SEC Proposes Updates To Form PF – Finance and Banking

On January 26, 2022, the SEC issued a release (the “Release“) proposing amendments to Form PF
(the “Proposal”). The Proposal includes: (i) new current
reporting requirements for large hedge fund
advisers1 and advisers to private equity funds,
obligating such advisers to report a number of specified events to
the SEC within one business day of their occurrence; (ii) a lowered
threshold for large private equity adviser reporting; (iii) certain
revised reporting questions for private equity funds; and (iv)
enhanced large liquidity fund adviser reporting.

The Proposal reflects the SEC’s experiences with recent
market turmoil, including the COVID-19 crisis and the January 2021
market volatility impacting certain stocks. Among other things, the
Proposal is designed to enhance FSOC’s ability to monitor
systemic market risk, address significant information gaps, assist
FSOC and the SEC with receiving more timely information to analyze
and assess marketplace and investor risks, and bolster the
SEC’s regulatory oversight of private fund advisers.

The proposed changes are not final and comments on the Release
must be received by the SEC no later than 30 days from the date of
publication of the release in the Federal
Register
.2 We have included as an Appendix the proposed revised Form PF and
also included cross references below to the applicable provisions
of that Form.

New Current Reporting Requirements for Large Hedge Fund
Advisers and Advisers to Private Equity Funds

The Proposal introduces a new requirement for large hedge fund
advisers and advisers to private equity funds to file current
reports within one business day of the occurrence of certain
reporting events (for example, if an adviser determines a reporting
event occurred on Monday, the current report must be filed by close
of business on Tuesday). If adopted as proposed, advisers would
file current reports through the existing Private Fund Reporting
Depository. Current reports would be filed on Section 5 (for
qualifying hedge funds) or Section 6 (for private equity funds), as
applicable, and no other sections of Form PF would be filed at the
time of a current report.

Reporting Events for Large Hedge Fund Advisers

If the amendments are adopted as proposed, large hedge fund
advisers would be required to file Section 5 with respect to any
qualifying hedge fund3 upon the occurrence of any
of the following reporting events:

  • Extraordinary investment losses,  meaning
    aggregate losses totaling 20% or more of the most recent net asset
    value (“NAV”) over a rolling 10 business day
    period;4

  • Significant margin and default events, including:

    • A margin, collateral or equivalent increase, meaning a
      cumulative increase in the total dollar value of margin, collateral
      or an equivalent posted by the fund of more than 20% of the
      fund’s most recent NAV over a rolling 10 business day
      period;5

    • Margin default or determination of inability to meet a call
      for margin,
       collateral or an equivalent, where the
      adviser has either (i) received notification of default and the
      fund is not able to cover or (ii) determined that the reporting
      fund is unable to meet a call for increased margin, collateral or
      an equivalent;6

    • Counterparty default, where a counterparty (i)
      fails to either meet a call or make any other payment in the time
      and form contractually required and (ii) the amount exceeds 5% of
      the fund’s most recent NAV;7


  • Material change in relationship with prime
    broker,
     including termination or material trading limits
    or investment restrictions on the reporting fund;8

  • Changes in Unencumbered Cash, meaning a decline
    in the value of the reporting fund’s unencumbered cash of more
    than 20% of the reporting fund’s most recent NAV over a rolling
    10 day trading period and the circumstances relating to such
    change;9

  • Operations events, meaning a significant
    disruption or degradation10 of the reporting
    fund’s key operations,11 which is not
    restricted to a fixed list of events but would include, for
    example:12

    • A cybersecurity event that disrupts the trading volume of a
      reporting fund by 20% of its normal capacity;

    • Events that significantly disrupt an adviser’s ability to
      value the fund’s assets (e.g., due to issues at a service
      provider); or

    • Severe weather events that significantly disrupt key
      operations;13


  • Significant withdrawals and redemptions,  meaning
    those that meet or exceed 50% of the reporting fund’s most
    recent NAV;14 and

  • Inability to satisfy redemptions or a suspension of
    redemptions lasting longer than 5 days.
    15

For purposes of the reporting events, the SEC has proposed that
the reporting fund’s “most recent NAV” refer to the
NAV reported on such fund’s most recent Form PF filing. As
noted above, a number of the thresholds above depend on the
adviser’s ability to measure certain changes as a percentage of
that NAV in real time (e.g., determining whether investment losses
hit the 20% reporting threshold within a rolling period), which may
be problematic for certain private equity funds that nonetheless
meet the definition of qualifying hedge funds for purposes of Form
PF.

