# Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-09775

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** June 12, 2023
- **Citation:** 88 FR 38146

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6297; File No. S7-01-22]
RIN 3235-AM75
Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“SEC” or “Commission”) is adopting amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require event reporting upon the occurrence of key events. The amendments also require large private equity fund advisers to provide additional information to the SEC about the private equity funds they advise. The reporting requirements 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:

Effective dates:
This rule is effective June 11, 2024, except for the amendments to Form PF sections 5 and 6 (referenced in 17 CFR 279.9) which are effective December 11, 2023.

Compliance dates:
For the amended, existing Form PF sections and amendments to 17 CFR 275.204(b)-1, June 11, 2024. For new Form PF sections 5 and 6, December 11, 2023.

FOR FURTHER INFORMATION CONTACT:

Robert Holowka, Jill Pritzker, and Samuel Thomas, Senior Counsels; Sirimal R. Mukerjee, Senior Special Counsel; or Melissa Roverts Harke, 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 Commission is adopting amendments to Form PF [17 CFR 279.9] and Rule 204(b)-1 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.

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 to Qualifying Hedge Funds

1. Timing of Hedge Fund Current Reports

2. Extraordinary Investment Losses

3. Significant Margin and Default Events

4. Prime Broker Relationship Terminated or Materially Restricted

5. Changes in Unencumbered Cash

6. Operations Events

7. Large Withdrawal and Redemption Requests, Inability To Satisfy Redemptions, or Suspensions of Redemptions

8. Explanatory Notes

B. Quarterly Private Equity Event Reports for All Private Equity Fund Advisers

1. Adviser-Led Secondary Transactions

2. Removal of General Partner or Election To Terminate the Investment Period or Fund

C. Filing Fees and Format for Reporting

D. Large Private Equity Fund Adviser Reporting

1. New Question on General Partner or Limited Partner Clawbacks

2. Other Amendments to Large Private Equity Fund Adviser Reporting

E. Effective and Compliance Dates

III. Other Matters

IV. 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

1. Changing the Frequency of Current Reporting, Quarterly Reporting Events, and Annual Reporting Events

2. Changing Current Reporting Filing Time

3. Alternative Reporting Thresholds for Current Reporting by Hedge Fund Advisers (Versus Just Large Hedge Fund Advisers to Qualifying Hedge Funds)

4. Different Size Thresholds for Private Equity Fund Advisers Who Must File Quarterly and Annual Reports on the Occurrence of Reporting Events

5. Changing the Reporting Events for Current Reporting by Hedge Fund Advisers

6. Alternative Size Threshold for Section 4 Reporting by Large Private Equity Fund Advisers

7. Alternatives to the New Section 4 Reporting Requirements for Large Private Equity

V. Paperwork Reduction Act

A. Purpose and Use of the Information Collection

B. Confidentiality

C. Burden Estimates

1. Proposed Form PF Requirements by Respondent

2. Final Form PF Requirements by Respondent

3. Annual Hour Burden Proposed and Final Estimates

4. Annual Monetized Time Burden Proposed and Final Estimates

5. Annual External Cost Burden Proposed and Final Estimates

6. Summary of Proposed and Final Estimates and Change in Burden

VI. Regulatory Flexibility Act Certification

Statutory Authority

I. Introduction

The Commission is adopting amendments to Form PF, the form that certain investment advisers registered with the Commission use to report confidential information about the private funds that they advise. 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.
2

We now have almost a decade of experience analyzing the information

collected on Form PF.
3

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 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

Accordingly, to enhance the FSOC's monitoring and assessment of systemic risk and to collect additional data for the Commission's use in its regulatory programs, in January 2022 the Commission proposed amendments to enhance the information advisers file on Form PF.
6

2
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 2022 Annual Staff Report Relating to the Use of Form PF Data (Dec. 2022),
available at https://www.sec.gov/files/2022-pf-report-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.

3
Form PF was adopted in 2011 as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Public Law 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)], at section I (“2011 Form PF Adopting Release”). 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, were adopted only by the Commission. Current Form PF section 5, request for temporary hardship exemption, which will become new section 7, is adopted only by the Commission. We are adopting new sections 5 and section 6 and amending section 4, all of which are adopted only by the Commission.

4
The value of private fund net assets reported on Form PF has almost tripled, growing from $5 trillion in 2013 to nearly $14 trillion through the second quarter of 2022, while the number of private funds reported on the form has increased by 110% in that time period. Unless otherwise noted, the private funds statistics used in this Release are from the Private Funds Statistics second quarter of 2022. 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 nine year span from the beginning of 2013 through the second quarter of 2022. Some discussion in this Release compares data from a seven year span, from the beginning of 2015 through the second quarter of 2022, because the SEC staff began publishing that particular data in 2016.

5
We are adopting 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.

6
Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Advisers Act Release No. 5950 (Jan. 26, 2022) [87 FR 9106 (Feb. 17, 2022)] (“2022 Form PF Proposing Release”). The Commission voted to issue the 2022 Form PF Proposing Release on Jan. 26, 2022. The release was posted on the Commission website that day, and comment letters were received beginning that same date. The comment period closed on Mar. 21, 2022. We have considered all comments received since Jan. 26, 2022. In Aug. 2022, the Commission and the CFTC proposed amendments to Form PF regarding certain reporting requirements for all filers and large hedge fund advisers. Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers, Advisers Act Release No. 6083 (Aug. 10, 2022) [87 FR 35938 (Sept. 1, 2022)] (“2022 Form PF Joint Proposing Release”).

The Commission received a number of comment letters on the 2022 Form PF Proposing Release.
7

Some commenters generally supported the policy goals of the proposal, stating that the proposal would help the Commission and FSOC assess and respond to systemic risk as well as consider appropriate policy responses.
8

Other commenters generally asserted that the proposal was not the appropriate way of achieving FSOC and the Commission's policy goals of assessing systemic risk and investor protection, respectively, due to the reporting and monitoring burdens they would impose.
9

Certain commenters stated that the reporting requirements are not indicative of systemic risk.
10

Some commenters argued that, instead, the proposed reporting requirements were more focused on supporting the Commission's regulatory examination and enforcement functions, and that these requirements would overburden advisers (especially smaller advisers) with compliance costs that investors would likely bear and obscure data that is related to systemic risk.
11

Lastly, other commenters stated that the SEC should consider the proposed amendments in tandem with the 2022 Form PF Joint Proposing Release as the amendments to both may impact each other and create a collective compliance burden that potentially should be implemented at one time if adopted.
12

7
The comment letters on the 2022 Form PF Proposing Release (File No. S7-01-22) are available at
https://www.sec.gov/comments/s7-01-22/s70122.htm.

8

See, e.g.,
Comment Letter of The Predistribution Initiative (Mar. 21, 2022) (“PDI Comment Letter”); Comment Letter of Mark C. (Feb. 21, 2022) (“Mark C. Comment Letter”); Comment Letter of Public Citizen (Mar. 21, 2022) (“Public Citizen Comment Letter”); Comment Letter of Anonymous Retail Investor (Mar. 24, 2022) (“Anonymous Retail Investor Comment Letter”); Comment Letter of Better Markets (Mar. 21, 2022) (“Better Markets Comment Letter”); Comment Letter of Americans for Financial Reform Education Fund (Mar. 21, 2022) (“AFREF Comment Letter”).

9

See, e.g.,
Comment Letter of Alternative Investment Management Association Limited and the Alternative Credit Council (Mar. 21, 2022) (“AIMA/ACC Comment Letter”); Comment Letter of Real Estate Roundtable (Mar. 21, 2022) (“RER Comment Letter”); Comment Letter of Managed Funds Association (Mar. 21, 2022) (“MFA Comment Letter”); Comment Letter of Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (Mar. 21, 2022) (“USCC Comment Letter”).

10

See, e.g.,
AIMA/ACC Comment Letter; RER Comment Letter; Comment Letter of the American Investment Council (Mar. 21, 2022) (“AIC Comment Letter”); Comment Letter of the Real Estate Board of New York (Mar. 21, 2022) (“REBNY Comment Letter”).

11

See, e.g.,
AIMA/ACC Comment Letter; AIC Comment Letter.

12

See, e.g.,
AIC Comment Letter (Oct. 11, 2022); MFA Comment Letter (Mar. 16, 2023).
See
discussion
infra
at section II.E.

We are adopting the amendments largely as proposed, but with certain modifications in response to comments received:

• First, we are adopting new current reporting requirements for large hedge fund advisers regarding their qualifying hedge funds.
13

We are modifying the proposal and eliminating the proposed current report for changes in unencumbered cash. Also, instead of reporting in one business day, as proposed, the amendments will require large hedge fund advisers to qualifying hedge funds to report as soon as practicable upon, but no later than 72 hours after, the occurrence of certain events that we believe may indicate significant stress or otherwise serve as signals of potential systemic risk implications or as potential areas for inquiry so as to mitigate investor harm.

13
Currently, 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. Depending on their size, 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 on a quarterly or annual basis. 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 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 fund adviser”). A qualifying hedge fund is defined in Form PF as “any hedge fund that has a net asset value (individually or in combination with any feeder funds, parallel funds and/or dependent parallel managed accounts) of at least $500 million as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter.”

• Second, in a modification from the proposal, we are also adopting event

reporting for all private equity fund advisers, which would include quarterly reporting within 60 days after quarter ends for two of the proposed current reporting items: (1) adviser-led secondary transactions, and (2) general partner removals and investor elections to terminate a fund or its investment period. We are requiring annual large private equity fund adviser reporting, however, with respect to general partner or limited partner clawbacks,
14

which we had proposed to be reported on a current basis by all private equity fund advisers.
15

14
We have made a global modification in Form PF to replace the term “private equity adviser” with “private equity fund adviser.” We believe that “private equity fund adviser” is the more precise term, but we do not view this modification as resulting in substantive differences.

