# Amendments to Form PF To Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2022-01976 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** February 17, 2022 - **Citation:** 87 FR 9106 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 275 and 279 [Release No. IA-5950; File No. S7-01-22] RIN 3235-AM75 Amendments to Form PF To Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers AGENCY: Securities and Exchange Commission. ACTION: Proposed rules. SUMMARY: The Securities and Exchange Commission (“SEC” or “Commission”) is proposing to amend Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require current reporting upon the occurrence of key events. The proposed amendments also would decrease the reporting threshold for large private equity advisers and require these advisers to provide additional information to the SEC about the private equity funds they advise. Finally, we are proposing to amend requirements concerning how large liquidity advisers report information about the liquidity funds they advise. The proposed amendments are designed to enhance the Financial Stability Oversight Council's (“FSOC”) ability to monitor systemic risk as well as bolster the SEC's regulatory oversight of private fund advisers and investor protection efforts. DATES: Comments should be received on or before March 21, 2022. ADDRESSES: Comments may be submitted by any of the following methods. Electronic Comments • Use the Commission's internet comment forms ( https://www.sec.gov/rules/submitcomments.htm ); or • Send an email to rule-comments@sec.gov. Please include File Number S7-01-22 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-01-22. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website ( https://www.sec.gov/rules/proposed.shtml ). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Alexis Palascak, Lawrence Pace, Samuel K. Thomas, Senior Counsels; Michael C. Neus, Senior Special Counsel; or Melissa Gainor, Assistant Director at (202) 551-6787 or IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549. SUPPLEMENTARY INFORMATION: The SEC is requesting public comment on the following under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (“Advisers Act”). 1 1 15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any section of the Advisers Act, we are referring to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we refer to rules under the Advisers Act, or any section of these rules, we are referring to title 17, part 275 of the Code of Federal Regulations [17 CFR 275], in which these rules are published. 2 Form PF was adopted in 2011 as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Pub. L. 111-203, 124 Stat. 1376 (2010). See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Advisers Act Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)] (“2011 Form PF Adopting Release”) at section I. In 2014, the Commission amended Form PF section 3 in connection with certain money market fund reforms. See Money Market Fund Reform; Amendments to Form PF, Advisers Act Release No. 3879 (July 23, 2014), [79 FR 47736] (Aug. 14, 2014) (“2014 Form PF Amending Release”). Form PF is a joint form between the Commission and the Commodity Futures Trading Commission (“CFTC”) only with respect to sections 1 and 2 of the Form; sections 3 and 4, which we propose to amend, were adopted only by the Commission. Current Form PF section 5, request for temporary hardship exemption, would become new section 7 and new sections 5 and 6 are proposed only by the Commission. Commission reference CFR citation Form PF 17 CFR 279.9. Rule 204(b)-1 17 CFR 275.204(b)-1. Table of Contents I. Introduction II. Discussion A. Current Reporting for Large Hedge Fund Advisers and Advisers to Private Equity Funds 1. Large Hedge Fund Adviser Current Reporting on Qualifying Hedge Funds 2. Private Fund Adviser Current Reporting on Private Equity Funds 3. Filing Fees and Format for Reporting B. Large Private Equity Adviser Reporting 1. Reduction in Large Private Equity Adviser Reporting Threshold 2. Large Private Equity Adviser Reporting C. Large Liquidity Fund Adviser Reporting III. Economic Analysis A. Introduction B. Economic Baseline and Affected Parties 1. Economic Baseline 2. Affected Parties C. Benefits and Costs 1. Benefits 2. Costs D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives F. Request for Comment IV. Paperwork Reduction Act A. Purpose and Use of the Information Collection B. Confidentiality C. Burden Estimates 1. Proposed Form PF Requirements by Respondent 2. Annual Hour Burden Estimates 3. Annual Monetized Time Burden Estimates 4. Annual External Cost Burden Estimates 5. Summary of Estimates and Change in Burden D. Request for Comments V. Regulatory Flexibility Act Certification VI. Consideration of Impact on the Economy VII. Statutory Authority I. Introduction The Commission is proposing to amend Form PF, the form that certain investment advisers registered with the Commission use to report confidential information about the private funds that they advise. 2 The proposed amendments are designed to enhance FSOC's monitoring and assessment of systemic risk and to provide additional information for FSOC's use in determining whether and how to deploy its regulatory tools. The proposed amendments also are designed to collect additional data for the Commission's use in its regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers. Form PF provides the Commission and FSOC with important information about the basic operations and strategies of private funds and has helped establish a baseline picture of the private fund industry for use in assessing systemic risk. 3 We now have almost a decade of experience analyzing the information collected on Form PF. In that time, the private fund industry has grown in size and evolved in terms of business practices, complexity of fund structures, and investment strategies and exposures. 4 Based on this experience and in light of these changes, the Commission and FSOC have identified significant information gaps and situations where more granular and timely information would improve our understanding of the private fund industry and the potential systemic risk within it, and improve our ability to protect investors. 5 3 Advisers Act section 202(a)(29) defines the term “private fund” as an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (“Investment Company Act”), but for sections 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 (or, in the case of a qualifying venture capital fund, 250 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. Since Form PF's adoption Commission staff have used Form PF statistics to inform our regulatory programs and establish census type information regarding the private fund industry. See SEC 2020 Annual Staff Report Relating to the Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf. Staff reports, statistics, and other staff documents (including those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these documents and, like all staff statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. The Commission has expressed no view regarding the analysis, findings, or conclusions contained therein. 4 The value of private fund net assets reported on Form PF has more than doubled, growing from $5 trillion in 2013 to $11 trillion by the end of 2020, while the number of private funds reported on the form has increased by nearly 70 percent in that time period. Unless otherwise noted, the private funds statistics used in this Release are from the Private Funds Statistics Fourth Quarter 2020. Any comparisons to earlier periods are from the private funds statistics from that period, all of which are available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. SEC staff began publishing the private fund statistics in 2015, including data from 2013. Therefore, many comparisons in this Release discuss the eight year span from the beginning of 2013 through the end of 2020. Some discussion in this Release compares data from a six year span, from the beginning of 2015 through the end of 2020, because the SEC staff began publishing that particular data in 2016. 5 We are proposing these amendments, in part, pursuant to our authority under section 204(b) of the Advisers Act, which gives the Commission the authority to establish certain reporting and recordkeeping requirements for advisers to private funds and provides that the records and reports of any private fund to which an investment adviser registered with the Commission provides investment advice are deemed to be the records and reports of the investment adviser. First, we are proposing new current reporting by large hedge fund advisers 6 regarding their qualifying hedge funds 7 and by private equity advisers upon the occurrence of certain key events. Most private fund advisers report general information on Form PF, such as the types of private funds advised ( e.g., hedge funds, private equity funds, or liquidity funds), fund size, use of borrowings and derivatives, strategy, and types of investors. Certain larger private fund advisers report more detailed information on the qualifying hedge funds, the liquidity funds and the private equity funds that they advise. 8 In its current form, however, Form PF does not require current reporting of information from advisers whose funds are facing stress that could result in investor harm or potentially create systemic risk. Advisers file Form PF months after their quarter and year ends, depending on their size and the type of funds they advise. This means that during fast moving market events, Form PF data is often stale. 9 6 See infra footnote 8. 7 A qualifying hedge fund is defined in Form PF as “any hedge fund that has a net asset value (individually or in combination with fund any feeder funds, parallel funds and/or dependent parallel managed accounts) of at least $500 million as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter.” 8 In particular, three types of “Large Private Fund Advisers” must complete certain additional sections of the current Form PF: (1) 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 (“large hedge fund advisers”); (2) 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 (“large liquidity fund advisers”); and (3) 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 (“large private equity adviser”). Under the proposal, we would lower the threshold for large private equity advisers to $1.5 billion. 9 Instruction 9 to Form PF directs large hedge fund advisers file within 60 calendar days of their first, second and third fiscal quarters. Large liquidity fund advisers file within 15 calendar days of their first, second and third fiscal quarters. All other advisers file their annual updates within 120 calendar days after their fiscal year ends. The SEC's experiences with recent market events like the March 2020 COVID-19 turmoil and the January 2021 market volatility in certain stocks, have highlighted the importance of receiving current information from market participants during fast moving market events. 10 We believe current reporting upon the occurrence of certain key events on Form PF would facilitate a regulatory response if appropriate and potentially mitigate the impact on investors and systemic risk. Current reports also would allow the Commission and FSOC to identify patterns among similarly situated funds that could indicate broader systemic implications or investor protection concerns. Therefore, we are proposing to require large hedge fund advisers and private equity advisers to report information within one day upon the occurrence of events that indicate significant stress or otherwise serve as signals of potential systemic risk implications, as well as potential areas for inquiry designed to prevent investor harm. 10 See SEC Staff Report on U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 4, 2020) (report of the SEC Division of Economic and Risk Analysis regarding market stress during the COVID-19 shock of March 2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf (noting that in March 2020 hedge funds were one of the principal sellers of U.S. Treasury futures with potential implications for the varying stresses in, the cash, futures, and repo markets). See also Staff Report on Equity and Options Market Structure Conditions in Early 2021 (Oct. 14, 2021), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf (noting significant participation of institutional investors, including hedge funds, in the market for Gamestop Corp shares). Second, we are proposing to decrease the threshold for reporting as a large private equity adviser 11 and to require additional information from these advisers. The private equity space has grown substantially since Form PF was initially adopted. There were 6,910 funds with $1.60 trillion in gross assets in first quarter of 2013 and 15,584 funds with $4.71 trillion in gross assets in the fourth quarter of 2020. 12 In addition, given the increased demand for exposure to private equity among institutional investors, private equity advisers have expanded the breadth of their investment strategies and the types of offerings, including a significant increase in private credit strategies, which raises questions regarding lending practices that could raise systemic risk concerns. 13 11 See supra footnote 8. 12 Division of Investment Management, Private Fund Statistics (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. 13 See Jessica Hamlin, Private Equity Funds Fuel Growth in Private Credit, Institutional Investor (Nov. 10, 2020), available at https://www.institutionalinvestor.com/article/b1vdhdbryr7dkp/Private-Equity-Funds-Fuel-Growth-in-Private-Credit. Given the growth in the private equity industry over the past 11 years, coupled with an increase in the number of advisers with aggregate private equity assets under management below $2 billion, we are proposing to reduce the threshold for reporting as a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management. 14 Lowering this threshold would enable the Commission and FSOC to receive reporting from a similar proportion of the U.S. private equity industry based on committed capital as we did when Form PF was initially adopted. We believe reducing the threshold in this manner would provide a robust data set to help identify potential investor protection issues and monitor for systemic risk, while also minimizing burdens for smaller advisers. 