[Federal Register Volume 87, Number 33 (Thursday, February 17, 2022)]
[Proposed Rules]
[Pages 9106-9235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01976]
[[Page 9105]]
Vol. 87
Thursday,
No. 33
February 17, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 275 and 279
Amendments to Form PF To Require Current Reporting and Amend Reporting
Requirements for Large Private Equity Advisers and Large Liquidity Fund
Advisers; Proposed Rule
Federal Register / Vol. 87, No. 33 / Thursday, February 17, 2022 /
Proposed Rules
[[Page 9106]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-5950; File No. S7-01-22]
RIN 3235-AM75
Amendments to Form PF To Require Current Reporting and Amend
Reporting Requirements for Large Private Equity Advisers and Large
Liquidity Fund Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing to amend Form PF, the confidential
reporting form for certain SEC-registered investment advisers to
private funds to require current reporting upon the occurrence of key
events. The proposed amendments also would decrease the reporting
threshold for large private equity advisers and require these advisers
to provide additional information to the SEC about the private equity
funds they advise. Finally, we are proposing to amend requirements
concerning how large liquidity advisers report information about the
liquidity funds they advise. The proposed amendments are designed to
enhance the Financial Stability Oversight Council's (``FSOC'') ability
to monitor systemic risk as well as bolster the SEC's regulatory
oversight of private fund advisers and investor protection efforts.
DATES: Comments should be received on or before March 21, 2022.
ADDRESSES: Comments may be submitted by any of the following methods.
Electronic Comments
Use the Commission's internet comment forms (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-01-22 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, U.S.
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-01-22. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/proposed.shtml). Comments also are
available for website viewing and printing in the Commission'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. Operating
conditions may limit access to the Commission's Public Reference Room.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Alexis Palascak, Lawrence Pace, Samuel
K. Thomas, Senior Counsels; Michael C. Neus, Senior Special Counsel; or
Melissa Gainor, Assistant Director at (202) 551-6787 or
[email protected], Investment Adviser Regulation Office, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The SEC is requesting public comment on the
following under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
(``Advisers Act'').\1\
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\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any section of the Advisers Act, we are referring
to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section of these
rules, we are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR 275], in which these rules are published.
\2\ Form PF was adopted in 2011 as required by the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010. Pub. L. 111-
203, 124 Stat. 1376 (2010). See Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool Operators and Commodity
Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31,
2011), [76 FR 71128 (Nov. 16, 2011)] (``2011 Form PF Adopting
Release'') at section I. In 2014, the Commission amended Form PF
section 3 in connection with certain money market fund reforms. See
Money Market Fund Reform; Amendments to Form PF, Advisers Act
Release No. 3879 (July 23, 2014), [79 FR 47736] (Aug. 14, 2014)
(``2014 Form PF Amending Release''). Form PF is a joint form between
the Commission and the Commodity Futures Trading Commission
(``CFTC'') only with respect to sections 1 and 2 of the Form;
sections 3 and 4, which we propose to amend, were adopted only by
the Commission. Current Form PF section 5, request for temporary
hardship exemption, would become new section 7 and new sections 5
and 6 are proposed only by the Commission.
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Commission reference CFR citation
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Form PF................................ 17 CFR 279.9.
Rule 204(b)-1.......................... 17 CFR 275.204(b)-1.
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Table of Contents
I. Introduction
II. Discussion
A. Current Reporting for Large Hedge Fund Advisers and Advisers
to Private Equity Funds
1. Large Hedge Fund Adviser Current Reporting on Qualifying
Hedge Funds
2. Private Fund Adviser Current Reporting on Private Equity
Funds
3. Filing Fees and Format for Reporting
B. Large Private Equity Adviser Reporting
1. Reduction in Large Private Equity Adviser Reporting Threshold
2. Large Private Equity Adviser Reporting
C. Large Liquidity Fund Adviser Reporting
III. Economic Analysis
A. Introduction
B. Economic Baseline and Affected Parties
1. Economic Baseline
2. Affected Parties
C. Benefits and Costs
1. Benefits
2. Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
F. Request for Comment
IV. Paperwork Reduction Act
A. Purpose and Use of the Information Collection
B. Confidentiality
C. Burden Estimates
1. Proposed Form PF Requirements by Respondent
2. Annual Hour Burden Estimates
3. Annual Monetized Time Burden Estimates
4. Annual External Cost Burden Estimates
5. Summary of Estimates and Change in Burden
D. Request for Comments
[[Page 9107]]
V. Regulatory Flexibility Act Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority
I. Introduction
The Commission is proposing to amend Form PF, the form that certain
investment advisers registered with the Commission use to report
confidential information about the private funds that they advise.\2\
The proposed amendments are designed to enhance FSOC's monitoring and
assessment of systemic risk and to provide additional information for
FSOC's use in determining whether and how to deploy its regulatory
tools. The proposed amendments also are designed to collect additional
data for the Commission's use in its regulatory programs, including
examinations, investigations and investor protection efforts relating
to private fund advisers.
Form PF provides the Commission and FSOC with important information
about the basic operations and strategies of private funds and has
helped establish a baseline picture of the private fund industry for
use in assessing systemic risk.\3\ We now have almost a decade of
experience analyzing the information collected on Form PF. In that
time, the private fund industry has grown in size and evolved in terms
of business practices, complexity of fund structures, and investment
strategies and exposures.\4\ Based on this experience and in light of
these changes, the Commission and FSOC have identified significant
information gaps and situations where more granular and timely
information would improve our understanding of the private fund
industry and the potential systemic risk within it, and improve our
ability to protect investors.\5\
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\3\ Advisers Act section 202(a)(29) 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 (``Investment
Company Act''), but for sections 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 (or, in the
case of a qualifying venture capital fund, 250 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. Since Form PF's adoption
Commission staff have used Form PF statistics to inform our
regulatory programs and establish census type information regarding
the private fund industry. See SEC 2020 Annual Staff Report Relating
to the Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf. Staff reports,
statistics, and other staff documents (including those cited herein)
represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person. The Commission has expressed no view
regarding the analysis, findings, or conclusions contained therein.
\4\ The value of private fund net assets reported on Form PF has
more than doubled, growing from $5 trillion in 2013 to $11 trillion
by the end of 2020, while the number of private funds reported on
the form has increased by nearly 70 percent in that time period.
Unless otherwise noted, the private funds statistics used in this
Release are from the Private Funds Statistics Fourth Quarter 2020.
Any comparisons to earlier periods are from the private funds
statistics from that period, all of which are available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. SEC
staff began publishing the private fund statistics in 2015,
including data from 2013. Therefore, many comparisons in this
Release discuss the eight year span from the beginning of 2013
through the end of 2020. Some discussion in this Release compares
data from a six year span, from the beginning of 2015 through the
end of 2020, because the SEC staff began publishing that particular
data in 2016.
\5\ We are proposing these amendments, in part, pursuant to our
authority under section 204(b) of the Advisers Act, which gives the
Commission the authority to establish certain reporting and
recordkeeping requirements for advisers to private funds and
provides that the records and reports of any private fund to which
an investment adviser registered with the Commission provides
investment advice are deemed to be the records and reports of the
investment adviser.
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First, we are proposing new current reporting by large hedge fund
advisers \6\ regarding their qualifying hedge funds \7\ and by private
equity advisers upon the occurrence of certain key events. Most private
fund advisers report general information on Form PF, such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors. Certain larger private fund advisers
report more detailed information on the qualifying hedge funds, the
liquidity funds and the private equity funds that they advise.\8\ In
its current form, however, Form PF does not require current reporting
of information from advisers whose funds are facing stress that could
result in investor harm or potentially create systemic risk. Advisers
file Form PF months after their quarter and year ends, depending on
their size and the type of funds they advise. This means that during
fast moving market events, Form PF data is often stale.\9\
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\6\ See infra footnote 8.
\7\ A qualifying hedge fund is defined in Form PF as ``any hedge
fund that has a net asset value (individually or in combination with
fund any feeder funds, parallel funds and/or dependent parallel
managed accounts) of at least $500 million as of the last day of any
month in the fiscal quarter immediately preceding your most recently
completed fiscal quarter.''
\8\ In particular, three types of ``Large Private Fund
Advisers'' must complete certain additional sections of the current
Form PF: (1) Any adviser having at least $1.5 billion in regulatory
assets under management attributable to hedge funds as of the end of
any month in the prior fiscal quarter (``large hedge fund
advisers''); (2) any adviser managing a liquidity fund and having at
least $1 billion in combined regulatory assets under management
attributable to liquidity funds and registered money market funds as
of the end of any month in the prior fiscal quarter (``large
liquidity fund advisers''); and (3) any adviser having at least $2
billion in regulatory assets under management attributable to
private equity funds as of the last day of the adviser's most
recently completed fiscal year (``large private equity adviser'').
Under the proposal, we would lower the threshold for large private
equity advisers to $1.5 billion.
\9\ Instruction 9 to Form PF directs large hedge fund advisers
file within 60 calendar days of their first, second and third fiscal
quarters. Large liquidity fund advisers file within 15 calendar days
of their first, second and third fiscal quarters. All other advisers
file their annual updates within 120 calendar days after their
fiscal year ends.
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The SEC's experiences with recent market events like the March 2020
COVID-19 turmoil and the January 2021 market volatility in certain
stocks, have highlighted the importance of receiving current
information from market participants during fast moving market
events.\10\ We believe current reporting upon the occurrence of certain
key events on Form PF would facilitate a regulatory response if
appropriate and potentially mitigate the impact on investors and
systemic risk. Current reports also would allow the Commission and FSOC
to identify patterns among similarly situated funds that could indicate
broader systemic implications or investor protection concerns.
Therefore, we are proposing to require large hedge fund advisers and
private equity advisers to report information within one day upon the
occurrence of events that indicate significant stress or otherwise
serve as signals of potential systemic risk implications, as well as
potential areas for inquiry designed to prevent investor harm.
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\10\ See SEC Staff Report on U.S. Credit Markets:
Interconnectedness and the Effects of the COVID-19 Economic Shock
(Oct. 4, 2020) (report of the SEC Division of Economic and Risk
Analysis regarding market stress during the COVID-19 shock of March
2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf (noting that in March 2020 hedge funds
were one of the principal sellers of U.S. Treasury futures with
potential implications for the varying stresses in, the cash,
futures, and repo markets). See also Staff Report on Equity and
Options Market Structure Conditions in Early 2021 (Oct. 14, 2021),
available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf (noting significant
participation of institutional investors, including hedge funds, in
the market for Gamestop Corp shares).
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[[Page 9108]]
Second, we are proposing to decrease the threshold for reporting as
a large private equity adviser \11\ and to require additional
information from these advisers. The private equity space has grown
substantially since Form PF was initially adopted. There were 6,910
funds with $1.60 trillion in gross assets in first quarter of 2013 and
15,584 funds with $4.71 trillion in gross assets in the fourth quarter
of 2020.\12\ In addition, given the increased demand for exposure to
private equity among institutional investors, private equity advisers
have expanded the breadth of their investment strategies and the types
of offerings, including a significant increase in private credit
strategies, which raises questions regarding lending practices that
could raise systemic risk concerns.\13\
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\11\ See supra footnote 8.
\12\ Division of Investment Management, Private Fund Statistics
(Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\13\ See Jessica Hamlin, Private Equity Funds Fuel Growth in
Private Credit, Institutional Investor (Nov. 10, 2020), available at
https://www.institutionalinvestor.com/article/b1vdhdbryr7dkp/Private-Equity-Funds-Fuel-Growth-in-Private-Credit.
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Given the growth in the private equity industry over the past 11
years, coupled with an increase in the number of advisers with
aggregate private equity assets under management below $2 billion, we
are proposing to reduce the threshold for reporting as a large private
equity adviser from $2 billion to $1.5 billion in private equity fund
assets under management.\14\ Lowering this threshold would enable the
Commission and FSOC to receive reporting from a similar proportion of
the U.S. private equity industry based on committed capital as we did
when Form PF was initially adopted. We believe reducing the threshold
in this manner would provide a robust data set to help identify
potential investor protection issues and monitor for systemic risk,
while also minimizing burdens for smaller advisers.
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\14\ Calculated based on the amount of private equity fund
assets under management as of the last day of the adviser's most
recently completed fiscal year.
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Additionally, we are proposing to amend section 4 of Form PF to
gather more detailed information from large private equity advisers.
The information regarding the activities of private equity funds,
certain of their portfolio companies and the creditors involved in
financing private equity transactions is important to the assessment of
systemic risk. We are proposing tailored amendments to section 4 to
gather more information from large private equity advisers regarding
fund strategies, use of leverage and portfolio company financings,
controlled portfolio companies (``CPCs'') and CPC borrowings, fund
investments in different levels of a single portfolio company's capital
structure, and portfolio company restructurings or recapitalizations.
We believe this reporting would provide useful empirical data to FSOC
with which it may analyze the extent to which the activities of private
equity funds or their advisers pose systemic risk and provide the
Commission with targeted information for use in its regulatory program
for the protection of investors.
Finally, we are proposing to require large liquidity fund advisers
to report substantially the same information that money market funds
would report on Form N-MFP, as we propose to amend it.\15\ As discussed
more fully in our release to amend Form N-MFP, we are proposing
amendments to improve money market funds' resiliency and transparency.
Together, Form N-MFP and Form PF are designed to provide a complete
picture of the short-term financing markets in which money market funds
and liquidity funds both invest.\16\ The proposed amendments to Form PF
are designed to enhance the Commission and FSOC's ability to assess
short-term financing markets and facilitate our oversight of those
markets and their participants. This, in turn, is designed to enhance
investor protection efforts and systemic risk assessment.
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\15\ See Money Market Fund Reforms, Investment Company Act
Release No. 34441 (Dec. 15, 2021) (``Money Market Fund Proposing
Release'').
\16\ See 2014 Form PF Amending Release, supra footnote 2.
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We consulted with FSOC to gain input on this proposal, and to help
ensure that Form PF continues to provide FSOC with information it can
use to assess systemic risk in light of changes in the private fund
industry over the past decade, while also serving to enhance the
Commission's investor protection efforts going forward.
II. Discussion
A. Current Reporting for Large Hedge Fund Advisers and Advisers to
Private Equity Funds
In order to receive more timely information about certain events
that may signal distress at qualifying hedge funds and private equity
funds or market instability we are proposing new current reporting
section 5 for large hedge fund advisers and new current reporting
section 6 for private equity advisers.\17\ Currently, large hedge fund
advisers file Form PF quarterly while private equity advisers file
annually. This means that during fast moving events that could have
systemic risk implications or negatively impact investors, Form PF data
is often stale. The proposed current reporting requirements would
provide important, current information to the Commission and FSOC to
facilitate timely assessment of the causes of the reporting event, the
potential impact on investors and the financial system, and any
potential regulatory responses.\18\ The current reports would also
enhance our analysis of other information the Commission already
collects across funds and other market participants allowing the
Commission and FSOC to identify patterns that may present systemic risk
or that could result in investor harm.\19\ For example, information
regarding a margin default at a large qualifying hedge fund would
inform our understanding of data on market trading conditions and other
information shared with other market participants, including securities
exchanges.
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\17\ We are also proposing, in connection with the proposed
addition of new section 5 and section 6 for current reporting, to
make conforming changes to rule 204(b)-1 under the Advisers Act to
re-designate current section 5, which includes instructions for
requesting a temporary hardship exemption, as section 7.
\18\ We propose to define ``reporting event'' in the Form PF
Glossary to include any event that triggers the requirement to
complete and file a current report pursuant to the items in sections
5 and 6.
\19\ We propose to define ``current report'' in the Form PF
Glossary to include a report provided pursuant to the items in
sections 5 and 6.
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Advisers would file current reports for reporting events within one
business day of the occurrence of a reporting event.\20\ We believe
this emphasizes the Commission's and FSOC's need for timely information
while allowing advisers one business day to evaluate and obtain the
necessary data to confirm the existence of a filing event, and file the
current report. For example, if an adviser determined that a reporting
event occurred on Monday, they would have to file a current report by
the close of business on Tuesday. Advisers should consider filing a
current report as soon as possible following such an event. Advisers
also would be able to file an amendment to a previously filed current
report to correct information
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that was not accurate at the time of filing.\21\
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\20\ We propose to amend Instructions 1, 3, 9, and 12 of the
general instructions to reflect this new obligation for large hedge
fund advisers and private equity advisers. Specifically, we propose
to amend Instruction 3 to identify the new sections 5 and 6 and
Instruction 9 to address the timing of filing the proposed current
reports.
\21\ Current Instruction 16 explains that an adviser is not
required to update information that it believes in good faith
properly responded to Form PF on the date of filing even if that
information is subsequently revised for purposes of the adviser's
recordkeeping, risk management or investor reporting (such as
estimates that are refined after completion of a subsequent audit).
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We request comments on the addition of current reporting to Form
PF:
1. Should we amend Form PF to include current reporting in sections
5 and 6 as proposed? If not, what alternatives would provide the
Commission with timely information regarding events that could signal
distress or financial stability risks or potential investor harm?
2. We have proposed Sections 5 and 6 as separate reporting sections
on Form PF. Should we instead require current reporting as its own
form?
3. Is the proposed one business day reporting window appropriate
for current reports? Should the notification be on the same day as the
event? Are there challenges associated with providing these current
reports within one business day? Is one business day sufficient time to
eliminate or significantly reduce false positive reports? Would
advisers need more than one business day to gather and confirm the
required information for certain current reports? If so, should we
require advisers to file a current report within two business days,
three business days or some longer period? Would different time limits
for different current reports, tailored to the potential seriousness of
the event or the level of burden in collecting the information be more
appropriate? Would different time limits for different current reports
potentially cause confusion?
4. Should we require advisers to file a current report based on a
number of calendar days instead of business days?
5. Should we define ``business day'' for sections 5 and 6? If so,
how? For example, should we define the term to include any day other
than a Saturday, Sunday, or Federal or market holiday for purposes of
sections 5 and 6?
6. In addition to filing the current report, are there some events
for which advisers should be required to notify the Commission via
email or a phone call on a more immediate basis on the same day the
event occurred?
7. Would proposed section 6 disproportionally impact or create an
undue burden for smaller private equity advisers, i.e., those with
private equity fund assets under management of between $150 million and
$1.5 billion? If so, how should we modify this reporting requirement?
1. Large Hedge Fund Adviser Current Reporting on Qualifying Hedge Funds
We propose to add a new section 5 to Form PF, which would require
large hedge fund advisers to file a current report within one business
day of the occurrence of one of several reporting events at a
qualifying hedge fund that they advise. As discussed below, the
reporting events include extraordinary investment losses, certain
margin events, counterparty defaults, material changes in prime broker
relationships, changes in unencumbered cash, operations events, and
certain events associated with redemptions. We have designed the
reporting events to indicate significant stress at a fund that could
harm investors or signal risk in the broader financial system. For
example, large investment losses or a margin default involving one
large highly levered hedge fund may have systemic risk implications.
Counterparties could react by increasing margin requirements or
limiting borrowing, or investors may withdraw, and these responses
could amplify the fund's stress by forcing additional asset sales.
Similarly, reports of large investment losses at multiple qualifying
hedge funds (even if not the largest or most levered) may indicate
market stress that could have systemic effects. Current reports would
be especially useful during periods of market volatility and stress,
when the Commission and FSOC are actively ascertaining the affected
funds, gathering information to assess systemic risk, and determining
whether and how to respond in a timely manner.
The proposed reporting events incorporate objective tests to allow
advisers to determine whether a report must be filed. We designed and
tailored the reporting events to decrease reporting burden and to allow
advisers to use frameworks that we understand many large hedge fund
advisers already maintain to assess and manage risk actively. A number
of the items include quantifiable threshold percentage tests calibrated
to trigger reporting for events that we believe are likely indicative
of severe stress at a fund or may have broader implications for
systemic risk. We considered varying levels of thresholds and believe
that the proposed thresholds would trigger reporting for relevant
stress events for which we seek timely information while minimizing the
potential for false positives and multiple unnecessary current reports.
In addition, we considered a number of temporal periods over which to
measure certain stress events before arriving at measurement windows
that we believe are appropriate to trigger reporting for precipitous,
but sustained stress events. In our experience these time frames, in
some instances applied over rolling periods, are calibrated to capture
serious stress events and mitigate the potential for reporting for
short-lived fund stresses or events caused by relatively routine market
volatility.
To supplement the objective triggers, several of the items include
check boxes that would provide additional context and obviate the need
for advisers to provide narrative responses during periods of stress
under time pressure. We designed the checkboxes to incorporate
descriptions of circumstances that we believe provide important context
to events that would allow the Commission and FSOC to review and
analyze the current reports and screen false positives (i.e., incidents
that trigger the proposed current reporting requirement but do not
actually raise significant risks) during periods in which they may be
actively evaluating fast-moving market events.
Proposed section 5 would contain Items A through K. Section 5, Item
A would require advisers to identify themselves and the reporting fund,
including providing the reporting fund's name, private fund
identification number, NFA identification number (if any), and LEI (if
any).\22\ Section 5, Items B through J would set forth the reporting
events and the applicable reporting requirements for each event.
Section 5, Item K would serve as an optional repository for explanatory
notes that the large hedge fund adviser could provide to improve
understanding of any information reported in response to the other
section 5 items. The following sections discuss each reporting event.
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\22\ Section 5, Item A would also require identifying
information on the reporting fund's adviser, including the adviser's
full legal name, SEC 801-Number, NFA ID Number (if any), large
trader ID (if any), and large trader ID suffix (if any), as well as
the name and contact information of the authorized representative of
the adviser and any related person who is signing the current
report.
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a. Extraordinary Investment Losses
Proposed current reporting Item B would require large hedge fund
advisers, whose advised qualifying hedge funds experience extraordinary
losses within a short period of time, to provide a current report
describing the losses. Reporting for proposed Item B would be triggered
by a loss equal to or greater than 20 percent of a fund's most recent
net asset value over a rolling 10 business day period. This reporting
event would capture, for example, a situation where the fund's most
recent
[[Page 9110]]
net asset value is $1 billion and the fund loses $20 million per
business day for consecutive 10 business days. It would also capture a
loss of $200 million in one business day as the rolling 10 day period
is backward looking. We designed the proposed threshold to capture a
significant loss at the reporting fund over a relatively short rolling
period as well as a precipitous loss without capturing immaterial
losses that may not be indicative of stress at the fund.
In our experience, losses of 20 percent or more of a fund's most
recent net asset value during this period could indicate significant
stress at the fund or the markets in which the fund participates that
could raise investor protection and systemic risk concerns warranting
prompt reporting. For example, these losses could signal a precipitous
liquidation or broader market instability that could lead to secondary
effects, including greater margin and collateral requirements,
financing costs for the fund, and the potential for large investor
redemptions. Notice of large losses could provide notice to the
Commission and FSOC of potential fund or market issues in advance of
the occurrence of more downstream consequences, such as sharp margin
increases, defaults, or fund liquidation. Also, funds in serious stress
may be in the process of deleveraging, exiting certain strategies, or
liquidating securities in a declining market with implications for both
fund investors and systemic risk. Moreover, large, sharp, and sustained
losses suffered by one fund within this short period may signal concern
for similarly situated funds, allowing the Commission and FSOC to
analyze the scale and scope of the event and whether additional funds
that may have similar investments, market positions, or financing
profiles are at risk.
Under this reporting event, the fund's losses would be compared to
its ``most recent net asset value,'' which we propose to define as ``as
of the data reporting date at the end of the reporting fund's most
recent reporting period,'' which typically would be the most recent
update to the fund's routine quarterly or annual Form PF filing.\23\ We
understand that some funds calculate a daily mark to market value for
certain assets in their portfolios and that using a current daily mark
to market value for this reporting event may be feasible and provide a
more current and accurate picture of a fund's losses. However, given
that some funds do not calculate a daily net asset value, we believe
that requiring that the losses be based on the most recent net asset
value reported on Form PF would ease burdens for some advisers while
still providing the Commission and FSOC with timely information about
investment losses that may indicate significant stress at a fund. We
acknowledge that this approach could result in a lag between the net
asset value date and a calculation date for purposes of this reporting
event, during which market movements could significantly affect values.
This could potentially result in over-reporting in instances where the
fund assets have appreciated substantially in the intervening period
since the last reporting date and under-reporting when the fund assets
have significantly depreciated in value since the last reporting date.
However, we propose this approach because we believe the proposed
limited reporting requirements discussed below, combined with the
option to add explanatory notes to its current report to explain the
circumstances of the loss, mitigate these concerns.
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\23\ See proposed Form PF Glossary.
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Under proposed Item B, an adviser must file the following
information: (1) the dates of the 10 business day period over which the
loss occurred and (2) the dollar amount of the loss. If the loss were
to continue past the initial 10 day period, advisers would not file
another current report until the next 10 business day loss period
beginning on or after the end date stated in the adviser's initial Item
B current report.\24\ This proposed information would allow the
Commission and FSOC to understand the scale of the loss and its
potential effects both to investors in the reporting fund as well as
the broader financial markets, particularly if current reports are
filed by multiple advisers.
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\24\ If the fund experiences a 20 percent loss the adviser would
not report a second time until the fund had experienced a second
loss of an additional 20 percent of the fund's most recent net asset
value over a second rolling 10-day period to begin on or after the
end date stated in the adviser's initial Item B current report.
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We request comment on the proposed current reporting item for
extraordinary investment losses:
8. Would extraordinary losses raise investor protection or systemic
risk concerns such that the Commission and FSOC should be notified
within one business day? Should the notification be on the same day as
the event? Should it be longer? For example, should we require advisers
to file a current report within two business days, three business days
or some longer period?
9. As currently formulated, is the trigger for reporting
extraordinary losses likely to provide us with an early warning of
hedge fund or industry stress and potential systemic risk implications?