15
This item has also been moved from proposed section 6 to section 4 because it is now an annual reporting item for large private equity fund advisers.

• Third, with modifications from the proposal, we are adopting several additional reporting items as well as amendments to require large private equity fund advisers to report more detailed information regarding certain activities of private equity funds that are important to the assessment of systemic risk and for the protection of investors. We are also adopting tailored amendments to gather more information from large private equity fund advisers regarding fund strategies and use of leverage as well as other amendments. In a change from the proposal, we are not adopting a lower $1.5 billion reporting threshold for large private equity fund advisers for purposes of reporting in section 4 and are instead retaining the existing $2 billion threshold.

The Commission proposed amendments that would have required large liquidity fund advisers to report substantially the same information that money market funds would be required to report on Form N-MFP under the Commission's proposal to amend that form.
16

However, we are continuing to consider comments relating to the proposed large liquidity fund adviser amendments—and the proposed amendments to Form N-MFP on which they are based—and are not adopting amendments to Form PF concerning large liquidity fund advisers at this time.

16

See
Money Market Fund Reforms, Investment Company Act Release No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)] (“Money Market Fund Proposing Release”).

The amendments we are adopting are important enhancements to the ability to monitor and assess systemic risk and to determine whether and how to deploy the Commission's or FSOC's regulatory tools.
17

The amendments will also strengthen the effectiveness of the Commission's regulatory programs, including examinations, investigations, and investor protection efforts relating to private fund advisers. We consulted with FSOC to gain input on these amendments to help ensure that Form PF continues to provide FSOC with information it can use to assess systemic risk.

17
Accordingly, we are adopting the amendments the Commission proposed in the 2022 Form PF Proposing Release at this time to facilitate FSOC and the Commission's assessment of systemic events and the Commission's investor protection efforts through current reporting, and we are continuing to consider comments received in connection with the 2022 Form PF Joint Proposing Release.
See
discussion of compliance dates for respective sections of Form PF
infra
at section II.E.

II. Discussion

A. Current Reporting for Large Hedge Fund Advisers to Qualifying Hedge Funds

We are adopting amendments that will require large hedge fund advisers to file a current report with respect to one or more current reporting events at a qualifying hedge fund that they advise.
18

We are modifying some of the proposed reporting events and eliminating the proposed unencumbered cash current report while also extending the reporting period from one business day to as soon as practicable, but no later than 72 hours. Currently, large hedge fund advisers file Form PF quarterly, which could cause Form PF data to be stale during fast moving events that could have systemic risk implications or negatively impact investors. The current reporting requirements for qualifying hedge funds will provide important, current information to the Commission and FSOC to facilitate timely assessment of the causes of the current reporting event, the potential impact on investors and the financial system, and any potential regulatory responses.
19

More specifically, a timely notice could allow the Commission and FSOC to assess the need for potential regulatory action, and could allow the Commission to pursue potential outreach, examinations, or investigations in response to any harm to investors or potential risks to financial stability on an expedited basis before they worsen. The current reports will also enhance our analysis of information the Commission already collects across funds and other market participants, allowing FSOC and the Commission to identify patterns that may present systemic risk or that could result in investor harm, respectively. The Commission and its staff will be able to use the information contained in the current reports to assess the nature and extent of the risks presented, as well as the potential effect on any impacted fund and the potential contagion risks across funds and counterparties more broadly.

18
As proposed and in connection with the addition of new section 5 for current reporting, we are also making 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 6.

19
In a change from the proposal, we are replacing “reporting event” with “current reporting event” in the Form PF Glossary to highlight that these events are current events occurring at funds specific to section 5 reporting. “Current reporting events” includes any event that triggers the requirement to complete and file a current report pursuant to the items in section 5. We are defining “current report” to include a report provided pursuant to the items in section 5.

Some commenters generally supported the requirement to provide current reports for certain events that may signal systemic risk or trigger certain investor protection concerns and some, in particular, stated that the one business day requirement was necessary to formulate an FSOC or Commission response to fast-moving market events.
20

Other commenters stated that some of the reporting items were not reflective of systemic risk concerns and did not directly connect the proposed reporting requirements with specific investor protection concerns.
21

For example, two commenters stated that extraordinary investment losses are not necessarily indicative of systemic risk and that losses are an investment risk that should not be conflated with investor protection.
22

20

See, e.g.,
PDI Comment Letter; AFREF Comment Letter; Mark C. Comment Letter; Public Citizen Comment Letter; Anonymous Retail Investor Comment Letter; Better Markets Comment Letter.

21

See, e.g.,
Comment Letter of SIFMA (Mar. 21, 2022) (“SIFMA Comment Letter”) (stating that triggering events, like the extraordinary loss current report, premised on investor protection concerns such as “large, sharp, and sustained losses” should be viewed as part of the investment risks associated with any investing).
See also
IAA Comment Letter (stating that many of the items proposed to be reported on a current basis will not assist the Commission or FSOC in addressing systemic risk, that current reporting is not necessary to meet the Commission's investor protection goals, and that the Commission appears to conflate investment protection with mitigation of investment risk and losses).

22

Id.

As discussed below, the current reporting events include extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, operations events, and certain events associated with redemptions. We

designed the current 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 to a fund in distress could react by increasing margin requirements, limiting borrowing, or forcing asset sales, and these responses could amplify the event and have potential contagion effects on the broader financial system. Similarly, reports of large investment losses at qualifying hedge funds (even if not the largest or most levered) may signal market stress that could have systemic effects.
23

Current reports would be especially useful during periods of market volatility and stress, when the Commission and FSOC may receive a large number of current reports and ascertain the affected funds and gather information to assess any potential contagion or systemic impact. The Commission or FSOC may analyze the events and organize outreach to the impacted entities, funds, counterparties, or other market participants that the current reports and other data may indicate could be next in a contagion circumstance. For example, if one fund that was particularly concentrated in a deteriorating position or strategy reported an extraordinary loss or was terminated by its prime broker for reasons related to that position or strategy, Commission staff could potentially conduct outreach to fund counterparties or other similarly situated funds to assess whether any regulatory action could mitigate the potential for contagion or harm to investors. Though some commenters stated that the current reports were not properly focused on systemic risk and would instead subject advisers to regulatory examinations and enforcement actions, we continue to believe that the potential seriousness of the events warrants the collection of current reports that could indicate directly systemic risk and investor protection concerns.
24

23

See, e.g.,
Better Markets Comment Letter (stating new reporting requirements will allow regulators to determine whether an issue at a private fund potentially signals deteriorating market conditions that could cascade into a crisis, or whether an issue at a private fund is itself indicative of a crisis already underway and that, if the Commission or FSOC determines that a crisis is underway, current reporting with details of fund assets, its exposures, and its counterparties will give the Commission and FSOC crucial information about where a crisis may spread).

24

See, e.g.,
AIMA/ACC Comment Letter (stating that the new reporting requirements go beyond Congress' mandate and the current Form PF Rule's stated objectives to foster the Commission's more general objectives: data collection to support examinations, and its regulatory and enforcement programs), and AIC Comment Letter (additional information that is merely potentially useful to the SEC as a compliance monitoring tool in administering its examination and enforcement programs is not an appropriate justification for significantly expanding reporting on Form PF and is inconsistent with the primary purpose of Form PF and the intent of Congress).

The current reporting events generally incorporate objective tests to allow advisers to determine whether a report must be filed. In response to comments, we either eliminated or further tailored the current reporting events both to decrease the reporting burden and to reduce the possibility of reporting “false positives” (
i.e.,
incidents that trigger the proposed current reporting requirement but do not actually raise significant risks) for events that may not indicate the potential for systemic risk or investor harm.
25

We also addressed comments that indicated that we should limit or better explain proposed current reporting triggers that use materiality thresholds, like the proposed prime broker relationship termination and operations event current reporting items, and instead simplify the analysis required to determine if you need to report by making reporting dependent on binary events.
26

As a result, a number of the items continue to include quantifiable threshold percentage tests or have been further refined to trigger reporting for events that are likely indicative of severe stress at a fund or may have broader implications for systemic risk for which we seek timely information while minimizing the potential for false positives and multiple unnecessary current reports.

25
In some instances our refinement of questions to include more current statistics would also likely reduce the number of “false negatives.”

26

See
AIMA Comment Letter and SIFMA Comment Letter. Several commenters pointed to National Futures Association (“NFA”) Compliance Rule 2-50 as a form that provided more binary and limited types of reporting. NFA Notice 9080—NFA Compliance Rule 2-50: CPO Notice Filing Requirements. The Interpretive Notice is
available at https://www.nfa.futures.org/rulebooksql/rules.aspx?Section=9&RuleID=9080. See also
discussions
infra
at sections II.A.4 and II.A.6.

To supplement the objective triggers, several of the items include check boxes, largely as proposed, that will provide additional context and avoid requiring advisers to provide narrative responses during periods of stress under time pressure. These check boxes will allow the Commission and FSOC to review and analyze the current reports and screen false positives during periods in which they may be actively evaluating fast-moving market events and potentially prioritizing responses to certain affected funds, counterparties, or other market participants.

The adopted amendments will establish new section 5 that will contain Items A through J. Section 5, Item A will require advisers to identify themselves and the reporting fund, including providing the reporting fund's name, private fund identification number, National Futures Association identification number (if any), and Legal Entity Identifier (if any).
27

Section 5, Items B through I will set forth the current reporting events and the applicable reporting requirements for each event. Like the proposal, the amendments will have an optional repository for explanatory notes in section 5, Item I that the adviser may use to improve understanding of any information reported in response to the other section 5 items. The following sections discuss the timing for filing the current reports and each adopted current reporting event.

