US SEC Announces Significant Amendments To Form PF – Fund Finance

On May 3, 2023, the US Securities and Exchange Commission (the
“SEC”) held an open meeting at which it announced the
adoption, by a 3-2 vote, of amendments to Form PF, the regulatory
reporting form used by certain SEC-registered investment advisers
to private funds to submit confidential reports to the SEC (the
“Final Rule”¹). Form PF will now require
certain filers to provide additional information to the SEC about
the funds they advise. The Final Rule reflects a number of changes
to the initial proposed amendments²(the
“Proposal”) in response to comments received by the
SEC.

This Legal Update provides a brief overview of relevant changes
to Form PF and summarizes some of the SEC’s commentary on the
reasons for those changes. The SEC currently requires advisers to
file Form PF following their fiscal quarter- or year-ends,
depending on the size and type of private funds they advise. As
summarized below, the Final Rule will now require certain advisers
to provide “current reporting” within 72 hours of
material events, including extraordinary investment losses and
significant disruption or degradation of a hedge fund’s
“critical operations.” Other amendments will impose new,
limited quarterly reporting requirements for all private equity
funds as well as changes to certain questions included on annual
reporting for large private equity fund advisers. As is currently
the case, Form PF filings will not be publicly available.

The new reporting requirements are important because the SEC and
the Financial Stability Oversight Council (FSOC) use data from Form
PF to facilitate assessments of US systemic risk presented by the
private fund industry. The new information required to be reported
on Form PF is intended to enhance the SEC’s and FSOC’s
ability to monitor systemic risk and could potentially impact
FSOC’s process for designation of systemically important
financial institutions (SIFIs). The enhanced disclosures are also
intended to bolster the SEC’s regulatory surveillance of
private fund advisers, and enhance investor protection efforts,
including by identifying examination and enforcement concerns and
priorities. The SEC’s experiences with recent market events,
including the COVID-19 turmoil and broader market volatility, have
highlighted the importance of receiving current and robust
information from market participants. As highlighted in the
following summary, the SEC indicated that it will scrutinize the
newly disclosed Form PF events as a substantive matter. Form PF
filers are therefore well advised to review their procedures and
controls and to implement enhanced processes to collect the new
information in compliance with the Final Rule.

I. Summary of New Event-Based Reporting Requirements

• Event Reporting Requirements for Large Hedge Fund
  Advisers to Qualifying Hedge Funds. Large hedge fund
  advisers³ to qualifying hedge funds⁴ will be
  required to file new “current reports” with the SEC after
  occurrence of certain triggering events as soon as practicable but
  no later than 72 hours after these events. Triggering events
  include, among others, extraordinary investment losses, certain
  margin and counterparty events, terminations of, or material
  restrictions on, prime broker relationships, significant disruption
  or degradations of a hedge fund’s “critical
  operations” and certain events regarding withdrawal or
  redemption requests. Notably, the SEC declined to adopt the current
  reporting requirement included in the Proposal related to changes
  in unencumbered cash.⁵

• New “Current Reporting” Thresholds
  

  • Extraordinary Investment Losses. An
    extraordinary investment loss will trigger a reporting obligation
    when a hedge fund’s investment losses are equal to or greater
    than 20% of a fund’s “reporting fund aggregate calculated
    value” (“RFACV”). RFACV is defined as “every
    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” and may be
    calculated using the adviser’s own methodologies and
    conventions of the adviser’s service providers provided that
    these are consistent with information reported internally. This use
    of RFACF represents a change from the Proposal’s use of
    “most recent net asset value” (“MRNAV”) based
    on commenters’ concerns that MRNAV—which would reference
    the NAV in a fund’s most recent quarterly or annual
    filing—would be too dated to be meaningful for purposes of
    the investment loss test.

  
  

  • Margin and Counterparty Events.
    

    • Increases in margin: Reporting obligations are triggered when
      increases in the dollar value of the margin, collateral or their
      functional equivalents posted by a reporting fund at the beginning
      of a given rolling ten-business day period are greater than or
      equal to 20% of the fund’s average daily RFACV during that
      period.

    
    

    • Failure to meet margin calls: Advisers are required to report
      each instance in which a reporting fund is either in default or
      unable to meet a margin call and will be required to provide
      additional information regarding the circumstances of the default
      or failure to meet a margin call.

    
    

    • Counterparty defaults: Reporting obligations are triggered when
      a counterparty to the reporting fund (1) does not meet a margin
      call or has failed to make any other contractually required payment
      (accounting for cure periods) and (2) the amount involved
      is greater than 5% of the fund’s RFACV.