14 Calculated based on the amount of private equity fund assets under management as of the last day of the adviser's most recently completed fiscal year. Additionally, we are proposing to amend section 4 of Form PF to gather more detailed information from large private equity advisers. The information regarding the activities of private equity funds, certain of their portfolio companies and the creditors involved in financing private equity transactions is important to the assessment of systemic risk. We are proposing tailored amendments to section 4 to gather more information from large private equity advisers regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (“CPCs”) and CPC borrowings, fund investments in different levels of a single portfolio company's capital structure, and portfolio company restructurings or recapitalizations. We believe this reporting would provide useful empirical data to FSOC with which it may analyze the extent to which the activities of private equity funds or their advisers pose systemic risk and provide the Commission with targeted information for use in its regulatory program for the protection of investors. Finally, we are proposing to require large liquidity fund advisers to report substantially the same information that money market funds would report on Form N-MFP, as we propose to amend it. 15 As discussed more fully in our release to amend Form N-MFP, we are proposing amendments to improve money market funds' resiliency and transparency. Together, Form N-MFP and Form PF are designed to provide a complete picture of the short-term financing markets in which money market funds and liquidity funds both invest. 16 The proposed amendments to Form PF are designed to enhance the Commission and FSOC's ability to assess short-term financing markets and facilitate our oversight of those markets and their participants. This, in turn, is designed to enhance investor protection efforts and systemic risk assessment. 15 See Money Market Fund Reforms, Investment Company Act Release No. 34441 (Dec. 15, 2021) (“Money Market Fund Proposing Release”). 16 See 2014 Form PF Amending Release, supra footnote 2. We consulted with FSOC to gain input on this proposal, and to help ensure that Form PF continues to provide FSOC with information it can use to assess systemic risk in light of changes in the private fund industry over the past decade, while also serving to enhance the Commission's investor protection efforts going forward. II. Discussion A. Current Reporting for Large Hedge Fund Advisers and Advisers to Private Equity Funds In order to receive more timely information about certain events that may signal distress at qualifying hedge funds and private equity funds or market instability we are proposing new current reporting section 5 for large hedge fund advisers and new current reporting section 6 for private equity advisers. 17 Currently, large hedge fund advisers file Form PF quarterly while private equity advisers file annually. This means that during fast moving events that could have systemic risk implications or negatively impact investors, Form PF data is often stale. The proposed current reporting requirements would provide important, current information to the Commission and FSOC to facilitate timely assessment of the causes of the reporting event, the potential impact on investors and the financial system, and any potential regulatory responses. 18 The current reports would also enhance our analysis of other information the Commission already collects across funds and other market participants allowing the Commission and FSOC to identify patterns that may present systemic risk or that could result in investor harm. 19 For example, information regarding a margin default at a large qualifying hedge fund would inform our understanding of data on market trading conditions and other information shared with other market participants, including securities exchanges. 17 We are also proposing, in connection with the proposed addition of new section 5 and section 6 for current reporting, to make conforming changes to rule 204(b)-1 under the Advisers Act to re-designate current section 5, which includes instructions for requesting a temporary hardship exemption, as section 7. 18 We propose to define “reporting event” in the Form PF Glossary to include any event that triggers the requirement to complete and file a current report pursuant to the items in sections 5 and 6. 19 We propose to define “current report” in the Form PF Glossary to include a report provided pursuant to the items in sections 5 and 6. Advisers would file current reports for reporting events within one business day of the occurrence of a reporting event. 20 We believe this emphasizes the Commission's and FSOC's need for timely information while allowing advisers one business day to evaluate and obtain the necessary data to confirm the existence of a filing event, and file the current report. For example, if an adviser determined that a reporting event occurred on Monday, they would have to file a current report by the close of business on Tuesday. Advisers should consider filing a current report as soon as possible following such an event. Advisers also would be able to file an amendment to a previously filed current report to correct information that was not accurate at the time of filing. 21 20 We propose to amend Instructions 1, 3, 9, and 12 of the general instructions to reflect this new obligation for large hedge fund advisers and private equity advisers. Specifically, we propose to amend Instruction 3 to identify the new sections 5 and 6 and Instruction 9 to address the timing of filing the proposed current reports. 21 Current Instruction 16 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). We request comments on the addition of current reporting to Form PF: 1. Should we amend Form PF to include current reporting in sections 5 and 6 as proposed? If not, what alternatives would provide the Commission with timely information regarding events that could signal distress or financial stability risks or potential investor harm? 2. We have proposed Sections 5 and 6 as separate reporting sections on Form PF. Should we instead require current reporting as its own form? 3. Is the proposed one business day reporting window appropriate for current reports? Should the notification be on the same day as the event? Are there challenges associated with providing these current reports within one business day? Is one business day sufficient time to eliminate or significantly reduce false positive reports? Would advisers need more than one business day to gather and confirm the required information for certain current reports? If so, should we require advisers to file a current report within two business days, three business days or some longer period? Would different time limits for different current reports, tailored to the potential seriousness of the event or the level of burden in collecting the information be more appropriate? Would different time limits for different current reports potentially cause confusion? 4. Should we require advisers to file a current report based on a number of calendar days instead of business days? 5. Should we define “business day” for sections 5 and 6? If so, how? For example, should we define the term to include any day other than a Saturday, Sunday, or Federal or market holiday for purposes of sections 5 and 6? 6. In addition to filing the current report, are there some events for which advisers should be required to notify the Commission via email or a phone call on a more immediate basis on the same day the event occurred? 7. Would proposed section 6 disproportionally impact or create an undue burden for smaller private equity advisers, i.e., those with private equity fund assets under management of between $150 million and $1.5 billion? If so, how should we modify this reporting requirement? 1. Large Hedge Fund Adviser Current Reporting on Qualifying Hedge Funds We propose to add a new section 5 to Form PF, which would require large hedge fund advisers to file a current report within one business day of the occurrence of one of several reporting events at a qualifying hedge fund that they advise. As discussed below, the reporting events include extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, changes in unencumbered cash, operations events, and certain events associated with redemptions. We have designed the reporting events to indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. For example, large investment losses or a margin default involving one large highly levered hedge fund may have systemic risk implications. Counterparties could react by increasing margin requirements or limiting borrowing, or investors may withdraw, and these responses could amplify the fund's stress by forcing additional asset sales. Similarly, reports of large investment losses at multiple qualifying hedge funds (even if not the largest or most levered) may indicate market stress that could have systemic effects. Current reports would be especially useful during periods of market volatility and stress, when the Commission and FSOC are actively ascertaining the affected funds, gathering information to assess systemic risk, and determining whether and how to respond in a timely manner. The proposed reporting events incorporate objective tests to allow advisers to determine whether a report must be filed. We designed and tailored the reporting events to decrease reporting burden and to allow advisers to use frameworks that we understand many large hedge fund advisers already maintain to assess and manage risk actively. A number of the items include quantifiable threshold percentage tests calibrated to trigger reporting for events that we believe are likely indicative of severe stress at a fund or may have broader implications for systemic risk. We considered varying levels of thresholds and believe that the proposed thresholds would trigger reporting for relevant stress events for which we seek timely information while minimizing the potential for false positives and multiple unnecessary current reports. In addition, we considered a number of temporal periods over which to measure certain stress events before arriving at measurement windows that we believe are appropriate to trigger reporting for precipitous, but sustained stress events. In our experience these time frames, in some instances applied over rolling periods, are calibrated to capture serious stress events and mitigate the potential for reporting for short-lived fund stresses or events caused by relatively routine market volatility. To supplement the objective triggers, several of the items include check boxes that would provide additional context and obviate the need for advisers to provide narrative responses during periods of stress under time pressure. We designed the checkboxes to incorporate descriptions of circumstances that we believe provide important context to events that would allow the Commission and FSOC to review and analyze the current reports and screen false positives ( i.e., incidents that trigger the proposed current reporting requirement but do not actually raise significant risks) during periods in which they may be actively evaluating fast-moving market events. Proposed section 5 would contain Items A through K. Section 5, Item A would require advisers to identify themselves and the reporting fund, including providing the reporting fund's name, private fund identification number, NFA identification number (if any), and LEI (if any). 22 Section 5, Items B through J would set forth the reporting events and the applicable reporting requirements for each event. Section 5, Item K would serve as an optional repository for explanatory notes that the large hedge fund adviser could provide to improve understanding of any information reported in response to the other section 5 items. The following sections discuss each reporting event. 22 Section 5, Item A would also require identifying information on the reporting fund's adviser, including the adviser's full legal name, SEC 801-Number, NFA ID Number (if any), large trader ID (if any), and large trader ID suffix (if any), as well as the name and contact information of the authorized representative of the adviser and any related person who is signing the current report. a. Extraordinary Investment Losses Proposed current reporting Item B would require large hedge fund advisers, whose advised qualifying hedge funds experience extraordinary losses within a short period of time, to provide a current report describing the losses. Reporting for proposed Item B would be triggered by a loss equal to or greater than 20 percent of a fund's most recent net asset value over a rolling 10 business day period. This reporting event would capture, for example, a situation where the fund's most recent net asset value is $1 billion and the fund loses $20 million per business day for consecutive 10 business days. It would also capture a loss of $200 million in one business day as the rolling 10 day period is backward looking. We designed the proposed threshold to capture a significant loss at the reporting fund over a relatively short rolling period as well as a precipitous loss without capturing immaterial losses that may not be indicative of stress at the fund. In our experience, losses of 20 percent or more of a fund's most recent net asset value during this period could indicate significant stress at the fund or the markets in which the fund participates that could raise investor protection and systemic risk concerns warranting prompt reporting. For example, these losses could signal a precipitous liquidation or broader market instability that could lead to secondary effects, including greater margin and collateral requirements, financing costs for the fund, and the potential for large investor redemptions. Notice of large losses could provide notice to the Commission and FSOC of potential fund or market issues in advance of the occurrence of more downstream consequences, such as sharp margin increases, defaults, or fund liquidation. Also, funds in serious stress may be in the process of deleveraging, exiting certain strategies, or liquidating securities in a declining market with implications for both fund investors and systemic risk. Moreover, large, sharp, and sustained losses suffered by one fund within this short period may signal concern for similarly situated funds, allowing the Commission and FSOC to analyze the scale and scope of the event and whether additional funds that may have similar investments, market positions, or financing profiles are at risk. Under this reporting event, the fund's losses would be compared to its “most recent net asset value,” which we propose to define as “as of the data reporting date at the end of the reporting fund's most recent reporting period,” which typically would be the most recent update to the fund's routine quarterly or annual Form PF filing. 