The SEC has recently adopted final Form PF, which requires reporting of certain information by advisers to hedge funds and private equity groups, as required by the Dodd-Frank Act.

The SEC believes Form PF, as adopted, addresses the concerns of many commenters so that the final Form will significantly reduce the burden of reporting and clarify how commenters are expected to respond. In particular:

• The certification language was removed.  This would have required an authorized individual to affirm “under penalty of perjury” that the statements made in Form PF are “true and correct.” However, a number of commenters expressed concern that such a standard would be inappropriate for Form PF because the Form requires advisers to provide estimates and exercise significant judgment in preparing responses.
• The ability of advisers to rely on their internal methodologies when reporting on Form PF was increased.  This change is intended, together with the removal of the certification, to clarify that Form PF does not require the time or expense involved in, for instance, an audit of the information included on Form PF

Form PF is comprised for four sections.

Section 1

Each adviser required to file Form PF must complete all or part of Section 1. This Section of the Form is divided into three parts: Section 1a requires information regarding the adviser’s identity and assets under management, Section 1b requires limited information regarding the size, leverage and performance of all private funds subject to the reporting requirements, and Section 1c requires additional basic information regarding hedge funds.

Section 2

A private fund adviser must complete Section 2 of Form PF if it had at least $1.5 billion in hedge fund assets under management as of the end of any month in the prior fiscal quarter. This Section of the Form requires additional information regarding the hedge funds these advisers manage, which the SEC believes it has tailored to focus on relevant areas of financial activity that have the potential to raise systemic concerns.  For example:

• Section 2a requires certain aggregate information about the hedge funds the adviser manages. For example, one question requires the adviser to report the value of assets invested (on a short and long basis) in different types of securities and commodities (e.g., different types of equities, fixed income securities, derivatives, and structured products).
• Another question requires the adviser to report the value of turnover in certain assets classes (including listed equities, corporate bonds, sovereign bonds and futures) in the hedge funds’ portfolios during the reporting period. This is intended to provide an indication of the adviser’s frequency of trading in those markets and the amount of liquidity hedge funds contribute to those markets.
• Section 2b also requires for each qualifying hedge fund data regarding certain hedge fund risk metrics. For instance, Question 40 requires the adviser to report value at risk (“VaR”) for each month of the reporting period if, during the reporting period, the adviser regularly calculated a VaR metric for the qualifying hedge fund.

Certain data in Form PF, while filed with the CFTC and SEC on an annual or quarterly basis, must be reported on a monthly basis to provide sufficiently granular data to allow FSOC to better identify trends and to mitigate “window dressing.”  Nearly all of these requirements appear in Section 2 of the Form, which only large hedge fund advisers complete. The SEC believes that rapidly changing markets and portfolios merit collecting certain information more often than on a quarterly basis, and it was not persuaded that the large hedge fund and large liquidity fund advisers required to respond to these questions will be overwhelmed by this reporting. Also, as noted, the SEC made several changes that increase the ability of advisers to rely on their own internal methodologies in responding to the Form, which is expected to ease the burden of reporting monthly information by clarifying that advisers need not incur substantial additional burdens in verifying the data.

Section 3

A private fund adviser must complete Section 3 of Form PF if it manages one or more liquidity funds and had at least $1 billion in combined liquidity fund and registered money market fund assets under management as of the end of any month in the prior fiscal quarter.

Section 4

A private fund adviser must complete Section 4 of Form PF if it had at least $2 billion in private equity fund assets under management as of the end of its most recently completed fiscal year.

The SEC acknowledges that several potentially mitigating factors suggest that private equity funds may have less potential to pose systemic risk than some other types of private funds, and this has been taken into account in requiring substantially less information with respect to private equity funds than with respect to hedge funds or liquidity funds. According to the SEC the design of Form PF, however, is not intended to reflect a determination as to where systemic risk exists but rather to provide empirical data to FSOC with which it may make a determination about the extent to which the activities of private equity funds or their advisers pose such risk.  Based on SEC staff’s consultation with staff representing FSOC’s members, the SEC continues to believe that targeted information regarding private equity leverage practices may be important to FSOC’s monitoring of systemic risk.

The SEC, however, adopted Form PF with several significant changes that reduce the frequency of reporting with respect to private equity funds, and more closely align the required reporting with information available on portfolio company financial statements.

Section 4 requires that large private equity advisers report certain information for each private equity fund they manage, including certain information about guarantees of portfolio company obligations and the leverage of the portfolio companies that the fund controls.  Most of the reporting in Section 4 relates to portfolio companies because the SEC understands that leverage in private equity structures is generally incurred at the portfolio company level. This reporting is limited to controlled portfolio companies, rather than portfolio companies generally, to ensure that advisers are able to obtain the relevant information without incurring potentially substantial additional burdens.

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