  
  

  • Prime Brokerage Relationship Terminated or Materially
    Restricted. Reporting is required when a prime broker
    terminates its agreement or materially restricts its relationship
    with the fund, in whole or in part, in markets where that prime
    broker continues to be active.

  
  

  • Significant Disruptions of Critical
    Operations. Advisers will be required to report
    “significant disruption or degradations” of a reporting
    fund’s “critical operations,” which refers to
    operations necessary for (1) the investment, trading, valuation,
    reporting, and risk management of the reporting fund; or (2) the
    operation of the reporting fund in accordance with the federal
    securities laws and regulations. Notably, such an operations event
    could arise out of an event impacting the adviser, the reporting
    fund, or a service provider to the reporting fund. The SEC declined
    to adopt a 20% threshold for measuring the significance of
    disruptions after commenters raised concerns about the practicality
    of measuring the significance of a disruption. As a result,
    “significant disruption or degradation” is not defined at
    all, and advisers will need to use their own judgment regarding the
    significance of a disruption (perhaps looking to the proposed 20%
    degradation threshold as a guidepost, even if not
    controlling).

  
  

  • Redemptions and Withdrawals.
    

    • Large withdrawal and redemption requests: Advisers will be
      required to file current reports if the reporting fund receives
      cumulative requests for withdrawals or redemption greater than 50%
      of the reporting fund’s most recent NAV (net of subscriptions
      or other contributions from investors).

    
    

    • Inability to satisfy redemptions or suspension of redemptions:
      An adviser is required to report any instance in which a reporting
      fund is either (1) unable to pay redemption requests or (2) has
      suspended redemptions and the suspension lasts for more than five
      business days.




• Quarterly Event Reporting Requirements for All Private
  Equity Fund Advisers. All private equity fund advisers
  will now be required to include in a quarterly report, within 60
  days after the end of the relevant quarter, the occurrence of
  certain events:
  

  • Adviser-Led Secondary Transactions: This item
    is unchanged from the Proposal and defines an adviser-led secondary
    transaction as “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.” This
    item was retained despite several comment letters arguing that
    adviser-led secondary transactions were not indicative of, or in
    any way related to, systemic instability.

  
  

  • Removal of General Partner or Election to Terminate the
    Investment Period. This item covers situations where
    investors of a private equity fund have (1) removed the adviser or
    an affiliate as the general partner of such fund, (2) elected to
    terminate the fund’s investment period, or (3) elected to
    terminate the fund. Note that this does not require
    reporting of an automatic termination of an investment period. Such
    reporting must include a description of the removal or termination
    event and the applicable effective date.




• Updated Reporting Requirements for Large Private Equity
  Fund Advisers. Large private equity fund
  advisers⁶ will be required to report general partner
  clawbacks or limited partner clawbacks (with the latter subject to
  a threshold of 10% of aggregate commitments) after the applicable
  year-end (as part of the existing filing due 120 days after the end
  of the adviser’s fiscal year). The SEC had initially proposed
  that clawbacks be reported on a current basis by all private equity
  fund advisers but ultimately declined to adopt that broader
  requirement. Several additional questions for large private equity
  fund advisers were also added to collect information designed to
  assist the SEC and FSOC’s ability to monitor changes in market
  trends and to monitor business practices of private equity fund
  advisers, including:
  

  • Further detail on events of default, including the type of
    default (e.g., payment default by a private equity fund or its
    portfolio company);

  
  

  • Identifying the institutions providing bridge financing to a
    private equity fund’s portfolio companies; and

  
  

  • Identifying each private equity fund’s greatest country
    exposures based on a percentage of net asset value.

    Additionally, while the SEC had initially proposed lowering the
    threshold for large private equity fund advisers for purposes of
    section 4 of Form PF from $2 billion to $1.5 billion in private
    equity fund assets under management, it ultimately
    declined to do so at this time.




• Compliance Dates. The amendments to Form PF
  will take effect on two compliance dates.
  

  • The first compliance date for advisers subject to the new
    “current reporting” for hedge funds and quarterly reports
    for private equity funds will begin six months from the date of the
    Final Rule’s publication in the Federal Register.
    Based on publication timing, we expect that these reports will
    therefore become required in late 2023 or early 2024.

  
  

  • The second compliance date, dealing with amendments to the
    existing annual reports for private equity funds, will take effect
    one year from the date of the Final Rule’s publication in the
    Federal Register. This means that such amendments will not
    impact the annual Form PF filings for large private equity fund
    advisers with a December 31 fiscal year-end until their annual
    filing due in April 2025. Nonetheless, such advisers should ensure
    they put in place adequate controls to collect relevant information
    during 2024.