27
Form PF 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.

1. Timing of Hedge Fund Current Reports

In a change from the proposal, the amendments will extend the time period for the filing of current reports. Instead of a one business day filing requirement, large hedge fund advisers to qualifying hedge funds are required to report as soon as practicable, but no later than 72 hours, upon the occurrence of certain events that we believe may indicate significant stress or otherwise serve as signals of potential systemic risk implications.

Some commenters expressed concern that the proposed requirement to file reports within one business day to the Commission would be burdensome and potentially lead to inaccurate or inadequate reporting at a time when advisers and their personnel are grappling with a potential crisis at the reporting fund.
28

More specifically,

some commenters stated that advisers would need to develop complicated internal operations capable of performing calculations on a daily basis that may not be applicable to illiquid or hard-to-value assets and that the resulting data may be of limited utility to regulators.
29

One commenter indicated that critical reporting of fast moving events could be delayed by weekends or holidays.
30

Some commenters suggested that advisers could notify the Commission of the occurrence of current reporting events using telephone or email in shorter time frames while delaying current reporting on Form PF to a later date.
31

28

See, e.g.,
Comment Letter of the Institutional Limited Partners Association (Mar. 21, 2022) (“ILPA Comment Letter”); AIMA/ACC Comment Letter; Comment Letter of State Street Corporation (Mar. 21, 2022) (“State Street Comment Letter”); Comment Letter of National Venture Capital Association (Mar. 21, 2022) (“NVCA Comment Letter”); RER Comment Letter; SIFMA Comment Letter; Comment Letter of Schulte Roth & Zabel LLP (Mar. 21, 2022) (“Schulte Comment Letter”); Comment Letter of the Investment Adviser Association (Mar. 21, 2022) (“IAA Comment Letter”); NYC Bar Comment Letter; REBNY Comment Letter.

29

See, e.g.,
SIFMA Comment Letter and USCC Comment Letter.
See also, infra
discussion of daily fund value statistics in section II.A.2.

30

See
Comment Letter of Sarah A. (Mar. 11, 2022) (“Sarah A. Comment Letter”) and AIMA/ACC Comment Letter.

31

See
SIFMA Comment Letter and State Street Comment Letter.

Receiving current reports on a timely basis will help address the Commission's and FSOC's need, discussed above, for current information. In order to allow advisers to qualifying hedge funds additional time to evaluate and obtain the necessary data to confirm the existence of a filing event, which will help improve the quality of the information contained in the report, the amendments will require advisers to file current reports for current reporting events as soon as practicable, but no later than 72 hours, upon the occurrence of a reporting event rather than one business day. We believe that shifting from a business day approach to one measuring elapsed hours after an event will address commenter concerns that critical reporting of fast moving events could be delayed by weekends or holidays.
32

We believe that this time period properly balances commenters' concerns with the Commission's need for timely information, while allowing advisers to collect information within 72 hours that may not be readily ascertainable at the event's immediate outset. The 72 hour period begins upon the occurrence of the current reporting event, or the time when the adviser reasonably believes that the event occurred, and, as proposed, the form requires the adviser to respond to the best of its knowledge on the date of the report. To illustrate, if an adviser determined that a current reporting event occurred on Monday at noon, it would have to file a current report, as soon as practicable, but no later than Thursday before noon.

32

See
Sarah A. Comment Letter and AIMA/ACC Comment Letter. We are amending Instructions 1, 3, 9, and 12 of the general instructions to reflect this new obligation for large hedge fund advisers. Specifically, we are amending Instruction 3 to identify new section 5 and Instruction 9 to address the timing of filing the current reports.

By extending the time period from one business day to 72 hours, we believe that an adviser will have sufficient time to identify events and conduct sufficient analysis to review and file timely current reports. Though some commenters stated that certain current reports will be burdensome to establish systems and processes to identify triggering events, in our experience, advisers to qualifying hedge funds generally already maintain the sophisticated operations and resources necessary to provide these reports. Moreover, changes we have made to the metrics for the 20 percent extraordinary loss and margin thresholds should alleviate concerns about the burdens and uncertainties concerning the timely valuation of illiquid or hard-to-value assets.
33

Though some commenters suggested that current reporting could include informal telephoning or emailing of the Commission, we continue to believe that reporting through Form PF will provide the Commission and FSOC with a systematic means through which to assess the events underlying the reporting.
34

33

See
discussion at
infra
sections II.A.2. and II.A.3.a.

34
Though we require filing reports using Form PF, we also encourage engagement with Commission staff from registrants in periods of stress or otherwise.

Lastly, advisers will be able to file an amendment to a previously filed current report to correct information that was not accurate at the time of filing in the event that information in a current report was inaccurate or was filed in error.
35

In a change from the proposal, to facilitate the filing of amendments, we are making a change to include the time of filing to enable the identification of previous filings.
36

35
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).

36

See
Form PF section 5, Item A. Item A also has an additional change to require advisers to enter a CRD number to help identify the adviser.

2. Extraordinary Investment Losses

We are adopting, largely as proposed, current reporting to 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.
37

In a change from the proposal, reporting for extraordinary investment losses would be triggered by a loss equal to or greater than 20 percent of a fund's “reporting fund aggregate calculated value” (“RFACV”), which we discuss further below, as opposed to the fund's most recent net asset value (“MRNAV”), over a rolling 10-business-day period.
38

This current reporting event will capture, for example, a situation where the fund's RFACV is $1 billion and the fund loses $20 million per business day for a consecutive 10 business days. It will also capture a loss of $200 million in one business day as the rolling 10-business-day period is backward looking. We designed the 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.

37

See
Form PF section 5, Item B.

38
The Commission proposed to include a definition for “reporting fund aggregate calculated value” in the 2022 Form PF Joint Proposing Release. The comment letters on the 2022 Form PF Joint Proposing Release (File No. S7-22-22) are available at
https://www.sec.gov/comments/s7-22-22/s72222.htm.
The RFACV statistic will only apply to section 5 of Form PF.

Some commenters supported the extraordinary loss event.
39

One commenter stated that a 20 percent loss over a 10-day period would be a significant event for any hedge fund and may render some funds insolvent.
40

Other commenters questioned whether the 20 percent loss threshold was truly significant or indicative of actual stress, and stated that in volatile or broadly down markets, the Commission might receive a large number of reports of limited value.
41

Some commenters questioned the Commission's use of MRNAV and stated that the Commission base the loss threshold on a more current net asset value figure,
42

a net asset value figure compiled on a best efforts basis from their evaluation of fair-valued assets and unaudited figures,
43

or a month-end net asset value.
44

39

See, e.g.,
Better Markets Comment Letter.
See also
ICGN Comment Letter.

40
Better Markets Comment Letter.

41

See, e.g.,
AIMA/ACC Comment Letter. AIMA/ACC also stated that the 20% threshold may not properly account for volatile market strategies that funds may employ.

42
Comment Letter of Anonymous (Feb. 25, 2022). Two commenters also criticized basing this threshold on a dated net asset value figure.
See
SIFMA Comment Letter and MFA Comment Letter.

43

See
MFA Comment Letter.

44

See
Schulte Comment Letter and MFA Comment Letter.

We continue to believe that the extraordinary loss current reporting

event will capture critical periods of hedge fund stress. Accordingly, we are adopting, as proposed, current reporting based on a 20 percent loss but, in a change from the proposal, are establishing the threshold by reference to the RFACV fund value statistic. As discussed below, RFACV is a more current statistic than the MRNAV filed on Form PF and will limit the potential for over or under-reporting. We believe that a 20 percent loss of RFACV over a 10-business-day period is sufficiently high to avoid over-reporting during periods of relative market stability, but sufficiently low that it avoids under-reporting during periods of market stress.
45

It is also our understanding that prime brokers and other fund counterparties already track certain net asset value triggers over varying periods and routinely build them into the risk control provisions of their agreements (
e.g.,
prime broker agreements, total return swap agreements, or ISDA Master Agreements).
46

Such net asset value decline triggers typically range from 10 percent to 25 percent declines over a 30 day period.
47

Accordingly, we believe a 20 percent decline is appropriate considering that such a decline may have triggered or nearly triggered a contractual reporting threshold with credit and trading counterparties who view net asset value triggers as potential early warning indicators of hedge fund stress or potential liquidation. The reporting of large losses will 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, fund liquidations, or ramifications for other types of Commission registrants.
48

Such 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.

45

See
discussion of thresholds at
infra
section IV.C.1.a.

46

See, e.g.,
Poseidon Retsinas,
How Fund Managers Can Mitigate NAV Triggers' Impact on Trading Agreements,
Hedge Fund Law Report (May 14, 2020) (“HFL Report”),
available at https://www.hflawreport.com/6769831/how-fund-managers-can-mitigate-nav-triggers-impact-on-trading-agreements.thtml. See
also discussion of the 20% threshold
infra
at text accompanying footnote 323.

47

Id.

48
For example, a hedge fund's registered broker-dealer counterparties may be subject to large losses, or registered investment companies with similar portfoloio exposures, though not necessarily as leveraged, might be at risk for future losses.

Though commenters asserted that sharp broad-based market downturns may lead to a large number of reports from advisers, we believe that such reporting still will be useful to FSOC or the Commission during market instability. Moreover, in singular events, large, sharp, and sustained losses suffered by one fund within this short period may signal potential concerns for similarly situated funds, allowing FSOC and the Commission 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.

