SEC Increases Hedge Fund Disclosure Requirements With Form PF
The hedge fund industry is facing unprecedented registration and disclosure requirements as a result of the Dodd-Frank Act. The Securities and Exchange Commission (“SEC”) has recast Form ADV, the US registration form for investment advisors, so that the entire form is now public on the agency’s website. Form ADV is also broader in terms of both the types of advisors who must register, which now includes advisors who manage at least $150 million, as well as the range of information that must be reported on a fund-by-fund basis. Yet, the new Form PF (initials stand for “private funds”) goes beyond anything required by Form ADV. In a marked departure from past practices, the new form significantly adds to the scope and detail of fund-by-fund disclosures.
“Identifying private fund advisors with the biggest compliance risks is one of the Agency’s priorities. The data we’re going to get coming in this year will help us in risk targeting firms and understanding where we should go for exams,” according to Norm Champ, deputy director of the SEC’s Office of Compliance Inspections and Examinations. In order to achieve this goal, Congress used Dodd-Frank to amend §204(b) of the Investment Advisors Act of 1940 to provide for reporting by SEC-registered investment advisors on assets under management, use of leverage, counterparty risk exposure, trading and investment positions, types of assets held, trading practices, valuations policies and practices of the fund, side-letter agreements, as well as “such other information as the [SEC], in consultation with [the FSOC], determines necessary and appropriate . . . for the assessment of systemic risk.” Thus, Form PF requires disclosure of information typically viewed as highly proprietary.
In determining who must report under Form PF, the SEC has set out a two part test. First, only SEC-registered investment advisors must report. Second, an SEC-registered advisor need only report if it meets a $150 million threshold where it advises private funds with an aggregate of $150 million or more in regulatory assets under management (“Regulatory AUM”) as of the end of its most recently completed fiscal year. In addition to an advisor’s total private fund AUM, the SEC has included certain additional categories of assets in the calculation of Regulatory AUM. Both (i) “parallel managed accounts” managed by the advisor, and (ii) private funds advised by “related persons” of the advisor, that are not “separately operated”, are included in the calculation. “Parallel managed accounts” refer to those that pursue substantially the same investment objective and strategy and invest in substantially the same positions as private funds advised by the firm. The term “related persons” encompasses all other investment advisors directly or indirectly controlling, controlled by, or under common control with the advisor. The term “separately operated” means that the advisor (i) has no business dealings with the related person in connection with its advisory services; (ii) does not conduct shared operations with the related person; (iii) does not refer clients or business to the related person and vice versa; (iv) does not share supervised persons or premises with the related person; and (v) has no reason to believe that its relationship with the related person otherwise creates a conflict of interest with the advisor’s clients.
Form PF filers fall into two categories: large private fund advisors and small private fund advisors. “Large private fund advisors” include large hedge fund advisors (having at least $1.5 billion in AUM attributable to hedge funds as of the end of any month in the prior fiscal quarter), large liquidity fund advisors (having at least $1 billion in AUM attributable to liquidity funds and SEC-registered money market funds as of the end of any month in the prior fiscal quarter), and large private equity advisors (having at least $2 billion in AUM attributable to private equity funds as of the completed fiscal year). All other Form PF filers fall under the category of “small private fund advisors.”
The frequency and timing of disclosure depends on the filing category. Large Private Fund Advisors that have at least $5 billion attributable to hedge funds, liquidity funds, or private equity funds are the earliest filers. Large Hedge Fund Advisors must file their first Form PF within 60 days of the end of such advisors’ fiscal quarter next after June 15, 2012; Large Liquidity Fund Advisors must file within 15 days. Large Private Equity Advisors have 120 days after their first fiscal year ending on or after June 15, 2012. All other filers must make their first filing by the end of either their first fiscal year (hedge funds and liquidity fund advisors) or fiscal year (private equity fund advisors) ending on or after December 15, 2012.
Dodd-Frank also mandates periodic reporting on Form PF. Large Hedge Fund Advisors must file quarterly within 60 days of the fiscal quarter-end, and large liquidity advisors must file within 15 days of the fiscal quarter-end. All other filers must file within 120 days of each fiscal year-end.
Most private fund advisors will only be required to comply with Section 1 of Form PF. Under Section 1, advisors will be required to make fund-by-fund disclosure of the fund’s name or identification number, assets under management, leverage, ownership attributable to the fund’s five largest investors, as well as the gross and net historical performance results for the end of each fiscal year. Additionally, all hedge fund advisors must disclose the percentage of assets used in certain strategies, the five counterparties to which the fund has its greatest net credit exposure, and the percentage of transactions made on both regulated and over-the-counter exchanges. Advisors that fall under the category of “Large Private Fund Advisor” are subject to additional disclosure requirements depending on the type of funds advised.
Unlike Form ADV, Form PF is not publicly disclosed. However, in the era of WikiLeaks and other unauthorized records leaks, investment advisors are worried that anything disclosed to the government will not stay private for long. An advisor can preserve the anonymity of a private fund by maintaining the fund’s identity on its books and records in numerical or alphabetical code pursuant to Rule 204-2(d) under the Investment Advisors Act. Form PF permits the advisor to identify the fund using the same designation as in the advisor’s recordkeeping practices in place of the fund’s name on the form. To achieve this purpose, an advisor may have to consider changing its overall recordkeeping practices so that it routinely identifies funds solely by numerical or alphabetical designation.
Private fund advisors should be prepared to comply with the new requirements of Form PF according to the implementation schedule mentioned above. Please reach out to us if you have any questions about how the new Form PF rules or any other provision of the Dodd-Frank Act affects your private fund business.