The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the Financial Stability Oversight Council (“FSOC”) for the purpose of monitoring risks to the stability of the U.S. financial system. The Dodd-Frank Act directed the SEC to collect information from advisers to private funds to assist FSOC with its monitoring responsibilities. On October 26, 2011, the Securities Exchange Commission (the “SEC”) voted unanimously to adopt Rule 204(b)-1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which will require SEC-registered investment advisers with at least $150 million in regulatory assets under management¹ (“Regulatory AUM”) attributable to “private funds”² (“Reporting Advisers”) to periodically file Form PF. The implementation of Form PF is a joint effort between the SEC and the Commodity Futures Trading Commission (the “CFTC”).³

The level and frequency of a Reporting Adviser’s Form PF reporting varies depending on the amount and type of private fund assets advised by the Reporting Adviser. Generally, more detailed reporting will be required from large hedge fund advisers and large private equity advisers. Only large hedge fund advisers, however, will have more frequent (e.g., quarterly) reporting.⁴

Form PF defines a “hedge fund” as any private fund (other than a securitized asset fund) that: (1) has one or more investment advisers or related persons of investment advisers that may be paid a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses); (2) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or (3) may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration). Form PF defines a “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund⁵, securitized asset fund⁶ or venture capital fund⁷ and does not provide investors with redemption rights in the ordinary course.

General Reporting Obligations for All Form PF Filers

All Reporting Advisers will be required to complete Section 1a of Form PF, which is generally aggregate information at the Reporting Adviser level. The information reported in Section 1a includes:

• identifying information about the Reporting Adviser (e.g., its name and the name of any related persons also reported on the Form PF, large trader IDs, and NFA IDs); and
• the Reporting Adviser’s Regulatory AUM and net assets under management attributable to various types of private funds managed by the Reporting Adviser.

Section 1a also provides a section for a Reporting Adviser to explain assumptions made in responding to any questions on Form PF.

All Reporting Advisers will also be required to complete Section 1b of Form PF. Section 1b provides information about each⁸ of the private funds advised and includes:

• general information, such as the private fund’s name, its identification number, whether it is part of a master-feeder or parallel fund structure and the gross asset value and net asset value of the private fund;
• a summary of the private fund’s leverage and borrowings, including a breakdown of borrowings by U.S. versus non-U.S. institutions and financial versus non-financial institutions;
  outstanding derivatives exposure;
• assets and liabilities organized in a hierarchical manner (e.g., by fair value level and cost-based);
• a breakdown of the private fund’s beneficial ownership by category; and
• a summary of performance by month, quarter and year.

All Reporting Advisers that advise hedge funds will be required to complete Section 1c of Form PF. Section 1c provides information about each⁹ of the hedge funds advised and includes:

• general identifying information about the hedge fund;
• investment strategies as a percentage of the hedge fund’s net asset value;
• the percentage of each hedge fund’s assets managed using computer-driven trading algorithms;
• significant counterparty exposures (including the identity of counterparties); and
• trading and clearing practices.

Reporting Advisers with less than $1.5 billion in Regulatory AUM attributable to hedge funds or less than $2 billion in Regulatory AUM attributable to private equity funds (“Medium Reporting Advisers”) will be required to complete only Section 1 of Form PF because they fall outside of Form PF’s “Large Private Fund Adviser” definition (as discussed below). Medium Reporting Advisers will be required to file Form PF on an annual basis within 120 days calendar days after the end of each fiscal year.

Reporting Obligations for Large Private Fund Advisers

Reporting Advisers with at least $1.5 billion in Regulatory AUM attributable to hedge funds (calculated on a monthly basis) (“Large Hedge Fund Advisers”) or at least $2 billion in Regulatory AUM attributable to private equity funds (calculated on an annual basis) (“Large Private Equity Advisers”) are considered “Large Private Fund Advisers”. Large Private Fund Advisers will be required to provide the most detailed information, and in the case of Large Hedge Fund Advisers, such information must be provided on a significantly more frequent basis. Large Hedge Fund Advisers will be required to update Form PF on a quarterly basis within 60 days after the end of each fiscal quarter (only items pertaining to hedge funds in Form PF will require quarterly updates). Large Private Equity Advisers, like Medium Reporting Advisers, will be required to update Form PF on an annual basis within 120 calendar days after the end of each fiscal year.