The amendments use RFACV as a reference statistic in response to commenters' concerns that MRNAV was too dated of a statistic and could result in false positives.
49

RFACV also is responsive to commenters' assertions that the reference value statistic be compiled on a best efforts basis from an evaluation of fair-valued assets and unaudited figures. RFACV is defined as “every position in the reporting fund's portfolio, including cash and cash equivalents, short positions, and any fund-level borrowing, with the most recent price or value applied to the position for purposes of managing the investment portfolio” and may be calculated using the adviser's own methodologies and conventions of the adviser's service providers, provided that these are consistent with information reported internally.
50

The RFACV is a signed value calculated on a net basis and not on a gross basis. While the inclusion of income accruals is recommended, the approach to the calculation should be consistent over time.
51

This calculation is similar to the typical practices for computing daily profit and loss and generally should include all items at their most recent, reasonable estimate, which will be marked-to-market for all holdings that can reasonably be marked daily. These value estimates are appropriate because they are both guided by the reporting fund's valuation policies and procedures that are shared with fund investors and counterparties and are increasingly performed and provided by third-party administrators who specialize in position-level valuation and reporting.
52

49

See
Comment Letter of Anonymous (Feb. 25, 2022). Other commenters also criticized basing this threshold on a dated net asset value figure.
See
SIFMA Comment Letter and MFA Comment Letter.

50

See
section IV.C.2
infra
(discussing the risks of unintended consequences of using RFACV statistics and the factors that mitigate those risks including the sharing of valuation policies with investors and that fund valuation is often outsourced to fund service providers with standardized methodologies).

51

See
Form PF Glossary. Those funds that do compute a daily net asset value may use it as their reporting fund aggregate calculated value. Where one or more portfolio positions are valued less frequently than daily, the last price used should be carried forward, though a current FX rate may be applied if the position is not valued in U.S. dollars. It is not necessary to adjust the RFACV for accrued fees or expenses. Position values do not need to be subjected to fair valuation procedures. While the RFACV definition permits funds to compute it excluding accrued fees and expenses, and without updating less frequently valued positions, these are optional, and intended to reduce burden for the funds. If the funds already calculate net asset value without these modifications on a daily basis, they can use it wherever RFACV is used.

52

See infra
footnote 423.

Using this statistic will be both more timely and less burdensome than a requirement to calculate a daily net asset value, which would necessarily require the adviser to make daily calculations of all of the fund's assets and liabilities, including accrued fees and expenses. Referencing a timelier statistic based on a daily estimate of the fund's value will provide a more current and accurate picture of large fund losses and also acknowledges that many funds do not perform daily net asset value calculations, because they may only strike a net asset value weekly, at month end, or at investor request, or because certain of their portfolio assets are only valued on a periodic basis.
53

The use of RFACV will be less burdensome than a daily net asset value figure to operationalize because, in our experience, it will rely on systems that many large hedge fund advisers already employ, while not requiring the adviser to adjust for accrued fees or expenses, subject position values to fair valuation procedures, or include income accruals. At the same time, we are allowing advisers to use their own internal methodologies or those of their service providers when calculating RFACV, provided that these are consistent with information reported internally.

53
Advisers utilizing RFACV should rely upon the information available to them at that current point in time when filing this item. For example, if reporting on Friday, and the reporting fund knows it has a position mark that will not be updated until Sunday, the adviser should generally rely on the Friday number for purposes of the calculation and the determination of whether to file.

Under this current reporting event, the revised Item B requires reporting if “on any business day the 10-day holding period return of the reporting fund is less than or equal to −20 percent of reporting fund aggregate calculated value.” In a change from the proposal, “holding period return” and “daily rate of return” are new terms in the Form PF Glossary to help advisers calculate the daily rate-of-return and link those daily returns together to calculate a cumulative rate of return over the 10-day holding period to promote consistent responses to the

current report.
54

When triggered, an adviser must file the following information: (1) the dates of the 10-business-day period over which the loss occurred, (2) the holding period return, and (3) the dollar amount of the loss over the 10-business-day period.
55

If the loss continues past the initial 10-business-day period, advisers will not report a second time until the fund has experienced a second loss of an additional 20 percent of the fund's RFACV over a second rolling 10-business-day period to begin on or after the end date stated in the adviser's initial Item B current report. This information will 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.

54
“Holding period return” is defined in the Form PF Glossary to mean the cumulative
daily rate of return
over the holding period calculated by geometrically linking the
daily rates of return.
Holding period return (%) = (((1 + R
1
) × (1 + R
2
) . . . (1 + R
10
))−1) × 100 where R
1
, R
2
. . . R1
0
are the daily rates of return during the holding period expressed as decimals. “Daily rate-of-return” is defined as the percentage change in the reporting fund aggregate value from one day to the next and adjusted for subscriptions and redemptions, if necessary.

55
“Dollar amount of loss over the 10-business-day period” is defined in the Form PF Glossary to facilitate reporting of the extraordinary loss current report and is equal to the reporting fund aggregate value at the end of the 10-business-day loss period less the reporting fund aggregate value at the beginning of the 10-business day loss period less the net of any subscriptions or redemptions during the 10-business-day period.

3. Significant Margin and Default Events

We are adopting, largely as proposed, current reporting of significant margin and default events that occur at qualifying hedge funds advised by large hedge fund advisers or at their counterparties.
56

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. The triggers and underlying thresholds are 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.

56

See
Form PF section 5, Item C.

a. Increases in Margin

We are requiring advisers to report significant increases in the reporting fund's requirements for margin, collateral, or an equivalent (collectively referred to as “margin”) based on a 20 percent threshold.
57

In a change from the proposal, and consistent with our adopted amendments to the extraordinary loss current report, we are referencing a different fund value statistic, average daily RFACV. Average daily RFACV is a more current statistic than MRNAV and, accordingly, will increase the report's accuracy and limit the potential for over- or under-reporting. In particular, in response to commenters that stated that the daily computation of net asset value may be burdensome, we selected average daily RFACV, because it is comparatively less burdensome and does not require all the calculations (
e.g.,
adjustments for accrued fees and expenses or fair valuation procedures) necessary for striking a daily net asset value.
58

The margin increase current report relies on RFACV outlined above in the extraordinary loss section, but is the average of the daily RFACV for the end of the business day on business days one through ten of the reporting period. As with the use of RFACV in the extraordinary loss current report, using the average daily RFACV will provide a more current daily number from which to calculate margin increases as opposed to using a dated net asset value statistic reported on Form PF that may be in excess of 60 days old.

57
An equivalent is any other type of payment or value understood to serve the same purposes as margin or collateral.

58

See
discussion in
supra
section II.A.2.

Current reporting of margin increases will provide FSOC and the Commission with valuable information that may provide early indications of stress at a fund before a potential default occurs triggering more widespread systemic impacts or harm to investors. 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 as well as the potential for future margin increases from the fund's other counterparties. Moreover, a number of margin increase reports from multiple funds that invest in certain securities or sectors through different counterparties will provide FSOC and the Commission with a broader picture of industry-wide risks and potential investor harms, respectively.

Some commenters supported the requirement as proposed.
59

One commenter stated that if the fund triggered a 20 percent margin increase it could be indicative of a risk to investors in the fund and should be reported.
60

Others opposed it, stating that the 20 percent threshold was too low or arbitrarily drawn without support,
61

would capture routine margin activity occurring in the normal course of business,
62

would likely cause excess reporting that would not be indicative of fund stress, and relied on a dated net asset value statistic that had the potential to induce either over or underreporting.
63

Other commenters expressed concern that the terms “margin,” “collateral,” or “an equivalent” were not clearly defined.
64

59
Comment Letter of International Corporate Governance Network (Mar. 21, 2022) (“ICGN Comment Letter”); AFREF Comment Letter.

60
ICGN Comment Letter.

61
AIMA/ACC Comment Letter; IAA Comment Letter.

62
AIMA/ACC Comment Letter.

63
AIMA/ACC Comment Letter; SIFMA Comment Letter.

64
AIMA/ACC Comment Letter; MFA Comment Letter, SIFMA Comment Letter.

In response to commenters that questioned the 20 percent threshold and its reliance on a dated MRNAV statistic, the amendments will reference a more current value statistic while retaining the 20 percent increase. We are triggering reporting on whether the total dollar value of margin, collateral, or an equivalent posted by the reporting fund at the end of a rolling 10-business-day period less the total dollar value of margin, collateral, or an equivalent posted by the reporting fund at the beginning of the rolling 10-business-day period is greater than or equal to 20 percent of the average daily RFACV during the period.

We are adopting “average daily reporting fund aggregate calculated value” as a new defined term in the Form PF Glossary to help advisers calculate the amount of the margin increase and promote consistent responses to the current report.
65

This change away from the reference net asset value statistic (MRNAV) should lessen under- and over-reporting by providing a more current reference statistic, decreasing the potential for false positives. In response to comments that specifically questioned the 20 percent threshold, we believe a 20 percent increase based on the new RFACV statistic will improve our ability to capture truly large and sudden margin increase events.
66

Specifically, 20 percent is an appropriate threshold for reporting increases in margin

because our experience and data suggests that a margin increase of this magnitude as a percentage of a fund's market value could represent a significantly higher percentage increase in margin itself.
67

Given that margin increases can happen quickly in volatile markets, reporting limited to large margin defaults alone would not allow the Commission and the FSOC to identify the extent of increasing liquidity constraints among market participants which could impair market function.
68

65
The Form PF Glossary definition of “average daily reporting fund aggregate calculated value” references the “reporting fund aggregate calculated value” that is utilized by the Item B extraordinary loss question.

66

See supra
section II.A.2. discussion of RFACV.

67
One estimate from the academic literature indicates that an increase in margin or collateral of 20% of the average daily RFACV over a ten-day period represents a substantially large increase in the actual level of margin or collateral, which would have potentially serious consequences for a fund depending on its circumstances. Based on a sample of large hedge fund advisers' qualifying hedge funds from Q4 2012 to Q1 2017, the paper finds that the hedge funds in the sample had median collateral as a percentage of borrowings of 121%, median borrowings of $.443 billion, and a median NAV of $.997 billion. This indicates that a typical hedge fund in the sample has collateral as a percentage of NAV of approximately 54.1%. For such a hedge fund, an increase in margin/collateral of 20% of RFACV represents an almost 40% increase in the level of margin/collateral posted.
See
Mathias S. Kruttli, Phillip J. Monin & Sumudu W. Watugala,
The Life of the Counterparty: Shock Propagation in Hedge Fund-Prime Broker Credit Networks,
(Dec. 2022).
See also
discussion of the margin increase threshold
infra
section IV.C.1.a.