Would proposed Item B capture extraordinary losses that are not
indicative of fund or market stress? Would reporting on Item B be
burdensome to operationalize, particularly its use of a measure of the
reporting fund's extraordinary losses over a rolling 10 business day
period? Are large hedge fund advisers able to apply the extraordinary
loss trigger using their existing metrics?
10. Should the scale of losses be compared to the reporting fund's
most recent net asset value as proposed? Is this approach a reasonable
measure of whether investment losses are ``extraordinary'' for purposes
of the current reporting requirement? Would this approach ease burdens
on reporting advisers or do large hedge fund advisers calculate the
fund's net asset value on each business day? Do large hedge fund
advisers calculate a different fund value that might be used instead of
net asset value for measuring extraordinary losses? If so, what other
measures would be practicable for reporting these advisers, while also
achieving our goal to identify extraordinary investment losses that may
have systemic risk implications or result in investor harm? For
example, should we require large hedge fund advisers to measure
extraordinary losses based on a daily mark to market calculation
(estimated or actual) for the portion of a qualifying hedge fund's
portfolio invested in marketable securities (a ``daily mark to market
calculation'')? If losses are measured using a daily mark to market
calculation for a portfolio of marketable securities, should we limit
the application of this reporting event to qualifying hedge funds that
hold at least a threshold value of their portfolios in marketable
securities, e.g., the lesser of $150 million or 50 percent of net asset
value or another threshold? How would large hedge fund advisers
calculate losses for purposes of this reporting event? Does the ability
to add explanatory notes in Item K help mitigate concerns of using the
most recent net asset value reported on Form PF?
11. Is a 20 percent loss measured against the fund's most recently
reported net asset value an amount that could raise investor protection
or systemic risk concerns such that the Commission and FSOC should be
notified within one business day? Should the threshold amount be higher
(e.g., 50 percent threshold) or lower (e.g., 10 percent threshold)? If
this reporting event were to measure losses using a daily mark to
market calculation for a portfolio of marketable securities,
[[Page 9111]]
should extraordinary losses instead be measured against a percent of
the value of the portfolio's marketable securities?
12. Would the use of rolling periods increase the likelihood that
we capture the types of extraordinary losses that could cause investor
harm or systemic risk? Is a ten-business day period appropriate? Should
it be longer or shorter? Should we use trading days or calendar days
instead of business days? If so, how should we define ``trading days''
and should our definition allow large hedge fund advisers to determine
what is a trading day by reference to the exchanges and markets on
which the fund's portfolio holdings are trading? Would monitoring
losses over the rolling periods be overly burdensome?
13. Should we require funds to file multiple Item B current reports
if they suffer 20 percent losses over multiple 10 business day periods
during a quarterly update period? Is it likely that funds would report
losses of this type multiple times a quarter? Would additional reports
be duplicative? Alternatively, should we require advisers to file only
one Item B current report per quarterly period?
14. Should we require a reporting event that measures investment
losses over a period (e.g., a 10-day or 20-day rolling period) against
the volatility of the fund's returns? We understand that losses that
are large compared to a hedge fund's historic volatility of returns may
signal significant stress. Could this type of reporting event be a
useful signal of extraordinary losses that may have systemic risk
implications? If so, how should we require hedge funds to measure
volatility of returns? Should we require funds to calculate the monthly
volatility of a daily mark to market calculation for this purpose?
Would doing so be burdensome to operationalize? Should we limit the
application of a reporting event that measures investment losses
against volatility of returns to qualifying hedge funds that hold at
least a threshold value of their portfolios in marketable securities,
e.g., the lesser of $150 million or 50 percent of net asset value, or
another threshold?
15. Are there other reporting events that would be indicative of
the types of extraordinary losses that could cause investor harm or
systemic risk that we should include in addition to or instead of the
proposed Item B current report?
16. Should we require additional or different information in
response to this item? In other current reporting items outlined below,
we provide checkboxes for advisers to provide additional context to the
reporting event. Should we provide checkboxes for advisers to describe
the circumstances of the loss, or are the reasons for an extraordinary
loss so variable as to avoid easy categorization? If we were to provide
checkboxes what should they be?
b. Significant Margin and Default Events
Proposed Section 5 Items C through E would require current
reporting of significant margin and default events that occur at
qualifying hedge funds advised by large hedge fund advisers or at their
counterparties. In our experience, significant increases in margin,
inability to meet a margin call, margin default, and default of a
counterparty are strong indicators of fund and potential market stress.
Each of the triggers and underlying thresholds is calibrated to
identify stress at a fund that may signal the potential for precipitous
liquidations or broader market instability that may affect similarly
situated funds, or markets in which the fund invests.
Proposed current reporting Item C would require advisers to report
significant increases in the reporting fund's requirements for margin,
collateral, or an equivalent (collectively referred to as
``margin'').\25\ If the reporting fund has experienced a cumulative
increase in margin of more than 20 percent of the reporting fund's most
recent net asset value over a rolling 10 business day period, Item C
would require the adviser to file certain information within one
business day.\26\ We believe that a 20 percent increase to a fund's
margin requirements over a 10 business day period is large enough and
precipitous enough to signal potential significant stress at the fund,
at its counterparties, or in the broader market while limiting the
potential for reporting in the case of routine margin increases. Sudden
and significant margin increases can have critical effects on funds
that may be operating with large amounts of leverage and could serve as
precursors to defaults at fund counterparties and eventual liquidation.
Large, sustained margin increases also may effectively signal that
counterparties are concerned about a fund's portfolio positions and may
signal the potential for future margin increases from the fund's other
counterparties. A large margin increase of this type may also serve as
a potential early indicator for broader market stress for similarly
situated funds that may help inform the Commission or FSOC of potential
implications for investor harm or systemic risk and allow them to
respond quickly to developing market events.
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\25\ An equivalent is any other type of payment or value
understood to serve the same purposes as margin or collateral.
\26\ As noted above, measures derived from ``most recent net
asset value'' are backward-looking to the most recently filed
routine quarterly or annual filing and could result in a lag between
the net asset value date and a calculation date for purposes of this
reporting event, during which market movements could significantly
affect values. This could result in over-reporting and under-
reporting, but we believe that this approach would simplify
monitoring and reporting by advisers. In addition, the option for an
adviser to add explanatory notes to its current report to explain
the circumstances of the loss mitigate these concerns.
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The adviser would report (a) the dates of the 10 business day
period over which the increase occurred; (b) the cumulative dollar
amount of the increase; and (c) the identity of the counterparty or
counterparties requiring the increase(s). If the increases in margin
were to continue past the initial 10 day period, advisers would not
file another current report until on or after the next 10 business day
period beginning on or after the end date stated in the adviser's
initial Item C current report.\27\ In circumstances where multiple
counterparties are involved, advisers would list the all the
counterparties who increased margin requirements. In addition, the
adviser would use check boxes to describe the circumstances of the
margin increase.\28\ These include: (1) Exchange requirements or known
regulatory action affecting one or more counterparties; (2) one or more
counterparties independently increasing the reporting fund's margin
requirements; (3) the reporting fund establishing a new relationship or
new business with one or more counterparties; (4) new investment
positions, investment approach or strategy and/or portfolio turnover of
the reporting fund; (5) a deteriorating position or positions in the
reporting fund's portfolio or other credit trigger under applicable
counterparty agreements; and/or (6) a reason ``other'' than those
outlined. We believe that this proposed information would provide
useful context regarding the margin increase and allow for an
assessment of the scale of the potential issue and related risks. We
believe this information would both better enable the Commission and
FSOC to screen false positives for margin increases (i.e., incidents
that trigger the proposed
[[Page 9112]]
current reporting requirement but do not actually raise significant
risks) and assess significant margin events.
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\27\ If the fund experiences a 20 percent increase to a fund's
margin requirements that continues past the initial 10 day period,
the adviser would not report a second time until the fund had
experienced a second margin increase of an additional 20 percent of
the fund's most recent net asset value over a second rolling 10 day
period beginning at or after the end date stated in the adviser's
initial Item C current report.
\28\ Proposed Form PF section 5, Item C, Question 11.
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Proposed current reporting Item D would require advisers to report
a fund's margin default or inability to meet a call for margin,
collateral, or an equivalent (taking into account any contractually
agreed cure period).\29\ We believe a current report is necessary to
capture these events because funds that are in margin default or that
are unable to meet a call for margin are at risk of potentially
triggering the liquidation of their positions at their counterparties.
This presents serious risks to the fund's investors, its
counterparties, and potentially the broader financial system. The
proposed amendments would require advisers to file a current report in
these circumstances, including in situations where there is a dispute
with regard to the margin call to avoid delays in reporting. However,
advisers would not be required to file a current report in situations
where there is a dispute in the amount and appropriateness of a margin
call, provided the reporting fund has sufficient assets to meet the
greatest of the disputed amount. We believe that according this
flexibility allows funds and advisers that are capable of meeting a
margin call time to respond to and resolve a margin dispute with their
counterparties.
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\29\ In situations where there is a contractually agreed upon
cure period an adviser would not be required to file an Item D
current report until the expiration of the cure period, unless the
fund would not expect to be able to meet the margin call during such
cure period.
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Under the proposal, the adviser would report for each separate
counterparty for which this occurred: (a) The date the adviser
determines or is notified that a reporting fund is in margin default or
will be unable to meet a margin call with respect to a counterparty;
(b) the dollar amount of the margin, collateral or equivalent involved;
and (c) the legal name and LEI (if any) of the counterparty. In
addition, the adviser would check any applicable check boxes that would
describe the adviser's current understanding of the circumstances of
the adviser's default or its determination that the fund will be unable
to meet a call for increased margin.\30\ These include: (1) An increase
in margin requirements by the counterparty; (2) losses in the value of
the reporting fund's portfolio or other credit trigger under the
applicable counterparty agreement; (3) a default or settlement failure
of a counterparty; or (4) a reason ``other'' than those outlined. We
believe that these check boxes would enable the Commission's staff and
FSOC to identify and evaluate the circumstances underlying the
inability to meet a call for margin and formulate any necessary
response in a timely manner. If the fund was unable to meet margin or
defaulted with multiple counterparties on the same day, the adviser
would file one current report on Item D broken out with details for
each counterparty.
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\30\ Proposed Form PF section 5, Item D, Question 15.
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Proposed current reporting Item E, ``Counterparty Default,'' would
require an adviser to report a margin default by a counterparty.
Defaults by counterparties can have serious implications for the funds
with which they transact, the fund's investors, and the broader market.
A current report of a counterparty default would help the Commission
and FSOC identify funds or market participants that may be affected by
a counterparty's default and analyze whether there are broader
implications for systemic risk. A current report would be triggered if
a counterparty to the reporting fund (1) does not meet a call for
margin or has failed to make any other payment, in the time and form
contractually required (taking into account any contractually agreed
cure period); and (2) the amount involved is greater than 5 percent of
the most recent net asset value of the reporting fund.\31\ While we are
not proposing a minimum threshold for reporting on a qualifying hedge
fund's margin default given the potential implications of such a
default, we believe it is appropriate to set a threshold for
counterparty defaults that could affect a sizeable percentage of the
fund's net asset value. We believe that 5 percent of the most recent
net asset value of the reporting fund is an appropriate threshold in
this regard because counterparty defaults of this size could have
systemic waterfall effects, triggering forced-selling by the fund and
raising potential risks for other hedge funds that may transact with
the same counterparty.\32\ Moreover, the 5 percent threshold is a
figure we have used in Form PF to measure and collect information
regarding sizable exposures to creditors or counterparties.\33\ In
addition, we believe setting the threshold for counterparty defaults at
5 percent of the most recent net asset value would limit the reports
for de minimis or superficial defaults that may be the result of a
short-lived operational error.
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\31\ As noted above, measures derived from ``most recent net
asset value'' are backward-looking to the most recently filed
routine quarterly, or annual filing and could result in a lag
between the net asset value date and a calculation date for purposes
of this reporting event, during which market movements could
significantly affect values. This could result in over-reporting and
under-reporting, but we believe that this approach would simplify
monitoring and reporting by advisers. In addition, the option to add
explanatory notes to its current report to explain the circumstances
of the loss mitigate these concerns.
\32\ See Financial Stability Oversight Council, ``Update on
Review of Asset Management Products and Activities,'' p. 15-18,
April 2016, available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf (noting that large highly interconnected
counterparties play a role in whether hedge fund activities have
financial stability implications).
\33\ See current question 47 of Form PF: Identify each creditor,
if any, to which the reporting fund owed an amount in respect of
borrowings equal to or greater than 5 percent of the reporting
fund's net asset value as of the data reporting date. For each such
creditor, provide the amount owed to that creditor.
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Item E would require the adviser to report: (a) The date of the
default; (b) the dollar amount of the default; and (c) the legal name
and LEI (if any) of the counterparty. In the event that multiple
counterparties to the fund default on the same day, Item E would allow
an adviser to file a single current report broken out with details for
each counterparty default. In the event that counterparties to the fund
default on different days, the adviser would file a separate Item E
current report for each counterparty default that occurred. We did not
provide checkboxes for Item E because we believe that advisers to the
funds are unlikely to have complete information regarding their
counterparty's default and the responses would likely be speculative.
We request comment on the proposed current reports for margin and
default events:
17. As currently formulated, is the trigger for reporting margin
increases likely to provide an indicator of hedge fund or industry
stress and systemic risk? Would proposed Item C capture margin
increases that are not indicative of fund or market stress? Would
reporting on Item C be burdensome to operationalize, particularly its
use of a measure of the reporting fund's increase in margin over a
rolling 10 business day period? Should we ask advisers to report the
dollar value of margin, collateral or an equivalent on the first and
last day of the 10 day period in Item C? Would this information be more
or less burdensome than reporting the amount of increase as currently
proposed?
18. Should the margin increase be compared to the reporting fund's
most recent net asset value as proposed? Or, as with extraordinary
losses, are there other measurements, such as a daily mark to market
value, we could use to
[[Page 9113]]
identify the types of margin increases that could cause investor harm
or systemic risk?
19. Should we tie reporting on margin increases to an amount
reported on Form PF as of the end of the last reporting period (e.g.,
total margin, collateral or other equivalent reported in Q43(a) and
(b))?
20. Is a 20 percent margin increase measured against the fund's
most recently reported net asset value an amount that could raise
investor protection or systemic risk concerns such that the Commission
and FSOC should be notified within one business day? Should the
threshold amount be higher (e.g., 50 percent threshold) or lower (e.g.,
10 percent threshold)?
21. Do the proposed check boxes provide proper context to events
captured by Item C? Should we remove any of the check boxes, or add
additional check boxes to improve our understanding of potential
responses to Item C? For example, should we also add a check box for an
operational issue (including the potential failure of a service
provider) that could lead to an inability to meet a margin call?
22. Should we ask advisers to identify the amount of margin
increase for each counterparty in Item C? Would reporting of this
dollar amount better inform our understanding of fund stress? Would
determining and reporting this figure be burdensome to advisers? Would
knowing the amount of margin increase provide appreciable insight into
risks to the fund's counterparties?
23. In circumstances where multiple counterparties are involved in
the margin increase, should advisers list the top three (or different
number of) counterparties, based on the dollar amount of the cumulative
increase required by each counterparty instead of all the
counterparties that increased margin as we propose? Would listing all
the counterparties that may have raised margin in such an event be
burdensome?
24. We understand that increases in margin may be subject to
extensive negotiation and/or dispute among counterparties so it may be
difficult for the adviser to determine the point at which the fund is
unable to meet a margin call and required to file in accordance with
Item D. Does Item D as currently written provide sufficiently objective
criteria for when advisers must file a current report? Are there more
objective criteria that we could provide that would be equally useful?
25. Item D would be triggered if the adviser determines that the
reporting fund is in default or will be unable to meet a call for
increased margin, collateral, or an equivalent, including in situations
where there is a dispute with regard to the margin call. Is that
appropriate or should we include a carve-out or checkbox for situations
where the margin call, collateral, or equivalent is in dispute? Should
Item D be triggered without taking into account any contractually
agreed cure period to provide more timely information regarding
potential systemic risk or would this approach create too many false
positives?
26. Is notice of default an easily ascertainable event for advisers
to identify or are there nuances to default provisions or certain
industry practices that may make this reporting event difficult to
implement in practice?
27. Do the proposed check boxes provide proper context to events
captured by Item D? Should we remove any of the check boxes, or add
additional check boxes to improve our understanding of potential
responses to Item D?
28. Items C and D involve events that could be triggered by a fund
experiencing stress with the potential to be triggered at the same time
or in rapid succession. Are there concerns about the timing of filing
reports for these related items? We believe Item C could serve as
indicator of the potential for events outlined in Item D. Are we
correct in this belief? Should we ask these related questions in a
different way so as to receive notice of a potential upcoming default?
Would a default event be likely to trigger both of these current
reports, and if so, would it be burdensome to file current reports for
each of these items in such a situation?
29. Are the triggers for reporting on Item E, including the 5
percent net asset value threshold, indicative of potential systemic
risk or investor protection concerns? Should that threshold be higher
or lower? Would a threshold for reporting on an adviser's default in
Item D be appropriate? If so, should that threshold also be 5 percent
of the reporting fund's net asset value? Or should that threshold be
higher or lower?
30. We did not provide checkboxes for Item E because we believe
that advisers to the funds are unlikely to have complete information
regarding their counterparty's default and the responses would likely
be speculative. Are we correct in this belief? If not, what checkboxes
should we include to improve our understanding of potential responses
to Item E?
31. For each of the current reports in Items in C, D, and E, should
we request the principal place of business address and the country
where we request to identify the counterparty? Or, should the legal
name and LEI be sufficient to identify counterparties?
c. Material Change in Relationship With Prime Broker
Proposed section 5, Item F would require the adviser to report a
material change in the relationship between the reporting fund and a
prime broker. We believe that material changes in a reporting fund's
prime brokerage relationships may signal that the fund or the brokers
with whom the fund transacts are experiencing stress and may be subject
to an increased risk of default or in the case of the reporting fund,
potential liquidation. Such events would include material changes to
the fund's ability to trade or an outright termination of the prime
brokerage relationship for default or breach of the prime brokerage
agreement. A prime broker that is no longer willing to provide services
to a fund client may be apprehensive of a fund's investment positions
or trading practices and may consider the fund to be an unacceptable
risk as a counterparty. Therefore, material changes to such
relationships may indicate potential stress at the fund that may have
implications for investor harm and broader systemic risk concerns.
Proposed Item F would require the adviser to provide the date of
the material change and the legal name and LEI (if any) of the prime
broker involved. An adviser also would check any applicable boxes that
describe the circumstances relating to the material change, including
whether the change involved: (1) Material trading limits or investment
restrictions on the reporting fund, including requests to reduce
positions, or unwind positions completely; and (2) whether the prime
brokerage relationship was terminated and by which party.\34\ We
request comment on the proposed current report in section 5, Item F:
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\34\ Proposed Form PF section 5, Item F, Question 21.
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32. Are material changes to a prime brokerage relationship
indicative of fund stress or potential systemic risk? Are the
circumstances described in the checkboxes sufficient to provide us with
detail on the change in the relationship? Should we add an ``other''
check box? Should we add or delete check boxes? Should we request the
principal place of business address of the prime broker? Or, should the
legal name and LEI be sufficient to identify the prime broker?
33. We would require reporting of only material changes in a
reporting
[[Page 9114]]
fund's relationship with a prime broker. Will it be challenging to
determine whether a change is material? Should we provide additional
guidance? Should we require funds that add a new prime broker to report
the new relationship, or is the addition of a new prime broker not
useful from a risk evaluation perspective? Should we require that all
changes in a reporting fund's relationship with a prime broker
reported?
34. We understand that many large funds have prime brokerage
agreements that include termination events that have net asset value
triggers. Are we correct in this understanding? Should we tie current
reporting in proposed Item F to the net asset value trigger provision
in a fund's prime brokerage agreement? If so, how? Should we provide a
checkbox asking whether a net asset value trigger has been breached?
35. Should we expand the proposed Item F reporting event to include
broker-dealer counterparties and not just prime brokers? Would this
provide us with a more complete picture of the fund's relationship with
broker-dealer counterparties? Would such a current report be burdensome
to track across multiple counterparties?
d. Changes in Unencumbered Cash
Proposed section 5, Item G would require the adviser to report a
significant decline in holdings of unencumbered cash. A current report
for changes in unencumbered cash would be triggered if the value of the
reporting fund's unencumbered cash declines by more than 20 percent of
the reporting fund's most recent net asset value over a rolling 10
business day period.\35\ In order to report significant changes in
unencumbered cash, advisers would need to calculate a daily
unencumbered cash figure using the same methodology they use to
calculate question 33 on the current Form PF.\36\ We believe that a
precipitous decline in unencumbered cash within a short time window may
indicate potential stress on the fund and its ability to access cash
affecting the fund's financing and its relationships with
counterparties, which may raise concerns of investor harm and systemic
risk. In our experience, funds and fund counterparties use unencumbered
cash figures as an indicator of a fund's overall health as it has
implications, among other things, for the fund's ability to allocate
investments, satisfy redemptions, and meet margin calls.
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\35\ As noted above, measures derived from ``most recent net
asset value'' are backward-looking to the most recently filed
routine Form PF quarterly or annual filing and could result in a lag
between the net asset value date and a calculation date for purposes
of this reporting event, during which market movements could
significantly affect values. This could result in over-reporting or
under-reporting, but we believe that this approach would simplify
monitoring and reporting by advisers. In addition, the option for an
adviser to add explanatory notes to its current report to explain
the circumstances of the loss mitigate these concerns.
\36\ See question 33 of current Form PF requiring the value of
the reporting fund's unencumbered cash.
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If this trigger is met, the adviser would report the last day of
the rolling 10 business day period during which the unencumbered cash
declined and the dollar amount of the unencumbered cash on the last day
of the period. If the decrease in unencumbered cash were to continue
past the initial 10 day period, advisers would not file another current
report until the next 10 business day period beginning on or after the
end date stated in the adviser's initial Item G report.\37\ Item G
would also include explanatory checkboxes for the adviser to provide
additional information concerning its current understanding of the
facts and circumstances around the change in unencumbered cash. These
checkboxes include whether (1) the change is attributable to redemption
activity for the fund; (2) the change is attributable to new investment
positions, strategy and/or portfolio turnover; (3) the change is a
related to losses in the value of the fund's portfolio; (4) the change
is related to a margin call; or (5) the change was caused by a reason
``other'' than those outlined.\38\ These checkboxes would provide
relevant information regarding the changes in the fund's unencumbered
cash allowing Commission and FSOC to begin to evaluate the event.
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\37\ If the fund experiences a 20 percent decline in
unencumbered cash that continues past the initial 10-day period, the
adviser would not report a second time until the fund had
experienced a second decline in unencumbered cash of an additional
20 percent of the fund's most recent net asset value over a second
rolling 10-day period beginning at or after the end date stated in
the adviser's initial Item G current report.
\38\ Proposed Form PF section 5, Item G, Question 23.
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We request comment on the proposed current report in section 5,
Item G:
36. Is a current report for a decline in unencumbered cash likely
to capture changes in unencumbered cash that are indicative of fund or
market stress? Is the trigger, including the daily calculation of
unencumbered cash, burdensome to operationalize? Is it common for
advisers to track an unencumbered cash figure on a daily basis?
37. Should we require reporting when the value of the reporting
fund's unencumbered cash declines by more than 20 percent of the fund's
most recent net asset value over a rolling 10 day business period as
proposed? Is 20 percent too high or too low? Is a rolling 10 business
day period appropriate or should we change the length of the period? As
with other reporting events that use the reporting fund's most recent
net asset value, are there other metrics we should use for purposes of
a reporting trigger for a decline in unencumbered cash?
38. Do the proposed check boxes provide proper context to events
captured by Item G? Should we remove any of the check boxes, or add
additional check boxes to improve our understanding of potential
responses to Item G? Why or why not?
39. Are there other similar types of triggers that may signal
stress that could be incorporated into Item G? For example, should we
include a significant increase or decrease in borrowing by the
reporting fund as a reporting event? For this purpose, would a 20
percent increase or decrease in borrowing measured against the most
recently reported net asset value be an appropriate measure? What other
approach could we use to identify a change in the amount of borrowing
that might signal potential stress occurring at a fund?
e. Operations Events
Proposed section 5, Item H would require the adviser to report when
the adviser or reporting fund experiences a ``significant disruption or
degradation'' of the reporting fund's ``key operations,'' whether as a
result of an event at the reporting fund, the adviser, or other service
provider to the reporting fund. Key operations means, for this purpose,
operations necessary for (1) the investment, trading, valuation,
reporting, and risk management of the reporting fund; as well as (2)
the operation of the reporting fund in accordance with the Federal
securities laws and regulations.\39\ When evaluating a reporting fund's
key operations that are reasonably measurable, a ``significant
disruption or degradation'' means a 20 percent disruption or
degradation of normal volume or capacity. For example, Item H would
require reporting of cybersecurity event that disrupted the trading
volume of a reporting fund by 20 percent of its normal capacity. It
also would require reporting in cases where an adviser's ability to
value the fund's assets is significantly disrupted or
[[Page 9115]]
degraded, for example, in connection with operational issues at a
service provider. As another example, events such as a severe weather
event causing wide-spread power outages that significantly disrupt or
degrade key operations also would require reporting. We understand that
many large hedge fund advisers have sophisticated back office
operations or already engage service providers that would be reasonably
able to measure whether an event has impaired their key operation
beyond a 20 percent threshold. We believe that an operations event
involving a qualifying hedge fund could have systemic risk implications
if the fund is not able to trade as a result of such an event.\40\ In
addition, notice of operations events from multiple advisers could
provide an early indicator of market-wide operations events to both the
Commission and FSOC. Such events could include a service provider
outage that may affect the ability of multiple funds to trade, leading
to negative implications for those funds' investors and broader
systemic risks.
