Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF

Federal RegisterNov 16, 2011

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3308; File No. S7-05-11]

RIN 3235-AK92

Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF

AGENCIES:

Commodity Futures Trading Commission and Securities and Exchange Commission.

ACTION:

Joint final rules.

SUMMARY:

The Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) (collectively, “we” or the “Commissions”) are adopting new rules under the Commodity Exchange Act and the Investment Advisers Act of 1940 to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new SEC rule requires investment advisers registered with the SEC that advise one or more private funds and have at least $150 million in private fund assets under management to file Form PF with the SEC. The new CFTC rule requires commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) registered with the CFTC to satisfy certain CFTC filing requirements with respect to private funds, should the CFTC adopt such requirements, by filing Form PF with the SEC, but only if those CPOs and CTAs are also registered with the SEC as investment advisers and are required to file Form PF under the Advisers Act. The new CFTC rule also allows such CPOs and CTAs to satisfy certain CFTC filing requirements with respect to commodity pools that are not private funds, should the CFTC adopt such requirements, by filing Form PF with the SEC. Advisers must file Form PF electronically, on a confidential basis. The information contained in Form PF is designed, among other things, to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system.

DATES:

The effective date for the addition of 17 CFR 4.27 (rule 4.27 under the Commodity Exchange Act), 17 CFR 275.204(b)-1 (rule 204(b)-1 under the Investment Advisers Act of 1940) and 17 CFR 279.9 (Form PF), as well as the revision to the authority citation for 17 CFR part 4, is March 31, 2012. See section III of this Release for compliance dates.

FOR FURTHER INFORMATION CONTACT:

CFTC: Amanda L. Olear, Special Counsel, Telephone: (202) 418-5283, Email:

aolear@cftc.gov,

or Kevin P. Walek, Assistant Director, Telephone: (202) 418-5463, Email:

kwalek@cftc.gov,

Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; SEC: David P. Bartels, Senior Counsel, or Sarah G. ten Siethoff, Senior Special Counsel, at (202) 551-6787 or

IArules@sec.gov,

Office of Investment Adviser Regulation, Division of Investment Management, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The CFTC is adopting rule 4.27 [17 CFR 4.27] under the Commodity Exchange Act (“CEA”)

and Form PF.

The SEC is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] and Form PF [17 CFR 279.9] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (“Advisers Act”).

7 U.S.C. 1a.

Form PF is a joint form between the SEC and the CFTC only with respect to sections 1 and 2 of the Form. Sections 3 and 4 of the Form are adopted solely by the SEC.

15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is codified, and when we refer to Advisers Act rule 204(b)-1, or any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1 of the Code of Federal Regulations in which this rule will be published. In addition, when we refer to the “Investment Company Act,” or any paragraph of the Investment Company Act, we are referring to 15 U.S.C. 80a of the United States Code, at which the Investment Company Act of 1940 is codified.

Table of Contents

I.Background

A. The Dodd-Frank Act and the Financial Stability Oversight Council

B. International Coordination

II. Discussion

A. Who Must File Form PF

1. “Hedge Fund” Definition

2. “Liquidity Fund” Definition

3. “Private Equity Fund” Definition

4. Large Private Fund Adviser Thresholds

5. Aggregation of Assets Under Management

6. Reporting for Affiliated and Sub-Advised Funds

7. Exempt Reporting Advisers

B. Frequency of Reporting

1. Annual and Quarterly Reporting

2. Reporting Deadlines

3. Initial Reports

4. Transition Filings, Final Filings and Temporary Hardship Exemptions

C. Information Required on Form PF

1. Section 1 of Form PF

2. Section 2 of Form PF

3. Section 3 of Form PF

4. Section 4 of Form PF

5. Aggregation of Master-Feeder Arrangements, Parallel Fund Structures, and Parallel Managed Accounts

D. Confidentiality of Form PF Data

E. Filing Fees and Format for Reporting

III. Effective and Compliance Dates

IV. Paperwork Reduction Act

A. Burden Estimates for Annual Reporting by Smaller Private Fund Advisers

B. Burden Estimates for Large Hedge Fund Advisers

C. Burden Estimates for Large Liquidity Fund Advisers

D. Burden Estimates for Large Private Equity Advisers

E. Burden Estimates for Transition Filings, Final Filings, and Temporary Hardship Exemption Requests

F. Aggregate Hour Burden Estimates

G. Cost Burden

V. Economic Analysis

A. Benefits

B. Costs

C. CFTC Statutory Findings

1. General Costs and Benefits

2. Section 15(a) Determination

VI. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the New Rule

B. Significant Issues Raised by Public Comment

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VII. Statutory Authority

Text of Final Rules

I. Background

A. The Dodd-Frank Act and the Financial Stability Oversight Council

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).

One significant focus of this legislation is to “promote the financial stability of the United States” by, among other measures, establishing better monitoring of emerging risks using a system-wide perspective.

To further this goal, the Act establishes the Financial Stability Oversight Council (“FSOC”) and directs it to monitor risks to the U.S. financial system. The Act also gives FSOC a number of tools to carry out this mission.

For instance, FSOC may

determine that a nonbank financial company will be subject to the supervision of the Board of Governors of the Federal Reserve System (“FRB”) if the company may pose risks to U.S. financial stability as a result of its activities or in the event of its material financial distress.

In addition, FSOC may issue recommendations to primary financial regulators, like the SEC and CFTC, for more stringent regulation of financial activities that FSOC determines may create or increase systemic risk.

Public Law 111-203, 124 Stat. 1376 (2010).

S. Rep. No. 111-176, at 2-3 (2010) (“Senate Committee Report”).

See

Sections 113 and 120 of the Dodd-Frank Act. In a recent rulemaking release, FSOC explained that its response to any potential threat to financial stability will be based on an assessment of the circumstances.

See Authority to Require Supervision and Regulation of Certain Nonbank

Financial Companies,

Financial Stability Oversight Counsel Release (Oct. 11, 2011) (“FSOC Second Notice”).

Section 113 of the Dodd-Frank Act. The Dodd-Frank Act also directs FSOC to recommend to the FRB heightened prudential standards for designated nonbank financial companies. Section 112(a)(2) of the Dodd-Frank Act.

Section 120 of the Dodd-Frank Act.

The Dodd-Frank Act anticipates that various regulatory agencies, including the Commissions, will support FSOC.

To that end, the Dodd-Frank Act amended section 204(b) of the Advisers Act to require that the SEC establish reporting and recordkeeping requirements for advisers to private funds,

many of which must also register for the first time as a consequence of the Dodd-Frank Act.

These new requirements may include maintaining records and filing reports containing such information as the SEC deems necessary and appropriate in the public interest and for investor protection or for the assessment of systemic risk by FSOC.

The SEC and CFTC must jointly issue, after consultation with FSOC, rules establishing the form and content of any reports to be filed under this new authority.

See, e.g.,

section 112(d)(1) of the Dodd-Frank Act, which authorizes FSOC to collect information from member agencies to support its functions.

See also

FSOC Second Notice,

supra

note 6 (explaining that information reported on Form PF will be important to FSOC's policy-making in regard to the assessment of systemic risk among private fund advisers).

Section 202(a)(29) of the Advisers Act defines the term “private fund” as “an issuer that would be an investment company, as defined in section 3 of the Investment Company Act, but for section 3(c)(1) or 3(c)(7) of that Act.” Section 3(c)(1) of the Investment Company Act provides an exclusion from the definition of “investment company” for any “issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities.” Section 3(c)(7) of the Investment Company Act provides an exclusion from the definition of “investment company” for any “issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities.” The term “qualified purchaser” is defined in section 2(a)(51) of the Investment Company Act.

See

sections 402, 403, 407 and 408 of the Dodd-Frank Act. The SEC recently adopted rule 203-1(e) providing a transition period for certain private advisers previously relying on the repealed exemption in section 203(b)(3) of the Advisers Act. The transition rule requires these advisers to register with the SEC by March 30, 2012.

See Rules Implementing Amendments to the Investment Advisers Act of 1940,

Investment Advisers Act Release No. IA-3221 (June 22, 2011), 76 FR 42950 (July 19, 2011) (“Implementing Adopting Release”).

See also Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers,

Investment Advisers Act Release No. IA-3222 (June 22, 2011), 76 FR 39646 (July 6, 2011) (“Exemptions Adopting Release”).

The Dodd-Frank Act does not identify specific information to be included in these reports, but section 204(b) of the Advisers Act does require that the records and reports required under that section cumulatively include a description of certain information about private funds, such as the amount of assets under management, use of leverage, counterparty credit risk exposure, and trading and investment positions for each private fund advised by the adviser.

See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF,

Investment Advisers Act Release No. 3145 (January 26, 2011), 76 FR 8068 (February 11, 2011) (“Proposing Release”) at n. 13 and accompanying text.

See

section 211(e) of the Advisers Act.

On January 26, 2011, in a joint release, the CFTC and SEC proposed new rules and a new reporting form intended to implement this statutory mandate.

In the release, the SEC proposed new Advisers Act rule 204(b)-1, which would require private fund advisers to file Form PF periodically with the SEC.

In addition, the CFTC proposed new rule 4.27,

which would require private fund advisers that are also registered as CPOs or CTAs with the CFTC to satisfy certain proposed CFTC systemic risk reporting requirements, should the CFTC adopt such requirements, by filing Form PF.

Today, we are adopting these proposed rules and Form PF with several changes from the proposal that are designed to respond to commenter concerns. Consistent with the proposal, advisers must report on Form PF certain information regarding the private funds they manage, and this information is intended to complement information the SEC collects on Form ADV and information the CFTC separately has proposed to collect from CPOs and CTAs.

Collectively, these reporting forms will provide FSOC and the Commissions with important information about the basic operations and strategies of private funds and help establish a baseline picture of potential systemic risk in the private fund industry.

As discussed below, Form PF is a joint form between the SEC and the CFTC only with respect to sections 1 and 2 of the Form.

Throughout this Release, we use the term “private fund adviser” to mean any investment adviser that (i) Is registered or required to register with the SEC (including any investment adviser that is also registered or required to register with the CFTC as a CPO or CTA) and (ii) advises one or more private funds. Advisers solely to venture capital funds or advisers solely to private funds that in the aggregate have less than $150 million in assets under management in the United States that rely on the exemption from registration under, respectively, section 203(l) or 203(m) of the Advisers Act (“exempt reporting advisers”) are not required to file Form PF.

See infra

section II.A.7 of this Release.

Because the CFTC is not adopting the remainder of proposed CEA rule 4.27 at the same time as it is adopting this rule, the CFTC has modified the designation of CEA rule 4.27(d) to be the sole text of that section.

See Commodity Pool Operators and Commodity Trading Advisors: Amendments to Compliance Obligations

(Jan. 26, 2011), 76 FR 7976 (Feb. 11, 2011) (“CFTC Proposing Release”). Additionally, the CFTC has made some revisions to the text of rule 4.27 to: (1) Clarify that the filing of Form PF with the SEC will be considered substitute compliance with certain CFTC reporting obligations (

i.e.,

for Schedules B and C of Form CPO-PQR and Schedule B of Form CTA-PR as proposed) should the CFTC determine to adopt such requirements and (2) to allow CPOs and CTAs who are otherwise required to file Form PF the option of submitting on Form PF data regarding commodity pools that are not private funds as substitute compliance with certain CFTC reporting obligations (

i.e.,

for Schedules B and C of Form CPO-PQR and Schedule B of Form CTA-PR as proposed) should the CFTC determine to adopt such requirements.

For these private fund advisers, filing Form PF through the Form PF filing system would be a filing with both the SEC and CFTC. Irrespective of their filing a Form PF with the SEC, the CFTC has proposed that all private fund advisers that are also registered as CPOs and CTAs with the CFTC would be required to file Schedule A of Form CPO-PQR (for CPOs) or Schedule A of Form CTA-PR (for CTAs).

See

CFTC Proposing Release,

supra

note 16.

See

Proposing Release,

supra

note 12, at n. 16, comparing the purposes of Form ADV and Form PF. References in this Release to Form ADV or terms defined in Form ADV or its glossary are to the form and glossary as amended in the Implementing Adopting Release,

supra

note 11.

The SEC is adopting Advisers Act rule 204(b)-1 and Form PF to enable FSOC to obtain data that will facilitate monitoring of systemic risk in U.S. financial markets. Our understanding of the utility to FSOC of the data to be collected is based on our staffs' consultations with staff representing the members of FSOC. The design of Form PF 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 funds or their advisers pose such risk. The information made available to FSOC will be collected for FSOC's use by the Commissions in their role as the primary regulators of private fund advisers. The policy judgments implicit in the information required to be reported on Form PF reflect FSOC's role as the primary user of the reported

information for the purpose of monitoring systemic risk. The SEC would not necessarily have required the same scope of reporting if the information reported on Form PF were intended solely for the SEC's use.

We expect the information collected on Form PF and provided to FSOC will be an important part of FSOC's systemic risk monitoring in the private fund industry.

We note that, simultaneous with the consultations between our staffs and the staff representing FSOC's members, FSOC has been building out its standards for assessing systemic risk across different kinds of financial firms and has proposed guidance and standards for determining which nonbank financial companies should be designated as subject to FRB supervision.

In its most recent release on this subject, FSOC confirmed that the information reported on Form PF is important not only to conducting an assessment of systemic risk among private fund advisers but also to determining how that assessment should be made.

See

section 204(b) of the Advisers Act. Today, regulators have little reliable data regarding this rapidly growing sector and frequently have to rely on data from other sources, which when available may be incomplete.

See, e.g.,

FSOC 2011 Annual Report,

http://www.treasury.gov/initiatives/fsoc/Pages/annual-report.aspx

(“FSOC 2011 Annual Report”) at 69. The SEC recently adopted amendments to Form ADV that will require the reporting of important information regarding private funds, but this includes little or no information regarding, for instance, performance, leverage or the riskiness of a fund's financial activities.

See

Implementing Adopting Release, supra note 11. The data collected through Form PF will be more reliable than existing data regarding the industry and significantly extend the data available through the revised Form ADV.

See, e.g.,

FSOC Second Notice,

supra

note 6;

Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies,

Financial Stability Oversight Council Release (Jan. 18, 2011), 76 FR 4555 (Jan. 26, 2011);

Advance Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies,

Financial Stability Oversight Council Release (Oct. 1, 2010), 75 FR 61653 (Oct. 6, 2010).

