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Securities and Exchange Commission proposing to amend Form PF reporting

26 January 2022

The SEC is proposing amendments to the Form PF for certain SEC-registered investment advisers to private funds to incorporate more current reporting upon the occurrence of key events

The proposals 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
  • include current reporting data for hedge funds

A high-level summary of the proposed changes is set out below:

Overview

Proposal & Rationale

Proposed amendment to Section 5 and 6 to include Current Reporting data for Large Hedge Fund Advisers and Advisers to Private Equity Funds

Currently, large hedge fund advisers file Form PF quarterly and private equity advisers file annually resulting in stale data.

The proposed current reporting requirements would provide current information of the causes of the reporting event, the potential impact on investors and the financial system, and any potential regulatory responses. The proposals set forth amendments to Form PF to include current reporting in sections 5 (Large Hedge Fund Advisers) and 6 (Private Equity Advisers) regarding events that could signal distress or financial stability risks or potential investor harm

Advisers would file current reports for reporting events within one business day of the occurrence of a reporting event

Proposal that Large Hedge Fund Adviser Current Reporting on Qualifying Hedge Funds to report within one business day of the occurrence of one or several reporting events at qualifying hedge funds that they advise as part of a new section 5

Reporting events include:

·         extraordinary investment losses

·         certain margin events

·         counterparty defaults

·         material changes in prime broker relationships

·         changes in unencumbered cash

·         operations events

·         certain events associated with redemptions

Subject to an objectivity test on such events

Extraordinary investment losses

Threshold triggers such as loss equal to or greater than 20 percent of a fund’s most recent net asset value over a rolling 10 business day period as of the data reporting date at the end of the reporting fund’s most recent reporting period.

Certain margin events

Report significant increases in the reporting fund’s requirements for margin, collateral, or an equivalent. Such as 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 to be reported within one business day.

 

Material Change in Relationship with Prime Broker

Require the adviser to report a material change in the relationship between the reporting fund and a prime broker.

Changes in Unencumbered Cash

 

Report a significant decline in holdings of unencumbered cash where 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.

Operations Events Proposed

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 operations necessary for:

o   the investment

o   trading

o   valuation

o   reporting and risk management of the reporting fund

 

·         Operation of the reporting fund in accordance with the Federal securities laws and regulations.

 

·         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.

 

Withdrawals and Redemptions

 

Report when 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).

 

 

Overview

Proposal & Rationale

Private Fund Adviser Current Reporting on Private Equity Funds

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.

It is therefore being proposed that advisers to private equity funds to file a current report within one business day of a reporting event.

The reporting events include:

·         execution of an adviser led secondary transaction

·         implementation of a general partner or limited partner clawback

·         removal of a fund’s general partner, termination of a fund’s investment period, or termination of a fund.

 

Adviser-led secondary transactions.

 

 

 

 

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.

Definition of “adviser-led secondary transaction” being any transaction initiated by the adviser or any of its related person 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.

 

General partner or limited partner clawback

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.

Definition of “general partner clawback” being

 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.

 

Removal of general partner,

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

(3) elected to terminate the fund, in each case as contemplated by the fund documents.

Reporting being on the effective date of the applicable removal event and a description of such removal event.

Proposal to amend Section 4 of Form PF threshold - Large Private Equity Adviser Reporting

Proposal to amend the current threshold:

(1) lower the reporting threshold from $2 billion to $1.5 billion in private equity fund assets under management

(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.

Further information to be collected from Large Private Equity Advisers

Proposal to include questions on the following:

·         Private equity fund investment strategies restructuring/recapitalization of a portfolio company

·         Reporting on investments in different levels of a single portfolio company’s capital structure by funds advised by an adviser or a related person

·         Investments in different levels of a single portfolio company’s capital structure by related funds

·         Fund-level borrowings.

Financing of portfolio companies - adviser to report whether the portfolio company 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.

Floating rate borrowings of controlled portfolio companies (CPCs)- 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

Events of default, bridge financing to controlled portfolio companies, and geographic breakdown of investments.

Large Liquidity Fund Adviser Reporting Section 3

Proposed amendments to 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:

·         How advisers report operational information

·         Assets and portfolio information

·         Financing information

·         Investor information

·         Disposition of portfolio securities

The SEC is seeking feedback on the nature of proposed data, timelines for the reporting and the manner of such reporting being proposed.

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