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\39\ See Form PF Glossary (proposed definitions of ``significant
disruption and degradation'' and ``key operations'').
\40\ We recognize that the SEC currently does not require
registered investment advisers and registered investment companies
to report operational events. We are also considering recommending
that the Commission propose rules to enhance fund and investment
adviser disclosures and governance relating to cybersecurity risks.
See Securities and Exchange Commission, Agency Rule List (Fall
2021), available at Agency Rule List--Fall 2021 (reginfo.gov).
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Item H would require the date of the operations event (or an
estimate of when it occurred), and the date the operations event was
discovered. Proposed Item H would also require the adviser to provide
additional information concerning its current understanding of the
circumstances relating to the operations event and its impact on the
normal operations of the reporting fund using checkboxes.\41\ These
include whether: (1) The event occurred at a service provider,\42\ (2)
the event occurred at a reporting fund or reporting fund adviser or a
related person; (3) the event is related to a natural disaster or other
force majeure event, or (4) an unlisted ``other'' event occurred. In
addition, proposed Item H would require an adviser to indicate whether
it has initiated a business continuity plan relating to the operations
of the adviser or reporting fund as we believe this may provide
additional appropriate context to the operations event.
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\41\ Proposed Form PF section 5, Item H, Questions 26 through
28.
\42\ If the event occurred at a service provider, an adviser
also must report the legal name of the service provider; the service
provider's LEI, if any; and the types of services provided by the
service provider.
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Proposed Item H also requires the adviser to check a box to
describe its current understanding of the impact of the operations
event on the normal operations of the reporting fund, including whether
the event resulted in the disruption or degradation of: (1) Trading of
portfolio assets; (2) the valuation of portfolio assets; (3) the
management of the reporting fund's investment risk; (4) the ability to
comply with applicable laws, rules, and regulations; or (5) any
``other'' type of operational impact than those outlined and may be
further explained in Item K Explanatory Notes. We believe that these
explanatory checkboxes would provide appropriate context to current
reports filed for operations events allowing the Commission and FSOC to
evaluate quickly the potential level of risk to funds, advisers, and
their service providers.
We request comment on the proposed current report in section 5,
Item H:
40. Will this proposed reporting requirement provide us with notice
of operations events that may have serious implications for the fund,
its investors, and financial stability?
41. Does the definition of ``operations event'' provide a clear,
objective trigger for reporting? Would advisers be able to assess this
during an operations event? We proposed a principles-based approach for
reporting of an operations event that is a ``significant'' disruption
or degradation of the adviser's operations and for operations that are
reasonably measurable, we would view a 20 percent disruption of
degradation of normal volume or capacity as ``significant.'' Are we
correct that certain disruptions may not be quantifiable? Do commenters
agree that a 20 percent disruption or degradation of normal volume or
capacity indicates that an event is ``significant?'' Should the
reporting event include a time frame to measure a 20 percent disruption
or degradation? If so, what time frame? Should it be over one business
day or over one month? Do advisers' compliance programs typically
include benchmarks that could be used to measure a 20 percent
disruption or degradation? Are there other potential approaches for an
operational events trigger?
42. Are we correct in our understanding that many large hedge fund
advisers maintain sophisticated back office operations or already
engage service providers that would be reasonably able to measure
whether an event has impaired their key operation beyond a 20 percent
threshold? Are there any other objective measures gathered by advisers
or their service providers that could be utilized as a trigger for this
reporting event?
43. Will the checkboxes provided to describe the circumstances of
the ``operations event'' provide us with sufficient detail regarding
the operational issue and its potential severity? Should we amend, add,
or remove any of the check boxes? Is the check box for force majeure
events appropriate, or does it have the potential to cause numerous
notifications during certain widely applicable disaster events like a
pandemic or large hurricane?
44. Should we require an adviser to indicate whether the operations
event is caused by a service provider and require the adviser to
provide information regarding the service provider, as proposed? Should
we define the term ``service provider'' for these purposes? Should we
require reporting only for those service providers listed in Form ADV,
Schedule D for the private fund? Are there some operations events that
could be caused by a third party that is not a service provider to the
reporting fund or adviser? If so, should we require an adviser to
provide information regarding such a third party?
45. Should we define ``key operations'' as proposed? Are there any
activities that we should add or delete from the definition? For
example, should key operations also include the operation of the
reporting fund in accordance with major contractual commitments to the
reporting fund's investors and/or counterparties? For example, should
it be considered a significant disruption or degradation of key
operations if an issue at a service provider degrades the fund's
ability to measure its positions or communicate certain information to
counterparties pursuant to contractual notice terms?
46. As an alternative to defining ``operations event'', should we
require current reporting by advisers whenever they initiate a business
continuity plan? Would the initiation of a business continuity plan be
a simpler trigger to apply? Would the initiation of a business
continuity plan as a reporting event result in too many current reports
about events that could not lead to investor harm or systemic risk?
Would it miss important operations events that could lead to investor
harm or systemic risk? Should we be concerned that advisers might delay
initiating a business continuity plan so as to avoid reporting?
47. Should we require an adviser to indicate whether it has
initiated a business continuity plan relating to the
[[Page 9116]]
operations of the adviser or reporting fund, as proposed? Does the
initiation of such a plan provide the Commission with indications of
potential stress at the fund or its adviser?
f. Withdrawals and Redemptions
We believe large redemption requests, suspensions of withdrawals/
redemptions, material restrictions on withdrawals/redemptions, and an
inability to satisfy redemptions are significant signals of potential
stress at a qualifying hedge fund.\43\ Qualifying hedge funds under
stress or in periods of volatility may have difficulty selling certain
assets in an orderly manner to meet large redemption requests. In such
a situation, hedge funds could fall back on more extraordinary
liquidity management measures to mitigate redemption difficulties and
the potential for forced asset sales.\44\ While advisers currently are
required to provide certain reporting regarding redemptions for
qualifying hedge funds on a quarterly basis, we are proposing current
reporting Items I and J to provide more detailed and timely information
to the Commission and FSOC indicating the potential for investor harm,
forced selling in liquidations, or broader systemic risk.\45\
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\43\ We understand that many funds place quarterly restrictions
on the timing and size of investor's redemptions.
\44\ See Financial Stability Oversight Council, Update on Review
of Asset Management Products and Activities (Apr. 2016), available
at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
\45\ See Form PF question 61 regarding restrictions on
withdrawals and redemptions by investors in the reporting fund.
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Proposed section 5, Item I would require an adviser to report if
the adviser receives cumulative requests for redemption exceeding 50
percent of the most recent net asset value (after netting against
subscriptions and other contributions from investors received and
contractually committed).\46\ We believe that the obligation to redeem
sizable redemption requests of 50 percent or more of a reporting fund's
most recent net asset value, despite pre-existing gates or limitations,
may present significant risks to the fund and increases the risk that
it may be forced to liquidate assets (potentially at lower prices),
disproportionately penalizing non-redeeming investors, and potentially
impacting markets more broadly. In the staff's experience, funds that
receive withdrawal requests for half or more of their assets in the
period between routine quarterly reports on Form PF may be subject to
increased selling and liquidity pressures that could be particularly
harmful to investors with potential broader market implications,
especially if the fund is invested in more illiquid assets. Timely
notice of such events would allow the Commission and FSOC to analyze
the potential implications for the fund's investors and systemic risk.
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\46\ As with the proposed use of ``most recent net asset value''
in other circumstances described above, this measure could result in
over-reporting or under-reporting, but we believe that a simple to
determine measure would ease the monitoring and reporting burden for
advisers. In addition, the option for an adviser to add explanatory
notes to its current report to explain the circumstances surrounding
the redemptions mitigates these concerns.
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Under proposed Item I, an adviser would report: (a) The date on
which the net redemption requests exceeded 50 percent of the most
recent net asset value; (b) the net value of redemptions paid from the
reporting fund between the last data reporting date (the end of the
most recently reported fiscal quarter on Form PF) and the date of the
current report; (c) the percentage of the fund's net asset value the
redemption requests represent; and (d) whether the adviser has notified
the investors that the reporting fund will liquidate.
Proposed section 5, Item J would require an adviser to report if a
qualifying hedge fund is unable to satisfy redemptions or suspends
redemptions for more than 5 consecutive business days. We believe that
this report would help the Commission and FSOC to identify stress at a
reporting fund and evaluate the effects of these circumstances on fund
investors and the markets more broadly. We also believe that this
reporting could provide a potential early warning of the fund's
liquidation and potentially allow the Commission or FSOC to analyze or
respond to any perceived harm to investors or systemic risks on an
expedited basis before they worsen. The 5 consecutive day period is
designed to limit reporting of temporary redemption suspensions that we
believe have less of an impact on investors or the broader market.
Under proposed Item J, the adviser would report: (a) The date the
reporting fund was unable to pay redemption requests or suspended
redemptions; (b) the percentage of redemptions requested and not yet
paid; and (c) whether the adviser has notified the investors that the
reporting fund will liquidate.
We request comment on the proposed current report in section 5,
Items I and J:
48. For proposed Item I, our goal is to be notified when the
adviser receives requests for substantial redemptions because they may
result in significant transaction costs and forced selling by a fund,
all of which can cause harm to investors and contribute to systemic
risk. Does Item I, as currently formulated, capture such events?
49. Should we ask different, additional questions, or provide
checkboxes to gather additional context and timely information on large
redemptions? What should such checkboxes describe?
50. Is the 50 percent of most recent net asset value threshold
trigger for substantial redemptions proposed in Item I appropriately
tailored to capture large scale liquidations? Should it be higher or
lower or over a different time period? We understand that some
investors may submit a redemption request each quarter to preserve
their flexibility as a matter of course. For example, a fund of funds
may submit a redemption request to its underlying funds so that it can
match any redemptions it receives from its investors. The fund of funds
then may rescind the redemption requests that they do not need so that
their initial redemption requests appear overstated. How should the
reporting event take these types of redemption requests into account?
Should we allow reporting funds to exclude certain redemption requests?
If so, how should we cabin such an exclusion?
51. Would proposed Item J provide the information we seek regarding
a reporting fund's inability to pay redemptions or its suspension of
redemptions? The 5 consecutive day period is designed to limit
reporting of temporary redemption suspensions that we believe have less
of an impact on investors or the broader market. Is the 5 consecutive
business day period for inability to satisfy or the suspension of
redemptions appropriate for capturing significant constraints on
investor liquidity or stress at the fund? Should the period be longer
or shorter?
52. Should we ask different, additional questions, or provide
checkboxes about why an adviser was unable to pay redemptions or why
redemptions were suspended? If so, what should they be?
g. Explanatory Notes
Proposed Item K would allow an adviser to provide a narrative
response if it believes that additional information would be helpful in
current report(s). We believe that current reports can sometimes
benefit from additional context so that the Commission and FSOC can
effectively evaluate them for both our investor protection mission and
FSOC's monitoring of systemic risk. This approach is consistent with
other
[[Page 9117]]
current reports filed with the Commission, where registrants have
requested the flexibility to provide additional narrative information
relating to circumstances surrounding the current report.\47\
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\47\ See Part H of Form N-RN.
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We request comment on the proposed current report in section 5,
Item K:
53. Should we provide the option for a narrative response? Are
advisers likely to use the space to provide additional context to a
filed current event?
54. Should we require advisers to provide a narrative response in
Item K when they check ``other'' in describing a key event?
55. Other current reporting forms require follow up reports for
certain events.\48\ Should we require follow up reports for any of the
current reporting events in section 5? For example, should we require
an adviser to file a follow up report if it learns additional material
information regarding the reported event that is responsive to a
proposed question? Should we require advisers to periodically file
follow-up reports (e.g., every 5 business days, every 30 business days)
until the event has been resolved? Should we instead permit advisers to
voluntarily file follow-up current reports? As another alternative,
should we require advisers to report information regarding the
resolution of the event as part of its next regular report on Form PF?
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\48\ 17 CFR 274.223 (Form N-Liquid or Form N-RN) and 17 CFR
274.222 (Form N-CR).
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56. Should advisers to funds that are not qualifying hedge funds
have to respond to any or all of the current reporting items? For
example, should we require all advisers that file Form PF to file a
current report in connection with an operations event? Should certain
current reporting events only be required of the largest hedge funds?
If so, what asset thresholds would be appropriate and for which items?
2. Private Fund Adviser Current Reporting on Private Equity Funds
Similar to the current reporting in proposed section 5 for large
hedge fund advisers, we are also proposing to require all advisers to
private equity funds to file a current report within one business day
of a reporting event. The reporting events include: (1) Execution of an
adviser-led secondary transaction, (2) implementation of a general
partner or limited partner clawback, and (3) removal of a fund's
general partner, termination of a fund's investment period, or
termination of a fund. As noted above, private equity fund advisers
file their annual updates within 120 calendar days after their fiscal
year ends, which leads to significant delays in reporting and staleness
of certain information. We believe that more current reporting of the
proposed information would improve the Commission's and FSOC's ability
to monitor systemic risk by providing information on certain events
(including potential trends affecting multiple private equity funds)
that could significantly affect both investors and markets more
broadly, and also enhance our investor protection efforts. Because
reporting of these events is designed to enhance our timely oversight
of these advisers, we propose to require current reporting on a limited
number of events by all advisers to private equity funds that file Form
PF. Furthermore, we believe that growth in the private equity industry
since the adoption of Form PF further supports the proposed current
reporting requirements, given that both the number of investors
invested in private equity funds has increased and the industry's
impact on markets generally has become more pronounced.\49\ We believe
that both of these developments merit more timely risk-based monitoring
and oversight by the Commission and FSOC given the potential
consequences for an ever increasing pool of private equity investors as
well as financial markets broadly.
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\49\ Since 2013, the number of private equity funds has more
than doubled from under 7,000 to nearly 16,000, private equity fund
gross assets have tripled from $1.6 trillion to $4.7 trillion, and
private equity fund net assets have also nearly tripled, increasing
from $1.5 trillion to $4.2 trillion. See Private Funds Statistics,
supra footnote 4.
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Proposed section 6 would contain Items A through E. Item A would
require advisers to identify themselves and the reporting fund,
including providing the reporting fund's name, private fund
identification number, NFA identification number (if any), and LEI (if
any).\50\ Items B through D would set forth the three reporting events
and the applicable reporting requirements. Item E would serve as an
optional item for advisers to provide any explanatory notes they
believe would be helpful to the Commission's and FSOC's understanding
of information reported in section 6. The following sections discuss
each reporting event in turn.
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\50\ Section 6, Item A would also require identifying
information on the reporting fund's adviser, including the adviser's
full legal name, SEC 801-Number, NFA ID Number (if any), large
trader ID (if any), and large trader ID suffix (if any), as well as
the name and contact information of the authorized representative of
the adviser and any related person who is signing the current
report. See Section 6, Item A.
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a. Adviser-Led Secondary Transactions
Proposed section 6 Item B would require reporting upon the
completion of an adviser-led secondary transaction. This proposed
reporting would include the transaction completion date and a brief
description of the transaction. We propose to define ``adviser-led
secondary transaction'' as any transaction initiated by the adviser or
any of its related persons \51\ that offers private fund investors the
choice to: (1) Sell all or a portion of their interests in the private
fund; or (2) convert or exchange all or a portion of their interests in
the private fund for interests in another vehicle advised by the
adviser or any of its related persons.\52\ Under the proposal,
transactions would only be subject to reporting if they are initiated
by a private equity fund's adviser or a related person of the
adviser.\53\ We understand that these transactions have become
increasingly common in the private equity space and may present
conflicts of interest that merit timely reporting and monitoring given
that these conflicts, particularly those that arise because the adviser
(or its related person) is on both sides of the transaction in an
adviser-led secondary transaction with potentially different economic
incentives, have the potential to negatively impact investors. To the
extent that an increase in adviser-led secondary transactions also
indicates an inability to sell portfolio companies (or to sell those
companies at existing valuations) through more traditional exit
avenues, transactions of this nature could be a leading indicator of a
declining market, a situation that also merits timely monitoring to
identify potential consequences for both investors as well as markets
more broadly from a systemic risk perspective. This proposed
requirement would provide the Commission and FSOC with data regarding
the frequency and circumstances surrounding these transactions allowing
the Commission and FSOC to assess market trends better and assess both
potential market impacts as well as potential conflicts of interest
associated with these transactions.
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\51\ See Form PF Glossary (definition of ``related person'').
\52\ See Form PF Glossary (proposed definition of ``adviser-led
secondary transaction'').
\53\ Whether a transaction is initiated by the adviser or its
related persons requires a facts and circumstances analysis.
However, we would generally not view a transaction to be initiated
by the adviser or one of its related persons to the extent the
adviser or one of its related persons, at the unsolicited request of
an investor, participates in the secondary sale of such investor's
fund interest.
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[[Page 9118]]
We request comment on the proposed current report in section 6,
Item B:
57. The purpose of this proposed reporting event is to identify an
adviser-led secondary transaction that merits monitoring on a timelier
basis than possible with an annual report on Form PF. Does the
reporting event accomplish this purpose? Why or why not? If not, how
should we modify the language? Should the rule use an alternative
trigger? Alternatively, do these types of transactions not merit such
monitoring?
58. Is the proposed definition of ``adviser-led secondary
transaction'' appropriate and clear? If not, how could the definition
be clarified? Should it be modified or eliminated? Is the proposed
definition too broad or too narrow? Should we provide additional
guidance?
59. Should we define or provide guidance on the term
``transaction'' in the definition of ``adviser-led secondary
transaction''? If so, how should ``transaction'' be defined? Should we
reference the various types of adviser-led secondary transactions in
the definition? Why or why not? The proposed definition of ``adviser-
led secondary transaction'' includes transactions initiated by the
adviser's related persons. Should we exclude transactions initiated by
some or all of the adviser's related persons from the proposed
definition?
b. General Partner or Limited Partner Clawback
Proposed section 6 Item C would require reporting upon the
implementation of a general partner clawback. This proposed reporting
would include the effective date of the clawback and the reason for the
clawback.\54\ We would define ``general partner clawback'' as any
obligation of the general partner, its related persons, or their
respective owners or interest holders to restore or otherwise return
performance-based compensation to the fund pursuant to the fund's
governing agreements.\55\
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\54\ As proposed section 6, Item C pertains to both general
partner clawbacks and limited partner clawbacks, the item also
requires filers to specify the type of clawback implemented (i.e.,
whether it is a general partner clawback or limited partner
clawback). See Section 6, Item C.
\55\ See Form PF Glossary (proposed definition of ``general
partner clawback''). Under the proposal we would define
``performance-based compensation'' as any allocation, payment, or
distribution of capital based on the fund's (or its portfolio
investments') capital gains and/or capital appreciation. This
definition would include cash or non-cash compensation, including
in-kind allocations, payments, or distributions of performance-based
compensation. See also Form PF Glossary (proposed definitions of
``performance-based compensation'' and ``portfolio investments'').
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For example, if the general partner of a fund is entitled to
performance-based compensation equaling 20 percent of the fund's
profits over the life of the fund and the fund distributes such
compensation to the general partner periodically based on the
profitability of the fund at the time of distribution, the general
partner may have received distributions of performance-based
compensation over the life of the fund in excess of 20 percent of the
fund's aggregate profits. In this situation, under the fund's governing
documents, the fund's general partner would be required to return the
excess performance-based compensation it received to the fund.
Specifically, reporting would be required when the general partner is
required to return to the fund performance-based compensation in excess
of the amount it was ultimately entitled to receive under the fund's
governing documents.
The widespread implementation of general partner clawbacks may be a
sign of a deteriorating market environment, which may have systemic
risk implications. For example, given that the implementation of
general partner clawbacks by private equity funds is typically rare, if
many funds are implementing general partner clawbacks at the same time,
this could be indicative of the early stages of a distressed credit
environment or cycle, and timely reporting received could help the
Commission and FSOC identify particular markets, sectors or funds on
which such a declining market environment could have an outsized
impact, and which may merit additional monitoring given the potential
consequence for both investors and financial market stability.
In addition, we propose to require reporting when an adviser
implements a limited partner clawback (or clawbacks) in excess of an
aggregate amount equal to 10 percent of a fund's aggregate capital
commitments. We would define ``limited partner clawback,'' sometimes
referred to as a limited partner ``giveback,'' as an obligation of a
fund's investors to return all or any portion of a distribution made by
the fund to satisfy a liability, obligation, or expense of the fund
pursuant to the fund's governing agreements.\56\ We believe requiring
the proposed minimum threshold is appropriate because we believe a
clawback of this magnitude would be associated with an event that could
have a significant negative impact on a fund's investors and, if a
pattern emerges among multiple private equity advisers, could indicate
financial stability concerns.
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\56\ See Form PF Glossary (proposed definition of ``limited
partner clawback'').
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Limited partner clawbacks of this magnitude also could signal that
a fund is under stress or is anticipating being under stress. For
example, a limited partner clawback (or clawbacks) in an aggregate
amount of more than 10 percent of a private equity fund's aggregate
capital commitments might suggest that the fund is planning for a
material event (e.g., substantial litigation or legal judgment) that
could negatively impact investors and we believe that such potential
impact merits prompt reporting to allow for more timely risked-based
monitoring.
We request comment on the proposed current report in section 6,
Item C:
60. Do the proposed reporting events based on implementation of a
general partner and/or limited partner clawback capture events that
could signal that a fund or the market more generally is under stress
or subject to an event that merits prompt reporting? Why or why not? If
not, how should we modify this reporting event or what alternative
reporting event would you suggest?
61. Are the proposed definitions of ``general partner clawback,''
``performance-based compensation,'' and ``limited partner clawback''
appropriate and clear? If not, how should the definitions be clarified?
Should they be modified or eliminated? Are the proposed definitions too
broad or too narrow? Should we provide additional guidance?
62. With respect to the limited partner clawback reporting event,
is the proposed minimum reporting threshold, i.e., a clawback (or
clawbacks) in excess of an aggregate amount equal to 10 percent of a
fund's aggregate capital commitments, appropriate? Why or why not? If
not, should the threshold be higher or lower and why? Would the
proposed limited partner clawback reporting event cause advisers to
hold more investment proceeds as reserves and delay distributions to
investors, rather than distributing proceeds to investors more quickly?
Why or why not?
63. We recognize that certain fund agreements require the adviser
to perform interim clawback calculations during the life of the fund.
For example, the adviser may be required to determine whether the
general partner would be subject to a clawback on the first anniversary
of the termination of the investment period. Should such ``interim''
clawbacks be subject to the current reporting requirement, as proposed?
Do they present the same monitoring needs as end-of-life clawbacks?
[[Page 9119]]
c. Removal of General Partner, Termination of the Investment Period or
Termination of a Fund
Proposed section 6 Item D would require an adviser to report when a
fund receives notification that fund investors have: (1) Removed the
adviser or an affiliate as the general partner or similar control
person of a fund, (2) elected to terminate the fund's investment
period, or (3) elected to terminate the fund, in each case as
contemplated by the fund documents. Proposed Item D would require
reporting on the effective date of the applicable removal event and a
description of such removal event.
We believe that events of this nature are rare, and accordingly,
current reporting would also be rare. However, we believe these events
could provide an indication of market deterioration and also raise
investor protection issues, including potential conflicts of interest,
and merit the Commission's and FSOC's timely monitoring. For example,
each of these triggers could lead to the liquidation of the fund
earlier than anticipated, which could present risks to investors and
potentially certain markets in which the fund assets were invested.
This proposed current reporting event would provide the Commission and
FSOC with timely notification of this event (of which we might
otherwise be unaware at the time it is initiated), and allow for
evaluation given the potential consequences of the event.
We request comment on the proposed current report in section 6,
Item D:
64. Does the proposed reporting event based on the removal of a
fund's general partner, termination of a fund's investment period, or
termination of a fund raise investor protection and systemic risk
concerns that merit timely monitoring? Why or why not? If not, how
should we modify this reporting event or what alternative reporting
event would you suggest? Is the use of the term ``termination'' in the
reporting event clear on its face or should it be defined? Why or why
not?
65. Are there other reporting events, in addition to the ones that
we have proposed in section 6, that you believe would provide the
Commission and FSOC with information that would enhance our ability to
protect private equity fund investors and monitor the private equity
industry? If so, what are they? For example, should we have a reporting
event in connection with the departure of a senior member (e.g.,
partner, executive officer, etc.) of a fund's general partner, e.g., a
key person event?
66. Should we add a ``for cause'' requirement to this reporting
event (i.e., typically defined in a fund's governing documents as the
general partner or its principals engaging in gross negligence, willful
misconduct, fraud, or violations of applicable law)? Should we narrow
the reporting event to only cover ``for cause'' events?
d. Explanatory Notes
Similar to proposed section 5 Item K and for the same reasons,
proposed section 6 Item E would allow an adviser to provide a narrative
response if it believes that additional information would be helpful in
explaining the circumstances of their current report(s).
We request comment on the proposed current report in section 6,
Item E:
67. Should we provide the option for a narrative response? Are
advisers likely to use the space to provide additional context to a
filed current event?
68. As noted above, other current reporting forms require follow up
reports for certain events. Should we require follow up reports for any
of the reporting events in section 6? For example, should we require an
adviser to file a follow up report if it learns additional material
information regarding the reported event that is responsive to a
proposed question?
3. Filing Fees and Format for Reporting
We propose to require advisers to file current reports through the
same non-public filing system they use to file the rest of Form PF, the
Private Fund Reporting Depository (``PFRD'').\57\ Large hedge fund
advisers and all private equity advisers would file current reports on
section 5 and section 6 of Form PF, respectively, and would not file
any other sections of Form PF at the time a current report is filed.