See

FSOC Second Notice,

supra

note 6 (“[FSOC] recognizes that the quantitative thresholds it has identified for application during [the initial stage of review] may not provide an appropriate means to identify a subset of nonbank financial companies for further review in all cases across all financial industries and firms. While [FSOC] will apply [such] thresholds to all nonbank financial companies, including * * * asset management companies, private equity firms, and hedge funds, these companies may pose risks that are not well-measured by the quantitative thresholds approach. * * * Using [Form PF] and other data, [FSOC] will consider whether to establish an additional set of metrics and thresholds tailored to evaluate hedge funds and private equity firms and their advisers.”).

The Commissions received more than 35 letters responding to the proposal, with trade associations, investment advisers and law firms accounting for most of the comments. Commenters representing investors were generally supportive of the proposal but thought it should have required more of private fund advisers.

Some of these supporters argued, in particular, for more detailed and more frequent reporting than we proposed.

In contrast, advisers and those writing on their behalf expressed concern regarding the scope, frequency and timing of the proposed reporting.

A number of these commenters generally supported the systemic risk monitoring goals of the Dodd-Frank Act or the broad framework of the proposal but argued that specific aspects of the proposal were impractical or burdensome.

We respond to these comments in section II of this Release.

See, e.g.,

comment letter of the American Federation of Labor and Congress of Industrial Organizations (Apr. 12, 2011) (“AFL-CIO Letter”); comment letter of the Council of Institutional Investors (Apr. 11, 2011) (“CII Letter”) (agreeing that “the SEC's proposal will facilitate FSOC's ability to promote the soundness of the U.S. financial system” but noting that the commenter's own working group report favored real-time reporting of position-level information).

See

AFL-CIO Letter (“We support the Proposed Rule, but believe it should be strengthened in a few key areas by requiring more frequent reporting, omitting the arbitrary distinction by investment strategy, and adding additional disclosure requirements necessary to protect investors and prevent systemic risks.”); comment letter of the Americans for Financial Reform (Apr. 12, 2011) (“AFR Letter”) (endorsing the AFL-CIO Letter).

See, e.g.,

comment letter of the Alternative Investment Management Association (Apr. 12, 2011) (“AIMA General Letter”); comment letter of the Investment Adviser Association (Apr. 12, 2011) (“IAA Letter”); comment letter of the Managed Funds Association (Apr. 8, 2011) (“MFA Letter”); comment letter of the Private Equity Growth Capital Council (Apr. 12, 2011) (“PEGCC Letter”); comment letter of Seward & Kissel, LLP (Apr. 12, 2011) (“Seward Letter”); comment letter of the Securities Industry and Financial Markets Association, Asset Management Group (Apr. 12, 2011) (“SIFMA Letter”).

See, e.g.,

comment letter of BlackRock Inc. (Apr. 12, 2011) (“BlackRock Letter”); IAA Letter (stating that they “fully support the Commission's goal of enhancing transparency of private funds that may be deemed to present systemic risk to the U.S. financial markets” but arguing that the proposal is too broad in scope); MFA Letter (supporting “the approach proposed by the SEC and CFTC to collect information from registered private fund managers through periodic, confidential reports on Form PF” and stating that the collection of data from market participants, including investment advisers and the funds they manage, “is a critical component of effective systemic risk monitoring and regulation”).

This rulemaking is intended primarily to support FSOC, consistent with the mandate to adopt private fund reporting requirements under the Dodd-Frank Act. Determinations made with respect to the Form PF reporting requirements have been made in furtherance of this goal and to comply with this legislative mandate.

B. International Coordination

The Dodd-Frank Act states that FSOC shall coordinate with foreign financial regulators in assessing systemic risk.

In recognition of this, our proposal discussed the potential importance of international regulatory coordination in responding to future financial crises.

A number of groups have continued to advance international efforts relating to the collection of systemic risk information. For example, recent reports from the Financial Stability Board (“FSB”), International Monetary Fund (“IMF”) and Bank for International Settlements (“BIS”) emphasize the importance of identifying and addressing gaps in the information available to systemic risk regulators.

One goal of this coordination is to collect comparable information regarding private funds, which will aid in the assessment of systemic risk on a global basis.

Several commenters agreed that international coordination in connection with private fund reporting is important and encouraged us to take an approach consistent with international precedents.

See

section 175(b) of the Dodd-Frank Act.

See also

Proposing Release,

supra

note 12, at nn. 19-22 and accompanying text.

See

Proposing Release,

supra

note 12, at section I.B.

See, e.g.,

FSB, IMF and BIS,

Macroprudential Policy Tools and Frameworks, Update to G20 Finance Ministers and Central Bank Governors

(Feb. 14, 2011) (highlighting the need for “[d]esign and collection of better information and data to support systemic risk identification and modelling [sic]”); FSB,

Shadow Banking: Scoping the Issues, A Background Note of the Financial Stability Board

(Apr. 12, 2011) (“FSB Shadow Banking Report”) (“authorities should cast the net wide, looking at all non-bank credit intermediation to ensure that data gathering and surveillance cover all the activities within which shadow banking-related risks might arise”); FSB and IMF,

The Financial Crisis and Information Gaps, Implementation Progress Report

(June 2011) (“Report on Information Gaps”).

See, e.g.,

Report on Information Gaps,

supra

note 28, at 5. The Commissions expect that they may share information reported on Form PF with various foreign financial regulators under information sharing agreements in which the foreign regulator agrees to keep the information confidential.

See, e.g.,

comment letter of the American Bar Association, Federal Regulation of Securities Committee and Private Equity and Venture Capital Committee (Apr. 11, 2011) (“ABA Committees Letter”); AIMA General Letter; comment letter of the Committee on Capital Markets Regulation (Apr. 12, 2011) (“CCMR Letter”).

To this end, our staffs have consulted with the United Kingdom's Financial Services Authority (the “FSA”), the European Securities and Markets Authority (“ESMA”), the International Organization of Securities Commissions (“IOSCO”) and Hong Kong's Securities and Futures Commission.

The FSA

was the first to develop significant experience with hedge fund reporting, conducting a voluntary, semi-annual survey beginning in October 2009 by sampling large hedge fund groups based in the United Kingdom.

IOSCO, in turn, used the guidelines established in the FSA Survey, together with its own report on hedge fund oversight, in coordinating a survey of hedge funds conducted by IOSCO's members (including the SEC and CFTC) as of the end of September 2010.

These consultations began prior to issuance of the Form PF proposal and have continued during

the development of the final rules and Form.

See also

Proposing Release,

supra

note 12, at nn. 24-32 and accompanying text.

See, e.g.,

Financial Services Authority,

Assessing the Possible Sources of Systemic Risk from Hedge Funds: A Report on the Findings of the Hedge Fund Survey and the Hedge Fund as Counterparty Survey

(July 2011),

available at http://www.fsa.gov.uk/pubs/other/hedge_fund_report_july2011.pdf

(“FSA Survey”).

See also

Proposing Release,

supra

note 12, at nn. 27-30 and accompanying text.

Most recently, ESMA has proposed its own template for private fund reporting, which shares many common elements with the FSA Survey (as well as the IOSCO survey and Form PF).

ESMA's proposed template will serve as the basis for mandatory private fund reporting in Europe under the European Union's Directive on alternative investment fund managers (“EU Directive”) and is expected eventually to supersede the FSA Survey in the United Kingdom. The proposed ESMA template is broader in scope than the FSA Survey, requiring information about a wide range of alternative investment funds, including private equity funds, venture capital funds and real estate funds.

Form PF includes many of the types of information collected through the FSA Survey and proposed to be collected in the ESMA template, and a number of the changes we are making from the proposal further align Form PF with these international approaches to private fund reporting.

See ESMA's draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive,

ESMA/2011/209 (July 2011), available at

http://www.esma.europa.eu/index.php? page=consultation_details&id=185 (“ESMA Proposal”

See also

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EU and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (published July 1, 2011, in the Official Journal of the European Union).

For additional discussion of international efforts relating to systemic risk monitoring in private equity funds,

see

Proposing Release,

supra

note 12, at nn. 33-35 and accompanying text.

See, e.g.,

infra

notes 227, 231, 244-246, 258, 279, 283 and 297 and accompanying text.

II. Discussion

The SEC is adopting Form PF and rule 204(b)-1 under the Advisers Act with several changes from the proposal that are designed to respond to commenter concerns. Under the new rule, SEC-registered investment advisers must report systemic risk information to the SEC on Form PF if they advise one or more private funds.

The final rule and changes from the proposal are discussed below.

See

Advisers Act rule 204(b)-1.

As noted above, section 204(b) of the Advisers Act gives the SEC authority to establish both reporting and recordkeeping requirements for private fund advisers.

See supra

note 12 and accompanying text. One commenter asked why the SEC proposed reporting requirements before proposing recordkeeping requirements for private fund advisers, expressing concern that advisers would need to know what records to maintain in order to report on Form PF.

See

comment letter of Congressman Darrell E. Issa, Chairman of the House Committee on Oversight and Government Reform (Sept. 20, 2011) (“Issa Letter”). Recordkeeping requirements serve a number of important purposes, such as ensuring that advisers maintain adequate documentation relevant to the disposition of their clients' and investors' assets and that SEC examiners are able to effectively inspect advisers' operations. The SEC does not believe, however, that establishing recordkeeping requirements is a necessary prerequisite to establishing reporting requirements.

In addition, the CFTC is adopting rule 4.27 with minor revisions.

This new rule provides that, for registered CPOs and CTAs that are also registered as investment advisers with the SEC and are required to file Form PF, filing Form PF serves as substitute compliance for certain of the CFTC's proposed systemic risk reporting requirements should the CFTC adopt such requirements.

The CFTC has revised the new rule to allow CPOs and CTAs who are otherwise required to file Form PF the option of submitting on Form PF data regarding commodity pools that are not private funds as substitute compliance with certain of the CFTC's proposed systemic risk reporting requirements should the CFTC adopt such requirements.

The CFTC believes that the revisions to the CEA rule adopted in this Release provide additional clarity with respect to the filing obligations of dually registered CPOs and CTAs. Because commodity pools that are reported or required to be reported on Form PF are categorized as hedge funds for purposes of Form PF, as discussed below, CPOs and CTAs filing Form PF need to complete only the sections applicable to hedge fund advisers.

See supra

note 16.

See

CEA rule 4.27. For purposes of this rule, it is the CFTC's position that any false or misleading statement of a material fact or material omission in the jointly adopted sections (sections 1 and 2) of Form PF that is filed by these CPOs and CTAs shall constitute a violation of section 6(c)(2) of the CEA.

Id.

Form PF is a joint form between the SEC and the CFTC only with respect to sections 1 and 2 of the Form. Accordingly, private fund advisers that are also CPOs or CTAs would be obligated to complete only section 1 and, if they meet the applicable threshold, section 2 of Form PF.

As discussed above and in the Proposing Release, we have designed Form PF, in consultation with staff representing FSOC's members, to provide FSOC with information important to its understanding and monitoring of systemic risk in the private fund industry.

Based on our staffs' consultations with staff representing FSOC's members, we expect that FSOC will use the information collected on Form PF, together with market data from other sources, to assist in determining whether and how to deploy its regulatory tools. This may include, for instance, identifying private funds that merit further analysis or deciding whether to recommend to a primary financial regulator, like the SEC or CFTC, more stringent regulation of the financial activities of the private fund industry.

See

Proposing Release,

supra

note 12, at section II.A and at n. 49.

See supra

note 6.

Although the Form we are adopting will provide information useful to FSOC's regulatory mission, the Form has not been designed to be FSOC's exclusive source of information regarding the private fund industry.

FSOC's recently proposed guidance regarding its process for designating nonbank financial companies that may pose risks to U.S. financial stability for FRB supervision helps to illustrate how FSOC may use the Form PF data along with other data sources.

This guidance would establish a three-stage process for determinations, at least in non-emergency situations. In the first and second stages, FSOC would screen firms using progressively more granular analyses of publicly available data and data that, like Form PF, are collected by other regulators. In the third stage, FSOC would work with the Office of Financial Research (“OFR”) to conduct an in-depth review of specific firms identified in the first two stages, and this would generally involve OFR collecting additional, targeted information directly from these firms.

Similarly, in determining whether to exercise its other authorities for addressing potential systemic risks, we expect that FSOC would likely utilize data from other sources in addition to Form PF.

See

Proposing Release,

supra

note 12, at n. 50 and accompanying text.

See

FSOC Second Notice,

supra

note 6.

See also

section 113 of the Dodd-Frank Act for a discussion of the matters that FSOC must consider when determining whether a U.S. nonbank financial company will be supervised by the FRB and subject to prudential standards.

See

sections 153 and 154 of the Dodd-Frank Act. One commenter expressed support for our approach, agreeing that, “Form PF should be used to obtain enough information to make a preliminary assessment, which can be followed up with data

requests and dialogue for those firms who may potentially pose systemic risks—Form PF should not be considered the `complete picture' of the private fund industry.” AIMA General Letter.

Form PF is primarily intended to assist FSOC in its monitoring obligations under the Dodd-Frank Act, but the Commissions may use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers. In section VI.A of this Release, we discuss some of the ways in which the SEC could use proposed Form PF data for its regulatory activities and investor protection efforts.

As discussed in more detail below, the amount and type of information required on Form PF varies based on both the size of the adviser and the types of funds managed. For instance, Form PF requires more detailed information from advisers managing a large amount of hedge fund or liquidity fund assets than from advisers managing fewer assets or other types of funds. This scaled approach is intended to provide FSOC with a broad picture of the private fund industry while relieving smaller advisers from much of the detailed reporting.

Based on our staffs' consultations with staff representing FSOC's members, we understand that obtaining this broad picture will help FSOC to contextualize its analysis and assess whether systemic risk may exist across the private fund industry and to identify areas where OFR may want to obtain additional information. This scaled approach is also designed to reflect the different implications for systemic risk that may be presented by different investment strategies.

In this Release, we refer to advisers that do not satisfy a Large Private Fund Adviser threshold as “smaller private fund advisers.” This is not intended to imply that these advisers are small, only that they fall under certain of the Form's reporting thresholds.

See

section VI of this Release for a discussion of entities that are regarded as small for purposes of the Advisers Act.

A. Who Must File Form PF

An investment adviser must file Form PF if it: (1) Is registered or required to register with the SEC; (2) advises one or more private funds; and (3) had at least $150 million in regulatory assets under management attributable to private funds as of the end of its most recently completed fiscal year.

