so growth of unregulated MMF substitutes 
would likely increase systemic risks. However, such funds need not 
comply with rule 2a-7 or other [Investment Company Act] protections 
and in general are subject to little or no regulatory oversight. In 
addition, the risks posed by MMF substitutes are difficult to 
monitor, since they provide far less market transparency than 
MMFs.'').
    \68\ See, e.g., Sree Vidya Bhaktavatsalam, BlackRock Earnings 
Beat Estimates on Hedge-Fund Fees, Bloomberg (Jan. 17, 2008) 
(``During the fourth quarter, BlackRock spent $18 million to support 
the net asset value of two enhanced cash funds whose values fell as 
the credit markets got squeezed''); Sree Vidya Bhaktavatsalam & 
Christopher Condon, Federated Investors Bails Out Cash Fund After 
Losses, Bloomberg (Nov. 20, 2007).
---------------------------------------------------------------------------

    Registered money market funds are subject to extensive regulation 
under Investment Company Act rule 2a-7, which imposes credit-quality, 
maturity, and diversification requirements on money market fund 
portfolios designed to ensure that the funds' investing remains 
consistent with the objective of maintaining a stable net asset 
value.\69\ While liquidity funds are not required to comply with rule 
2a-7, we understand that many liquidity funds can suspend redemptions 
or impose gates on shareholder redemptions upon indications of stress 
at the fund. As a result, the risk of runs at liquidity funds may be 
mitigated. The information that the SEC is proposing to require 
advisers to liquidity funds report is designed to allow FSOC to assess 
liquidity funds' susceptibility to runs and ability to otherwise pose 
systemic risk.
---------------------------------------------------------------------------

    \69\ See 17 CFR 270.2a-7.
---------------------------------------------------------------------------

    The SEC requests comment on this analysis of the potential systemic 
risk posed by liquidity funds. Does it adequately identify the ways in 
which liquidity funds might generate systemic risk? Are there other 
ways that liquidity funds could create systemic risk? Do liquidity 
funds lack any potential to create systemic risk? Please explain your 
views and discuss their implications for the reporting proposed on Form 
PF.
3. Private Equity Funds
    It is the SEC's initial view, after consultation with staff 
representing FSOC's members, that the activities of private equity 
funds, certain of their portfolio companies, or creditors involved in 
financing private equity transactions also may be important to the 
assessment of systemic risk and, therefore, that large advisers to 
these funds should provide targeted information on Form PF to allow 
FSOC to conduct basic systemic risk monitoring.\70\
---------------------------------------------------------------------------

    \70\ See section II.B of this Release for a discussion of the 
definition of ``private equity fund'' in Form PF. Form PF is a joint 
form between the SEC and the CFTC only with respect to sections 1 
and 2 of the form. Section 4 of the form, which would require more 
specific reporting regarding private equity funds, would only be 
required by the SEC.
---------------------------------------------------------------------------

    One aspect of the private equity business model that some have 
identified as potentially having systemic implications is its method of 
financing buyouts of companies. Leveraged private equity transactions 
often rely on banks to provide bridge financing until the permanent 
debt financing for the transaction is completed, whether through a 
syndicated bank loan or issuance of high yield bonds by the portfolio 
company or both.\71\ When market conditions suddenly turn, these 
institutions can be left holding this potentially risky bridge 
financing (or committed to provide the final bank financing, but no 
longer able to syndicate or securitize it and thus forced to hold it) 
at precisely the time when credit market conditions, and therefore the 
institutions' own general exposure to private equity transactions and 
other committed financings, have worsened.\72\ For example, prior to 
the recent financial crisis, a trend in private equity transactions was 
for private equity firms to enter into buyout transactions with seller-
favorable financing conditions and terms that placed much of the risk 
of market deterioration after the transaction agreement was signed on 
the financing institutions and the private equity adviser.\73\
---------------------------------------------------------------------------

    \71\ See Steven M. Davidoff, The Failure of Private Equity, 82 
S. Cal. L. Rev. 481, 494 (2009) (``Davidoff'').
    \72\ See Senior Supervisors Group, Observations on Risk 
Management Practices during the Recent Market Turbulence, at 2 (Mar. 
6, 2008), available at http://www.occ.gov/publications/publications-by-type/other-publications/pub-other-risk-mgt-practices-2008.pdf 
(``Firms likewise found that they could neither syndicate to 
external investors their leveraged loan commitments to corporate 
borrowers nor cancel their commitments to fund those loans despite 
material and adverse changes in the availability of funding from 
other investors in the market''); BIS Private Equity Paper, supra 
note 35, at 1-2 (``Conditions in the leveraged loan market 
deteriorated in the second half of 2007, and demand for leveraged 
finance declined sharply. An initial temporary adverse investor 
reaction to loose lending terms and low credit spreads prevailing in 
early 2007 became more protracted over the course of the second half 
of the year as the turbulence in financial markets deepened and 
contraction in demand for leveraged loans became more severe. Global 
primary market leveraged loan volumes shrank by more than 50% in the 
second half of 2007. The contraction in demand for leveraged loans 
revealed substantial exposure of arranger banks to warehouse risk. 
Undistributed loans will contribute to increased funding costs and 
capital requirements for banks in 2008, on top of other offbalance 
sheet products that they have been forced to bring on-balance sheet. 
Moreover, with leveraged loan indices trading close to 90 cents on a 
dollar in March 2008, realisation of warehouse risks has resulted in 
significant mark to market losses to banks''); Bank of England, 
Financial Stability Report, at 19 (Oct. 2007), available at http://www.bankofengland.co.uk/publications/fsr/2007/fsrfull0710.pdf 
(``Bank of England'') (``The near closure of primary issuance 
markets for collateralised loan obligations, and an increase in risk 
aversion among investors, left banks unable to distribute leveraged 
loans that they had originated earlier in the year. This exacerbated 
a problem banks already faced, as debt used to finance a number of 
high-profile private-equity sponsored leveraged buyouts (LBOs) had 
remained on their balance sheets.'').
    \73\ See Davidoff, supra note 71, at 495-496 (noting the trend 
in private equity transaction agreements signed prior to the 
financial crisis to have no financing condition and to have limited 
``market outs'' and ``lender outs'' in the debt commitment letters 
and further noting that ``by agreeing to a more certain debt 
commitment letter and providing bridge financing, the banks now took 
on the risk of market deterioration between the time of signing and 
closing.''). Bank regulators and industry observers also noted the 
trend in private equity financing prior to the financial crisis for 
banks to enter into ``covenant lite'' loans, which did not require 
borrowers to meet certain performance metrics for cash flow or 
profits. See The Economics of Private Equity Investments: Symposium 
Summary, FRBSF Economic Letter (Feb. 29, 2008), available at http://www.frbsf.org/publications/economics/letter/2008/el2008-08.html 
(noting growth in the first half of 2007 in such ``covenant lite'' 
loans); Financial Stability Forum, Report of the Financial Stability 
Forum on Enhancing Market and Institutional Resilience, at 7 (Apr. 
7, 2008), available at http://www.financialstabilityboard.org/publications/r_0804.pdf (``Another segment that saw rapid growth in 
volume accompanied by a decline in standards was the corporate 
leveraged loan market, where lenders agreed to weakened loan 
covenants to obtain the business of private equity funds.''); Bank 
of England, supra note 73, at 27 (``Market intelligence suggested 
that private equity sponsors had considerable market power to impose 
aggressive capital structures, tight spreads and weak covenants 
because investor demand was so strong. But in August, the flow of 
new LBOs came to a virtual standstill and the debt of a sequence of 
high-profile companies could not be sold [by banks].'').
---------------------------------------------------------------------------

    In addition, some industry observers have noted that the leveraged 
buyout investment model of imposing significant amounts of leverage on 
their portfolio companies in an effort to meet investment return 
objectives subjects those portfolio companies to greater risk in the 
event of economic stress.\74\ If private equity funds conduct a

[[Page 8075]]

leveraged buyout of an entity that could be systemically important, 
information about that investment could be important in FSOC monitoring 
and assessing potential systemic risk.\75\
---------------------------------------------------------------------------

    \74\ See, e.g., Paying the Price, The Economist (Jul. 31, 2010) 
(``Pension funds could decide to make a geared bet on equities by 
borrowing money and investing in the S&P 500 index. But they would 
understandably regard such a strategy as highly risky. Giving money 
to private-equity managers, who then use debt to acquire quoted 
companies, is viewed in an entirely different light but amounts to 
the same gamble''). See also BIS Private Equity Paper, supra note 
35, at 24-25.
    \75\ For example, some noted the role of private equity 
investments in companies that the government ultimately bailed out 
during the financial crisis. See, e.g., Casey Ross, Cerberus' 
Success Hurt by a Pair of Gambles, The Boston Globe (Mar. 25, 2010) 
(discussing private equity investments in GMAC and Chrysler Corp., 
both of which received government bailouts); and Louise Story, For 
Private Equity, A Very Public Disaster, N.Y. Times (Aug. 8, 2009) 
(same).
---------------------------------------------------------------------------

    For these reasons, the SEC believes certain information on the 
activities of private equity funds and their portfolio companies is 
relevant for purposes of monitoring potential systemic risk.\76\ In 
addition, based on the SEC's consultations with staff representing 
FSOC's members, private equity transaction financings, and their 
interconnected impact on the lending institutions, could be a useful 
area for FSOC to monitor in fulfilling its duty to gain a comprehensive 
picture of the financial services marketplace in order to identify 
potential threats to the stability of the U.S. financial system.
---------------------------------------------------------------------------

    \76\ See section II.D.4 of this Release for a discussion of the 
information we propose requiring certain private equity fund 
advisers report on Form PF.
---------------------------------------------------------------------------

    The SEC requests comment on this analysis of the potential systemic 
risk posed by the activities of private equity funds. Does it identify 
the ways in which private equity fund activities might generate 
systemic risk? Are there other ways that private equity funds or their 
activities could create systemic risk? Is the preliminary view that 
private equity fund activities may have less potential to create 
systemic risk than hedge funds and liquidity funds correct? Many 
advisers to private equity funds have noted that certain features of 
the private equity business model, such as its reliance on long-term 
capital commitments from investors, lack of substantial debt at the 
private equity fund level, and investment primarily in the equity of a 
diverse range of private companies, mitigate its potential to pose 
systemic risk.\77\ Do private equity funds not have any potential to 
create systemic risk? Is the monitoring of private equity fund 
activities unnecessary to assess systemic risk generally? Please 
explain your views and discuss their implications for the reporting 
proposed on Form PF.
---------------------------------------------------------------------------

    \77\ See, e.g., PE Council Letter, supra note 49; Testimony of 
Mark Tresnowksi, General Counsel, Madison Dearborn Partners, before 
the Senate Banking Subcommittee on Securities, Insurance and 
Investment, July 15, 2009.
---------------------------------------------------------------------------

B. Who Must File Form PF

    We propose that any investment adviser registered or required to 
register with the SEC that advises one or more private funds must file 
a Form PF with the SEC.\78\ A CPO or CTA that also is a registered 
investment adviser that advises one or more private funds would be 
required to file Form PF with respect to any advised commodity pool 
that is a ``private fund.'' By filing Form PF with respect to these 
private funds, a CPO will be deemed to have satisfied certain of its 
filing requirements for these funds.\79\ Under these rules, most 
private fund advisers would be required to complete only section 1 of 
Form PF, providing certain basic information regarding any hedge funds 
they advise in addition to information about their private fund assets 
under management and more generally about their funds' performance and 
use of leverage. The information collected under section 1 of Form PF 
is described in further detail in section II.D.1 of this Release. 
Certain larger private fund advisers would be required to complete 
additional sections of Form PF, which require more detailed 
information.
---------------------------------------------------------------------------

    \78\ Proposed Advisers Act rule 204(b)-1.
    \79\ Proposed CEA rule 4.27(d). A CPO registered with the CFTC 
that is also registered as a private fund adviser with the SEC will 
be deemed to have satisfied its filing requirements for Schedules B 
and C of proposed Form CPO-PQR by completing and filing the 
applicable portions of Form PF for each of its commodity pools that 
satisfy the definition of ``private fund'' in the Dodd-Frank Act.
---------------------------------------------------------------------------

    Three types of ``Large Private Fund Advisers'' would be required to 
complete certain additional sections of Form PF: \80\
---------------------------------------------------------------------------

    \80\ See proposed Instruction 3 to Form PF.
---------------------------------------------------------------------------

     Advisers managing hedge funds that collectively have at 
least $1 billion in assets as of the close of business on any day 
during the reporting period for the required report;
     Advisers managing a liquidity fund and having combined 
liquidity fund and registered money market fund assets of at least $1 
billion as of the close of business on any day during the reporting 
period for the required report; and
     Advisers managing private equity funds that collectively 
have at least $1 billion in assets as of the close of business on the 
last day of the quarterly reporting period for the required report.
1. Types of Funds
    Proposed Form PF would define ``hedge fund'' as any private fund 
that (1) has a performance fee or allocation calculated by taking into 
account unrealized gains; (2) may borrow an amount in excess of one-
half of its net asset value (including any committed capital) or may 
have gross notional exposure in excess of twice its net asset value 
(including any committed capital); or (3) may sell securities or other 
assets short.\81\ As noted above, ``liquidity fund'' would be defined 
as any private fund that seeks to generate income by investing in a 
portfolio of short term obligations in order to maintain a stable net 
asset value per unit or minimize principal volatility for 
investors.\82\ ``Private equity fund'' would be defined as any private 
fund that is not a hedge fund, liquidity fund, real estate fund, 
securitized asset fund or venture capital fund and does not provide 
investors with redemption rights in the ordinary course.\83\
---------------------------------------------------------------------------

    \81\ See proposed Glossary of Terms to Form PF. This definition 
also is the same as the SEC has proposed in amendments to Form ADV. 
See Implementing Release, supra note 9. For purposes of the 
definition, the fund should not net long and short positions in 
calculating its borrowings but should include any borrowings or 
notional exposure of another person that are guaranteed by the fund 
or that the fund may otherwise be obligated to satisfy. In addition, 
a commodity pool that meets the definition of a private fund is 
treated as a hedge fund for purposes of Form PF.
    \82\ See proposed Glossary of Terms to Form PF.
    \83\ See proposed Glossary of Terms to Form PF. Proposed Form PF 
would define ``real estate fund'' as any private fund that is not a 
hedge fund, that does not provide investors with redemption rights 
in the ordinary course and that invests primarily in real estate and 
real estate-related assets. Proposed Form PF would define 
``securitized asset fund'' as any private fund that is not a hedge 
fund and that issues asset backed securities and whose investors are 
primarily debt-holders. These definitions are designed to encompass 
entities that we believe are typically considered real estate or 
securitized asset funds, respectively, and are primarily intended to 
exclude these types of funds from our definition of private equity 
fund to improve the quality of data reported on Form PF relating to 
private equity funds. Proposed Form PF would define ``venture 
capital fund'' as any private fund meeting the definition of venture 
capital fund in rule 203(l)-1 of the Advisers Act for consistency. 
See proposed Glossary of Terms to Form PF. See also Private Fund 
Exemption Release, supra note 9, for a discussion of proposed 
Advisers Act rule 203(l)-1.
---------------------------------------------------------------------------

    Our proposed definition of hedge fund would cover any private fund 
that has any one of three common characteristics of a hedge fund: A 
performance fee using market value (instead of only realized gains), 
high leverage or short selling. We are not aware of any standard 
definition of a hedge fund,\84\ although we note that our proposed 
definition is broadly based on those used in the FSA survey and in the 
IOSCO report described in section I.B above and thus generally would 
promote international consistency in

[[Page 8076]]

hedge fund reporting.\85\ Moreover, we believe that any fund meeting 
this definition is an appropriate subject for this higher level of 
reporting even if the fund would not otherwise be considered a hedge 
fund.
---------------------------------------------------------------------------