68

See
Review of Margining Practices, Bank for International Settlement, Basel Committee on Banking Supervision, Committee on Payments and Market Structure, Board of International Securities Commissions (Sept. 2022),
available at https://www.bis.org/bcbs/publ/d537.htm.

We continue to believe that the terms “margin” and “collateral” are general terms that will allow advisers to apply the reporting trigger to their unique collateral requirements. Commenters requested a more detailed definition of both “margin” and “collateral,” but these terms are common terms for margin that we believe properly scope the margin activity for which we seek reporting without potentially narrowing or limiting reporting to certain types of margin requirements specific to certain funds and their counterparty agreements.
69

In our experience, “margin” and “collateral” generally refer to assets and cash that can be claimed by a fund counterparty, lender, or clearinghouse if needed to satisfy an obligation. These terms refer both to assets that have been physically transferred to an account outside the fund as well as those that remain in the fund's accounts, but have been identified by custodians, prime brokers, and fund administrators as collateral for an obligation. The inclusion of “or an equivalent” is designed to provide increased flexibility to account for funds' unique circumstances. In the event advisers have unique circumstances related to their margining practices and reporting of margin increases, advisers may use the explanatory notes section to explain their margin increase current report.

69

See
AIMA Comment Letter and MFA Comment Letter.

The adviser will be required to report (1) the dates of the 10-business-day period over which the increase occurred; (2) the total dollar amount of the increase; (3) the total dollar value amount of margin, collateral or an equivalent posted by the reporting fund at both the beginning and the end of the 10-business-day period during which the increase was measured (an addition from the proposal);
70

(4) the average daily RFACV of the reporting fund during the 10-business-day period during which the increase was measured (an addition from the proposal); and (5) the identity of the counterparty or counterparties requiring the increase(s). In a change from the proposal, we are requiring the disclosure of the average daily reporting fund aggregate calculated value of the reporting fund during the 10-business-day period during which the increase was measured to provide FSOC and the Commission with a fund value statistic that provides additional context for the margin increase. If the increases in margin were to continue past the initial 10-business-day period, advisers should 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. In circumstances where multiple counterparties are involved, advisers will list all counterparties who increased margin requirements. In addition, the adviser must use check boxes to describe the circumstances of the margin increase. Commenters stated that the margin increase item would capture margin activity that was within business as usual operations. As discussed above, this reporting item is triggered on a 20 percent increase in margin, which we believe is a significant increase that will not capture margin activity that is within business as usual operations. In addition, the amended form contains clearly defined check boxes for this item that will allow the Commission and FSOC to understand the cause of the margin increase reports that may help distinguish the levels of risk. These items are largely unchanged from the proposal and include: (1) exchange or central clearing counterparty
71

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 that, in a change from the proposal, will now require advisers to provide an explanation in the explanatory notes section.
72

This information, along with any information advisers include in the explanatory notes section, will provide useful context concerning the margin increase and will better enable the Commission and FSOC to both 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.

70
In a change from the proposal, we are requiring the total dollar value amount of margin, collateral or an equivalent posted by the reporting fund at the end of the 10-business-day period during which the increase was measured rather than a cumulative figure. We believe having the dollar value figure measured both at the beginning and at the end of the 10-business day period will provide more detailed and useful information to the Commission and FSOC.

71
In a change from the proposal, we are including “central clearing counterparty” or “CCP” requirements in this check box to reflect better the types requirements that can be imposed by central counterparties or clearing houses and impact margin.

72
In a change from the proposal we are requiring advisers that check “other” to provide an explanation of their use of other in the explanatory notes section to provide additional context to their current report.

b. Fund Margin Default or Inability To Meet Margin Call

We are also requiring, as proposed, 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).
73

Quickly identifying such events is important because funds that are in margin default or that are unable to meet a call for margin are at risk of triggering the liquidation of their positions at their counterparties, and this presents serious risks to the fund's investors, its

counterparties, and potentially the broader financial system.

73

See
Form PF section 5, Item D. In situations where there is a contractually agreed upon cure period, an adviser will not be required to file an Item D current report until the expiration of the cure period, unless the fund does not expect to be able to meet the margin call during such cure period.

A commenter supported reporting related to margin defaults or inability to meet a call for margin if it was limited to circumstances where there was a written notice of default because counterparty agreements typically require written notice of default, and written notice provides a bright line test for determining whether a default occurred.
74

The same commenter also stated that only large defaults in excess of 5 percent of a fund's last reported net asset value adjusted for subscriptions and redemptions should be reported to avoid the possibility of immaterial defaults.
75

Other commenters asserted that if the Commission did adopt any of the current reporting items, it should focus on margin defaults and the inability to satisfy redemptions, as both were events that signaled potential stress to the financial sector by contributing to fire sales and counterparty exposure risk.
76

Another commenter stated that other market participants like major broker-dealers, banks, or other counterparties could more readily provide this information to the Commission.
77

74

See
MFA Comment Letter.

75

Id.

76

See, e.g.,
AIMA Comment Letter.

77
NYC Bar Comment Letter.

We are largely adopting this item, as proposed, because margin defaults or a determination of an inability to meet margin calls are risk events that may portend liquidation events that could trigger systemic risk or harm investors. While commenters indicated that we should limit this reporting to large margin defaults or collect this information from other market participants or registrants, we do not believe doing so would capture key indicators of fund risk. Default events in certain trades, strategies, or positions will provide insight into whether funds or counterparties facing similar positions may be at risk. Reporting limited to large margin defaults, conversely, may not provide the FSOC with sufficiently early or fulsome information to identify and help prevent potential contagion. Furthermore, we believe it is important to receive this confidential reporting directly from the advisers to these large qualifying hedge funds on Form PF, because a fund's broker-dealer or bank counterparties may only have limited visibility into a fund's stress rather than a comprehensive picture of a fund's overall counterparty risks. In addition, we believe that limiting reporting to only written notifications of a default may incentivize funds or their counterparties to avoid written notice of default, particularly when it may be less clear a party is in default. The amendments, like the proposal, will continue to require advisers to file a current report in situations where there is a dispute with regard to the margin call to avoid delays in reporting. Advisers will 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. 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.

Under the amendments, an adviser will report for each separate counterparty for which the event occurred: (1) 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; (2) the dollar amount of the call for margin, collateral, or equivalent; and (3) the legal name and LEI (if any) of the counterparty. In addition, the adviser will 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.
78

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 for which the adviser will be required to provide further information in the explanatory notes item.
79

These check boxes will enable the Commission and FSOC to identify and evaluate the circumstances underlying the inability to meet a call for margin. If the fund is unable to meet margin or defaulted with multiple counterparties on the same day, the adviser will file one current report broken out with details for each counterparty.

78
Form PF section 5, Item D, Question 15.

79
In a change from the proposal we are requiring advisers that check “other” to provide an explanation of their use of “other” in the explanatory notes section to provide additional context to their current report.

c. Counterparty Default

The amendments, like the proposal, will require advisers to report a margin, collateral or equivalent default or failure to make any other payment in the time and form contractually required by a counterparty.
80

Counterparty defaults can have serious implications for transacting funds, the funds' investors, and the broader market. A current report of a counterparty default will 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 or investor protection.

80

See
Form PF section 5, Item E.

One commenter supported the reporting of counterparty defaults,
81

while others believed this item should only capture larger counterparty defaults that accounted for a greater portion of the fund's net asset value than the proposed 5 percent threshold.
82

Some commenters stated that there should not be a percentage threshold associated with the counterparty defaults and that, if a percentage was relied upon, the Commission's five percent threshold was too low.
83

Another commenter argued that counterparty default reporting should not be required for all types of market participants, but should be limited to regulated broker-dealers and banks, while noting that the net asset value calculation for counterparty defaults should be amended to a timelier figure that accounts for interim subscriptions and redemptions.
84

Other commenters stated that the triggers for a counterparty default notification differ from the default provisions utilized in industry standard documents and that the definitions and default provisions in the standard documents be expressly incorporated into Form PF triggers.
85

81
AFREF Comment Letter.

82

See, e.g.,
SIFMA Comment Letter; AIMA/ACC Comment Letter; IAA Comment Letter; and NYC Bar Comment Letter.

83

See, e.g.,
AIMA/ACC Comment Letter and NYC Bar Comment Letter.

84
MFA Comment Letter.

85
NYC Bar Comment Letter.

We are adopting the counterparty default event with minor amendments as counterparty defaults to hedge funds of the size of qualifying hedge funds would be central to any analysis of systemic risk or potential risk of investor harm. A single hedge fund counterparty, such as a large broker dealer, may have dozens of fund counterparties that may be subject to a pending default. Though some commenters stated that certain definitions and default provisions in industry standard documents should be expressly incorporated into the counterparty default current report trigger, based on our review of certain industry contracts we believe the

adopted reporting item will broadly capture default reporting triggers in many contracts. We also believe, given the variability we observed in industry contract default triggers, that it would be impractical to design a default trigger in the form that matches industry documents.

A current report for this item will 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 five percent of RFACV. While we are not adopting a minimum threshold for reporting on a qualifying hedge fund's margin default given the potential implications of such a default, we are adopting a threshold for counterparty defaults that could affect a sizeable percentage of the fund's value. However, in response to comments that the MRNAV was not reflective of the current value of the fund, we are amending this item to reference the more current RFACV statistic that is employed in the extraordinary loss and margin event items.