A CPO or CTA that is also registered or required to register with the SEC as an investment adviser and satisfies the other conditions described above must file Form PF with respect to any commodity pool it manages that is a “private fund” and may file Form PF with respect to any commodity pool it manages that is not a “private fund.”

By filing Form PF with respect to these commodity pools, a CPO will be deemed to have satisfied certain filing requirements for these pools under the CFTC's regulatory regime should the CFTC adopt such requirements.

See

Advisers Act rule 204(b)-1. This rule requires advisers to calculate the value of private fund assets under management pursuant to instructions in Form ADV, which provide a uniform method of calculating assets under management for regulatory purposes under the Advisers Act.

See

Implementing Adopting Release,

supra

note 11, at section II.A.3 (discussing the rationale underlying the new instructions for calculating assets under management for regulatory purposes).

See supra

note 10 for the definition of “private fund.”

See

CEA rule 4.27. In the Proposing Release, the CFTC stated that a CPO registered with the CFTC that is also registered as a private fund adviser with the SEC will be deemed to have satisfied its filing requirements for Schedules B and C of Form CPO-PQR by completing and filing the applicable portions of Form PF for each of its commodity pools that satisfy the definition of “private fund” in the Dodd-Frank Act.

We have modified the conditions under which an adviser must file Form PF by adding a minimum reporting threshold of $150 million in private fund assets under management.

Under the proposal, all private fund advisers registered with the SEC would have been required to file Form PF. The Dodd-Frank Act modified the Advisers Act's minimum registration requirements so that most advisers with less than $100 million in assets under management must register with one or more states rather than the SEC.

In addition, the Dodd-Frank Act created exemptions from SEC registration for advisers solely to venture capital funds and for advisers solely to private funds that in the aggregate have less than $150 million in assets under management in the United States.

As a result, under our proposed approach, most advisers with under $100 million in assets under management, and many advisers with less than $150 million in private fund assets under management, would not have reported on Form PF because they would not be registered with the SEC. However, some registered advisers with relatively few private fund assets would have been required to report on Form PF while exempt advisers with less than $150 million in private fund assets under management would not have been required to file Form PF.

See

Advisers Act rule 204(b)-1.

See

section 203A of the Advisers Act.

See also

Implementing Adopting Release,

supra

note 11, at section II.A.

See

sections 203(l) and 203(m) of the Advisers Act and rules 203(l)-1 and 203(m)-1 under the Advisers Act.

See also

Exemptions Adopting Release,

supra

note 11.

Commenters argued that this outcome was not justified from a systemic risk perspective and recommended a minimum reporting threshold for advisers based on the amount of private fund assets under management.

One commenter proposed setting the threshold at $150 million to match the new private fund adviser exemption under section 203(m) of the Advisers Act.

From the perspective of systemic risk monitoring, it does not appear at this time that the value of gathering this information from registered advisers with less than $150 million in private fund assets under management justifies the burden to these advisers.

See, e.g.,

IAA Letter; Seward Letter. Two commenters also supported a minimum reporting threshold based on the size of individual funds, suggesting an exclusion for funds “with net asset values of less than $250 million and that are less than 5% of a manager's assets under management * * *.” MFA Letter;

see also

BlackRock Letter. We do not believe that a threshold based on fund size would be appropriate because the aggregate amount of assets in smaller funds that an adviser controls may contribute significantly to the adviser's total ability to affect financial markets and the $150 million minimum reporting threshold that we are adopting, based on the adviser's private fund assets under management, will adequately differentiate between advisers with only smaller funds and those with significant fund assets.

See

IAA Letter.

Most private fund advisers that are required to file Form PF will only need to complete section 1 of the Form. This section requires advisers to provide certain basic information regarding any private funds they advise in addition to information about their private fund assets under management and their funds' performance and use of leverage. We describe the information to be collected under section 1 of Form PF in further detail in section II.C.1 of this Release.

As discussed below, however, certain larger private fund advisers must complete additional sections of Form PF, which require more detailed information.

Specifically, three types

of “Large Private Fund Advisers” would be required to complete certain additional sections of Form PF:

See

Instruction 3 to Form PF. With this scaled approach, the reporting requirements we are adopting reflect the Dodd-Frank Act directive that, in formulating systemic risk reporting and recordkeeping for investment advisers to mid-sized private funds, the SEC take into account the size, governance, and investment strategy of such funds to determine whether they pose systemic risk.

See

section 203(n) of the Advisers Act. The Dodd-Frank Act also provides that the SEC may establish different reporting requirements for different classes of fund advisers, based on the type or size of private

fund being advised.

See

section 204(b) of the Advisers Act.

• 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;

See

Instruction 3 to Form PF. To determine whether an adviser must file a quarterly report at the end of the second quarter, it must look to its hedge fund assets under management as of the end of each month in the first quarter.

See infra

text accompanying note 112. We have modified the amount of this threshold from the proposal. For a discussion of this modification and the reasons for establishing the threshold at this amount, see below in section II.A.4.a of this Release (including notes 90-92 and accompanying text).

• Any adviser managing a liquidity fund and having at least $1 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds as of the end of any month in the prior fiscal quarter;

and

See supra

note 57. For a discussion of the reasons for establishing the threshold at this amount, see below in section II.A.4.a of this Release.

• 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.

See

Instruction 3 to Form PF. For a discussion of the reasons for establishing the threshold at this amount, see below in section II.A.4.a of this Release.

These large advisers must complete additional sections of Form PF, with large hedge fund advisers completing section 2 and large liquidity fund and private equity fund advisers completing sections 3 and 4, respectively.

The information each of these sections requires is tailored to the type of fund, focusing on relevant areas of financial activity that have the potential to raise systemic concerns. We discuss these areas of financial activity as they relate to hedge funds, liquidity funds and private equity funds in greater detail in the Proposing Release and below.

As adopted, Form PF requires advisers to determine whether they meet the large adviser thresholds less frequently than was proposed (quarterly rather than daily for hedge fund and liquidity fund advisers and annually rather than quarterly for private equity advisers). We discuss this change in section II.A.4 of this Release.

See

sections II.A.1, II.A.2 and II.A.3 of the Proposing Release,

supra

note 12, and sections II.C.2, II.C.3 and II.C.4 of this Release.

1. “Hedge Fund” Definition

Registered advisers managing hedge funds must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large hedge fund advisers are required to provide additional information in section 2 of the Form.

Form PF defines “hedge fund” generally to include any private fund having any one of three common characteristics of a hedge fund: (a) A performance fee that takes into account market value (instead of only realized gains); (b) high leverage; or (c) short selling.

Solely for purposes of Form PF, a commodity pool that is reported or required to be reported on Form PF is treated as a hedge fund.

Several commenters debated whether the hedge fund industry generally, or any hedge fund in particular, could pose systemic risk.

See, e.g.,

AFL-CIO Letter and CII Letter, identifying hedge fund activities that could have systemic consequences; and AIMA General Letter and MFA Letter, arguing that no hedge fund operating today is likely to be systemically significant. Even among skeptical commenters, however, there was recognition that “there is no concrete data to draw conclusions either way, and that the exercise [of reporting] will be useful to allow the FSOC to make evidence-based conclusions.” AIMA General Letter;

see also

MFA Letter. As discussed in the Proposing Release, we believe that Congress expected hedge fund advisers would be required to report under Title IV of the Dodd-Frank Act and that information regarding certain activities of hedge funds may be important to FSOC's monitoring of systemic risk.

See

Proposing Release,

supra

note 11, at nn. 54-61 and accompanying text.

See

Glossary of Terms to Form PF. We are defining the term “hedge fund” in Form PF solely for purposes of determining what information an adviser is required to report on the Form. This definition does not apply with respect to any other form or regulation of either Commission unless otherwise specified. The SEC has recently adopted this same definition in amendments to Form ADV.

See

Implementing Adopting Release,

supra

note 11, at nn. 248-255 and accompanying text. The CFTC has not adopted any definition of “hedge fund” beyond that adopted solely for purposes of Form PF.

A number of commenters addressed the “hedge fund” definition. Some of these suggested that we eliminate the distinctions among fund types and instead require all advisers to complete the entire Form so that advisers could not use the definitions to avoid reporting requirements.

Others, however, urged us to narrow the definition so that fewer funds would be classified as hedge funds.

Form PF generally requires more information regarding hedge funds than other types of funds, and in most cases, an adviser must conclude that a fund is not a hedge fund in order to classify it as one of the six other types of private fund defined in Form PF.

As a result, narrowing the “hedge fund” definition in Form PF could have a significant effect on reporting. Commenters persuaded us, however, that certain revisions to the proposed definition would result in a more accurate grouping of funds, thereby improving the quality of the data collected and, at the same time, reducing the reporting burdens on some advisers.

See, e.g.,

AFL-CIO Letter.

See, e.g.,

ABA Committees Letter; AIMA General Letter; IAA Letter; PEGCC Letter; SIFMA Letter; comment letter of TCW Group, Inc. (Apr. 12, 2011) (“TCW Letter”).

See

Glossary of Terms to Form PF. Altogether, the seven types of private fund defined in Form PF are: (1) Hedge fund; (2) liquidity fund; (3) private equity fund; (4) real estate fund; (5) securitized asset fund; (6) venture capital fund; and (7) other private fund.

The “hedge fund” definition, as well as the six other private fund definitions used in Form PF, are also included in the SEC's recent revisions to Form ADV.

See

Implementing Adopting Release,

supra

note 11, at section II.C.1. Although the SEC received no comments on these same definitions in the context of that rulemaking, the SEC believes that having consistent definitions in the two forms is important. As a result, the SEC considered in the context of that rulemaking the comments received on these definitions in Form PF and determined, when adopting revisions to Form ADV, to make several changes in that form. The changes we are making to these definitions as used in Form PF conform the two sets of definitions so that both forms use identical terms (with the exception that, for purposes of Form PF, all commodity pools about which an adviser is reporting are treated as hedge funds, while in Form ADV, only commodity pools that are private funds are treated as hedge funds).

See

Implementing Adopting Release,

supra

note 11, at nn 248-255. The CFTC has not adopted any definition of “hedge fund” beyond that adopted solely for purposes of Form PF.

First, we have expressly excluded from the “hedge fund” definition in Form PF vehicles established for the purpose of issuing asset backed securities (“securitized asset funds”).

One commenter noted that these funds could have been categorized as hedge funds under our proposal, which was not the intended result.

Although the issuance of asset backed securities may have systemic risk implications, the questions on Form PF regarding hedge funds would not yield relevant data regarding securitized asset funds. As a result, including responses regarding securitized asset funds in the hedge fund data could distort the information FSOC obtains from questions directed at hedge funds.

Specifically, the “hedge fund” definition in Form PF now refers to any private fund having one of the listed characteristics and excludes securitized asset funds. Under the proposal, a fund that satisfied the “hedge fund” definition would have been categorized as a hedge fund even if it otherwise would have satisfied the “securitized asset fund” definition. As adopted, Form PF defines “securitized asset fund” as any private fund “whose primary purpose is to issue asset backed securities and whose investors are primarily debt-holders.” We have also modified this definition from the proposal so that it is no longer defined by reference to the “hedge fund” definition.

See

Glossary of Terms to Form PF.

See

TCW Letter.

Second, we have modified clause (a) Of the “hedge fund” definition in Form PF, which classifies a fund as a hedge fund if it uses performance fees or allocations that are calculated by taking into account unrealized gains. One

commenter pointed out that even funds that do not allow for the payment of such fees or allocations, such as private equity funds, may be required to accrue or allocate these amounts in their financial statements to comply with applicable accounting principles.

It was not intended for funds that accrue or allocate these fees or allocations solely for financial reporting purposes to be classified as hedge funds, so we have clarified that clause (a) relates only to fees or allocations that may be

paid

to an investment adviser (or its related persons).

See

TCW Letter.

Some commenters objected to clause (a) of the “hedge fund” definition more generally, arguing that it is too broad because some traditional/long only funds use performance fees or allocations calculated by taking into account unrealized gains.

See, e.g.,

AIMA General Letter; TCW Letter. However, based on our staffs' discussions with staff representing FSOC's members, we believe that funds using these types of fees are often active in markets that FSOC may desire to monitor for concentration risks. In addition, Form PF is intended to provide FSOC with a broad picture of the private fund industry so that it has context against which to assess systemic risk. An important part of this is gathering information about funds with similar characteristics, such as performance fees based on unrealized gains, so that industry-wide comparisons can be made. The inclusion of any particular fund in a reporting group, whether as a result of the private fund definitions or the reporting thresholds, does not represent a conclusion that the fund engages in activities that pose systemic risk.

Third, we have addressed another commenter's concern that clause (a) could inadvertently capture certain private equity funds because, although these funds typically calculate currently payable performance fees and allocations based on realized amounts, they will sometimes reduce these fees and allocations by taking into account “unrealized losses net of unrealized gains in the portfolio.”

Funds should not be classified as hedge funds for purposes of Form PF based solely on this practice, and we have clarified that clause (a) would not include performance fees or allocations the calculation of which may take into account unrealized gains solely for the purpose of reducing such fees or allocations to reflect net unrealized losses.

See

PEGCC Letter.

Finally, several commenters asserted that clause (c) of the “hedge fund” definition, which looks to whether a fund may engage in short selling, should include an exception for a

de minimis

amount of short selling or exclude short selling intended to hedge the fund's exposures.

However, short selling appears to be, for purposes of Form PF, a potentially important distinguishing feature of hedge funds, many of which may, as the name suggests, use short selling to hedge or manage risk of various types. On the other hand, we also understand that many funds pursuing traditional investment strategies use short positions to hedge foreign exchange risk and to manage the duration of interest rate exposure, and we are persuaded that including funds within the definition of “hedge fund” in Form PF solely because they use these particular techniques would dilute the meaningfulness of the category. Therefore, we have modified clause (c) to provide an exception for short selling that hedges currency exposure or manages duration.

See

IAA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

We have also made a change to clause (c) to clarify that this clause includes traditional short sales and any transaction resulting in a short exposure to a security or other asset (such as using a derivative instrument to take a short position). The purpose of this definition is to categorize funds that engage in certain types of market activity, and therefore, whether the definition applies should not depend on the form in which the fund engages in that activity.

Commenters arguing that, instead of a definition, the Commissions should take an approach similar to that used in the FSA Survey, which outlined common hedge fund characteristics and allowed an adviser “to make its own good faith judgment as to whether a particular fund is a hedge fund,” were not persuasive.