Upon the occurrence of a reporting event, a large hedge fund
adviser would file Section 5 of Form PF as a standalone filing.
Section 5 requires the adviser to provide certain biographical
information about the reporting fund,16 applicable
information on the reporting event, and provides an opportunity for
the adviser to include any explanatory notes relating to the
reporting event.17

Reporting Events for Private Equity Funds

If the amendments are adopted as proposed, private equity
advisers will be required to complete and file Section 6 with
respect to any private equity fund18 upon the
occurrence of any of the following reporting events:

  • Adviser-led secondary transactions, meaning
    transactions led by the adviser or its related persons whereby
    private fund investors are offered the choice to sell, convert, or
    exchange their interests in the reporting fund;19

  • General partner or limited partner
    clawback
    20 in an aggregate amount exceeding
    10% of the reporting fund’s aggregate capital
    commitments;21 and

  • General partner removal, or investment period or fund
    termination
    , where such action is taken by fund
    investors.22

Upon the occurrence of a reporting event, a private equity
adviser would file Section 6 of Form PF as a standalone filing.
Section 6 requires the adviser to provide certain biographical
information about the reporting fund,23 applicable
information on the reporting event, and provides an opportunity for
the adviser to include any explanatory notes relating to the
reporting event.24

Lowered Threshold for Large Private Equity Adviser
Reporting

The Proposal would lower the reporting threshold for large
private equity advisers from $2 billion to $1.5 billion in private
equity fund assets under management.

Revisions to Reporting Items for Private Equity Advisers

The Proposal would add the following new questions for private
equity funds to Section 4.

  • Controlled portfolio company ownership. Question
    67 would require private equity advisers to report the number of
    controlled portfolio companies a reporting fund
    owns.25

  • Investment strategy reporting. Question 68 would
    require private equity advisers to select each reporting fund’s
    investment strategy from a prescribed list, including, among other
    options, various subtypes of private credit and private equity
    strategies, real estate and digital assets
    strategies.26

  • Portfolio company restructuring or
    recapitalization. 
    Question 70 would require that private
    equity advisers report whether the reporting fund restructured or
    recapitalized a portfolio company following its investment
    period.27

  • Investments in different levels of a portfolio
    company’s capital structure.
     Question 71 would
    require private equity advisers to report whether a reporting fund
    held an investment in one level of a portfolio company’s
    capital structure where another fund advised by the private equity
    adviser or its related persons held an investment in a different
    level of such company’s capital structure.28

  • Fund-level borrowings.  Question 72 would require
    private equity advisers to report whether a reporting fund has the
    ability to borrow at the fund level as an alternative or complement
    to financing of portfolio companies and indicate the actual and
    available amount of borrowings during the reporting
    period.29

  • Portfolio company financing.  Question 74 would
    require private equity advisers to report whether the adviser or
    its related persons provided financing or extended credit to a
    portfolio company of a reporting fund and disclose the total dollar
    amount of such financing or credit.30

  • Floating rate borrowings of controlled portfolio
    companies. 
    Question 82 would require private equity
    advisers to report the percentage of aggregate borrowings for a
    controlled portfolio company that are at a floating (rather than
    fixed) rate.31

The Proposal also includes amendments to the following questions
in Section 4.

