SEC Adopts Changes to Form PF for Private Equity and Large Hedge Fund Advisers
The final amendments require:
- new quarterly event-based reporting for all private equity fund advisers;
- new or expanded categories of information to be reported annually by private equity fund advisers that manage over $2 billion; and
- additional reporting (within 72 hours) of certain triggering events for large hedge fund advisers.
On May 3, 2023, the US Securities and Exchange Commission (SEC), in a 3-2 decision, adopted a final rule that modifies Form PF’s reporting requirements for certain registered investment advisers to private equity funds, hedge funds, and liquidity funds (collectively, private funds).Advisers Act Release No. 6297, SEC (May 3, 2023), https://www.sec.gov/rules/final/2023/ia-6297.pdf. Form PF was adopted in 2011 to provide the Financial Stability Oversight Council (FSOC) and the SEC with important information about the basic operations and strategies of private funds and to help establish a picture of potential systemic risk in the private fund industry. Form PF is kept confidential by the SEC and FSOC, and Form PF filings are not available to the public. Currently, private equity fund advisers file Form PF annually, while large hedge fund advisers and large liquidity fund advisers file quarterly.
The final rule adopts many aspects of the original proposalAdvisers Act Release No. 5950, 87 Fed. Reg. 9,106 (Feb. 17, 2022), https://www.govinfo.gov/content/pkg/FR-2022-02-17/pdf/2022-01976.pdf. while also scaling back certain portions.See a summary of the proposed amendments in our Client Alert SEC Proposes Changes to Form PF for Private Equity and Large Hedge Fund Advisers. In particular, the final rule:
- Requires all private equity fund advisers that file Form PF to report within 60 days after a fiscal quarter the occurrence of:
- Completion of an “adviser-led secondary transaction”An adviser-led secondary transaction is “any transaction initiated by the adviser or any of its related persons that offers private fund investors the choice to: (1) sell all or a portion of their interest 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.” This is the same definition as used in the SEC’s Private Fund Advisers proposal. See Advisers Act Release No. 5955, 87 Fed. Reg. 16,886 (Mar. 24, 2022). or
- Investor election to remove a fund’s general partner, terminate a fund’s investment period, or terminate a fund
- Expands the information that large private equity fund advisers must report in their annual Form PF filing, including information about general partner and limited partner clawbacks, fund-level borrowings, events of default, and bridge financings
- Requires large hedge fund advisers to submit reports (Current Reports) to the SEC within 72 hours of the occurrence of certain triggering events (Current Reporting Events) that the SEC believes may indicate significant or otherwise signal potential systemic risk, such as certain extraordinary investment losses, margin and default events, certain changes to prime broker relationships, operations events, and events associated with withdrawals and redemptions
The changes affect registered investment advisers that are (i) private equity fund advisers with at least $150 million in private equity fund assets under management, (ii) large hedge fund advisers with at least $1.5 billion in hedge fund assets under management, and (iii) large private equity fund advisers with at least $2 billion in private equity assets under management.In a departure from the proposed $1.5 billion threshold, the SEC will leave intact the $2 billion threshold for determining whether a
particular adviser is deemed a large private equity fund adviser.
The effective date for the new event-based reporting requirements is six months after publication in the Federal Register. Amendments to the existing sections of Form PF will become effective one year after publication in the Federal Register, which means annual Form PF filings for advisers with a December fiscal year-end will not be affected until 2025 (covering fiscal year 2024).
Private Equity Fund Advisers
All Private Equity Fund Advisers — Event Reports
Private equity fund advisers that file Form PF will need to file newly adopted “private equity event reports” on section 6 of Form PF triggered by the occurrence of any of the following events:
- Execution of an adviser-led secondary transaction
- Investor election to remove a fund’s general partner, terminate a fund’s investment period, or terminate the fundIn a modification to the proposed amendments, certain general partner and limited partner clawback events will only need to be
reported by large private equity advisers annually under section 4.
Private equity event reports will need to be filed within 60 days of the end of the fiscal quarter during which such event took place.
Large Private Equity Advisers Only — Additional Disclosures
The final rule requires annual Form PF filings to include information and disclosures relating to (i) investment strategies, (ii) fund-level borrowings, (iii) events of default by a fund or a controlled portfolio company (CPC), (iv) bridge financings provided to CPCs, and (v) the geographical exposure of a fund by country.
The final rule will require large private equity advisers to report information relating to:
- Any general partner clawbacks that occurred during the reporting periodThe general partner clawback reporting is triggered when the general partner becomes obligated to return to the fund any
performance-based compensation more than the amount it was ultimately entitled to receive based on the fund’s governing
documents (regardless of when such compensation is actually returned).
