On May 3, 2023, the Securities and Exchange Commission (the “SEC”) adopted a new rule (the “Rule”)[i] that amends Form PF, the confidential reporting form for certain SEC-registered investment advisers to privately-offered investment funds[ii] that provides the SEC and the Financial Stability Oversight Council (the “FSOC”) with information on the basic operations and strategies of the funds. The Rule primarily focuses on expanding reporting requirements in an effort to enhance the FSOC’s ability to monitor systemic risk and bolster the SEC’s regulatory oversight of the private fund industry.

A summary of some of the amendments to Form PF and key takeaways are discussed below:

Amendments to Form PF

Reporting for Large Hedge Fund Advisers to Qualifying Hedge Funds. The SEC has indicated that certain events at the fund level may be strong indicators of fund and potential market stress.[iii] Accordingly, in addition to private fund advisers’ existing quarterly and/or annual filing obligations, the Rule will require large hedge fund advisers (i.e., hedge fund advisers with at least $1.5 billion in assets under management) to file a current report as soon as practicable, but no later than 72 hours from the occurrence of one or more “trigger events”, identified as the following:

• Extraordinary investment losses (i.e., a loss equal to or greater than 20% of a fund’s reporting fund aggregate calculated value within a 10-business-day period);
• Margin and default events, including significant increases in the reporting fund’s margin, inability of the fund to meet a margin call, margin default, and certain defaults of a counterparty;
• Termination or material restriction of the reporting fund’s relationship with a prime broker;
• Events where the adviser or reporting fund experiences a “significant disruption or degradation” of the fund’s key operations; and
• Large withdrawal and redemption requests, a qualifying hedge fund’s inability to satisfy redemptions, or a fund’s suspension of redemptions for more than five consecutive business days.

Quarterly Private Equity Event Reports for Private Equity Fund Advisers. All private equity fund advisers reporting on Form PF will be required to file a report within 60 days of each fiscal quarter end upon the occurrence of:

• The execution of an adviser-led secondary transaction; or
• An investor election to remove a fund’s general partner or to terminate a fund’s investment period or the fund itself.

The SEC acknowledges in the adopting release that these reportable events may not necessarily indicate urgent distress of a fund or imminent systemic risk that would necessitate current reports.  However, the SEC remains concerned that some of these events may have a higher potential for conflicts of interest or fund distress which may indicate an investor protection issue at a particular fund, and trends in these events may “signal the exacerbation of conflicts of interest within the private equity industry.”[iv]

Additional Reporting for Large Private Equity Fund Advisers. In an effort to improve the FSOC’s ability to monitor systemic risk and evaluate market trends, enhance the SEC’s understanding of certain private equity fund adviser practices, and improve data collection, the Rule will require large private equity fund advisers (i.e., private equity fund advisers with at least $2 billion in private equity assets under management) to report additional information on Section 4 of their annual Form PF, including information on the following:

• Implementation of any general partner clawback and certain limited partner clawbacks;
• A reporting fund’s investment strategies;
• Fund-level borrowing;
• Nature of reported events of default;
• Identity of the institutions providing bridge financing to the reporting adviser’s controlled portfolio companies and the amount of such financing; and
• Geographical breakdown of investments by identifying the reporting fund’s greatest country exposures.

Compliance Dates

The amendments with respect to current and quarterly event reporting will become effective 180 days after the publication of the adopting release in the Federal Register, and the remainder of the amendments will become effective one year after publication.

Takeaways

In light of the new Rule and the SEC’s expanding oversight of private fund adviser practices, advisers should consider the following:

• Review and Update Internal Systems. To ensure compliance with the revised Form PF requirements, advisers should assess their reporting capabilities and internal systems (e.g., update data collection processes, enhance reporting infrastructure, and implement appropriate compliance controls if necessary).
• Enhance Data Governance. Given the increased focus on data collection, advisers should prioritize data governance practices, ensuring accuracy, integrity, and security of information. Robust data management system and controls will be crucial in meeting regulatory expectations.
• Stay Informed. Advisers should stay abreast of regulatory updates and interpretive guidance to ensure their compliance efforts align with regulatory expectations.

***

If you have any questions about the Rule, Form PF, or about the regulation of investment advisers, broker-dealers, and private investment vehicles generally, please feel free to contact us.