  • Events of default. Revisions to current question
    74 would require private equity advisers to provide additional
    information about the type of reporting events of default (e.g.,
    payment default of the fund or a controlled portfolio
    company).32

  • Bridge financing and counterparties.  Amendments
    to current question 75 would require additional information about
    bridge financing providers and counterparties for controlled
    portfolio companies.33

  • Geographic information.  Revisions to current
    question 78 would require more specific geographic information on
    investments by private equity funds.34

Large Liquidity Fund Adviser Reporting

The proposed amendments include changes to Form PF designed to
align Liquidity Fund reporting with the amendments the SEC has
proposed to Form N-MFP for money market funds. These changes
include: (i) additional or enhanced reporting on operational
information (e.g., stable pricing and NAV
calculations);35 (ii) changes to how advisers
report certain asset and portfolio
information;36 (iii) revisions to certain creditor
information reporting;37 (iv) refined investor and
beneficial ownership reporting;38 (v) additional
information on disposition of portfolio
securities;39 and (vi) changes to the definitions
of WAL (weighted average life) and WAM (weighted average
maturity).40

Footnotes

1. Form PF defines a large hedge fund adviser to mean an
adviser that, collectively with its related persons, has at least
$1.5 billion in hedge fund assets under management. Form PF
Instruction 3 (p. 2).

2. As of the date of this Alert, the Release has not been
published in the Federal Register.

3. Section 5 (p. 46).

4. Item B of Section 5 (p. 47). The Release notes that,
for example, this reporting event would capture the following
scenarios (assuming a most recent NAV of $1 billion): (i) losses of
$20 million per business day for 10 consecutive business days; or
(ii) a loss of $200 million in a single business day.

5. Item C of Section 5 (p. 47).

6. Item D of Section 5 (p. 48).

7. Item E of Section 5 (p. 49).

8. Item F of Section 5 (p. 49).

9. Item G of Section 5 (p. 50).

10. The Proposal defines a “significant disruption
or degradation” to mean, in instances where the reporting
fund’s key operations are reasonably measurable, a 20%
disruption or degradation of normal volume or capacity. The
Proposal does not specify what would constitute a significant
disruption or degradation where key operations are not measurable.
Form PF Glossary of Terms (p. 12).

11. The Proposal defines “key operations” to
mean operations necessary for (i) the investment, trading,
valuation, reporting, and risk management of the reporting fund;
and (ii) the operation of the reporting fund in accordance with the
federal securities laws and regulations. Form PF Glossary of Terms
(p. 6).

12. Item H of Section 5 (p. 50).

13. While the Release sets out these examples, the
Proposal does not otherwise specify what types of events would
constitute an operations event, nor does it provide any
clarification regarding what might constitute a “significant
disruption or degradation” would mean where the fund’s key
operation

14. Item I of Section 5 (p. 51).

15. Item J of Section 5 (p. 52).

16. Item A of Section 5 (p. 46).

17. Item K of Section 5 (p. 52).

18. Section 6 (p. 53).

19. Item B of Section 6 (p.54)

20. The Proposal defines a “general partner
clawback” to mean any obligation under the reporting
fund’s governing documents for a general partner, its related
persons or their ultimate owners to return performance-based
compensation. Form PF Glossary of Terms (p. 4). The Proposal
defines a “limited partner clawback” to mean any
obligation under the reporting fund’s governing documents for
an investor to return any portion of a fund distribution to satisfy
a fund liability, obligation or expense. Form PF Glossary of Terms
(p. 7).

21. Item C of Section 6 (p.54)

22. Item D of Section 6 (p.54)

23. Item A of Section 6 (p. 53).

24. Item E of Section 6 (p. 54).

25. Section 4, Item B, Question 67 (p. 40)

26. Section 4, Item B, Question 68 (p. 40).

27. Section 4, Item B, Question 70 (p. 41).

28. Section 4, Item B, Question 71 (p. 42).

29. Section 4, Item B, Question 72 (p. 42).

30. Section 4, Item B, Question 74 (p. 42).

31. Section 4, Item B, Question 82 (p. 43).

32. Section 4, Item B, Question 83 (p. 43).

33. Section 4, Item B, Question 84 (p. 44).

34. Section 4, Item B, Question 69 (p. 41).

35. Section 3, Item B, Questions 52-53
(p.32).

36. Section 3, Item B, Questions 53 (p. 32) and 63
(p.36).

37. Section 3, Item C, Question 55 (p. 33).

38. Section 3, Item D, Questions 58 and 59 (p.
34).

39. Section 3, Item F (p.39).

40. Form PF Glossary of Terms (p. 14).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

https://www.mondaq.com/unitedstates/financial-services/1158364/sec-proposes-updates-to-form-pf

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