Member Article

The Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) recently adopted new rules (the “Rules”) under the Investment Advisers Act of 1940 (the “Advisers Act”), and the Commodity Exchange Act (the “CEA”) that will require registered investment advisers with at least $150 million in private fund assets under management to file Form PF with the SEC. Form PF is designed to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the information gathered by the form is  primarily intended for use by the Financial Stability Oversight Council (the “FSOC”) in assessing systemic risks posed to the U.S. financial system. While the information reported on Form PF generally will remain confidential, the SEC and the CFTC will be permitted to use Form PF information in examinations, investigations and enforcement actions. 

SCOPE OF THE RULES

An investment adviser will be required to file Form PF if it (a) is registered (or required to be registered) with the SEC, (b) advises one or more private funds and (c) had at least $150 million in private fund assets under management as of the end of its most recently completed fiscal year. A “private fund” is defined as an issuer that would be an investment company but for the exceptions contained in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the “Company Act”).1

In addition, a commodity pool operator (a “CPO”) or commodity trading adviser (a “CTA”) registered with the CFTC that (a) also is registered with the SEC as an investment adviser, (b) advises one or more private funds and (c) had at least $150 million in private fund assets under management as of the end of its most recently completed fiscal year, must file Form PF with respect to any commodity pool that it manages as a private fund and may (but will not be required to) file Form PF with respect to any non-private fund commodity pool that it manages (in lieu of other reports that may be required by the CFTC).2

The amount and type of information required to be reported on Form PF will vary depending upon both the size of, and types of funds managed by, the adviser. Most advisers will only be required to complete Section 1 of Form PF, which will require basic information regarding advisers and the private funds managed thereby. The Rules and Form PF also will require additional information from certain larger private fund managers (“Large Fund Managers”). A Large Fund Manager will include: 

• Any adviser with at least $1.5 billion in private fund assets under management attributable to hedge funds (3)  as of the end of any month in the prior fiscal quarter (“Large Hedge Fund Managers”); 

• Any adviser with at least $1 billion in private fund assets under management attributable to liquidity funds (4)  and registered money market funds (5)  as of the end of any month in the prior fiscal quarter (“Large Liquidity Fund Managers”); and 

• Any adviser with at least $2 billion in private fund assets under management attributable to private equity funds (6)  as of the last day of the adviser’s most recently completed fiscal year (“Large Private Equity Fund Managers”). 

To determine whether an adviser meets the $150 million  reporting threshold or is a Large Fund Manager, the adviser will be required to calculate the value of its  “regulatory assets under management” attributable to private funds in accordance with the instructions to Form ADV. In addition, an adviser will be required to aggregate the following assets with its private fund assets:  

• Assets of managed accounts advised by the adviser that pursue substantially the same investment objective and strategy and invest in substantially the same positions as private funds advised by the adviser (“parallel managed accounts”), unless the value of those accounts exceeds the value of the private funds with which they are managed; and 

• Assets of private funds advised by any of the adviser’s related persons other than related persons that are separately operated. 7

When reporting on individual funds, an adviser may  elect to provide information regarding master-feeder arrangements or parallel fund structures either in the aggregate or separately, provided that it does so consistently throughout Form PF.  

In determining its reporting status and submitting Form PF, an adviser will not be required to include private fund assets that are invested in other private funds (e.g., funds of funds). If a private fund only owns interests in other private funds, cash, cash equivalents  and/or currency hedging instruments, an adviser will only be required to complete Section 1(b) of Form PF with respect to such fund.  

OVERVIEW OF REPORTING REQUIREMENTS 

All Advisers--All reporting advisers must complete Sections 1(a) and 1(b) of Form PF. Section 1(a) will require basic identifying information about the adviser, such  as its name, the names of any related persons whose information is reported on Form PF, its gross and  net assets under management and the amount of assets attributable to certain types of funds.   

Advisers generally will be required to complete Section 1(b) of Form PF with respect to each private fund they advise (excluding feeder funds in master-feeder structures). Section 1(b) will require information regarding each fund, including its gross and net assets, the value of its equity investments in other private funds, the value of all parallel managed accounts related to the fund, basic  information about borrowings, the aggregate value of derivative positions, asset and liability reporting, information about valuation/accounting methods, basic information about the concentration of the types of investors in the fund’s investor base and monthly and quarterly performance information. 

In addition to the foregoing, advisers will be required to complete Section 1(c) with respect to any hedge funds that they manage. Section 1(c) will require information regarding each hedge fund, including its investment strategies, percentage of assets managed using computer-driven  trading algorithms, significant trading counterparty exposures and trading and clearing practices. 

