US SEC Announces Significant Amendments to Form PF

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.

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.