  
  

  • Despite concerns from some commenters regarding the likelihood
    of confusion regarding implementation timing for different parts of
    amended Form PF, the SEC has adopted an accelerated, piecemeal
    approach to compliance dates. The SEC will be doubling down on this
    piecemeal approach since the SEC has, in a joint proposal with the
    US Commodity Futures Trading Commission (CFTC), separately proposed
    to amend other portions of the form later this year.




• Proposed Changes for Liquidity Funds. While
  the Proposal also would have imposed significant new reporting
  requirements for “liquidity funds” (i.e., private money
  market-style funds), the SEC did not finalize that portion of the
  Proposal. However, the SEC has indicated that it is continuing to
  evaluate potential reporting changes for liquidity funds.




• Filing Fees. The new current reporting
  requirements being implemented in the Final Rule will also be
  subject to filing fees. As a practical matter,
  advisers—particularly large hedge fund advisers—will
  likely be well served by maintaining a positive balance in their
  flex-funding account to avoid any issues when up against a tight
  filing deadline.

II. Concluding Thoughts

The Final Rule’s additional reporting requirements highlight
the SEC’s growing scrutiny of the private funds industry and
previews further proposals that may significantly impact the
industry. Based on the SEC’s commentary in the Final Rule, it
is unambiguously pushing for additional avenues to (1) uncover more
information to inform future examinations, investigations, and
policy priorities; and (2) potentially intervene to limit contagion
risk in the event a private fund becomes distressed. At the same
time, the SEC’s commentary throughout the Final Rule
acknowledges public comments both in favor of and against the
proposed changes and has addressed some—though certainly not
all—of the more challenging aspects of the Proposal in the
Final Rule. This promises to be the first of several SEC
rulemakings this year that will have a significant impact on
advisers to private funds, with the joint Form PF amendments with
the CFTC and the broader private fund rule proposal on the
near-term horizon.

In light of the uncertainties with the compliance timeline,
which is dependent on the Federal Register publication of
the Final Rule, current and quarterly event reporting Form PF
filers are therefore well advised to begin reviewing their
procedures and controls and to implement enhanced processes to
collect the new information beginning in Q4 2023.

We continue to evaluate the amended Form PF and its impact on
advisers. We expect to provide updates as the other SEC rulemakings
impacting private funds are finalized. Please reach out to your
regular Mayer Brown contact with any questions.

Footnotes

1. Final Rule: Amendments to Form PF to Require Event
Reporting for Large Hedge Fund Advisers and Private Equity Fund
Advisers and to Amend Reporting Requirements for Large Private
Equity Fund Advisers (sec.gov) (May 3, 2023).

2. Proposed Rule: Amendments to Form PF to Require
Current Reporting and Amend Reporting Requirements for Large
Private Equity Advisers and Large Liquidity Fund Advisers
(sec.gov) (Jan. 26, 2022).

3. Meaning any adviser having at least $1.5 billion in
regulatory assets under management attributable to hedge funds as
of the end of any month in the prior fiscal quarter.

4. A qualifying hedge fund is defined in Form PF as
“any hedge fund that has a net asset value (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 your
most recently completed fiscal quarter.”

5. The SEC acknowledged that these reports could generate
“false positives” arising out of ordinary course trading
activity or otherwise attributable to the variety of different
trading strategies used by hedge funds.

6. Meaning any adviser having at least $2 billion in
regulatory assets under management attributable to private equity
funds as of the last day of the adviser’s most recently
completed fiscal year.

Visit us at mayerbrown.com

Mayer Brown is a global services provider comprising
associated legal practices that are separate entities, including
Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP
(England & Wales), Mayer Brown (a Hong Kong partnership) and
Tauil & Chequer Advogados (a Brazilian law partnership) and
non-legal service providers, which provide consultancy services
(collectively, the “Mayer Brown Practices”). The Mayer
Brown Practices are established in various jurisdictions and may be
a legal person or a partnership. PK Wong & Nair LLC
(“PKWN”) is the constituent Singapore law practice of our
licensed joint law venture in Singapore, Mayer Brown PK Wong &
Nair Pte. Ltd. Details of the individual Mayer Brown Practices and
PKWN can be found in the Legal Notices section of our website.
“Mayer Brown” and the Mayer Brown logo are the trademarks
of Mayer Brown.

© Copyright 2023. The Mayer Brown Practices. All rights
reserved.

This Mayer Brown article provides information and
comments on legal issues and developments of interest. The
foregoing is not a comprehensive treatment of the subject matter
covered and is not intended to provide legal advice. Readers should
seek specific legal advice before taking any action with respect to
the matters discussed herein.