- Limited partner clawback(s) that exceed an aggregate amount over the life of the relevant fund equal to 10% of such fund’s aggregate capital commitments, plus each later limited partner clawback over the remaining duration of the fundThe limited partner clawback reporting is triggered when the aggregate limited partner clawbacks over the course of a fund’s life
exceed 10 percent of the fund’s aggregate capital commitments at such time. The amended section 4 will not require reporting
of information relating to the following events set out in the proposed amendments: (i) Restructuring or recapitalization of
portfolio companies after the completion of the fund’s investment period; (ii) Investments in portfolio companies in which another
fund advised by the manager or such manager’s related persons invested in a different class of securities, (iii) Financing of or
extension of credit to portfolio companies by the manager or the manager’s related persons, (iv) Floating rate indebtedness of
CPCs, (v) A fund’s ownership of CPCs.
Large Hedge Fund Advisers
The final rule requires large hedge fund advisers to file Current Reports with the SEC as soon as practicable but no later than 72 hours after the occurrenceOr 72 hours after the time at which the adviser reasonably determines such Current Reporting Event to have occurred. of one of the following:The SEC did not adopt the proposed requirement that an adviser report a significant decline in holdings of unencumbered cash,
as the SEC recognized that this requirement could result in a large number of false positives in the normal course of certain
strategies. Additionally, the SEC initially proposed a one business-day requirement for reporting but has lengthened the time to
seventy-two hours to account for weekends, holidays and the time required for advisers to obtain and evaluate relevant data to
confirm the occurrence of a Current Reporting Event and provide accurate information in the current report. The SEC also
changed the scope of certain of the Current Reporting Events from those in the proposed amendments, including, for example,
eliminating the definition of “significant disruption or degradation,” which was to be determined based on a 20 percent
degradation of normal volume or capacity of a fund.
- Extraordinary investment losses (over 20% of a fund’s reporting fund aggregate calculated value (RFACV)RFACV is a signed value that is calculated on a net basis and includes “[e]very position in the reporting fund’s portfolio, including
cash and cash equivalents, short positions, and any fund-level borrowing, with the most recent price or value applied to the
position for purposes of managing the investment portfolio.” See Form PF Glossary of Terms as set out in the final rule. RFACV
may be calculated based on an adviser’s methodologies and conventions, provided that such information is consistent with the
adviser’s internal reporting. In addition, advisers do not have to adjust RFACV for accrued fees or expenses, and position values
do not have to be determined based on fair valuation procedures. The SEC changed certain calculations to be based on
RFACV rather than a fund’s most recent net asset value to lessen over or under-reporting and reflect current statistics used in
the industry.) over a rolling 10-business-day period
- Significant increases in the requirements for margin, collateral, or an equivalent over a rolling 10-business-day period based on the average daily RFACV
- Receipt of a notice of default by the fund on a call for margin, collateral, or an equivalent, leading to a deficit that the fund will be unable to cover or address by adding funds
- A determination by the manager that a fund cannot meet a call for margin, collateral, or an equivalent
- Default by a fund’s counterparty on a call for margin, collateral, or an equivalent, or fails to make any other payment in the time and form contractually required (over 5% of a fund’s RFACV)
- A material restriction or termination of the relationship between a fund and one or more of its prime brokers
- Significant disruption or degradation of a fund’s critical operations, including those resulting from events that occur at the fund, the adviser, or a service provider
- Various events about withdrawals and redemptions
An adviser can amend previously filed Current Reports if the adviser discovers that information filed was not accurate at the time of filing.The adopting release notes that 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
Large Liquidity Fund Advisers Unaffected (for Now)
The SEC proposed amendments to the reporting requirements for advisers to large liquidity funds to align with the reporting requirements for money market funds under proposed updates to Form N-MFP. The SEC said in the adopting release that it is continuing to consider comments regarding such proposals and is not adopting the proposed amendments at this time.
“Digital Assets” Left Undefined
One significant proposed amendment was to include a definition of “digital assets” in connection with a fund’s investment strategy. The final rule does not provide a definition for “digital assets” but does list digital assets as one of the categories of investment strategies.
Information collected on Form PF will likely inform future SEC rulemakings in the private fund space, and new controls and processes related to the requirements of the final rule will likely require private equity and large hedge fund advisers to incur significant additional costs.
The rule’s effective date includes two parts: (i) current and quarterly event reporting compliance within six months of publication in the Federal Register, and (ii) all other amendments within 12 months of publication in the Federal Register, which for most large private equity advisers will be implemented in their 2025 Form PF filing for fiscal year 2024.