SEC significantly expands Form PF reporting requirements for private equity fund advisers and large hedge fund advisers
The Securities and Exchange Commission (SEC) adopted amendments to Form Private Fund (Form PF), the confidential reporting form for certain SEC-registered investment advisers to private funds (the Amendments).[1]
The amended Form PF includes several new disclosure requirements and amends several existing requirements for private equity fund advisers. Key requirements include:
- All reporting private equity fund advisers (ie, advisers with $150 million or more private equity fund assets under management) will be required to report on a quarterly basis completed adviser-led secondaries transactions and instances where fund investors have elected to: remove the general partner, terminate the fund’s investment period, or terminate the fund.
- Large private equity fund advisers ($2 billion or more private equity assets under management) must report any general partner clawbacks and certain limited partner clawbacks on an annual basis and provide additional information regarding fund investment strategies, fund-level borrowings, and defaults or bridge financings to a fund’s controlled portfolio companies (CPCs).
- Large hedge fund advisers ($1.5 billion or more hedge funds assets under management) will be required to make significant disclosures within 72 hours upon the occurrence of certain financial events impacting a fund including extraordinary investment losses, margin increases, inability to meet margin or margin default, counterparty default, operational events, and large redemption withdrawals and requests.
The Amendments include several changes from the amendments proposed in January 2022 (the Proposal).[2] The Amendments increase the amount of time large hedge fund advisers have to report certain financial events from one day to as soon as reasonably practicable, but in no event later than 72 hours. In addition, the SEC did not adopt a lowered $1.5 billion reporting threshold for large private equity fund advisers as proposed and instead retained the existing $2 billion threshold. Further, the SEC determined not to adopt proposed amendments to Form PF concerning large liquidity fund advisers at this time.[3]
New quarterly reporting requirements for all reporting private equity fund advisers
The Amendments require all private equity fund advisers reporting on Form PF to file quarterly reports, within 60 days after fiscal quarter end, upon (1) the closure of an adviser-led secondary transaction or (2) investor election to (a) remove a reporting fund’s general partner or (b) terminate a reporting fund’s investment period or the reporting fund.
Adviser-led secondary transactions. An adviser will be required to report whether it closed on an adviser-led secondary transaction that was initiated by the adviser or a related person of the adviser, along with a brief explanation of the transaction.[4]
Removal of general partner or election to terminate the investment period or fund. An adviser will be required to report when reporting 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 reporting fund’s investment period; or (3) elected to terminate the reporting fund, in each case as contemplated by the reporting fund’s governing documents. The reporting requirement is triggered when the adviser receives notification of such investor election in each case.[5]
Amendments to large private equity fund adviser reporting
All large private equity fund advisers will be required to report information about (1) general partner clawbacks and certain limited partner clawbacks; (2) reporting fund investment strategies; (3) fund-level borrowings and leverage; (4) certain events of default relating to a fund and certain portfolio companies; (5) bridge financings to certain portfolio companies; and (6) geographic breakdowns of investments by their funds.
General partner or limited partner clawbacks
In a change from the Proposal, the SEC requires clawback events to be reported on an annual basis, as opposed to quarterly. Advisers must report any general partner clawback and limited partner clawback(s) in excess of an aggregate amount equal to 10 percent of a reporting fund’s aggregate capital commitments. Required reporting also includes the effective date of the clawback and the reason for the clawback.[6]
Private equity fund investment strategies. Similar to existing reporting requirements for hedge fund advisers, the Amendments require private equity fund advisers to report information about reporting funds’ investment strategies based on the percentage of deployed capital. An adviser will choose the applicable strategy from a drop-down menu of strategies; if a reporting fund’s strategy is not listed, the adviser may select “other” and provide a description of such strategy.
Fund-level borrowings. An adviser to a reporting fund that engages in fund-level borrowing (including subscription lines of credit) generally will be required to report a detailed breakdown of the dollar value of the reporting fund’s borrowings or other cash financing, and the types of creditors.