Such an approach could effectively defer to the adviser the determination of whether to report on Form PF information about hedge funds—an approach that might be appropriate for a voluntary survey, like the FSA's, but one that would significantly compromise the value of data collected for FSOC and thus would fail to achieve the purpose of this rulemaking.

ABA Committees Letter.

See also

AIMA General Letter; IAA Letter; Seward Letter.

Two other commenters suggested instead that we eliminate all of the private fund definitions and require that every private fund adviser complete the entire Form.

These commenters were concerned that any distinction among funds tied to the amount or type of information required would encourage advisers to change strategies in order to avoid reporting. Although we are sensitive to these concerns, we believe that distinguishing fund types is important for two reasons. First, by distinguishing among types of funds, we are able to limit the information collection burdens on advisers to funds for which the information is most relevant.

Second, separating reported data by fund strategy allows extraneous information to be excluded, which we believe will improve its utility to FSOC and the Commissions.

See

AFL-CIO Letter; AFR Letter.

For instance, one commenter, in agreeing that Form PF appropriately differentiates “between the reporting requirements for hedge funds and private equity funds,” pointed out that section 2 of the Form, which would be completed by large hedge fund advisers, contains many questions that “are not relevant to private equity funds.” This commenter also explained that requiring response to “questions that are not directly related to” the operations of private equity advisers would impose burdens on both FSOC and the advisers.

See

comment letter of Lone Star U.S. Acquisitions (Apr. 12, 2011) (“Lone Star Letter”).

Several commenters also expressed concern that clauses (b) and (c) of the “hedge fund” definition in Form PF are too broad because many funds have the capacity to borrow or incur derivative exposures in excess of the specified amounts or to engage in short selling but do not in fact engage, or intend to engage, in these practices.

These commenters generally argued that clauses (b) and (c) should focus on actual or contemplated use of these practices rather than potential use. Changes to the “hedge fund” definition in response to these comments have not been made because clauses (b) and (c) properly focus on a fund's ability to engage in these practices. Even a fund for which leverage or short selling is an important part of its strategy may not engage in that practice during every reporting period. Thus, the suggested approach could result in incomplete data sets for hedge funds, a class of funds that may be systemically significant. However, a private fund would not be a “hedge fund” for purposes of Form PF solely because its organizational documents fail to prohibit the fund from borrowing or incurring derivative exposures in excess of the specified amounts or from engaging in short selling so long as the fund in fact does not engage in these practices (other than, in the case of clause (c), short selling for the purpose of hedging currency exposure or managing duration) and a reasonable investor would understand, based on the fund's offering documents, that the fund will not engage in these practices.

See, e.g.,

AIMA General Letter; IAA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

Finally, some commenters recommended that a fund should not be classified as a “hedge fund” for purposes of Form PF unless it satisfies at least two of the prongs of the “hedge fund” definition (rather than any one prong).

The definition is designed to identify funds that are an appropriate subject for the higher level of reporting to which hedge funds will be subject

under Form PF, and, based on our staffs' consultations with staff representing FSOC's members, we believe that any one of the identified characteristics is sufficient to appropriately distinguish a fund for this purpose. We have not, therefore, made the change these commenters suggested. The changes to the “hedge fund” definition discussed above are intended to more accurately group private funds for purposes of Form PF and, thereby, improve the quality of information reported.

See, e.g.,

Lone Star Letter; PEGCC Letter; TCW Letter.

2. “Liquidity Fund” Definition

Registered advisers managing liquidity funds must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large liquidity fund advisers are required to provide additional information in section 3 of the Form.

For purposes of Form PF, a “liquidity fund” is any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.

Commenters did not address the “liquidity fund” definition, which the SEC is adopting as proposed.

Form PF is a joint form between the SEC and the CFTC only with respect to sections 1 and 2 of the Form. Section 3 of the Form, which requires more specific reporting regarding liquidity funds, is only required by the SEC.

See

Glossary of Terms to Form PF. As discussed in the Proposing Release, liquidity funds can resemble registered money market funds, certain features of which may make them susceptible to runs and thus create the potential for systemic risk.

See

Proposing Release,

supra

note 12, at section II.A.2.

3. “Private Equity Fund” Definition

Registered advisers managing private equity funds must submit information on Form PF regarding the financing and activities of these funds in section 1 of the Form, and large private equity advisers are required to provide additional information in section 4 of the Form.

Consistent with the proposal, Form PF defines “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.

Two commenters advocated for a definition of “private equity fund” that would not depend on whether a fund is a hedge fund.

This approach could, however, create gaps between the definitions and encourage advisers to structure around the reporting requirements.

The changes we have made to the “hedge fund” definition substantially address the concerns of these commenters.

Therefore, we believe that the proposed approach to defining “private equity fund” continues to be appropriate for the purposes of Form PF.

Form PF is a joint form between the SEC and the CFTC only with respect to sections 1 and 2 of the Form. Section 4 of the Form, which requires more specific reporting regarding private equity funds, is only required by the SEC.

See

Glossary of Terms to Form PF. The definitions of “real estate fund” and “venture capital fund” are being adopted as proposed, and changes to the definition of “securitized asset fund” are discussed above.

See supra

note 69. These definitions are primarily intended to exclude these types of funds from our definition of “private equity fund” to improve the quality of data reported on Form PF relating to private equity funds.

See

PEGCC Letter (proposing an alternative that largely inverts the proposed “hedge fund” definition but would allow for short selling and soften other distinctions); SIFMA Letter (suggesting an alternative that would define a “private equity fund” as a private fund having “a large number of sophisticated, third-party institutional and high net worth investors” and satisfying ten additional criteria, including that “the fund and its investment activities are not subject to regulatory restrictions or limitations.”).

Some commenters were concerned that creating any distinctions among funds would encourage advisers to change strategies in order to avoid reporting.

See supra

note 76 and accompanying text. The SEC believes, based on its staff's consultations with staff representing FSOC's members, that this risk is best addressed by tightly integrating the definitions.

See supra

notes 64-79 and accompanying text for a discussion of comments on the “hedge fund” definition and the changes we are making from the proposal. Some of these comments reflected concern that the breadth of the “hedge fund” definition would cause it to capture some private equity funds. Commenters arguing for an independent “private equity fund” definition expressed similar concerns. As discussed above, certain of the changes we are making to the “hedge fund” definition are designed to address these concerns.

4. Large Private Fund Adviser Thresholds

a. Amounts

As noted above, we are adopting a threshold of $1.5 billion in hedge fund assets under management for large hedge fund adviser reporting, $1 billion in combined liquidity fund and registered money market fund assets under management for large liquidity fund adviser reporting, and $2 billion in private equity fund assets under management for large private equity fund adviser reporting.

These thresholds are designed so that the group of Large Private Fund Advisers filing Form PF will be relatively small in number but represent a substantial portion of the assets of their respective industries. For example, we estimate that approximately 230 U.S.-based advisers each managing at least $1.5 billion in hedge fund assets represent over 80 percent of the U.S. hedge fund industry based on assets under management.

Similarly, SEC staff estimates that the approximately 155 U.S.-based advisers each managing over $2 billion in private equity fund assets represent approximately 75 percent of the U.S. private equity fund industry based on committed capital.

As proposed, we are requiring that an adviser determine whether it meets a threshold and qualifies as a large hedge fund adviser, large liquidity fund adviser or large private equity adviser based solely on the assets under management attributable to the particular types of fund. Two commenters suggested that we instead require advisers to aggregate all of their assets under management, regardless of strategy, for purposes of the thresholds.

See

AFL-CIO Letter; AFR Letter. These commenters cautioned that our approach could allow advisers with substantial private fund assets under management to nevertheless avoid classification as a Large Private Fund Advisers. We are sensitive to these commenters' concerns, but we continue to believe that the hedge fund, liquidity fund and private equity fund business models are sufficiently distinct that for FSOC's purposes they are most appropriately analyzed on a separate basis.

See Billion Dollar Club

, HedgeFund Intelligence (“HFI”) (Oct. 3, 2011). We estimate that, in addition to the 230 U.S.-based hedge fund advisers that will exceed the threshold, approximately 23 non-U.S. private fund advisers will also be classified as large hedge fund advisers, for a total of approximately 250 large hedge fund advisers. We have based this estimate of non-U.S. advisers on IARD data as of October 1, 2011, showing that, among currently registered private fund advisers, fewer than 10% are non-U.S. advisers. (We are not aware of any reason that recent changes in the exemptions available under the Advisers Act would affect the relative representation of U.S. and non-U.S. advisers.) One commenter suggested that estimates based on HFI data should be grossed up because the database is under-inclusive.

See

comment letter of the Alternative Investment Management Association (Jul. 26, 2011) (“AIMA AUM Letter”). Although we acknowledge that this database is likely somewhat under-inclusive, we believe that the amount of assets under management not represented in the database is relatively small because the aggregate amount of assets reported to the database is consistent with other data sources estimating the total size of the hedge fund industry. In addition, we believe the uncounted assets are likely skewed toward the smaller advisers in the industry because the identity and size of the industry's largest advisers are relatively consistent across sources. As a result, although this database may under-represent the total amount of hedge fund industry assets under management, the count of large hedge fund advisers is likely to be relatively accurate. The changes to the “hedge fund” definition discussed above will likely result in fewer funds being classified as hedge funds than under the proposed definition. However, these changes are intended to more accurately group private funds for purposes of Form PF and should more closely align the definition to the estimates discussed above.

Preqin. The Preqin data relating to private equity fund committed capital is available in File No. S7-05-11. We estimate that, in addition to the 155 U.S.-based private equity advisers that will exceed the threshold, approximately 16 non-U.S. private fund advisers will also be classified as large private equity advisers, for an approximate total of 170 large private equity advisers.

See supra

note 88 for a discussion of the basis for this estimate.

The threshold we are adopting for large hedge fund advisers reflects an increase from the $1 billion threshold that we proposed. We do not expect,

however, that this increase will substantially change the group of advisers that were estimated in the proposal would be classified as large hedge fund advisers. Rather, the change is intended simply to adjust for a difference in how assets under management are measured in Form PF compared to how they are measured in the commercial databases that we consulted in proposing the $1 billion threshold amount. Form PF uses the definition of “regulatory assets under management” that the SEC recently adopted in connection with amendments to its Form ADV. This definition measures assets under management

gross

of outstanding indebtedness and other accrued but unpaid liabilities. One commenter pointed out, however, that the assets under management that advisers report to the currently available third-party databases are generally calculated on a

net

basis.

In other words, without adjustment, our proposed threshold of $1 billion in gross assets would have captured advisers with less than $1 billion in net assets, expanding the group of advisers classified as large hedge fund advisers beyond what we intended.

We believe this revised threshold strikes an appropriate balance between obtaining information regarding a significant portion of the hedge fund industry while minimizing the burden imposed on smaller advisers.

See

AIMA AUM Letter.

We are not aware of any existing source with data regarding the gross assets under management of U.S. hedge fund managers. Therefore, based on our staffs' consultations with staff representing FSOC's members, we have established this threshold by multiplying the proposed threshold by an industry average leverage ratio of 1.5 times net assets. The commenter suggested that industry leverage ranges between 1.5 and 3 times net assets but noted that leverage ratios over the preceding 12 months had dropped to 1.1 times investment capital.

See

AIMA AUM Letter;

see also

MFA Letter (citing leverage ratios from 3.0 to as low as 1.16); Andrew Ang,

et al., Hedge Fund Leverage,

National Bureau of Economic Research (Feb. 2011). We have used a leverage ratio at the lower end of this range because, without data regarding the industry's gross assets, it cannot confidently be estimated that a higher threshold would capture a portion of the industry sufficient to allow FSOC to effectively perform systemic risk assessments. Also, although the definition of “regulatory assets under management” is measured gross of certain liabilities, it does not capture all forms of leverage that may be included in the sources cited in the AIMA AUM Letter, such as off-balance sheet leverage. As a result, the leverage implied by “regulatory assets under management” may be lower than the leverage estimated based on these sources. The AIMA AUM Letter also suggested that the average leverage ratio used should be asset-weighted because advisers with over $1 billion in net assets under management tend to use greater amounts of leverage. However, these larger advisers would exceed the threshold even if measured on a net basis. The adjustment to the threshold to account for leverage is most relevant for the middle group of advisers, not the large advisers, and the leverage ratio we have used is consistent with the leverage ratio this commenter estimates for advisers with $200 million to $1 billion in net assets under management.

Similar adjustments to the thresholds applicable to liquidity fund advisers and private equity fund advisers have not been made because we understand these strategies typically involve little leverage at the fund level.

See infra

note 306 and accompanying text.

An adviser managing liquidity funds must combine liquidity fund and registered money market fund assets for purposes of determining whether it meets the threshold for more extensive reporting regarding its liquidity funds. Liquidity funds and registered money market funds often pursue similar strategies, invest in the same securities and present similar risks. An adviser is, however, only required to report information about unregistered liquidity funds on Form PF. This information will supplement data the SEC collects about registered money market funds on its Form N-MFP and provide FSOC a more complete picture of large liquidity pools and their management. The SEC expects this approach to the reporting threshold to capture approximately 80 of the most significant managers of liquidity funds.

Commenters supported this approach, which we are adopting as proposed.

See also

Proposing Release,

supra

note 12, at n. 89. The estimate of the number of large liquidity fund advisers is based on the number of advisers with at least $1 billion in registered money market fund assets under management, as reported on Form N-MFP as of October 1, 2011.

See

AFL-CIO Letter; AFR Letter.

Based on our staffs' consultations with staff representing FSOC's members, we believe that requiring basic information from all registered advisers over the minimum reporting threshold but more extensive and detailed information only from advisers meeting the higher thresholds is important to enabling FSOC to obtain a broad picture of the private fund industry. We understand that obtaining this broad picture will help FSOC to contextualize its analysis and assess whether systemic risk may exist across the private fund industry and to identify areas where OFR may want to obtain additional information. At the same time, requiring that only these Large Private Fund Advisers complete additional reporting requirements under Form PF will provide systemic risk information for a substantial majority of private fund assets while minimizing burdens on smaller private fund advisers that are less likely to pose systemic risk concerns.

Although thresholds set at a higher amount could still yield information regarding much or a majority of the private fund industry's assets under management, such thresholds would potentially impede FSOC's ability to obtain a representative picture of the private fund industry. The activities of private fund advisers may differ significantly depending on size because, for instance, some strategies may be practical only at certain scales.