23 We understand that some funds calculate a daily mark to market value for certain assets in their portfolios and that using a current daily mark to market value for this reporting event may be feasible and provide a more current and accurate picture of a fund's losses. However, given that some funds do not calculate a daily net asset value, we believe that requiring that the losses be based on the most recent net asset value reported on Form PF would ease burdens for some advisers while still providing the Commission and FSOC with timely information about investment losses that may indicate significant stress at a fund. We acknowledge that this approach could result in a lag between the net asset value date and a calculation date for purposes of this reporting event, during which market movements could significantly affect values. This could potentially result in over-reporting in instances where the fund assets have appreciated substantially in the intervening period since the last reporting date and under-reporting when the fund assets have significantly depreciated in value since the last reporting date. However, we propose this approach because we believe the proposed limited reporting requirements discussed below, combined with the option to add explanatory notes to its current report to explain the circumstances of the loss, mitigate these concerns. 23 See proposed Form PF Glossary. Under proposed Item B, an adviser must file the following information: (1) the dates of the 10 business day period over which the loss occurred and (2) the dollar amount of the loss. If the loss were to continue past the initial 10 day period, advisers would not file another current report until the next 10 business day loss period beginning on or after the end date stated in the adviser's initial Item B current report. 24 This proposed information would allow the Commission and FSOC to understand the scale of the loss and its potential effects both to investors in the reporting fund as well as the broader financial markets, particularly if current reports are filed by multiple advisers. 24 If the fund experiences a 20 percent loss the adviser would not report a second time until the fund had experienced a second loss of an additional 20 percent of the fund's most recent net asset value over a second rolling 10-day period to begin on or after the end date stated in the adviser's initial Item B current report. We request comment on the proposed current reporting item for extraordinary investment losses: 8. Would extraordinary losses raise investor protection or systemic risk concerns such that the Commission and FSOC should be notified within one business day? Should the notification be on the same day as the event? Should it be longer? For example, should we require advisers to file a current report within two business days, three business days or some longer period? 9. As currently formulated, is the trigger for reporting extraordinary losses likely to provide us with an early warning of hedge fund or industry stress and potential systemic risk implications? Would proposed Item B capture extraordinary losses that are not indicative of fund or market stress? Would reporting on Item B be burdensome to operationalize, particularly its use of a measure of the reporting fund's extraordinary losses over a rolling 10 business day period? Are large hedge fund advisers able to apply the extraordinary loss trigger using their existing metrics? 10. Should the scale of losses be compared to the reporting fund's most recent net asset value as proposed? Is this approach a reasonable measure of whether investment losses are “extraordinary” for purposes of the current reporting requirement? Would this approach ease burdens on reporting advisers or do large hedge fund advisers calculate the fund's net asset value on each business day? Do large hedge fund advisers calculate a different fund value that might be used instead of net asset value for measuring extraordinary losses? If so, what other measures would be practicable for reporting these advisers, while also achieving our goal to identify extraordinary investment losses that may have systemic risk implications or result in investor harm? For example, should we require large hedge fund advisers to measure extraordinary losses based on a daily mark to market calculation (estimated or actual) for the portion of a qualifying hedge fund's portfolio invested in marketable securities (a “daily mark to market calculation”)? If losses are measured using a daily mark to market calculation for a portfolio of marketable securities, should we limit the application of this reporting event to qualifying hedge funds that hold at least a threshold value of their portfolios in marketable securities, e.g., the lesser of $150 million or 50 percent of net asset value or another threshold? How would large hedge fund advisers calculate losses for purposes of this reporting event? Does the ability to add explanatory notes in Item K help mitigate concerns of using the most recent net asset value reported on Form PF? 11. Is a 20 percent loss measured against the fund's most recently reported net asset value an amount that could raise investor protection or systemic risk concerns such that the Commission and FSOC should be notified within one business day? Should the threshold amount be higher ( e.g., 50 percent threshold) or lower ( e.g., 10 percent threshold)? If this reporting event were to measure losses using a daily mark to market calculation for a portfolio of marketable securities, should extraordinary losses instead be measured against a percent of the value of the portfolio's marketable securities? 12. Would the use of rolling periods increase the likelihood that we capture the types of extraordinary losses that could cause investor harm or systemic risk? Is a ten-business day period appropriate? Should it be longer or shorter? Should we use trading days or calendar days instead of business days? If so, how should we define “trading days” and should our definition allow large hedge fund advisers to determine what is a trading day by reference to the exchanges and markets on which the fund's portfolio holdings are trading? Would monitoring losses over the rolling periods be overly burdensome? 13. Should we require funds to file multiple Item B current reports if they suffer 20 percent losses over multiple 10 business day periods during a quarterly update period? Is it likely that funds would report losses of this type multiple times a quarter? Would additional reports be duplicative? Alternatively, should we require advisers to file only one Item B current report per quarterly period? 14. Should we require a reporting event that measures investment losses over a period ( e.g., a 10-day or 20-day rolling period) against the volatility of the fund's returns? We understand that losses that are large compared to a hedge fund's historic volatility of returns may signal significant stress. Could this type of reporting event be a useful signal of extraordinary losses that may have systemic risk implications? If so, how should we require hedge funds to measure volatility of returns? Should we require funds to calculate the monthly volatility of a daily mark to market calculation for this purpose? Would doing so be burdensome to operationalize? Should we limit the application of a reporting event that measures investment losses against volatility of returns to qualifying hedge funds that hold at least a threshold value of their portfolios in marketable securities, e.g., the lesser of $150 million or 50 percent of net asset value, or another threshold? 15. Are there other reporting events that would be indicative of the types of extraordinary losses that could cause investor harm or systemic risk that we should include in addition to or instead of the proposed Item B current report? 16. Should we require additional or different information in response to this item? In other current reporting items outlined below, we provide checkboxes for advisers to provide additional context to the reporting event. Should we provide checkboxes for advisers to describe the circumstances of the loss, or are the reasons for an extraordinary loss so variable as to avoid easy categorization? If we were to provide checkboxes what should they be? b. Significant Margin and Default Events Proposed Section 5 Items C through E would require current reporting of significant margin and default events that occur at qualifying hedge funds advised by large hedge fund advisers or at their counterparties. In our experience, significant increases in margin, inability to meet a margin call, margin default, and default of a counterparty are strong indicators of fund and potential market stress. Each of the triggers and underlying thresholds is calibrated to identify stress at a fund that may signal the potential for precipitous liquidations or broader market instability that may affect similarly situated funds, or markets in which the fund invests. Proposed current reporting Item C would require advisers to report significant increases in the reporting fund's requirements for margin, collateral, or an equivalent (collectively referred to as “margin”). 25 If the reporting fund has experienced a cumulative increase in margin of more than 20 percent of the reporting fund's most recent net asset value over a rolling 10 business day period, Item C would require the adviser to file certain information within one business day. 26 We believe that a 20 percent increase to a fund's margin requirements over a 10 business day period is large enough and precipitous enough to signal potential significant stress at the fund, at its counterparties, or in the broader market while limiting the potential for reporting in the case of routine margin increases. Sudden and significant margin increases can have critical effects on funds that may be operating with large amounts of leverage and could serve as precursors to defaults at fund counterparties and eventual liquidation. Large, sustained margin increases also may effectively signal that counterparties are concerned about a fund's portfolio positions and may signal the potential for future margin increases from the fund's other counterparties. A large margin increase of this type may also serve as a potential early indicator for broader market stress for similarly situated funds that may help inform the Commission or FSOC of potential implications for investor harm or systemic risk and allow them to respond quickly to developing market events. 25 An equivalent is any other type of payment or value understood to serve the same purposes as margin or collateral. 26 As noted above, measures derived from “most recent net asset value” are backward-looking to the most recently filed routine quarterly or annual filing and could result in a lag between the net asset value date and a calculation date for purposes of this reporting event, during which market movements could significantly affect values. This could result in over-reporting and under-reporting, but we believe that this approach would simplify monitoring and reporting by advisers. In addition, the option for an adviser to add explanatory notes to its current report to explain the circumstances of the loss mitigate these concerns. The adviser would report (a) the dates of the 10 business day period over which the increase occurred; (b) the cumulative dollar amount of the increase; and (c) the identity of the counterparty or counterparties requiring the increase(s). If the increases in margin were to continue past the initial 10 day period, advisers would not file another current report until on or after the next 10 business day period beginning on or after the end date stated in the adviser's initial Item C current report. 27 In circumstances where multiple counterparties are involved, advisers would list the all the counterparties who increased margin requirements. In addition, the adviser would use check boxes to describe the circumstances of the margin increase. 28 These include: (1) Exchange requirements or known regulatory action affecting one or more counterparties; (2) one or more counterparties independently increasing the reporting fund's margin requirements; (3) the reporting fund establishing a new relationship or new business with one or more counterparties; (4) new investment positions, investment approach or strategy and/or portfolio turnover of the reporting fund; (5) a deteriorating position or positions in the reporting fund's portfolio or other credit trigger under applicable counterparty agreements; and/or (6) a reason “other” than those outlined. We believe that this proposed information would provide useful context regarding the margin increase and allow for an assessment of the scale of the potential issue and related risks. We believe this information would both better enable the Commission and FSOC to screen false positives for margin increases ( i.e., incidents that trigger the proposed current reporting requirement but do not actually raise significant risks) and assess significant margin events. 27 If the fund experiences a 20 percent increase to a fund's margin requirements that continues past the initial 10 day period, the adviser would not report a second time until the fund had experienced a second margin increase of an additional 20 percent of the fund's most recent net asset value over a second rolling 10 day period beginning at or after the end date stated in the adviser's initial Item C current report. 