SEC Proposes Heightened Reporting by Private Equity and Hedge Fund Advisers on Form PF

Earlier today, the SEC proposed amendments[1] to Form PF (“Proposed Amendments”) that would significantly increase the reporting requirements for certain private fund advisers, including by:

• requiring advisers to private equity funds[2] and “large hedge fund advisers”[3] to report within one business day of the occurrence of events that, according to the Proposed Amendments, indicate significant stress at a fund that could harm investors or signal risk in the broader financial system; and
• lowering the reporting threshold for “large private equity advisers”[4] from $2 billion to $1.5 billion in “private equity fund assets under management” and requiring these advisers to provide additional information about the private equity funds they advise to enhance the information used by the Financial Stability Oversight Council for risk assessment and the SEC’s regulatory programs.

Private Equity Funds

Under proposed Section 7 to Form PF, advisers to private equity funds would be required to report within one business day of the occurrence of any of the following regarding a private equity fund that it advises:

• completion (i.e., execution) by the “reporting fund”[5] of an “adviser-led secondary transaction;”[6]
• implementation by the reporting fund of (i) a general partner clawback or (ii) a limited partner clawback (or clawbacks) in excess of an aggregate amount equal to 10% of the fund’s aggregate capital commitments; or
• receipt by the reporting fund or the adviser of notification that fund investors have removed the general partner of the reporting fund, elected to terminate the reporting fund’s investment period, or elected to terminate the reporting fund’s term, in each case as contemplated by the fund documents.

In addition, the Proposed Amendments would revise reporting requirements for large private equity advisers by:

• decreasing the reporting threshold for large private equity advisers from $2 billion in private equity assets under management to $1.5 billion; and
• amending Section 4 of Form PF for large private equity advisers to gather the following additional information regarding the private equity funds it advises:
• the reporting fund’s investment strategy (i.e., buyout, growth, private credit, distressed debt, direct lending, secondaries, etc.);
• whether a portfolio company was restructured or recapitalized following the reporting fund’s investment period, and if so, to provide the name of the portfolio company and the effective date of the restructuring;
• investments in different levels of a single portfolio company’s capital structure by funds advised by an adviser or a related person;
• whether a reporting fund borrows or has the ability to borrow at the fund level as an alternative or complement to the financing of portfolio companies, including (i) information on each borrowing or other cash financing available to the fund, (ii) the total dollar amount available, and (iii) the average amount borrowed over the reporting period;
• whether the adviser 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;
• the percentage of the aggregate borrowings of a reporting fund’s controlled portfolio companies (“CPCs”) that is at a floating rate rather than a fixed rate;
• the number of CPCs a reporting fund owns;
• additional information about the nature of reported events of default, such as whether it is a payment default of the reporting fund, a payment default of a CPC, or a default relating to a failure to uphold terms under the applicable borrowing agreement;
• the identity of the institutions providing bridge financing to the adviser’s CPCs and the amount of such financing, and additional counterparty identifying information (i.e., LEI (if any) and if the counterparty is affiliated with a major financial institution, the name of the financial institution); and
• each country to which the reporting fund’s investments in portfolio companies represent exposure of 10% or more of the reporting fund’s NAV.

Hedge Funds

Under proposed Section 5 to Form PF, large hedge fund advisers would be required to report within one business day of the occurrence of any of the following regarding a “qualifying hedge fund”[7] that it advises:

• a cumulative loss by the reporting fund equal to or greater than 20% of the fund’s most recent NAV over a rolling 10 business day period;
• significant margin and counterparty default events :
  • a cumulative increase in the total dollar value of margin, collateral, or an equivalent posted by the reporting fund of more than 20% of the reporting fund’s most recent NAV over a rolling 10 business day period;
  • receipt by the adviser of notification that the reporting fund is in default on a call for margin, collateral or an equivalent, resulting in a deficit that the reporting fund will not be able to cover or address by adding additional funds, or the adviser determines that the reporting fund is unable to meet a call for increased margin, collateral or an equivalent;
  • a counterparty to the reporting fund does not meet a call for margin, collateral or equivalent or fails to make any other payment, in the time and form contractually required (taking into account any contractually agreed cure period), and the amount involved is greater than 5% of the most recent NAV of the reporting fund;
• a material change in the relationship between the reporting fund and any of its prime brokers (e.g., changes concerning material trading limits or investment restrictions on the reporting fund, termination of prime broker relationship);
• the value of the reporting fund’s unencumbered cash declines by more than 20% of the reporting fund’s most recent NAV over a rolling 10 trading day period;
• the reporting fund or adviser experiences a significant disruption or degradation of the reporting fund’s “key operations;”[8]
• receipt of cumulative requests for redemption in the reporting fund equal to or more than 50% of the most recent NAV (after netting against subscriptions and other contributions from investors received and contractually committed); or
• the reporting fund is unable to pay redemption requests, or suspends redemptions; and the suspension is in place for more than five consecutive business days.

Next Steps

Significant pushback from the private funds industry is anticipated, both with respect to the substance of the additional reporting requirements and the timing of such reporting.

The public comment period will remain open for 30 days after the Proposed Amendments publication in the Federal Register.

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[1]        See the SEC’s Fact Sheet and Proposing Release regarding the proposed amendments to Form PF.

[2]        As a reminder, Form PF defines a “hedge fund” as any private fund (other than a securitized asset fund): (a) with respect to which one or more investment advisers (or related persons of investment advisers) may be paid a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses); (b) that 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 (c) that may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration); and a “private equity fund” 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.

[3]        “Large hedge fund adviser” means a hedge fund adviser having at least $1.5 billion in “hedge fund assets under management” as of the last day of any month in the fiscal quarter immediately preceding the adviser’s most recently completed fiscal year. “Hedge fund assets under management” means the portion of an investment adviser’s regulatory assets under management (calculated in accordance with Part 1A, Instruction 5.b of Form ADV) attributable to hedge funds that it advises.

[4]        “Large private equity adviser” means a private equity fund adviser having at least $2 billion in “private equity fund assets under management” as of the last day of the adviser’s most recently completed fiscal year. “Private equity fund assets under management” means the portion of an investment adviser’s regulatory assets under management (calculated in accordance with Part 1A, Instruction 5.b of Form ADV) attributable to private equity funds that it advises.

[5]        “Reporting fund” means a private fund as to which an investment adviser must report information on Form PF.

[6]        “Adviser-led secondary transaction” means any transaction initiated by the adviser or any of its related persons that offers private fund investors the choice to: (i) sell all or a portion of their interests in the private fund; or (ii) 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.

[7]        “Qualifying hedge fund” means any hedge fund that has a NAV (individually or in combination with any feeder funds, parallel funds and/or dependent parallel managed accounts) of at least $500 million as of the last day of any month in the fiscal quarter immediately preceding its most recently completed fiscal quarter.

[8]        “Key operations” means 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.