As a result, obtaining information regarding, for instance, 50 percent or 60 percent of the industry's assets under management may not be sufficient to confidently draw conclusions regarding the remaining portion of the industry. However, because relatively few advisers manage most of the industry's assets under management, a substantial reduction in the potential burdens of reporting can be achieved without sacrificing the ability to obtain a more representative picture. For example, setting the threshold to cover, for instance, 80 percent of industry assets under management rather than 100 percent would relieve thousands of advisers from more detailed reporting while still obtaining a reasonably representative picture.

There are, however, limits to the range within which this tradeoff can be effectively made. For example, setting the thresholds to cover, for instance, 60 percent of industry assets under management rather than 80 percent would relieve a relatively small segment of advisers from more detailed reporting but might not result in a picture broad enough to be representative. Accordingly, the thresholds have been established to balance FSOC's need for a broad, representative set of data regarding the private fund industry with the desire to limit the potential burdens of private fund systemic risk reporting.

For example, one commenter cited evidence suggesting that the use of leverage varies significantly with fund size, though they did not state whether this variation continues among advisers with over $1 billion in net assets under management.

See

AIMA AUM Letter.

See also

Ibbotson, Roger G., Peng Chen, and Kevin X. Zhu, 2011,

The ABCs of Hedge Funds: Alphas, Betas, and Costs,

Financial Analysts Journal 67 (1) (“Ibbotson,

et al.”

) at 17-18 (discussing possible explanations for observed differences in returns for larger and smaller hedge funds).

In the PRA analysis below, the SEC estimates that the large adviser thresholds will result in approximately 500 advisers reporting additional information in section 2, 3 or 4 of Form PF while approximately 3,070 advisers will report information only in section 1 and another 700 will not report on Form PF at all because of the minimum reporting threshold.

See infra

section IV.A of this Release.

Commenters expressed support for a tiered reporting system based on size.

However, most commenters thought the proposed threshold of $1 billion was either too high or too low.

Commenters arguing for a lower threshold expressed concern that, at $1 billion, regulators would receive insufficient information to monitor certain types of market behavior with potentially systemic consequences.

In contrast, a number of commenters argued that even an adviser with $1 billion in assets under management could not pose systemic risk.

100

Several of these commenters supported an increase to $5 billion, which they argued would still capture over half the hedge fund industry while ensuring that advisers have sufficient operational capabilities to complete the Form.

101

See, e.g.,

comment letter of Coalition of Private Investment Companies (Mar. 31, 2011) (“CPIC Letter”) and MFA Letter.

Compare AFL-CIO Letter and AFR Letter (supporting a lower threshold) to AIMA General Letter; IAA Letter; MFA Letter; PEGCC Letter; SIFMA Letter (supporting a higher threshold).

See also

comment letter of George Merkl (Feb. 22, 2011) (“Merkl February Letter”) (supporting the proposed thresholds).

See

AFL-CIO Letter (arguing that the proposal would not allow regulators to monitor “herding” behavior, which it defines as the tendency for market participants to trade together on one side of the market; also suggesting that, at a minimum, advisers with between $150 million and $1 billion in assets under management “should be required to complete all applicable sections of Form PF on a semi-annual basis.”); AFR Letter.

100

See, e.g.,

AIMA General Letter (also questioning whether the SEC and FSOC have the capacity to analyze the data from all the advisers above the proposed threshold); IAA Letter; MFA Letter; comment letter of Olympus Partners (Apr. 1, 2011) (“Olympus Letter”); PEGCC Letter (preferring that there be no large adviser category for private equity fund advisers because, in their view, these advisers pose little systemic risk); Seward Letter; SIFMA Letter; comment letter of the United States Chamber of Commerce, Center for Capital Markets Competitiveness (Apr. 12, 2011) (“USCC Letter”).

101

See, e.g.,

AIMA General Letter (asserting that a $5 billion threshold “still captures around 50-60% of the US hedge fund industry assets or just over 75 large hedge fund managers.”); MFA Letter (“Based on estimates, 77 hedge fund managers representing approximately 50-60% of hedge fund industry assets would exceed this [$5 billion] threshold.”); Seward Letter; USCC Letter (citing figures similar to those provided in the AIMA General Letter and the MFA Letter in support of a $5 billion threshold). Other commenters asserted that the thresholds should take into account measures of leverage or derivatives exposures rather than just assets under management.

See, e.g.,

ABA Committees Letter; AIMA General Letter. As discussed above, measuring these thresholds using “regulatory assets under management,” as defined in Form ADV, implies adjustment for some forms of leverage. Two commenters suggested that, instead of assets under management, the adviser's proprietary assets are the most appropriate measure of assets at risk.

See

PEGCC Letter; USCC Letter. However, private fund advisers exercise significant discretion over the assets they manage, which makes assets under management a more accurate measure of an adviser's ability to affect the U.S. financial system.

We have carefully considered these comments in light of the information we understand FSOC desires and its intended use by FSOC. Based on this, the SEC has determined to adopt the proposed threshold for large liquidity fund advisers and to increase the threshold for large private equity fund advisers to $2 billion. We are adopting the threshold for large hedge fund advisers with the corrective change discussed above. Although we understand commenters' concerns that the proposed thresholds are too high and will not permit regulators to detect certain group behaviors among smaller private fund advisers, we believe at this time that the amount of additional information that would be required for this purpose would impose a significant burden on these smaller advisers and not significantly expand FSOC's ability to understand the industry.

On the other hand, in light of the information we understand FSOC desires and its intended use by FSOC, we are also not persuaded that a larger increase in the thresholds would be appropriate. Commenters supporting an increase may be correct that an adviser just exceeding these thresholds could not be large enough to pose systemic risk. However, the thresholds are not intended to establish a cutoff separating the risky from the safe but rather to provide FSOC with sufficient context for the assessment of systemic risk while minimizing the burden imposed on smaller advisers.

102

We understand based on our staffs' consultation with staff representing FSOC's members that, in order to assess potential systemic risk posed by the activities of certain funds, FSOC would benefit from access to data about funds that, on an individual basis, may not be a source of systemic risk. As discussed above, the increase that some commenters supported would result in coverage of a substantially smaller part of the industry, potentially impeding FSOC's ability to obtain a broad picture of the private fund industry.

103

102

See supra

text accompanying notes 94-96. As noted above, the FSOC Second Notice highlights that even establishing guidelines for evaluating private fund advisers may require the context that Form PF will provide.

See supra

note 21.

103

In particular, the activities of private fund advisers may differ significantly depending on size and that the portion of industry assets represented by advisers with over $5 billion in private fund assets under management may look substantially different from the portion of industry assets represented by advisers with between, for instance, $1 billion and $5 billion.

The SEC is, however, persuaded that an increase in the threshold for large private equity advisers that is smaller than some commenters advocated can be made without sacrificing the ability to obtain a broad picture of the private equity industry. SEC staff estimates that an increase in this threshold to $2 billion from the proposed $1 billion will reduce the portion of U.S. private equity industry assets covered by the more detailed reporting in section 4 of the Form from approximately 85 percent to approximately 75 percent.

104

At the same time, it reduces the number of U.S.-based advisers SEC staff estimates will be categorized as large private equity advisers from approximately 270 to approximately 155.

105

This will significantly mitigate the number of advisers subject to the more detailed reporting while still covering a substantial majority of industry assets. As a result of this change, section 4 of Form PF will cover a smaller portion of U.S. private equity industry assets than section 2 covers of U.S. hedge fund industry assets. However, the SEC believes this result is appropriate because private equity funds tend to pursue a narrower range of strategies than hedge funds, reducing concerns regarding the level of representativeness.

104

See supra

note 89.

105

See supra

note 89.

b. Frequency of Testing

The proposal would have required hedge fund and liquidity fund advisers to measure whether they had crossed these thresholds on a daily basis and private equity advisers to measure them on a quarterly basis. The proposed approach was based on our understanding that, as a matter of ordinary business practice, advisers are aware of hedge fund and liquidity fund assets under management on a daily basis, but are likely to be aware of private equity fund assets under management only on a quarterly basis.

However, several commenters argued that advisers would have difficulty monitoring on a daily basis the value of private funds holding complex or illiquid investments.

106

One commenter also noted that, in any given quarter, an adviser could experience significant spikes in the value of its assets under management.

107

These commenters suggested a variety of alternatives, such as testing at the end of the prior reporting period,

108

using an average over the period (possibly based on values at the end of each month in the quarter),

109

or testing at the end of each month.

110

We are persuaded that requiring daily testing of complex or illiquid investments could impose a substantial burden on some advisers,

and we have, accordingly, modified the Form so that advisers need only test whether their hedge fund or liquidity fund assets meet the relevant threshold as of the end of each month.

111

In addition, as some commenters suggested, the test will look back one quarter so that these advisers know at the start of each reporting period whether they will be required to complete the more detailed reporting required of large hedge fund advisers and large liquidity fund advisers.

112

We did not adopt an approach using an average because it would add unnecessary complexity and potentially allow an adviser whose assets under management have grown significantly during a quarter to delay more detailed reporting for an additional quarter.

106

See, e.g.,

ABA Committees Letter; BlackRock Letter; MFA Letter; Seward Letter.

107

See

ABA Committees Letter.

108

See

BlackRock Letter; MFA Letter.

109

See

ABA Committees Letter; AIMA General Letter; IAA Letter.

110

See

Seward Letter.

111

See

Instruction 3 to Form PF.

112

Id. See also supra

note 108.

Commenters also objected to the proposed quarterly testing with respect to private equity advisers, suggesting that even such infrequent testing may be difficult for some advisers.

113

As we discuss in further detail below, large private equity fund advisers will be required to report information regarding their private equity funds only on an annual (rather than quarterly) basis, with the result that quarterly testing of the threshold is unnecessary.

114

Accordingly, advisers need only test whether their private equity fund assets meet the relevant threshold at the end of each fiscal year.

115

113

See

Merkl February Letter (noting that some private equity funds do not provide first and third quarter financial statements to investors); PEGCC Letter (suggesting annual testing and asserting that the less volatile nature of private equity investments would not justify the cost of quarterly valuation).

114

See

section II.B of this Release.

115

See

Instruction 3 to Form PF.

5. Aggregation of Assets Under Management

For purposes of determining whether an adviser meets the $150 million minimum reporting threshold or is a Large Private Fund Adviser for purposes of Form PF, the adviser must aggregate together:

• Assets of managed accounts advised by the firm that pursue substantially the same investment objective and strategy and invest in substantially the same positions as private funds advised by the firm (“parallel managed accounts”) unless the value of those accounts exceeds the value of the private funds with which they are managed;

116

and

116

See

Instructions 1, 3, 5, and 6 to Form PF; and Glossary of Terms to Form PF.

See also

definitions of “dependent parallel management account,” “hedge fund assets under management,” “liquidity fund assets under management,” and “private equity fund assets under management” in the Glossary of Terms to Form PF.

• Assets of private funds advised by any of the adviser's “related persons” other than related persons that are separately operated.

117

See

Instructions 3 and 5 to Form PF. “Related person” is defined generally as: (1) All of the adviser's officers, partners, or directors (or any person performing similar functions); (2) all persons directly or indirectly controlling, controlled by, or under common control with the adviser; and (3) all of the adviser's employees (other than employees performing only clerical, administrative, support or similar functions). For purposes of Form PF, a related person is “separately operated” if the advisers is not required to complete section 7.A. of Schedule D to Form ADV with respect to that related person.

See

Glossary of Terms to Form PF and Glossary of Terms to Form ADV. In addition, an adviser may, but is not required to, file one consolidated Form PF for itself and its related persons.

See infra

section II.A.6 of this Release.

These aggregation requirements are designed to prevent an adviser from avoiding Form PF reporting requirements by re-structuring how it provides advice.

We have modified these aggregation requirements from the proposal. As adopted, an adviser may exclude parallel managed accounts if the value of those accounts is greater than the value of the private funds with which they are managed.

118

This change recognizes that, as some commenters noted, an adviser managing a relatively small amount of private fund assets could end up crossing a reporting threshold simply because it has a significant separate account business using a similar strategy.

119

We believe this approach is consistent with section 204(b) of the Advisers Act, the focus of which is private fund reporting.

120

We remain concerned, however, that advisers focusing on private funds may increasingly structure investments as separate accounts to avoid Form PF reporting requirements, which could diminish the utility to FSOC of the information collected on Form PF.

121

Accordingly, an adviser must still include the value of parallel managed accounts in determining whether it meets a reporting threshold if the value of those accounts is less than the value of the private funds managed using substantially the same strategy.

122

118

See supra

note 116.

119

See

IAA Letter; TCW Letter.

120

An adviser managing primarily separate accounts would, of course, still be subject to the applicable Form PF reporting requirements if its private fund assets, taken alone, would cause it to exceed one or more reporting thresholds.

121

Commenters disagreed over whether such evasion was likely. One commenter supported the proposed aggregation rules, agreeing that they “will prevent [an adviser from splitting itself] into smaller components to avoid reporting requirements that are triggered by the amount of assets that are managed by an investment adviser.” Merkl February Letter. Another commenter, however, was skeptical that advisers would re-structure to avoid reporting because clients typically determine the structure of their investments.

See

IAA Letter. Although clients may in many cases dictate the form of investment, we believe that advisers are not without influence in such structuring decisions and may prefer to avoid reporting on Form PF. (We note that advisers, as fiduciaries, may not subordinate clients' interests to their own such as by altering the structure of investments in a way that is not in the client's best interest in an attempt to remain under the reporting thresholds.)

122

See supra

note 116. Some commenters also encouraged us to narrow the definition of “parallel managed account” so that fewer accounts or fewer types of accounts would be covered.

See, e.g.,

AIMA General Letter; IAA Letter (suggesting that we replace “substantially the same” with the “same”); comment letter of the Investment Company Institute (Apr. 12, 2011); TCW Letter (suggesting we exclude registered investment companies, undertakings for collective investment in transferable securities (UCITS) and SICAVs). We have, however, determined to adopt this definition as proposed because we believe that it appropriately reflects the total amount of assets that an adviser is managing using a particular strategy. In addition, the changes we are making with respect to how these account assets are treated for purposes of the reporting thresholds, as well as changes discussed below that allow advisers not to aggregate these account assets with their private funds for reporting purposes, substantially address the concerns of these commenters.

See infra

note 335 and accompanying text.

We have also modified these aggregation requirements from the proposal so that advisers may exclude the assets under management of related persons that are separately operated.

123

There was general support for the proposed aggregation of related persons.

124

However, commenters argued that “[r]equiring aggregation of funds managed by `any related person' is not possible for many large institutions such as a large firm which operates under separate business units with independent asset management functions and decision making by affiliated entities.”