28 Proposed Form PF section 5, Item C, Question 11. Proposed current reporting Item D would require advisers to report a fund's margin default or inability to meet a call for margin, collateral, or an equivalent (taking into account any contractually agreed cure period). 29 We believe a current report is necessary to capture these events because funds that are in margin default or that are unable to meet a call for margin are at risk of potentially triggering the liquidation of their positions at their counterparties. This presents serious risks to the fund's investors, its counterparties, and potentially the broader financial system. The proposed amendments would require advisers to file a current report in these circumstances, including in situations where there is a dispute with regard to the margin call to avoid delays in reporting. However, advisers would not be required to file a current report in situations where there is a dispute in the amount and appropriateness of a margin call, provided the reporting fund has sufficient assets to meet the greatest of the disputed amount. We believe that according this flexibility allows funds and advisers that are capable of meeting a margin call time to respond to and resolve a margin dispute with their counterparties. 29 In situations where there is a contractually agreed upon cure period an adviser would not be required to file an Item D current report until the expiration of the cure period, unless the fund would not expect to be able to meet the margin call during such cure period. Under the proposal, the adviser would report for each separate counterparty for which this occurred: (a) The date the adviser determines or is notified that a reporting fund is in margin default or will be unable to meet a margin call with respect to a counterparty; (b) the dollar amount of the margin, collateral or equivalent involved; and (c) the legal name and LEI (if any) of the counterparty. In addition, the adviser would check any applicable check boxes that would describe the adviser's current understanding of the circumstances of the adviser's default or its determination that the fund will be unable to meet a call for increased margin. 30 These include: (1) An increase in margin requirements by the counterparty; (2) losses in the value of the reporting fund's portfolio or other credit trigger under the applicable counterparty agreement; (3) a default or settlement failure of a counterparty; or (4) a reason “other” than those outlined. We believe that these check boxes would enable the Commission's staff and FSOC to identify and evaluate the circumstances underlying the inability to meet a call for margin and formulate any necessary response in a timely manner. If the fund was unable to meet margin or defaulted with multiple counterparties on the same day, the adviser would file one current report on Item D broken out with details for each counterparty. 30 Proposed Form PF section 5, Item D, Question 15. Proposed current reporting Item E, “Counterparty Default,” would require an adviser to report a margin default by a counterparty. Defaults by counterparties can have serious implications for the funds with which they transact, the fund's investors, and the broader market. A current report of a counterparty default would help the Commission and FSOC identify funds or market participants that may be affected by a counterparty's default and analyze whether there are broader implications for systemic risk. A current report would be triggered if a counterparty to the reporting fund (1) does not meet a call for margin or has failed to make any other payment, in the time and form contractually required (taking into account any contractually agreed cure period); and (2) the amount involved is greater than 5 percent of the most recent net asset value of the reporting fund. 31 While we are not proposing a minimum threshold for reporting on a qualifying hedge fund's margin default given the potential implications of such a default, we believe it is appropriate to set a threshold for counterparty defaults that could affect a sizeable percentage of the fund's net asset value. We believe that 5 percent of the most recent net asset value of the reporting fund is an appropriate threshold in this regard because counterparty defaults of this size could have systemic waterfall effects, triggering forced-selling by the fund and raising potential risks for other hedge funds that may transact with the same counterparty. 32 Moreover, the 5 percent threshold is a figure we have used in Form PF to measure and collect information regarding sizable exposures to creditors or counterparties. 33 In addition, we believe setting the threshold for counterparty defaults at 5 percent of the most recent net asset value would limit the reports for de minimis or superficial defaults that may be the result of a short-lived operational error. 31 As noted above, measures derived from “most recent net asset value” are backward-looking to the most recently filed routine quarterly, or annual filing and could result in a lag between the net asset value date and a calculation date for purposes of this reporting event, during which market movements could significantly affect values. This could result in over-reporting and under-reporting, but we believe that this approach would simplify monitoring and reporting by advisers. In addition, the option to add explanatory notes to its current report to explain the circumstances of the loss mitigate these concerns. 32 See Financial Stability Oversight Council, “Update on Review of Asset Management Products and Activities,” p. 15-18, April 2016, available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf (noting that large highly interconnected counterparties play a role in whether hedge fund activities have financial stability implications). 33 See current question 47 of Form PF: Identify each creditor, if any, to which the reporting fund owed an amount in respect of borrowings equal to or greater than 5 percent of the reporting fund's net asset value as of the data reporting date. For each such creditor, provide the amount owed to that creditor. Item E would require the adviser to report: (a) The date of the default; (b) the dollar amount of the default; and (c) the legal name and LEI (if any) of the counterparty. In the event that multiple counterparties to the fund default on the same day, Item E would allow an adviser to file a single current report broken out with details for each counterparty default. In the event that counterparties to the fund default on different days, the adviser would file a separate Item E current report for each counterparty default that occurred. We did not provide checkboxes for Item E because we believe that advisers to the funds are unlikely to have complete information regarding their counterparty's default and the responses would likely be speculative. We request comment on the proposed current reports for margin and default events: 17. As currently formulated, is the trigger for reporting margin increases likely to provide an indicator of hedge fund or industry stress and systemic risk? Would proposed Item C capture margin increases that are not indicative of fund or market stress? Would reporting on Item C be burdensome to operationalize, particularly its use of a measure of the reporting fund's increase in margin over a rolling 10 business day period? Should we ask advisers to report the dollar value of margin, collateral or an equivalent on the first and last day of the 10 day period in Item C? Would this information be more or less burdensome than reporting the amount of increase as currently proposed? 18. Should the margin increase be compared to the reporting fund's most recent net asset value as proposed? Or, as with extraordinary losses, are there other measurements, such as a daily mark to market value, we could use to identify the types of margin increases that could cause investor harm or systemic risk? 19. Should we tie reporting on margin increases to an amount reported on Form PF as of the end of the last reporting period ( e.g., total margin, collateral or other equivalent reported in Q43(a) and (b))? 20. Is a 20 percent margin increase measured against the fund's most recently reported net asset value an amount that could raise investor protection or systemic risk concerns such that the Commission and FSOC should be notified within one business day? Should the threshold amount be higher ( e.g., 50 percent threshold) or lower ( e.g., 10 percent threshold)? 21. Do the proposed check boxes provide proper context to events captured by Item C? Should we remove any of the check boxes, or add additional check boxes to improve our understanding of potential responses to Item C? For example, should we also add a check box for an operational issue (including the potential failure of a service provider) that could lead to an inability to meet a margin call? 22. Should we ask advisers to identify the amount of margin increase for each counterparty in Item C? Would reporting of this dollar amount better inform our understanding of fund stress? Would determining and reporting this figure be burdensome to advisers? Would knowing the amount of margin increase provide appreciable insight into risks to the fund's counterparties? 23. In circumstances where multiple counterparties are involved in the margin increase, should advisers list the top three (or different number of) counterparties, based on the dollar amount of the cumulative increase required by each counterparty instead of all the counterparties that increased margin as we propose? Would listing all the counterparties that may have raised margin in such an event be burdensome? 24. We understand that increases in margin may be subject to extensive negotiation and/or dispute among counterparties so it may be difficult for the adviser to determine the point at which the fund is unable to meet a margin call and required to file in accordance with Item D. Does Item D as currently written provide sufficiently objective criteria for when advisers must file a current report? Are there more objective criteria that we could provide that would be equally useful? 25. Item D would be triggered if the adviser determines that the reporting fund is in default or will be unable to meet a call for increased margin, collateral, or an equivalent, including in situations where there is a dispute with regard to the margin call. Is that appropriate or should we include a carve-out or checkbox for situations where the margin call, collateral, or equivalent is in dispute? Should Item D be triggered without taking into account any contractually agreed cure period to provide more timely information regarding potential systemic risk or would this approach create too many false positives? 26. Is notice of default an easily ascertainable event for advisers to identify or are there nuances to default provisions or certain industry practices that may make this reporting event difficult to implement in practice? 27. Do the proposed check boxes provide proper context to events captured by Item D? Should we remove any of the check boxes, or add additional check boxes to improve our understanding of potential responses to Item D? 28. Items C and D involve events that could be triggered by a fund experiencing stress with the potential to be triggered at the same time or in rapid succession. Are there concerns about the timing of filing reports for these related items? We believe Item C could serve as indicator of the potential for events outlined in Item D. Are we correct in this belief? Should we ask these related questions in a different way so as to receive notice of a potential upcoming default? Would a default event be likely to trigger both of these current reports, and if so, would it be burdensome to file current reports for each of these items in such a situation? 29. Are the triggers for reporting on Item E, including the 5 percent net asset value threshold, indicative of potential systemic risk or investor protection concerns? Should that threshold be higher or lower? Would a threshold for reporting on an adviser's default in Item D be appropriate? If so, should that threshold also be 5 percent of the reporting fund's net asset value? Or should that threshold be higher or lower? 30. We did not provide checkboxes for Item E because we believe that advisers to the funds are unlikely to have complete information regarding their counterparty's default and the responses would likely be speculative. Are we correct in this belief? If not, what checkboxes should we include to improve our understanding of potential responses to Item E? 31. For each of the current reports in Items in C, D, and E, should we request the principal place of business address and the country where we request to identify the counterparty? Or, should the legal name and LEI be sufficient to identify counterparties? c. Material Change in Relationship With Prime Broker Proposed section 5, Item F would require the adviser to report a material change in the relationship between the reporting fund and a prime broker. We believe that material changes in a reporting fund's prime brokerage relationships may signal that the fund or the brokers with whom the fund transacts are experiencing stress and may be subject to an increased risk of default or in the case of the reporting fund, potential liquidation. Such events would include material changes to the fund's ability to trade or an outright termination of the prime brokerage relationship for default or breach of the prime brokerage agreement. A prime broker that is no longer willing to provide services to a fund client may be apprehensive of a fund's investment positions or trading practices and may consider the fund to be an unacceptable risk as a counterparty. Therefore, material changes to such relationships may indicate potential stress at the fund that may have implications for investor harm and broader systemic risk concerns. Proposed Item F would require the adviser to provide the date of the material change and the legal name and LEI (if any) of the prime broker involved. An adviser also would check any applicable boxes that describe the circumstances relating to the material change, including whether the change involved: (1) Material trading limits or investment restrictions on the reporting fund, including requests to reduce positions, or unwind positions completely; and (2) whether the prime brokerage relationship was terminated and by which party. 