    \84\ See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (`` 
`Hedge funds' are notoriously difficult to define. The term appears 
nowhere in the federal securities laws, and even industry 
participants do not agree upon a single definition.'')
    \85\ The FSA survey is voluntary and does not proscriptively 
define a hedge fund, but states that if a fund generally satisfies a 
number of the following criteria, it should be deemed to fall within 
the scope of the FSA hedge fund survey: (1) Employs investment 
management techniques that can include the use of short selling, 
derivatives, and leverage; (2) takes in external investor money; (3) 
are not UCITS funds; (4) pursue absolute returns; (5) charge 
performance-based fees; (6) have broader mandates than traditional 
funds which give managers more flexibility to shift strategy; (7) 
have higher trading volumes/fund turnover; and (8) frequently set a 
high minimum investment limit. The IOSCO Report generally considered 
as a hedge fund all investment schemes displaying a combination of 
some of the following characteristics: (1) Borrowing and leverage 
restrictions are not applied; (2) significant performance fees are 
paid to the manager in addition to an annual management fee; (3) 
investors are typically permitted to redeem their interests 
periodically, e.g., quarterly, semi-annually or annually; (4) often 
significant `own' funds are invested by the manager; (5) derivatives 
are used, often for speculative purposes, and there is an ability to 
short sell securities; and (6) more diverse risks or complex 
underlying products are involved. See IOSCO Report, supra note 24, 
at 4-5.
---------------------------------------------------------------------------

    The Commissions request comment on the hedge fund definition 
proposed in Form PF.\86\ Does this proposed definition capture the 
appropriate features of funds that should be subject to more detailed 
reporting as ``hedge funds''? Many private funds sell short. Is the 
bright line of classifying any private fund that engages in short 
selling as a hedge fund appropriate? Is the proposed leverage threshold 
for hedge funds set at the appropriate level? One alternative approach 
we could take is to not define a hedge fund in Form PF and simply 
require that all advisers managing in excess of $1 billion in private 
fund assets (regardless of strategy) complete section 2 of Form PF. 
Would this be a more effective approach? For purposes of Form PF, a 
commodity pool satisfying the definition of a ``private fund'' is 
categorized as a hedge fund. Is this treatment appropriate?
---------------------------------------------------------------------------

    \86\ The SEC previously defined private fund for purposes of 
registration of advisers to hedge funds by focusing on the structure 
of the fund to differentiate it from other pooled investment 
vehicles, while the definition of hedge fund we propose today for 
purposes of Form PF reporting focuses on the strategy of the fund in 
order to monitor trading strategies and behaviors which could 
contribute to systemic risk. See Registration under the Advisers Act 
of Certain Hedge Fund Advisers, Investment Advisers Act Release No. 
2333 (Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) (rulemaking 
vacated, Goldstein, 451 F.3d at 884).
---------------------------------------------------------------------------

    The proposed definition of liquidity fund is designed to capture 
all potential substitutes for money market funds because we believe 
these funds may be susceptible to runs and otherwise pose systemic risk 
that FSOC will want to monitor. The SEC recognizes that its proposed 
definition of liquidity fund potentially could capture some short-term 
bond funds. Are there ways that the SEC could define a liquidity fund 
to capture all potential substitutes for money market funds, but not 
short-term bond funds? The SEC requests comment on the liquidity fund 
definition proposed in Form PF.
    Our proposed definition of a private equity fund is intended to 
distinguish private equity funds from other private funds based upon 
the lack of redemption rights and their not being engaged in certain 
investment strategies (such as securitization, real estate or venture 
capital), while these funds would typically have performance fees based 
on realized gains. Has the SEC appropriately distinguished private 
equity funds from other types of private funds in its proposed 
definition? Should others be excluded? The SEC requests comment on the 
private equity fund definition proposed in Form PF.
2. Large Private Fund Adviser Thresholds
    As noted above, we are proposing $1 billion in hedge fund assets 
under management as the threshold for large hedge fund adviser 
reporting, $1 billion in combined liquidity fund and registered money 
market fund assets under management as the threshold for large 
liquidity fund adviser reporting, and $1 billion in private equity fund 
assets under management as the threshold for large private equity fund 
adviser reporting. Advisers would be required to measure whether these 
thresholds have been crossed daily for hedge funds and liquidity funds 
and quarterly for private equity funds based on our belief that, as a 
matter of ordinary business practice, advisers are aware of hedge fund 
and liquidity fund assets under management on a daily basis, but are 
likely to be aware of private equity fund assets under management only 
on a quarterly basis. We designed these thresholds so that the group of 
Large Private Fund Advisers that would be included based on the 
proposed thresholds is relatively small in number but represents the 
large majority of their respective industries based on assets under 
management. For example, we understand that the approximately 200 U.S.-
based advisers managing at least $1 billion in hedge fund assets 
represent over 80 percent of the U.S. hedge fund industry based on 
assets under management.\87\ Similarly, SEC staff estimates that the 
approximately 250 U.S.-based advisers managing over $1 billion in 
private equity fund assets represent approximately 85 percent of the 
U.S. private equity fund industry based on committed capital.\88\
---------------------------------------------------------------------------

    \87\ See HFI, supra note 20.
    \88\ Preqin. The Preqin data relating to private equity fund 
committed capital is available in File No. S7-05-11.
---------------------------------------------------------------------------

    The SEC is proposing that private fund advisers combine liquidity 
fund and registered money market fund assets for purposes of 
determining whether the adviser meets the threshold for more extensive 
reporting regarding its liquidity funds because it understands that an 
adviser's liquidity funds and registered money market funds often 
pursue similar strategies and invest in the same securities and thus 
are subject to many of the same risks. Historically, most advisers of 
enhanced cash funds or other unregistered money market funds also 
advised a substantial amount of registered money market fund assets, 
and so the SEC's criteria for liquidity fund reporting is expected to 
encompass most significant managers of liquidity funds, which it 
estimates number around 80 advisers.\89\
---------------------------------------------------------------------------

    \89\ See, e.g., iMoneyNet, Enhanced Cash Report (3rd quarter 
2009). The estimate of the number of large liquidity fund advisers 
is based on the number of advisers with at least $1 billion in 
registered money market fund assets under management.
---------------------------------------------------------------------------

    We believe that requiring basic information from all advisers about 
all private funds but more extensive and detailed information only from 
advisers with these amounts of assets under management in hedge funds, 
private equity funds, and liquidity funds would allow FSOC to 
effectively conduct basic monitoring for potential systemic risk in 
these private fund industries and to identify areas where OFR may want 
to obtain additional information. In addition, requiring that only 
these Large Private Fund Advisers complete additional reporting 
requirements under Form PF would provide systemic risk information for 
most private fund assets while minimizing burdens on smaller private 
fund advisers that are less likely to pose systemic risk concerns. The 
proposed approach thus incorporates Congress' directive in section 408 
of the Dodd-Frank Act to take into account the size, governance, and 
investment strategy of advisers to mid-sized private funds in 
determining whether they pose systemic risk and formulating systemic 
risk reporting and recordkeeping requirements for private funds.\90\
---------------------------------------------------------------------------

    \90\ We note that the SEC has proposed to collect information 
regarding the governance of private fund advisers through Form ADV. 
See Implementing Release, supra note 9.

---------------------------------------------------------------------------

[[Page 8077]]

    We request comment on the proposed thresholds. Are there more 
appropriate dividing lines as to when a private fund adviser should be 
required to report more information? Should any of the assets under 
management thresholds be lower or higher? Are the daily (for hedge fund 
and liquidity fund managers) and quarterly (for private equity fund 
managers) measurement periods for the assets under management 
thresholds set appropriately? Should we, as proposed, base the 
threshold on the amount of assets under management? If not, what should 
we base it on?
    We request comment on our proposed approach of only requiring these 
Large Private Fund Advisers to report additional information on Form 
PF. Will collecting the information required by sections 2, 3, and 4 of 
Form PF only from advisers managing in excess of these asset thresholds 
provide adequate information about potential systemic risk in these 
industries? Should we instead require that all private fund advisers 
registered with the SEC complete all of the information on Form PF 
appropriate to the type of private funds they advise regardless of fund 
size or assets under management? Are there advisers to other types of 
private funds that should be required to report more information on 
Form PF? For example, should advisers to other types of private fund 
report more information if they manage in excess of a certain threshold 
of that type of private fund assets?
3. Aggregation of Assets Under Management
    For purposes of determining whether an adviser is a Large Private 
Fund Adviser for purposes of Form PF, each adviser would have to 
aggregate together:
     Assets of managed accounts advised by the firm that pursue 
substantially the same investment objective and strategy and invest in 
substantially the same positions as the private fund (``parallel 
managed accounts''); \91\ and
---------------------------------------------------------------------------

    \91\ See proposed Instructions 3, 5, and 6 to Form PF; and 
proposed Glossary of Terms to Form PF. See also definitions of 
``hedge fund assets under management,'' ``liquidity fund assets 
under management,'' and ``private equity fund assets under 
management'' in the proposed Glossary of Terms to Form PF.
---------------------------------------------------------------------------

     Assets of that type of private fund advised by any of the 
adviser's ``related persons.'' \92\

    \92\ See proposed Instructions 3 and 5 to Form PF. ``Related 
person'' is defined generally as: (1) All of the adviser's officers, 
partners, or directors (or any person performing similar functions); 
(2) all persons directly or indirectly controlling, controlled by, 
or under common control with the adviser; and (3) all of the 
adviser's employees (other than employees performing only clerical, 
administrative, support or similar functions). See proposed Glossary 
of Terms to Form PF and Glossary of Terms to Form ADV. The adviser 
would be permitted, but not required, to file one consolidated Form 
PF for itself and its related persons. See section II.B.4 of this 
Release below.
---------------------------------------------------------------------------

These proposed aggregation requirements are designed to prevent an 
adviser from avoiding the proposed Large Private Fund Adviser reporting 
requirements by re-structuring the manner of providing private fund 
advice internally within the private fund manager group. The adviser 
also would be required to exclude any assets in any account that are 
solely invested in other funds (i.e., internal or external fund of 
funds) in order to avoid duplicative reporting.\93\ We request comment 
on these proposed aggregation requirements. Would these proposed 
aggregation rules appropriately meet our goal of preventing improper 
avoidance of the reporting requirements while giving a complete picture 
of private fund assets managed by a particular private fund adviser 
group? Would aggregating in a different manner be more effective at 
meeting our goal? Should funds that invest most (e.g., 95 percent), but 
not all, of their assets in other funds be excluded from Form PF 
reporting? Would excluding such funds still provide FSOC with a 
complete enough picture of private fund activities to have an adequate 
baseline for systemic risk monitoring purposes?
---------------------------------------------------------------------------

    \93\ See proposed Instruction 7 to Form PF.
---------------------------------------------------------------------------

    If the adviser's principal office and place of business is outside 
the United States, the adviser could exclude any private fund that 
during the last fiscal year was neither a United States person nor 
offered to, or beneficially owned by, any United States person.\94\ 
This aspect of the proposed form is designed to allow an adviser to 
report with respect to only those private funds that are more likely to 
implicate U.S. regulatory interests. We request comment on this aspect 
of the proposed form. Should we require different reporting relating to 
foreign advisers or foreign private funds?
---------------------------------------------------------------------------

    \94\ See proposed Instruction 1 to Form PF. ``United States 
person'' would have the meaning provided in proposed rule 203(m)-1 
of the Advisers Act, and ``principal office and place of business'' 
would have the same meaning as in Form ADV. See Private Fund 
Exemption Release, supra note 9.
---------------------------------------------------------------------------

4. Reporting for Affiliated and Subadvised Funds
    To provide private fund advisers with reporting flexibility and 
convenience, the adviser could, but is not required to, report the 
private fund assets that it manages and the private fund assets that 
its related persons manage on a single Form PF.\95\ This would allow 
affiliated entities that share reporting and risk management systems to 
report jointly while also permitting affiliated entities that operate 
separately to report separately. With respect to sub-advised funds, to 
prevent duplicative reporting, only one adviser would report 
information on Form PF with respect to that fund. For reporting 
efficiency and to prevent duplicative reporting, we are proposing that 
if an adviser completes information on Schedule D of Form ADV with 
respect to any private fund, the same adviser would be responsible for 
reporting on Form PF with respect to that fund.\96\ We request comment 
on this approach. Should we not allow advisers to file a consolidated 
form with its related persons? Are there other persons related to a 
private fund adviser that should also be able to report on Form PF on a 
consolidated basis? For example, should we adjust Form PF to permit 
consolidated reporting with related persons that are exempt reporting 
advisers in the event an adviser chooses to voluntarily report exempt 
reporting adviser information? Should we allow a different arrangement 
on reporting of sub-advised funds? If so, what would those arrangements 
be?
---------------------------------------------------------------------------

    \95\ See proposed Instruction 2 to Form PF. See supra note 92 
for the definition of ``related person.''
    \96\ See proposed Instruction 4 to Form PF.
---------------------------------------------------------------------------

5. Exempt Reporting Advisers and Other Advisers Not Registered With the 
SEC
    We are proposing that only private fund advisers registered with 
the SEC (including those that are also registered with the CFTC as CPOs 
or CTAs) file Form PF.\97\ The Dodd-Frank Act created exemptions from 
SEC registration under the Advisers Act for advisers solely to venture 
capital funds or for advisers to private funds that in the aggregate 
have less than $150 million in assets under management in the United 
States (``exempt reporting advisers'').\98\ We are not proposing that 
exempt reporting advisers be required to file Form PF.\99\ We believe 
that Congress' determination to exempt these advisers from SEC 
registration indicates Congress' belief that they are sufficiently 
unlikely to pose systemic risk that regular reporting of detailed 
information may not be necessary.\100\ Based on consultation

[[Page 8078]]

with staff representing FSOC's members and on the basic information 
that the SEC has proposed requiring exempt reporting advisers report to 
the SEC on Form ADV, the SEC is not proposing to extend Form PF 
reporting to these advisers.
---------------------------------------------------------------------------

    \97\ See proposed Advisers Act rule 204(b)-1.
    \98\ See Private Fund Exemption Release, supra note 9; 
Implementing Release, supra note 9.
    \99\ To the extent an exempt reporting adviser is registered 
with the CFTC as a CPO or CTA, that adviser would be obligated to 
file either proposed Form CPO-PQR or CTA-PR, respectively.
    \100\ See Senate Committee Report, supra note 4, at 74 (``The 
Committee believes that venture capital funds * * * do not present 
the same risks as the large private funds whose advisers are 
required to register with the SEC under this title. Their activities 
are not interconnected with the global financial system, and they 
generally rely on equity funding, so that losses that may occur do 
not ripple throughout world markets but are borne by fund investors 
alone.''). See also Private Fund Exemption Release, supra note 9.
---------------------------------------------------------------------------

    Our proposed rules, however, would require some advisers managing 
less than $150 million in private fund assets to report limited 
information on Form PF. While Congress exempted from registration with 
the SEC advisers solely to private funds that in the aggregate have 
less than $150 million in assets under management, it provided no such 
exemption for advisers with less than $150 million in private fund 
assets under management that also, for example, advise individual 
clients with over $100 million in assets under management. Because this 
latter group of advisers is registered with the SEC and thus is subject 
to the full range of investor protection efforts that accompany 
registration, and because of the limited burden of the basic reporting, 
we believe it is appropriate to require these advisers to complete and 
file section 1 of Form PF. We request comment on this approach. Should 
we require that exempt reporting advisers file Form PF? \101\ Why or 
why not? If so, which portions of Form PF should we require that exempt 
reporting advisers complete?
---------------------------------------------------------------------------

    \101\ Section 404 of the Dodd-Frank Act states that the SEC 
``shall issue rules requiring each investment adviser to a private 
fund to file reports containing such information as the [SEC] deems 
necessary and appropriate in the public interest and for the 
protection of investors or for the assessment of systemic risk,'' 
(emphasis added).
---------------------------------------------------------------------------

C. Frequency of Reporting

    The Commissions propose to require that all private fund advisers 
other than the Large Private Fund Advisers discussed above complete and 
file a Form PF on an annual basis. A newly registering adviser's 
initial Form PF filing would be submitted within 15 days of the end of 
its next occurring calendar quarter after registering with the SEC so 
that FSOC can begin including this data in its analysis as soon as 
possible.\102\ Annual updates would be due no later than the last day 
on which the adviser may timely file its annual updating amendment to 
Form ADV (currently, 90 days after the end of the adviser's fiscal 
year).\103\ This frequency of reporting would allow the Commissions and 
FSOC to periodically monitor certain key information relevant to 
assessing systemic risk posed by these private funds on an aggregate 
basis. It also would allow these advisers to file amendments at the 
same time as they file their Form ADV annual updating amendment, which 
may make certain aspects of the reporting more efficient, such as 
reporting assets under management. Finally, this timing will facilitate 
FSOC's compilation and analysis of Form PF and Form ADV data for these 
filers since both sets of data will be reported as of the same date.
---------------------------------------------------------------------------

    \102\ See proposed rule 204(b)-1(a).
    \103\ See proposed Advisers Act rule 204(b)-1(e).
---------------------------------------------------------------------------