125

123

See supra

note 117.

See also

Proposing Release,

supra

note 12, for the proposed version of Instructions 3, 5 and 6 to Form PF.

124

See, e.g.,

Merkl February Letter.

125

TCW Letter.

See also

IAA Letter.

We are persuaded that advisers may have difficulty gathering the information necessary to aggregate the assets of related persons whose operations are genuinely independent of their own and that, with an appropriate standard of separateness, the risk of evasion is substantially mitigated. Having considered several existing SEC standards of separateness, we believe that the most appropriate for this purpose is the standard the SEC recently adopted in Item 7.A of Form ADV for determining whether an adviser must complete section 7.A of Schedule D to that form with respect to a related

person.

126

Although the Item 7.A standard was adopted for a somewhat different regulatory purpose, we believe it suits this role as well. In addition, every adviser filing Form PF will have already considered this standard with respect to its related persons, which means that applying the standard in the context of Form PF will impose little or no incremental burden on advisers. Accordingly, for purposes of determining whether an adviser meets one or more of the reporting thresholds, the adviser need only aggregate its private fund assets with those of its related persons for which it is required to complete section 7.A of Schedule D to Form ADV.

127

126

One commenter suggested that we use the standard under section 13 of the Securities Exchange Act of 1934 (“Exchange Act”) or look to whether the related persons “share information about investment decisions on a real time basis.” TCW Letter. We are concerned that using the standard under sections 13(d) and 13(g) of the Exchange Act would impose additional burdens on advisers as compared to the Item 7.A standard because advisers will not necessarily have considered the former in the ordinary course of business, and we believe the alternative proposed by this commenter would make it too easy to conclude that a related person is separately operated.

127

See supra

note 117. The relevant instruction to Item 7.A of Form ADV reads as follows: “You do not need to complete Section 7.A. of Schedule D for any related person if: (1) You have no business dealings with the related person in connection with advisory services you provide to your clients; (2) you do not conduct shared operations with the related person; (3) you do not refer clients or business to the related person, and the related person does not refer prospective clients or business to you; (4) you do not share supervised persons or premises with the related person; and (5) you have no reason to believe that your relationship with the related person otherwise creates a conflict of interest with your clients.”

For purposes of both the reporting thresholds and responding to questions on Form PF, an adviser may exclude any assets invested in the equity of other private funds.

128

In addition, if any of the adviser's private funds invests substantially all of its assets in the equity of other private funds and, aside from those investments, holds only cash, cash equivalents and instruments intended to hedge currency risk, the adviser may complete only section 1b with respect to that fund and otherwise disregard that fund.

129

These instructions are intended to avoid duplicative reporting, which reduces the burden of reporting for advisers and improves the quality of the data reported.

128

See

Instruction 7 to Form PF. The adviser must, however, treat these assets consistently for purposes of Form PF. For example, an adviser may not count these assets when determining whether the fund's borrowing may exceed half its net asset value and then disregard these assets for purposes of the reporting thresholds. Although this instruction allows an adviser to disregard these investments in other private funds, it would not allow an adviser to disregard any liabilities of the private fund, even if incurred in connection with an investment in other private funds.

129

See

Instruction 7 to Form PF. Solely for purposes of this instruction, an adviser is also permitted to treat as a private fund any non-U.S. fund that would be a private fund had it used U.S. jurisdictional means in offering its securities. A non-U.S. fund that has never used U.S. jurisdictional means in the offering of the securities it issues would not be a private fund.

See infra

note 134; Exemptions Adopting Release,

supra

note 11, at n.294 and accompanying text.

Based on our staffs' consultation with staff representing FSOC's members, we have expanded from the proposal the scope of assets that may be disregarded under this instruction. The proposed instruction would have allowed advisers to disregard only fund of funds that invest exclusively in other private funds.

130

Commenters expressed concern that the proposed instruction would prove too narrow to accommodate many funds of funds, noting that these funds often hold cash or some amount of direct investments.

131

These commenters generally sought a broader exclusion for funds of funds, suggesting alternatives that would allow these funds to hold essentially unlimited dollar amounts of direct investments while not reporting on Form PF.

132

In light of the purpose for which information is collected on Form PF, we are not convinced that an adviser should not have to report on a fund's direct investments simply because it primarily holds investments in other private funds. However, we are persuaded that our proposed exception for funds of funds was too narrow in that it did not allow for a

de minimis

amount of cash, cash equivalents and currency hedges. These limited non-private fund holdings appear unlikely, on their own, to raise systemic concerns. We are also persuaded that, even where a fund is not necessarily a “fund of funds” but holds investments in other private funds, reporting on those investments is unnecessary because information regarding the other private funds will, in most cases, be reported separately on Form PF, and we have modified the instructions accordingly.

133

130

See

the Proposing Release,

supra

note 12, for the proposed version of Instruction 7 to Form PF. We have also added a new Instruction 8, which clarifies that, except as provided in Instruction 7, all investments in other funds should be included for all purposes under Form PF but that advisers are not required to “look through” the other funds to the underlying assets (unless the other fund's purpose is to act as a holding company for the private fund's investments).

131

See, e.g.,

ABA Committees Letter; comment letter of Akina Limited (Feb. 25, 2011) (“Akina Letter”); MFA Letter; PEGCC Letter; comment letter of Sidley Austin, LLP (submitted to the CFTC) (Apr. 12, 2011) (“Sidley Letter”); SIFMA Letter.

132

Id.

Some commenters also suggested that advisers should not report even the limited information required in section 1b with respect to funds of funds.

See, e.g.,

ABA Committees Letter; Sidley Letter; SIFMA Letter. However, as one commenter pointed out, these funds may be employing leverage at the fund of funds level, which would not be reported if these funds did not complete this section.

See

Merkl February Letter. In addition, information collected in section 1b will provide regulators with information regarding the extent of these funds' investments in other private funds, and certain of the information collected in this section may be important to our investor protection mission.

See infra

notes 133 and 197.

133

See

Instruction 7 to Form PF. We have, however, added a new question 10 to Form PF, which requires the adviser to disclose the amount that each private fund has invested in other private funds. This will allow regulators to understand the extent to which these investments occur and are otherwise being disregarded on Form PF.

See infra

note 197.

If an adviser's principal office and place of business is outside the United States, the adviser may exclude any private fund that, during the adviser's last fiscal year, was not a United States person, was not offered in the United States, and was not beneficially owned by any United States person.

134

This approach is designed to reduce the duplication of reporting requirements that foreign regulators may impose and to allow an adviser to report with respect to only those private funds that are more likely to implicate U.S. regulatory interests.

134

See

Instruction 1 to Form PF. This portion of Instruction 1 is only necessary for those funds that fall within the definition of “private fund.” A non-U.S. fund that has never used U.S. jurisdictional means in the offering of the securities it issues would not be a private fund.

See

Exemptions Adopting Release,

supra

note 11, at n.294 and accompanying text. We have modified this instruction from the proposal to more closely follow the requirements of Regulation S; the instruction now looks to whether the offering was made “in the United States” rather than “to * * * any

United States person.” See also

Glossary of Terms to Form PF. “United States person” is defined for purposes of Form PF by reference to the definition in rule 203(m)-1, which tracks the definition of a “U.S. person” under Regulation S but contains a special rule for discretionary accounts maintained for the benefit of United States persons.

See

Exemptions Adopting Release,

supra

note 11, at section II.B.4.

Reporting for Affiliated and Sub-advised Funds

An adviser may, but is not required to, report the private fund assets that it manages and the private fund assets that its related persons manage on a single Form PF.

135

This is intended to provide private fund advisers with reporting flexibility and convenience, allowing affiliated entities that share reporting and risk management systems to report jointly while also permitting affiliated entities that operate separately to report separately. Commenters did not address

this aspect of the proposal, which we are adopting as proposed.

135

See

Instruction 2 to Form PF.

See supra

note 117 for the definition of “related person.”

With respect to sub-advised funds, to prevent duplicative reporting, only one adviser should report information on Form PF with respect to that fund.

136

For reporting efficiency and to prevent duplicative reporting, if the adviser that completes information in section 7.B.1. of Schedule D to Form ADV with respect to any private fund is also required to file Form PF, the same adviser is responsible for reporting on Form PF with respect to that fund.

137

However, if the adviser that completes information on Schedule D to Form ADV with respect to the private fund is not required to file Form PF (such as in the case of an exempt reporting adviser), then another adviser must report on that fund on Form PF.

138

If none of the advisers to a fund is required to file Form PF because they are all exempt reporting advisers or do not exceed the minimum reporting threshold, Instruction 4 to Form PF would not require any adviser to file the Form with respect to that fund. Commenters did not address this aspect of the proposal.

136

Each adviser that meets the criteria for reporting on Form PF has an independent obligation to file the Form with respect to every fund it advises.

See

Advisers Act rule 204(b)-1(a); Instructions 1 and 3 to Form PF. However, when one adviser files Form PF with respect to a fund for a given reporting period, the other advisers are relieved of their obligation to file for that fund.

137

See

Instruction 4 to Form PF. We have modified this instruction from the proposal to clarify who would report in the case that the adviser completing section 7.B.1 of Schedule D to Form ADV with respect to a particular private fund is an exempt reporting adviser or does not meet the new minimum reporting threshold of $150 million in private fund assets under management.

138

See

Instruction 4 to Form PF.

See supra

note 48 and accompanying text.

7. Exempt Reporting Advisers

Only private fund advisers registered with the SEC (including those that are also registered with the CFTC as CPOs or CTAs) must file Form PF.

139

As noted above, the Dodd-Frank Act created exemptions from SEC registration under the Advisers Act for advisers solely to venture capital funds and for advisers solely to private funds that in the aggregate have less than $150 million in assets under management in the United States.

140

We believe that Congress' determination to exempt these advisers from SEC registration indicates Congress' belief that regular reporting of detailed systemic risk information may not be necessary because they are sufficiently unlikely to pose this kind of risk.

141

After consultation with staff representing FSOC's members and in light of the basic information that the SEC obtains from exempt reporting advisers on Form ADV, the SEC did not propose to extend Form PF reporting to these advisers.

142

Commenters that addressed this aspect of the proposal agreed that exempt reporting advisers should not be required to file Form PF, and we have adopted this approach as proposed.

143

139

See

Advisers Act rule 204(b)-1.

140

See supra

note 53 and accompanying text.

141

See

Senate Committee Report,

supra

note 5, at 74 (“The Committee believes that venture capital funds * * * do not present the same risks as the large private funds whose advisers are required to register with the SEC under this title. Their activities are not interconnected with the global financial system, and they generally rely on equity funding, so that losses that may occur do not ripple throughout world markets but are borne by fund investors alone.”).

See also

Exemptions Adopting Release,

supra

note 11.

142

See

Implementing Adopting Release,

supra

note 11, for a discussion of the information exempt reporting advisers are required to provide on Form ADV.

143

See

AIMA General Letter; Lone Star Letter. To the extent an exempt reporting adviser is registered with the CFTC as a CPO or CTA, the CFTC has proposed that the adviser would be obligated to file either Form CPO-PQR or CTA-PR, respectively.

B. Frequency of Reporting

1. Annual and Quarterly Reporting

Most private fund advisers, including large private equity advisers and smaller private fund advisers, are required to complete and file Form PF only once per fiscal year.

144

Large hedge fund advisers and large liquidity fund advisers, on the other hand, must update information relating to their hedge funds or liquidity funds, respectively, each fiscal quarter.

145

Periodic reporting will permit FSOC to monitor periodically certain key information relevant to assessing systemic risk posed by these private funds on both an individual and aggregate basis. More frequent, quarterly reporting for large hedge fund and large liquidity fund advisers is necessary in order to provide FSOC with timely data to identify emerging trends in systemic risk.

146

144

See

Instruction 9 to Form PF.

145

Even these advisers, however, need only update information regarding other types of funds they manage on an annual basis. For example, a large hedge fund adviser that also manages a small amount of liquidity fund and private equity fund assets must update information relating to its hedge funds each quarter but only needs to update information relating to its liquidity funds and private equity funds when it submits its fourth quarter filing. An adviser that is both a large hedge fund adviser and a large liquidity fund adviser must file quarterly updates regarding both its liquidity funds and hedge funds.

See

Instruction 9 to Form PF.

146

See

Proposing Release,

supra

note 12, at section II.C. We also noted in the Proposing Release that we understood hedge fund advisers already collect and calculate on a quarterly basis much of the information that Form PF requires relating to hedge funds. One commenter argued that this is only true with respect to the information required in sections 1a and 1b of Form PF.

See

comment letter of Fidelity Investments (Apr. 12, 2011) (“Fidelity Letter”);

see also

MFA Letter. We have taken these comments into account in determining to extend the reporting deadlines for hedge fund advisers, as discussed below in section II.B.2 of this Release. We note, however, that another commenter also stated that “Form PF for the most part * * * [requests] information that is part of, or should be part of, the existing risk management processes at the responding institutions,” and as such “this information will either be something the adviser produces already, or arguably should.” Comment letter of MSCI Inc. (submitted to the CFTC) (Apr. 11, 2011) (“MSCI Letter”). Commenters did not address the ability of liquidity funds to prepare and submit quarterly filings, and we continue to believe, as discussed in the Proposing Release, that most liquidity fund advisers collect on a monthly basis much of the information that we are requiring in section 3 of Form PF and that quarterly reporting should, as a result, be relatively efficient for these advisers.

The filing requirements we are adopting differ from the proposal in two principal respects. First, the proposal would have required large private equity advisers to report on a quarterly, rather than annual, basis. Second, under the proposal, once an adviser became subject to quarterly reporting, it would have been required to update information with respect to all of its private funds each quarter (not just for the type of private fund that caused it to exceed the large adviser threshold).

147

The proposal also would have required reporting based on calendar quarters rather than the adviser's fiscal quarters. We have made this change because some advisers with quarterly updating obligations will now only need to update information about certain funds on an annual basis. The annual reporting is intended to align with typical end of fiscal year reporting activities, and requiring advisers to file separate annual and fourth quarter reports would impose additional burdens. We believe this change will, in practice, have little effect on the reporting (based on IARD data as of October 1, 2011, only about 2% of all registered advisers report a fiscal year ending in a month other than March, June, September or December, though the total may be slightly higher because IARD does not distinguish among, for instance, mid-month and end-of-month fiscal year ends).

A number of commenters responded to our proposal regarding the frequency of reporting. One agreed that quarterly reporting would be appropriate, and two others argued that advisers should report even more frequently because market conditions and portfolios can change rapidly.