34 We request comment on the proposed current report in section 5, Item F: 34 Proposed Form PF section 5, Item F, Question 21. 32. Are material changes to a prime brokerage relationship indicative of fund stress or potential systemic risk? Are the circumstances described in the checkboxes sufficient to provide us with detail on the change in the relationship? Should we add an “other” check box? Should we add or delete check boxes? Should we request the principal place of business address of the prime broker? Or, should the legal name and LEI be sufficient to identify the prime broker? 33. We would require reporting of only material changes in a reporting fund's relationship with a prime broker. Will it be challenging to determine whether a change is material? Should we provide additional guidance? Should we require funds that add a new prime broker to report the new relationship, or is the addition of a new prime broker not useful from a risk evaluation perspective? Should we require that all changes in a reporting fund's relationship with a prime broker reported? 34. We understand that many large funds have prime brokerage agreements that include termination events that have net asset value triggers. Are we correct in this understanding? Should we tie current reporting in proposed Item F to the net asset value trigger provision in a fund's prime brokerage agreement? If so, how? Should we provide a checkbox asking whether a net asset value trigger has been breached? 35. Should we expand the proposed Item F reporting event to include broker-dealer counterparties and not just prime brokers? Would this provide us with a more complete picture of the fund's relationship with broker-dealer counterparties? Would such a current report be burdensome to track across multiple counterparties? d. Changes in Unencumbered Cash Proposed section 5, Item G would require the adviser to report a significant decline in holdings of unencumbered cash. A current report for changes in unencumbered cash would be triggered if the value of the reporting fund's unencumbered cash declines by more than 20 percent of the reporting fund's most recent net asset value over a rolling 10 business day period. 35 In order to report significant changes in unencumbered cash, advisers would need to calculate a daily unencumbered cash figure using the same methodology they use to calculate question 33 on the current Form PF. 36 We believe that a precipitous decline in unencumbered cash within a short time window may indicate potential stress on the fund and its ability to access cash affecting the fund's financing and its relationships with counterparties, which may raise concerns of investor harm and systemic risk. In our experience, funds and fund counterparties use unencumbered cash figures as an indicator of a fund's overall health as it has implications, among other things, for the fund's ability to allocate investments, satisfy redemptions, and meet margin calls. 35 As noted above, measures derived from “most recent net asset value” are backward-looking to the most recently filed routine Form PF quarterly or annual filing and could result in a lag between the net asset value date and a calculation date for purposes of this reporting event, during which market movements could significantly affect values. This could result in over-reporting or under-reporting, but we believe that this approach would simplify monitoring and reporting by advisers. In addition, the option for an adviser to add explanatory notes to its current report to explain the circumstances of the loss mitigate these concerns. 36 See question 33 of current Form PF requiring the value of the reporting fund's unencumbered cash. If this trigger is met, the adviser would report the last day of the rolling 10 business day period during which the unencumbered cash declined and the dollar amount of the unencumbered cash on the last day of the period. If the decrease in unencumbered cash were to continue past the initial 10 day period, advisers would not file another current report until the next 10 business day period beginning on or after the end date stated in the adviser's initial Item G report. 37 Item G would also include explanatory checkboxes for the adviser to provide additional information concerning its current understanding of the facts and circumstances around the change in unencumbered cash. These checkboxes include whether (1) the change is attributable to redemption activity for the fund; (2) the change is attributable to new investment positions, strategy and/or portfolio turnover; (3) the change is a related to losses in the value of the fund's portfolio; (4) the change is related to a margin call; or (5) the change was caused by a reason “other” than those outlined. 38 These checkboxes would provide relevant information regarding the changes in the fund's unencumbered cash allowing Commission and FSOC to begin to evaluate the event. 37 If the fund experiences a 20 percent decline in unencumbered cash that continues past the initial 10-day period, the adviser would not report a second time until the fund had experienced a second decline in unencumbered cash of an additional 20 percent of the fund's most recent net asset value over a second rolling 10-day period beginning at or after the end date stated in the adviser's initial Item G current report. 38 Proposed Form PF section 5, Item G, Question 23. We request comment on the proposed current report in section 5, Item G: 36. Is a current report for a decline in unencumbered cash likely to capture changes in unencumbered cash that are indicative of fund or market stress? Is the trigger, including the daily calculation of unencumbered cash, burdensome to operationalize? Is it common for advisers to track an unencumbered cash figure on a daily basis? 37. Should we require reporting when the value of the reporting fund's unencumbered cash declines by more than 20 percent of the fund's most recent net asset value over a rolling 10 day business period as proposed? Is 20 percent too high or too low? Is a rolling 10 business day period appropriate or should we change the length of the period? As with other reporting events that use the reporting fund's most recent net asset value, are there other metrics we should use for purposes of a reporting trigger for a decline in unencumbered cash? 38. Do the proposed check boxes provide proper context to events captured by Item G? Should we remove any of the check boxes, or add additional check boxes to improve our understanding of potential responses to Item G? Why or why not? 39. Are there other similar types of triggers that may signal stress that could be incorporated into Item G? For example, should we include a significant increase or decrease in borrowing by the reporting fund as a reporting event? For this purpose, would a 20 percent increase or decrease in borrowing measured against the most recently reported net asset value be an appropriate measure? What other approach could we use to identify a change in the amount of borrowing that might signal potential stress occurring at a fund? e. Operations Events Proposed section 5, Item H would require the adviser to report when the adviser or reporting fund experiences a “significant disruption or degradation” of the reporting fund's “key operations,” whether as a result of an event at the reporting fund, the adviser, or other service provider to the reporting fund. Key operations means, for this purpose, operations necessary for (1) the investment, trading, valuation, reporting, and risk management of the reporting fund; as well as (2) the operation of the reporting fund in accordance with the Federal securities laws and regulations. 39 When evaluating a reporting fund's key operations that are reasonably measurable, a “significant disruption or degradation” means a 20 percent disruption or degradation of normal volume or capacity. For example, Item H would require reporting of cybersecurity event that disrupted the trading volume of a reporting fund by 20 percent of its normal capacity. It also would require reporting in cases where an adviser's ability to value the fund's assets is significantly disrupted or degraded, for example, in connection with operational issues at a service provider. As another example, events such as a severe weather event causing wide-spread power outages that significantly disrupt or degrade key operations also would require reporting. We understand that many large hedge fund advisers have sophisticated back office operations or already engage service providers that would be reasonably able to measure whether an event has impaired their key operation beyond a 20 percent threshold. We believe that an operations event involving a qualifying hedge fund could have systemic risk implications if the fund is not able to trade as a result of such an event. 40 In addition, notice of operations events from multiple advisers could provide an early indicator of market-wide operations events to both the Commission and FSOC. Such events could include a service provider outage that may affect the ability of multiple funds to trade, leading to negative implications for those funds' investors and broader systemic risks. 39 See Form PF Glossary (proposed definitions of “significant disruption and degradation” and “key operations”). 40 We recognize that the SEC currently does not require registered investment advisers and registered investment companies to report operational events. We are also considering recommending that the Commission propose rules to enhance fund and investment adviser disclosures and governance relating to cybersecurity risks. See Securities and Exchange Commission, Agency Rule List (Fall 2021), available at Agency Rule List—Fall 2021 ( reginfo.gov ). Item H would require the date of the operations event (or an estimate of when it occurred), and the date the operations event was discovered. Proposed Item H would also require the adviser to provide additional information concerning its current understanding of the circumstances relating to the operations event and its impact on the normal operations of the reporting fund using checkboxes. 41 These include whether: (1) The event occurred at a service provider, 42 (2) the event occurred at a reporting fund or reporting fund adviser or a related person; (3) the event is related to a natural disaster or other force majeure event, or (4) an unlisted “other” event occurred. In addition, proposed Item H would require an adviser to indicate whether it has initiated a business continuity plan relating to the operations of the adviser or reporting fund as we believe this may provide additional appropriate context to the operations event. 41 Proposed Form PF section 5, Item H, Questions 26 through 28. 42 If the event occurred at a service provider, an adviser also must report the legal name of the service provider; the service provider's LEI, if any; and the types of services provided by the service provider. Proposed Item H also requires the adviser to check a box to describe its current understanding of the impact of the operations event on the normal operations of the reporting fund, including whether the event resulted in the disruption or degradation of: (1) Trading of portfolio assets; (2) the valuation of portfolio assets; (3) the management of the reporting fund's investment risk; (4) the ability to comply with applicable laws, rules, and regulations; or (5) any “other” type of operational impact than those outlined and may be further explained in Item K Explanatory Notes. We believe that these explanatory checkboxes would provide appropriate context to current reports filed for operations events allowing the Commission and FSOC to evaluate quickly the potential level of risk to funds, advisers, and their service providers. We request comment on the proposed current report in section 5, Item H: 40. Will this proposed reporting requirement provide us with notice of operations events that may have serious implications for the fund, its investors, and financial stability? 41. Does the definition of “operations event” provide a clear, objective trigger for reporting? Would advisers be able to assess this during an operations event? We proposed a principles-based approach for reporting of an operations event that is a “significant” disruption or degradation of the adviser's operations and for operations that are reasonably measurable, we would view a 20 percent disruption of degradation of normal volume or capacity as “significant.” Are we correct that certain disruptions may not be quantifiable? Do commenters agree that a 20 percent disruption or degradation of normal volume or capacity indicates that an event is “significant?” Should the reporting event include a time frame to measure a 20 percent disruption or degradation? If so, what time frame? Should it be over one business day or over one month? Do advisers' compliance programs typically include benchmarks that could be used to measure a 20 percent disruption or degradation? Are there other potential approaches for an operational events trigger? 42. Are we correct in our understanding that many large hedge fund advisers maintain sophisticated back office operations or already engage service providers that would be reasonably able to measure whether an event has impaired their key operation beyond a 20 percent threshold? Are there any other objective measures gathered by advisers or their service providers that could be utilized as a trigger for this reporting event? 43. Will the checkboxes provided to describe the circumstances of the “operations event” provide us with sufficient detail regarding the operational issue and its potential severity? Should we amend, add, or remove any of the check boxes? Is the check box for force majeure events appropriate, or does it have the potential to cause numerous notifications during certain widely applicable disaster events like a pandemic or large hurricane? 44. Should we require an adviser to indicate whether the operations event is caused by a service provider and require the adviser to provide information regarding the service provider, as proposed? Should we define the term “service provider” for these purposes? Should we require reporting only for those service providers listed in Form ADV, Schedule D for the private fund? Are there some operations events that could be caused by a third party that is not a service provider to the reporting fund or adviser? If so, should we require an adviser to provide information regarding such a third party? 