    Large Private Fund Advisers would be required to complete and file 
a Form PF no later than 15 days after the end of each calendar 
quarter.\104\ Our preliminary view is that, unlike for smaller private 
fund advisers, quarterly reporting for Large Private Fund Advisers is 
necessary in order to provide FSOC with timely data to identify 
emerging trends in systemic risk. We understand that hedge fund 
advisers already collect and calculate much of the information that 
would be required by Form PF relating to hedge funds on a quarterly 
basis.\105\ As a result, quarterly reporting on Form PF would coincide 
with most hedge fund advisers' internal reporting cycles and leverage 
data collection systems and processes already existing at these 
advisers. In addition, we believe that most liquidity fund advisers 
collect on a monthly basis much of the information that we are 
proposing be reported in section 3 of Form PF and thus quarterly 
reporting should be relatively efficient for these advisers. We 
anticipate that Large Private Fund Advisers would be able to collect 
and file this information within 15 days after the end of each quarter, 
which is sufficiently timely for FSOC's use in conducting systemic risk 
monitoring.
---------------------------------------------------------------------------

    \104\ See proposed Instruction 7 to Form PF.
    \105\ See Report of the Asset Manager's Committee to the 
President's Working Group on Financial Markets, Best Practices for 
the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing 
best practices on disclosing to investors performance data, assets 
under management, risk management practices (including on asset 
types, geography, leverage, and concentrations of positions) with 
which SEC staff understands many hedge funds comply).
---------------------------------------------------------------------------

    Advisers would be required to file Form PF to report that they are 
transitioning to only filing Form PF annually with the Commissions or 
to report that they no longer meet the requirements for filing Form PF 
no later than the last day on which the adviser's next Form PF update 
would be timely.\106\ This would allow us to determine promptly whether 
an adviser's discontinuance in reporting is due to it no longer meeting 
the form's reporting thresholds as opposed to a lack of attention to 
its filing obligations. Advisers also would be able to avail themselves 
of a temporary hardship exemption in a similar manner as with other 
Commission filings if they are unable to file Form PF electronically in 
a timely manner due to unanticipated technical difficulties.\107\
---------------------------------------------------------------------------

    \106\ See proposed Instruction 8 to Form PF.
    \107\ See proposed rule 204(b) 1(f). The adviser would check the 
box in Section 1a of Form PF indicating that it was requesting a 
temporary hardship exemption and complete Section 5 of Form PF no 
later than one business day after the electronic Form PF filing was 
due and submit the filing that is the subject of the Form PF paper 
filing in electronic format with the Form PF filing system no later 
than seven business days after the filing was due.
---------------------------------------------------------------------------

    We request comment on our proposed filing frequency. Are the filing 
requirements for private fund advisers frequent enough to assess high-
level systemic risk posed by private funds? Should smaller private fund 
advisers have to file more frequently or less frequently? Should Large 
Private Fund Advisers be required to file Form PF more frequently (such 
as monthly) or less frequently (such as annually or semiannually)? Is 
90 days for an annual update or 15 days for a quarterly update too long 
to ensure reporting of timely information? Would more or less time be 
more appropriate? Specifically, would 15 days be enough time for Large 
Private Fund Advisers to prepare and file quarterly reports? Is there 
information in the form that should be amended promptly if it becomes 
inaccurate? Should Large Private Fund Advisers be required to file Form 
PF as of the end of each calendar quarter or as of the end of each 
fiscal quarter?
    Currently, we anticipate that the proposed rules requiring filing 
of Form PF would have a compliance date of December 15, 2011, at which 
time Large Private Fund Advisers would begin filing 15 days after the 
end of each quarter (i.e., Large Private Fund Advisers would need to 
make their initial Form PF filing by January 15, 2012). This timing 
should allow sufficient time for Large Private Fund Advisers to develop 
systems for collecting the information required on Form PF and prepare 
for filing. We currently anticipate that this timeframe also would give 
the SEC sufficient time to create and program a system to accept 
filings of Form PF.\108\ We are proposing

[[Page 8079]]

that the rules allow smaller private fund advisers until 90 days after 
the end of their first fiscal year occurring on or after the compliance 
date of the proposed rule to file their first Form PF (with the 
expectation that this would result in smaller private fund advisers 
with a December 31 fiscal year end filing their first Form PF by March 
31, 2012) because we anticipate that some of these advisers may require 
more time to prepare for their initial Form PF filing and so that the 
first group of private fund advisers filing Form PF would all be 
reporting based generally on information as of December 31, 2011.\109\ 
Under this proposed compliance date and transition rule, smaller 
private fund advisers would have at least eight months after adoption 
of the proposed form, depending on their fiscal year end, to file their 
first Form PF. We request comment on when advisers should be required 
to comply with the proposed rules and file Form PF. Do the compliance 
dates and transition times that we have proposed provide sufficient 
time for smaller advisers and Large Private Fund Advisers to prepare 
for filing?
---------------------------------------------------------------------------

    \108\ The SEC will work closely with the firm it selects to 
create and program a system for Form PF filings and will monitor 
whether it could do so on this timeframe.
    \109\ See proposed Advisers Act rule 204(b)-1(g).
---------------------------------------------------------------------------

D. Information Required on Form PF

    The questions contained in proposed Form PF reflect relevant 
requirements and considerations under the Dodd-Frank Act, consultations 
with staff representing FSOC's members, and the Commissions' experience 
in regulating those private fund advisers that are already registered 
with the Commissions. As discussed above, with respect to hedge fund 
advisers in particular, the information we propose requiring registered 
advisers to file on Form PF also is broadly based on the guidelines 
discussed in the IOSCO Report with many of the more detailed items 
generally tracking questions contained in the surveys of large hedge 
fund advisers conducted by the FSA and other IOSCO members.\110\ We 
expect that the information collected on Form PF would assist FSOC in 
monitoring and assessing any systemic risk, as discussed in section 
II.A above, that may be posed by private funds. We discuss below the 
information that Form PF would require.
---------------------------------------------------------------------------

    \110\ See supra note 24.
---------------------------------------------------------------------------

1. Section 1
    Section 1 would apply to all investment advisers required to file 
Form PF. Item A of Section 1a seeks identifying information about the 
adviser, such as its name and the name of any of its related persons 
whose information is also reported on the adviser's Form PF. Section 1a 
also would require reporting of basic aggregate information about the 
private funds managed by the adviser, such as total and net assets 
under management, and the amount of those assets that are attributable 
to certain types of private funds.\111\ This identifying information 
would assist us and FSOC in monitoring the amount of assets managed by 
private fund advisers and the general distribution of those assets 
among various types of private funds.
---------------------------------------------------------------------------

    \111\ Section 1 would require the adviser to indicate the 
adviser's total ``regulatory assets under management,'' using the 
same proposed definition of that term as used on proposed amendments 
to Part 1 of Form ADV, and its net assets under management, which 
subtracts out any liabilities of the private funds. See Implementing 
Release, supra note 9. Form PF, however, would require the adviser 
to aggregate parallel managed accounts with related private funds in 
reporting its assets under management (even if the accounts are not 
``securities portfolios'' within the meaning of proposed Instruction 
5.b, Instructions to Part 1A of Form ADV), and thus the total and 
net assets under management figures reported in section 1a of Form 
PF may differ from what the adviser reports on Form ADV. Proposed 
question 2 would require the adviser to report what portion of these 
assets under management are attributable to hedge funds, liquidity 
funds, private equity funds, real estate funds, securitized asset 
funds, venture capital funds, other private funds, and funds and 
accounts other than private funds. See section II.B.1 of this 
Release for a discussion of these different types of funds and their 
proposed definitions for purposes of Form PF.
---------------------------------------------------------------------------

    Section 1b of Form PF would elicit certain identifying and other 
basic information about each private fund advised by the investment 
adviser. The adviser generally would need to complete a separate 
section 1b for each private fund it advised. However, because feeder 
funds typically invest substantially all their assets in a master fund, 
to prevent duplicative reporting the adviser must report information in 
section 1b on an aggregated basis for private funds that are part of a 
master-feeder arrangement and so would not file a separate section 1b 
for any feeder fund.\112\
---------------------------------------------------------------------------

    \112\ See proposed Instructions 5 and 6 to Form PF. When 
providing responses in Form PF with respect to a private fund, the 
adviser also must include any parallel managed accounts related to 
the private fund. Id.
---------------------------------------------------------------------------

    Section 1b would require reporting of each private fund's gross and 
net assets and the aggregate notional value of its derivative 
positions.\113\ It also would require basic information about the 
fund's borrowings, including a breakdown of the fund's borrowing based 
on whether the creditor is a U.S. financial institution, foreign 
financial institution or non-financial institution as well as the 
identity of, and amount owed to, each creditor to which the fund owed 
an amount equal to or greater than 5 percent of the fund's net asset 
value as of the reporting date. This section would require reporting of 
certain basic information about how concentrated the fund's investor 
base is, such as the number of beneficial owners of the fund's equity 
and the percentage of the fund's equity held by the five largest equity 
holders.\114\ Finally, section 1b would require monthly and quarterly 
performance information about each fund.
---------------------------------------------------------------------------

    \113\ The form would require the adviser to report the total 
gross notional value of its funds' derivative positions, except that 
options would be reported using their delta adjusted notional value. 
Long and short positions would not be netted. See proposed Form PF, 
instructions to question 11.
    \114\ See proposed question 12 on Form PF.
---------------------------------------------------------------------------

    The information required by section 1b would allow FSOC to monitor 
certain systemic trends for the broader private fund industry, such as 
how certain kinds of private funds perform and exhibit correlated 
performance behavior under different economic and market conditions and 
whether certain funds are taking significant risks that may have 
systemic implications.\115\ It would allow FSOC to monitor borrowing 
practices for the broader private fund industry, which may have 
interconnected impacts on banks (including specific banks) and thus the 
broader financial system. We believe that collecting both monthly and 
quarterly performance data also would allow FSOC to monitor the data at 
sufficient granularity to track trends.
---------------------------------------------------------------------------

    \115\ This information also would be useful for advancing the 
Commissions' investor protection goals.
---------------------------------------------------------------------------

    Finally, section 1c would require reporting of certain information 
only about hedge funds managed by the adviser, such as their investment 
strategies, percentage of the fund's assets managed using computer-
driven trading algorithms, significant trading counterparty exposures 
(including identity of counterparties),\116\ and trading and clearing 
practices.\117\ This information will enable FSOC to

[[Page 8080]]

monitor systemic risk that could be transmitted through counterparty 
exposure, track how different strategies are affected by and correlated 
with different market stresses, and follow the extent of private fund 
activities conducted away from regulated exchanges and clearing 
systems. We have based some of this information, such as information 
about significant trading counterparty exposures and trading and 
clearing practices, on the FSA surveys, which would promote 
international consistency in hedge fund reporting.\118\
---------------------------------------------------------------------------

    \116\ Specifically, proposed questions 19 and 20 on Form PF 
would require the adviser to identify the five trading 
counterparties to which the fund has the greatest net counterparty 
credit exposure (measured as a percentage of the fund's net asset 
value) and that have the greatest net counterparty credit exposure 
to the fund (measured in U.S. dollars).
    \117\ More specifically, proposed question 21 on Form PF would 
require estimated breakdowns of percentages of the hedge fund's 
securities and derivatives traded on a regulated exchange versus 
over the counter and percentages of the hedge fund's securities, 
derivatives, and repos cleared by a central clearing counterparty 
(``CCP'') versus bilaterally (or, in the case of repos, that 
constitute a tri-party repo).
    \118\ For example, the FSA survey asks for identification of the 
hedge fund's top five counterparties in terms of net credit 
exposure. It also asks for estimates of the percentage of the fund's 
securities or derivatives traded on a regulated exchange versus over 
the counter and the percentage of the fund's derivatives and repos 
cleared by a CCP versus bilaterally.
---------------------------------------------------------------------------

    We request comment on section 1 of proposed Form PF. Is there 
additional basic information that we should require from all advisers 
filing Form PF or regarding all of the hedge funds or other private 
funds that they manage? For example, should we require any of the more 
detailed information about their borrowing practices that we require 
regarding large hedge funds in Item B of section 2b? Is a creditor 
providing 5 percent of the fund's borrowings an appropriate threshold 
for significant creditors of whose identity FSOC may want to be aware 
for purposes of assessing the fund's interconnectedness in the 
financial system? Should the threshold be more or less? Are the top 
five equity holders in the fund an appropriate threshold for 
significant investors in the fund? Should the threshold be more or 
less? Should we require assets under management information for other 
private fund categories than those specified in question 4? Should we 
request that performance data be reported on a different basis than 
monthly and quarterly? Are there other primary investment strategies 
that hedge funds use that should be included in question 17? Is the 
information we have proposed requiring on the fund's borrowings 
necessary given that other questions in section 1b ask for information 
on the fund's gross and net assets? Will asking for the amount and 
identity of the five trading counterparties to which the fund has the 
greatest net counterparty credit exposure and that have the greatest 
net counterparty credit exposure to the fund appropriately track 
significant exposures for systemic risk assessment purposes? Have we 
requested appropriate information on trading and clearing practices 
sufficient to allow FSOC to examine systemic risks relating to trading 
and clearing outside of regulated exchanges and central clearing 
systems? Is there information in section 1 that we should not require, 
or that we should only require of large hedge fund advisers and why? 
With respect to the aggregation of master-feeder arrangements for 
reporting purposes, are there common situations in which an adviser 
will not have sufficient access to a feeder fund's information to 
report accurately on Form PF? If so, how should the form address those 
situations? We also request comment more generally on the definitions 
of terms we have proposed in the glossary of terms for Form PF.
2. Section 2
    Form PF would require private fund advisers who had at least $1 
billion in hedge fund assets under management as of the close of 
business on any day during the reporting period to complete section 
2.\119\ Section 2a would require certain aggregate information about 
the hedge funds advised by Large Private Fund Advisers, such as the 
market value of assets invested (on a short and long basis) in 
different types of securities and commodities (e.g., different types of 
equities, fixed income securities, derivatives, and structured 
products). It also would require the adviser to report the duration of 
fixed income portfolio holdings (including asset backed securities), to 
indicate the assets' interest rate sensitivity, as well as the turnover 
rate of the adviser's aggregate portfolios during the reporting period 
to provide an indication of the adviser's frequency of trading. 
Finally, the adviser would be required to report a geographic breakdown 
of investments held by the hedge funds it advises.
---------------------------------------------------------------------------

    \119\ See section II.B of this Release.
---------------------------------------------------------------------------

    This information would assist FSOC in monitoring asset classes in 
which hedge funds may be significant investors and trends in hedge 
funds' exposures to allow FSOC to identify concentrations in particular 
asset classes (or in particular geographic regions) that are building 
or transitioning over time. It would aid FSOC in examining large hedge 
fund advisers' role as a source of liquidity in different asset 
classes. In some cases, we are proposing that the information be broken 
down into categories that would facilitate FSOC's use of flow of funds 
information, which is an important tool for evaluating trends in and 
risks to the U.S. financial system.\120\ This information also is 
designed to address requirements under section 404 of the Dodd-Frank 
Act specifying certain mandatory contents for records and reports that 
must be maintained and filed by advisers to private funds. For example, 
it would provide information about the types of assets held and trading 
and investment positions and practices.
---------------------------------------------------------------------------

    \120\ For example, we are proposing that in some cases the data 
be broken down between issuers that are financial institutions and 
those that are not. The FRB publishes flow of funds data, which is 
available at http://www.federalreserve.gov/releases/z1/.
---------------------------------------------------------------------------

    Section 2b of Form PF would require large hedge fund advisers to 
report certain additional information about any hedge fund they advise 
with a net asset value of at least $500 million as of the close of 
business on any day during the reporting period (a ``qualifying hedge 
fund'').\121\ For purposes of determining whether a private fund is a 
qualifying hedge fund, the adviser would have to aggregate any parallel 
managed accounts, parallel funds, and funds that are part of the same 
master-feeder arrangement, and would have to treat any private funds 
managed by its related person as if they were managed by the filing 
adviser.\122\ We are proposing this aggregation to prevent an adviser 
from structuring its activities to avoid the reporting requirement. We 
have selected $500 million as a threshold for more extensive individual 
hedge fund reporting because we believe that a $500 million hedge fund 
is a substantial fund the activities of which could have an impact on 
particular markets in which it invests or on its particular 
counterparties. We also believe that setting this threshold at this 
level would minimize reporting burdens on advisers to smaller or start 
up hedge funds that are less likely to have a systemic impact. Finally, 
this threshold is the same threshold used by the FSA in its hedge fund 
surveys and thus would create a certain level of consistency in 
reported data.
---------------------------------------------------------------------------