While some commenters believed the five percent default trigger to be too low, we believe that the five percent of the timelier RFACV statistic is an appropriate threshold to trigger reporting because counterparty defaults of this size could have systemic waterfall effects, triggering forced-selling by the fund and identifying potential risks for other hedge funds that may transact with the same counterparty.
86

Moreover, the five percent threshold is a figure we have used in Form PF to measure and collect information regarding sizable exposures to creditors or counterparties.
87

We understand it also represents an often-used industry practice for measuring significant exposure at both the position level and the counterparty-exposure level. A default at this level could be a sign of issues at both the fund and counterparty making it well suited for systemic risk monitoring. Even if a five percent default is insignificant at a fund level, a high number of such reports across a number of hedge funds can be significant systemically, especially if it involves similar counterparties. Setting the threshold for counterparty defaults at five percent of the RFACV would limit the reports for
de minimis
or superficial defaults that may be the result of a short-lived operational error. We are not limiting reporting to defaults that occur only at regulated broker-dealer and bank counterparties because there are circumstances where large defaults with non-regulated market participants, such as foreign entities or private special purpose entities, may have direct impacts on the reporting fund and broader implications for systemic risk.

86

See
Financial Stability Oversight Council, Update on Review of Asset Management Products and Activities (Apr. 2016), at 15-18,
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).

87

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% 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.

The amendments will require an adviser to report: (1) the date of the default; (2) the dollar amount of the default; and (3) the legal name and LEI (if any) of the counterparty. In the event that multiple counterparties to the fund default on the same day, the reporting item will 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 current report for each counterparty default that occurred. We did not provide check boxes for this item, because advisers to the funds are unlikely to have complete information regarding their counterparty's default and the responses would likely be speculative.

4. Prime Broker Relationship Terminated or Materially Restricted

The prime broker current report we proposed would have required an adviser to report a material change in the relationship between the reporting fund and a prime broker.
88

In response to comments, we are adopting a modified reporting item to require an adviser to report only the termination or material restriction of the reporting fund's relationship with a prime broker.
89

We have narrowed the focus of this current report trigger to exclude relationship changes that could be initiated by the fund for business reasons that may not be indicative of fund or market stress.

88

See
2022 Form PF Proposing Release,
supra
footnote 6, at section II.A.1.c.

89

See
Form PF section 5, Item F.

Some commenters supported a current report for material changes in the prime broker relationship.
90

Others opposed it, stating that prime brokers and funds would have difficulty discerning what constituted a “material” change in the relationship,
91

that both parties may terminate relationships for ordinary business reasons that are not indicative of fund or counterparty stress,
92

and that the Commission only should require reporting when the prime broker or the fund terminates the relationship for default or breach of the agreement, which would serve as a bright line.
93

Other commenters argued that the prime broker current reporting event was unnecessary or duplicative of the margin default current report
94

and, therefore, should be removed.
95

Another commenter stated that starting or terminating a relationship with a prime broker occurs on a frequent basis and is not an indication of potential stress at the fund but, in most instances, is based on business imperatives.
96

90
ICGN Comment Letter; AFREF Comment Letter.

91

See, e.g.,
AIMA/ACC Comment Letter; MFA Comment Letter; NYC Bar Comment Letter; IAA Comment Letter; and USCC Comment Letter.

92

See, e.g.,
AIMA/ACC; MFA Comment Letter; NYC Bar Comment Letter; IAA Comment Letter; and SIFMA Comment Letter.

93
AIMA/ACC Comment Letter.

94

See supra
section II.A.3.

95

See, e.g.,
AIMA/ACC Comment Letter and IAA Comment Letter.

96
AIMA/ACC Comment Letter.

After considering comments that expressed concern with the broad scope of reporting any “material change” in the relationship with a prime broker, we generally are narrowing the prime broker reporting items from what was proposed by requiring reporting under two separate instructions. The first instruction requires reporting when the prime broker terminates the agreement or “materially restricts its relationship with the fund, in whole or in part, in markets where that prime broker continues to be active.” For example, if a prime broker will no longer conduct certain trades on behalf of a U.S. fund in a particular market, like a major foreign equities market, this, in our view, would constitute a “material restriction.” On the other hand, if the same prime broker ceases activities in a market for all customers, this should not trigger a current report for an individual fund affected by this action. To address commenters who expressed concern that discerning a “material change” was difficult, we believe a material restriction generally would include a prime broker imposing substantial changes to credit limits or significant price increases, or stating that it ceases to support the fund in an important market or asset type, even if it does not terminate the relationship. We are not limiting this reporting trigger to

terminations, because there are certain circumstances indicating potential stress or investor protection concerns in which a prime broker may not explicitly terminate the relationship, but rather that significantly limits the fund's ability to operate.

The prime broker current report includes a new second instruction that captures instances where there is a fund termination event as well as a cessation of the relationship whether initiated by the prime broker or the fund. The change narrows the circumstances that can give rise to a report as the instruction states that termination events, as specified in the prime broker agreement or related agreements that are isolated to the financial state, activities, or other conditions solely of the prime broker should not be considered for purposes of the current report. Thus, a termination would need to be fund-specific and would not be reportable if the adviser understands that the termination was a part of a widespread change applicable to other of the prime broker's clients and isolated to the financial state, activities, or other characteristics solely of the prime broker. By narrowing the prime broker reporting items from the proposal, advisers would not be required to report when funds terminate or materially restrict prime broker relationships for ordinary course business reasons and would limit reporting to prime broker terminations or material restrictions that we believe are most clearly linked to potential fund stress and resulting systemic risk.

We also believe it is appropriate to leverage prime broker agreements to capture termination events that indicate stress at a fund. These agreements typically contain provisions, the violation of which may indicate stress at a fund, but may not as a matter of industry practice be immediately enforced resulting in the termination of the agreement or relationship between the prime broker and the reporting fund.
97

In our experience we believe it is important to capture circumstances in which a fund has, for example, repeatedly breached margin thresholds and is technically in default, but the prime broker has not terminated the relationship, and at a later date asks the fund to find prime brokerage services elsewhere. Accordingly, the item will also require an adviser to report a termination of the relationship between the prime broker and the reporting fund if the relationship between the prime broker and the reporting fund was terminated in the last 72 hours or less in accordance with the section 5 current reporting period, and a “termination event” was activated in the prime brokerage agreement, or related agreements, within the last 12 months.
98

By leveraging the prime broker agreement, or other related agreements with termination events in the trigger for reporting, we will capture non-routine terminations that may be indicative of stress at a fund including, for example certain “key man” provisions, like the departure of a manager. While funds and their prime brokers might terminate their relationship over ordinary business terms, this current report will capture terminations or material restrictions that might indicate more serious issues for a fund. Lastly, this current reporting event is tied to termination events that may have been triggered in the past 12 months in recognition that a termination may take time to become finalized after a termination event was activated.

97
Similarly, we requested comment on prime broker agreements, specifically whether the agreements include termination events related to net asset value triggers. We did not receive specific comments on whether prime broker agreements specifically include termination events related to net asset value triggers. We do not believe it is necessary to include specific references to terminations related to net asset value triggers in the prime broker current report because, in our experience, net asset value triggers are included in some agreements already, but may not be used in many agreements depending upon the types of fund and strategies involved.

98
Under this reporting item the 72-hour time period within which an adviser must report would begin to run upon the occurrence of the termination or a material restriction or when the adviserreasonably believed such an event occurred.

This current report will allow the Commission and FSOC, for example, to assess whether a particular termination would have a greater or lesser impact on the broader market or on investors and better understand what potentially caused the termination. Though some commenters stated the prime broker current report was duplicative of the margin default current report, we continue to believe that a prime broker-specific question is necessary in addition to the margin default current report because prime broker terminations may signal stress that did not lead to a margin default or may indicate other potential investor protection issues.

Terminations or material restriction of a reporting fund's prime brokerage relationships of this type 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. In addition, a prime broker that is no longer willing to provide services to a fund client could 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 restrictions upon such relationships may indicate potential stress at the fund that may have implications for investor harm and broader systemic risk concerns. In a modification from the proposal, the prime broker reporting item will require an adviser to provide the date of the termination or material restriction, the date of the termination event(s) if different, and the legal name and LEI (if any) of the prime broker involved. We are not adopting the check boxes that we proposed, because they are no longer needed in light of the narrower focus of the report on terminations or material restrictions. However, the explanatory notes item is available if advisers would like to provide more details. Lastly, the item will include a new note stating that if a prime broker changes the terms of its relationship with the reporting fund in a way that significantly limits the fund's ability to operate under the terms of the original agreement, or significantly impairs the fund's ability to trade, the adviser should consider it a “material restriction” that would require filing of the prime broker current report.
99

We believe this note is necessary to ensure that certain circumstances that amount to an effective “firing” of the fund are captured by the current report. Moreover, in response to commenters that had generally asserted that a “material change” to the prime broker agreement would be difficult to determine when considering filing this item, we are providing this note to provide specificity as to when there is a “material restriction.”

99

See
Form PF section 5, Item F.

5. Changes in Unencumbered Cash

In a departure from the proposal, we are not adopting a requirement that an adviser report a significant decline in holdings of unencumbered cash. In the proposal, a current report for changes in unencumbered cash would have been triggered if the value of the reporting fund's unencumbered cash declined by more than 20 percent of the reporting fund's most recent net asset value over a rolling 10-business-day period.