This requirement is designed to facilitate reporting of clear and
timely information in an efficient manner. Under the proposed rule,
advisers filing current reports on either section 5 or 6 would be
required to pay to the operator of the Form PF filing system fees that
have been approved by the SEC. 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.\58\ Advisers also would be able to amend their current report
if they discover that information they filed was not accurate at the
time of filing.\59\
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\57\ See proposed Instruction 12. See also rule 17 CFR
275.204(b)-1.
\58\ See section 204(c) of the Advisers Act.
\59\ Consistent with the current instructions for other types of
Form PF filings, large hedge fund advisers and private equity
advisers would not be required to update information that they
believe in good faith properly responded to Form PF on the date of
filing even if that information is subsequently revised for purposes
of recordkeeping, risk management or investor reporting (such as
estimates that are refined after completion of a subsequent audit).
This proposed requirement is designed to provide advisers with a way
to correct current reports, just as all advisers can correct other
types of Form PF filings. See Instruction 16.
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69. Should advisers file current reports through PFRD as proposed?
Alternatively, is there another filing system (e.g., IARD, EDGAR) that
would be more appropriate? Should we instead allow advisers to file
current reports via secure email? Would that be less burdensome for
advisers experiencing an operations event?
70. Should there be filing fees associated with filing a current
report on Form PF? Considering the expeditious reporting deadlines and
the nature of the current reporting events, would filing fees prevent a
timely filing of a current report?
71. Under the proposal, filers may request a temporary hardship
exemption pursuant to rule 204(b)-1(f) for a current report. Should we
instead require advisers to notify the Commission via email or phone
call if they are experiencing a temporary hardship and as a result
cannot file their current report? Alternatively, should we instead
prohibit advisers from requesting a temporary hardship exemption
pursuant to rule 204(b)-1(f) for a current report given the importance
of timely reporting?
B. Large Private Equity Adviser Reporting
We also propose to amend section 4 of Form PF, which requires
reporting by large private equity advisers to: (1) Lower the reporting
threshold from $2 billion to $1.5 billion in private equity fund assets
under management, and (2) add new questions designed to enhance our
understanding of certain practices of private equity advisers and amend
certain existing questions to improve data collection.\60\
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\60\ Under the proposal, Item B would also be split into three
new items to be designated new Item B ``Certain information
regarding the reporting fund,'' new Item C ``Reporting fund and
controlled portfolio company financing,'' and new Item D ``Portfolio
company investment exposures.''
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1. Reduction in Large Private Equity Adviser Reporting Threshold
Currently, a private fund adviser must complete section 4 of Form
PF if it had at least $2 billion in private equity fund assets under
management as of the end of its most recently completed fiscal year
(``large private equity adviser'').\61\
[[Page 9120]]
Section 4 of the Form requires additional information regarding the
private equity funds these advisers manage, which are tailored to focus
on relevant areas of financial activity that have the potential to
raise systemic concerns. When Form PF was originally adopted in 2011,
the $2 billion reporting threshold captured 75 percent of the U.S.
private equity industry based on committed capital.\62\ Today, this
threshold only captures about 67 percent of the U.S. private equity
industry.\63\ We therefore propose to lower this threshold to $1.5
billion in order to continue to capture about 75 percent of the U.S.
private equity industry based on committed capital.\64\ We believe the
proposed reduction is important so that Form PF continues to capture
and provide robust data on a sizable portion of the private equity
industry. The proposed threshold reduction is designed so that the
group of advisers filing Form PF as large private equity advisers would
continue to represent a substantial portion of private equity industry
assets. Having a robust data set for analysis is important for both
identifying potential investor protection issues as well as for
monitoring systemic risk. We think that the proposed new threshold
strikes an appropriate balance between obtaining information regarding
a significant portion of the private equity industry for analysis while
continuing to minimize the burden imposed on smaller advisers.
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\61\ See Instruction 3 to Form PF.
\62\ See 2011 Form PF Adopting Release, supra footnote 2, at 32.
\63\ Based on data reported on Form PF and Form ADV.
\64\ As under the current instructions to Form PF, an adviser
would determine whether it meets the threshold and qualifies as a
large private equity adviser based solely on the assets under
management attributable to private equity funds.
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We request comment on the proposed change to the reporting
threshold:
72. Should the Commission reduce the reporting threshold for large
private equity advisers as proposed? Why or why not? If not, should the
reporting threshold be kept constant, increased, or decreased further?
If the threshold should be changed, what do you believe is the
appropriate threshold and why?
73. Would the proposed reduction in the large private equity
adviser reporting threshold create an undue burden on advisers that
will newly be required to complete section 4 (i.e., those with between
$1.5 billion and $2 billion in private equity fund assets under
management)? If so, why?
74. Does the change in reporting threshold for filing as a large
private equity adviser accurately capture the information needed to
monitor for systemic risk? Why or why not?
2. Large Private Equity Adviser Reporting
Private Equity Fund Investment Strategies. We propose to add
Question 68 to Section 4 to collect information about private equity
fund investment strategies.\65\ Form PF does not currently collect data
on private equity fund strategies. Given the growth in the industry
since adoption of Form PF and the current diversity of strategies
employed by private equity funds, we believe that it is important that
we begin collecting this information. Different strategies carry
different types and levels of risk for the markets and financial
stability. We believe that reporting on investment strategies would
allow the Commission and FSOC to understand and monitor better the
potential market and systemic risks presented by the different
strategies to both markets and investors. For example, a shift in
private equity assets towards riskier strategies could provide valuable
information about emerging systemic risks. Similarly, as noted above,
this information would also allow the Commission and FSOC to assess
better private equity funds' increasing role in providing credit to
companies.
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\65\ For purposes of this proposed question, private equity fund
investment strategies would include private credit (and associated
sub-strategies such as distressed debt, senior debt, special
situations, etc.), private equity (and associated sub-strategies
such as early stage, buyout, growth, etc.), real estate, annuity and
life insurance policies, litigation finance, digital assets, general
partner stakes investing, and other. In connection with this
proposed question, we also propose to add two new terms to the Form
PF Glossary of Terms for ``digital assets'' and ``general partner
stakes investing.'' See Form PF Glossary of Terms.
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The proposed question would be structured similar to Question 20,
which collects information about hedge fund strategies, but tailored to
private equity funds (i.e., the strategies would represent common
strategies employed by private equity funds). The proposal would
require advisers to choose from a mutually exclusive list of strategies
by percent of deployed capital even if the categories do not precisely
match the characterization of the reporting fund's strategies. If a
reporting fund engages in multiple strategies, the adviser would
provide a good faith estimate of the percentage the reporting fund's
deployed capital represented by each strategy.
Proposed Question 68 also would include an ``other'' category for
advisers to select in cases where a reporting fund's strategy is not
listed, but an adviser selecting ``other'' in response to this question
must explain why. This proposed requirement is designed to improve data
quality by providing context to an adviser's selection of the ``other''
category. It also is designed to help ensure that advisers are not
selecting the ``other'' category when they should be reporting
information in a different strategy category. Proposed Question 68 is
designed to allow FSOC to filter data for targeted analysis, monitor
trends in the private equity industry, analyze potential system risk,
and to support the Commission's oversight of the private equity
industry and investor protection efforts.
We request comment on proposed Question 68:
75. Should Form PF require large private equity advisers to report
investment strategies for the private equity funds they advise as
proposed?
76. Should we collect strategy information for all advisers to
private equity funds and not just large private equity advisers? Why or
why not? Would collecting this data be overly burdensome for smaller
private equity advisers? If so, what should be the threshold cutoff for
such reporting (e.g., $500 million in private equity assets under
management)?
77. Should Question 68, as proposed, provide that the strategy
options are mutually exclusive and direct advisers to not report the
same assets under multiple strategies? Why or why not? Alternatively,
should Form PF allow advisers to report the same assets under multiple
strategies? Would this approach better identify the reporting fund's
strategies?
78. Should Form PF require more granular strategy information than
proposed? Why or why not? If so, please provide examples of more
granular categories or sub-categories that should be included.
79. Should Question 68 require more, fewer, or different
categories? Are there other strategies that are important for tracking
and assessing systemic risk or for the protection of investors? If so,
please provide examples of desired changes in the strategy categories.
80. With respect to private credit strategies, should we
consolidate some of the private credit categories? For example, are
``Private Credit--Junior/Subordinated Debt,'' ``Private Credit--
Mezzanine Financing,'' ``Private Credit--Senior Debt,'' and Private
Credit--Senior Subordinated Debt'' each considered a subset of the
category ``Private Credit--Direct Lending/Mid Market Lending''? If so,
should we only have a ``Private Credit--Direct Lending/Mid Market
Lending'' category and
[[Page 9121]]
remove the other four sub-categories? Why or why not? Furthermore,
should ``Private Credit--Direct Lending/Mid Market Lending'' be changed
to ``Private Credit--Direct Lending'' to capture direct lending to
large corporations? Why or why not?
81. Should Question 68 include an ``other'' category, as proposed?
If advisers select the ``other'' category, should Form PF require them
to explain the selection, as proposed? Should Form PF require the
adviser to include more, less, or different information in the
explanation? Would this proposed change improve data quality by
providing context to the adviser's selection of the ``other'' category?
Would this proposed change help us ensure that advisers are not
misreporting information in the ``other'' category when they should be
reporting information in a different category? Is there a better way to
meet these objectives? Should Form PF require advisers to provide
explanations for any other categories besides the ``other'' category,
as proposed?
82. Should we define ``digital assets'' and ``general partner
stakes investing'' as proposed or are other alternative definitions
more suitable?
Restructuring/recapitalization of a portfolio company. We propose
to add Question 70 to Section 4 to obtain additional information
regarding restructurings or recapitalizations of the reporting fund's
portfolio companies. Specifically, we propose to require an adviser to
indicate whether a portfolio company was restructured or recapitalized
following the reporting fund's investment period, and if so, to provide
the name of the portfolio company and the effective date of the
restructuring.\66\ For example, a fund that holds portfolio company
equity that has become worthless might restructure its equity interest
into a note or loan with a different valuation. While we understand
that private equity funds routinely engage in these practices during
the investment period, we believe that when these activities happen
post-investment period, it would tell the Commission and FSOC more
about the current market environment and would allow FSOC to monitor
these activities for systemic risk analysis and assist us with our
risk-based exam program.
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\66\ Proposed Question 70.
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We request comment on proposed Question 70:
83. Should Form PF require advisers to report on restructuring or
recapitalizations of a portfolio company as proposed? Why or why not?
84. Would the proposed reporting tell us more about the current
market environment or potential systemic risk?
85. Would it be overly burdensome for advisers to report this
information? Why or why not? If so, are there alternative ways for us
to collect this data that would be less burdensome? Please provide
examples.
86. As drafted, is this question appropriate in scope? Should we
carve out certain types of recapitalizations or restructurings? Should
certain types of funds not be required to report this information based
on their investment strategy or underlying holdings?
Investments in different levels of a single portfolio company's
capital structure by related funds. We propose to add Question 71 to
require reporting on investments in different levels of a single
portfolio company's capital structure by funds advised by an adviser or
a related person. Specifically, the adviser would indicate whether the
reporting fund held an investment in one class, series or type of
securities (e.g., debt, equity, etc.) of a portfolio company while
another fund advised by the adviser or its related persons concurrently
held an investment in a different class, series or type of securities
(e.g., debt, equity, etc.) of the same portfolio company, and if so, to
provide the name of the portfolio company and a description of the
class, series or type of securities held.\67\ This can create a
conflict of interest for the adviser that could be important for the
Commission to monitor. For example, if a portfolio company suffers
financial distress, there may be a conflict between the funds'
interests given that the company may not be able to satisfy the claims
all of classes of creditors. In such a circumstance, the adviser's
decisions may have the effect of benefiting one fund over another fund.
The purpose of this question would be to identify circumstances where
multiple reported funds advised by the same adviser have exposure to
the same portfolio company, which would allow us to better understand
and monitor market trends regarding this practice and enhance our
investor protection efforts.\68\
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\67\ Proposed Question 71.
\68\ For example, an adviser may have two advised funds invested
in different classes of a portfolio company's capital structure,
with one fund managing outside capital while the other manages
primarily internal capital of the adviser's owners/employees.
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We request comment on proposed Question 71:
87. Should Form PF require advisers to report on investments in a
different class, series or type of securities (e.g., debt, equity,
etc.) of a single portfolio company's capital structure? Why or why
not? Do you believe that this information would be useful in monitoring
exposures that present risks to investors, the markets, and financial
stability? Why or why not? If not, how would you modify this question
or what alternatives would you suggest to identify potential conflicts
of this nature?
88. Should we expand the proposed question to capture all funds of
the same adviser or related persons (including those not reported on
Form PF) or separately managed accounts or other clients that hold
investments in different levels of a single portfolio company's capital
structure? Why or why not?
89. Current Question 79 of Form PF \69\ requires an adviser to
report on whether it or any of its related persons (other than the
reporting fund) invest in any companies that are portfolio companies of
the reporting fund. Would proposed Question 71 provide additional
insight into these investments? In connection with this change, should
we add a threshold for responding to current Question 79 (e.g., greater
than 10 percent of gross asset value) to reduce the burden on advisers
in responding to this question? Alternatively, should we amend current
Question 79 to require the adviser to report additional information
regarding the related persons' investments?
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\69\ We would redesignate Question 79 as Question 87.
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Fund-level borrowings. The proposal would add Question 72 to
require advisers to report whether a reporting private equity fund
borrows or has the ability to borrow at the fund-level as an
alternative or complement to the financing of portfolio companies. We
understand that many funds use fund-level financing for this
alternative or complementary financing purpose. If a fund engages in
fund-level borrowing, the proposal would require the adviser to provide
(1) information on each borrowing or other cash financing available to
the fund, (2) the total dollar amount available, and (3) the average
amount borrowed over the reporting period.\70\ This new question is
designed to collect data that the Commission believes would provide
valuable insight into how private equity funds obtain leverage, thereby
giving the Commission and FSOC a better understanding of a reporting
fund's risk profile.
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\70\ Proposed Question 72.
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Fund-level leverage generally causes a fund to make larger, less
frequent capital calls. Such practice has the
[[Page 9122]]
potential to cause liquidity concerns for investors that may not have
occurred had the adviser made smaller, more frequent capital calls.
This concern is exacerbated for investors with commitments to multiple
private equity funds because advisers may call capital simultaneously--
particularly when liquidity is generally constrained across the
market--resulting in investors receiving large, concurrent capital
calls. This may increase the likelihood of potential defaults by
investors. We believe that this information would enhance the
Commission's and FSOC's ability to monitor systemic risk posed by such
potential defaults.
We request comment on proposed Question 72:
90. Should Form PF require advisers to report on private equity
fund borrowings as proposed? Why or why not? Do you believe that this
question as proposed would be useful in identifying and monitoring
potential systemic risk associated with private equity fund leverage?
Why or why not? If not, how would you modify this question or what
alternatives would you suggest?
91. Should we collect additional data beyond the type of borrowing
or financing, dollar amount available, and average amount borrowed as
proposed? If so, what additional data should we collect and why?
92. Are the categories for ``type of financing'' in proposed
Question 72 appropriate or should there be more, fewer or different
categories? If there should be more or different categories, what
additional or different categories do you suggest?
Financing of portfolio companies. We propose to add Question 74 to
require an adviser to report whether it or any of its related persons
provide financing or otherwise extend credit to any portfolio company
in which the reporting fund invests and to quantify the value of such
financing or other extension of credit.\71\ This proposed question
would provide additional information on these financing arrangements
and identify possible conflicts of interest that may arise that would
help us focus our risk-based exam program, and could also alert us to
industry financing trends that could affect systemic risk concerns. For
example, if a reporting fund's portfolio companies are unable to obtain
credit from traditional sources, advisers (and their related persons)
may be more likely to lend to these companies, especially if a
portfolio company is in distress. We believe these types of financing
could be an early indicator of a market downturn.
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\71\ Proposed Question 74.
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We request comment on proposed Question 74:
93. Should Form PF require advisers to report on whether a
reporting private equity fund or any of its related persons provide
financing to a reporting fund's portfolio companies? Why or why not? Do
you believe that this question as proposed would be useful for the
purpose stated above? Why or why not? If not, how would you modify this
question or what alternatives would you suggest? Please be specific.
Floating rate borrowings of controlled portfolio companies (CPCs).
The proposal would add Question 82 to require advisers to report what
percentage of the aggregate borrowings of a reporting private equity
fund's CPCs is at a floating rate rather than a fixed rate.\72\ This
proposed requirement would provide additional information on the risk
profiles of CPCs, and help the Commission and FSOC better monitor fund
level and portfolio level risk profiles for systemic risk purposes, as
elevated CPC leverage could signal default risk, particularly if
financings are at a floating versus fixed rate. More specifically, we
believe that floating rate borrowings carry different and potentially
greater risks than fixed rate borrowings, given that companies that
issue floating rate debt take on the added risk that rates will move
higher, which would increase the amount they must pay to creditors, a
situation that can put added stress on a company.
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\72\ Proposed Question 82.
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We request comment on proposed Question 82:
94. Should Form PF require advisers to report on floating rate
borrowings of CPCs as proposed? Why or why not? Do you believe limiting
reporting to floating rate (versus fixed rate) borrowings is
appropriate given the purpose of the proposed question? Why or why not?
If not, how would you modify this question (e.g., should we also
require reporting on fixed rate borrowings)?
CPCs owned by private equity funds. The proposal would add Question
67 to require an adviser to report how many CPCs a reporting private
equity fund owns.\73\ We believe collecting this information would help
to provide insight into a fund's concentration risk and strategy, as it
pertains to the interconnectedness of private equity funds and their
portfolio companies, which is important for assessing systemic risk in
the industry generally.
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\73\ Proposed Question 67.
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We request comment on proposed Question 67:
95. Would collecting the number of a fund's CPCs help to provide
insight into a fund's concentration risk and strategy? Why or why not?
If not, what alternatives or information would provide better insight?
Events of default, bridge financing to controlled portfolio
companies, and geographic breakdown of investments. We propose to amend
three existing questions in section 4. First, we propose to amend
current Question 74 to require advisers to provide more granular
information about the nature of reported events of default, such as
whether it is a payment default of the private equity fund, a payment
default of a CPC, or a default relating to a failure to uphold terms
under the applicable borrowing agreement (other than a failure to make
regularly scheduled payments).\74\ We believe this more detailed
information would help the Commission and FSOC better assess the impact
of default events to both investors and markets more generally and may
indicate emerging potential systemic risks.
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\74\ We would redesignate Question 74 as Question 83.
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Second, we propose to amend current Question 75, which requires
reporting on the identity of the institutions providing bridge
financing to the adviser's CPCs and the amount of such financing, to
add additional counterparty identifying information (i.e., LEI (if any)
and if the counterparty is affiliated with a major financial
institution, the name of the financial institution).\75\ We believe
that the proposed changes would not be burdensome for advisers given
that this information is readily available to advisers, and would
provide globally standardized identification information about
counterparty entities reported in this question that would enhance the
Commission's and FSOC's ability to analyze exposure data for purposes
of assessing systemic risk.
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\75\ We would redesignate Question 75 as Question 84.
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Third, we propose to amend current Question 78, which requires
reporting on the geographical breakdown of investments by private
equity funds, by moving away from reporting based on a static group of
regions and countries and towards identifying a private equity fund's
greatest country exposures based a percent of net asset value.\76\ The
proposed changes to Question 78 would improve the usefulness of data
collected, as reporting is currently limited to exposure by region with
additional reporting on a limited number of countries of interest. For
[[Page 9123]]
example, information obtained from Question 78 could provide insight
into whether a critical mass of private equity funds have investments
concentrated in a country that is experiencing significant political
instability or a natural disaster, which could be important for
systemic risk assessments. We have found the current reporting approach
lacks precision because the regions are not uniformly defined and
although countries of interest change over time, the form is not
dynamic in this regard. The proposal would require advisers to report
all countries (by ISO country code \77\) to which a reporting fund has
exposure of 10 percent or more of its net asset value. We believe the
proposed exposure threshold represents significant county exposure,
while balancing the burden that the question would create for advisers.
Advisers would have to follow Instruction 15 for purposes of
calculating the information in the proposal, including reporting the
exposure in U.S. dollars which would improve data comparability across
funds. Advisers also would categorize investments based on
concentrations of risk and economic exposure. We would also remove
regional level reporting because we would now be able to analyze
regional exposure using the country level information.
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\76\ We would redesignate Question 78 as Question 69.
\77\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
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We request comment on the proposed amendments to current Questions
74, 75 and 78:
96. Should current Questions 74, 75 and 78 be amended as proposed?
Why or why not?
97. Are the more granular default questions that we are proposing
to include in amended current Question 74 appropriate? Why or why not?
Alternatively, should there be more, fewer or different questions? If
there should be more or different questions, what additional or
different questions do you suggest?
98. Do you agree that the additional information that we propose to
require in amended current Question 75 would not be overly burdensome
for advisers to report? Why or why not? Do you believe that requiring
advisers to report a counterparty's LEI in this question would serve
our purpose of better identifying counterparties for purposes of
analysis? Why or why not? Are there alternative identifiers that you
suggest we include? If so, what are they?
99. Do you agree with the proposed reporting threshold in amended
current Question 78 (i.e., country exposure of 10 percent or more of
net asset value) for reporting on the geographical breakdown of
investments? Should the threshold be higher or lower?
C. Large Liquidity Fund Adviser Reporting
Section 3 requires large liquidity fund advisers to disclose
information about the liquidity funds they advise. The proposal would
revise how large liquidity fund advisers report operational information
and assets, as well as portfolio, financing, and investor information.
The proposal also would add a new item concerning the disposition of
portfolio securities. The proposed changes are designed to help us see
a more complete picture of the short-term financing markets in which
liquidity funds invest, and in turn, enhance the Commission's and
FSOC's ability to assess short-term financing markets and facilitate
our oversight of those markets and their participants.\78\ The proposed
changes also are designed to improve data quality and comparability and
make certain categories in section 3 more consistent with the
categories the Board of Governors of the Federal Reserve System
(``Federal Reserve Board'') uses in its reports and analysis. Together,
the proposed amendments are designed to enhance investor protection
efforts and systemic risk assessment.
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\78\ We have proposed similar amendments to Form N-MFP. See
Money Market Fund Proposing Release, supra footnote 15. The proposed
amendments to Form N-MFP would provide new information about money
market fund shareholders and the disposition of non-maturing
portfolio investments, as well as enhance reporting accuracy and
consistency, increase the frequency of certain data points, and
improve identifying information.
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Operational information. We propose to revise how advisers report
operational information about their liquidity funds.\79\ Liquidity
funds that seek to maintain a stable price per share may be susceptible
to runs, which could cause systemic risk. Currently, Questions 52 and
53 require advisers to report whether the liquidity fund uses certain
methodologies to compute its net asset value. These questions were
designed to help determine how the fund might try to maintain a stable
net asset value.\80\ We propose to replace current Questions 52 and 53
with a requirement for advisers to report the information more
directly, by requiring advisers to report whether the liquidity fund
seeks to maintain a stable price per share and, if so, to provide the
price it seeks to maintain.\81\ This proposed approach is designed to
help the Commission and FSOC identify liquidity funds that seek to
maintain a stable price per share, and therefore, may be susceptible to
runs, which could cause systemic risk.
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\79\ Form PF, section 3, Item A.
\80\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, Release No. 3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11,
2011)], at n.133 and accompanying text (discussing proposed
Questions 43 and 44, which currently are Questions 52 and 53).
\81\ Proposed Question 52.
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We also propose to remove current Question 54, which requires
advisers to report whether the liquidity fund has a policy of complying
with certain provisions of rule 2a-7. We can use portfolio information
we collect in section 3, Item E, to determine whether the liquidity
fund is complying with rule 2a-7, regardless of whether it has a policy
or not.
Assets and portfolio information. We propose to require advisers to
report cash separately from other categories when reporting assets and
portfolio information concerning repo collateral.\82\ Section 3 already
requires advisers to report all liquidity fund assets and repo
collateral, including cash. However, because there is no distinct
category for cash, it is unclear what category advisers should use to
report it. Therefore, this proposed change is designed to improve data
quality and comparability, and help ensure data is reported in the
correct category.
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\82\ See current Questions 55 and 63(g), which we would
redesignate as Questions 53 and 63(h), respectively.
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We are proposing to revise further how advisers report liquidity
fund assets. We propose to require advisers to provide the total gross
subscriptions (including dividend reinvestments) and total gross
redemptions for each month of the reporting period.\83\ This proposed
requirement is designed to help explain changes in net asset value
during the reporting period, such as whether net asset value changes
are due to subscriptions, redemptions, or changes in the value of the
reporting fund's holdings. This level of detail is designed to help
ensure accurate reporting and inform the Commission and FSOC of trends
across large liquidity funds and short-term financing markets,
generally. We also propose to clarify that the term ``weekly liquid
assets'' includes ``daily liquid assets.'' \84\ This clarification is
designed to improve data quality and comparability, based on our
experience with Form PF.
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\83\ Proposed Question 54. As discussed, we would remove current
Question 54, concerning the liquidity fund's policy of complying
with certain provisions of rule 2a-7.
\84\ See Form PF Glossary of Terms.
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We are proposing to revise further how advisers would report
liquidity
[[Page 9124]]
fund portfolio information.\85\ As a general matter, the proposed more
granular requirements are designed to enhance reporting accuracy and
data comparability, as well as enhance our and FSOC's data analysis, as
described below. We propose to add instructions directing advisers to
provide information separately for the initial acquisition of each
security the liquidity fund holds and any subsequent acquisitions. This
instruction is designed to facilitate the Commission and FSOC's ability
to analyze other information we propose to require about each security,
including acquisition information: The trade date and the yield, as of
the trade date. These proposed requirements also would facilitate
understanding regarding how long a liquidity fund has held a position
and the maturity of the position when the liquidity fund first acquired
it. Accordingly, this level of detail is designed to help us understand
the liquidity fund's portfolio turnover during normal and stressed
markets, which is designed to enhance systemic risk assessment. In
connection with these proposed amendments, we would remove the
requirement for advisers to report the coupon when reporting the title
of the issue, because the yield would provide us with that information.