    \121\ See proposed Instruction 3 to Form PF. Advisers should not 
complete section 2 with respect to assets managed by a fund of hedge 
funds. See proposed Instruction 7 to Form PF.
    \122\ See proposed Instructions 5 and 6 to Form PF. Parallel 
funds are a structure in which one or more private funds pursues 
substantially the same investment objective and strategy and invests 
side by side in substantially the same positions as another private 
fund. See proposed Glossary of Terms to Form PF.
---------------------------------------------------------------------------

    We request comment on the qualifying hedge fund threshold. Should 
it be lower or higher? If so, why? Should large hedge fund advisers 
have to report the information for all their hedge funds? Could all of 
such advisers' hedge funds, in the aggregate, potentially have a 
systemic impact that would merit such

[[Page 8081]]

reporting? Should Form PF have different requirements regarding 
aggregating parallel managed accounts, parallel funds, or feeder funds 
or aggregating hedge funds managed by affiliates?
    Section 2b would require reporting of the same information as that 
requested in section 2a regarding exposure to different types of 
assets.\123\ In this section, however, this information would be 
reported separately for each qualifying hedge fund the adviser manages. 
Section 2b also would require on a per fund basis data not requested in 
section 2a. The adviser would be required to report information 
regarding the qualifying hedge fund's portfolio liquidity, 
concentration of positions, collateral practices with significant 
counterparties, and the identity of, and clearing relationships with, 
the three central clearing counterparties to which the fund has the 
greatest net counterparty credit exposure.\124\ This information is 
designed to assist FSOC in monitoring the composition of hedge fund 
exposures over time as well as the liquidity of those exposures. The 
information also would aid FSOC in its monitoring of credit 
counterparties' unsecured exposure to hedge funds as well as the hedge 
fund's exposure and ability to respond to market stresses and 
interconnectedness with central clearing counterparties. Finally, some 
of this information, such as information about the identity of three 
central clearing counterparties to which the fund has the greatest net 
counterparty credit exposure and fund asset liquidity information, was 
broadly based on information requested by the FSA survey, which would 
promote international consistency in hedge fund reporting.\125\
---------------------------------------------------------------------------

    \123\ See proposed question 26 on Form PF.
    \124\ See proposed questions 27-34 on Form PF. For example, 
question 28 would require reporting of the percentage of the fund's 
portfolio capable of being liquidated within different time periods. 
Question 31 would require reporting, for each position that 
represents 5% or more of the fund's net asset value, of the 
position's portion of the fund's net asset value and sub-asset 
class. Questions 32 and 33 would require reporting of initial and 
variation margin for collateral securing exposure to the fund's top 
five counterparty groups as well as the face amount of letters of 
credit posted and certain information on rehypothecation of such 
collateral.
    \125\ For example, the FSA survey asks for the percentage of the 
hedge fund's portfolio that can be liquidated within different time 
periods and the identity of the fund's top three CCPs in terms of 
net credit exposure.
---------------------------------------------------------------------------

    Section 2b also would require for each qualifying hedge fund data 
regarding certain hedge fund risk metrics, financing information, and 
investor information. If during the reporting period the adviser 
regularly calculated a value at risk (``VaR'') metric for the 
qualifying hedge fund, the adviser would have to report VaR for each 
month of the reporting period.\126\ The form also would require the 
adviser to report the impact on the fund's portfolio from specified 
changes to certain identified market factors, if regularly considered 
in the fund's risk management, broken down by the long and short 
components of the qualifying hedge fund's portfolio.\127\ This 
information is designed to allow FSOC to track basic sensitivities of 
the hedge fund to common market sensitivities, correlations in those 
factor sensitivities, and trends in those factor sensitivities among 
large hedge funds.
---------------------------------------------------------------------------

    \126\ If VaR was calculated, the adviser would have to report 
the confidence interval, time horizon, whether any weighting was 
used, and the method used to calculate VaR (historical simulation, 
Monte Carlo simulation, parametric, or other). If applicable, the 
adviser would have to report the historical lookback period used. 
The adviser would also have to report if it did not regularly 
calculate VaR. See proposed question 35 on Form PF.
    \127\ The market factors are changes in: equity prices, risk 
free interest rates, credit spreads, currency rates, commodity 
prices, option implied volatilities, ABS default rates, and 
corporate bond default rates. Advisers are permitted to omit a 
response with respect to any market factor that it did not regularly 
consider in the reporting fund's risk management. However, to be 
``regularly considered'' in the fund's risk management does not 
require that the adviser have conducted stress testing on that 
market factor (it could simply mean, for example, that the fund's 
risk managers recognized that such a market factor could have an 
impact on the fund's portfolio). See proposed question 36 on Form PF 
and related instructions.
---------------------------------------------------------------------------

    Item D of Section 2b would require reporting of certain financing 
information for each qualifying hedge fund, including a monthly 
breakdown of its secured and unsecured borrowing and its derivatives 
exposures as well as information about the value of the collateral and 
letters of credit supporting the secured borrowing and derivatives 
exposures and the types of creditors. It also would require a breakdown 
of the term of the fund's committed financing. This information would 
assist FSOC in monitoring the qualifying hedge fund's leverage, the 
unsecured exposure of credit counterparties to the fund, and the 
committed term of that leverage, which may be important to monitor if 
the fund comes under stress. Collecting financing data broken down on a 
monthly basis should provide FSOC with sufficient granularity to 
identify trends.
    Finally, Item E of section 2b would require the private fund 
adviser to report information about each qualifying hedge fund's 
investor composition and liquidity. For example, it contains questions 
about the fund's side pocket and gating arrangements and provides for a 
breakdown of the percentage of the fund's net asset value that is 
locked in for different periods of time.\128\ We believe this 
information may be important in allowing FSOC to monitor the hedge 
fund's susceptibility to failure through investor redemptions in the 
event the fund experiences stress due to market or other factors.
---------------------------------------------------------------------------

    \128\ A side pocket is a type of account used by private funds 
to separate illiquid assets from other more liquid fund investments. 
Only investors in the hedge fund at the time the asset is put in the 
side pocket (and not future investors) will be entitled to a share 
of proceeds from that investment. A gate is a restriction imposed by 
the manager of a private fund on permissible redemptions from the 
fund during a certain period of time. The standards for imposing 
suspensions and gates may vary among funds, so in responding to 
these questions, an adviser would be expected to make a good faith 
determination as to which provisions of the reporting fund's 
governing documents would likely be triggered during conditions that 
it views as significant market stress.
---------------------------------------------------------------------------

    The information in proposed section 2b also is designed to address 
requirements under section 404 of the Dodd-Frank Act for records and 
reports that the SEC requires of private fund advisers, such as 
monitoring the amount of assets under management and the use of 
leverage, counterparty credit risk exposure, trading and investment 
positions, and the types of assets held. We request comment on the 
information that we propose requiring large hedge fund advisers to 
report under section 2. Is there additional information with respect to 
the types of their investments, use of leverage, or counterparties that 
we should require and why? Have we asked for appropriate time period 
breakdowns of the fund's liquidity in terms of asset liquidity, 
financing liquidity, and investor liquidity? Is there other information 
we could ask to assess hedge funds' potential impact on liquidity in 
particular markets? Would the threshold in the proposed form capture 
significant central clearing counterparties? Does the proposed form ask 
sufficient questions regarding the fund's collateral practices to 
ensure that FSOC will be able to monitor the fund's unsecured exposure 
to significant counterparties? Should the form require reporting of 
hedge funds' investment in different types of instruments or 
commodities than those proposed in questions 23 and 27?
    Are there risk metrics or additional market factors that we should 
require? Should we require the proposed market factors but with 
different specified changes? Stress testing is an important metric for 
FSOC's assessment of potential systemic risk posed by hedge funds, but 
we understand that the type of stress testing conducted varies

[[Page 8082]]

substantially depending on the strategy of the particular hedge fund 
and among hedge funds pursuing the same strategy. Is there a better way 
for the form to assess the effects of stresses on hedge funds than the 
stress testing questions included in the proposed form? Should we 
request the geographic breakdown of the hedge fund's investments for 
different geographic regions or countries? Are there existing 
collections of data broken down by geographic regions or countries with 
which we should be consistent? Should we require more or less detailed 
information regarding the types of assets in which the fund invests?
    Is there information that we should not require and why? Is there 
information that we should require large hedge fund advisers to report 
regarding all of the hedge funds they manage that we only propose 
requiring qualifying hedge funds to report? Is there information in 
proposed Form PF that is unlikely to be reported in a comparable or 
meaningful fashion such that FSOC would be unable to draw any useful 
conclusions or insights for purposes of assessing systemic risk? If so, 
how could changes to the question or instructions to the question 
improve the utility of the information the form seeks? Are there any 
disclosure requirements in the SEC's proposed amendments to Form ADV 
(which will be publicly available) that should instead be reported 
through Form PF (which will not be publicly available) or vice versa? 
\129\
---------------------------------------------------------------------------

    \129\ See Implementing Release, supra note 9, for a discussion 
of the SEC's proposed amendments to Form ADV.
---------------------------------------------------------------------------

    We request comment more generally on the information we propose 
requiring in Form PF with respect to hedge funds and their advisers. Is 
there additional information that would be helpful to FSOC in 
monitoring for systemic risk with respect to hedge funds?
    We note that certain data in the proposed form, while filed with 
the Commissions on an annual or quarterly basis, would have to be 
reported on a monthly basis. In addition to providing more granular 
data to allow FSOC to better identify trends, this aspect of the 
proposal is designed to mitigate the ability of an adviser to ``window 
dress,'' or manipulate certain reported data to mask activities or 
risks undertaken by the private funds it manages.
    Is there information that should be broken down further and 
reported as of smaller time increments, such as weekly, or as of larger 
time increments? Is there information that should be reported to show 
ranges, averages, high points, or low points during the reporting 
period, rather than as of the last day of the month or quarter? If so 
what time period should the range or average cover and how should it be 
calculated? We note that we have considered in other contexts different 
ways of disclosing information that can fluctuate during a reporting 
period.\130\ Are there approaches in these other contexts that should 
be used in Form PF? What would be the best method of avoiding ``window 
dressing'' in the form and why? Is there information that should not be 
reported on a monthly basis or, in contrast, information that should be 
reported on a monthly basis (in each case, when the information is 
filed with the Commissions quarterly or annually)? Please explain your 
response.
---------------------------------------------------------------------------

    \130\ See Short-Term Borrowings Disclosure, Securities Act 
Release No. 9143 (Sept. 17, 2010), at section II.A [75 Fed. Reg. 
59866 (Sept. 28, 2010)].
---------------------------------------------------------------------------

3. Section 3
    Form PF would require private fund advisers advising a liquidity 
fund and managing at least $1 billion in combined liquidity fund and 
registered money market fund assets as of the close of business on any 
day in the reporting period to complete and file the information on 
section 3.\131\ As discussed above, to the extent that liquidity funds 
function as unregistered substitutes for money market funds or 
otherwise share certain basic characteristics of money market funds, 
they may be susceptible to runs and thus have the potential to pose 
systemic risk.\132\
---------------------------------------------------------------------------

    \131\ See sections II.A.2 and II.B of this Release for a 
discussion of this reporting threshold and the definition of 
liquidity fund. For purposes of the $1 billion threshold, an adviser 
would have to treat any liquidity funds managed by any of the 
adviser's related persons as though they were advised by the 
adviser. See proposed Instruction 3 to Form PF. Form PF is a joint 
form between the SEC and the CFTC only with respect to sections 1 
and 2 of the form. Section 3 of the form, which would require more 
specific reporting regarding liquidity funds, would only be required 
by the SEC.
    \132\ See section II.A.2 of this Release. The SEC also notes 
that institutional investors--the principal investors in liquidity 
funds--were the primary participants in the run on money market 
funds in September 2008, rather than retail investors. See MMF 
Reform Proposing Release, supra note 65.
---------------------------------------------------------------------------

    Section 3 would require that these private fund advisers report 
certain information for each liquidity fund they manage. The section 
includes questions on whether the fund uses the amortized cost method 
of valuation and/or the penny rounding method of pricing in computing 
its net asset value per share to help determine how the fund might try 
to maintain a stable net asset value that could make the fund more 
susceptible to runs.\133\ It asks whether the fund as a matter of 
policy is managed in compliance with certain provisions of rule 2a-7 
under the Investment Company Act of 1940, which is the principal rule 
through which the SEC regulates registered money market funds.\134\ 
This information would assist FSOC in assessing the extent to which the 
liquidity fund is being managed consistent with restrictions imposed on 
registered money market funds that might mitigate their likelihood of 
posing systemic risk.
---------------------------------------------------------------------------

    \133\ See proposed questions 43 and 44 of Form PF.
    \134\ See proposed question 45 of Form PF. The restrictions in 
rule 2a-7 are designed to ensure, among other things, that money 
market funds' investing remains consistent with the objective of 
maintaining a stable net asset value. Many liquidity funds state in 
investor offering documents that the fund is managed in compliance 
with rule 2a-7 even though that rule does not apply to liquidity 
funds.
---------------------------------------------------------------------------

    Section 3 also would require reporting of certain information 
regarding the liquidity fund's portfolio. For example, it would ask, 
for each month of the reporting period, for the fund's net asset value, 
net asset value per share, market-based net asset value per share, 
weighted average maturity (``WAM''), weighted average life (``WAL''), 
7-day gross yield, amount of daily and weekly liquid assets, and amount 
of assets with a maturity greater than 397 days.\135\ It also would 
require the fund to report the amount of its assets invested in 
different types of instruments, broken down by the maturity of those 
instruments, as well as information for each open position of the fund 
that represents 5 percent or more of the fund's net asset value.\136\ 
This information would assist FSOC in assessing the risks undertaken by 
liquidity funds, their susceptibility to runs, and how their 
investments might pose systemic risks either among liquidity funds or 
through contagion to registered money market funds.
---------------------------------------------------------------------------

    \135\ See proposed question 46 of Form PF. WAM, WAL, daily 
liquid assets, and weekly liquid assets are to be calculated in 
accordance with rule 2a-7 under the Investment Company Act. The 7-
day gross yield is to be calculated consistent with the methodology 
required under Form N-MFP, which must be filed by money market funds 
registered with the SEC. See 17 CFR 274.201.
    \136\ See proposed question 47 of Form PF. Proposed question 48 
of Form PF would require reporting for each month of the reporting 
period, for each of the fund's positions representing 5% or more of 
its net asset value, of the position's portion of the fund's net 
asset value and sub-asset class.
---------------------------------------------------------------------------

    Item C of Section 3 would require reporting of any secured or 
unsecured borrowing of the liquidity fund, broken down by creditor type 
and the maturity profile of that borrowing, and of whether the fund has 
in place a committed liquidity facility. This information would aid 
FSOC in monitoring leverage practices among

[[Page 8083]]

liquidity funds and their potential to magnify risks undertaken by the 
fund. Finally, Item D of Section 3 would ask for certain information 
regarding the concentration of the fund's investor base, gating and 
redemption policies, and investor liquidity.\137\ It also would require 
reporting of a good faith estimate of the percentage of the fund 
purchased using securities lending collateral. The SEC believes this 
information would be important in allowing FSOC to monitor the 
susceptibility of the liquidity fund to a run in the event the fund 
comes under stress and its interconnectedness to securities lending 
programs.
---------------------------------------------------------------------------

    \137\ For example, question 52 would require reporting of the 
percentage of the reporting fund's equity that is beneficially owned 
by the beneficial owner having the largest equity interest in the 
fund and of how many investors beneficially own 5% or more of the 
fund's equity.
---------------------------------------------------------------------------