Section 2a of Form PF requires Large Hedge Fund Advisers to provide, on a quarterly basis, information regarding:

• aggregate hedge fund exposures (value of long and short positions by sub-asset class);
• geographical breakdown of investments (generally by region, but in some cases, by particular country); and
  portfolio turnover rate.

Large Hedge Fund Advisers that advise “Qualifying Hedge Funds”¹⁰ will be required in Section 2b of Form PF to report further detailed information for each Qualifying Hedge Fund, including:

• identifying information;
• trading and exposure information (value of long and short positions by sub-asset class);
• portfolio liquidity;
• cash position;
• concentration of positions;
• collateral practices and significant counterparties;
• liquidity (including disclosure of side pockets, suspension and gating arrangements);
• VaR calculations; and
• risk management items that seek to analyze the effects of hypothetical market events on a Qualifying Hedge Fund’s portfolio (e.g., fluctuations in equity prices, risk free interest rates, credit spreads, and corporate bond default rates).

Aggregation of Assets Under Management

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

• managed account assets that pursue substantially the same investment objective and strategy and invest in substantially the same positions as the adviser’s private funds (“Parallel Managed Accounts”), unless the value of those managed accounts exceeds the value of the private funds with which they are managed, and
• private fund assets advised by any of the adviser’s “related persons” other than related persons that are separately operated.¹¹

For purposes of determining whether a private fund is a Qualifying Hedge Fund, the Reporting Adviser must aggregate:

• private funds that are part of the same master-feeder arrangement;
• private funds that are part of the same parallel fund structure; and
• Dependent Parallel Managed Accounts¹² with the largest private fund to which that dependent parallel managed account relates.

Additionally, a Reporting Adviser must treat any private fund or Parallel Managed Account advised by any of its related persons as though it were advised by the Reporting Adviser (unless the related persons are separately operated).

Fund-of-Funds

Reporting Advisers that advise private funds that invest substantially all of their assets in other private funds¹³ (“Fund-of-Funds”) will only be required to complete Section 1b of Form PF for each Fund-of-Funds it advises, in addition to the adviser level reporting required in Part 1a. A private fund will be treated as a Fund-of-Funds if such private fund: (i) invests substantially all of its assets in the equity of private funds for which the Reporting Adviser is not an adviser; and (ii) aside from such private fund investments, such private fund holds only cash and cash equivalents and instruments acquired for the purpose of hedging currency exposure. If a Reporting Adviser’s funds do not qualify as Fund-of-Funds, the Reporting Adviser may be subject to the more detailed reporting found in Section 1c and Section 2.

Non-U.S. Advisers

For purposes of completing Form PF, an adviser with its principal office and place of business outside the United States may disregard any private fund that, during the last fiscal year, was not a United States person, was not offered in the United States, and was not beneficially owned by any United States person.

Sub-Advisers

To prevent duplicative reporting on Form PF, information regarding a private fund should only be included on one Reporting Adviser’s Form PF. Whichever adviser included information in Section 7.B.1 of Part 1 of Form ADV with respect to the private fund is the adviser that must complete Form PF with respect to the private fund. If the adviser that filed ADV Section 7.B.1 is not required to file Form PF (e.g., the adviser is an Exempt Reporting Adviser), and one or more other advisers to the private fund is required to file Form PF, such other adviser must include the private fund on its Form PF.

Transition

Implementation of Form PF will be phased-in over two stages. The Form PF compliance date for Reporting Advisers with at least (i) $5 billion in Regulatory AUM attributable to hedge funds or (ii) $5 billion in Regulatory AUM attributable private equity funds is June 15, 2012 (“Early Large Filers”).¹⁴ The initial filing will be due (i) 120 days after the end of the first fiscal year occurring on or after June 15, 2012 for private equity advisers and (ii) 60 days after the end of the first fiscal year or quarter, as applicable, occurring on or after June 15, 2012 for hedge fund advisers. For all other Reporting Advisers, the initial compliance date is December 15, 2012; therefore, most filings will not be required until at least March 2013.