Some commenters supported the inclusion of this item, stating that unencumbered cash was an important metric for understanding hedge fund stability.
100

Other commenters

challenged it, primarily on the grounds that it would capture new investments or routine cash movements in certain strategies resulting in some funds filing numerous reports over the course of a year.
101

Another commenter also stated that the definition of “unencumbered cash” in Form PF is inconsistent with how most advisers would calculate unencumbered cash internally.
102

Another commenter stated that the 2022 Form PF Joint Proposing Release's change of the definition of “cash equivalents” that excluded U.S. Treasury securities would create confusion for advisers seeking to comply with an unencumbered cash current report.
103

100
AFREF Comment Letter and ICGN Comment Letter.

101

See, e.g.,
AIMA/ACC Comment Letter; SIFMA Comment Letter; IAA Comment Letter; Schulte Comment Letter; TIAA Comment Letter; and MFA Comment Letter.

102
AIMA/ACC Comment Letter.

103

See
MFA Comment Letter (Mar. 16, 2023) (stating that the proposed definition of “cash equivalents” was inconsistent with how financial markets generally and advisers treat short-term Treasury securities for risk management and cash management purposes).

We are not adopting this item after considering comments received, including those commenters that stated the unencumbered cash current report may result in a large number of false positives related to certain transactions that occur in the normal course of some strategies. For example, commenters stated that changes in unencumbered cash to purchase highly liquid sovereign bonds or to transfer cash between U.S. Treasuries and sovereign debt would result in a fund submitting 30-70 reports a year to the Commission.
104

Though we still believe that unencumbered cash levels could serve as a marker for fund health in periods of market volatility or stress, receiving such a potentially large number of reports annually that may not be indicative of fund stress does not align with our policy goals for current reporting. For example, it may be difficult to distinguish quickly for reporting purposes between increases of unencumbered cash that could be attributable to ordinary course trading activity versus substantial increases or decreases that are a direct result of fund losses or cash transactions that the fund undertook in response to increased market volatility. An additional difficulty is that different types of strategies utilize very different unencumbered cash levels making it difficult to find a single unencumbered cash indicator that is meaningful, without many false positives and negatives. Lastly, other current reporting items, especially the extraordinary loss, margin, and prime broker questions, will provide real time insight into fund stress and hedge fund stability, at which this proposed question was aimed.

104
MFA Comment Letter.

6. Operations Events

The proposed operations event current report would have required an 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.
105

Under the proposal, key operations would have meant 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. The proposal also would have defined “significant disruption or degradation” to mean a 20 percent disruption or degradation of normal volume or capacity. We are adopting, with certain changes from the proposal, the requirement for an adviser to report when the adviser or reporting fund experiences a “significant disruption or degradation” of the reporting fund's “critical operations,” whether as a result of an event at the reporting fund, the adviser, or other service provider to the reporting fund.
106

As discussed below, in light of comments received, we are not adopting the proposed 20 percent threshold for the “significant disruption or degradation” definition.

105

See
2022 Form PF Proposing Release,
supra
footnote 6, at section II.A.1.e.

106

See
Form PF section 5, Item G. The Operations Events report was initially proposed as Item H.

We continue to 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. 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.

Some commenters generally supported the Commission's receiving current reports about operations events that affected private fund advisers, their funds, and their service providers.
107

For example, one commenter stated that operations events should be the subject of reporting because they can have systemic risk implications while also supporting the Commission's policy goal of investor protection.
108

Others took issue with the proposal defining a “significant disruption or degradation” as a “20% disruption or degradation of normal volume or capacity,” generally arguing that quantifying the scale of a disruption would be both difficult and operationally burdensome.
109

Some commenters indicated that the operations event item would be too difficult to respond to in one day under what may be potentially difficult operational circumstances in which the origin of the problem may still be undiscovered.
110

One commenter objected to the inclusion of service providers in the item, stating that naming a service provider in a filing to the Commission could violate confidentiality agreements or open the adviser or fund to legal liability from their service providers.
111

Other commenters stated that we should only require reporting in the event that an adviser initiated a disaster recovery or business continuity plan.
112

Some commenters questioned whether Form PF was the appropriate place for operations event reporting, stating that the Form PF operations event item may potentially conflict with, or be duplicative of, the Commission's proposal relating to cybersecurity risk management.
113

One such commenter asserted that the operations item's timing for reporting conflicted with the Commission's recent cybersecurity proposal and also did not properly reflect the dichotomy between adviser and fund-level events, stating that events involving severe weather or cybersecurity issues appear to be adviser-level events as opposed to the other proposed key events, which are all fund-level specific.
114

Another

commenter indicated that there were broad trends from other legislative and regulatory initiatives that the Commission should draw from in its approach to operations event reporting to help ensure Commission reporting works consistently with these other requirements.
115

The same commenter requested that, if the Commission adopted the operations report, it provide an additional mechanism to provide updates on the status of the significant disruption or degradation so as to provide ongoing details and eventual notice to the Commission and FSOC of the event's resolution.

107
AFREF Comment Letter and ICGN Comment Letter.

108

See
CRINDATA Comment Letter.

109

See, e.g.,
AIMA/ACC Comment Letter; CRINDATA Comment Letter; ICGN Comment Letter; MFA Comment Letter; IAA Comment Letter; Schulte Comment Letter; and SIFMA Comment Letter.

110

See, e.g.,
AIMA/ACC Comment Letter; NYC Bar Comment Letter; and IAA Comment Letter.

111
AIMA/ACC Comment Letter.

112

See, e.g.,
Schulte Comment Letter; IAA Comment Letter; and MFA Comment Letter.

113

See generally
AIMA/ACC Comment Letter; USCC Comment Letter; Comment Letter of CRINDATA, LLC (Mar. 21, 2022) (“CRINDATA Comment Letter”).
See
Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Advisers Act Release No. 5956 (Feb. 9, 2022) [87 FR 13524 (Mar. 9, 2022)].

114
AIMA/ACC Comment Letter, at 25 (stating that in another Commission proposal, Cybersecurity

Risk Management, Strategy, Governance, and Incident Disclosure, certain advisers are required to disclose information, on amended Form 8-K, about a cybersecurity incident within four business days after it has determined that it has experienced a material cybersecurity incident).

115

See
CRINDATA Comment Letter. The letter discussed the recent enactment of the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (“CIRCIA”).
See
Cyber Incident Reporting for Critical Infrastructure Act of 2022, H.R. 2471, 116th Cong. (2022). The letter also discussed the 2021 Department of the Treasury and banking regulators rule.
See
Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corp.,
Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers
(Nov. 18, 2021) [86 FR 66424 (Nov. 23, 2021)].

In response to comments, we are adopting much of the operations event current report as proposed, but are making two modifications: (1) re-titling “key operations” to be “critical operations”; and (2) not adopting the definition of a “significant disruption or degradation” which contained the 20 percent threshold. In response to commenter concerns that the operations item may be conflating adviser and fund-level events, we believe that the check boxes and associated reporting fund census data collected from Item A of the current report will allow us to properly determine whether this is an adviser-wide issue or fund-specific. We believe it is important to include adviser events in the operations report, because it will allow the Commission and FSOC to determine quickly whether all, or just some, of an adviser's funds or other systems are significantly disrupted or degraded. Moreover, we believe that by including the adviser and the reporting fund in the current report, the report will be more tailored and capture situations in which only certain of an adviser's reporting funds will have suffered a significant disruption or degradation. For example, this could include a situation in which only one of an adviser's funds are impacted by an outage at a pricing provider that values certain asset types specific to that fund's portfolio. In addition, we acknowledge that there are other government cybersecurity initiatives and our own proposed cybersecurity rulemaking as raised by commenters.
116

However, this reporting requirement relates to operations events that go beyond cybersecurity, and receiving such private fund specific operations event reporting with this particularity will inform the FSOC's and Commission's assessment of systemic risk and investor protection efforts.

116

See supra
footnote 113.

In response to commenters' concerns that operations events may be difficult both to discern and accurately report within one business day, we are, as discussed above, extending the reporting period from one business day to as soon as reasonably practicable, but no later than 72 hours upon the occurrence of the event. In such circumstances, with this additional time, an adviser likely will be able to ascertain more information about the operations event and its impact(s) on the reporting fund. As a result, and to alleviate commenter concerns, the report will serve as an expedient means of notifying the Commission and FSOC with salient information about potential stress events rather than an alert that would need to be updated.

While some commenters stated that naming a service provider in operations reporting could open a fund or adviser to liability, we believe that identifying which service provider is contributing to the impairment of a reporting fund's operations may have implications for other advisers and funds that utilize the same service provider, the identification of which is critical for FSOC's ability to monitor systemic risk.
117

Moreover, Form PF is a non-public confidential reporting form, and any current reports identifying service providers involved in an operations event would be reported on a confidential basis.

117
AIMA/ACC Comment Letter.

We are not triggering an operations current report only upon the initiation of a business continuity or disaster recovery plan as there are certain internal operations scenarios that may be indicative of fund stress, but may not necessarily cause an adviser to initiate firm-wide disaster or business continuity plans.
118

For example, there are situations that do not involve natural disasters or force majeure events, but involve more isolated adviser or fund specific events that would not trigger a business continuity plan like when certain key persons that are integral to certain of a fund's operations or certain trading systems or software are unavailable and the adviser or fund is unable to perform its critical operations without them. The current report will include, as proposed, the check the box reporting to indicate whether the adviser has initiated a disaster recovery or business continuity plan relating to the operations event as this will provide greater context to the nature of the operations event and its impact on the adviser and fund.

118
One commenter stated that a business continuity plan would not appear to be a good proxy for receiving information sought by the operations event report.
See
CRINDATA Comment Letter.

Rather than “key operations,” in a change from the proposal, we will use a different term, “critical operations,” but maintain substantially the same underlying definition that we had proposed. “Critical operations” better reflects the nature and types of events for which we seek reporting. For this purpose, critical operations are operations necessary for (1) the investment, trading, valuation, reporting, and risk management of the reporting fund; or (2) the operation of the reporting fund in accordance with the Federal securities laws and regulations.
119

In response to commenters' concerns about the practicality of the 20 percent threshold, we are not adopting the definition of a “significant disruption or degradation” which contained the threshold. After considering comments, we understand there may be circumstances where it would be difficult to quantitatively measure disruptions in critical operations. While we are not adopting the numeric threshold, we continue to believe that, in circumstances where operations are reasonably measurable, a 20 percent disruption or degradation of normal volume or capacity generally might be indicative of the types of stress for which reporting may be necessary.