    The SEC requests comment on the information that it proposes 
requiring in section 3. Is there additional information that the SEC 
should require? For example, is there information that the SEC requires 
to be reported for registered money market funds on Form N-MFP that the 
SEC also should require to be reported on Form PF for liquidity funds? 
Should the SEC require reporting of more specific information about the 
holdings or types of holdings of these liquidity funds? Is the 
threshold for when the private fund adviser is required to report 
information in section 3 for an individual liquidity fund appropriate 
for purposes of FSOC to be able to monitor for potential systemic risk 
in this sector? Is five percent an appropriate threshold for 
considering a liquidity fund investment or investor to be significant 
for purposes of Form PF reporting? Is our proposed breakdown of the 
liquidity fund's asset maturity and investor liquidity appropriate?
4. Section 4
    The SEC is proposing that section 4 of Form PF require private fund 
advisers managing at least $1 billion in private equity fund assets as 
of the close of business on the last day of the reporting period to 
report certain information about each private equity fund they 
manage.\138\ Section 4 would require reporting of certain information 
about the fund's borrowings and guarantees and the leverage of the 
portfolio companies in which the fund invests. Specifically, section 4 
would require information about the outstanding balance of the fund's 
borrowings and guarantees.\139\ It also would require the adviser to 
report the weighted average debt-to-equity ratio of controlled 
portfolio companies in which the fund invests and the range of that 
debt to equity ratio among these portfolio companies.\140\ It asks for 
the maturity profile of its portfolio companies' debt, for the portion 
of that debt that is payment-in-kind or zero coupon, and whether the 
fund or any of its portfolio companies experienced an event of default 
on any of its debt during the reporting period.\141\ It also asks for 
the identity of the institutions providing bridge financing to the 
adviser's portfolio companies and the amount of that financing.\142\ 
The SEC believes that this information would allow FSOC to assess to 
what extent private equity funds use leverage and the potential 
exposure of banks and other lending providers to the larger private 
equity funds and their portfolio companies and leverage among portfolio 
companies of the larger private equity funds to monitor whether trends 
in those areas could pose systemic implications for the portfolio 
companies' lenders.
---------------------------------------------------------------------------

    \138\ See section II.B of this Release for a discussion of this 
reporting threshold and the definition of ``private equity fund.'' 
Form PF is a joint form between the SEC and the CFTC only with 
respect to sections 1 and 2 of the form. Section 4 of the form, 
which would require more specific reporting regarding private equity 
funds, would only be required by the SEC.
    \139\ See proposed questions 57 and 58.
    \140\ See proposed questions 59-61. A ``controlled portfolio 
company'' is defined as a portfolio company that is controlled by 
the private equity fund, either alone or together with the private 
equity fund's related persons or other persons that are part of a 
club or consortium investing in the portfolio company. ``Control'' 
has the same meaning as used in Form ADV, and generally means the 
power, directly or indirectly, to direct the management or policies 
of a person, whether through ownership of securities, by contract, 
or otherwise. See proposed Glossary of Terms to Form PF; Glossary of 
Terms to Form ADV.
    \141\ See proposed questions 62-64.
    \142\ See proposed question 65.
---------------------------------------------------------------------------

    Section 4 also would require reporting of certain information if 
the fund invests in any financial industry portfolio company, such as 
its name, its debt-to-equity ratio, and the percentage of the portfolio 
company beneficially owned by the fund.\143\ This information would 
allow FSOC to monitor large private equity funds' investments in 
companies that may be particularly important to the stability of the 
financial system. Section 4 also would ask whether any of the adviser's 
related persons co-invest in any of the fund's portfolio 
companies.\144\ Finally, the form would require a breakdown of the 
fund's investments by industry and by geography, which should provide 
FSOC with basic information about global and industry concentrations 
that may be relevant to monitoring risk exposures in the financial 
system.\145\
---------------------------------------------------------------------------

    \143\ See proposed question 66. A ``financial industry portfolio 
company'' generally is defined as a nonbank financial company, as 
defined by section 102(a)(4) of the Dodd-Frank Act, bank or savings 
association, bank holding company or financial holding company, 
savings and loan holding company, credit union, or Farm Credit 
System institution. See proposed Glossary of Terms to Form PF.
    \144\ See proposed question 69.
    \145\ See proposed questions 67 and 68. Industries would be 
identified using NAICS codes. ``NAICS'' stands for the ``North 
American Industry Classification System,'' and is a system of 
industry classifications commonly used in the financial industry.
---------------------------------------------------------------------------

    The SEC requests comment on the information it proposes requiring 
regarding private equity funds in section 4. Is there additional 
information that the SEC should request and why? For example, are their 
additional lending practices used in leveraged buyouts about which the 
form should collect information? Are there particular industries in 
which private equity funds might invest that could be systemically 
important? Should the Form ask additional questions specific to those 
industries? Should the form track private equity fund investments in 
different geographic and/or industry concentrations than those we have 
proposed? Should the SEC request less information and why? Should the 
SEC not require any reporting on Form PF specific to private equity 
funds? Why or why not?

E. Filing Fees and Format for Reporting

    Under proposed Advisers Act rule 204(b)-1(b), Form PF would need to 
be filed through an electronic system designated by the SEC for this 
purpose. There may be efficiencies realized if the current Investment 
Adviser Registration Depository (``IARD'') platform, which is operated 
by the Financial Industry Regulatory Authority, were expanded for this 
purpose, such as the possible interconnectivity of Form ADV filings and 
Form PF filings, and possible ease of filing with one password. The 
filing system would need to have certain features, including being 
programmed with special confidentiality protections designed to ensure 
the heightened confidentiality protections created for Form PF filing 
information under the Dodd-Frank Act but to allow for secure access by 
FSOC and other regulators as permitted under the Dodd-Frank Act.
    The SEC separately will decide on the system to be selected for the 
electronic filing of Form PF. That determination will be reflected in a 
separate notice.
    Under the proposed rule, advisers required to file Form PF would be 
required to pay to the operator of the Form PF filing system fees that 
have

[[Page 8084]]

been approved by the SEC.\146\ We anticipate that Large Private Fund 
Advisers' filing fees would be set at a higher amount because their 
filings would be responsible for a larger proportion of system needs 
due to their more frequent and extensive filings. The SEC in a separate 
action would approve filing fees that reflect the reasonable costs 
associated with the filings and the establishment and maintenance of 
the filing system.\147\
---------------------------------------------------------------------------

    \146\ See proposed Advisers Act rule 204(b)-1(d).
    \147\ See section 204(c) of the Advisers Act.
---------------------------------------------------------------------------

    While we are not requiring that the information be filed in 
eXtensible Markup Language (``XML'') tagged data format, we expect to 
look for a filing system that could accept information filed in XML 
format. We intend to establish data tags to allow Form PF to be 
submitted in XML format with the SEC. Accordingly, advisers would be 
able to file the information in Form PF in XML format if they choose. 
We believe that certain advisers may prefer to report in XML format 
because it allows them to automate aspects of their reporting and thus 
minimize burdens and generate efficiencies for the adviser. We 
anticipate that we may eventually require Form PF filers to tag data 
submitted on Form PF using a refined, future taxonomy defined by us, 
working in collaboration with the industry. Thereafter, the usability 
of data contained in Form PF is expected to increase greatly because 
tagged data would be easier to sort and analyze. We note that private 
initiatives are underway to create such taxonomies.\148\ We request 
comment on our proposed system of electronic filing. Should we require 
that all filings be done in XML format? Should we allow or require the 
form to be provided in a format other than XML, such as eXtensible 
Business Reporting Language (``XBRL'')? Is there another format that is 
more widely used or would be more appropriate for the required data? 
Should smaller and/or Large Private Fund Advisers be charged different 
amounts than what we have anticipated charging? If so, why?
---------------------------------------------------------------------------

    \148\ See, e.g., http://www.operastandards.org.
---------------------------------------------------------------------------

III. General Request for Comment

    The Commissions request comment on the rules and form proposed in 
this Release and comment on other matters that might have an effect on 
the proposals contained in this Release. Commenters should provide 
empirical data to support their views.

IV. Paperwork Reduction Act

CFTC

    Proposed CEA rule 4.27(d) does not impose any additional burden 
upon registered CPOs and CTAs that are dually registered as investment 
advisers with the SEC. By filing the Form PF with the SEC, these dual 
registrants would be deemed to have satisfied certain of their filing 
obligations with the CFTC, and the CFTC is not imposing any additional 
burdens herein. Therefore, any burden imposed by Form PF through 
proposed CEA rule 4.27(d) on entities registered with both the CFTC and 
the SEC has been accounted for within the SEC's calculations regarding 
the impact of this collection of information under the Paperwork 
Reduction Act of 1995 (``PRA'').\149\
---------------------------------------------------------------------------

    \149\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

SEC

    Section 404 of the Dodd-Frank Act, which amends section 204(b) of 
the Advisers Act, directs the SEC to require private fund advisers to 
file reports containing such information as the SEC deems necessary and 
appropriate in the public interest and for investor protection or for 
the assessment of systemic risk. Proposed rule 204(b)-1 and Form PF 
under the Advisers Act, which would implement this requirement of the 
Dodd-Frank Act. Proposed Form PF contains a new ``collections of 
information'' within the meaning of the PRA.\150\ The title for the new 
collection of information is: ``Form PF under the Investment Advisers 
Act of 1940, reporting by investment advisers to private funds.'' For 
purposes of this PRA analysis, the paperwork burden associated with the 
requirements of proposed rule 204(b)-1 is included in the collection of 
information burden associated with proposed Form PF and thus does not 
entail a separate collection of information. The SEC is submitting this 
collection of information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \150\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    Proposed Form PF is intended to provide FSOC with information that 
would facilitate fulfillment of its obligations under the Dodd-Frank 
Act relating to nonbank financial companies and systemic risk 
monitoring.\151\ The SEC also may use the information in connection 
with its regulatory and examination programs. The respondents to Form 
PF would be private fund advisers.\152\ Compliance with proposed Form 
PF would be mandatory for any private fund adviser. Smaller private 
fund advisers would be required to file Form PF only on an annual 
basis. These smaller private fund advisers would provide a limited 
amount of basic information about the operations of the private funds 
they advise.\153\ Large Private Fund Advisers would be required to file 
Form PF on a quarterly basis reporting additional information regarding 
the private funds they advise. The PRA analysis set forth below takes 
into account the fact that the additional information proposed Form PF 
would require that large hedge fund advisers report would be more 
extensive than the additional information required from large liquidity 
fund advisers, which in turn would be more extensive than that required 
from large private equity fund advisers.\154\
---------------------------------------------------------------------------

    \151\ See sections I.A and II.A of this Release.
    \152\ The requirement to file the form would apply to investment 
advisers registered, or required to register, with the SEC that 
advise one or more private funds. See proposed rule 204(b)-1(a). It 
would not apply to state-registered investment advisers or exempt 
reporting advisers.
    \153\ See section II.B of this Release for a description of who 
would be required to file Form PF, section II.C of this Release for 
information regarding the frequency with which smaller private fund 
advisers would be required to file Form PF, and section II.D.1 of 
this Release for a description of the information that smaller 
private fund advisers would be required to report on Form PF. See 
also proposed Instruction 8 to Form PF for information regarding the 
frequency with which smaller private fund advisers would be required 
to file Form PF.
    \154\ See section II.B of this Release for a description of who 
would be required to file Form PF, section II.C of this Release for 
information regarding the frequency with which Large Private Fund 
Advisers would be required to file Form PF, section II.D.2 of this 
Release for a description of the information that large hedge fund 
advisers would be required to report on Form PF, and sections II.D.3 
and II.D.4 of this Release for a description of the information that 
large liquidity and private equity fund advisers would be required 
to report on Form PF. See also proposed Instruction 8 to Form PF for 
information regarding the frequency with which Large Private Fund 
Advisers would be required to file Form PF.
---------------------------------------------------------------------------

    As discussed in section II.B of this Release, the SEC has sought to 
minimize the reporting burden on private fund advisers to the extent 
appropriate. In particular, the SEC has designed the reporting 
frequency based on when it understands advisers to private funds are 
already collecting certain information that Form PF would require. In 
addition, the SEC has based certain more specific reporting items on 
information that it understands large hedge fund advisers frequently 
collect

[[Page 8085]]

for purposes of reporting to investors in the funds.\155\
---------------------------------------------------------------------------

    \155\ See Report of the Asset Manager's Committee to the 
President's Working Group on Financial Markets, Best Practices for 
the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing 
best practices on disclosing to investors performance data, assets 
under management, and risk management practices (including on asset 
types, geography, leverage, and concentrations of positions) with 
which we understand many hedge funds comply).
---------------------------------------------------------------------------

    The information that Form PF would require would be filed through 
an electronic filing system expected to be operated by an entity 
designated by the SEC. Responses to the information collections would 
be kept confidential to the extent permitted by law.\156\
---------------------------------------------------------------------------

    \156\ See supra note 39 and accompanying text.
---------------------------------------------------------------------------

A. Burden Estimates for Annual Reporting by Smaller Private Fund 
Advisers

    In the Implementing Release, the SEC estimated that 3,500 currently 
registered advisers would become subject to the private fund reporting 
requirements included in the proposed amendments to Form ADV.\157\ The 
SEC further estimated that 200 advisers to private funds would register 
with the SEC as a result of normal growth in the population of 
registered advisers and that 750 advisers to private funds would 
register as a result of the Dodd-Frank Act's elimination of the private 
adviser exemption.\158\ As a result, the SEC estimates that a total of 
approximately 4,450 registered investment advisers would become subject 
to the proposed private fund reporting requirements in Form ADV.\159\ 
Because these advisers would also be required to report on Form PF, the 
SEC accordingly estimates that approximately 4,450 advisers would be 
required to file all or part of Form PF.\160\ Out of this total number, 
the SEC estimates that approximately 3,920 would be smaller private 
fund advisers, not meeting the thresholds for reporting as Large 
Private Fund Advisers.\161\
---------------------------------------------------------------------------

    \157\ See section V.B.2.a.ii of the Implementing Release. As 
proposed in the Implementing Release, advisers to private funds 
would be required to complete Item 7.B and Section 7.B of Schedule D 
to the amended Form ADV.
    \158\ Id. The estimates of registered private fund advisers are 
based in part on the number of advisers that reported a fund in 
Section 7.B of Schedule D to the current version of Form ADV. 
Because these responses include funds advised by a related person 
rather than the adviser, these data may over-estimate the total 
number of private fund advisers.
    \159\ 3,500 currently registered advisers to private funds + 200 
advisers to private funds registering as a result of normal growth + 
750 newly registered advisers to private funds = 4,450 advisers.
    \160\ If a private fund is advised by both an adviser and one or 
more subadvisers, only one of these advisers would be required to 
complete Form PF. See section II.B.4 of this Release. As a result, 
it is likely that some portion of these advisers either would not be 
required to file Form PF or would be subject to a reporting burden 
lower than is estimated for purposes of this PRA analysis. The SEC 
has not attempted to adjust the burden estimates downward for this 
purpose because the SEC does not currently have reliable data with 
which to estimate the number of funds that have subadvisers.
    \161\ Based on the estimated total number of registered private 
fund advisers that would not meet the thresholds to be considered 
Large Private Fund Advisers. (4,450 estimated registered private 
fund advisers -200 large hedge fund advisers -80 large liquidity 
fund advisers -250 large private equity fund advisers = 3,920 
smaller private fund advisers.)
---------------------------------------------------------------------------

    Smaller private fund advisers would be required to complete all or 
portions of section 1 of Form PF and to file on an annual basis. As 
discussed in greater detail above, section 1 would require basic data 
regarding the reporting adviser's identity and certain information 
about the private funds it manages, such as performance, leverage, and 
investor concentration data.\162\ If the reporting adviser advises any 
hedge funds, section 1 also would require basic information regarding 
those funds, including their investment strategies, trading 
counterparty exposures, and trading and clearing practices.
---------------------------------------------------------------------------

    \162\ See supra section II.D.1.
---------------------------------------------------------------------------

    Based on the SEC's experience with other data filings, it estimates 
that smaller private fund advisers would require an average of 
approximately 10 burden hours to compile, review and electronically 
file the required information in section 1 of Form PF for the initial 
filing and an average of approximately 3 burden hours for subsequent 
filings.\163\ Accordingly, the amortized average annual burden of 
periodic filings would be 5 hours per smaller private fund adviser for 
each of the first three years,\164\ and the amortized aggregate annual 
burden of periodic filings for smaller private fund advisers would be 
19,600 hours for each of the first three years.\165\
---------------------------------------------------------------------------

    \163\ These estimates reflect the SEC's understanding that much 
of the information in section 1 of Form PF is currently maintained 
by most private fund advisers in the ordinary course of business. In 
addition, the time required to determine a private fund adviser's 
aggregate assets under management and the amount of assets under 
management that relate to private funds of various types largely is 
expected to be included in the approved burden associated with the 
SEC's Form ADV (this information would only differ if the adviser 
managed parallel managed accounts). As a result, responding to 
questions on Form PF that relate to assets under management and 
determining whether an adviser is a Large Private Fund Adviser 
should impose little or no additional burden on private fund 
advisers.
    \164\ The SEC estimates that a smaller private fund adviser 
would make 3 annual filings in three years, for an amortized average 
annual burden of 5 hours (1 initial filing x 10 hours + 2 subsequent 
filings x 3 hours = 16 hours; and 16 hours / 3 years = approximately 
5 hours). After the first three years, filers generally would not 
incur the start-up burdens applicable to the first filing.
    \165\ 5 burden hours on average per year x 3,920 smaller private 
fund advisers = 19,600 burden hours per year.
---------------------------------------------------------------------------