Events of default, bridge financing to controlled portfolio companies, and geographic breakdown of investments. The Amendments expand three existing questions to require advisers to provide additional reporting, including:
- detailed information about the nature of reported events of default, including whether it is (1) a payment default of the reporting fund; (2) a payment default of a CPC; or (3) a default resulting from a failure to uphold terms under the applicable borrowing arrangement (other than a failure to make regularly scheduled payments)
- reporting on the identity of the institutions providing bridge financing to the adviser’s CPCs and the amount of such financing, additional counterparty identifying information (ie, LEI), and if the counterparty is affiliated with a major financial institution, the name of the financial institution, and
- detailed geographical breakdown of investments by country which the reporting fund has at least 10 percent or more net asset value exposure.
New current reporting for large hedge fund advisers to qualifying hedge funds
The Amendments will require large hedge fund advisers to file current reports as soon as practicable, but in no event later than 72 hours upon the occurrence of certain reporting events described below. The 72 hour requirement will likely be challenging for many advisers as they seek to simultaneously address these events and collect information needed to provide accurate reporting to the SEC and FSOC.
Extraordinary investment losses. Advisers will be required to report extraordinary investment losses that are equal to or greater than 20 percent of a fund’s reporting fund aggregate calculated value (RFACV)[7] over a rolling 10-business-day period, including (1) the dates of the 10-business-day period over which the loss occurred; (2) the holding period return; and (3) the dollar amount of the loss over the 10-business-day period.[8]
Margin, collateral, or equivalent increase. Advisers will be required to report significant margin increases and defaults or an equivalent.[9] A margin increase is significant if it exceeds 20 percent of average daily RFACV.[10] Specifically, an adviser must report (1) the dates of the 10-business-day period over which the increase occurred; (2) the total dollar amount of the increase; (3) the total dollar value amount of margin, collateral, or an equivalent posted by the reporting fund at both the beginning and the end of the 10-business-day period during which the increase was measured; (4) the average daily RFACV of the reporting fund during the 10-business-day period during which the increase was measured; and (5) the identity of the counterparty or counterparties requiring the increase(s). Advisers also will be required to describe their understanding of the circumstances related to the margin increase.
Notice of margin default or inability to meet margin. Advisers also must disclose a reporting fund’s margin default or inability to meet a margin call, taking into account any contractually agreed cure period.[11] Specifically, an adviser must report the date it is notified that a reporting fund is in margin default or cannot make the margin call, the dollar amount of the margin, and the legal name and LEI (if any) of the counterparty faced with the margin default or margin call. An adviser must also select from a menu any applicable circumstance that explains the underlying reasons why the fund was unable to meet the margin call.
Counterparty default. The Amendments require advisers to report if a counterparty to a reporting fund (1) fails to 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 (2) the amount involved is greater than 5 percent of RFACV.[12]
Prime broker relationship terminated or materially restricted. In a change from the Proposal, advisers will not be required to report a material change in the relationship between the reporting fund and a prime broker. Instead, an adviser must report instances where (1) the prime broker terminates the agreement or materially restricts[13] its relationship with the fund in markets where the prime broker continues to be active or (2) the relationship between the prime broker and the reporting fund was terminated by either the reporting fund or the prime broker in the last 72 hours or less, and a termination event was activated in the prime brokerage agreement or related agreements within the last 12 months.[14]
Operation events. Advisers will be required to report certain events impacting their operations. An operation event occurs when a reporting fund or adviser experiences a significant disruption or degradation of the reporting fund’s critical operations, whether as a result of an event at a service provider to the reporting fund, the reporting fund, or the adviser. “Critical operations” in this context means operations necessary for the (1) investment, trading, valuation, reporting, and risk management of the reporting fund or (2) operation of the reporting fund in accordance with federal securities laws and regulations.[15]
Large withdrawal and redemption requests, inability to satisfy redemptions, or suspensions of redemptions. An adviser must submit a current report if a reporting fund receives cumulative requests for withdrawals or redemptions exceeding 50 percent of its most recent net asset value (after netting against subscriptions or other contributions from investors received and contractually committed). Specifically, an adviser must record (1) the date on which the net redemption requests exceeded 50 percent of the most recent net asset value; (2) the net value of redemptions paid from the reporting fund between the last data reporting date (the end of the most recently reported fiscal quarter on Form PF) and the date of the current report; and (3) the percentage of the reporting fund’s net asset value the redemption requests represent. An adviser also must report if a reporting fund cannot meet redemption requests or suspends redemptions for more than five consecutive business days. In either event, an adviser must disclose whether it has notified investors of the impending liquidation.