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\85\ Question 63.
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We also propose to require advisers to report additional
identifying information about each portfolio security, including the
name of the counterparty of a repo.\86\ Currently, section 3 requires
advisers to name the issuer. However, for repos, it is not clear
whether advisers should report the name of the counterparty of the
repo, the name of the clearing agency (in the case of centrally cleared
repos), or both. Therefore, this proposed amendment is designed to
improve data quality and comparability, based on our experience with
Form PF. If an adviser reports an ``other unique identifier,'' the
proposal would require the advisers to describe the identifier. These
proposed changes are designed to help the Commission and FSOC identify
the security and compare Form PF data with other data sets that use
these identifiers. When advisers select the category of investments
that most closely identifies the security, we propose to revise the
categories so advisers would distinguish between U.S. Government agency
debt categorized as (1) a coupon-paying note and (2) a no-coupon paying
note.\87\ This proposed amendment is designed to provide more granular
information about U.S. Government agency debt, so the Commission and
FSOC can filter data for more robust analysis.
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\86\ Question 63(a) through (f).
\87\ Question 63(g).
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For reporting portfolio information about repos, the proposal would
no longer allow advisers to aggregate certain information if multiple
securities of an issuer are subject to a repo.\88\ This proposed
amendment is designed to provide us with more complete information
about the repo market. We also propose to require advisers to provide
clearing information for repos to inform the Commission and FSOC about
liquidity fund activity in various segments of the market.\89\
Together, the proposed amendments are designed to improve the
Commission's and FSOC's understanding of the role of liquidity funds in
providing liquidity to the repo markets and enhance the Commission's
and FSOC's ability to conduct analysis of stress events in the funding
markets.
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\88\ Question 63(h).
\89\ Question 63(h).
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Financing information. We propose to revise how advisers report
financing information by requiring advisers to indicate whether a
creditor is based in the United States and whether it is a ``U.S.
depository institution,'' rather than a ``U.S. financial institution,''
as section 3 currently provides.\90\ This proposed amendment is
designed to make the categories in section 3 more consistent with the
categories the Federal Reserve Board uses in its reports and analysis,
to enhance systemic risk assessment.\91\ The proposal would not require
advisers to distinguish between non-U.S. creditors that are depository
institutions and those that are not. We understand that it would be
difficult for filers to make this distinction, which could result in
inconsistent data and less robust analysis.
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\90\ See current Question 56, which we would redesignate as
Question 55. Form PF would define ``U.S. depository institution'' as
any U.S. domiciled depository institution, including any of the
following: (1) A depository institution chartered in the United
States, including any federally-chartered or state-chartered bank,
savings bank, cooperative bank, savings and loan association, or an
international banking facility established by a depositary
institution chartered in the United States; (2) banking offices
established in the United States by a financial institution that is
not organized or chartered in the United States, including a branch
or agency located in the United States and engaged in banking not
incorporated separately from its financial institution parent,
United States subsidiaries established to engage in international
business, and international banking facilities; (3) any bank
chartered in any of the following United States affiliated areas:
U.S. territories of American Samoa, Guam, and the U.S. Virgin
Islands; the Commonwealth of the Northern Mariana Islands; the
Commonwealth of Puerto Rico; the Republic of the Marshall Islands;
the Federated States of Micronesia; and the Trust Territory of the
Pacific Islands (Palau); or (4) a credit union (including a natural
person or corporate credit union). Form PF defines ``U.S. financial
institution'' as any of the following: (1) A financial institution
chartered in the United States (whether federally-chartered or
state-chartered); (2) a financial institution that is separately
incorporated or otherwise organized in the United States but has a
parent that is a financial institution chartered outside the United
States; or (3) a branch or agency that resides outside the United
States but has a parent that is a financial institution chartered in
the United States.
\91\ The Chairman of the Federal Reserve Board is a member of
FSOC.
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Investor information. We propose to revise how advisers report
investor information.\92\ We propose to add a new question requiring
advisers to report whether the liquidity fund is established as a cash
management vehicle for other funds or accounts that the adviser or the
adviser's affiliates manage that are not cash management vehicles.\93\
This proposed amendment is designed to distinguish between liquidity
funds that are offered as a separate investment strategy versus those
that are maintained to support other investment strategies, which would
help us assess whether assets are shifting from registered money market
funds to unregistered products, such as liquidity funds, and better
understand the risks associated with assets shifting to unregistered
products.
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\92\ Form PF, section 3, Item D.
\93\ Proposed Question 58. We would redesignate current Question
58 to Question 57.
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We also propose to revise how advisers report beneficial ownership
information.\94\ Instead of requiring advisers to simply report how
many investors beneficially own five percent or more of the liquidity
fund's equity, section 3 would require advisers to provide the
following information for each investor that beneficially owns five
percent or more of the reporting fund's equity: (1) The type of
investor and (2) the percent of the reporting fund's equity owned by
the investor.\95\ This information is designed to help inform the
Commission and FSOC of the liquidity and redemption risks of liquidity
funds, because different types of investors may pose different types of
redemption risks. For example, if a market event results in a certain
type of investor exercising redemption rights, liquidity funds with a
homogenous investor base composed of that type of investor could face
greater redemption risks, which could raise systemic risk implications,
as compared to liquidity funds with a more diversified investor base.
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\94\ Question 59(b).
\95\ Question 59.
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Disposition of portfolio securities. We propose to require advisers
to report information about the disposition of portfolio securities for
each of the three
[[Page 9125]]
months in the quarter. To effectuate this, the proposal would add new
Item F (Disposition of Portfolio Securities) to section 3.\96\ Under
the proposal, advisers would report information about the portfolio
securities that the liquidity fund sold or disposed of during the
reporting period (not including portfolio securities that the fund held
until maturity). Advisers would report the amount as well as the
category of investment.\97\ This proposed amendment is designed to
inform the Commission and FSOC of liquidity funds' liquidity
management, as well as their secondary market activities in normal and
stress periods, to enhance systemic risk assessment. It also is
designed to help provide data about how liquidity funds' selling
activity relates to broader trends in short-term funding markets to aid
the Commission's investor protection efforts and FSOC's systemic risk
analysis.
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\96\ We would redesignate current Item F as Item G (Parallel
Money Market Funds).
\97\ We propose to include the following categories of
investment: U.S. Treasury Debt; U.S. Government Agency Debt (if
categorized as coupon-paying notes); U.S. Government Agency Debt (if
categorized as no-coupon-discount notes); Non-U.S. Sovereign, Sub-
Sovereign and Supra-National debt; Certificate of Deposit; Non-
Negotiable Time Deposit; Variable Rate Demand Note; Other Municipal
Security; Asset Backed Commercial Paper; Other Asset Backed
Securities; U.S. Treasury Repo, if collateralized only by U.S.
Treasuries (including Strips) and cash; U.S. Government Agency Repo,
collateralized only by U.S. Government Agency securities, U.S.
Treasuries, and cash; Other Repo, if any collateral falls outside
Treasury, Government Agency and cash; Insurance Company Funding
Agreement; Investment Company; Financial Company Commercial Paper;
Non-Financial Company Commercial Paper; or Tender Option Bond. If
Other Instrument, advisers would include a brief description, as is
currently required.
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Weighted average maturity and weighted average life. Large
liquidity fund advisers report information in section 3 about the
liquidity fund's ``WAM,'' or weighted average maturity and ``WAL,'' or
the weighted average life. Generally, WAM and WAL are calculations of
the average maturities of all securities in a portfolio, weighted by
each security's percentage of net assets. These calculations help
determine risk in a portfolio, because a longer WAM and WAL may
increase a fund's exposure to interest rate risks. Form PF's definition
of ``WAM'' and ``WAL'' instruct advisers to calculate them using
provisions of rule 2a-7. We propose to revise the Form PF glossary
definition of ``WAM'' and ``WAL'' to include an instruction to
calculate them with the dollar-weighted average based on the percentage
of each security's market value in the portfolio.\98\ This proposed
change is designed to help ensure advisers calculate WAM and WAL, which
can indicate potential risk in the market, using a consistent approach.
We believe the proposed amendment would improve data quality and
comparability, which in turn could enhance investor protection efforts
and systemic risk assessment.
---------------------------------------------------------------------------
\98\ See Form PF Glossary of Terms.
---------------------------------------------------------------------------
We request comment on the proposed amendments to Section 3 of Form
PF:
100. Would the proposed amendments improve data quality and
comparability? Is there a better way to achieve these objectives?
101. Would the proposed amendments provide a better picture of the
reporting fund's operations, assets, portfolio, financing, and investor
information? Is there alternative or additional information we should
require? Is there a less burdensome way to obtain the information?
102. Would the proposed amendments help the Commission and FSOC see
a more complete picture of the short-term financing markets in which
liquidity funds invest? Would the proposed amendments enhance our and
FSOC's ability to assess short-term financing markets, their systemic
risk, and facilitate our oversight of those markets and their
participants? Is there a better way to meet these objectives?
103. Should section 3 be more or less consistent with Form N-MFP
and rule 2a-7? Why or why not?
104. Should we add, remove, or revise any categories for any
questions in section 3? Why or why not? Should we add cash as a
category for certain questions in section 3, as proposed? Why or why
not?
105. Should section 3 require more, less, or different identifying
information? Currently, Form PF provides that in the case of a
financial institution, if a legal entity identifier has not been
assigned, then advisers must provide the RSSD ID assigned by the
National Information Center of the Federal Reserve Board, if any.\99\
Should we require advisers to report the RSSD ID, if they have one, as
a separate line item from LEI for securities, financial institutions,
or any others that section 3 should identify? How burdensome would it
be to obtain an RSSD ID?
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\99\ See the definition of ``LEI'' in the Form PF Glossary of
Terms.
---------------------------------------------------------------------------
106. Should we revise how advisers report whether the liquidity
fund seeks to maintain a stable price per share, as proposed? Would the
proposed requirement help the Commission and FSOC identify liquidity
funds that could be more susceptible to runs? Would the proposed
requirements make data for liquidity funds and money market funds more
comparable, and in turn, help FSOC assess systemic risk across the
types of funds? Is there a better way to meet these objectives? Should
section 3 require advisers to report any additional information
concerning maintaining a stable price per share? For example, should
section 3 require advisers to report the degree of rounding to maintain
a stable price per share, and if so, how? Should we remove current
Questions 52 and 53, concerning whether the liquidity fund uses certain
methodologies to compute its net asset value?
107. Should we remove current Question 54, concerning whether the
liquidity fund has a policy of complying with the risk limiting
conditions of rule 2a-7, as proposed? Could we determine whether the
liquidity fund is complying with the risk limiting conditions of rule
2a-7 using the portfolio information in section 3?
108. Should we amend how advisers report assets, as proposed? Would
the proposed amendments allow us to use comparable data for liquidity
funds and registered money market funds so we can analyze data across
the types of funds? Would the proposed amendments improve data quality
and comparability? Is there a better way to meet these objectives?
109. Section 3 currently requires advisers to report the 7-day
gross yield of the liquidity fund. Should section 3 also require
advisers to report the 7-day net yield of the liquidity fund? Would
this requirement enhance systemic risk assessment or investor
protection?
110. Should we amend how advisers report portfolio information, as
proposed? Would the proposed amendments improve data quality and
comparability? Would the proposed amendments help us and FSOC identify
the security and allow the Commission and FSOC to compare Form PF data
with other data sets that use certain identifiers? Would the proposed
amendments provide us and FSOC with more granular information to help
us filter data for more robust analysis, such as filtering data
concerning U.S. Government agency debt categorized as (1) a coupon-
paying note and (2) a no-coupon paying note? Would the proposed
amendments help the Commission and FSOC understand the liquidity fund's
portfolio turnover during normal and stressed markets? Would the
proposed amendments provide the Commission and FSOC with a more
complete information about repos? Would the proposed amendments help
inform us and FSOC of liquidity fund activity in various
[[Page 9126]]
market segments? Is there a better way to meet these objectives? Should
we remove the requirement for advisers to report the coupon when
reporting the title of the issue? Would the yield provide that
information?
111. Section 3 requires advisers to report information concerning
ratings assigned by credit rating agencies, when reporting portfolio
information. Currently, if a rating assigned by a credit rating agency
played a substantial role in the liquidity fund's or reporting fund's
evaluation of the quality, maturity, or liquidity of the security,
advisers must provide the name of each credit rating agency and the
rating each assigned to the security. How often does the credit rating
agency play a substantial role in the reporting fund's or its adviser's
evaluation of the quality, maturity, or liquidity of the security?
Please provide supportive data. Should section 3 continue to require
advisers to report this type of information?
112. Would advisers find it difficult to distinguish between non-
U.S. creditors that are depository institutions and those that are not
depository institutions? Should proposed Question 55 (currently
Question 56) be more or less consistent with Form PF section 1,
Question 12, which requires all advisers to provide a breakdown showing
whether a creditor is based in the United States and whether it is a
U.S. financial institution? \100\
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\100\ As discussed, we would redesignate Question 56 to Question
55. Form PF section 1 is part of the joint form between the SEC and
CFTC. See supra footnote 2.
---------------------------------------------------------------------------
113. As an alternative approach to reporting financing information,
should section 3 continue to require advisers to report information
concerning financial institutions? If so, should section 3 continue to
require advisers to distinguish between non-U.S. creditors that are
financial institutions and those that are not? Do advisers find it
difficult to make that distinction? If so, how could we revise section
3 to alleviate such a burden and improve data quality?
114. We are not proposing to amend current Question 57, which
requires advisers to report information about committed liquidity
facilities.\101\ Should we amend it? For example, should we require
advisers to provide the maturity dates of any committed liquidity
facilities that the liquidity fund has in place, as applicable? Why or
why not?
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\101\ We would redesignate current Question 57 to Question 56.
---------------------------------------------------------------------------
115. Should we amend how advisers report investor information, as
proposed? Would the proposed amendments help distinguish between
liquidity funds that are offered as a separate investment strategy and
those that are maintained to support other investment strategies? Would
this information, in turn, inform the Commission and FSOC if money
market fund requirements result in assets shifting from registered
money market funds to unregistered products such as liquidity funds?
Would the proposed changes help inform the Commission and FSOC about
the liquidity and redemption risks of liquidity funds, and any
potential systemic risk implications? Is there a better way to meet
these objectives? Should section 3 require advisers to report
identifying information for each investor that beneficially owns five
percent or more of the liquidity fund's equity, such as its name and
address, as we are proposing for Form N-MFP? \102\ Should we, as
proposed, remove current Question 59(b), which requires advisers to
report how many investors beneficially own five percent or more of the
liquidity fund's equity, because advisers would disclose this
information through the proposed new requirements for Question 59?
---------------------------------------------------------------------------
\102\ See Money Market Fund Proposing Release, supra footnote
15.
---------------------------------------------------------------------------
116. Should we amend how advisers report investor liquidity? For
example, should Question 62 require advisers to report investor
liquidity in dollar amounts, instead of, or in addition to a percentage
of net asset value, as Question 62 currently requires? Would advisers
find it more or less burdensome to report investor liquidity in dollar
amounts instead of as a percentage of net asset value?
117. Should section 3 require advisers to report information
concerning the disposition of portfolio securities, as proposed? Would
the proposed amendments help inform the Commission and FSOC of a
liquidity fund's liquidity management, as well as their secondary
market activities in normal and stress periods, to enhance systemic
risk assessment? Would the proposed amendments help provide data about
how liquidity funds' selling activity relates to broader trends in
short-term funding markets? Is there a better way to meet these
objectives? Are the proposed categories of investment appropriate?
Should we add, remove, or revise any categories of investment?
118. Should Form PF define ``U.S. depository institution'' and
revise the terms ``weekly liquid assets,'' ``WAM,'' and ``WAL,'' as
proposed? Would the proposed definitions improve data quality? Should
we provide additional guidance on these or any other terms used in
section 3?
III. Economic Analysis
A. Introduction
The Commission is mindful of the economic effects, including the
costs and benefits, of the proposed amendments. Section 202(c) of the
Advisers Act provides that when the Commission is engaging in
rulemaking under the Advisers Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission shall also consider whether the action will
promote efficiency, competition, and capital formation, in addition to
the protection of investors.\103\ The analysis below addresses the
likely economic effects of the proposed amendments, including the
anticipated and estimated benefits and costs of the amendments and
their likely effects on efficiency, competition, and capital formation.
The Commission also discusses the potential economic effects of certain
alternatives to the approaches taken in this proposal.
---------------------------------------------------------------------------
\103\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------
Many of the benefits and costs discussed below are difficult to
quantify. For example, the Commission cannot quantify how regulators
may adjust their policies and oversight of the private fund industry in
response to the additional data collected under the proposed rule.
Also, in some cases, data needed to quantify these economic effects are
not currently available and the Commission does not have information or
data that would allow such quantification. For example, costs
associated with the proposal may depend on existing systems and levels
of technological expertise within the private fund advisers, which
could differ across reporting persons. While the Commission has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The Commission
seeks comment on all aspects of the economic analysis, especially any
data or information that would enable a quantification of the
proposal's economic effects.
B. Economic Baseline and Affected Parties
1. Economic Baseline
The Commission adopted Form PF in 2011, with additional amendments
made to section 3 along with certain money market reforms in 2014.\104\
Form PF complements the basic information about private fund advisers
and funds
[[Page 9127]]
reported on Form ADV.\105\ Unlike Form ADV, Form PF is not an investor-
facing disclosure form. Information that private fund advisers report
on Form PF is provided to regulators on a confidential basis and is
nonpublic.\106\ The purpose of Form PF is to provide the Commission and
FSOC with data that regulators can deploy in their regulatory and
oversight programs directed at assessing and managing systemic risk and
protecting investors both in the private fund industry and in the U.S.
financial markets more broadly.\107\
---------------------------------------------------------------------------
\104\ See supra footnote 2.
\105\ Investment advisers to private funds report on Form ADV
general information about private funds that they advise. This
includes basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://adviserinfo.sec.gov/. Some private fund advisers that are required
to report on Form ADV are not required to file Form PF (for example,
exempt reporting advisers and advisers with less than $150 million
in private fund assets under management). Other advisers are
required to file Form PF and are not required to file Form ADV (for
example, commodity pools that are not private funds). Based on the
staff review of Form ADV filings and the Private Fund Statistics,
less than 10 percent of funds reported on Form ADV but not on Form
PF in 2020. See infra footnote 141.
\106\ Commission staff publish quarterly reports of aggregated
and anonymized data regarding private funds on the Commission's
website. See Private Fund Statistics, Securities and Exchange
Commission: Division of Investment Management, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. See
also supra footnote 4.
\107\ See supra section I.
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Private funds and their advisers play an important role in both
private and public capital markets. These funds, including hedge funds,
private equity funds, and liquidity funds, currently have more than
$17.0 trillion in gross private fund assets.\108\ Private funds invest
in large and small businesses and use strategies that range from long-
term investments in equity securities to frequent trading and
investments in complex instruments. Their investors include
individuals, institutions, governmental and private pension funds, and
non-profit organizations.
---------------------------------------------------------------------------
\108\ These estimates are based on staff review of data from the
Private Fund Statistics report for the last quarter of 2020, issued
in August 2021. Private fund advisers who file Form PF currently
have $17.0 trillion in gross assets. See Division of Investment
Management, Private Fund Statistics, (Aug. 21, 2021), available at
https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. As discussed above, not all private fund advisers
are required to file Form PF. See supra footnote 105.
---------------------------------------------------------------------------
Before Form PF was adopted, the Commission and other regulators had
limited visibility into the economic activity of private funds and
relied largely on private vendor databases about private funds that
covered only voluntarily provided private fund data and are not
representative of the total population.\109\ Form PF represented an
improvement in available data about private funds, both in terms of its
reliability and completeness.\110\ Generally, investment advisers
registered (or required to be registered) with the Commission with at
least $150 million in private fund assets under management must file
Form PF.\111\ Smaller private fund advisers and all private equity fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors.\112\ Large private equity advisers
also provide data about each private equity fund they manage. Large
hedge fund and liquidity fund advisers also provide data about each
reporting fund they manage, and are required to file quarterly.\113\
---------------------------------------------------------------------------
\109\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\110\ Id.
\111\ Registered investment advisers with less than $150 million
in private funds assets under management, exempt reporting advisers,
and state-registered advisers report general private fund data on
Form ADV, but do not file Form PF. See supra footnote 105.
\112\ Id.
\113\ See supra footnotes 8, 9, and 111.
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The Commission and FSOC now have almost a decade of experience with
analyzing the data collected on Form PF. The collected data has helped
FSOC establish a baseline picture of the private fund industry for the
use in assessing systemic risk \114\ and improved the Commission's
oversight of private fund advisers.\115\ Form PF data also has enhanced
the Commission and FSOC's ability to frame regulatory policies
regarding the private fund industry, its advisers, and the markets in
which they participate, as well as more effectively evaluate the
outcomes of regulatory policies and programs directed at this sector,
including the management of systemic risk and the protection of
investors.\116\ Additionally, based on the data collected through Form
PF filings, regulators have been able to regularly inform the public
about ongoing private fund industry statistics and trends by generating
quarterly Private Fund Statistics reports \117\ and by making publicly
available certain results of staff research regarding the
characteristics, activities, and risks of private funds.\118\
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\114\ See, e.g., OFR 2021 Annual Report to Congress (Nov. 2021),
available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf; and FSOC 2020 Annual Report, available at
https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf.
\115\ See supra footnote 109.
\116\ See supra footnotes 114, 115.
\117\ See supra footnotes 4, 106.
\118\ See e.g., D. Johnson and F. Martinez, Form PF Insights on
Private Equity Funds and Their Portfolio Companies, 18-01 Office of
Financial Research (Working Paper) (June 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; D. Hiltgen, Private liquidity Funds:
Characteristics and Risk Indicators, DERA White Paper (Jan. 2017)
(``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf; G. Aragon, T. Ergun, M. Getmansky, and
G. Girardi, Hedge Funds: Portfolio, Investor, and Financing
Liquidity, DERA White Paper (May 2017), available at https://www.sec.gov/files/dera_hf-liquidity.pdf; George Aragon, Tolga Ergun,
and Giulio Girardi, Hedge Fund Liquidity Management: Insights for
Fund Performance and Systemic Risk Oversight, DERA White Paper (Apr.
2021), available at https://www.sec.gov/files/dera_hf-liquidity-management.pdf; M. Kruttli, P. Monin, and S. Watugala, The Life of
the Counterparty: Shock Propagation in Hedge Fund-Prime Broker
Credit Networks, 19-03 Office of Financial Research (Working Paper)
(Working Paper) (Oct. 2019), available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-03_the-life-of-the-counterparty.pdf; M. Kruttli, P. Monin, S. Petrasek, and S.
Watugala, Hedge Fund Treasury Trading and Funding Fragility:
Evidence from the COVID-19 Crisis, Federal Reserve Board, Finance
and Economics Discussion Series (Apr. 2021), available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; M. Kruttli,
P. Monin, and S. Watugala, Investor Concentration, Flows, and Cash
Holdings: Evidence from Hedge Funds, Federal Reserve Board, Finance
and Economics Discussion Series (Dec. 2017), available at https://doi.org/10.17016/FEDS.2017.121.
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However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where more granular and
timely information would improve the Commission and FSOC's
understanding of the private fund industry and the potential systemic
risk relating to its activities, and improve regulators' ability to
protect investors.\119\ The need for more granular and timely
information collected on Form PF is further heightened by the
increasing significance of the private fund industry to financial
markets and to the broader economy, and resulting regulatory concerns
regarding potential risks to U.S. financial stability from this
sector.\120\
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\119\ See supra section I.
\120\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. Supra footnote 4. See also Financial
Stability Oversight Council Update on Review of Asset Management
Product and Activities (2014), available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
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[[Page 9128]]
2. Affected Parties
The proposal amends and introduces new reporting requirements for
the advisers to hedge funds,\121\ private equity funds,\122\ and
liquidity funds.\123\
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\121\ Form PF defines ``hedge fund'' broadly to include any
private fund (other than a securitized asset fund) that has any of
the following three characteristics: (1) A performance fee or
allocation that takes into account unrealized gains, or (2) a high
leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notational
exposure in excess of twice its net asset value (including committed
capital)) or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary.
\122\ Form PF defines ``private equity fund'' broadly to include
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.
Private funds that have the ability to borrow or short securities
have to file as a hedge fund. See Form PF Glossary.
\123\ Form PF defines ``liquidity fund'' broadly to include 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 or minimize principal volatility for investors. See
Form PF Glossary.
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Hedge funds are one of the largest categories of private
funds,\124\ and as such play an important role in the U.S. financial
system due to their ability to mobilize large pools of capital, take
economically important positions in a market, and their extensive use
of leverage, derivatives, complex structured products, and short
selling.\125\ While these features may enable hedge funds to generate
higher returns as compared to other investment alternatives, the same
features may also create spillover effects in the event of losses
(whether caused by their investment and derivatives positions or use of
leverage or both) that could lead to significant stress or failure not
just at the affected fund but also across financial markets.\126\
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\124\ See supra footnote 108.
\125\ See, e.g., Lloyd Dixon, Noreen Clancy, and Krishna B.
Kumar, Hedge Fund and Systemic Risk, RAND Corporation (2012); John
Kambhu, Til Schuermann, and Kevin Stiroh, Hedge Funds, Financial
Intermediation, and Systemic Risk, Federal Reserve Bank of New
York's Economic Policy Review (2007).