B. Burden Estimates for Quarterly Reporting by Large Private Fund 
Advisers

    The SEC estimates that 530 of the private fund advisers registered 
with the SEC would meet one or more of the thresholds for reporting as 
Large Private Fund Advisers.\166\ As discussed in section II.D above, 
Large Private Fund Advisers would be required to report more 
information on Form PF than smaller private fund advisers and would be 
required to report on a quarterly basis. The amount of additional 
information reported by a Large Private Fund Adviser would depend, in 
part, on whether it is a large hedge fund adviser, a large liquidity 
fund adviser, or large private equity fund adviser. A large hedge fund 
adviser would be required to report more information with respect to 
itself and the funds it advises than would a large liquidity fund 
adviser, which in turn would report more information than a large 
private equity fund adviser.\167\ Of the total number of Large Private 
Fund Advisers, the SEC estimates that 200 are large hedge fund 
advisers, 80 are large liquidity fund advisers, and 250 are large 
private equity fund advisers.\168\
---------------------------------------------------------------------------

    \166\ See section II.B.2 of this Release for estimates of the 
numbers of large hedge fund advisers, large liquidity fund advisers, 
and large private equity fund advisers. (200 large hedge fund 
advisers + 80 large liquidity fund advisers + 250 large private 
equity fund advisers = 530 Large Private Fund Advisers.)
    \167\ See supra sections II.D.2, II.D.3 and II.D.4.
    \168\ See supra section II.B.2.
---------------------------------------------------------------------------

    Because the proposed reporting requirements on Form PF for large 
hedge fund advisers would be the most extensive of the Large Private 
Fund Advisers, the SEC estimates that these advisers would require, on 
average, more hours than other Large Private Fund Advisers to configure 
systems and to compile, review and electronically file the required 
information. Accordingly, the SEC estimates that large hedge fund 
advisers would require an average of approximately 75 burden hours for 
an initial filing and 35 burden hours for each subsequent filing.\169\ 
In

[[Page 8086]]

contrast, large liquidity fund advisers, which would report more 
information than smaller private fund advisers or large private equity 
fund advisers but less information than large hedge fund advisers, 
would require an average of approximately 35 burden hours for an 
initial filing and 16 burden hours for each subsequent filing. Finally, 
the SEC estimates that large private equity fund advisers, which would 
report more information than smaller private fund advisers but less 
than other Large Private Fund Advisers, would require an average of 
approximately 25 burden hours for an initial filing and 12 burden hours 
for each subsequent filing. Based on these estimates, the amortized 
average annual burden of periodic filings would be 153 hours per large 
hedge fund adviser,\170\ 70 hours per large liquidity fund 
adviser,\171\ and 52 hours per large private equity fund adviser, in 
each case for each of the first three years.\172\ In the aggregate, the 
amortized annual burden of periodic filings would then be 30,600 hours 
for large hedge fund advisers,\173\ 5,600 hours for large liquidity 
fund advisers,\174\ and 13,000 hours for large private equity fund 
advisers,\175\ in each case for each of the first three years.
---------------------------------------------------------------------------

    \169\ The estimates of hour burdens and costs for Large Private 
Fund Advisers provided in the Paperwork Reduction Act and cost 
benefit analyses are based on burden data provided by advisers in 
response to the FSA hedge fund survey and on the experience of SEC 
staff. These estimates also assume that some Large Private Fund 
Advisers will find it efficient to automate some portion of the 
reporting process, which would increase the burden of the initial 
filing but reduce the burden of subsequent filings, which has been 
taken into consideration in our burden estimates.
    \170\ The SEC estimates that a large hedge fund adviser would 
make 12 quarterly filings in three years, for an amortized average 
annual burden of 153 hours (1 initial filing x 75 hours + 11 
subsequent filings x 35 hours = 460 hours; and 460 hours / 3 years = 
approximately 153 hours). After the first three years, filers 
generally would not incur the start-up burdens applicable to the 
first filing.
    \171\ The SEC estimates that a large liquidity fund adviser 
would make 12 quarterly filings in three years, for an amortized 
average annual burden of 70 hours (1 initial filing x 35 hours + 11 
subsequent filings x 16 hours = 211 hours; and 211 hours / 3 years = 
approximately 70 hours). After the first three years, filers 
generally would not incur the start-up burdens applicable to the 
first filing.
    \172\ The SEC estimates that a large private equity fund adviser 
would make 12 quarterly filings in three years, for an amortized 
average annual burden of 52 hours (1 initial filing x 25 hours + 11 
subsequent filings x 12 hours = 157 hours; and 157 hours / 3 years = 
approximately 52 hours). After the first three years, filers 
generally would not incur the start-up burdens applicable to the 
first filing.
    \173\ 153 burden hours on average per year x 200 large hedge 
fund advisers = 30,600 hours.
    \174\ 70 burden hours on average per year x 80 large liquidity 
fund advisers = 5,600 hours.
    \175\ 52 burden hours on average per year x 250 large private 
equity fund advisers = 13,000 hours.
---------------------------------------------------------------------------

C. Burden Estimates for Transition Filings, Final Filings and Temporary 
Hardship Exemption Requests

    In addition to periodic filings, a private fund adviser would be 
required to file very limited information on Form PF in three 
situations.
    First, any adviser that transitions from quarterly to annual filing 
because it has ceased to be a Large Private Fund Adviser would be 
required to file a Form PF indicating that it is no longer obligated to 
report on a quarterly basis. The SEC estimates that approximately 9 
percent of Large Private Fund Advisers would need to make a transition 
filing each year with a burden of 0.25 hours, or a total of 12 burden 
hours per year for all private fund advisers.\176\
---------------------------------------------------------------------------

    \176\ Estimate is based on IARD data on the frequency of 
advisers to one or more private funds ceasing to have assets under 
management sufficient to cause them to be Large Private Fund 
Advisers. (530 Large Private Fund Advisers x 0.09 x 0.25 hours = 12 
hours.)
---------------------------------------------------------------------------

    Second, filers who are no longer subject to Form PF's periodic 
reporting requirements would file a final report indicating that fact. 
The SEC estimates that approximately 8 percent of the advisers required 
to file Form PF would have to file such an amendment each year with a 
burden of 0.25 of an hour, or a total of 89 burden hours per year for 
all private fund advisers.\177\
---------------------------------------------------------------------------

    \177\ Estimate is based on IARD data on the frequency of 
advisers to one or more private funds withdrawing from SEC 
registration. (4,450 private fund advisers x 0.08 x 0.25 hours = 89 
hours.)
---------------------------------------------------------------------------

    Finally, an adviser experiencing technical difficulties in 
submitting Form PF may request a temporary hardship exemption by filing 
portions of Form PF in paper format.\178\ The information that must be 
filed is comparable to the information that Form ADV filers provide on 
Form ADV-H when requesting a temporary hardship exemption relating to 
that form. In the case of Form ADV-H, the SEC has estimated that the 
average burden of filing is 1 hour and that approximately 1 in every 
1,000 advisers will file annually.\179\ Assuming that Form PF filers 
request hardship exemptions at the same rate and that the applications 
impose the same burden per filing, the SEC would expect approximately 4 
filers to request a temporary hardship exemption each year \180\ for a 
total of 4 burden hours.\181\
---------------------------------------------------------------------------

    \178\ See proposed SEC rule 204(b)-1(f). The proposed rule would 
require that the adviser complete and file Item A of Section 1a and 
Section 5 of Form PF, checking the box in Section 1a indicating that 
the filing is a request for a temporary hardship exemption.
    \179\ See section V.F of the Implementing Release.
    \180\ 4,450 private fund advisers x 1 request per 1,000 advisers 
= approximately 4 advisers.
    \181\ 4 advisers x 1 hour per response = 4 hours.
---------------------------------------------------------------------------

D. Aggregate Burden Estimates

    Based on the foregoing, the SEC estimates that Form PF would result 
in an aggregate of 68,905 burden hours per year for all private fund 
advisers for each of the first three years, or 15 burden hours per year 
on average for each private fund adviser over the same period.\182\
---------------------------------------------------------------------------

    \182\ 19,600 hours for periodic filings by smaller advisers + 
30,600 hours for periodic filings by large hedge fund advisers + 
5,600 hours for periodic filings by large liquidity fund advisers + 
13,000 hours for periodic filings by large private equity fund 
advisers + 12 hours per year for transition filings + 89 hours per 
year for final filings + 4 hours per year for temporary hardship 
requests = approximately 68,905 hours per year. 68,905 hours per 
year / 4,450 total advisers = 15 hours per year on average.
---------------------------------------------------------------------------

E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to: 
(i) Evaluate whether the proposed amendments to the collection of 
information are necessary for the proper performance of the functions 
of the SEC, including whether the information would have practical 
utility; (ii) evaluate the accuracy of the SEC's estimate of the burden 
of the proposed collection of information; (iii) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (iv) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology. In particular, 
would private fund advisers seek to automate all or part of their Form 
PF reporting obligations? Would automation be efficient only for Large 
Private Fund Advisers, or would smaller private fund advisers also be 
able to automate efficiently? What is the likely burden of automation? 
Would advisers use internal personnel or pay outside service providers 
to make needed system modifications or to perform all or part of their 
Form PF reporting obligations? If outside service providers are used, 
what is the likely cost and how would it impact our estimates of 
internal costs and hourly burdens for the proposed reporting?
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 10102, 
New Executive Office Building, Washington, DC 20503, and also should 
send a copy of their comments to Elizabeth M. Murphy, Secretary, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090 with reference to File No. S7-05-11. Requests for materials 
submitted to OMB by the Commission with regard to this collection of 
information should be

[[Page 8087]]

in writing, refer to File No. S7-05-11, and be submitted to the 
Securities and Exchange Commission, Office of Investor Education and 
Advocacy, 100 F Street, NE., Washington, DC 20549-0213. OMB is required 
to make a decision concerning the collections of information between 30 
and 60 days after publication of this Release. Therefore, a comment to 
OMB is best assured of having its full effect if OMB receives it within 
30 days after publication of this Release.

V. CFTC Cost-Benefit Analysis

    Section 15(a) of the CEA \183\ requires the CFTC to consider the 
costs and benefits of its actions before issuing rules, regulations, or 
orders under the CEA. By its terms, section 15(a) does not require the 
CFTC to quantify the costs and benefits of its rules, regulations or 
orders or to determine whether the benefits outweigh the costs. Rather, 
section 15(a) requires that the CFTC ``consider'' the costs and 
benefits of its actions. Section 15(a) further specifies that the costs 
and benefits shall be evaluated in light of the following five broad 
areas of concern: (1) Protection of market participants and the public; 
(2) efficiency, competitiveness and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The CFTC may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding the costs, 
a particular rule, regulation, or order is necessary or appropriate to 
protect the public interest or to effectuate any of the provisions or 
accomplish any of the purposes of the CEA.
---------------------------------------------------------------------------

    \183\ See 5 U.S.C. 801(a)(1)(B)(i).
---------------------------------------------------------------------------

    The proposed rule 4.27(d) would deem a CPO registered with the CFTC 
that is dually registered as a private fund adviser with the SEC to 
have satisfied its filing requirements for Schedules B and C of 
proposed Form CPO-PQR by completing and filing the applicable portions 
of Form PF for each of its commodity pools that satisfy the definition 
of ``private fund'' in the Dodd-Frank Act. Under the proposed rule, 
most of the CPOs and CTAs that are dually registered as private fund 
advisers would be required to provide annually a limited amount of 
basic information on Form PF about the operations of their private 
funds. Only large CPOs and CTAs that are also registered as private 
fund advisers with the SEC would have to submit on a quarterly basis 
the full complement of systemic risk related information required by 
Form PF.
    As noted above, the Dodd-Frank Act tasks FSOC with monitoring the 
financial services marketplace in order to identify potential threats 
to the financial stability of the United States.\184\ The Dodd-Frank 
Act also requires FSOC to collect information from member agencies to 
support its functions.\185\ The CFTC and the SEC are jointly proposing 
sections 1 and 2 of Form PF as a means to collect the information 
necessary to permit FSOC to fulfill its obligation to monitor private 
funds, and in order to identify any potential systemic threats arising 
from their activities. The CFTC and the SEC do not currently collect 
the information that is covered in proposed sections 1 and 2 of Form 
PF.
---------------------------------------------------------------------------

    \184\ See section 112(a)(2)(C) of the Dodd-Frank Act.
    \185\ See section 112(d)(1) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    With respect to costs, the CFTC has determined that: (1) Without 
the proposed reporting requirements imposed on dually-registered CPOs 
and CTAs, FSOC will not have sufficient information to identify and 
address potential threats to the financial stability of the United 
States (such as the near collapse of Long Term Capital Management); (2) 
the proposed reporting requirements, once finalized, will provide the 
CFTC with better information regarding the business operations, 
creditworthiness, use of leverage, and other material information of 
certain registered CPOs and CTAs that are also registered as investment 
advisers with the SEC; and (3) while they are necessary to U.S. 
financial stability, the proposed reporting requirements will create 
additional compliance costs for these registrants.
    The CFTC has determined that the proposed reporting requirements 
will provide a benefit to all investors and market participants by 
providing the CFTC and other policy makers with more complete 
information about these registrants and the potential risk their 
activities may pose to the U.S. financial system. In turn, this 
information would enhance the CFTC's ability to appropriately tailor 
its regulatory policies to the commodity pool industry and its 
operators and advisors. As mentioned above, the CFTC and the SEC do not 
have access to this information today and have instead been made to use 
information from other, less reliable sources.
    The CFTC invites public comment on its cost-benefit considerations 
as concerns sections 1 and 2 of Form PF. Commenters are also invited to 
submit any data and other information that they may have quantifying or 
qualifying the perceived costs and benefits of this proposed rule with 
their comment letters.

VI. SEC Economic Analysis

    As discussed above, the Dodd-Frank Act amended the Advisers Act to, 
among other things, authorize and direct the SEC to promulgate 
reporting requirements for private fund advisers. In enacting Sections 
404 and 406 of the Dodd-Frank Act, Congress determined to require that 
private fund advisers file reports with the SEC and specified certain 
types of information that should be subject to reporting and/or 
recordkeeping requirements, but Congress left to the SEC the 
determination of the specific information to be maintained or reported. 
When determining the form and content of such reports, the SEC may 
require that private fund advisers file such information ``as necessary 
and appropriate in the public interest and for the protection of 
investors'' or for the assessment of system risk.
    The SEC is proposing rule 204(b)-1 and Form PF, to implement the 
private fund adviser reporting requirements that the Dodd-Frank Act 
contemplates. Under the proposed rule, private fund advisers would be 
required to file information responsive to all or portions of Form PF 
on a periodic basis. The scope of the required information and the 
frequency of the reporting would be related to the amount of private 
fund assets that each private fund adviser manages and the type of 
private fund to which those assets relate. Specifically, smaller 
private fund advisers would be required to report annually and provide 
only basic information regarding their operations and the private funds 
they advise, while Large Private Fund Advisers would report on a 
quarterly basis and provide more information.\186\
---------------------------------------------------------------------------

    \186\ See section II.B of this Release for a description of who 
would be required to file Form PF, section II.C of this Release for 
information regarding the frequency with which private fund advisers 
would be required to file Form PF, and section II.D of this Release 
for a description of the information that private fund advisers 
would be required to report on Form PF. See also proposed 
Instruction 8 to Form PF for information regarding the frequency 
with which private fund advisers would be required to file Form PF.
---------------------------------------------------------------------------

    The SEC is sensitive to the costs and benefits imposed by its 
rules. It has identified certain costs and benefits of proposed 
Advisers Act rule 204(b)-1 and Form PF, and it requests comment on all 
aspects of the cost-benefit analysis below, including identification 
and assessment of any costs and benefits not discussed in this 
analysis. In

[[Page 8088]]

connection with its consideration of the costs and benefits, the SEC 
also has considered whether the proposal would promote efficiency, 
competition, and capital formation. Section 202(c) of the Advisers Act 
requires the SEC, when engaging in rulemaking that requires it to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.\187\
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    The SEC seeks comment and data on the value of the benefits 
identified. It also welcomes comments on the accuracy of the cost 
estimates in this analysis, and requests that commenters provide data 
that may be relevant to these cost estimates. In addition, the SEC 
seeks estimates and views regarding these costs and benefits for 
particular covered advisers, including small advisers, as well as any 
other costs or benefits that may result from the adoption of the 
proposed rule and form.
    Because proposed Advisers Act rule 204(b)-1 and Form PF would 
implement sections 404 and 406 of the Dodd-Frank Act, the benefits and 
costs considered by Congress in passing the Dodd-Frank Act are not 
entirely separable from the benefits and costs imposed by the SEC in 
designing the proposed rule and form. Accordingly, although the PRA 
hourly burden estimates discussed above, and their corresponding dollar 
cost estimates, are included in full below and in the PRA analysis 
above, a portion of the reporting costs is attributable to the 
requirements of the Dodd-Frank Act and not specific requirements of the 
proposed rule or form.