Compliance dates and looking ahead
Advisers must comply with new hedge fund current reporting and private equity fund quarterly reporting requirements within 180 days after the publication of the Amendments in the Federal Register (Publication Date). The compliance date for the amendments to existing private equity fund reporting requirements will be within one year after the Publication Date.
Given the short compliance period for hedge fund advisers’ new current reporting requirements, we recommend that advisers and their fund administrators assess their reporting controls and procedures to determine how to identify and report the triggering events within the requisite 72 hour time frame. In addition, advisers should review their compliance policies and procedures to include appropriate internal reporting and tracking systems and protocols regarding how to collect the required information.
Moreover, advisers should anticipate additional changes to Form PF, as the SEC and CFTC joint rulemaking on Form PF amendments currently is included on the SEC’s short-term regulatory agenda.
If you have any specific questions regarding the amendments to Form PF, please contact one of the authors, your DLA Piper relationship attorney, or another member of the DLA Piper Investment Funds team.
[1] 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 Release No. IA-6297 (May 3, 2023) available at https://www.sec.gov/rules/final/2023/ia-6297.pdf.
[2] Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, SEC Release No. IA-5950 (Jan. 26, 2022) available at https://www.sec.gov/rules/proposed/2022/ia-5950.pdf.
[3] The SEC noted in the adopting release that it is continuing to consider comments relating to the proposed large liquidity fund adviser amendments and the proposed amendments to Form N-MFP on which they are based.
[4] “Adviser-led secondary transactions” is defined as “any transaction initiated by the adviser or any of its related persons 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.” Form PF Glossary.
[5] Section 6 Item D will give a private equity fund advisers the opportunity to provide a narrative response if it believes additional information or context would be helpful in explaining the circumstances of events required to be reported quarterly.
[6] If an adviser believes additional information will be helpful to explain the circumstances surrounding the clawback, the adviser may provide an optional narrative response in Section 4.
[7] The SEC in response to commenters determined to use the reporting fund aggregate calculated value (RFACV) instead of a fund’s most recent net asset value. “Reporting fund aggregate calculated value” 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. The reporting fund aggregate calculated value is a signed value calculated on a net basis and not on a gross basis. Where one or more portfolio positions are valued less frequently than daily, the last price used should be carried forward, though a current foreign exchange rate may be applied if the position is not valued in US dollars. It is not necessary to adjust the reporting fund aggregate calculated value for accrued fees or expenses. Reporting fund aggregate calculated value does not need to be subjected to fair valuation procedures. The inclusion of income accruals is recommended but not required; however, the approach should be consistent over time. The reporting fund aggregate calculated value may be calculated using the adviser’s own internal methodologies and conventions of the adviser’s service providers, provided that these are consistent with information reported internally.” Form PF Glossary.
[8] “Dollar amount of loss over the 10-business-day period” is defined as "equal to the reporting fund aggregate value at the end of the 10-business-day period less the reporting fund aggregate value at the beginning of the 10-business-day loss period less the net of any subscriptions or redemptions during the 10-business-day period.” Form PF Glossary.
[9] An equivalent is any other type of payment or value understood to serve the same purposes as margin or collateral
[10] “Average daily RFACV” is defined as "the average of the daily reporting fund aggregate calculated value for the end of the business day on business days one through ten of the reporting period.” Form PF Glossary.
[11] In situations where there is a contractually agreed upon cure period, an adviser will not be required to file a current report until the expiration of the cure period, unless the fund does not expect to meet the margin call during such cure period.
[12] If multiple counterparties to the same fund experience a default on the same day, the adviser may file a single current report including details for each counterparty default. In the event that the counterparties to the fund default on different dates, the adviser would file a single current report broken out with details for each counter party default.
[13] The Form PF Section 5 Item 5.F instructions provide that an adviser should consider a prime broker’s change of relationship with the reporting fund in a way that significantly limits the fund’s ability to operate under the terms of the original agreement, or significantly impairs the fund’s ability to trade to be a “material restriction” that would require the reporting of this Item.
[14] Termination events as specified that are isolated to the financial state, activities, or other conditions solely of the prime broker should not be considered for purposes of Section 5 Item 5.F.
[15] See Form PF Glossary.