45. Should we define “key operations” as proposed? Are there any activities that we should add or delete from the definition? For example, should key operations also include the operation of the reporting fund in accordance with major contractual commitments to the reporting fund's investors and/or counterparties? For example, should it be considered a significant disruption or degradation of key operations if an issue at a service provider degrades the fund's ability to measure its positions or communicate certain information to counterparties pursuant to contractual notice terms? 46. As an alternative to defining “operations event”, should we require current reporting by advisers whenever they initiate a business continuity plan? Would the initiation of a business continuity plan be a simpler trigger to apply? Would the initiation of a business continuity plan as a reporting event result in too many current reports about events that could not lead to investor harm or systemic risk? Would it miss important operations events that could lead to investor harm or systemic risk? Should we be concerned that advisers might delay initiating a business continuity plan so as to avoid reporting? 47. Should we require an adviser to indicate whether it has initiated a business continuity plan relating to the operations of the adviser or reporting fund, as proposed? Does the initiation of such a plan provide the Commission with indications of potential stress at the fund or its adviser? f. Withdrawals and Redemptions We believe large redemption requests, suspensions of withdrawals/redemptions, material restrictions on withdrawals/redemptions, and an inability to satisfy redemptions are significant signals of potential stress at a qualifying hedge fund. 43 Qualifying hedge funds under stress or in periods of volatility may have difficulty selling certain assets in an orderly manner to meet large redemption requests. In such a situation, hedge funds could fall back on more extraordinary liquidity management measures to mitigate redemption difficulties and the potential for forced asset sales. 44 While advisers currently are required to provide certain reporting regarding redemptions for qualifying hedge funds on a quarterly basis, we are proposing current reporting Items I and J to provide more detailed and timely information to the Commission and FSOC indicating the potential for investor harm, forced selling in liquidations, or broader systemic risk. 45 43 We understand that many funds place quarterly restrictions on the timing and size of investor's redemptions. 44 See Financial Stability Oversight Council, Update on Review of Asset Management Products and Activities (Apr. 2016), available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf. 45 See Form PF question 61 regarding restrictions on withdrawals and redemptions by investors in the reporting fund. Proposed section 5, Item I would require an adviser to report if the adviser receives cumulative requests for redemption exceeding 50 percent of the most recent net asset value (after netting against subscriptions and other contributions from investors received and contractually committed). 46 We believe that the obligation to redeem sizable redemption requests of 50 percent or more of a reporting fund's most recent net asset value, despite pre-existing gates or limitations, may present significant risks to the fund and increases the risk that it may be forced to liquidate assets (potentially at lower prices), disproportionately penalizing non-redeeming investors, and potentially impacting markets more broadly. In the staff's experience, funds that receive withdrawal requests for half or more of their assets in the period between routine quarterly reports on Form PF may be subject to increased selling and liquidity pressures that could be particularly harmful to investors with potential broader market implications, especially if the fund is invested in more illiquid assets. Timely notice of such events would allow the Commission and FSOC to analyze the potential implications for the fund's investors and systemic risk. 46 As with the proposed use of “most recent net asset value” in other circumstances described above, this measure could result in over-reporting or under-reporting, but we believe that a simple to determine measure would ease the monitoring and reporting burden for advisers. In addition, the option for an adviser to add explanatory notes to its current report to explain the circumstances surrounding the redemptions mitigates these concerns. Under proposed Item I, an adviser would report: (a) The date on which the net redemption requests exceeded 50 percent of the most recent net asset value; (b) the net value of redemptions paid from the reporting fund between the last data reporting date (the end of the most recently reported fiscal quarter on Form PF) and the date of the current report; (c) the percentage of the fund's net asset value the redemption requests represent; and (d) whether the adviser has notified the investors that the reporting fund will liquidate. Proposed section 5, Item J would require an adviser to report if a qualifying hedge fund is unable to satisfy redemptions or suspends redemptions for more than 5 consecutive business days. We believe that this report would help the Commission and FSOC to identify stress at a reporting fund and evaluate the effects of these circumstances on fund investors and the markets more broadly. We also believe that this reporting could provide a potential early warning of the fund's liquidation and potentially allow the Commission or FSOC to analyze or respond to any perceived harm to investors or systemic risks on an expedited basis before they worsen. The 5 consecutive day period is designed to limit reporting of temporary redemption suspensions that we believe have less of an impact on investors or the broader market. Under proposed Item J, the adviser would report: (a) The date the reporting fund was unable to pay redemption requests or suspended redemptions; (b) the percentage of redemptions requested and not yet paid; and (c) whether the adviser has notified the investors that the reporting fund will liquidate. We request comment on the proposed current report in section 5, Items I and J: 48. For proposed Item I, our goal is to be notified when the adviser receives requests for substantial redemptions because they may result in significant transaction costs and forced selling by a fund, all of which can cause harm to investors and contribute to systemic risk. Does Item I, as currently formulated, capture such events? 49. Should we ask different, additional questions, or provide checkboxes to gather additional context and timely information on large redemptions? What should such checkboxes describe? 50. Is the 50 percent of most recent net asset value threshold trigger for substantial redemptions proposed in Item I appropriately tailored to capture large scale liquidations? Should it be higher or lower or over a different time period? We understand that some investors may submit a redemption request each quarter to preserve their flexibility as a matter of course. For example, a fund of funds may submit a redemption request to its underlying funds so that it can match any redemptions it receives from its investors. The fund of funds then may rescind the redemption requests that they do not need so that their initial redemption requests appear overstated. How should the reporting event take these types of redemption requests into account? Should we allow reporting funds to exclude certain redemption requests? If so, how should we cabin such an exclusion? 51. Would proposed Item J provide the information we seek regarding a reporting fund's inability to pay redemptions or its suspension of redemptions? The 5 consecutive day period is designed to limit reporting of temporary redemption suspensions that we believe have less of an impact on investors or the broader market. Is the 5 consecutive business day period for inability to satisfy or the suspension of redemptions appropriate for capturing significant constraints on investor liquidity or stress at the fund? Should the period be longer or shorter? 52. Should we ask different, additional questions, or provide checkboxes about why an adviser was unable to pay redemptions or why redemptions were suspended? If so, what should they be? g. Explanatory Notes Proposed Item K would allow an adviser to provide a narrative response if it believes that additional information would be helpful in current report(s). We believe that current reports can sometimes benefit from additional context so that the Commission and FSOC can effectively evaluate them for both our investor protection mission and FSOC's monitoring of systemic risk. This approach is consistent with other current reports filed with the Commission, where registrants have requested the flexibility to provide additional narrative information relating to circumstances surrounding the current report. 47 47 See Part H of Form N-RN. We request comment on the proposed current report in section 5, Item K: 53. Should we provide the option for a narrative response? Are advisers likely to use the space to provide additional context to a filed current event? 54. Should we require advisers to provide a narrative response in Item K when they check “other” in describing a key event? 55. Other current reporting forms require follow up reports for certain events. 48 Should we require follow up reports for any of the current reporting events in section 5? For example, should we require an adviser to file a follow up report if it learns additional material information regarding the reported event that is responsive to a proposed question? Should we require advisers to periodically file follow-up reports ( e.g., every 5 business days, every 30 business days) until the event has been resolved? Should we instead permit advisers to voluntarily file follow-up current reports? As another alternative, should we require advisers to report information regarding the resolution of the event as part of its next regular report on Form PF? 48 17 CFR 274.223 (Form N-Liquid or Form N-RN) and 17 CFR 274.222 (Form N-CR). 56. Should advisers to funds that are not qualifying hedge funds have to respond to any or all of the current reporting items? For example, should we require all advisers that file Form PF to file a current report in connection with an operations event? Should certain current reporting events only be required of the largest hedge funds? If so, what asset thresholds would be appropriate and for which items? 2. Private Fund Adviser Current Reporting on Private Equity Funds Similar to the current reporting in proposed section 5 for large hedge fund advisers, we are also proposing to require all advisers to private equity funds to file a current report within one business day of a reporting event. The reporting events include: (1) Execution of an adviser-led secondary transaction, (2) implementation of a general partner or limited partner clawback, and (3) removal of a fund's general partner, termination of a fund's investment period, or termination of a fund. As noted above, private equity fund advisers file their annual updates within 120 calendar days after their fiscal year ends, which leads to significant delays in reporting and staleness of certain information. We believe that more current reporting of the proposed information would improve the Commission's and FSOC's ability to monitor systemic risk by providing information on certain events (including potential trends affecting multiple private equity funds) that could significantly affect both investors and markets more broadly, and also enhance our investor protection efforts. Because reporting of these events is designed to enhance our timely oversight of these advisers, we propose to require current reporting on a limited number of events by all advisers to private equity funds that file Form PF. Furthermore, we believe that growth in the private equity industry since the adoption of Form PF further supports the proposed current reporting requirements, given that both the number of investors invested in private equity funds has increased and the industry's impact on markets generally has become more pronounced. 49 We believe that both of these developments merit more timely risk-based monitoring and oversight by the Commission and FSOC given the potential consequences for an ever increasing pool of private equity investors as well as financial markets broadly. 49 Since 2013, the number of private equity funds has more than doubled from under 7,000 to nearly 16,000, private equity fund gross assets have tripled from $1.6 trillion to $4.7 trillion, and private equity fund net assets have also nearly tripled, increasing from $1.5 trillion to $4.2 trillion. See Private Funds Statistics, supra footnote 4. Proposed section 6 would contain Items A through E. Item A would require advisers to identify themselves and the reporting fund, including providing the reporting fund's name, private fund identification number, NFA identification number (if any), and LEI (if any). 50 Items B through D would set forth the three reporting events and the applicable reporting requirements. Item E would serve as an optional item for advisers to provide any explanatory notes they believe would be helpful to the Commission's and FSOC's understanding of information reported in section 6. The following sections discuss each reporting event in turn. 50 Section 6, Item A would also require identifying information on the reporting fund's adviser, including the adviser's full legal name, SEC 801-Number, NFA ID Number (if any), large trader ID (if any), and large trader ID suffix (if any), as well as the name and contact information of the authorized representative of the adviser and any related person who is signing the current report. See Section 6, Item A. a. Adviser-Led Secondary Transactions Proposed section 6 Item B would require reporting upon the completion of an adviser-led secondary transaction. This proposed reporting would include the transaction completion date and a brief description of the transaction. We propose to define “adviser-led secondary transaction” as any transaction initiated by the adviser or any of its related persons 51 that offers private fund investors the choice to: (1) Sell all or a portion of their interests in the private fund; or (2) convert or exchange all or a portion of their interests in the private fund for interests in another vehicle advised by the adviser or any of its related persons. 