On January 26, 2022, the Securities and Exchange Commission (the “SEC”) proposed amendments to Form PF that would (i) require a large hedge fund adviser to report within one business day certain events in respect of its qualifying hedge fund clients, (ii) reduce the reporting threshold for a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management, (iii) require an adviser to one or more private equity funds (irrespective of a fund’s size) to report within one business day certain events in respect of its private equity fund clients, (iv) impose additional reporting obligations on a large private equity adviser and (v) impose additional reporting obligations on a large liquidity fund adviser. The proposed enhanced Form PF reporting is intended to bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts as well as the Financial Stability Oversight Council’s ability to monitor systemic risk. An overview of the proposed amendments is provided below:
Proposed Reporting for a Large Hedge Fund Adviser
The proposed amendments would require a large hedge fund adviser in respect of its qualifying hedge fund clients to report within one business day any of the following events:
- Extraordinary investment losses
- The relevant fund experiences a loss equal to or greater than 20% of the fund’s most recent net asset value (i.e., typically, the fund’s net asset value as reported on the most recent update to the fund’s Form PF filing) over a rolling 10 business day period.
- Significant margin and default events
- The relevant fund experiences (i) significant increases in the fund’s requirements for margin, collateral or an equivalent (i.e., a cumulative increase in margin of more than 20% of the fund’s most recent net asset value over a rolling 10 business day period), (ii) a margin default or an inability to meet a call for margin, collateral or an equivalent (taking into account contractual cure periods) and/or (iii) a margin default by a counterparty in respect of more than 5% of the fund’s most recent net asset value.
- Material change in relationship with prime broker
- There is a material change in the relationship between the relevant fund and a prime broker (e.g., material changes to the fund’s ability to trade or a termination of the prime brokerage relationship for default or breach of the prime brokerage agreement).
- Changes in unencumbered cash
- The value of the relevant fund’s unencumbered cash declines by more than 20% of the fund’s most recent net asset value over a rolling 10 business day period.
- Operations events
- The adviser or the relevant fund experiences a significant disruption or degradation (i.e., a 20% disruption or degradation of normal volume or capacity) of the fund’s key operations (i.e., operations necessary for (i) the investment, trading, valuation, reporting and risk management of the fund and (ii) the operation of the fund in accordance with the federal securities laws and regulations), whether as a result of an event at the fund, the adviser or other service provider to the fund.
- Withdrawals and redemptions
- The relevant fund (i) receives cumulative requests for withdrawal or redemption exceeding 50% of the most recent net asset value of the fund (after netting against subscriptions and capital contributions) or (ii) is unable to satisfy withdrawals or redemptions or suspends withdrawals or redemptions for more than 5 consecutive business days.
Proposed Reporting for an Adviser to One or More Private Equity Funds
The proposed amendments would require an adviser to one or more private equity funds to report within one business day any of the following events in respect of its private equity fund clients:
- Adviser-led secondary transaction
- The adviser or any of its related persons initiates any transaction that offers investors the choice to (i) sell all or a portion of their interests in the relevant fund or (ii) convert or exchange all or a portion of their interests in the relevant fund for interests in another vehicle advised by the adviser or any of its related persons.
- General partner or limited partner clawback
- There is a (i) general partner clawback (i.e., any obligation of the general partner, its related persons or their respective owners or interest holders to restore or otherwise return performance-based compensation to the relevant fund) or (ii) limited partner clawback (i.e., an obligation of the relevant fund’s investors to return all or any portion of a distribution made by the fund to satisfy a liability, obligation or expense of the fund) in excess of an aggregate amount equal to 10% of the fund’s aggregate capital commitments.
- Removal of general partner, termination of the investment period or termination of a fund
- Investors have (i) removed the adviser or an affiliate as the general partner or similar control person of the relevant fund, (ii) elected to terminate the relevant fund’s investment period or (iii) elected to terminate the relevant fund.
Proposed Large Private Equity Adviser Reporting
In addition to lowering the threshold for reporting by a large private equity adviser from $2 billion to $1.5 billion in private equity fund assets under management, the proposed amendments would require a large private equity adviser to report the following information in Section 4 of Form PF in respect of its private equity fund clients:
- The relevant fund’s investment strategy
- Whether a portfolio company was restructured or recapitalized following the relevant fund’s investment period
- Whether the relevant fund held an investment in one class, series or type of securities of a portfolio company while another fund advised by the adviser or its related persons concurrently held an investment in a different class, series or type of securities of the same portfolio company
- Whether the relevant fund borrows or has the ability to borrow at the fund level as an alternative or complement to the financing of portfolio companies
- Whether the adviser or any of its related persons provide financing or otherwise extend credit to any portfolio company in which the relevant fund invests and the value of such financing or other extension of credit
- The percentage of the aggregate borrowings of the relevant fund’s controlled portfolio companies (“CPCs”) that is at a floating rate rather than a fixed rate
- The number of CPCs that are owned by the relevant fund
- The nature of reported events of default
- Bridge financing counterparty identifying information
- The relevant fund’s greatest country exposures based on a percent of net asset value
Proposed Large Liquidity Fund Adviser Reporting
The proposed amendments would require a large liquidity fund adviser to report additional information in Section 3 of Form PF regarding operations, investors, financings, portfolio holdings, and the disposition of portfolio holdings.
The public comment period for the proposed amendments will remain open for 30 days after publication in the Federal Register. In its notice of proposed rulemaking, the SEC included a series of questions seeking industry feedback on the proposed amendments to Form PF. Given that the proposed amendments would impose substantial new obligations on private fund advisers, we anticipate significant industry interest and comments.
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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.