Confidentiality

The SEC stated that it does not intend to make public Form PF information which may be identifiable to any particular adviser or private fund.¹⁸ The Dodd-Frank Act amended the Advisers Act to preclude SEC from being compelled to reveal Form PF information, except in very limited circumstances. Additionally, as the Dodd-Frank Act contemplates the sharing of Form PF data, any department, agency or self-regulatory agency with which the SEC shares Form PF information will be exempt from being compelled under the Freedom of Information Act to disclose confidential information collected on Form PF and will be required to maintain the confidentiality consistent with the level established for the SEC in the Advisers Act. Prior to sharing Form PF information, the SEC intends to require that any such department, agency or self-regulatory organization represents that it has controls in place designed to ensure the use and handling of Form PF data is in a manner consistent with the protections established in the Dodd-Frank Act. As an additional measure to ensure confidentiality, Form PF also allows Reporting Advisers to maintain the identity of private funds in the Reporting Adviser’s books and records in a numerical or alphabetical code. This code may be used in place of the private fund’s name on Form PF.

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If you have any questions about Form PF, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.

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¹ “Regulatory AUM” is calculated in accordance with Part 1A, Instruction 5.b of Form ADV.

² A “private fund” is defined in Section 202(a)(29) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), as any issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for sections 3(c)(1) or 3(c)(7) of that Act.

³ The CFTC also adopted Form PF, which may in the future allow Reporting Advisers also registered with the CFTC as commodity pool operators or commodity trading advisers to file Form PF to comply with certain proposed CFTC reporting obligations on which the CFTC has not yet voted.

⁴ This memorandum does not generally discuss the application of Form PF and Rule 204(b)-1 to liquidity funds and advisers to such funds.

⁵ Defined in Form PF as any private fund that is not a hedge fund, that does not provide investors with redemption rights in the ordinary course and that invests primarily in real estate and real estate related assets.

⁶ Defined in Form PF as any private fund that is not a hedge fund and that issues asset backed securities and whose investors are primarily debt-holders.

⁷ Defined in Form PF as any private fund meeting the definition of venture capital fund in Rule 203(l)-1 under the Advisers Act.

⁸ A separate Section 1b will be completed for each private fund (though advisers may aggregate certain fund structures on one Section 1b).

⁹ A separate Section 1c will be completed for each hedge fund (though advisers may aggregate certain fund structures on one Section 1c).

¹⁰ 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 the most recently completed fiscal quarter. Net asset value is determined, with respect to any fund, by subtracting any outstanding indebtedness or other accrued but unpaid liabilities from the gross assets (as reported in Question 8 of Form PF).

¹¹ A related person is “separately operated” if a Reporting Adviser is not required to complete Section 7.A. of Schedule D to Form ADV with respect to that related person.

¹² Form PF defines a “Dependent Parallel Managed Account”, with respect to any private fund, as any parallel managed account other than a parallel managed account that individually (or together with other parallel managed accounts that pursue substantially the same investment objective and strategy and invest side by side in substantially the same positions) has a gross asset value greater than the gross asset value of such private fund (or, if such private fund is a parallel fund, the gross asset value of the parallel fund structure of which it is a part).

¹³ For purposes of Form PF, a Reporting Adviser may disregard private fund equity investments in other private funds. However, if the investments are disregarded, it must be done so consistently throughout Form PF.

¹⁴ The $5 billion threshold is not aggregated across private fund type. For example, a Reporting Adviser managing $3 billion in Regulatory AUM attributable to hedge funds and $3 billion in Regulatory AUM attributable to private equity funds will not be subject to the June 15, 2012 compliance date.

¹⁵ Certain filing dates for Reporting Advisers that do not have a December 31 fiscal year-end may vary from the dates included in this memorandum.

¹⁶ For example, a Reporting Adviser with more than $1.5 billion in Regulatory AUM attributable to hedge funds as of February 29, 2014 will file as a Large Hedge Fund Adviser with respect to the second quarter of 2014 within 60 days of the end of the second quarter.

¹⁷ For example, a Reporting Adviser with a December 31st fiscal year that has greater than $150 million in Regulatory AUM attributable to Private Funds (but less than $1.5 billion attributable to hedge funds) as of December 31, 2013 will file Form PF with respect to the 2013 fiscal year within 120 days of December 31, 2013.

¹⁸ Form PF information may, however, be used by the SEC in an enforcement action.