52 Under the proposal, transactions would only be subject to reporting if they are initiated by a private equity fund's adviser or a related person of the adviser. 53 We understand that these transactions have become increasingly common in the private equity space and may present conflicts of interest that merit timely reporting and monitoring given that these conflicts, particularly those that arise because the adviser (or its related person) is on both sides of the transaction in an adviser-led secondary transaction with potentially different economic incentives, have the potential to negatively impact investors. To the extent that an increase in adviser-led secondary transactions also indicates an inability to sell portfolio companies (or to sell those companies at existing valuations) through more traditional exit avenues, transactions of this nature could be a leading indicator of a declining market, a situation that also merits timely monitoring to identify potential consequences for both investors as well as markets more broadly from a systemic risk perspective. This proposed requirement would provide the Commission and FSOC with data regarding the frequency and circumstances surrounding these transactions allowing the Commission and FSOC to assess market trends better and assess both potential market impacts as well as potential conflicts of interest associated with these transactions. 51 See Form PF Glossary (definition of “related person”). 52 See Form PF Glossary (proposed definition of “adviser-led secondary transaction”). 53 Whether a transaction is initiated by the adviser or its related persons requires a facts and circumstances analysis. However, we would generally not view a transaction to be initiated by the adviser or one of its related persons to the extent the adviser or one of its related persons, at the unsolicited request of an investor, participates in the secondary sale of such investor's fund interest. We request comment on the proposed current report in section 6, Item B: 57. The purpose of this proposed reporting event is to identify an adviser-led secondary transaction that merits monitoring on a timelier basis than possible with an annual report on Form PF. Does the reporting event accomplish this purpose? Why or why not? If not, how should we modify the language? Should the rule use an alternative trigger? Alternatively, do these types of transactions not merit such monitoring? 58. Is the proposed definition of “adviser-led secondary transaction” appropriate and clear? If not, how could the definition be clarified? Should it be modified or eliminated? Is the proposed definition too broad or too narrow? Should we provide additional guidance? 59. Should we define or provide guidance on the term “transaction” in the definition of “adviser-led secondary transaction”? If so, how should “transaction” be defined? Should we reference the various types of adviser-led secondary transactions in the definition? Why or why not? The proposed definition of “adviser-led secondary transaction” includes transactions initiated by the adviser's related persons. Should we exclude transactions initiated by some or all of the adviser's related persons from the proposed definition? b. General Partner or Limited Partner Clawback Proposed section 6 Item C would require reporting upon the implementation of a general partner clawback. This proposed reporting would include the effective date of the clawback and the reason for the clawback. 54 We would define “general partner clawback” as any obligation of the general partner, its related persons, or their respective owners or interest holders to restore or otherwise return performance-based compensation to the fund pursuant to the fund's governing agreements. 55 54 As proposed section 6, Item C pertains to both general partner clawbacks and limited partner clawbacks, the item also requires filers to specify the type of clawback implemented ( i.e., whether it is a general partner clawback or limited partner clawback). See Section 6, Item C. 55 See Form PF Glossary (proposed definition of “general partner clawback”). Under the proposal we would define “performance-based compensation” as any allocation, payment, or distribution of capital based on the fund's (or its portfolio investments') capital gains and/or capital appreciation. This definition would include cash or non-cash compensation, including in-kind allocations, payments, or distributions of performance-based compensation. See also Form PF Glossary (proposed definitions of “performance-based compensation” and “portfolio investments”). For example, if the general partner of a fund is entitled to performance-based compensation equaling 20 percent of the fund's profits over the life of the fund and the fund distributes such compensation to the general partner periodically based on the profitability of the fund at the time of distribution, the general partner may have received distributions of performance-based compensation over the life of the fund in excess of 20 percent of the fund's aggregate profits. In this situation, under the fund's governing documents, the fund's general partner would be required to return the excess performance-based compensation it received to the fund. Specifically, reporting would be required when the general partner is required to return to the fund performance-based compensation in excess of the amount it was ultimately entitled to receive under the fund's governing documents. The widespread implementation of general partner clawbacks may be a sign of a deteriorating market environment, which may have systemic risk implications. For example, given that the implementation of general partner clawbacks by private equity funds is typically rare, if many funds are implementing general partner clawbacks at the same time, this could be indicative of the early stages of a distressed credit environment or cycle, and timely reporting received could help the Commission and FSOC identify particular markets, sectors or funds on which such a declining market environment could have an outsized impact, and which may merit additional monitoring given the potential consequence for both investors and financial market stability. In addition, we propose to require reporting when an adviser implements a limited partner clawback (or clawbacks) in excess of an aggregate amount equal to 10 percent of a fund's aggregate capital commitments. We would define “limited partner clawback,” sometimes referred to as a limited partner “giveback,” as an obligation of a fund's investors to return all or any portion of a distribution made by the fund to satisfy a liability, obligation, or expense of the fund pursuant to the fund's governing agreements. 56 We believe requiring the proposed minimum threshold is appropriate because we believe a clawback of this magnitude would be associated with an event that could have a significant negative impact on a fund's investors and, if a pattern emerges among multiple private equity advisers, could indicate financial stability concerns. 56 See Form PF Glossary (proposed definition of “limited partner clawback”). Limited partner clawbacks of this magnitude also could signal that a fund is under stress or is anticipating being under stress. For example, a limited partner clawback (or clawbacks) in an aggregate amount of more than 10 percent of a private equity fund's aggregate capital commitments might suggest that the fund is planning for a material event ( e.g., substantial litigation or legal judgment) that could negatively impact investors and we believe that such potential impact merits prompt reporting to allow for more timely risked-based monitoring. We request comment on the proposed current report in section 6, Item C: 60. Do the proposed reporting events based on implementation of a general partner and/or limited partner clawback capture events that could signal that a fund or the market more generally is under stress or subject to an event that merits prompt reporting? Why or why not? If not, how should we modify this reporting event or what alternative reporting event would you suggest? 61. Are the proposed definitions of “general partner clawback,” “performance-based compensation,” and “limited partner clawback” appropriate and clear? If not, how should the definitions be clarified? Should they be modified or eliminated? Are the proposed definitions too broad or too narrow? Should we provide additional guidance? 62. With respect to the limited partner clawback reporting event, is the proposed minimum reporting threshold, i.e., a clawback (or clawbacks) in excess of an aggregate amount equal to 10 percent of a fund's aggregate capital commitments, appropriate? Why or why not? If not, should the threshold be higher or lower and why? Would the proposed limited partner clawback reporting event cause advisers to hold more investment proceeds as reserves and delay distributions to investors, rather than distributing proceeds to investors more quickly? Why or why not? 63. We recognize that certain fund agreements require the adviser to perform interim clawback calculations during the life of the fund. For example, the adviser may be required to determine whether the general partner would be subject to a clawback on the first anniversary of the termination of the investment period. Should such “interim” clawbacks be subject to the current reporting requirement, as proposed? Do they present the same monitoring needs as end-of-life clawbacks? c. Removal of General Partner, Termination of the Investment Period or Termination of a Fund Proposed section 6 Item D would require an adviser to report when a fund receives notification that fund investors have: (1) Removed the adviser or an affiliate as the general partner or similar control person of a fund, (2) elected to terminate the fund's investment period, or (3) elected to terminate the fund, in each case as contemplated by the fund documents. Proposed Item D would require reporting on the effective date of the applicable removal event and a description of such removal event. We believe that events of this nature are rare, and accordingly, current reporting would also be rare. However, we believe these events could provide an indication of market deterioration and also raise investor protection issues, including potential conflicts of interest, and merit the Commission's and FSOC's timely monitoring. For example, each of these triggers could lead to the liquidation of the fund earlier than anticipated, which could present risks to investors and potentially certain markets in which the fund assets were invested. This proposed current reporting event would provide the Commission and FSOC with timely notification of this event (of which we might otherwise be unaware at the time it is initiated), and allow for evaluation given the potential consequences of the event. We request comment on the proposed current report in section 6, Item D: 64. Does the proposed reporting event based on the removal of a fund's general partner, termination of a fund's investment period, or termination of a fund raise investor protection and systemic risk concerns that merit timely monitoring? Why or why not? If not, how should we modify this reporting event or what alternative reporting event would you suggest? Is the use of the term “termination” in the reporting event clear on its face or should it be defined? Why or why not? 65. Are there other reporting events, in addition to the ones that we have proposed in section 6, that you believe would provide the Commission and FSOC with information that would enhance our ability to protect private equity fund investors and monitor the private equity industry? If so, what are they? For example, should we have a reporting event in connection with the departure of a senior member ( e.g., partner, executive officer, etc.) of a fund's general partner, e.g., a key person event? 66. Should we add a “for cause” requirement to this reporting event ( i.e., typically defined in a fund's governing documents as the general partner or its principals engaging in gross negligence, willful misconduct, fraud, or violations of applicable law)? Should we narrow the reporting event to only cover “for cause” events? d. Explanatory Notes Similar to proposed section 5 Item K and for the same reasons, proposed section 6 Item E would allow an adviser to provide a narrative response if it believes that additional information would be helpful in explaining the circumstances of their current report(s). We request comment on the proposed current report in section 6, Item E: 67. Should we provide the option for a narrative response? Are advisers likely to use the space to provide additional context to a filed current event? 68. As noted above, other current reporting forms require follow up reports for certain events. Should we require follow up reports for any of the reporting events in section 6? For example, should we require an adviser to file a follow up report if it learns additional material information regarding the reported event that is responsive to a proposed question? 3. Filing Fees and Format for Reporting We propose to require advisers to file current reports through the same non-public filing system they use to file the rest of Form PF, the Private Fund Reporting Depository (“PFRD”). 57 Large hedge fund advisers and all private equity advisers would file current reports on section 5 and section 6 of Form PF, respectively, and would not file any other sections of Form PF at the time a current report is filed. This requirement is designed to facilitate reporting of clear and timely information in an efficient manner. Under the proposed rule, advisers filing current reports on either section 5 or 6 would be required to pay to the operator of the Form PF filing system fees that have been approved by the SEC. The SEC in a separate action would approve filing fees that reflect the reasonable costs associated with the filings and the establishment and maintenance of the filing system. 