\126\ See supra footnotes 114, 120. See also infra section
III.C.1.a.
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In the last quarter of 2020, hedge fund advisers that are required
to file Form PF had investment discretion over nearly $8.7 trillion in
gross assets under management, which represented approximately half of
the reported assets in the private fund industry.\127\ Currently, hedge
fund advisers with between $150 million and $2 billion in regulatory
assets (that do not qualify as large hedge fund advisers) file Form PF
annually, in which they provide general information about funds they
advise such as the types of private funds advised, fund size, their use
of borrowings and derivatives, strategy, and types of investors. Large
hedge fund advisers with at least $1.5 billion in regulatory assets
under management attributable to hedge funds file Form PF quarterly, in
which they provide data about each hedge fund they managed during the
reporting period (irrespective of the size of the fund). Large hedge
fund advisers must report more information on Form PF about qualifying
hedge funds \128\ than other hedge funds they manage during the
reporting period. In the last quarter of 2020, there were 1,793
qualifying hedge funds reported on Form PF with $7.1 trillion in gross
assets under management, which represented approximately 81 percent of
the reported hedge fund assets.\129\
---------------------------------------------------------------------------
\127\ See supra footnote 108. In the last quarter of 2020, hedge
fund assets accounted for 52 percent of the gross asset value
(``GAV'') ($$8.8/$17.0 trillion) and 40 percent of the net asset
value (``NAV'') ($4.6/$11.5 trillion) of all private funds reported
on Form PF.
\128\ See supra footnote 7.
\129\ See supra footnote 108. In the last quarter of 2020,
qualifying hedge fund assets accounted for 81 percent of the GAV
($7.1/$8.8 trillion) and 77 percent of the NAV ($3.6/$4.7 trillion)
of all hedge funds reported on Form PF.
---------------------------------------------------------------------------
Private equity funds are another large category of funds in the
private fund industry. In the last quarter of 2020, advisers to private
equity funds had investment discretion over approximately one third of
the reported gross assets in the private fund industry.\130\ Many
private equity funds focus on long-term returns by investing in a
private, non-publicly traded company or business--the portfolio
company--and engage actively in the management and direction of that
company or business in order to increase its value.\131\ Other private
equity funds may specialize in making minority investments in fast-
growing companies or startups.\132\
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\130\ See supra footnote 108. In the last quarter of 2020,
private equity assets accounted for 28 percent of the GAV ($4.7/
$17.0 trillion) and 36 percent of the NAV ($4.1/$11.5 trillion) of
all private funds reported on Form PF.
\131\ After purchasing controlling interests in portfolio
companies, private equity advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., Private Equity Funds, Securities and Exchange
Commission, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
\132\ See supra footnote 131.
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While all fund advisers are subject to fiduciary duties to their
clients, private equity funds' long-term investment horizons and
various relationships with affiliates and portfolio companies mean that
there exist opportunities for fund advisers to pursue transactions or
investments despite conflicts of interest and also to extract private
benefits at the expense of the funds they manage and, by extension, the
limited partners invested in the funds.\133\ The Commission has brought
several enforcement actions against private equity advisers that
allegedly received undisclosed fees and expenses, impermissibly shifted
and misallocated expenses, or failed to disclose conflicts of interests
adequately, including conflicts arising from fee and expense
issues.\134\ In addition, private equity funds' increasingly extensive
use of leverage for financing portfolio companies and a significant
increase in the use of private credit strategies both raise systemic
risk concerns.\135\
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\133\ Private equity advisers may be managing multiple private
equity funds and portfolio companies. The funds typically pay the
private equity adviser for advisory services. Additionally, the
portfolio companies may also pay the private equity adviser for
services such as managing and monitoring the portfolio company.
Affiliates of the private equity adviser may also play a role as
service providers to the funds or the portfolio companies. See,
e.g., Observations from Examinations of Investment Advisers Managing
Private Funds, SEC Risk Alert (June 23, 2020), available at https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf; Staff
Statement of Andrew Ceresney, Securities Enforcement Forum West 2016
Keynote Address: Private Equity Enforcement Securities and Exchange
Commission (May 12, 2016) (``Ceresney Keynote''), available at
https://www.sec.gov/news/speech/private-equity-enforcement.html.
\134\ See Ceresney Keynote, supra footnote 133.
\135\ See Moody's Warns of `Systemic Risks' in Private Credit
Industry, Financial Times (Oct. 26, 2021), available at https://www.ft.com/content/862d0efb-09e5-4d92-b8aa-7856a59adb20; Rod
Dubitsky, CLOs, Private Equity, Pensions, and Systemic Risk, 26 (1)
Journal of Structured Finance 26-1 (2020), available at https://jsf.pm-research.com/content/26/1/8.
---------------------------------------------------------------------------
Currently, all private equity advisers registered with the
Commission who are required to file Form PF must do so annually.
Private equity advisers with between $150 million and $2 billion in
regulatory assets under management attributable to private equity funds
must provide general information while large private equity advisers
with at least $2 billion in regulatory assets under management must
report more detailed data about the private equity funds they
[[Page 9129]]
manage (section 4 of Form PF).\136\ In the last quarter of 2020, there
were 15,623 private equity funds reported on Form PF with $4.7 trillion
in gross assets under management.\137\ Of those, 5,266 funds were
private equity funds managed by large private equity advisers with
discretion over nearly $3.6 trillion in gross assets, representing 78
percent of the reported private equity assets.\138\ However, because
not all private equity advisers file Form PF, section 4 private equity
fund advisers represent less than 78 percent of total private equity
fund regulatory assets. When Form PF was adopted in 2011, the $2
billion reporting threshold for large private equity advisers captured
75 percent of the U.S. private equity industry's assets under
management.\139\ As a result of substantial growth in the number of
private equity funds and advisers since 2011, the market share
attributable to investors with less than $2 billion in assets under
management has grown.\140\ As such, currently, the $2 billion reporting
threshold only captures 67 percent of the entire private equity
industry.\141\
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\136\ See supra footnote 8.
\137\ See supra footnote 108.
\138\ Id.
\139\ See supra footnote 2.
\140\ See supra section I.
\141\ Based on staff review of Form ADV filings, in 2020, the
aggregate regulatory assets under management under the discretion of
private equity advisers were $4.2 trillion. According to the Private
Fund Statistics Report, this aggregate estimate includes
approximately $3.8 trillion (90 percent) in gross assets under
management by private equity advisers that file Form PF, $2.8
trillion of which were under the discretion of large private equity
advisers. This represents 67 percent of the industry. See supra
footnote 108.
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Liquidity funds are a relatively small \142\ but important category
of private funds due to the role they play along with money market
funds as sources, and users, of liquidity in markets for short-term
financing.\143\ Liquidity funds follow similar investment strategies as
money market funds, but are unregistered.\144\ Similar to money market
funds, liquidity funds are managed with the goal of maintaining a
stable net asset value or minimizing principal volatility for
investors.\145\ These funds typically achieve these goals by investing
in high-quality, short-term debt securities, such as Treasury bills,
repurchase agreements, or commercial paper, that fluctuate very little
in value under normal market conditions.\146\ Also, similar to money
market funds, liquidity funds are sensitive to market conditions and
may be exposed to losses from certain of their holdings when the
markets in which the funds invest are under stress.\147\ Compared to
money market funds, liquidity funds may take on greater risks and, as a
result, may be more sensitive to market stress, as they are not
required to comply with the risk-limiting conditions of rule 2a-7,
which place restrictions on the maturity, diversification, credit
quality, and liquidity of money market fund investments.\148\
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\142\ Id. In the last quarter of 2020, liquidity fund assets
accounted for 2 percent of the GAV ($0.3/$17.0 trillion) and 2.6
percent of the NAV ($0.3/$11.5 trillion) of all liquidity funds
reported on Form PF.
\143\ See supra footnote 118 (Hiltgen Paper).
\144\ Id.
\145\ See supra footnote 123.
\146\ See supra footnote 118 (Hiltgen Paper).
\147\ For example, in the second week of March 2020, conditions
significantly deteriorated in markets for private short-term debt
instruments, such as commercial paper and certificates of deposit.
Widening spreads in short-term funding markets put downward pressure
on the prices of assets in money market and liquidity funds'
portfolios. See, e.g., U.S. Credit Markets Interconnectedness and
the Effects of COVID-19 Economic Shock, SEC Staff Report (Oct.
2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf; Financial Stability Report, Federal
Reserve Board (Nov. 2020), available at https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf.
\148\ See supra footnote 143.
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Currently, liquidity fund advisers with between $150 million and $1
billion in assets file Form PF annually, which contains general
information about funds they manage. Large liquidity fund advisers with
at least $1 billion in combined regulatory assets under management
attributable to unregistered liquidity funds and registered money
market funds are required to file Form PF quarterly and provide more
detailed data on the liquidity funds they manage (section 3 of Form
PF).\149\ In the last quarter of 2020, there were 71 liquidity funds
reported on Form PF with $318 billion in gross assets under
management.\150\ Of those, 52 funds were large liquidity funds with
$315 billion in gross assets, which represented 99 percent of the
reported liquidity fund assets.\151\
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\149\ Item A of section 3 of Form PF collects certain
information for each liquidity fund the adviser manages, such as
information regarding the fund's portfolio valuation methodology.
This item also requires information regarding whether the fund, as a
matter of policy, is managed in compliance with certain provisions
of rule 2a-7 under the Investment Company Act. Item B requires the
adviser to report information regarding the fund's assets, while
Item C requires the adviser to report information regarding the
fund's borrowings. Finally, Item D asks for certain information
regarding the fund's investors, including the concentration of the
fund's investor base and the liquidity of its ownership interests.
See Form PF.
\150\ See supra footnote 108.
\151\ Id.
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Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\152\ Retail U.S. investors with exposure to private funds
are typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\153\ In the
last quarter of 2020, public pension plans had $1,533 billion invested
in reporting private funds while private pension plans had $1,248
billion invested in reporting private funds, making up 13.3 percent and
10.9 percent of the overall beneficial ownership in the private equity
industry, respectively.\154\ Investors may also gain direct exposure to
private funds through the inclusion of private investments in their
defined contribution plans, such as 401(k)s.
---------------------------------------------------------------------------
\152\ See supra footnote 131. See also Hedge Funds, Securities
and Exchange Commission (Investor.gov: Private Equity Funds),
available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
\153\ See supra footnotes 108, 152.
\154\ Id.
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C. Benefits and Costs
1. Benefits
The proposal is designed to facilitate two primary goals the
Commission sought to achieve with reporting on Form PF as articulated
in the original adopting release, namely: (1) Facilitating FSOC's
understanding and monitoring of potential systemic risk relating to
activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the Commission's
ability to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the Commission's efforts to protect
investors and maintain fair, orderly and efficient markets.\155\
---------------------------------------------------------------------------
\155\ See supra footnote 2.
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Specifically, the proposal includes amendments to sections 3 and 4
of Form PF, which would enhance and provide more specificity regarding
the information collected on large advisers of liquidity funds and
private equity funds. The proposal also introduces new sections 5 and 6
of Form PF, which would require advisers to qualifying hedge funds and
private equity funds to provide current reporting to the Commission
when their funds are facing certain events that may signal stress or
potential future stress in financial markets or implicate investor
protection concerns. In addition, the proposed
[[Page 9130]]
amendments include improvements to guidelines, definitions, and
existing questions aimed to reduce their ambiguity and improve data
quality. Below we discuss benefits associated with the specific
elements of the proposed amendments.
a. Current Reporting Requirements for Large Hedge Fund Advisers to
Qualifying Hedge Funds (Section 5 of Form PF)
The proposal introduces new section 5 of Form PF requiring large
hedge fund advisers to qualifying hedge funds (i.e., hedge funds with a
net asset value of at least $500 million) to file a current report with
the Commission when their funds experience certain stress events: (1)
Extraordinary investment losses, (2) certain margin events and
counterparty defaults, (3) material changes in prime broker
relationships, (4) changes in unencumbered cash, (5) operations events,
and (6) certain events associated with withdrawals and redemptions at
the reporting hedge fund.\156\ These events may serve as signals to the
Commission and FSOC about significant stress at the reporting fund and
potential risks to financial stability. Advisers would be required to
file current reports within one business day of the occurrence of such
an event.\157\
---------------------------------------------------------------------------
\156\ See supra section II.A.1.
\157\ As discussed above, advisers should consider filing a
current report as soon as possible following such an event. See
supra section II.A.
---------------------------------------------------------------------------
The reporting of these stress events is designed to assist the
Commission and FSOC in assessing potential risks to financial stability
that hedge funds' activities could pose due to the complexity of their
strategies, their interconnectedness in the financial system, and the
limited regulations governing them.\158\ There are two main channels
through which stress events at an individual hedge fund may pose risks
to broader financial stability: Forced liquidation of assets, which
could depress asset prices, and spillover of stress to the fund's
counterparties, which could negatively impact other activities of the
counterparties.
---------------------------------------------------------------------------
\158\ See supra section II.A.1.
---------------------------------------------------------------------------
First, when a large hedge fund experiences significant losses, a
margin default, or faces large redemptions, it may be forced to
deleverage and liquidate its positions at substantially depressed
prices. Forced liquidation of assets by the hedge fund at depressed
prices may affect other investors and financial institutions holding
the same or similar assets.\159\ Consequently, more investors and
financial institutions may then face increased stress from margin calls
and creditor concerns. This could lead to more sales at depressed
prices, potentially causing stress across the entire financial system.
Second, large hedge funds that use leverage through loans, derivatives,
or repurchase agreements with other financial institutions as
counterparties may cause significant problems at those financial
institutions in times of stress.\160\ This in turn may force those
institutions to scale back their lending efforts and other investment
and financing activities with other counterparties, thereby potentially
creating stress for other market participants.\161\
---------------------------------------------------------------------------
\159\ For example, because financial institutions base asset
valuations in part on recent transaction prices for comparable
assets, when assets are sold at depressed prices, forced
liquidations at depressed prices could lead to lower valuations for
entire classes of similar assets. See, e.g., Andrei Shleifer and
Robert Vishny, Fire Sales in Finance and Macroeconomics, 25 (1)
Journal of Economic Perspectives 29-48 (2011), available at https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.1.29. See also Fernando
Duarte and Thomas Eisenbach, Fire-Sale Spillovers and Systemic Risk,
76 (3) The Journal of Finance 1251-1294, 1251-1256 (Feb. 2021),
available at https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.13010; Wulf A. Kaal and Timothy A. Krause, Handbook on Hedge
Funds: Hedge Funds and Systemic Risk, Oxford University Press 12-19
(2016), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2748096 (retrieved from SSRN Elsevier
database).
\160\ For example, a lender to a hedge fund may view its loans
as increasingly high risk as the hedge fund's balance sheet
deteriorates. See, e.g., Mark Gertler and Nobuhiro Kiyotaki, Chapter
11--Financial Intermediation and Credit Policy in Business Cycle
Analysis, 3 Handbook of Monetary Economics 547-599 (2010), available
at https://eml.berkeley.edu/~webfac/obstfeld/kiyotaki.pdf.
\161\ For example, if a bank has a large exposure to a hedge
fund that defaults or operates in markets where prices are falling
rapidly, the bank's greater exposure to risk may reduce its ability
or willingness to extend credit to worthy borrowers. To the extent
that these bank-dependent borrowers cannot access alternative
sources of funding, their investment and economic activity could be
curtailed. See, e.g., Reint Gropp, How Important Are Hedge Funds in
a Crisis?, FRBSF Economic Letter (Apr. 14, 2014), available at
https://www.frbsf.org/economic-research/files/el2014-11.pdf. Even
banks and financial institutions that are not directly harmed by the
forced liquidation of assets by hedge funds may contribute to a
system-wide lending contraction in response to hedge fund crises, to
the extent they withdraw capital from lending to exploit distressed
prices. See, e.g., Jeremy Stein, The Fire-Sales Problem and
Securities Financing Transactions, Workshop on `Fire Sales' as a
Driver of Systemic Risk in Tri-Party Repo and Other Secured Funding
Markets, Federal Reserve Bank of New York (Oct. 4, 2013), available
at https://www.bis.org/review/r131007d.pdf.
---------------------------------------------------------------------------
As a result, a stress event at one large hedge fund may potentially
spill over to the fund's lenders, counterparties, and across the entire
financial system, carrying with it significant economic costs and the
loss of confidence of investors. We believe that a timely notice about
stress events could provide an early warning of the fund's assets
liquidation and risk to counterparties. Such a timely notice could
allow the Commission and FSOC to assess the need for regulatory policy,
and could allow the Commission to pursue potential outreach,
examinations, or investigations, in response to any harm to investors
or potential risks to financial stability on an expedited basis before
they worsen.
In addition, current reporting of stress events at multiple
qualifying hedge funds may indicate broader market instability with
potential risks for similarly situated funds, or markets in which these
funds invest. Current reports would allow the Commission and FSOC to
assess the prevalence of the reported stress events based on the number
of funds filing in a short time frame, and identify patterns among
similarly situated funds and common factors that contributed to the
reported stress events. In that regard, current reports would be
especially useful during periods of market volatility and stress, when
the Commission and FSOC are actively and quickly ascertaining the
affected funds, gathering information to assess systemic risk, and
determining whether and how to pursue regulatory responses, and when
the Commission is actively determining whether and how to pursue
outreach, examinations, or investigations.
We anticipate that the proposed current reporting requirement would
improve the transparency to the Commission and FSOC of hedge fund
activities and risk exposures, which would enhance systemic risk
assessment and investor protection efforts. We believe that those
efforts would be beneficial for hedge fund advisers, hedge funds, and
hedge fund investors, as well as for other market participants, as the
new and timely information about stress events at hedge funds would
help the Commission and FSOC to address emerging risk events
proactively with regulatory responses, and would help the Commission
further evaluate the need for outreach, examinations, or
investigations, in order to minimize market disruptions doing so, the
Commission and FSOC may further advance investor protection efforts. In
turn, this could help develop robust resolution mechanisms for dealing
with the stress at systemically important hedge funds, which could lead
to more resilient financial markets and instill stronger investor
confidence in the U.S. hedge fund industry and financial markets more
broadly.\162\
---------------------------------------------------------------------------
\162\ See, e.g., J[oacute]n Dan[iacute]elsson, Ashley Taylor,
and Jean-Pierre Zigrand, Highwaymen or Heroes: Should Hedge Funds Be
Regulated? A Survey, 1 (4) Journal of Financial Stability, 522-543
(2005), available at https://www.sciencedirect.com/science/article/pii/S1572308905000306.
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[[Page 9131]]
We also anticipate that the proposed current reporting requirements
might incentivize some hedge fund managers to enhance internal risk
controls and reporting, which could support more effective risk
management for these funds.\163\ To the extent these enhanced internal
risk controls and reporting improve managers' ability to monitor and
respond to potential stress events, we believe this could provide
market-wide benefits to funds, their investors, and financial markets
more broadly.
---------------------------------------------------------------------------
\163\ For example, fund advisers may not internalize all of the
benefits that enhanced risk reporting provides other fund advisers
and investors to other fund advisers. Current reporting requirements
may result in reporting practices that are more consistent with fund
advisers considering the impact of their internal risk reporting on
the broader market.
---------------------------------------------------------------------------
Furthermore, requiring hedge fund advisers to report stress events
on Form PF would support regulatory efficiency because all eligible
hedge fund advisers would be required to file information about certain
stress events on a standardized form. This would provide a more
complete record of significant stress events in the hedge fund industry
that can be used by the Commission and FSOC for background research to
identify regulatory tools and mechanisms that could potentially be used
to make future systemic crises episodes both less likely to occur as
well as less costly and damaging when they do occur.\164\ The
observations from this research could help inform and frame regulatory
responses to future market events and policymaking.
---------------------------------------------------------------------------
\164\ For instance, a more complete record would allow the staff
to more accurately assess the prevalence of the reported stress
events, identify patterns among affected funds, and detect factors
that contributed to the reported stress events. The observations
from this research could be used to identify causes for and
implications of possible future similar stress events, or causes of
and implications for investor harm, thus enabling the Commission and
FSOC to respond quickly to such future events.
---------------------------------------------------------------------------
b. Current Reporting Requirements for Advisers to Private Equity Funds
(Section 6 of Form PF)
The proposal introduces new section 6 of Form PF requiring all
advisers of private equity funds (irrespective of a fund's size) to
file a current report with the Commission within one business day of
the occurrence of a certain significant event at one or more funds that
they manage: (1) Execution of an adviser-led secondary transaction, (2)
implementation of a general partner or limited partner clawback, and
(3) removal of a fund's general partner, termination of a fund's
investment period, or termination of a fund.\165\ These events may
signal to the Commission and FSOC the presence of significant
developments at the reporting funds and potential risks to broader
financial markets, as well as indicate potential areas for the
Commission to pursue outreach, examinations, and investigations
designed to prevent investor harm and protect investors' interests.
---------------------------------------------------------------------------
\165\ See supra section II.A.2. As discussed above, advisers
should consider filing a current report as soon as possible
following such an event. See supra section II.A.
---------------------------------------------------------------------------
Although private equity funds have become an essential part of the
U.S. financial system,\166\ there is only partial and insufficient
information about their governance, strategies, and performance
available to regulators. Currently, all private equity advisers (that
have at least $150 million of private fund assets under management)
file Form PF annually, within 120 calendar days of the end of their
fiscal year, which can lead to meaningful delays in reporting
significant events to the Commission and staleness of certain
information about their activities. Furthermore, because private equity
investments are mostly in private companies and businesses, there is
limited information available on the interim performance of these
investments and, therefore, on the interim performance and volatility
of private equity funds.\167\ As a result, significant events at
private equity funds that could have negative consequences for the
fund's investors and other financial market participants--such as
significant losses, removal of the fund's general partner, and fund
reorganizations and recapitalizations--may not be known to the
Commission or FSOC, preventing any possible regulatory response,
outreach, examinations, or investigations that could further investor
protection for considerable periods of time.
---------------------------------------------------------------------------
\166\ See supra section II.B.
\167\ Even when the updated valuations of private equity
portfolio companies are available, these valuations may appear
relatively uninformative as they tend to respond slowly to market
information and could be artificially smoothed. See Tim Jenkinson,
Miguel Sousa, and R[uuml]diger Stucke, How Fair are the Valuations
of Private Equity Funds? SSRN Electronic Journal (Feb. 2013),
available at https://www.psers.pa.gov/About/Investment/Documents/PPMAIRC%202018/27%20How%20Fair%20are%20the%20Valuations%20of%20Private%20Equity%20Funds.pdf; Robert Harris, Tim Jenkinson, and Steven Kaplan, Private
Equity Performance: What Do We Know?, 69 (5) The Journal of Finance
1851-1882 (Mar. 27, 2014).
---------------------------------------------------------------------------
The proposed current reporting for private equity advisers would
provide an alert to the Commission and FSOC on significant developments
at the reporting funds that could potentially cause investor harm and
loss of investor confidence. Such alerts would enable the Commission
and FSOC to assess the severity of the reported events at the reporting
private equity fund and, to the extent the reported event may cause
significant investor harm and loss of investor confidence, these alerts
would allow the Commission and FSOC to frame potential regulatory
responses. For example, an implementation of a limited partner clawback
\168\ may signal that the fund is planning for a material event such as
substantial litigation or a legal judgment that could negatively impact
the fund's investors and potentially other market participants.
---------------------------------------------------------------------------
\168\ See supra section II.A.2.
---------------------------------------------------------------------------
The Commission could also use the information provided in section 6
to target its examination program more efficiently and effectively and
better identify areas in need of regulatory oversight and assessment,
which should increase both the efficiency and effectiveness of its
programs and, thus, increase investor protection. For example, the
removal of a fund's general partner, termination of a fund's investment
period, or termination of a fund \169\ could lead to the liquidation of
the fund earlier than anticipated, which could present risks to
investors and potentially certain markets in which the fund assets were
invested. A report about an adviser-led secondary transaction \170\ is
another example of an event that may signal to the Commission a
potential area for inquiry to prevent investor harm and protect
investors' interests, as such transactions may present fund-level
conflicts of interest, such as those that arise because the adviser (or
its related person) is on both sides of the transaction in adviser-led
secondary transactions with potentially different economic incentives.
Current reporting about such events could alert the Commission to
specific investor protection issues at the fund and the fund's adviser,
including potential conflicts of interest, and therefore merit timely
and targeted oversight and assessment.
---------------------------------------------------------------------------
\169\ Id.
\170\ Id.
---------------------------------------------------------------------------
In addition, current reporting of significant events at multiple
private equity funds may indicate broader market instability that
negatively affects similarly situated funds, or markets in which these
funds invest in. For example, widespread implementation of general
partner clawbacks \171\ among private equity funds may be a sign of an
emerging market-wide stress episode or
[[Page 9132]]
worsening of economic conditions contributing to the underperformance
of the funds' portfolio companies. Also, multiple reports about
adviser-led secondary transactions \172\ such as a fund reorganization
may serve as an early warning to the Commission and FSOC about
deteriorating market conditions that may prevent private equity
managers from utilizing more traditional ways to exit their portfolio
companies and realize gains.\173\ Current reports would allow the
Commission and FSOC to assess the prevalence of the reported events in
the private equity space and identify patterns among similarly situated
funds and common factors that contributed to the reported events.
---------------------------------------------------------------------------
\171\ Id.
\172\ Id.