A. Benefits

    The SEC believes Form PF may create two principal classes of 
benefits. First, the information collected through Form PF is expected 
to facilitate FSOC's monitoring of the systemic risks that private 
funds may pose and to assist FSOC in carrying out its other duties 
under the Dodd-Frank Act with respect to nonbank financial companies. 
Second, this information may enhance the ability of the SEC to evaluate 
and form regulatory policies and improve the efficiency and 
effectiveness of the SEC's monitoring of markets for investor 
protection and market vitality.
    The Dodd-Frank Act directs FSOC to monitor emerging risks to U.S. 
financial stability \188\ and to require FRB supervision of designated 
nonbank financial companies that may pose risks to U.S. financial 
stability in the event of their material financial distress or failure 
or because of their activities.\189\ In addition, the Dodd-Frank Act 
directs FSOC to recommend to the FRB heightened prudential standards 
for designated nonbank financial companies.\190\
---------------------------------------------------------------------------

    \188\ See supra note 6 and accompanying text.
    \189\ Section 112(a)(2) of the Dodd-Frank Act.
    \190\ See supra note 7 and accompanying text.
---------------------------------------------------------------------------

    In enacting Sections 404 and 406 of the Dodd-Frank Act, Congress 
recognized that FSOC would need information from private fund advisers 
to help it carry out its duties. As a result, proposed Form PF is 
designed to gather information regarding the private fund industry that 
would be useful to FSOC in monitoring systemic risk.\191\ Systemic risk 
may arise from a variety of sources, including interconnectedness, 
changes in market liquidity and market concentrations, and so the 
information that Form PF elicits is intended to provide data that, 
individually or in the aggregate, would permit FSOC to identify where 
systemic risk may arise across a range of sources. The SEC expects that 
FSOC would use this data to supplement the data that it collects 
regarding other financial market participants and gain a broader view 
of the financial system than is currently available to regulators. In 
this manner, the SEC believes that the information collected through 
Form PF could play an important role in FSOC's monitoring of systemic 
risk, both in the private fund industry and in the financial markets 
more broadly.
---------------------------------------------------------------------------

    \191\ See section II.D of this Release for a description of the 
information that private fund advisers would be required to report 
on proposed Form PF.
---------------------------------------------------------------------------

    The proposed private fund reporting on Form PF would also benefit 
all investors and market participants by improving the information 
available to the SEC regarding the private fund industry. Today, 
regulators have little reliable data regarding this rapidly growing 
sector and frequently have to rely on data from other sources, which 
when available may be incomplete. As discussed above, the more reliable 
data collected through Form PF would assist FSOC in identifying and 
addressing risks to U.S. financial stability, potentially protecting 
investors and other market participants from significant losses. In 
addition, this data would provide the SEC with a more complete view of 
the financial markets in general and the private fund industry in 
particular. This broader perspective and more reliable data may enhance 
its ability to form and frame regulatory policies regarding the private 
fund industry and its advisers, and to more effectively evaluate the 
outcomes of regulatory policies and programs directed at this sector, 
including for the protection of private fund investors.
    The SEC also estimates that the proposed rule may improve the 
efficiency and effectiveness of the SEC's oversight of private fund 
advisers by enabling SEC staff to manage and analyze information 
related to the risks posed by private funds more quickly, more 
effectively, and at a lower cost than is currently possible. This would 
allow the SEC to more efficiently and effectively target its 
examination program. The SEC would be able to use Form PF information 
to generate reports on the industry, its characteristics and trends. 
These reports may help the SEC anticipate regulatory problems, allocate 
and reallocate its resources, and more fully evaluate and anticipate 
the implications of various regulatory actions it may consider taking, 
which should increase both the efficiency and effectiveness of its 
programs and thus increase investor protection. Responses to many of 
the proposed questions would help the SEC better understand the 
investment activities of private funds and the scope of their potential 
effect on investors and the markets that the SEC regulates.
    The coordination with the CFTC would also result in significant 
efficiencies for private fund advisers that are also registered as a 
CPO or CTA with the CFTC because, under the proposed rules in this 
Release, these advisers would satisfy certain reporting obligations 
under both proposed Advisers Act rule 204(b)-1 and proposed CEA rule 
4.27(d) with respect to commodity pools that satisfy the definition of 
``private fund'' (as proposed in Form PF) by filing Form PF. As 
discussed in section I.B of this Release, the SEC also has coordinated 
with foreign financial regulators regarding the reporting of systemic 
risk information regarding hedge funds and anticipates that this 
coordination, as reflected in proposed Form PF, would result in greater 
efficiencies in reporting by private fund advisers, as well as 
information sharing and private fund monitoring among foreign financial 
regulators.
    As discussed in section II.B of this Release, the SEC has designed 
the reporting frequency in proposed Form PF based on when it 
understands advisers to private funds are already compiling certain 
information that Form PF would require, creating efficiencies for, and 
benefiting, the adviser in satisfying its reporting obligations. The 
SEC also has based certain more specific

[[Page 8089]]

reporting items on information that it understands large hedge fund 
advisers frequently calculate for purposes of reporting to investors in 
the funds.\192\
---------------------------------------------------------------------------

    \192\ See note 105 and accompanying text.
---------------------------------------------------------------------------

    The SEC does not expect that this proposal would have an effect on 
competition because the information generally would be non-public and 
similar types of advisers would have comparable burdens under the form. 
The SEC also does not expect that this proposal would have an effect on 
capital formation because the information generally would be non-public 
and thus should not impact private fund advisers' ability to raise 
capital or their market activities.

B. Costs

    The proposed reporting requirement also would impose certain costs 
on private fund advisers. In order to minimize these costs, the scope 
of the required information and the frequency of the reporting 
generally would be less for private fund advisers that manage less 
private fund assets or that do not manage types of private funds that 
may be more likely to pose systemic risk. Specifically, smaller private 
fund advisers would be required to report annually and provide only 
basic information regarding their operations and the private funds they 
advise, while Large Private Fund Advisers would report on a quarterly 
basis and provide more information.\193\ Further, the additional 
information required from large hedge fund advisers would be more 
extensive than the additional information required from large liquidity 
fund advisers, which in turn would be more extensive than that required 
from large private equity fund advisers.
---------------------------------------------------------------------------

    \193\ See section II.B of this Release for a description of who 
would be required to file Form PF, section II.C of this Release for 
information regarding the frequency with which private fund advisers 
would be required to file Form PF, and section II.D of this Release 
for a description of the information that private fund advisers 
would be required to report on Form PF. See also proposed 
Instruction 8 to Form PF for information regarding the frequency 
with which private fund advisers would be required to file Form PF.
---------------------------------------------------------------------------

    The SEC expects that the costs of reporting would be most 
significant for the first report that a private fund adviser is 
required to file because the adviser would need to familiarize itself 
with the new reporting form and may need to configure its systems in 
order to efficiently gather the required information. The SEC also 
anticipates that the initial report would require more attention from 
senior personnel, including compliance managers and senior risk 
management specialists, than would subsequent reports. In addition, the 
SEC expects that some Large Private Fund Advisers would find it 
efficient to automate some portion of the reporting process, which 
would increase the burden of the initial filing but reduce the burden 
of subsequent filings.
    In subsequent reporting periods, the SEC anticipates that filers 
would incur significantly lower costs because much of the work involved 
in the initial report is non-recurring and because of efficiencies 
realized from system configuration and reporting automation efforts 
accounted for in the initial reporting period. In addition, the SEC 
estimates that senior personnel would bear less of the reporting burden 
in subsequent reporting periods, reducing costs though not necessarily 
reducing the burden hours.
    Based on the foregoing, the SEC estimates \194\ that, for the 
purposes of the PRA, the periodic filing requirements under Form PF 
(including configuring systems and compiling, automating, reviewing and 
electronically filing the report) would impose:
---------------------------------------------------------------------------

    \194\ The SEC understands that some advisers may outsource all 
or a portion of their Form PF reporting responsibilities to a filing 
agent, software consultant, or other third-party service provider. 
The SEC believes, however, that an adviser would engage third-party 
service providers only if the external costs were comparable, or 
less than, the estimated internal costs of compiling, reviewing, and 
filing the Form PF. The hourly wage data used in this Economic 
Analysis section of the Release is based on the Securities Industry 
and Financial Markets Association's Report on Management & 
Professional Earnings in the Securities Industry 2010. This data has 
been modified to account for an 1,800-hour work-year and multiplied 
by 5.35 for management and professional employees and by 2.93 for 
general and compliance clerks to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    (1) 10 burden hours at a cost of $3,410 \195\ per smaller private 
fund adviser for the initial annual report;
---------------------------------------------------------------------------

    \195\ The SEC expects that for the initial report these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour and a senior risk management 
specialist at a cost of $409 per hour and that, because of the 
limited scope of information required from smaller private fund 
advisers, these advisers generally would not realize significant 
benefits from or incur significant costs for system configuration or 
automation. ($273/hour x 0.5 + $409/hour x 0.5) x 10 hours = 
approximately $3,410.
---------------------------------------------------------------------------

    (2) 3 burden hours at a cost of $830 \196\ per smaller private fund 
adviser for each subsequent annual report;
---------------------------------------------------------------------------

    \196\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden. As a result, the 
SEC estimates that these activities will most likely be performed 
equally by a compliance manager at a cost of $273 per hour, a senior 
compliance examiner at a cost of $235 per hour, a senior risk 
management specialist at a cost of $409 per hour and a risk 
management specialist at a cost of $192 per hour. ($273/hour x 0.25 
+ $235/hour x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 3 hours 
= approximately $830.
---------------------------------------------------------------------------

    (3) 75 burden hours at a cost of $23,270 \197\ per large hedge fund 
adviser for the initial quarterly report;
---------------------------------------------------------------------------

    \197\ The SEC expects that for the initial report, of a total 
estimated burden of 75 hours, approximately 45 hours will most 
likely be performed by compliance professionals and 30 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, the SEC anticipates that it will be 
performed equally by a compliance manager at a cost of $273 per hour 
and a senior risk management specialist at a cost of $409 per hour. 
Of the work performed by programmers, the SEC anticipates that it 
will be performed equally by a senior programmer at a cost of $304 
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 45 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 30 hours = approximately $23,270.
---------------------------------------------------------------------------

    (4) 35 burden hours at a cost of $9,700 \198\ per large hedge fund 
adviser for each subsequent quarterly report;
---------------------------------------------------------------------------

    \198\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden and that 
significant system configuration and reporting automation costs will 
not be incurred. As a result, the SEC estimates that these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour, a senior compliance examiner at 
a cost of $235 per hour, a senior risk management specialist at a 
cost of $409 per hour and a risk management specialist at a cost of 
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x 
0.25 + $192/hour x 0.25) x 35 hours = approximately $9,700.
---------------------------------------------------------------------------

    (5) 35 burden hours at a cost of $10,860 \199\ per large liquidity 
fund adviser for the initial quarterly report;
---------------------------------------------------------------------------

    \199\ The SEC expects that for the initial report, of a total 
estimated burden of 35 hours, approximately 21 hours will most 
likely be performed by compliance professionals and 14 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, the SEC anticipates that it will be 
performed equally by a compliance manager at a cost of $273 per hour 
and a senior risk management specialist at a cost of $409 per hour. 
Of the work performed by programmers, the SEC anticipates that it 
will be performed equally by a senior programmer at a cost of $304 
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 21 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 14 hours = approximately $10,860.
---------------------------------------------------------------------------

    (6) 16 burden hours at a cost of $4,440 \200\ per large liquidity 
fund adviser for each subsequent quarterly report;
---------------------------------------------------------------------------

    \200\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden and that 
significant system configuration and reporting automation costs will 
not be incurred. As a result, the SEC estimates that these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour, a senior compliance examiner at 
a cost of $235 per hour, a senior risk management specialist at a 
cost of $409 per hour and a risk management specialist at a cost of 
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x 
0.25 + $192/hour x 0.25) x 16 hours = approximately $4,440.
---------------------------------------------------------------------------

    (7) 25 burden hours at a cost of $7,760 \201\ per large private 
equity fund

[[Page 8090]]

adviser for the initial quarterly report; and
---------------------------------------------------------------------------

    \201\ The SEC expects that for the initial report, of a total 
estimated burden of 25 hours, approximately 15 hours will most 
likely be performed by compliance professionals and 10 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, the SEC anticipates that it will be 
performed equally by a compliance manager at a cost of $273 per hour 
and a senior risk management specialist at a cost of $409 per hour. 
Of the work performed by programmers, the SEC anticipates that it 
will be performed equally by a senior programmer at a cost of $304 
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 15 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 10 hours = approximately $7,760.
---------------------------------------------------------------------------

    (8) 12 burden hours at a cost of $3,330 \202\ per large private 
equity fund adviser for each subsequent quarterly report.

    \202\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden and that 
significant system configuration and reporting automation costs will 
not be incurred. As a result, the SEC estimates that these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour, a senior compliance examiner at 
a cost of $235 per hour, a senior risk management specialist at a 
cost of $409 per hour and a risk management specialist at a cost of 
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x 
0.25 + $192/hour x 0.25) x 12 hours = approximately $3,330.
---------------------------------------------------------------------------

Assuming that there are 3,920 smaller private fund advisers, 200 large 
hedge fund advisers, 80 large liquidity fund advisers, and 250 large 
private equity fund advisers, the foregoing estimates would suggest an 
annual cost of $30,200,000 \203\ for all private fund advisers in the 
first year of reporting and an annual cost of $15,800,000 in subsequent 
years.\204\
---------------------------------------------------------------------------

    \203\ (3,920 smaller private fund advisers x $3,410 per initial 
annual report) + (200 large hedge fund advisers x $23,270 per 
initial quarterly report) + (200 large hedge fund advisers x 3 
quarterly reports x $9,700 per subsequent quarterly report) + (80 
large liquidity fund advisers x $10,860 per initial quarterly 
report) + (80 large liquidity fund advisers x 3 quarterly reports x 
$4,440 per subsequent quarterly report) + (250 large private equity 
fund advisers x $7,760 per initial quarterly report) + (250 large 
private equity fund advisers x 3 quarterly reports x $3,330 per 
subsequent quarterly report) = approximately $30,200,000.
    \204\ (3,920 smaller private fund advisers x $830 per subsequent 
annual report) + (200 large hedge fund advisers x 4 quarterly 
reports x $9,700 per subsequent quarterly report) + (80 large 
liquidity fund advisers x 4 quarterly reports x $4,440 per 
subsequent quarterly report) + (250 large private equity fund 
advisers x 4 quarterly reports x $3,330 per subsequent quarterly 
report) = approximately $15,800,000.
---------------------------------------------------------------------------

    In addition, as discussed above, a private fund adviser would be 
required to file very limited information on Form PF if it needed to 
transition from quarterly to annual filing, if it were no longer 
subject to the reporting requirements of Form PF or if it required a 
temporary hardship exemption under proposed rule 204(b)-1(f). The SEC 
estimates that transition and final filings would, collectively, cost 
private fund advisers as a whole approximately $6,770 per year.\205\ 
The SEC further estimates that hardship exemption requests would cost 
private fund advisers as a whole approximately $760 per year.\206\
---------------------------------------------------------------------------