148

On the other hand, a number of commenters disagreed with the proposal, suggesting instead that Large Private Fund Advisers should report no more than semi-annually.

149

These commenters argued that semi-

annual reporting would reduce the burden to advisers while also giving regulators more time to analyze the data, and several compared Form PF to the FSA Survey, which has been conducted on a voluntary, semi-annual basis.

150

Another commenter stated that the generally illiquid portfolios of private equity funds fluctuate little in value throughout the year, in its view, making quarterly reporting unnecessary.

151

148

See

CPIC Letter (supporting the proposal with respect to large private funds advisers); AFL-CIO Letter and AFR Letter (arguing for more frequent reporting).

149

See, e.g.,

ABA Committees Letter; BlackRock Letter; Fidelity Letter; comment letter of Kleinberg, Kaplan, Wolff & Cohen, P.C. (submitted to the SEC) (Apr. 12, 2011) (“Kleinberg General Letter”); MFA Letter; SIFMA Letter; USCC Letter.

150

See, e.g.,

ABA Committees Letter; Kleinberg General Letter.

151

See

PEGCC Letter.

After consultation with staff representing FSOC's members, we continue to believe that quarterly reporting is important to provide FSOC with meaningfully current information with respect to the hedge fund and liquidity fund industries and to allow FSOC to identify rapidly emerging trends among these types of funds.

152

Although some commenters suggested that the speed with which markets and portfolios change may warrant even more frequent reporting, we believe at this time that the additional benefit to FSOC from reporting more often than once a quarter would not justify the additional burdens imposed on advisers.

153

On the other hand, we are also not convinced that less frequent (

e.g.,

semi-annual) reporting would provide sufficient, or sufficiently timely, information to enable FSOC to identify and respond to rapidly emerging trends. In addition, we believe that international approaches to private fund reporting may be shifting in favor of quarterly, rather than semi-annual, reporting.

154

152

Moreover, we believe that quarterly reporting helps to discourage “window-dressing” around the reporting dates.

See infra

notes 285-292 and accompanying text.

153

See supra

note 148. We also note that FSOC has the authority to direct OFR to gather additional data where systemic risk concerns merit the reporting.

See, e.g.,

sections 153 and 154 of the Dodd-Frank Act.

154

ESMA's proposed reporting template would impose quarterly reporting requirements on private fund advisers.

See

ESMA Proposal,

supra

note 33.

With respect to large private equity advisers, however, the SEC is persuaded that the generally illiquid nature of private equity fund portfolios means that trends emerge more slowly in that sector.

155

As a result, the proposal has been modified so that large private equity advisers are required to report information regarding private equity funds on an annual basis only.

156

155

See supra

note 151.

156

See

Instruction 9 to Form PF.

Fewer commenters addressed the frequency of reporting for smaller advisers. One commenter agreed that annual reporting would be appropriate for these advisers,

157

and several others argued that smaller advisers should report more frequently, proposing at least semi-annual filings.

158

Again, although we acknowledge the potential value of more frequent reporting from smaller private fund advisers, we are concerned about the burden this would impose. At this time, we are not convinced that more frequent reporting from smaller private fund advisers would, from a systemic risk monitoring perspective, be justified by the value of the additional data.

157

See

AIMA General Letter.

158

See

AFL-CIO Letter; AFR Letter.

See also

MFA Letter (arguing that all advisers, large and small, should report on a semi-annual basis).

As noted above, the requirements we are adopting also differ from the proposal in that even those advisers who must report on a quarterly basis are only required to do so with respect to the type of fund that caused them to exceed the reporting threshold. We are adopting this approach in part because these other funds will include private equity funds, venture capital funds and real estate funds, all of which are likely to have generally illiquid portfolios and for which we believe annual reporting is appropriate, as explained above. This approach also reflects the different implications for systemic risk that may be presented by different investment strategies.

Reporting Deadlines

Large private equity advisers and smaller private fund advisers have 120 days from the end of their fiscal years to file Form PF.

159

In contrast, large hedge fund advisers have 60 days from the end of each fiscal quarter, and large liquidity fund advisers have 15 days.

160

The deadlines we are adopting for large hedge fund advisers, large private equity advisers and smaller advisers are longer than the deadlines we proposed. In particular, we have extended the deadline for large hedge fund advisers from 15 days to 60 days, the deadline for large private equity fund advisers from 15 days to 120 days and the deadline for smaller private fund advisers from 90 days to 120 days.

161

159

See

Instruction 9 to Form PF; Advisers Act rule 204(b)-1(a).

160

See

Instruction 9 to Form PF. As discussed above, a large hedge fund adviser (or large liquidity fund adviser) that also manages other types of funds must file quarterly updates with respect to its hedge funds (or liquidity funds, as applicable) but only needs to update information regarding its other funds when it files its fourth quarter update. Such an adviser may comply with its filing obligations by initially filing a fourth quarter update that includes only information about its hedge funds (or liquidity funds, as applicable) within 60 days (or 15 days, as applicable) and then amending its filing within 120 days after the end of the quarter to include information about its other funds.

161

We noted in the Proposing Release that the proposed 90 day deadline would allow these advisers to file amendments at the same time as they file their Form ADV annual updating amendment, which may make certain aspects of the reporting more efficient, such as reporting assets under management. Proposing Release,

supra

note 12, at section II.C. We believe these efficiencies will still be realized because the reporting continues to be “as of” the same date as the annual reports on Form ADV and an adviser may still file on or after the date on which it files Form ADV.

The proposed deadline of 15 days for large hedge fund and private equity fund advisers attracted significant opposition. Commenters offered a number of reasons to extend the deadline, including that: (1) 15 days is not enough time to prepare and submit a report with reliably accurate data, particularly where the adviser must value illiquid fund assets;

162

(2) other SEC reporting requirements allow more time;

163

(3) the FSA Survey has allowed more time (approximately 30 to 45 days in the most recent surveys) and required less detail;

164

(4) the same personnel will be closing the books at the end of the quarter and completing Form PF;

165

and (5) the more current the information reported, the greater the consequences should it become public.

166

These commenters suggested alternatives that ranged from 45 to 120 days.

167

We understand from the comments, however, that the proposed reporting deadlines would be more problematic for some types of advisers than for

others. For instance, commenters focusing on private equity advisers generally suggested longer deadlines than commenters focusing on hedge fund advisers, and the valuation of illiquid portfolios is likely to be a more common problem for private equity advisers.

168

Also, although a number of commenters addressed hedge fund advisers and private equity advisers, none commented specifically on whether liquidity fund advisers could meet the proposed deadline.

162

See, e.g.,

ABA Committees Letter; AIMA General Letter; BlackRock Letter; IAA Letter; MFA Letter; USCC Letter.

163

See, e.g.,

ABA Committees Letter (noting that Forms N-SAR and N-Q, used by registered investment companies, allow 60 days); AIMA General Letter (pointing to Form 13F (allowing 45 days), Form 10-K (allowing at least 60 days), and Form 10-Q (allowing at least 40 days)); Fidelity Letter; Kleinberg General Letter; MFA Letter (pointing to the 120 days allowed for audited financial statements under the Advisers Act custody rule); TCW Letter.

164

See, e.g.,

AIMA General Letter; IAA Letter.

165

See, e.g.,

Kleinberg General Letter.

166

See, e.g.,

AIMA General Letter; Kleinberg General Letter. Some commenters also pointed to the Form's proposed signature page, which would have required advisers to certify that the information provided is “true and correct,” arguing that this standard would be difficult to satisfy in 15 days.

See, e.g.,

AIMA General Letter. As discussed below, we are not adopting the proposed certification requirement.

See infra

notes 183-185 and accompanying text.

167

See, e.g.,

AIMA General Letter (45 days); Akina Letter (120 days for private equity fund data); BlackRock Letter (120 days); CPIC Letter (45 days, at least initially); Fidelity Letter (preferably 90 days, but no less than 45 days); IAA Letter (90 days); Kleinberg General Letter (60 days); Lone Star Letter (60 days for private equity fund data); Merkl February Letter (four months for private equity fund data); MFA Letter (120 days); PEGCC Letter (at least 90 days for private equity fund data); Seward Letter (120 days); SIFMA Letter (120 days); TCW Letter (60 days); USCC Letter (120 days).

168

Id.

We are persuaded that longer deadlines are appropriate for large hedge fund advisers and large private equity fund advisers and that, with respect to large private equity fund advisers in particular, the work required to value the generally illiquid portfolios of private equity funds favors a substantially longer reporting deadline than was proposed.

169

A few commenters favored a deadline for large hedge fund advisers longer than the one we are adopting, but several commenters indicated that a deadline shorter than the one we are adopting would be adequate.

170

We believe that our revised approach strikes an appropriate balance between the need to provide FSOC with timely data and the ability of these advisers to prepare and submit Form PF. We also believe it will reduce the burden of reporting for these advisers.

169

We note that many of the questions in section 4, which large private equity fund advisers must file, relate to information that should be available on the financial statements of their portfolio companies. By extending the deadline to 120 days for these advisers, we anticipate that the burden of reporting will be reduced because, in many cases, they will now be able to delay reporting until after receiving financial statements from their portfolio companies.

170

See supra

note 167.

Fewer commenters addressed the proposed reporting deadline of 90 days for smaller advisers. One commenter supported the proposal,

171

but several argued that smaller advisers should have more than 90 days to prepare and submit their filings.

172

Several commenters noted that the Advisers Act custody rule allows advisers up to 120 days to distribute audited financial statements to investors when relying on the annual audit provision under that rule.

173

We believe that our revised deadline of 120 days will enable these advisers to benefit from the availability of financial statements and also help to avoid crowding advisers' calendars with end of year reporting obligations while at the same time providing FSOC with reasonably timely data.

171

See

AIMA General Letter.

172

See, e.g.,

BlackRock Letter (120 days); MFA Letter (120 days); PEGCC Letter (150 days for private equity fund data).

173

See, e.g.,

BlackRock Letter; MFA Letter; USCC Letter.

See also

Advisers Act rule 206(4)-2(b)(4).

3. Initial Reports

Newly registering private fund advisers are subject to the same Form PF reporting deadlines as currently registered advisers.

174

Advisers are not, however, required to file Form PF with respect to any period that ended prior to the effective date of their registrations. Accordingly, a smaller private fund adviser that registers during its 2013 fiscal year must file Form PF within 120 days following the end of its 2013 fiscal year. It would not, however, need to file Form PF for its 2012 fiscal year. Similarly, a large hedge fund adviser that registers during its third fiscal quarter must file Form PF within 60 days following the end of that quarter but need not file for the preceding fiscal quarter.

175

174

See

Advisers Act rule 204(b)-1(a);

supra

section II.B.2 of this Release.

175

Whether an adviser is a large hedge fund or large liquidity fund adviser would be determined as of the date specified in Form PF, not the date of registration. When filing an initial Form PF, a large hedge fund or large liquidity fund adviser that also manages other types of private fund may rely on the instructions in the Form allowing it to delay updating information regarding these other fund types when filing an update.

We have extended the deadlines for initial filings from the 15 days that we proposed. One commenter argued that the proposed deadline would be too short and suggested 90 days instead.

176

We believe the revised initial filing deadlines are more consistent with the deadlines for updating Form PF discussed above in section II.B.2 of this Release.

176

See

AIMA General Letter.

4. Transition Filings, Final Filings and Temporary Hardship Exemptions

An adviser must file Form PF to report that it is transitioning to only filing Form PF annually with the Commissions or to report that it no longer meets the requirements for filing Form PF no later than the last day on which the adviser's next Form PF update would be timely.

177

This allows us to determine promptly whether an adviser's discontinuance in reporting is due to it no longer meeting the form's reporting thresholds as opposed to a lack of attention to its filing obligations. Advisers may also avail themselves of a temporary hardship exemption in a similar manner as with other SEC filings if they are unable to file Form PF electronically in a timely manner due to unanticipated technical difficulties.

178

No commenters addressed the proposed transition filings, final filings or temporary hardship exemption, and we are adopting them as proposed.

177

See

Instruction 9 to Form PF.

178

See

Advisers Act rule 204(b)-1(f); Instruction 14 to Form PF. The adviser would complete and file on paper Item A of section 1a and section 5 of Form PF, checking the box in section 1a indicating that it is requesting a temporary hardship exemption. The adviser must file any request for a temporary hardship exemption no later than one business day after the electronic Form PF filing was due. The adviser must then submit the filing that is the subject of the Form PF paper filing in electronic format with the Form PF filing system no later than seven business days after the filing was due.

C. Information Required on Form PF

The questions contained in Form PF reflect relevant requirements and considerations under the Dodd-Frank Act, consultations with staff representing FSOC's members, and the Commissions' experience in regulating those private fund advisers that are already registered with the Commissions. As discussed above, with respect to hedge fund advisers in particular, the information collected on Form PF is also broadly based on the guidelines initially developed in the FSA Survey and the IOSCO report on hedge fund oversight, and many of the more detailed items are similar to questions proposed to be included in ESMA's reporting template.

179

Form PF has been designed to collect information to assist FSOC in monitoring and assessing systemic risks that private funds may pose, as discussed in section II.A above.

179

See supra

section I.B of this Release.

Commenters' reactions to the scope of Form PF varied, with some proposing further enhancements and others arguing that the proposed reporting is excessive. Commenters arguing for expanded reporting recommended additional questions about counterparty exposures and short selling or suggested having all advisers complete the entire form.

180

In contrast, critics of the proposal argued that information required on Form PF would be unduly burdensome to provide or is available to regulators from other sources.

181

A few commenters who objected to other aspects of the proposal recommended adding several questions that were originally proposed on Form ADV.

182

Although this would expand the Form, these commenters believed that these

questions, which relate to valuation, beneficial ownership and the identity of service providers, would require competitively sensitive or proprietary information and would be more appropriately reported confidentially on Form PF.

180

See, e.g.,

AFL-CIO Letter; AFR Letter; Merkl February Letter; MSCI Letter; comment letter of Plexus Consulting Group (Feb. 28, 2011).

See also

ABA Committees Letter (comparing Form PF to other SEC forms, including Form N-SAR, Form N-Q, Schedule 13D and Schedule 13G); AIMA General Letter (pointing to Schedule 13G); BlackRock Letter; Kleinberg General Letter.

185

We note, however, that even absent the certification, a willful misstatement or omission of a material fact in any report filed with the SEC under the Advisers Act is unlawful.