\173\ For example, private equity exits have been adversely
affected by the global Covid-19 pandemic as the three traditional
ways for private equity advisers to exit portfolio companies--trade
sales, secondary buy-outs and initial public offerings (``IPOs'')--
became unattainable or unattractive for some advisers. See, e.g.,
Alastair Green, Ari Oxman, and Laurens Seghers, Preparing for
Private-Equity Exits in the COVID-19 Era, Private Equity & Principal
Investors Insights, McKinsey &Company (June 11, 2020), available at
https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/preparing-for-private-equity-exits-in-the-covid-19-era. Conversely, during the same period, there was an
increase in the adviser-led secondary transactions. See, e.g.,
Nicola Chapman, Martin Forbes, Colin Harley, and Sherri Snelson,
Private Equity Turns to Fund Restructurings in COVID-19 Slowdown,
Debt Explorer, White & Case (Feb. 8, 2021), available at https://debtexplorer.whitecase.com/leveraged-finance-commentary/private-equity-turns-to-fund-restructurings-in-covid-19-slowdown#!.
---------------------------------------------------------------------------
We anticipate that the improved transparency of private equity fund
activities as a result of the proposed current reporting requirements
to the Commission and FSOC would enhance regulatory systemic risk
assessment and investor protection efforts. We expect that those
efforts would be beneficial for private equity advisers, private equity
funds, and private equity fund investors, as well as for other market
participants, as the new and timely information about significant
events at private equity funds would help the Commission and FSOC to
address proactively emerging risk events with appropriate regulatory
policy, thereby minimizing market disruptions and limiting potential
damages and costs associated with them. Further, collected data on
significant events at private equity funds would enable the Commission
and FSOC to perform background research to identify private equity
trends and areas prone to potential systemic risk and investor
protection concerns. The observations from this research could
potentially inform and frame regulatory responses to future market
events and policymaking.
Finally, similar to the effect of the proposed current reporting on
qualifying hedge funds, we anticipate that the proposed current
reporting requirements for private equity advisers might incentivize
some managers to enhance internal risk controls and reporting.\174\ To
the extent these enhanced internal risk controls and reporting improve
managers' ability to monitor and respond to potential stress events, we
believe this could provide market-wide benefits to funds, their
investors, and financial markets more broadly.
---------------------------------------------------------------------------
\174\ See supra section III.C.1.a.
---------------------------------------------------------------------------
c. Amendments To Require Additional Reporting by Large Private Equity
Advisers (Section 4 of Form PF)
The proposed amendments to section 4 of Form PF include
requirements for additional and more granular information that large
private equity advisers must provide regarding their activities, risk
exposures, and counterparties on an annual basis.\175\ The proposal
would also lower the reporting threshold for the advisers required to
complete section 4 of Form PF.\176\
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\175\ See supra section II.B.2.
\176\ Id.
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i. Lowering the Reporting Threshold for Large Private Equity Advisers
The proposed amendments would expand the universe of large private
equity advisers required to complete section 4 of Form PF to include
advisers with at least $1.5 billion in private equity assets under
management.\177\ The new size threshold is designed to ensure
continuity of the originally envisioned reporting coverage of the
private equity funds industry.
---------------------------------------------------------------------------
\177\ Id.
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As discussed above, when Form PF was adopted in 2011, the $2
billion reporting threshold for large private equity advisers captured
75 percent of the U.S. private equity industry's assets under
management.\178\ The threshold was established to balance regulators'
need for a broad, representative set of data regarding the private fund
industry with the desire to limit the potential burdens of private
funds' reporting.\179\ However, the $2 billion reporting threshold
currently only captures 67 percent of the private equity industry.\180\
Such reduced coverage could potentially impede regulators' ability to
obtain a representative picture of the private fund industry and lead
to misleading conclusions regarding emerging industry trends and
characteristics. For instance, the activities of private fund advisers
may differ significantly depending on their size because some
strategies such as the use of leverage may be practical only at certain
scales. As a result, reduced reporting coverage--caused by an increase
in the number of smaller advisers--may hinder regulators from detecting
certain new trends and group behaviors among smaller private fund
advisers with potential systemic consequences. By adjusting the
threshold to maintain comparable coverage of the industry over time,
analysis of emerging industry trends and characteristics yields more
accurate pictures of the private fund industry.
---------------------------------------------------------------------------
\178\ See supra section I.A.1.
\179\ See supra footnote 139.
\180\ See supra section I.A.1.
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The proposed reduction in the reporting threshold for large private
equity advisers maintains the originally intended coverage of 75
percent of private equity assets in today's market.\181\ Having a
robust data set for analysis is important for both identifying
potential investor protection issues as well as for assessing systemic
risk. By maintaining a constant reporting coverage of private equity
funds, this proposed amendment may ultimately lead to an improved
understanding of the trends in the private equity industry by the
Commission and FSOC and better informed regulatory policymaking and
examinations functions.
---------------------------------------------------------------------------
\181\ See supra section I.A.1.
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The proposed $1.5 billion reporting threshold for private equity
advisers would also match the reporting threshold for large hedge fund
advisers,\182\ thereby eliminating a loophole that advisers with
between $1.5 billion and $2 billion in hedge fund assets under
management may avoid providing detailed data on their hedge funds on a
quarterly basis by classifying those funds as private equity funds
instead. As the distinctions between hedge funds and private equity
become less evident,\183\ it would be prudent to harmonize the
reporting thresholds for large hedge fund and private equity fund
advisers. This would make data collected on Form PF for the two
categories of funds more comparable and may improve regulatory
assessment of the trends and systemic risks in the private fund
industry.
---------------------------------------------------------------------------
\182\ See supra footnote 8.
\183\ See, e.g., Joshua Franklin and Laurence Fletcher, Hedge
Funds Muscle in to Silicon Valley With Private Deals, Financial
Times (Sept. 9, 2021), available at https://www.ft.com/content/4935b205-8344-465a-8edf-dc23ec990302.
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[[Page 9133]]
ii. Requirements for Additional and More Granular Information for Large
Private Equity Advisers
The proposed amendments to section 4 of Form PF would revise how
large private equity advisers report on fund investment strategies,
restructuring/recapitalization of portfolio companies, investments in
different levels of a single portfolio company's capital structure by
related funds, fund-level borrowings, financing of portfolio companies,
and risk profiles of controlled portfolio companies and fund exposures
to these risks.\184\
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\184\ See supra section II.B.2.
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The proposed amendments would further improve the transparency of
private equity fund activities and risks to the Commission and FSOC and
help in developing a more complete picture of the markets where private
equity funds operate. In turn, this would enhance the Commission's and
FSOC's ability to assess potential systemic risks presented by private
equity funds, as well as the potential for loss of investor confidence
should conflicts of interest in private equity funds materialize.
Specifically, new and more granular information about private equity
funds would assist regulators in understanding the diversity of and
trends in investment and financing strategies employed by private
equity funds,\185\ their uses and sources of leverage,\186\ the risk
profiles of portfolio companies controlled by private equity fund
advisers and funds' exposures to these risks,\187\ funds' exposure to
changes in interest rates,\188\ as well as to risks from outside the
U.S.\189\
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\185\ The proposal introduces a new Question 68 that asks
advisers to provide information about their private fund strategies
by choosing from a mutually exclusive list of strategies, allocating
the percent of capital deployed to each strategy, even if the
categories do not precisely match the characterization of the
reporting fund's strategies. If a reporting fund engages in multiple
strategies, the adviser would provide a good faith estimate of the
percentage the reporting fund's deployed capital represented by each
strategy. Id.
\186\ The proposal introduces several new questions, including:
New Question 72 asking advisers to report whether a reporting
private equity fund borrows, or if it has the ability to borrow at
the fund-level as an alternative or complement to the financing of
portfolio companies; new Question 74 asking an adviser to report
whether it, or any of its related persons, provides financing or
otherwise extends credit to any portfolio company in which the
reporting fund invests, so as to quantify the value of such
financing or other extension of credit; and amendments to existing
Question 75, which requires reporting on the identity of the
institutions providing bridge financing to the adviser's CPCs (and
the amount of such financing), to add additional counterparty
identifying information (i.e., LEI (if any) and if the counterparty
is affiliated with a major financial institution, the name of the
financial institution). Id.
\187\ The proposal introduces new Question 67, which asks an
adviser to report how many CPCs a reporting private equity fund
owns. Id.
\188\ The proposal introduces new Question 82, which asks
advisers to report what percentage of the aggregate borrowings of a
reporting private equity fund's controlled portfolio companies is at
a floating rate rather than a fixed rate. Id.
\189\ The proposal amends existing Question 78, which asks
advisers to report the geographical breakdown of investments by
private equity funds. The new requirement asks for a private equity
fund's greatest country exposures based a percent of net asset
value. Id.
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We also expect that some new and more granular information would be
beneficial for the Commission's investor protection efforts. For
instance, the proposed amendments include a series of new questions
designed to identify potential conflicts of interest. These include
questions asking advisers to provide a breakdown of each fund's
investments in different levels of a single portfolio company's capital
structure (e.g., equity versus debt),\190\ which would reveal whether
related funds of a single adviser invest in different levels of a
portfolio company's capital structure, and therefore, may have
conflicting interests.\191\ Also, the proposal would ask advisers to
report whether they or their funds have restructured or recapitalized a
portfolio company, which may also involve conflicts of interest.\192\
This information would enable the Commission to target its examination
program more efficiently and effectively and better identify areas in
need of regulatory oversight and market assessment to increase investor
protection.
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\190\ The proposal introduces new Question 71, which asks an
adviser to indicate whether the reporting fund held an investment in
one class, series, or type of securities (e.g., debt, equity, etc.)
of a portfolio company while another fund advised by the adviser or
its related persons concurrently held an investment in a different
class, series or type of securities (e.g., debt, equity, etc.) of
the same portfolio company. If the answer is yes, Question 71 asks
an adviser to provide the name of the portfolio company and a
description of class, series or type of securities held. Id.
\191\ For example, an adviser may have two advised funds
invested in different levels of a portfolio company's capital
structure, with one fund managing outside capital, while the other
manages solely internal capital of the adviser's owners/employees.
See supra footnote 68.
\192\ The proposal introduces new Question 70, which asks an
adviser to indicate whether a portfolio company was restructured or
recapitalized following the reporting fund's investment period. If
the company was restructured or recapitalized, Question 70 asks the
adviser, to provide the name of the portfolio company and the
effective date of the restructuring. See supra section II.B.2.
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Overall, the proposed amendments to section 4 of Form PF would
ultimately assist the Commission and FSOC in better identifying and
addressing risks to U.S. financial stability and pursuing appropriate
regulatory policy in response, and would further assist the Commission
in determining the potential need for outreach, examinations, and
investigations, thereby enhancing efforts to protect investors and
other market participants. We expect that the proposed new information
about large private equity advisers and funds they manage would enable
the Commission and FSOC to better anticipate and deal with potential
risks to financial markets and investor harm associated with activities
by large private equity funds. This could lead to more resilient
financial markets and instill stronger investor confidence in the U.S.
private equity industry and financial markets more broadly, which could
facilitate additional capital formation.
d. Amendments To Require Additional Reporting by Large Liquidity Fund
Advisers (Section 3 of Form PF)
The proposed amendments to section 3 of Form PF include
requirements for additional and more granular information that large
private liquidity funds would have to provide regarding their
operational information and assets, as well as portfolio holdings,
financing, and investor information.\193\ The proposal also would add a
new item concerning the disposition of portfolio securities.
---------------------------------------------------------------------------
\193\ See supra section II.C.
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The proposed amendments would improve the transparency of liquidity
fund activities and risks and help the Commission and FSOC in
developing a more complete picture of the short-term financing markets
where liquidity funds operate. In turn, this would enhance the
Commission's and FSOC's ability to assess the potential market and
systemic risks presented by liquidity funds' activities. Specifically,
the proposed additional and more granular information would enable the
Commission and FSOC to better assess liquidity funds' asset
turnover,\194\ liquidity management and secondary market
activities,\195\ subscriptions and
[[Page 9134]]
redemptions,\196\ and ownership type and concentration.\197\ This
information can be used to analyze funds' liquidity and susceptibility
of funds with specific characteristics to the risks of runs, which have
a potential to cause systemic risk concerns.\198\ In addition, the
information can be used for identifying trends in the liquidity funds
industry during normal market conditions and for assessing deviations
from those trends that could potentially serve as signals for changes
in the short-term funding markets. Also, some proposed amendments \199\
to section 3 of Form PF would improve comparability of data across
liquidity funds and money market funds so that regulators can use data
on both types of funds for oversight and assessment of short term-
financing markets and their participants.
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\194\ The proposal includes amendments to existing Question 63,
which asks advisers to provide information separately for the
initial acquisition of each security the liquidity fund holds and
any subsequent acquisitions. Question 63 also asks advisers to
provide additional identifying information about each portfolio
security, including the name of the counterparty of a repo. See
supra section II.C; see also infra footnote 204.
\195\ The proposal introduces new Item F (Disposition of
Portfolio Securities), which asks advisers to report information
about the portfolio securities that the liquidity fund sold or
disposed of during the reporting period (not including portfolio
securities that the fund held until maturity). Advisers would report
the amount as well as the category of investment. See supra section
II.C.
\196\ The proposal includes new Question 54, which asks advisers
to provide the total gross subscriptions (including dividend
reinvestments) and the total gross redemptions for each month of the
reporting period. As discussed above, this would include removing
current Question 54, which concerns the liquidity fund's policy of
complying with certain provisions of rule 2a-7. Id.
\197\ The proposal introduces new Question 58, which asks
advisers to report whether the liquidity fund is established as a
cash management vehicle for other funds or accounts that the adviser
or the adviser's affiliates manage (that are not themselves cash
management vehicles). The proposal also amends existing Question 59
by asking advisers to provide, for each investor that beneficially
owns five percent or more of the reporting fund's equity, (1) the
type of investor and (2) the percent of the reporting fund's equity
owned by the investor. Id.
\198\ Runs on liquidity in markets for short-term financing have
the potential to increase systemic risk and instability, as funds
may be forced to sell assets at depressed prices in order to
continue providing liquidity. See, e.g., supra footnote 147.
\199\ The proposal clarifies that the term ``weekly liquid
assets'' includes ``daily liquid assets'' in existing Question 53.
The proposal amends categories in existing Question 56 that now asks
advisers to indicate whether a creditor is based in the United
States and whether it is a ``U.S. depository institution,'' rather
than asking if the creditor is a ``U.S. financial institution.''
These amendments will make these categories more consistent with the
categories the Federal Reserve Board uses in its reports and
analysis. The proposal also revises the Form PF glossary definition
of ``WAM'' and ``WAL'' to include an instruction to calculate them
with the dollar-weighted average based on the percentage of each
security's market value in the portfolio. This revision will help
ensure advisers calculate WAM and WAL, which can indicate potential
risk in the market using a consistent approach. Id.
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These additional tools and data would enable the Commission and
FSOC to better anticipate and deal with potential systemic and investor
harm risks associated with activities in the liquidity funds industry
and overall markets for short-term financing. This could lead to more
resilient financial markets and instill stronger investor confidence in
the U.S. markets for short-term financing, which could facilitate
additional capital formation.
e. Amendments to Guidelines, Definitions, and Existing Questions
In addition to the amendments requiring additional and more
granular information about specific types of private funds and
advisers, the proposal also includes clarifications and improvements to
guidelines, definitions, and existing questions aimed to reduce their
ambiguity and improve data quality.\200\ We believe that these
amendments would reduce uncertainty among filers and reduce filing
errors, thereby improving efficiencies for both regulators and
advisers.
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\200\ For example, as discussed above, the proposal clarifies
the terms ``weekly liquid asset'' and ``U.S. financial
institution,'' while providing instructions for calculating ``WAM''
and ``WAL.'' See supra footnote 199. The proposal also removes
Questions 52 and 53, which require reporting whether the liquidity
fund uses certain methodologies to compute its net asset value, and
instead requires advisers to report whether the liquidity fund seeks
to maintain a stable price per share. If it does, advisers are
required to provide the price it seeks to maintain. Large liquidity
fund advisers are also required to both report cash separately from
other categories when reporting assets and portfolio information
concerning repo collateral, and to name the counterparty of each
repo. Id.
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Specifically, the proposed amendments would address certain
concerns that private fund advisers indicated regarding the ambiguities
and inefficiencies that currently exist in the reporting requirements,
including understanding the definitions and instructions in Form PF and
the ease of interpreting Form PF questions, which contributed to an
increased amount of time and effort required to prepare and submit Form
PF.\201\ We believe that, as a result of the proposed changes aimed at
reducing these ambiguities and inefficiencies, advisers would face
lower costs associated with the preparation and submission of Form PF.
---------------------------------------------------------------------------
\201\ For example, one survey identified the following advisers'
concerns regarding Form PF: (1) The ambiguity of some questions on
Form PF; (2) the unclear definition of funds in Form PF; (3) the
limitations of private fund advisers' existing reporting systems;
and (4) the challenges in aggregating form PF data. See Wulf Kaal,
Private Fund Disclosures Under the Dodd-Frank Act, 9(2) Brooklyn
Journal of Corporate, Financial, and Commercial Law (2015).
---------------------------------------------------------------------------
We also expect that the proposed amendments would address the
Commission's and FSOC's concerns regarding the quality and reliability
of Form PF data and reduce time and effort required to process and
analyze the data. Staff experience with data collected from Form PF
over the past decade has revealed inconsistencies and errors in the
advisers' answers to certain questions, which undermines the quality,
accuracy, and comparability of the collected data. The proposed
amendments to existing questions, definitions, and form instructions in
Form PF would result in less erroneous and more reliable data collected
through Form PF and would lower the costs to regulators associated with
processing and understanding this data. The more reliable data
collected through Form PF would assist regulators in better identifying
and addressing risks to U.S. financial stability, potentially
furthering efforts to protect investors and other market participants.
2. Costs
The proposed amendments to Form PF would lead to certain additional
costs for private fund advisers. Any portion of these costs that is not
borne by advisers would ultimately be passed on to private funds'
investors. These costs would vary depending on the scope of the
required information and the frequency of the reporting, which is
determined based on the size and types of funds managed by the adviser.
For the proposed current reporting requirements, the costs would also
vary depending on whether funds experience a reporting event and the
frequency of those events. Generally, the costs would be lower for
private fund advisers that manage fewer private fund assets or that do
not manage types of private funds that may be more prone to financial
stress events. These costs are quantified, to the extent possible, by
examination of the analysis in section IV.C.\202\
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\202\ A 2015 survey of SEC-registered investment advisers to
private funds affirmed the Commission's cost estimates for smaller
private fund advisers' Form PF compliance costs, and found that the
Commission overestimated Form PF compliance costs for larger private
fund advisers. See Wulf Kaal, Private Fund Disclosures Under the
Dodd-Frank Act, 9(2) Brooklyn Journal of Corporate, Financial, and
Commercial Law (2015).
---------------------------------------------------------------------------
We anticipate that the costs to advisers would be comprised of both
direct compliance costs and indirect costs. Direct costs for advisers
would consist of internal costs (for compliance attorneys and other
non-legal staff of an adviser, such as computer programmers, to prepare
and review the required disclosure) and external costs (including
filing fees as well as any costs associated with outsourcing all or a
portion of the Form PF reporting responsibilities to a filing agent,
software consultant, or other third-party service provider).\203\
---------------------------------------------------------------------------
\203\ See section IV.C (for an analysis of the direct costs
associated with the new Form PF requirements for quarterly and
annual filings).
---------------------------------------------------------------------------
We believe that the direct costs associated with the proposed
amendments would be most significant for the first updated Form PF
report that
[[Page 9135]]
a private fund adviser would be required to file because the adviser
would need to familiarize itself with the new reporting form and may
need to configure its systems to efficiently gather the required
information. In addition, we believe that some large private fund
advisers will find it efficient to automate some portion of the
reporting process, which will increase the burden of the initial
filing. In subsequent reporting periods, we anticipate 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. This is consistent with
the results of a survey of private fund advisers, finding that the
majority of respondents identified the cost of subsequent annual Form
PF filings at about half of the initial filing cost.\204\
---------------------------------------------------------------------------
\204\ See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9(2) Brooklyn Journal of Corporate, Financial, and
Commercial Law (2015).
---------------------------------------------------------------------------
We anticipate that the proposed amendments aimed at improving data
quality and comparability would impose limited direct costs on advisers
given that advisers already accommodate similar requirements in their
current Form PF and Form ADV reporting and can utilize their existing
capabilities for preparing and submitting an updated Form PF. We expect
that most of the costs would arise from the proposed requirements to
report additional and more granular information on Form PF and new
current reporting requirements for advisers to qualifying hedge funds
and private equity funds. For existing section 3 and 4 filers, the
direct costs associated with the proposed amendments to sections 3 and
4 would mainly include an initial cost to set up a system for
collecting, verifying additional more granular information, and limited
ongoing costs associated with periodic reporting of this additional
information.\205\ The initial costs will be higher for the private
equity advisers with assets under management between $1.5 billion and
$2 billion that will be required to complete section 4 under the new
proposed reporting threshold.\206\
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\205\ Based on the analysis in section IV.C, direct internal
compliance costs for existing section 3 filers associated with the
preparation and reporting of additional and more granular
information is estimated at $544.5 per quarterly filing or $2,178
annually per large liquidity fund adviser. This is calculated as the
cost of filing under the proposal of $20,022 minus the cost of
filing prior to the proposal of $19,477.5, where $19,477.5 =
$29,216/105*70 to incorporate the adjustment explained in footnote 9
to Table 7. See Table 7. Direct internal compliance costs for
existing section 4 filers associated with the preparation and
reporting of additional and more granular information is estimated
at $7,425 per annual filing per large private equity adviser. This
is calculated as the cost of filing under the proposal of $35,250
minus the cost of filing prior to the proposal of $27,825. See Table
7. It is estimated that there will be no additional direct external
costs and no changes to filing fees associated with the proposed
amendments to sections 3 and 4. See Table 10.
\206\ Based on the analysis in section IV.C, initial costs for
new section 4 filers is estimated at $80,325 per annual filing per
large private equity adviser, which is $16,865 higher than the cost
of initial filing prior to the proposal, which was estimated at
$63,460. See Table 6. In addition, new section 4 filers will be
subject to a filing fee of $150 per annual filing and an external
cost burden ranging from $0 to $50,000 per adviser, which remains at
the same level as before the proposal. See Table 10.
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As discussed in the benefits section, we believe that part of the
costs to advisers arising from the proposed amendments would be
mitigated by the cost savings resulting from reduced ambiguities and
inefficiencies that currently exist in the reporting requirements, as
this may reduce the amount of time and effort required for some
advisers to prepare and submit Form PF information.
The direct costs associated with the proposed new current reporting
requirements for the advisers of qualifying hedge funds and private
equity funds would include initial costs required to set up a system
for monitoring significant events that are subject to the current
reporting requirement as well as filing fees (the amount of which would
be determined by the Commission in a separate action).\207\ We
anticipate these initial costs to be limited because the current report
triggers were tailored and designed not to be overly burdensome and to
allow advisers to use existing risk management frameworks that they
already maintain to actively assess and manage risk. In particular,
advisers would use the same PFRD non-public filing system as used to
file the rest of Form PF.\208\ The subsequent compliance costs would
depend on the occurrence of the reporting events and frequency with
which those events occur.\209\ To the extent that the reporting events
occur infrequently, we anticipate the costs associated with the
proposed current reporting requirement to be limited as advisers would
not be required to file current reports in the absence of the events.
For example, during periods of normal market activity we would expect
relatively few filings for this part of Form PF. The costs associated
with the proposed amendment, however, would increase with the frequency
of stress events at the adviser's funds.
---------------------------------------------------------------------------
\207\ See supra section II.A.3.
\208\ Id.
\209\ Based on the analysis in section IV.C, direct internal
costs associated with the preparation and filing of current reports
is estimated at $3,538 per report for large hedge fund advisers and
$4,182 per report for private fund advisers. See Table 8. In
addition, large hedge fund advisers will be subject to an external
cost burden of $992 per report associated with outside legal
services and additional one-time cost ranging from $0 to $12,500,
per adviser associated with system changes. See Table 11. Private
equity advisers will be subject to an external cost burden of $992
per report associated with outside legal service. Additionally,
there will be a filing fee per current report for both hedge fund
and private equity fund advisers that is yet to be determined, as
explained in footnote 1 to Table 11. See Table 11.
---------------------------------------------------------------------------
Indirect costs for advisers would include the costs associated with
additional actions that advisers may decide to undertake in light of
the additional reporting requirements. Specifically, to the extent that
the proposed amendments provide an incentive for advisers to improve
internal controls and devote additional time and resources to managing
their risk exposures and enhancing investor protection, this may result
in additional expenses for advisers, some of which may be passed on to
the funds and their investors.\210\
---------------------------------------------------------------------------
\210\ As discussed above, the length of the reporting period is
intended to mitigate costs associated with advisers needing to both
respond to the reporting event and file the required current report.
See supra section II.A.
---------------------------------------------------------------------------
Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. However, we anticipate that these
adverse effects would be mitigated by certain aspects of the Form PF
reporting requirements and controls and systems designed by the
Commission for handling the data. For example, with the exception of
select questions, such as those relating to restructurings/
recapitalizations of portfolio companies and investments in different
levels of the same portfolio company by funds advised by the adviser
and its related person,\211\ Form PF data generally could not, on its
own, be used to identify individual investment positions. The
Commission has controls and systems for the use and handling of the
proposed modified and new Form PF data in a manner that reflects the
sensitivity of the data and is consistent with the maintenance of its
confidentiality. The Commission has substantial experience with the
storage and use of nonpublic information reported on Form PF as well as
other
[[Page 9136]]
nonpublic information that the Commission handles in its course of
business.
---------------------------------------------------------------------------
\211\ See supra section II.B.2.