We understand that many large hedge fund advisers maintain sophisticated back office operations, or already engage service providers that reasonably would be able to measure whether an event has impaired their critical operations beyond a 20 percent threshold. For example, in most cases, operations event reporting would likely be required if a software malfunction at the adviser disrupted the trading volume of a reporting fund by 20 percent or more of its normal capacity. This item will 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 critical operations also would require reporting.

119
While the proposed definition of “key operations” included operations that are “necessary for (1) the investment, trading, valuation, reporting, and risk management of the reporting fund;
and
(2) the operation of the reporting fund in accordance with the Federal securities laws and regulations” (emphasis added), the Commission intended for each provision of the definition to be considered a key operation.
See
2022 Form PF Proposing Release,
supra
footnote 6, at n.39 and accompanying text (“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” (emphasis added)). Accordingly, we are clarifying the definition of “critical operations” by defining the term as operations “necessary for (1) the investment, trading, valuation, reporting, and risk management of the reporting fund;
or
(2) the operation of the reporting fund in accordance with the Federal securities laws and regulations” (emphasis added).
See
Form PF Glossary.

As proposed, the operations event current report will require the date of the operations event (or an estimate of when it occurred), and the date the operations event was discovered. Also largely as proposed, the operations event current report will 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 check boxes.
120

These include whether: (1) the event occurred at a service provider;
121

(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 for which the adviser will be required to provide further information in the explanatory notes item.
122

In addition, this current report 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.

120
Form PF section 5, Item H, Questions 26 through 28.

121
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.

122
As noted above, in a change from the proposal we are requiring advisers that check “other” to provide an explanation of their use of other in the explanatory notes section to provide additional context to their current report.

As proposed, the operations event current report also will require 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, which an adviser is required to explain further in the separate explanatory notes item. We continue to believe that these explanatory check boxes, along with the separate explanatory notes item should advisers need to provide more detailed reporting, will provide appropriate context to current reports filed for operations events and allow the Commission and FSOC to evaluate quickly the potential level of risk to funds, advisers, and their service providers.

7. Large Withdrawal and Redemption Requests, Inability To Satisfy Redemptions, or Suspensions of Redemptions

We are adopting, largely as proposed, reporting for large withdrawal and redemption requests, inability to satisfy redemptions or withdrawals, and suspensions of redemptions or withdrawals.
123

These current reports will 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.

123

See
Form PF, section 5 Items H and I.

a. Withdrawal and Redemption Requests

We are adopting the large withdrawals and redemptions current report, largely as proposed. The current report will require an adviser to report if the fund receives cumulative requests for withdrawals or redemption exceeding 50 percent of the most recent net asset value (after netting against subscriptions or other contributions from investors received and contractually committed).
124

We believe that the obligation to redeem sizable withdrawal or 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.
125

124
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.

125

See
George O. Aragon, Tolga Ergun, Mila Getmansky & Giulio Girardi,
Hedge Funds: Portfolio, Investor, and Financing Liquidity,
DERA White Paper (May 17, 2017),
available at https://www.sec.gov/files/dera_hf-liquidity.pdf
(discussing hedge fund liquidity and the impact of redemptions).

Some commenters supported reporting for large withdrawal or redemption requests of 50 percent or more,
126

while another commenter felt it was an arbitrary and unsupported.
127

Others stated that withdrawals or redemptions of this magnitude may occur in the ordinary course, and the 50 percent threshold might therefore produce “false positives” in certain cases, such as single investor funds with large institutional investors, changes in client preference or commercial considerations, or scheduled structured withdrawals or redemptions.
128

One commenter believed that the current reporting event should have a minimum $1 billion threshold, asserting that $250 million in redemptions for a minimally sized $500 million qualifying hedge fund is a relatively low number of systemic risk monitoring.
129

This commenter also suggested this reporting trigger not disregard any pre-existing gates or limitations as these often serve to prevent sudden large redemptions and such reports will significantly distort the risk posed by notified redemptions. The same commenter also asserted that the redemptions current report did not address the mismatch in timing between redemption requests, which are normally given anywhere from 30 to 90 days before the applicable redemption date, and subscriptions, which are usually contracted for in the two to five day period prior to the subscription date meaning that advisers would not be able to net subscriptions against redemption requests before having to report.
130

126
AFREF Comment Letter (stating that by some estimates redemption requests leading up to the financial crisis indicated that a quarter of the hedge fund industry sold 40% or more of their equity portfolios and the average hedge fund during that time sold about 30% of its equity portfolio).

127
AIMA/ACC Comment Letter.

128

See, e.g.,
AIMA/ACC Comment Letter; SIFMA Comment Letter; MFA Comment Letter; and NYC Bar Comment Letter.

129
MFA Comment Letter.

130
MFA Comment Letter.

We are maintaining the 50 percent threshold, as proposed. We continue to believe, and some commenters support, that funds receiving such large withdrawal or redemption requests in

between routine quarterly reports on Form PF may be subject to increased selling and liquidity pressures that could be particularly harmful to investors and may contribute to the potential for broader market implications, especially if the fund is invested in illiquid assets and engages in a fire sale of assets.
131

The 50 percent threshold represents what we believe is well accepted as a substantial withdrawal that could threaten the fund's health and potentially markets if it requires substantial portfolio sales. Indeed, one commenter that disagreed with the scope of the withdrawal and redemptions event for the assessment of systemic risk acknowledged such a withdrawal could indicate a run on a fund or stress at a particular fund.
132

Another commenter stated that substantial redemptions at a fund could signal that external or internal events are causing investors to lack confidence in the fund's adviser and that, if the fund is not able to handle the redemptions without selling assets, other investors that remain in the fund could be seriously harmed.
133

Moreover, we do not believe that this item should have a $1 billion floor as substantial withdrawals from multiple qualifying hedge funds could indicate systemic risk that we believe warrants monitoring even if such withdrawals are less than $1 billion at an individual qualifying hedge fund. We designed this item to capture large dollar-value redemption requests and avoid capturing routine redemptions in the ordinary course.

131
AFREF Comment Letter.
See also
MFA Comment Letter. MFA noted that subject to certain conditions it supported the 50%withdrawal threshold, but that there should be a minimum dollar threshold of $1 billion to trigger reporting.

132
NYC Bar Comment Letter.

133
ICGN Comment Letter.

We considered the comment that this reporting item should not disregard pre-existing gates or other liquidity limitations. However, requests for redemptions of this size can have impacts despite liquidity limitations. For example, if it is public knowledge that a fund is facing large redemptions, other investors may submit withdrawals, which will pressure a gated fund to liquidate or lead to a flood of asset sales once the gate is lifted due to pent up redemption pressures. If an adviser believes a report may be a “false positive” and the large withdrawals are occurring in the ordinary course of business for the fund, advisers may indicate the circumstances behind the large withdrawal(s) in the explanatory notes item. In addition, an event that one fund may consider a “false positive” may be more systemically significant if the conditions triggering it are amassed across a number of qualifying hedge funds. Commenters stated that a mismatch in timing between redemption requests and subscriptions could distort reporting of this item, but withdrawals or redemptions in excess of 50 percent in spite of subscriptions would still be a notable event for which notice would provide the Commission and FSOC with important insight.
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Based on the above, timely notice of such events in this current report will allow the Commission and FSOC to analyze the potential implications for the fund's investors and systemic risks should such withdrawals or redemptions precipitate large-scale liquidations.

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MFA Comment Letter.

Under the withdrawals and redemptions current report, an adviser will enter: (1) the date on which the net redemption requests exceeded 50 percent of the most recent net asset value; (2) the net value of redemptions paid from the reporting fund between the last data reporting date (the end of the most recently reported fiscal quarter on Form PF) and the date of the current report; (3) the percentage of the fund's net asset value the redemption requests represent; and (4) whether the adviser has notified the investors that the reporting fund will liquidate.

b. Inability To Satisfy Redemptions or Suspension of Redemptions

We are adopting, largely as proposed, the requirement for an adviser to report if a qualifying hedge fund is unable to satisfy redemptions, or suspends redemptions for more than five consecutive business days. We have modified the form text from the proposal to state that an adviser would report in either of two cases: if the reporting fund (1) is unable to pay redemption requests, or (2) has suspended redemptions and the suspension lasts for more than 5 consecutive business days. One commenter stated that the proposed item was indicative of significant distress that could potentially lead to counterparty losses and that the five consecutive business day qualification period would appropriately limit reporting of temporary redemption suspensions that would have less of an impact on investors or the broader market.
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Another commenter suggested that the trigger for reporting a failure to pay redemption requests should be five days following the due date specified for payment of redemption proceeds under a fund's governing documents and that hedge funds typically have a specified timeframe for paying redemption requests, and a filing should be triggered under this current report only after this timeframe has passed if a redemption remains unsatisfied.
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135
AIMA/ACC Comment Letter.

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MFA Comment Letter.

This reporting item will help the Commission and FSOC identify stress at a reporting fund and evaluate the effects of these circumstances on fund investors and the markets more broadly. We recognize that redemptions are governed by preexisting terms and conditions outlined in fund contracts and governing documents. However, we are not modifying the item in response to commenters stating that reporting should be triggered only after the period specified for payment of redemption proceeds under a fund's governing documents because reporting should be based on whether, as a factual matter, the fund has suspended redemptions for a period of five consecutive business days or not. The reporting of inability to satisfy redemptions or a prolonged suspension of redemptions will 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 five consecutive busi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-09775. Public record. Not legal advice.