See

section 207 of the Advisers Act. We have also added an instruction to the Form that clarifies when an adviser is required to amend its filing to correct an error. In particular, Instruction 16 to Form PF explains that an adviser is not required to update information that it believes in good faith properly responded to Form PF on the date of filing even if that information is subsequently revised for purposes of the adviser's recordkeeping, risk management or investor reporting (such as estimates that are refined after completion of a subsequent audit). The instruction also explains that large hedge fund advisers and large liquidity fund advisers that comply with their fourth quarter filing obligations by submitting an initial filing followed by an amendment in accordance with Instruction 8 to Form PF will not be viewed as affirming responses regarding one fund solely by providing updated information regarding another fund at a later date.

The second change is to increase the ability of advisers to rely on their internal methodologies when reporting on Form PF.

186

A number of commenters encouraged this approach, recommending “that the instructions to the Form be modified to confirm that advisers be able to rely on the same internal reporting procedures and practices when reporting on the Form that they would use when reporting to advisory clients, unless directly contradicted by the instructions.”

187

The revised approach strikes an appropriate balance between easing the burden on advisers by allowing them to rely on their existing practices and ensuring that FSOC receives comparable data across the industry. 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, and we anticipate that these changes will reduce the burden that many advisers incur in completing the Form.

188

186

See

Instruction 15 to Form PF. As noted in the instruction, we would expect reporting on Form PF to be consistent with information the adviser uses for internal and investor reporting purposes. Methodologies also must be consistently applied, and to the extent we have indicated how an adviser should respond to a question, the answer should be consistent with our instructions. In addition to this general instruction, we have increased the ability of advisers to rely on their own methodologies with a number of specific changes throughout the Form, including permitting advisers to report performance using their existing practices, allowing flexibility in reporting interest rate sensitivities and changing the frequency and substance of reporting for large private equity advisers.

See, e.g., infra

notes 202, 241-242, 247-248 and 258-260 and accompanying text and section II.C.4.

187

BlackRock Letter.

See also

IAA Letter; MFA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

188

If audited information is available at the time an adviser files Form PF, we would of course expect responses to Form PF to be consistent with that audited information.

The information that Form PF requires and the changes made from the proposal are discussed in detail below.

1. Section 1 of Form PF

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. We are adopting Form PF with several changes to the information that advisers are required to report in section 1. These changes, which are discussed in detail below, are intended to respond to industry concerns while still providing FSOC the information it needs to monitor systemic risk across the private fund industry. In general, we expect that these changes will reduce the burden of responding to the Form and more closely align the Form with ESMA's proposed reporting template.

a. Section 1a of Form PF

Item A of section 1a seeks identifying information about the adviser, such as its name and the name of any of its related persons whose information is also reported on the adviser's Form PF. The adviser will also be required to provide its large trader identification number, if any.

189

The addition of the large trader identification number will enhance the value of Form PF information by allowing it to be quickly and accurately linked to other information that may be available to the SEC while imposing little additional burden. Section 1a also requires basic aggregate information about the private funds managed by the adviser, such as the portion of gross (

i.e.,

regulatory) and net assets under management attributable to certain types of private funds.

190

This identifying information

will assist us and FSOC in monitoring the amount of assets managed by private fund advisers and the general distribution of those assets among various types of private funds.

191

This information also provides data about the size of the adviser, the nature of the adviser's activities and the extent to which assets are managed rather than owned, which are factors that FSOC must consider in making a determination to designate a nonbank financial company for FRB supervision under the Dodd-Frank Act.

192

189

See

Question 1 on Form PF.

190

See

Question 3 on Form PF. This question requires the adviser to report the portion of its assets under management that are attributable to hedge funds, liquidity funds, private equity funds, real estate funds, securitized asset funds, venture capital funds, other private funds, and funds and accounts other than private funds. We have modified the instructions to Question 3 to improve their consistency and to respond to a commenter's request for clarification regarding the meaning of “funds and accounts other than private funds.”

See

MFA Letter. We have also determined not to adopt a proposed question that would have required advisers to report their aggregate gross and net

regulatory assets under management because this information can be derived from the data reported in Question 3.

See

the Proposing Release,

supra

note 12, for the proposed Question 3 on Form PF.

191

Question 4 in section 1a of Form PF also permits an adviser to explain any assumptions it made in responding to Form PF. This question is optional. One commenter expressed support for “providing space for managers to describe any assumptions they make in responding to a question,” and we are adopting this question substantially as proposed.

See

MFA Letter.

192

See

section 113(a) of the Dodd-Frank Act; FSOC Second Notice,

supra

note 6.

b. Section 1b of Form PF

Section 1b of Form PF elicits certain identifying and other basic information about each private fund the adviser manages. The adviser generally must complete a separate section 1b for each private fund.

193

This section of the Form requires reporting of each private fund's gross and net assets and the aggregate notional value of its derivative positions.

194

It also requires basic information about the fund's borrowings, including a breakdown showing whether the creditor is based in the United States and whether it is a financial institution.

195

Advisers must also report the percentage of the fund's equity held by the five largest equity holders, which provides information about the concentration of the fund's investor base.

196

Two new questions, which we have added in connection with other changes to the Form, also require the value of the fund's investments in other private funds and of the parallel managed accounts managed alongside the fund.

197

193

However, if the adviser elects to report on an aggregated basis regarding the funds comprising a master-feeder arrangement or a parallel fund structure, it would only file a single section 1b for the master fund in the master-feeder arrangement or for the largest fund in the parallel fund structure. We have modified the approach to aggregation of master-feeder arrangements and parallel fund structures to allow advisers more flexibility in determining how to report.

See

Instruction 5 to Form PF. This change is discussed in greater detail below in section II.C.5 of this Release.

194

See

Questions 8, 9 and 13 on Form PF. With respect to Question 13 and similar questions regarding the value of derivatives, the Form requires the adviser to report the gross notional value of its funds' derivative positions, except that options must be reported using their delta adjusted notional value.

See

Instruction 15 to Form PF. In contrast, Questions 8 and 9, and similar questions that refer to gross asset value or net asset value, require valuations based on the instruction in Form ADV for calculating regulatory assets under management.

See

definitions of “gross asset value” and “net asset value” in the Glossary to Form PF.

195

See

Question 12 on Form PF. One commenter suggested that the amount of borrowings should be netted where a private fund is both a lender to and a creditor of a counterparty.

See

MFA Letter. The commenter's approach would, however, obscure the total amount of leverage the fund has incurred, and we have clarified that such amounts should not be netted. Also, in response to this commenter, we have modified the instructions to clarify that collateral should not be netted against borrowings. We have also modified this question, and other questions on the Form requiring a breakdown of creditor types, to split the non-financial institution category into U.S. and non-U.S. creditors. This change is intended to increase the usefulness of this data for the FRB's flow of funds report, which is an important tool for evaluating trends in and risks to the U.S. financial system.

See infra

note 475.

We proposed that advisers completing section 1b also report the identity of, and amount owed to, each creditor to which the fund owed an amount equal to or greater than 5 percent of the fund's net asset value as of the reporting date.

See

the Proposing Release,

supra

note 12, for the proposed Question 10 on Form PF. This question has been moved to section 2b of the Form so that only large hedge fund advisers must provide this information. This change is intended to respond to commenter concerns that completing this question will be burdensome but also preserve information regarding interconnectedness that may be important to FSOC's monitoring of systemic risk among large hedge funds.

See, e.g.,

PEGCC Letter.

196

See

Question 15 on Form PF. For purposes of this question and Question 16 on Form PF, beneficial owners are persons who would be counted as beneficial owners under section 3(c)(1) of the Investment Company Act or who would be included in determining whether the owners of the fund are qualified purchasers under section 3(c)(7) of that Act. (15 U.S.C. 80a-3(c)(1) or (7)). The proposal would have required that advisers report the number of beneficial owners of the fund. However, we are not adopting this question because, as a result of our revised approach to reporting on parallel managed accounts, this information will largely duplicate information collected on Form ADV, and we do not believe that receiving updated responses on a quarterly basis from large hedge fund advisers and large liquidity fund advisers is necessary with respect to this information.

See infra

section II.C.5 of this Release.

See also

the Proposing Release,

supra

note 12, for the proposed Question 12(a) on Form PF; Question 13 of section 7.B.1. of Schedule D to Form ADV.

197

See

Questions 10 and 11 on Form PF. Question 10, which asks for the value of the fund's investments in other private funds, has been added because our expanded Instruction 7 otherwise allows these investments to be disregarded on Form PF and it is important that FSOC have a basic measure of the extent of assets not otherwise reflected on the Form. This will also serve as a measure of interconnectedness among private funds.

See supra

notes 128 and 131 and accompanying text for a discussion of Instruction 7. Question 11, relating to the value of parallel managed accounts, has been added for similar reasons.

See infra

section II.C.5 of this Release for a discussion of our revised approach to reporting on parallel managed accounts.

Section 1b also requires that advisers report in response to Question 17 the performance of each fund, both on a gross basis and net of management fees and incentive fees and allocations. Advisers must provide performance information that is consistent with the performance results they report to investors (or use internally, if not reported to investors). Advisers are required, at a minimum, to report annual performance results for the fund's most recently completed fiscal year but only need to report monthly and quarterly performance information if that information is already being calculated for the fund.

Question 17 has been modified from the proposal in response to commenter concerns regarding the burden of providing performance results in the form proposed.

198

In particular, it omits the requirement to report the change in net asset value, allows advisers to report performance gross and net of management fees and incentive fees and allocations (rather than gross and net of incentive fees and allocations only) and makes reporting of monthly and quarterly performance mandatory only for those funds for which advisers are already calculating performance results with that frequency. Commenters were concerned primarily that the proposed instructions to this question would require advisers to calculate performance in a manner different from that used for investor reporting purposes or more frequently than is their current practice.

199

A number of commenters explained that funds with illiquid portfolios, such as private equity funds, typically do not calculate performance on a monthly (and in many cases, even quarterly) basis and that calculating performance more frequently would impose a significant burden on these advisers.

200

As discussed above, we are persuaded that trends emerge more slowly in private funds having illiquid portfolios, meaning that developments in these funds may be tracked using information reported on a less frequent basis.

201

We believe that the revised approach, which allows advisers to rely on their existing procedures for calculating and reporting fund performance, significantly reduces the burden of responding to this question but will nonetheless yield valuable information for FSOC.

202

198

See infra

notes 199 and 200.

199

See, e.g.,

ABA Committees Letter; MFA Letter (recommending that “the Form be revised to request (i) Gross performance and (ii) performance net of all fees” and suggesting that advisers be permitted to report what they report to private fund investors).

200

See, e.g.,

ABA Committees Letter; IAA Letter; Merkl February Letter; MFA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

201

See supra

text accompanying note 156.

202

See

Question 17 on Form PF.

See also

Proposing Release,

supra

note 12, at text

accompanying n. 115 for a discussion of potential uses for this data.

We have also added to section 1b two questions that the SEC originally proposed as part of the expanded private fund reporting in Form ADV.

203

The first, Question 14, requires that advisers report the assets and liabilities of each fund broken down using categories that are based on the fair value hierarchy established under U.S. generally accepted accounting principles (“GAAP”).

204

The second, Question 16, requires that advisers provide the approximate percentage of each fund beneficially owned by certain types of investors.

205

As discussed in the Implementing Adopting Release, the SEC determined not to adopt these questions on Form ADV in response to commenter concerns that they would result in the public disclosure of competitively sensitive or proprietary information.

206

We have added these questions to Form PF (with the modifications discussed below) because, as the SEC explained in the Implementing Adopting Release, this information may be important to FSOC's systemic risk monitoring activities and to our investor protection mission.

207

203

See

Questions 14 and 16 on Form PF.

204

Advisers must report this information annually (or on their fourth quarter updates, in the case of large hedge fund and large liquidity fund advisers). This question will provide information indicating the illiquidity and complexity of a fund's portfolio and the extent to which the fund's value is determined using metrics other than market mechanisms. In a recent rulemaking release, FSOC identified this fair value categorization as the type of information that may be important for assessing liquidity risk and maturity mismatch, one factor in determining whether a nonbank financial company may pose systemic risk.

See

FSOC Second Notice,

supra

note 6.

See also Rules Implementing Amendments to the Investment Advisers Act of 1940,

Investment Advisers Act Release No. 3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (“Implementing Proposing Release”) for the proposed version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D, question 12.

See also

FASB ASC 820-10-50-2b.

We have modified this question from the proposal to expressly include definitions for Levels 1, 2 and 3 of the hierarchy. This change is intended to minimize ambiguity for advisers that do not utilize GAAP or another international accounting standard that requires the contemplated breakdown of assets and liabilities. Advisers that already prepare this breakdown for financial reporting purposes should respond to this question using the fair value hierarchy established under the applicable accounting standard.

205

See

the Implementing Proposing Release for the proposed version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D, question 17.

206

See

Implementing Adopting Release,

supra

note 11, at nn. 246-247. Information filed on Form ADV is made available to the public through the Investment Adviser Public Disclosure (IAPD) Web site. In contrast, information filed on Form PF will generally remain confidential.

See infra

section II.D of this Release.

207

Id.

Several commenters responding to the Proposing Release also encouraged us to move these questions from Form ADV to Form PF.

See

IAA; MFA Letter; Seward Letter.

Commenters responding to these questions as proposed on Form ADV argued that they would be difficult or burdensome to complete. With respect to Question 14, commenters argued that some private funds—especially non-U.S. funds—do not use generally accepted accounting principles (whether U.S. or international) or obtain audited financial statements, making the requirement to report a breakdown of fair values potentially costly.

208

We understand, however, that the group of funds not using some form of generally accepted accounting standard is relatively small and that most private funds already utilize GAAP or other international accounting standards that require the contemplated breakdown of assets and liabilities.

209

In addition, funds are not required to adopt GAAP for these purposes, and Question 14 does not require that the

valuations

within the breakdown of assets and liabilities be audited, or even determined in accordance with GAAP. For instance, an adviser could rely on the procedure for calculating fair value that is specified in a private fund's governing documents.

210

As a result, we are not convinced that the aggregate burden attributable to this reporting is unreasonable or even as significant as some commenters contend. The question has, however, been modified from the proposal to require a breakdown only by category and not by class.

211

For advisers that do not already prepare this breakdown for financial reporting purposes, this revised approach will significantly reduce the work required to respond to this question.

212

Such advisers may, nevertheless, incur additional costs to complete this question, and we are sensitive to these costs. We believe, however, that this questio

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