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D. Effects on Efficiency, Competition, and Capital Formation
We anticipate that the increased ability for the Commission's and
FSOC's oversight, resulting from the proposed amendments, would promote
better functioning and more stable financial markets, which would lead
to efficiency improvements. The additional, more granular, and timely
data collected on the amended Form PF about private funds and advisers
would help reduce uncertainty about risks in the U.S. financial system
and inform and frame regulatory responses to future market events and
policymaking. It would also help develop regulatory tools and
mechanisms that could potentially be used to make future systemic
crises episodes less likely to occur and less costly and damaging when
they do occur.
Also, we believe that the proposed amendments would improve the
efficiency and effectiveness of the Commission's and FSOC's oversight
of private fund advisers by enabling them to manage and analyze
information related to the risks posed by private funds more quickly,
more efficiently, and more consistently than is currently possible.
Private fund advisers' responses to new proposed questions would help
the Commission and FSOC better understand the investment activities of
private funds and the scope of their potential effect on investors and
the U.S. financial markets.
We do not anticipate significant effects of the proposed amendments
on competition in the private fund industry because the reported
information generally would be nonpublic and similar types of advisers
would have comparable burdens under the amended Form.
As discussed in the benefits sections, we expect the proposed
amendments would enhance the Commission's and FSOC's systemic risk
assessment and investor protection efforts, which could ultimately lead
to more resilient financial markets and instill stronger investor
confidence in the U.S. private fund industry and financial markets more
broadly. We anticipate that these developments would make U.S.
financial markets more attractive for investments and improve private
fund advisers' ability to raise capital, thereby, facilitating capital
formation.
E. Reasonable Alternatives
1. Changing the Frequency of Current Reporting
As an alternative to current reporting for hedge fund and private
equity fund advisers, we considered requiring advisers to report
relevant information as part of the existing Form PF filing or on a
scheduled basis, such as semi-annually, quarterly, or monthly.
In general, these alternatives would provide the Commission and
FSOC with the same information but at potentially greater cost to
advisers and on a less timely basis. Specifically, we believe that
neither of these alternative approaches would significantly reduce the
cost burden to advisers compared to the proposed current reporting
requirement, because advisers would still need to incur initial costs
to set up a system for monitoring significant events that are subject
to the proposed current reporting requirement. In the case of advisers
who experience only a few reporting events per year, the alternative
filing frequency for current reports could also increase subsequent
reporting costs, as advisers would be required to file two, four, or
twelve reports per year rather than one report upon the occurrence of
each reporting event.
At the same time, delayed reporting about stress events at hedge
funds and significant events at private equity funds would
significantly reduce the Commission's and FSOC's ability to assess and
frame timely responses to the emerging risks and limit potential market
disruptions, damages, and costs associated with them.
2. Giving Current Report Filers More Time To Reply (Versus One Business
Day)
We also considered an alternative to require hedge fund and private
equity advisers to file current reports within a time period longer
than one business day.
Although this alternative would provide more time to advisers to
prepare and file the form, we do not anticipate that this would reduce
the cost burden to advisers as compared to the proposed one-day
reporting requirement. We believe that the proposed structures of
sections 5 and 6 of Form PF are relatively simple and require advisers
to flag the reporting event from a menu of available options and add
straightforward explanatory notes about the events, which generally
should not require considerable time to complete. Extending the
reporting time period may increase internal costs to advisers to
prepare and review the required disclosure, to the extent a longer
reporting time period indirectly signals to advisers a need for greater
detail, thoroughness, or diligence.
On the other hand, due to the time sensitive nature of the reported
events, additional reporting time would significantly reduce the
Commission's and FSOC's ability to assess and frame timely responses to
the emerging risks and limit potential market disruptions, damages and
costs associated with them.
3. Alternative Reporting Thresholds for Current Reporting by Hedge Fund
Advisers (Versus Just Large Hedge Fund Advisers to Qualifying Hedge
Funds)
We considered an alternative to require all hedge fund advisers to
file section 5 of Form PF upon occurrence of stress events at one of
their hedge funds (irrespective of the fund size) instead of requiring
this reporting from only large advisers to qualifying hedge funds.
Although this information would be beneficial for the Commission and
FSOC, as this would provide a more complete picture of the stress
events in the hedge fund industry and allow better assessment of
systemic risk and investor protection issues in the smaller hedge funds
space, we believe that this benefit would be marginal as compared to
the benefit of the information about qualifying hedge funds for two
reasons. First, the hedge fund industry is dominated by qualifying
hedge funds that currently account for approximately 81 percent of the
industry's gross assets under management among filers of Form PF.\212\
Therefore, the proposed current reporting requirement would cover
stress events that affect a broad, representative set of assets in the
hedge fund industry. Second, the proposed current reporting is designed
to serve as a signal to the Commission and FSOC about systemically
important stress events at hedge funds. Stress events at larger hedge
funds are more likely to be systemically important due to their
quantitatively important positions in a market and more extensive use
of leverage. Overall, we believe at this time that requiring advisers
to smaller hedge funds to file current reports would impose a
significant burden on these smaller advisers and not significantly
expand or improve the Commission's and FSOC's oversight and assessment
of systemic risk efforts.
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\212\ See supra footnote 129.
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[[Page 9137]]
We also considered an alternative to increase the reporting
threshold for hedge funds that would require a subgroup of the largest
qualifying hedge funds to file current reports. Although this
alternative would reduce the reporting burden at smaller qualifying
hedge advisers, we believe that this would also reduce the benefit
associated with the proposed current reporting. Specifically, we
believe that this alternative would likely impede the Commission's and
FSOC's ability to assess and respond to emerging industry risks, as
this would reduce the scope of reported stress events to the events
that affect the largest qualifying hedge funds. To the extent that
largest qualifying hedge funds have a greater propensity to withstand
deteriorating market conditions, the Commission and FSOC would have
less visibility into the stress events that simultaneously affect
smaller qualifying hedge funds that may indicate or have implications
for systemic risk and investor protection concerns.
4. Requiring Fewer Private Equity Advisers To File Current Reports (by
Introducing a Reporting Threshold)
We considered an alternative current reporting requirement for
private equity advisers where only advisers to larger private equity
funds would be required to file section 6 of form PF, i.e., imposing a
fund size threshold for current reporting.
Although this alternative would reduce the reporting burden at
smaller private equity advisers, we believe that this would also reduce
the benefit associated with the proposed current reporting.
Specifically, one of the goals of the proposed current reporting for
private equity funds is to provide the Commission with indicators of
potential conflicts of interests and investor harm at the funds. This
would enable the Commission to target its examination program more
efficiently and effectively and better identify areas in need of
regulatory oversight and market assessment to increase investor
protection. The Commission's oversight of private equity advisers is
not limited to the advisers of a certain size. Conflicts of interest
and resulting investor harm may occur at private equity advisers of all
sizes, and the Commission has brought a number of enforcement actions
against smaller advisers in the past.\213\ In that regard, current
reports by smaller private equity advisers would be beneficial for the
Commission's improved ability to protect investors in smaller funds.
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\213\ For example, in 2019 the Commission investigated
Corinthian Capital Group, LLC for misuse of its assets under
management. As of December 31, 2017, Corinthian managed $270 million
in assets. See, e.g., Administrative Proceeding, File No. 3-19159
(May 6, 2019), available at https://www.sec.gov/litigation/admin/2019/ia-5229.pdf. Another example, in 2015 the Commission
investigated Fenway Partners, LLC for potential conflicts of
interest. As of April 29, 2015, Fenway Partners had $445 million in
assets under management. See, e.g., Administrative Proceeding, File
No. 3-16938 (November 3, 2015), available at https://www.sec.gov/litigation/admin/2015/ia-4253.pdf.
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We recognize that the costs associated with the proposed current
reporting requirement may appear higher to smaller advisers as compared
to larger advisers. However, as discussed in the costs section, we
expect the reporting events to be relatively infrequent and, therefore,
the costs associated with current reporting to be relatively low.
5. Changing the Reporting Events for Current Reporting by Hedge Fund
Advisers
We also considered alternatives to which stress events should
trigger current reporting for hedge fund advisers. Alternative
reporting events include both different thresholds for how severe of a
stress event triggers a current report, as well as different categories
of stress events altogether, separate from those considered in the
proposal. For example, a hedge fund reporting for proposed Item B would
be triggered by a loss equal to or greater than 20 percent of a fund's
most recent net asset value over a rolling 10 business day period,\214\
and this threshold could be revised to be triggered by a 10% loss, or a
30% loss, or any other threshold. As another alternative, and as
discussed above, the threshold could instead compare losses against the
volatility of the fund's returns.\215\ Lastly, current reporting could
alternatively be triggered by stress events besides those considered in
this proposal. For example, hedge fund current reporting could be
triggered by a large increase in the volatility of the fund's returns,
even if that volatility does not result in investment losses.
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\214\ See supra section II.A.1.a.
\215\ Id.
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In general, alternative triggers to current reporting requirements
would either provide the Commission and FSOC with more information at a
greater cost to advisers, less information at a lower cost to advisers,
or an alternative metric for measuring the same stress event as the
proposed reporting event. We believe that the thresholds as proposed
would trigger reporting for relevant stress events for which we seek
timely information while minimizing the potential for false positives
and multiple unnecessary current reports, but as discussed above we
request suggestions and comments on each proposed reporting event.
6. Alternative Size Threshold for Section 4 Reporting by Large Private
Equity Advisers
The proposed amendments to section 4 of form PF include a proposal
to reduce the filing threshold for large private equity advisers from
$2 billion to $1.5 billion. We also considered alternatives to reduce
the reporting size threshold below $1.5 billion or increase it above $2
billion.
We believe that increasing the threshold for large private equity
advisers above $2 billion would likely impede the Commission's and
FSOC's ability to a representative picture of the private fund industry
and lead to misleading conclusions regarding emerging industry trends
and characteristics, as this would reduce the coverage of private
equity assets in today's market below 67 percent, which is already
below the originally envisioned 75 percent coverage.\216\
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\216\ See supra footnotes 62-63.
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On the other hand, reducing the current report size threshold below
$1.5 billion would be marginally beneficial for the Commission's and
FSOC's risk oversight and assessment efforts as this would increase the
representativeness of the sample of reporting advisers. Given that
smaller private equity advisers and funds now account for a larger
fraction of the industry than they did when the Form PF was originally
adopted,\217\ collecting more detailed information about these funds
would help the Commission and FSOC to detect certain new trends and
group behaviors with potential systemic consequences among these
advisers and funds. However, this would also increase the number of
advisers that would be categorized as large private equity advisers
subject to the more detailed reporting and impose additional reporting
burden on those advisers.
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\217\ See supra footnote 141.
---------------------------------------------------------------------------
We think that the proposed new threshold of $1.5 billion strikes an
appropriate balance between obtaining information regarding a
significant portion of the private equity industry for analysis while
continuing to minimize the burden imposed on smaller advisers.
7. Alternatives to the New Section 3 and 4 Reporting Requirements for
Large Private Equity and Liquidity Fund Advisers
The proposed amendments also include new questions and revisions to
[[Page 9138]]
existing questions in sections 3 and 4 for large private equity
advisers and large liquidity fund advisers. The additional large
private equity adviser revisions are designed to enhance the
Commission's and FSOC's understanding of certain practices in the
private equity industry and amend certain existing questions to improve
data collection.\218\ The additional large liquidity fund adviser
revisions are designed to help us see a more complete picture of the
short-term financing markets in which liquidity funds invest, and in
turn, enhance the Commission and FSOC's ability to monitor and assess
short-term financing markets and facilitate better regulatory oversight
of those markets and their participants.\219\ We also considered
alternatives to each of these sets of proposed amendments in the form
of different choices of framing, level of detail requested, and precise
information targeted. For example, for Question 68 of section 4, on
reporting of private equity private credit strategies, we considered
consolidating ``Private Credit--Junior/Subordinated Debt,'' ``Private
Credit--Mezzanine Financing,'' ``Private Credit--Senior Debt,'' and
Private Credit--Senior Subordinated Debt'' into the ``Private Credit--
Direct Lending/Mid Market Lending'' category.\220\ For the questions in
section 3 on liquidity fund strategies to maintain a stable price per
share, we considered maintaining the existing questions and adding the
new proposed Question 52, which requires advisers to state directly
whether the reporting fund seeks a stable price per share, instead of
replacing existing questions with the new Question 52.\221\ We believe
that the amendments as proposed maximize data quality and enhance the
usefulness of reported data, but as discussed above we request
suggestions and comments on each proposed change.\222\
---------------------------------------------------------------------------
\218\ See supra section II.B.
\219\ See supra section II.C.
\220\ See supra section II.B.
\221\ See supra section II.C.
\222\ See supra sections II.B to C.
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F. Request for Comment
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the amendments, if we were to
adopt them, would promote efficiency, competition, and capital
formation. In addition, we request comments on our selection of data
sources, empirical methodology, and the assumptions we have made
throughout the analysis. Commenters are requested to provide empirical
data, estimation methodologies, and other factual support for their
views, in particular, on costs and benefits estimates. In addition, we
request comment on:
119. Whether there are any additional costs and benefits associated
with the proposed amendments to Form PF that should be considered? What
additional materials and data should we consider for estimating these
costs and benefits?
120. Whether our assumptions about costs associated with the
proposal are accurate? For example, is it accurate to assume that the
proposed reporting requirements would be less burdensome to advisers
who are already accustomed to the PFRD filing system they use to file
the rest of Form PF?
IV. Paperwork Reduction Act
The proposal would revise an existing ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\223\ The SEC is submitting the collection of information to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\224\ The title for the collection of information is
``Form PF and Rule 204(b)-1'' (OMB Control Number 3235-0679), and
includes both Form PF and rule 204(b)-1 (``the rules''). 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 OMB
control number. Compliance with the information collection is
mandatory.
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\223\ 44 U.S.C. 3501 through 3521.
\224\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
The respondents are investment advisers who are (1) registered or
required to be registered under Advisers Act section 203, (2) advise
one or more private funds, and (3) managed private fund assets of at
least $150 million at the end of their most recently completed fiscal
year (collectively, with their related persons).\225\ Form PF divides
respondents into groups based on their size and types of private funds
they manage, requiring some groups to file more information more
frequently than others. The types of respondents are (1) smaller
private fund advisers (i.e., private fund advisers who do not qualify
as a large private fund adviser), (2) large hedge fund advisers, (3)
large liquidity fund advisers, and (4) large private equity
advisers.\226\ As discussed more fully in section II above and as
summarized in sections IV.A and IV.C below, the proposal would require
current reporting for some groups, and would revise what some groups
would file.
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\225\ See 17 CFR 275.204(b)-1.
\226\ See supra footnote 8 (discussing the definitions of large
hedge fund advisers, large liquidity fund advisers, and large
private equity advisers).
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A. Purpose and Use of the Information Collection
The rules implement provisions of Title IV of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''), which
amended the Advisers Act to require the SEC to, among other things,
establish reporting requirements for advisers to private funds.\227\
The rules are intended to assist the FSOC in its monitoring obligations
under the Dodd-Frank Act, but the SEC also may use information
collected on Form PF in its regulatory programs, including
examinations, investigations, and investor protection efforts relating
to private fund advisers.\228\
---------------------------------------------------------------------------
\227\ See 15 U.S.C. 80b-4(b) and 15 U.S.C. 80b-11(e).
\228\ See 2011 Form PF Adopting Release, supra footnote 2.
---------------------------------------------------------------------------
The proposed amendments are designed to enhance FSOC's ability to
monitor systemic risk as well as bolster the SEC's regulatory oversight
of private fund advisers and investor protection efforts. The proposed
amendments would do the following:
Require large hedge fund advisers to file current reports
upon certain reporting events, as discussed more fully in section II.A
above;
Require advisers to private equity funds to file current
reports upon certain reporting events, as discussed more fully in
section II.A above;
Reduce the threshold to qualify as a large private equity
adviser, as discussed more fully in section II.B above.
Amend how large private equity advisers report information
about the private equity funds they advise, as discussed more fully in
section II.B above; and
Amend how large liquidity fund advisers report information
about the liquidity funds they advise, as discussed more fully in
section II.C above.
[[Page 9139]]
The proposed current reporting requires advisers to report
information upon reporting events, which could occur more or less than
quarterly.\229\ As discussed more fully in sections I and II, above, we
are proposing the current reporting requirements so we and FSOC can
receive more timely data to identify and respond to private funds that
are facing stress that could result in investor harm or systemic risk.
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\229\ See 5 CFR 1320.5(d)(2)(i).
---------------------------------------------------------------------------
B. Confidentiality
Responses to the information collection will be kept confidential
to the extent permitted by law.\230\ Form PF elicits non-public
information about private funds and their trading strategies, the
public disclosure of which could adversely affect the funds and their
investors. The SEC does not intend to make public Form PF information
that is identifiable to any particular adviser or private fund,
although the SEC may use Form PF information in an enforcement action
and to assess potential systemic risk.\231\ SEC staff issues certain
publications designed to inform the public of the private funds
industry, all of which use only aggregated or masked information to
avoid potentially disclosing any proprietary information.\232\ The
Advisers Act precludes the SEC from being compelled to reveal Form PF
information except (1) to Congress, upon an agreement of
confidentiality, (2) to comply with a request for information from any
other Federal department or agency or self-regulatory organization for
purposes within the scope of its jurisdiction, or (3) to comply with an
order of a court of the United States in an action brought by the
United States or the SEC.\233\ Any department, agency, or self-
regulatory organization that receives Form PF information must maintain
its confidentiality consistent with the level of confidentiality
established for the SEC.\234\ The Advisers Act requires the SEC to make
Form PF information available to FSOC.\235\ For advisers that are also
commodity pool operators or commodity trading advisers, filing Form PF
through the Form PF filing system is filing with both the SEC and
CFTC.\236\ Therefore, the SEC makes Form PF information available to
FSOC and the CFTC, pursuant to Advisers Act section 204(b), making the
information subject to the confidentiality protections applicable to
information required to be filed under that section. Before sharing any
Form PF information, the SEC requires that any such department, agency,
or self-regulatory organization represent to the SEC that it has in
place controls designed to ensure the use and handling of Form PF
information in a manner consistent with the protections required by the
Advisers Act. The SEC has instituted procedures to protect the
confidentiality of Form PF information in a manner consistent with the
protections required in the Advisers Act.\237\
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\230\ See 5 CFR 1320.5(d)(2)(vii) and (viii).
\231\ See 15 U.S.C. 80b-10(c).
\232\ See e.g., Private Funds Statistics, issued by staff of the
SEC Division of Investment Management's Analytics Office, which we
have used in this PRA as a data source, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\233\ See 15 U.S.C. 80b-4(b)(8).
\234\ See 15 U.S.C. 80b-4(b)(9).
\235\ See 15 U.S.C. 80b-4(b)(7).
\236\ See 2011 Form PF Adopting Release, supra footnote 2, at
n.17.
\237\ See 5 CFR 1320.5(d)(2)(viii).
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C. Burden Estimates
We are revising our total burden estimates to reflect the proposed
amendments, updated data, and new methodology for certain
estimates.\238\ The tables below map out the Form PF requirements as
they apply to each group of respondents and detail our burden
estimates.
---------------------------------------------------------------------------
\238\ For the previously approved estimates, see ICR Reference
No. 202011-3235-019 (conclusion date Apr. 1, 2021), available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202011-3235-019.
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1. Proposed Form PF Requirements by Respondent
Table 1--Proposed Form PF Requirements by Respondent
----------------------------------------------------------------------------------------------------------------
Smaller private Large hedge fund Large liquidity Large private
Form PF fund advisers advisers fund advisers equity advisers
----------------------------------------------------------------------------------------------------------------
Section 1a and section 1b (basic Annually.......... Quarterly......... Quarterly......... Annually.
information about the adviser
and the private funds it
advises); No proposed revisions.
Section 1c (additional Annually, if they Quarterly......... Quarterly, if they Annually, if they
information concerning hedge advise hedge advise hedge advise hedge
funds); No proposed revisions. funds. funds. funds.
Section 2 (additional No................ Quarterly......... No................ No.
information concerning
qualifying hedge funds); No
proposed revisions.
Section 3 (additional No................ No................ Quarterly......... No.
information concerning
liquidity funds); Proposed
revisions.
Section 4 (additional No................ No................ No................ Annually.
information concerning private
equity funds); Proposed
revisions.
Section 5 (current reporting No................ Upon a reporting No................ No.
concerning qualifying hedge event.
funds); The proposal would add
section 5.
Section 6 (current reporting for Upon a reporting No................ No................ Upon a reporting
private equity advisers); The event, if they event.
proposal would add section 6. advise private
equity funds.
Section 7 (temporary hardship Optional, if they Optional, if they Optional, if they Optional, if they
request); The proposal would qualify. qualify. qualify. qualify.
make this available for current
reporting.
----------------------------------------------------------------------------------------------------------------
2. Annual Hour Burden Estimates
Below are tables with annual hour burden estimates for (1) initial
filings, (2) ongoing annual and quarterly filings, (3) current
reporting, and (4) transition filings, final filings, and temporary
hardship requests.
BILLING CODE 8011-01-P
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3. Annual Monetized Time Burden Estimates
Below are tables with annual monetized time burden estimates for
(1) initial filings, (2) ongoing annual and quarterly filings, (3)
current reporting, and (4) transition filings, final filings, and
temporary hardship requests.\239\
---------------------------------------------------------------------------
\239\ The hourly wage rates are based on (1) SIFMA's Management
& Professional Earnings in the Securities Industry 2013, modified by
SEC staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead; and (2) SIFMA's Office Salaries in the
Securities Industry 2013, modified by SEC staff to account for an
1,800-hour work-year and inflation, and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead.
[GRAPHIC] [TIFF OMITTED] TP17FE22.006
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4. Annual External Cost Burden Estimates
Below are tables with annual external cost burden estimates for (1)
initial filings as well as ongoing annual and quarterly filings and (2)
current reporting. There are no filing fees for transition filings,
final filings, or temporary hardship requests and we continue to
estimate there would be no external costs for those filings, as
previously approved.
[[Page 9151]]
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[[Page 9153]]
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5. Summary of Estimates and Change in Burden
[[Page 9154]]
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[GRAPHIC] [TIFF OMITTED] TP17FE22.015
BILLING CODE 8011-01-C
D. Request for Comments
We request comment on whether our estimates for burden hours and
external costs as described above are reasonable. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicits comments in order to (1)
evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the SEC, including
whether the information will have practical utility; (2) evaluate the
accuracy of the SEC's estimate of the burden of the proposed collection
of information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) 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.
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
[email protected], and should send a copy to
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-01-22. 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. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
01-22, and be submitted to the Securities and Exchange Commission,
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736.
V. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act of 1980 (``Regulatory Flexibility
Act'') \240\ requires the SEC to prepare and make available for public
comment an initial regulatory flexibly analysis of the impact of the
proposed rule amendments on small entities, unless the SEC certifies
that the rules, if adopted would not have a significant economic impact
on a substantial number of small entities.\241\ Pursuant to section
605(b) of the Regulatory Flexibility Act, the SEC hereby certifies that
the proposed amendments to Advisers Act rule 204(b)-1 and Form PF would
not, if adopted, have a significant economic impact on a substantial
number of small entities.
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\240\ 5 U.S.C. 601, et. seq.
\241\ See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
---------------------------------------------------------------------------
For the purposes of the Advisers Act and the Regulatory Flexibility
Act, an investment adviser generally is a small entity if it (1) has
assets under management having a total value of less than $25 million;
(2) did not have total assets of $5 million or more on the last day of
the most recent fiscal year; and (3) 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.\242\
---------------------------------------------------------------------------
\242\ 17 CFR 275.0-7.
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By definition, no small entity on its own, would meet rule 204(b)-1
and Form PF's minimum reporting threshold of $150 million in regulatory
assets under management attributable to private funds. Based on Form PF
and Form ADV data as of September 2021, the SEC estimates that no small
entity advisers are required to file Form PF. The SEC does not have
evidence to suggest that any small entities are required to file Form
PF but are not filing Form PF. Therefore, there would be no significant
economic impact on a substantial number of small entities. The SEC
encourages written comments on the certification. Commentators are
asked to describe the nature of any impact on small entities and
provide empirical data to support the extent of the impact.
[[Page 9156]]
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\243\ 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 the following:
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\243\ 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).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
The SEC requests comment on whether the proposal would be a ``major
rule'' for purposes of SBREFA. The SEC solicits comment and empirical
data on the following:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
VII. Statutory Authority
The Commission is proposing amendments to Form PF pursuant to
authority set forth in Sections 204(b) and 211(e) of the Advisers Act
[15 U.S.C. 80b-4(b) and 80b-11(e)].
List of Subjects 17 CFR Part 275 and 279
Reporting and recordkeeping requirements, Securities.
By the Commission.
Dated: January 26, 2022.
Vanessa A. Countryman,
Secretary.
Text of Proposed Rules
For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for part 275 continues to read as
follows.
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
0
2. Amend Sec. 275.204(b)-1 by revising paragraphs (f)(2)(i) and (f)(3)
to read as follows:
Sec. 275.204(b)-1 Reporting by investment advisers to private funds.
* * * * *
(f) * * *
(2) * * *
(i) Complete and file in paper format, in accordance with the
instructions to Form PF, Item A of Section 1a and Section 7 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;
* * * * *
(3) The temporary hardship exemption will be granted when you file
Item A of Section 1a and Section 7 of Form PF, checking the box in
Section 1a indicating that you are requesting a temporary hardship
exemption.
* * * * *
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
3. The authority citation for part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq., Pub. L. 111-203, 124 Stat. 1376.
Sec. 279.9 Form PF, reporting by investment advisers to private
funds.
Note: The text of Form PF does not, and the amendments will
not, appear in the Code of Federal Regulations.
0
4. Revise PF (referenced in Sec. 279.9) to read as follows.
BILLING CODE 8011-01-P
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[FR Doc. 2022-01976 Filed 2-16-22; 8:45 am]
BILLING CODE 8011-01-C