    \205\ The SEC estimates that, for the purposes of the PRA, 
transition filings will impose 12 burden hours per year on private 
fund advisers in the aggregate and that final filings will impose 89 
burden hours per year on private fund advisers in the aggregate. The 
SEC anticipates that this work will most likely be performed by a 
compliance clerk at a cost of $67 per hour. (12 burden hours + 89 
burden hours) x $67/hour = approximately $6,770.
    \206\ The SEC estimates that, for the purposes of the PRA, 
requests for temporary hardship exemptions will impose 4 burden 
hours per year on private fund advisers in the aggregate. The SEC 
anticipants that five-eighths of this work will most likely be 
performed by a compliance manager at a cost of $273 per hour and 
that three-eighths of this work will most likely be performed by a 
general clerk at a cost of $50 per hour. (($273 per hour x \5/8\ of 
an hour) + ($50 per hour x \3/8\ of an hour)) x 4 hours = 
approximately $760.
---------------------------------------------------------------------------

    Finally, firms required to file Form PF would have to pay filing 
fees. The amount of these fees has not yet been determined.\207\
---------------------------------------------------------------------------

    \207\ See supra note 147 and accompanying text.
---------------------------------------------------------------------------

C. Request for Comment

    The SEC requests comments on all aspects of the foregoing cost-
benefit analysis, including the accuracy of the potential costs and 
benefits identified and assessed in this Release, as well as any other 
costs or benefits that may result from the proposals. The SEC 
encourages commenters to identify, discuss, analyze, and supply 
relevant data regarding these or additional costs and benefits. The SEC 
also requests comment on the foregoing analysis of the likely effect of 
the proposed rule on competition, efficiency, and capital formation. 
Commenters are requested to provide empirical data to support their 
views.
    In addition, for purposes of the Small Business Regulatory 
Enforcement Fairness Act of 1996, or ``SBREFA,'' \208\ the SEC must 
advise OMB whether a proposed regulation constitutes a ``major'' rule. 
Under SBREFA, a rule is considered ``major'' where, if adopted, it 
results in or is likely to result in: (1) An annual effect on the 
economy of $100 million or more; (2) a major increase in costs or 
prices for consumers or individual industries; or (3) significant 
adverse effects on competition, investment, or innovation.
---------------------------------------------------------------------------

    \208\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed new rule 
and proposed rule amendments on the economy on an annual basis. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

VII. Initial Regulatory Flexibility Analysis

CFTC

    Under proposed rule 4.27(d), the CFTC would not impose any 
additional burden upon registered CPOs and CTAs that are dually 
registered as investment advisers with the SEC because such entities 
are only required to file Form PF with the SEC. Further, certain CPOs 
registered with the CFTC that are also registered with the SEC would be 
deemed to have satisfied certain CFTC-related filing requirements by 
completing and filing the applicable sections of Form PF with the SEC. 
Therefore, any burden imposed by Form PF through proposed rule 4.27(d) 
on small entities registered with both the CFTC and the SEC has been 
accounted for within the SEC's initial calculations regarding the 
impact of this collection of information under the Regulatory 
Flexibility Act (``RFA'').\209\ Accordingly, the Chairman, on behalf of 
the CFTC, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed rules will not have a significant impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \209\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

SEC

    The SEC has prepared the following Initial Regulatory Flexibility 
Analysis (``IRFA'') regarding proposed Advisers Act rule 204(b)-1 in 
accordance with section 3(a) of the RFA.

A. Reasons for Proposed Action

    The SEC is proposing rule 204(b)-1 and Form PF specifying 
information that private fund advisers must disclose confidentially to 
the SEC, which information the SEC will share with FSOC for systemic 
risk assessment purposes to help implement sections 404 and 406 of the 
Dodd-Frank Act. Under the proposed rule, private fund advisers would be 
required to file information responsive to all or portions of Form PF 
on a periodic basis. The scope of the required information and the 
frequency of the reporting would be related to the amount of private 
fund assets that each private fund adviser manages and the type of 
private fund to which those assets relate. Specifically, smaller 
private fund advisers would be required to report annually and provide 
only basic information regarding their operations and the private funds 
they advise, while Large Private Fund

[[Page 8091]]

Advisers would report on a quarterly basis and provide more 
information.\210\
---------------------------------------------------------------------------

    \210\ See section II.B of this Release for a description of who 
would be required to file Form PF, section II.C of this Release for 
information regarding the frequency with which private fund advisers 
would be required to file Form PF, and section II.D of this Release 
for a description of the information that private fund advisers 
would be required to report on Form PF. See also proposed 
Instruction 8 to Form PF for information regarding the frequency 
with which private fund advisers would be required to file Form PF.
---------------------------------------------------------------------------

B. Objectives and Legal Basis

    As described more fully in sections I and II of this Release, the 
general objective of proposed Advisers Act rule 204(b)-1 is to assist 
FSOC in its obligations under the Dodd-Frank Act relating to nonbank 
financial companies and in monitoring systemic risk. The SEC is 
proposing rule 204(b)-1 and Form PF pursuant to the SEC's authority set 
forth in sections 404 and 406 of the Dodd-Frank Act, to be codified at 
sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4(b) and 
80b-11(e)].

C. Small Entities Subject to the Rule

    Under SEC rules, for the purposes of the Advisers Act and the 
Regulatory Flexibility Act, an investment adviser generally is a small 
entity if it: (i) Has assets under management having a total value of 
less than $25 million; (ii) did not have total assets of $5 million or 
more on the last day of its most recent fiscal year; and (iii) does not 
control, is not controlled by, and is not under common control with 
another investment adviser that has assets under management of $25 
million or more, or any person (other than a natural person) that had 
total assets of $5 million or more on the last day of its most recent 
fiscal year.\211\
---------------------------------------------------------------------------

    \211\ 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    Under section 203A of the Advisers Act, most advisers qualifying as 
small entities are prohibited from registering with the SEC and are 
instead registered with State regulators. Therefore, few small advisers 
would be subject to the proposed rule and form. The SEC estimates that 
as of December 1, 2010, approximately 50 advisers that were small 
entities were registered with the SEC and advised one or more private 
funds.\212\
---------------------------------------------------------------------------

    \212\ Based on IARD data.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed rule and form would impose certain reporting and 
compliance requirements on advisers, including small advisers. The 
proposed rule would require all small advisers registered with the SEC 
and that advise one or more private funds to file Form PF, completing 
all or part of section 1 of that form. As discussed above, the SEC 
estimates that completing, reviewing, and filing Form PF would cost 
$3,410 per year for each small adviser in its first year of reporting 
and $830 per year for each subsequent year.\213\ In addition, small 
entities would be required to pay a filing fee when submitting Form PF. 
The amount of the filing fee has not yet been determined, but we 
anticipate that Large Private Fund Advisers' filing fees would be set 
at a higher amount than small advisers.
---------------------------------------------------------------------------

    \213\ See supra notes 195-196 and accompanying text.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The SEC has not identified any Federal rules that duplicate or 
overlap or conflict with the proposed rule.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the SEC to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant impact on small entities. In 
connection with the proposed rules and amendments, the SEC considered 
the following alternatives: (i) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (ii) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (iii) the use 
of performance rather than design standards; and (iv) an exemption from 
coverage of the rule, or any part thereof, for small entities.
    Regarding the first and fourth alternatives, the SEC has proposed 
different reporting requirements and timetables for small entities. The 
proposed rule only would require small entity advisers to file Form PF 
annually and to complete applicable portions of section 1 of the 
form.\214\ These smaller advisers also would have to pay a smaller 
amount of filing fees than Large Private Fund Advisers. Regarding the 
second alternative, the information that would be required of small 
entities under section 1 of Form PF is quite simplified from the more 
extensive reporting that would be required of Large Private Fund 
Advisers and is consolidated in one section of the form.
---------------------------------------------------------------------------

    \214\ If the adviser had no hedge fund assets under management, 
it would not need to complete section 1.C of the proposed form. 
Advisers that manage both registered money market funds and 
liquidity funds would be required to complete section 3 of Form PF, 
but there are no small entities that manage a registered money 
market fund. See section II.B of this Release for a description of 
who would be required to file Form PF, section II.C of this Release 
for information regarding the frequency with which smaller private 
fund advisers would be required to file Form PF, and section II.D.1 
of this Release for a description of the information that smaller 
private fund advisers would be required to report on Form PF. See 
also proposed Instruction 8 to Form PF for information regarding the 
frequency with which smaller private fund advisers would be required 
to file Form PF.
---------------------------------------------------------------------------

G. Solicitation of Comments

    The SEC encourages written comments on matters discussed in this 
IRFA. In particular, the SEC seeks comment on:
     The number of small entities that would be subject to the 
proposed rule; and
     Whether the effect of the proposed rule on small entities 
would be economically significant.
    Commenters are asked to describe the nature of any effect and 
provide empirical data supporting the extent of the effect.

VIII. Statutory Authority

CFTC

    The CFTC is proposing rule 4.27(d) [17 CFR 4.27(d)] pursuant to its 
authority set forth in section 4n of the Commodity Exchange Act [7 
U.S.C. 6n].

SEC

    The SEC is proposing rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant 
to its authority set forth in sections 404 and 406 of the Dodd-Frank 
Act, to be codified at sections 204(b) and 211(e) of the Advisers Act 
[15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
    The SEC is proposing rule 279.9 pursuant to its authority set forth 
in sections 404 and 406 of the Dodd-Frank Act, to be codified at 
sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4 and 15 
U.S.C. 80b-11], respectively.

List of Subjects

17 CFR Part 4

    Advertising, Brokers, Commodity Futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

[[Page 8092]]

Text of Proposed Rules

Commodity Futures Trading Commission

    For the reasons set out in the preamble, the CFTC is proposing to 
amend Title 17, Chapter I of the Code of Federal Regulations as 
follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 
12a, and 23.
* * * * *
    2. In Sec.  4.27, as proposed to be added elsewhere in this issue 
of the Federal Register, add paragraph (d) to read as follows:


Sec.  4.27  Additional reporting by advisors of commodity pools.

* * * * *
    (d) Investment advisers to private funds. CPOs and CTAs who are 
dually registered with the Securities and Exchange Commission and 
advise one or more private funds, as defined in section 202 of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)), shall file Form 
PF with the Securities and Exchange Commission. Dually registered CPOs 
and CTAs that file Form PF with the Securities and Exchange Commission 
will be deemed to have filed Form PF with the Commission for purposes 
of any enforcement action regarding any false or misleading statement 
of a material fact in Form PF. Dually registered CPOs and CTAs must 
file such other reports as are required under this section with respect 
to all pools that are not private funds.
* * * * *

Securities and Exchange Commission

    For the reasons set out in the preamble, the SEC is proposing to 
amend Title 17, Chapter II of the Code of Federal Regulations as 
follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    3. The authority citation for part 275 continues to read in part as 
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
    4. Section 275.204(b)-1 is added to read as follows:


Sec.  275.204(b)-1  Reporting by investment advisers to private funds.

    (a) Reporting by investment advisers to private funds on Form PF. 
Subject to paragraph (g), if you are an investment adviser registered 
or required to be registered under section 203 of the Act (15 U.S.C. 
80b-3) and act as an investment adviser to one or more private funds, 
you must complete and file a report on Form PF (17 CFR 279.9) within 15 
days of the end of the next calendar quarter by following the 
instructions in the Form, which specify the information that an 
investment adviser must provide.
    (b) Electronic filing. You must file Form PF electronically with 
the Form PF filing system.

    Note to paragraph (b):  Information on how to file Form PF is 
available on the Commission's Web site at http://www.sec.gov/[----].

    (c) When filed. Each Form PF is considered filed with the 
Commission upon acceptance by the Form PF filing system.
    (d) Filing fees. You must pay the operator of the Form PF filing 
system a filing fee as required by the instructions to Form PF. The 
Commission has approved the amount of the filing fee. No portion of the 
filing fee is refundable. Your completed Form PF will not be accepted 
by the operator of the Form PF filing system, and thus will not be 
considered filed with the Commission, until you have paid the filing 
fee.
    (e) Amendments to Form PF. You must amend your Form PF:
    (1) At least annually, no later than the last day on which you may 
timely file your annual amendment to Form ADV under rule 204-1(a)(1) 
(17 CFR 275.204-1(a)(1)); and
    (2) More frequently, if required by the instructions to Form PF. 
You must file all amendments to Form PF electronically with the Form PF 
filing system.
    (f) Temporary hardship exemption. (1) If you have unanticipated 
technical difficulties that prevent you from submitting Form PF on a 
timely basis through the Form PF filing system, you may request a 
temporary hardship exemption from the requirements of this section to 
file electronically.
    (2) To request a temporary hardship exemption, you must:
    (i) Complete and file with the operator of the Form PF filing 
system in paper format Item A of Section 1a and Section 5 of Form PF, 
checking the box in Section 1a indicating that you are requesting a 
temporary hardship exemption, no later than one business day after the 
electronic Form PF filing was due; and
    (ii) Submit the filing that is the subject of the Form PF paper 
filing in electronic format with the Form PF filing system no later 
than seven business days after the filing was due.
    (3) The temporary hardship exemption will be granted when you file 
Item A of Section 1a and Section 5 of Form PF, checking the box in 
Section 1a indicating that you are requesting a temporary hardship 
exemption.
    (g) Transition for certain filers. If you were an investment 
adviser registered or required to be registered under section 203 of 
the Act (15 U.S.C. 80b-3), act as an investment adviser to one or more 
private funds immediately prior to the compliance date of rule 204(b)-
1, and are only required to complete all or portions of section 1 of 
Form PF, no later than 90 days after the end of your then-current 
fiscal year you must complete and file your initial report on Form PF 
by following the instructions in the Form, which specify the 
information that an investment adviser must provide.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

    5. The authority citation for part 279 continues to read as 
follows:

    Authority: 15 U.S.C. 80b-1, et seq.

    6. Section 279.9 is added to read as follows:


Sec.  279.9  Form PF, reporting by investment advisers to private 
funds.

    This form shall be filed pursuant to Rule 204(b)-1 (Sec.  
275.204(b)-1 of this chapter) by certain investment advisers registered 
or required to register under section 203 of the Act (15 U.S.C. 80b-3) 
that act as an investment adviser to one or more private funds.

    Note: The following Form PF will not appear in the Code of 
Federal Regulations.


[[Page 8093]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.075


[[Page 8094]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.076


[[Page 8095]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.077


[[Page 8096]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.078


[[Page 8097]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.079


[[Page 8098]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.080


[[Page 8099]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.081


[[Page 8100]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.082


[[Page 8101]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.083


[[Page 8102]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.084


[[Page 8103]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.085


[[Page 8104]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.086


[[Page 8105]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.087


[[Page 8106]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.088


[[Page 8107]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.089


[[Page 8108]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.090


[[Page 8109]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.091


[[Page 8110]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.092


[[Page 8111]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.093


[[Page 8112]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.094


[[Page 8113]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.095


[[Page 8114]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.096


[[Page 8115]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.097


[[Page 8116]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.098


[[Page 8117]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.099


[[Page 8118]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.100


[[Page 8119]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.101


[[Page 8120]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.102


[[Page 8121]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.103


[[Page 8122]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.104


[[Page 8123]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.105


[[Page 8124]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.106


[[Page 8125]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.107


[[Page 8126]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.108


[[Page 8127]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.109


[[Page 8128]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.110


[[Page 8129]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.111


[[Page 8130]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.112


[[Page 8131]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.113


[[Page 8132]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.114


[[Page 8133]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.115


[[Page 8134]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.116


[[Page 8135]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.117


[[Page 8136]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.118


[[Page 8137]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.119


[[Page 8138]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.120


[[Page 8139]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.121


[[Page 8140]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.122


[[Page 8141]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.123


[[Page 8142]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.124


[[Page 8143]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.125


[[Page 8144]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.126


[[Page 8145]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.127


[[Page 8146]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.128


[[Page 8147]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.129


[[Page 8148]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.130


[[Page 8149]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.131


[[Page 8150]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.132


[[Page 8151]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.133


[[Page 8152]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.134


[[Page 8153]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.135


[[Page 8154]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.136


[[Page 8155]]


[GRAPHIC] [TIFF OMITTED] TP11FE11.137



    By the Commodity Futures Trading Commission.
    Dated: January 26, 2011.
David A. Stawick,
Secretary.
    By the Securities and Exchange Commission.

    Dated: January 26, 2011.
Elizabeth M. Murphy,
Secretary.

Appendix 1--Commodity Futures Trading Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Sommers 
(by proxy), Chilton and O'Malia voted in the affirmative; no 
Commissioner voted in the negative.

[FR Doc. 2011-2175 Filed 2-10-11; 8:45 am]
BILLING CODE 8011-01-P; 6351-01-P