58 Advisers also would be able to amend their current report if they discover that information they filed was not accurate at the time of filing. 59 57 See proposed Instruction 12. See also rule 17 CFR 275.204(b)-1. 58 See section 204(c) of the Advisers Act. 59 Consistent with the current instructions for other types of Form PF filings, large hedge fund advisers and private equity advisers would not be required to update information that they believe in good faith properly responded to Form PF on the date of filing even if that information is subsequently revised for purposes of recordkeeping, risk management or investor reporting (such as estimates that are refined after completion of a subsequent audit). This proposed requirement is designed to provide advisers with a way to correct current reports, just as all advisers can correct other types of Form PF filings. See Instruction 16. 69. Should advisers file current reports through PFRD as proposed? Alternatively, is there another filing system ( e.g., IARD, EDGAR) that would be more appropriate? Should we instead allow advisers to file current reports via secure email? Would that be less burdensome for advisers experiencing an operations event? 70. Should there be filing fees associated with filing a current report on Form PF? Considering the expeditious reporting deadlines and the nature of the current reporting events, would filing fees prevent a timely filing of a current report? 71. Under the proposal, filers may request a temporary hardship exemption pursuant to rule 204(b)-1(f) for a current report. Should we instead require advisers to notify the Commission via email or phone call if they are experiencing a temporary hardship and as a result cannot file their current report? Alternatively, should we instead prohibit advisers from requesting a temporary hardship exemption pursuant to rule 204(b)-1(f) for a current report given the importance of timely reporting? B. Large Private Equity Adviser Reporting We also propose to amend section 4 of Form PF, which requires reporting by large private equity advisers to: (1) Lower the reporting threshold from $2 billion to $1.5 billion in private equity fund assets under management, and (2) add new questions designed to enhance our understanding of certain practices of private equity advisers and amend certain existing questions to improve data collection. 60 60 Under the proposal, Item B would also be split into three new items to be designated new Item B “Certain information regarding the reporting fund,” new Item C “Reporting fund and controlled portfolio company financing,” and new Item D “Portfolio company investment exposures.” 1. Reduction in Large Private Equity Adviser Reporting Threshold Currently, a private fund adviser must complete section 4 of Form PF if it had at least $2 billion in private equity fund assets under management as of the end of its most recently completed fiscal year (“large private equity adviser”). 61 Section 4 of the Form requires additional information regarding the private equity funds these advisers manage, which are tailored to focus on relevant areas of financial activity that have the potential to raise systemic concerns. When Form PF was originally adopted in 2011, the $2 billion reporting threshold captured 75 percent of the U.S. private equity industry based on committed capital. 62 Today, this threshold only captures about 67 percent of the U.S. private equity industry. 63 We therefore propose to lower this threshold to $1.5 billion in order to continue to capture about 75 percent of the U.S. private equity industry based on committed capital. 64 We believe the proposed reduction is important so that Form PF continues to capture and provide robust data on a sizable portion of the private equity industry. The proposed threshold reduction is designed so that the group of advisers filing Form PF as large private equity advisers would continue to represent a substantial portion of private equity industry assets. Having a robust data set for analysis is important for both identifying potential investor protection issues as well as for monitoring systemic risk. We think that the proposed new threshold strikes an appropriate balance between obtaining information regarding a significant portion of the private equity industry for analysis while continuing to minimize the burden imposed on smaller advisers. 61 See Instruction 3 to Form PF. 62 See 2011 Form PF Adopting Release, supra footnote 2, at 32. 63 Based on data reported on Form PF and Form ADV. 64 As under the current instructions to Form PF, an adviser would determine whether it meets the threshold and qualifies as a large private equity adviser based solely on the assets under management attributable to private equity funds. We request comment on the proposed change to the reporting threshold: 72. Should the Commission reduce the reporting threshold for large private equity advisers as proposed? Why or why not? If not, should the reporting threshold be kept constant, increased, or decreased further? If the threshold should be changed, what do you believe is the appropriate threshold and why? 73. Would the proposed reduction in the large private equity adviser reporting threshold create an undue burden on advisers that will newly be required to complete section 4 ( i.e., those with between $1.5 billion and $2 billion in private equity fund assets under management)? If so, why? 74. Does the change in reporting threshold for filing as a large private equity adviser accurately capture the information needed to monitor for systemic risk? Why or why not? 2. Large Private Equity Adviser Reporting Private Equity Fund Investment Strategies. We propose to add Question 68 to Section 4 to collect information about private equity fund investment strategies. 65 Form PF does not currently collect data on private equity fund strategies. Given the growth in the industry since adoption of Form PF and the current diversity of strategies employed by private equity funds, we believe that it is important that we begin collecting this information. Different strategies carry different types and levels of risk for the markets and financial stability. We believe that reporting on investment strategies would allow the Commission and FSOC to understand and monitor better the potential market and systemic risks presented by the different strategies to both markets and investors. For example, a shift in private equity assets towards riskier strategies could provide valuable information about emerging systemic risks. Similarly, as noted above, this information would also allow the Commission and FSOC to assess better private equity funds' increasing role in providing credit to companies. 65 For purposes of this proposed question, private equity fund investment strategies would include private credit (and associated sub-strategies such as distressed debt, senior debt, special situations, etc.), private equity (and associated sub-strategies such as early stage, buyout, growth, etc.), real estate, annuity and life insurance policies, litigation finance, digital assets, general partner stakes investing, and other. In connection with this proposed question, we also propose to add two new terms to the Form PF Glossary of Terms for “digital assets” and “general partner stakes investing.” See Form PF Glossary of Terms. The proposed question would be structured similar to Question 20, which collects information about hedge fund strategies, but tailored to private equity funds ( i.e., the strategies would represent common strategies employed by private equity funds). The proposal would require advisers to choose from a mutually exclusive list of strategies by percent of deployed capital even if the categories do not precisely match the characterization of the reporting fund's strategies. If a reporting fund engages in multiple strategies, the adviser would provide a good faith estimate of the percentage the reporting fund's deployed capital represented by each strategy. Proposed Question 68 also would include an “other” category for advisers to select in cases where a reporting fund's strategy is not listed, but an adviser selecting “other” in response to this question must explain why. This proposed requirement is designed to improve data quality by providing context to an adviser's selection of the “other” category. It also is designed to help ensure that advisers are not selecting the “other” category when they should be reporting information in a different strategy category. Proposed Question 68 is designed to allow FSOC to filter data for targeted analysis, monitor trends in the private equity industry, analyze potential system risk, and to support the Commission's oversight of the private equity industry and investor protection efforts. We request comment on proposed Question 68: 75. Should Form PF require large private equity advisers to report investment strategies for the private equity funds they advise as proposed? 76. Should we collect strategy information for all advisers to private equity funds and not just large private equity advisers? Why or why not? Would collecting this data be overly burdensome for smaller private equity advisers? If so, what should be the threshold cutoff for such reporting ( e.g., $500 million in private equity assets under management)? 77. Should Question 68, as proposed, provide that the strategy options are mutually exclusive and direct advisers to not report the same assets under multiple strategies? Why or why not? Alternatively, should Form PF allow advisers to report the same assets under multiple strategies? Would this approach better identify the reporting fund's strategies? 78. Should Form PF require more granular strategy information than proposed? Why or why not? If so, please provide examples of more granular categories or sub-categories that should be included. 79. Should Question 68 require more, fewer, or different categories? Are there other strategies that are important for tracking and assessing systemic risk or for the protection of investors? If so, please provide examples of desired changes in the strategy categories. 80. With respect to private credit strategies, should we consolidate some of the private credit categories? For example, are “Private Credit—Junior/Subordinated Debt,” “Private Credit—Mezzanine Financing,” “Private Credit—Senior Debt,” and Private Credit—Senior Subordinated Debt” each considered a subset of the category “Private Credit—Direct Lending/Mid Market Lending”? If so, should we only have a “Private Credit—Direct Lending/Mid Market Lending” category and remove the other four sub-categories? Why or why not? Furthermore, should “Private Credit—Direct Lending/Mid Market Lending” be changed to “Private Credit—Direct Lending” to capture direct lending to large corporations? Why or why not? 81. Should Question 68 include an “other” category, as proposed? If advisers select the “other” category, should Form PF require them to explain the selection, as proposed? Should Form PF require the adviser to include more, less, or different information in the explanation? Would this proposed change improve data quality by providing context to the adviser's selection of the “other” category? Would this proposed change help us ensure that advisers are not misreporting information in the “other” category when they should be reporting information in a different category? Is there a better way to meet these objectives? Should Form PF require advisers to provide explanations for any other categories besides the “other” category, as proposed? 82. Should we define “digital assets” and “general partner stakes investing” as proposed or are other alternative definitions more suitable? Restructuring/recapitalization of a portfolio company. We propose to add Question 70 to Section 4 to obtain additional information regarding restructurings or recapitalizations of the reporting fund's portfolio companies. Specifically, we propose to require an adviser to indicate whether a portfolio company was restructured or recapitalized following the reporting fund's investment period, and if so, to provide the name of the portfolio company and the effective date of the restructuring. 66 For example, a fund that holds portfolio company equity that has become worthless might restructure its equity interest into a note or loan with a different valuation. While we understand that private equity funds routinely engage in these practices during the investment period, we believe that when these activities happen post-investment period, it would tell the Commission and FSOC more about the current market environment and would allow FSOC to monitor these activities for systemic risk analysis and assist us with our risk-based exam program. 66 Proposed Question 70. We request comment on proposed Question 70: 83. Should Form PF require advisers to report on restructuring or recapitalizations of a portfolio company as proposed? Why or why not? 84. Would the proposed reporting tell us more about the current market environment or potential systemic risk? 85. Would it be overly burdensome for advisers to report this information? Why or why not? If so, are there alternative ways for us to collect this data that would be less burdensome? Please provide examples. 86. As drafted, is this question appropriate in scope? Should we carve out certain types of recapitalizations or restructurings? Should certain types of funds not be required to report this information based on their investment strategy or underlying holdings? Investments in different levels of a single portfolio company's capital structure by related funds. We propose to add Question 71 to require reporting on investments in different levels of a single portfolio company's capital structure by funds advised by an adviser or a related person. Specifically, the adviser would indicate whether the reporting fund held an investment in one class, series or type of securities ( e.g., debt, equity, etc.) of a portfolio c [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2022-01976. Public record. Not legal advice.