Large Hedge Fund Managers-- Large Hedge Fund Managers will be required to complete Sections 2(a) and 2(b) of Form PF. Section 2(a) will require, on an aggregate basis, certain information about hedge funds managed by the Large Hedge Fund Manager, including exposure to different  types of securities, commodities and other assets, turnover by asset class and a geographic breakdown of  the hedge funds’ investments. Section 2(b) will require additional information with respect to any hedge fund advised by the Large Hedge Fund Manager that had a net asset value of at least $500 million as of the end of any month in the prior fiscal quarter (a “qualifying hedge fund”), including asset exposures, liquidity, concentration, cash holdings, base currency, collateral practices with counterparties, use of central clearing counterparties, risk metrics, impact from market factors, borrowing and credit support and total notional derivatives exposure.   

Large Liquidity Fund Managers-- Large Liquidity Fund Managers will be required to complete Section 3 of Form PF. Section 3 will require certain information with respect to each liquidity fund managed by a Large Liquidity Fund Manager, including information on portfolio valuation and valuation methodology, liquidity, borrowing, exposure to certain instruments and concentration of investor base.  

Large Private Equity Fund Managers-- Large Private Equity Fund Managers will be required to complete Section 4 of Form PF. Section 4 will require certain information with respect to each private equity fund managed by a Large Private Equity Fund Manager, including information regarding underlying portfolio companies (including any guarantees of portfolio company obligations provided by the fund and information regarding leverage utilized by portfolio companies), defaults by the fund or by portfolio companies on financings, debt-to-equity ratios and gross asset values of portfolio companies, investments in financial companies and a breakdown of investments by industry and geographic location. 

FREQUENCY OF REPORTING AND INITIAL FILING DEADLINES

Under the Rules, most advisers will be required to file Form PF within 120 days of the end of their fiscal years. However, Large Hedge Fund Managers will be required to file Form PF within 60 days of the end of each fiscal quarter and Large Liquidity Fund Managers will be required to file Form PF within 15 days of the end of each fiscal quarter.

The following advisers will be required to file an initial Form PF following their first fiscal year or fiscal quarter, as applicable, ending on or after June 15, 2012:  

• Advisers with at least $5 billion in private fund assets under management attributable to hedge funds; 

• Advisers with at least $5 billion in private fund assets under management attributable to liquidity funds and registered money market funds; and 

• Advisers with at least $5 billion in private fund assets under management attributable to private equity funds. 

Other advisers will be required to file an initial Form PF following the end of their first fiscal year or fiscal quarter, as applicable, ending on or after December 15, 2012. Newly registered advisers will not be required to file Form PF with respect to any  period that ended prior to the effective date of their registrations. For example, an adviser (other than  a Large Hedge Fund Manager or Large Liquidity Fund Manager) that registers as an investment adviser with the SEC in 2013 would be required to file its initial Form PF within 120 days of the end of its 2013 fiscal year.   

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1 Exempt reporting advisers will not be required to file Form PF.  

2 For purposes of Form PF reporting, commodity pools will be treated as hedge funds. If an adviser reports on non-private fund commodity pools, these should generally be treated as “private funds” and, if appropriate, as qualifying hedge funds. However, non-private fund commodity pools should be excluded when determining whether an adviser has exceeded a reporting threshold. 

3 “Hedge fund” is defined as any private fund, other than a securitized asset fund, that has one or more of the following characteristics (i) has a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation calculation which takes into account unrealized gains solely for purposes of reducing such fee or allocation to reflect net unrealized losses); (ii) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or  (iii) may sell securities or other assets short. A securitized asset fund is any private fund whose primary purpose is to issue asset backed securities and whose investors are primarily debt-holders.  

4 “Liquidity fund” is defined as any private fund that seeks to generate income by investing in a portfolio of short term obligations in order tomaintain a stable net asset value per unit or minimize principal volatility for investors.  

5 “Money market fund” has the meaning provided in rule 2a-7 under the Company Act.

6 “Private equity fund” is defined as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course. 

7 “Related person” is defined generally as (i) all of the adviser’s officers, partners, or directors; (ii) all persons directly or indirectly controlling, controlled by, or under common control with the adviser; and (iii)  all of the adviser’s employees (other than employees performing solely clerical, administrative, support or similar functions.  For purposes of Form PF, a related person is “separately operated” if the adviser is not required to complete section 7.A. of Schedule D to Form ADV with respect to that related person.  An adviser may, but is not required to, file one consolidated Form PF for itself and its related persons. 

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For additional information regarding the Rules or Form PF, please contact one of the attorneys listed below: