[Federal Register Volume 89, Number 49 (Tuesday, March 12, 2024)]
[Rules and Regulations]
[Pages 17984-18161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03473]
[[Page 17983]]
Vol. 89
Tuesday,
No. 49
March 12, 2024
Part III
Commodity Futures Trading Commission
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17 CFR Chapter I
Securities and Exchange Commission
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17 CFR Parts 275 and 279
Form PF; Reporting Requirements for All Filers and Large Hedge Fund
Advisers; Joint Final Rule
Federal Register / Vol. 89 , No. 49 / Tuesday, March 12, 2024 / Rules
and Regulations
[[Page 17984]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN 3038-AF31
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6546; File No. S7-22-22]
RIN 3235-AN13
Form PF; Reporting Requirements for All Filers and Large Hedge
Fund Advisers
AGENCY: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint final rule.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
``Commissions'') are adopting amendments to Form PF, the confidential
reporting form for certain SEC-registered investment advisers to
private funds, including those that also are registered with the CFTC
as a commodity pool operator (``CPO'') or commodity trading adviser
(``CTA''). The amendments are designed to enhance the Financial
Stability Oversight Council's (``FSOC's'') ability to monitor systemic
risk as well as bolster the SEC's regulatory oversight of private fund
advisers and investor protection efforts. In connection with the
amendments to Form PF, the SEC is amending a rule under the Investment
Advisers Act of 1940 (``Advisers Act'') to revise instructions for
requesting a temporary hardship exemption.
DATES:
Effective date: This rule is effective March 12, 2025.
Compliance date: See section II.F of this final rule.
FOR FURTHER INFORMATION CONTACT: CFTC: Pamela Geraghty, Acting Deputy
Director; Michael Ehrstein, Special Counsel; Elizabeth Groover, Special
Counsel; or Andrew Ruggiero, Special Counsel, at (202) 418-6700,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581. SEC: Neema Nassiri, Jill Pritzker,
Senior Counsels; Tom Strumpf, Branch Chief; or Melissa Roverts Harke,
Assistant Director, at (202) 551-6787 or [email protected], Investment
Adviser Regulation Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The Commissions are adopting amendments to
Form PF [17 CFR 279.9] under the Advisers Act, and the SEC is adopting
amendments to 17 CFR 275.204(b)-1 under the Advisers Act.\1\
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\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any section of the Advisers Act, we are referring
to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section of these
rules, we are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR 275], in which these rules are published.
\2\ Congress enacted Sections 404 and 406 of the Dodd-Frank Act,
which required that private fund advisers file reports and specified
certain types of information that should be subject to reporting
and/or recordkeeping requirements. With respect to such reports, the
Dodd-Frank Act authorized the SEC to require that private fund
advisers file such information ``as necessary and appropriate in the
public interest and for the protection of investors, or for the
assessment of systemic risk.'' The result of this enactment was Form
PF, which is a joint form between the SEC and CFTC only with respect
to sections 1 and 2 of the Form.
[[Page 17985]]
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Agency Reference CFR citation
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CFTC & SEC...................... Form PF \2\....... 17 CFR 279.9.
SEC............................. Rule 204(b)-1..... 17 CFR 275.204(b)-
1.
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I. Introduction
II. Discussion
A. Amendments to the General Instructions
1. Reporting Master-Feeder Arrangements and Parallel Fund
Structures
2. Reporting Private Funds That Invest in Other Funds
3. Reporting Timelines
B. Amendments Concerning Basic Information About the Adviser and
the Private Funds It Advises
1. Amendments to Section 1a of Form PF--Identifying Information
2. Amendments to Section 1b of Form PF--Concerning All Private
Funds
3. Amendments to Section 1c of Form PF--Concerning All Hedge
Funds
C. Amendments Concerning Information About Hedge Funds Advised
by Large Private Fund Advisers
1. Removal of Existing Section 2a
2. Amendments to Section 2
D. Amendments To Enhance Data Quality
E. Additional Amendments
F. 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, Costs, and Effects on Efficiency, Competition, and
Capital Formation
1. Benefits
2. Costs
D. Reasonable Alternatives
1. Alternatives to Amendments to General Instructions,
Amendments To Enhance Data Quality, and Additional Amendments
2. Alternatives to Amendments to Basic Information About the
Adviser and the Private Funds It Advises
3. Alternatives to Amendments to Information About Hedge Funds
Advised by Large Private Fund Advisers
4. Alternatives to the Definition of the Term ``Hedge Fund''
V. Paperwork Reduction Act
A. Purpose and Use of the Information Collection
B. Confidentiality
C. Burden Estimates
VI. Regulatory Flexibility Act Certification
Statutory Authority
I. Introduction
The Commissions are adopting amendments to sections of Form PF, the
form that certain SEC-registered investment advisers, including those
that also are registered with the CFTC as a CPO or CTA, use to report
confidential information about the private funds that they advise.\3\
Form PF provides the Commissions 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. We now have more than a decade of
experience analyzing the information collected on Form PF.\4\ 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.\5\ Based on this experience and in light of
these changes, the Commissions and FSOC have identified significant
information gaps and situations where revised information would improve
the Commissions' and FSOC's understanding of the private fund industry
and the potential systemic risk posed by it, as well as further
investor protection efforts. Accordingly, to enhance FSOC's monitoring
and assessment of systemic risk and to collect additional data and make
data more useful for the Commissions' use in their respective
regulatory programs,\6\ in August 2022, the Commissions proposed
amendments to enhance the information advisers file on Form PF and
improve data quality.\7\
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\3\ See 17 CFR 275.204(b)-1. 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 section
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. Any reference to the ``Commissions'' or
``we,'' as it relates to the collection and use of Form PF data, are
meant to refer to the agencies in their separate or collective
capacities (as the context requires or permits), and such data from
filings made pursuant to 17 CFR 275.204(b)-1, by and through Private
Fund Reporting Depository, a subsystem of the Investment Adviser
Registration Depository (``IARD''), and reports, analysis, and
memoranda produced pursuant thereto.
\4\ Form PF was adopted in 2011 as required by the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank
Act''). 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 SEC
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''). In May 2023, the SEC
amended Form PF section 4, added new sections 5 and 6, and
redesignated prior section 5 as section 7 in connection with certain
amendments to require event reporting for large hedge fund advisers
and all private equity fund advisers and to revise certain reporting
requirements for large private equity fund advisers. See Form PF;
Event Reporting for Large Hedge Fund Advisers and Private Equity
Fund Advisers; Requirements for Large Private Equity Fund Adviser
Reporting, Advisers Act Release No. 6297 (May 3, 2023) [88 FR 38146
(June 12, 2023)] (``May 2023 SEC Form PF Amending Release''). In
July 2023, the SEC amended Form PF section 3 in connection with
certain money market fund reforms. See Money Market Fund Reforms;
Form PF Reporting Requirements for Large Liquidity Fund Advisers;
Technical Amendments to Form N-CSR and Form N-1A, Advisers Act
Release No. 6344 (July 12, 2023) [88 FR 51404 (Aug. 3, 2023)]
(``July 2023 SEC Form PF Amending Release''). We are now adopting
amendments to the general instructions, section 1, and section 2,
and related amendments in the glossary of terms.
\5\ The value of private fund net assets reported on Form PF has
more than doubled, growing from $5 trillion (net) in 2013 to $14
trillion (net) through the first quarter of 2023, while the number
of private funds reported on the form has increased by nearly 130%
in that time period. Unless otherwise noted, the private funds
statistics used in this Release are from the Private Funds
Statistics First Quarter of 2023. Division of Investment Management,
Private Fund Statistics First Quarter 2023 (Oct. 16, 2023),
available at https://www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf (``Private Fund Statistics Q1 2023''). 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 ten
year span from the beginning of 2013 through the first quarter of
2023. Some discussion in this Release compares data from a shorter
time span because the SEC staff published such data later than 2013.
Staff reports, statistics, and other staff documents (including
those cited herein) represent the views of SEC staff and are not a
rule, regulation, or statement of the SEC. The SEC 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.
\6\ Additionally, the Board of Governors of the Federal Reserve
System (``FRB'') uses this data for research and analysis.
\7\ Form PF; Reporting Requirements for All Filers and Large
Hedge Fund Advisers, Advisers Act Release No. 6083 (Aug. 10, 2022)
[87 FR 53832 (Sept. 1, 2022)] (``2022 Joint Form PF Proposing
Release''). The Commissions voted to issue the 2022 Joint Form PF
Proposing Release on Aug 10, 2022. The release was posted on each of
the Commissions' websites that day (or shortly thereafter), and
comment letters were received beginning that same date. The comment
period closed on Oct. 11, 2022. We have considered all comments
received since Aug. 10, 2022.
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The Commissions received a number of comment letters on the 2022
Joint Form PF Proposing Release.\8\ Some commenters generally supported
the policy goals of the proposal, stating that the proposal would help
the Commissions and FSOC assess and respond to systemic risk and the
Commissions to achieve their investor protection goals.\9\ Certain
commenters stated that the additional proposed reporting requirements
are not necessary to identify systemic risk or protect investors.\10\
Some commenters stated that the economic analysis understates the costs
of compliance due to the scope of proposed changes and expressed
skepticism at the stated benefits.\11\ Some commenters criticized the
proposed rulemaking for not considering the cumulative impact and costs
of the amendments proposed in the 2022 Joint Form PF Proposing Release
along with those proposed in the 2022 SEC Form PF Proposing
Release,\12\ which the SEC proposed in January 2022 and adopted in May
2023.\13\
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\8\ The comment letters on the 2022 Joint Form PF Proposing
Release (File No. S7-22-22) that the SEC received are available at
https://www.sec.gov/comments/s7-22-22/s72222.htm. The comment
letters that the CFTC received are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7312. Several
comment letters are addressed jointly to the Commissions and appear
in both comment files.
\9\ See, e.g., Comment Letter of Americans for Financial Reform
Education Fund (Oct. 11, 2022) (``AFREF Comment Letter I''); Comment
Letter of Better Markets, Inc. (Oct. 11, 2022) (``Better Markets
Comment Letter''); Comment Letter of FACT Coalition (Oct. 11, 2022)
(``FACT Coalition Comment Letter''); Comment Letter of Global Legal
Entity Identifier Foundation (Oct. 11, 2022) (``GLEIF Comment
Letter''); Comment Letter of Americans for Financial Reform
Education Fund, et al. (Feb. 21, 2023); Comment Letter of Andrew V.
(Aug. 10, 2022).
\10\ See, e.g., Comment Letter of American Investment Council
(Oct. 11, 2022) (``AIC Comment Letter I''); Comment Letter of U.S.
Chamber of Commerce (Oct. 11, 2022) (``USCC Comment Letter'');
Comment Letter of Alternative Investment Management Association
Limited & Alternative Credit Council (Oct. 11, 2022) (``AIMA/ACC
Comment Letter''); Comment Letter of Securities Industry and
Financial Markets Association (Oct. 11, 2022) (``SIFMA Comment
Letter''); Comment Letter of Managed Funds Association (Dec. 7,
2022) (``MFA Comment Letter II''). See infra at sections II and
IV.C.1 of this Release for discussion of the benefits of the adopted
amendments for systemic risk assessment and investor protection
efforts.
\11\ See, e.g., AIC Comment Letter I; SIFMA Comment Letter;
Comment Letter of Managed Funds Association and National Association
of Private Fund Managers (July 21, 2023) (``MFA/NAPFM Comment
Letter''). See discussion infra at section IV.C of this Release.
\12\ 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 SEC Form PF Proposing
Release'').
\13\ See, e.g., AIC Comment Letter I; Comment Letter of Managed
Funds Association, Investment Adviser Association, et al. (Sept. 14,
2022) (``MFA Comment Letter I''); Comment Letter of Managed Funds
Association (Mar. 16, 2023) (``MFA Comment Letter III''); SIFMA
Comment Letter; Comment Letter of United States House of
Representatives Committee on Financial Services (Sept. 26, 2023)
(``Comment Letter of U.S. House of Representatives Committee on
Financial Services''). See also May 2023 SEC Form PF Amending
Release, supra footnote 4. See also Comment Letter of AIC (Aug. 8,
2023) (``AIC Comment Letter II''). See infra section IV.C of this
Release for discussion of costs and benefits.
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We are adopting the amendments largely as proposed, but with
certain modifications, in consideration of the comments we received:
First, we are adopting amendments to the form's general
instructions, which apply to all Form PF filers, to improve data
quality and comparability and to enhance investor protection efforts
and systemic risk assessment. Amendments include:
[cir] Reporting Master-Feeder and Parallel Fund Structures. As
proposed, we are adopting amendments that will require separate
reporting for each component fund of a master-feeder arrangement and
parallel fund structure, other than a disregarded feeder fund (i.e., a
feeder fund that invests all of its assets in a single master fund,
U.S. treasury bills, and/or cash and cash equivalents \14\). In a
change from the proposal, we are modifying the instructions to specify
how a feeder fund is required to treat its equity in the master fund
for the purpose of determining its reporting threshold and responding
to certain questions.
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\14\ As discussed in greater detail below, we are removing
government securities from the definition of ``cash and cash
equivalents'' and presenting government securities as its own line
item in the Form PF Glossary of Terms. Thus, references herein to
``cash and cash equivalents'' refer to the amended definition,
unless otherwise indicated. The amended definition is intended to
provide more granular detail on this reporting form and is not
intended to change any commercial understanding or accounting
treatment of cash equivalents. See infra section II.B.2 of this
Release.
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[cir] Reporting Fund of Funds. We are also adopting, with some
modifications from the proposal, amendments to Form PF regarding how
advisers report private fund investments in other funds. We are
revising proposed Instruction 7 to require an adviser to include the
value of investments in other private funds (including internal and
external private funds) when determining whether the adviser is
required to file Form PF, whether it meets the thresholds for reporting
as a large hedge fund adviser, large liquidity fund adviser, or large
private equity fund adviser, and whether a hedge fund is a qualifying
hedge fund, rather than permit an adviser to either include or exclude
the value of investments in other private funds for the purpose of
determining its reporting threshold, as proposed.\15\
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\15\ See Instruction 7.
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[cir] Reporting Trading Vehicles. In a change from the proposal, we
are adopting an amendment to require advisers to identify trading
vehicles in section 1b of Form PF and report on an aggregated basis for
the reporting fund and all trading vehicles (whether fully owned by the
reporting fund or partially owned), rather than (i) permitting advisers
to report fully owned trading vehicles on an aggregated or
disaggregated basis and (ii) requiring advisers to report partially
owned trading vehicles on a disaggregated basis, as proposed. In a
change from the proposal, we are also adding an instruction for
advisers to specify whether the reporting fund holds assets, incurs
leverage, or conducts trading or other activities through a trading
vehicle.
[cir] Reporting Timelines. We are also adopting, as proposed, an
amendment to the instructions that will require all quarterly filers to
file on a calendar quarter basis, rather than on a fiscal quarter
basis.\16\
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\16\ The calendar quarter basis filing requirement does not
apply to a private equity fund adviser filing a private equity event
report as contemplated by section 6 of Form PF, which requires such
adviser to file within 60 calendar days after the end of the
applicable fiscal quarter upon the occurrence of a private equity
reporting event. See May 2023 SEC Form PF Amending Release, supra
footnote 4.
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Second, we are adopting amendments to sections 1a and 1b
of Form PF, which apply to all Form PF filers, to provide greater
insight into private funds' operations and strategies, and assist in
identifying trends, including those that could create systemic risk and
which are as such designed to enhance investor protection efforts and
systemic risk assessment. The amendments are also designed to improve
comparability across advisers, improve data quality, and reduce
reporting errors. We are adopting, as proposed, amendments to collect
additional identifying information regarding the adviser and its
related persons, as well as their private fund assets under management.
We are also adopting, largely as proposed, amendments to require
advisers to report additional identifying information about the private
funds they manage and other information about the
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private funds' assets, financing, investor concentration, and
performance.
Third, we are adopting amendments to section 1c of Form
PF, which applies to private fund advisers that advise hedge funds. We
are adopting, largely as proposed, amendments to require advisers to
hedge funds to report certain additional information. As proposed, we
are adopting amendments to require advisers to hedge funds to report on
the fund's use of digital assets as an investment strategy, but in a
modification from the proposal, we are not adopting the proposed
definition of digital assets. We are also adopting, as proposed,
amendments to remove certain questions to streamline reporting and to
reduce reporting burdens.
Fourth, as proposed, we are redesignating existing section
2a and 2b of Form PF as section 2, and we are adopting amendments to
the new consolidated section 2, which applies to large hedge fund
advisers that advise qualifying hedge funds (i.e., hedge funds that
have a net asset value of at least $500 million). As proposed, we are
removing aggregate reporting questions for large hedge fund advisers
and requiring additional fund-level reporting to enhance investor
protection efforts and systemic risk assessment.\17\ We are adopting,
largely as proposed, amendments to require large hedge fund advisers to
report more granular information about the reporting fund's investment
exposure, open and large position reporting, borrowing and counterparty
exposure, and market factor effects. In a change from the proposal, we
are not adopting a proposed question about investment performance by
portfolio correlation.
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\17\ Unless stated otherwise, terms in this release that are
defined in the Form PF Glossary of Terms are as defined therein.
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Finally, we are adopting, largely as proposed, certain
additional amendments to improve data quality and accuracy of
reporting.
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 Commissions' or FSOC's regulatory tools. The
amendments will also strengthen the effectiveness of the SEC's
regulatory programs, including examinations, investigations, and
investor protection efforts relating to private fund advisers. The
Commissions consulted with FSOC to gain input on these amendments and
to help ensure that Form PF continues to provide FSOC with information
it can use to assess systemic risk.
II. Discussion
A. Amendments to the General Instructions
We are adopting amendments to the Form PF general instructions
designed to improve data quality and comparability and to enhance
investor protection efforts and systemic risk assessment.\18\
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\18\ Additional adopted changes to the General Instructions
concerning amendments to enhance data quality methodologies and
additional amendments are discussed in sections II.D and II.E of
this Release. The amendments to Instruction 3 to reflect the removal
of section 2a are discussed in section II.C.1 of this Release.
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1. Reporting Master-Feeder Arrangements and Parallel Fund Structures
Private funds often use complex structures to invest, including
master-feeder arrangements and parallel fund structures.\19\ We are
adopting, largely as proposed, amendments to Form PF that generally
require advisers to report separately each component fund of a master-
feeder arrangement and parallel fund structure.\20\ An adviser will
continue to aggregate these structures, however, for purposes of
determining whether the adviser meets a reporting threshold.\21\
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\19\ A ``master-feeder arrangement'' is an arrangement in which
one or more funds (``feeder funds'') invest all or substantially all
of their assets in a single private fund (``master fund''). A
``parallel fund structure'' is a structure in which one or more
private funds (each, a ``parallel fund'') pursues substantially the
same investment objective and strategy and invests side by side in
substantially the same positions as another private fund. See Form
PF Glossary of Terms.
\20\ See Instruction 6. We also are amending Instruction 3, as
proposed, to reflect the adopted approach for reporting master-
feeder arrangements and parallel fund structures. See infra footnote
21.
\21\ See Instruction 5. For example, an adviser would aggregate
private funds that are part of the same master-feeder arrangement in
determining whether the adviser is a large hedge fund adviser that
must complete section 2 of Form PF. In connection with these
changes, we are amending, as proposed, the term ``reporting fund''
and Instruction 3 so that they no longer discuss reporting
aggregated information. Additionally, we are reorganizing current
Instruction 5 and current Instruction 6 so that they reflect the
adopted approach for when to aggregate certain funds. Current
Instruction 5 instructs advisers about when to aggregate information
about certain funds for purposes of reporting thresholds and
responding to questions. Current Instruction 6 instructs advisers
about how to aggregate information about certain funds. Instruction
5, as amended, instructs advisers on when to aggregate information
about certain funds for purposes of determining whether they meet
reporting thresholds. Instruction 6, as amended, instructs advisers
about how to report information about certain funds when responding
to questions. Further, in a modification from the proposal, we have
added a reference to section 5 (Current report for large hedge fund
advisers to qualifying hedge funds), which a qualifying hedge fund
would also be required to complete, as applicable, as a result of
the amendments adopted in the May 2023 SEC Form PF Amending Release.
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Currently, Form PF provides advisers with flexibility to respond to
questions regarding master-feeder arrangements and parallel fund
structures either in the aggregate or separately, as long as they do so
consistently throughout Form PF.\22\ In adopting this approach in 2011,
the Commissions stated that requiring advisers to aggregate or
disaggregate funds in a manner inconsistent with their internal
recordkeeping and reporting may impose additional burdens and that, as
long as the structure of those arrangements is adequately disclosed, a
prescriptive approach to aggregation was not necessary.\23\ However,
based on experience reviewing Form PF data, we observed that when some
advisers report in aggregate and some advisers report separately, this
can result in obscured risk profiles (e.g., with respect to asset size,
counterparty exposure, investor liquidity) and make it difficult to
compare complex structures, undermining the utility of the data
collected.\24\ Prescribing the way advisers report a master-feeder
arrangement and parallel fund structure will provide better insight
into the risks and exposures of these arrangements.
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\22\ See current Instruction 5.
\23\ 2011 Form PF Adopting Release, supra footnote 4, at text
following n.332.
\24\ For example, a feeder fund may have counterparty exposure
rather than the entire fund in the aggregate. When this is the case,
fewer assets (e.g., only those held at the feeder level) may be
available as collateral and the counterparty may have greater risk.
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Accordingly, we are amending the instructions to require an adviser
to report each component fund of a master-feeder arrangement and
parallel fund structure, except where a feeder fund invests all its
assets in a single master fund, U.S. treasury bills, and/or ``cash and
cash equivalents'' (i.e., is a disregarded feeder fund).\25\ In the
case
[[Page 17988]]
of a disregarded feeder fund in Question 6, advisers instead will
identify the disregarded feeder fund and look through to any
disregarded feeder fund's investors in responding to certain questions
regarding fund investors on behalf of the applicable master fund, as
proposed. The master fund effectively is a conduit through which a
disregarded feeder fund invests, and we do not believe separate
reporting for such a feeder fund is necessary for data analysis
purposes. In a modification from the proposal, we are adopting
instructions to specify that a feeder fund should disregard any of its
holdings in the master fund's equity for the purpose of determining its
reporting threshold.\26\
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\25\ See Instruction 6. We are also revising the term ``cash and
cash equivalents,'' as described in section II.B.2 in this Release,
to improve data quality and provide more granular detail of fund
exposures to the Commissions and FSOC. In alignment with this
revision, we have modified the term ``disregarded feeder fund'' for
the purposes of Form PF to specifically include U.S. treasury bills.
U.S. treasury bills are direct obligations of the U.S. Government
with a maturity of one year or less. Because these short-term
holdings are sufficiently cash-like for our reporting and data
analysis purposes, separate reporting for a feeder fund that invests
all of its assets in U.S. treasury bills (or some combination of
U.S. treasury bills, ``cash and cash equivalents,'' and a single
master fund) is not necessary. One commenter stated that the removal
of government securities from the definition of cash and cash
equivalents would reduce the number of funds that qualify as
disregarded feeder funds. See AIMA/ACC Comment Letter. This
commenter stated that the Commission should revise the definition to
allow for disregarded feeder funds to invest in government
securities. Id. The final amendments permit disregarded feeder funds
to invest in U.S. treasury bills, but not other government
securities. We believe this approach is appropriate because, as
noted above and unlike certain other government securities, U.S.
treasury bills are short-term holdings and sufficiently cash-like
for our reporting and data analysis purposes. Further, U.S. treasury
bills generally do not have the interest rate risk that longer-dated
government securities have.
\26\ See Instruction 6.
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Some commenters generally supported the proposed amendments that
require more granular reporting of private fund structures because this
would allow FSOC to assess systemic risk and the Commissions to protect
investors more effectively.\27\ Other commenters generally opposed the
proposed amendments to require disaggregated reporting of master-feeder
funds and parallel fund structures, stating that it would be overly
burdensome for advisers to report this information and of limited
benefit to the Commissions and/or FSOC.\28\
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\27\ See, e.g., AFREF Comment Letter I; Better Markets Comment
Letter.
\28\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
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Although we acknowledge that the requirement to report
disaggregated data for parallel fund and master-feeder fund structures
may increase the reporting burdens on certain advisers, we disagree
that requiring disaggregated reporting would be significantly more
burdensome than the existing requirements, because filers are already
required to assemble aggregated data from the individual components of
their fund structures to determine their reporting category on Form
PF.\29\ Any increased burdens are justified because disaggregated data
of these structures will provide the Commissions and FSOC with
increased transparency into risk profiles and complex fund structures,
which will improve our ability to monitor systemic risk and protect
investors. We also disagree that disaggregated reporting of master-
feeder funds and parallel fund structures will be of limited value
based on our experience with Form PF, which currently obscures our
understanding of their fund structures and the risk exposure of their
component funds. Some commenters opposed the proposed disaggregated
reporting requirement, asserting that it would provide misleading
information by reporting data in isolation as opposed to as part of an
overall fund or investment program.\30\ However, rather than be
misleading, the disaggregated reporting will allow for a clearer
understanding of a fund's structure. Disaggregated data will not be
misleading to the Commissions or FSOC in comparison to aggregated data
because the disaggregated data can still be aggregated by FSOC and the
Commissions if necessary to understand and assess the risk of the fund.
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\29\ See current Instruction 5.
\30\ See, e.g., MFA Comment Letter II; USCC Comment Letter.
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One commenter stated that the disaggregated reporting requirement
would be particularly burdensome for private equity fund advisers, as
this commenter believed private equity funds pose less systemic
risk.\31\ The existing reporting instructions allowing aggregated
reporting result in an obscured risk profile of all types of private
funds, including private equity funds. Although private equity funds
may exhibit a different risk profile than hedge funds, we disagree with
the commenter that understanding their structure is unimportant to
assessing systemic risk. Understanding the full risk profile of private
equity funds is an important component of the reporting on Form PF
because of the growth in the private equity fund industry and its
significance to financial markets.\32\ Additionally, the disaggregated
reporting requirement is important for investor protection efforts due
to the increased exposure of investors to the private equity industry
through investments such as pension funds.\33\
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\31\ AIC Comment Letter I.
\32\ Since 2013, the number of private equity funds has more
than doubled from under 7,000 to over 20,000, private equity fund
gross assets have quadrupled from $1.6 trillion to $6.6 trillion,
and private equity fund net assets have also quadrupled, increasing
from $1.5 trillion to $6 trillion. See Private Fund Statistics Q1
2023, supra footnote 4.
\33\ See, e.g., Public Plans Data (2022), available at https://publicplansdata.org/quick-facts/national/.
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One commenter stated that requiring disaggregated data would add a
data security risk that sensitive information about a fund's strategy
could be publicly exposed.\34\ We do not agree that requiring
disaggregated reporting of component funds presents a significant
increase in public disclosure risk, in part because the required
information is no more granular than the information already required
to be reported for other private funds without a master-feeder
arrangement or parallel fund structure. The Commissions currently have
robust data protection measures in place to protect all information
filed on Form PF, which is filed on a non-public basis. Any limited
increase in data security risk associated solely with the collection of
more information is justified because of the importance of receiving
this disaggregated information for FSOC and the Commissions' systemic
risk monitoring and the Commissions' investor protection efforts. As
discussed more fully above, this disaggregated data will provide
increased transparency into complex fund structures and better insight
into the risks presented by such arrangements. As discussed above, in
response to commenters' concerns, we are modifying the instructions for
how a feeder fund determines its reporting category to specify that the
feeder fund should exclude any of its holdings in the master fund's
equity when calculating its total asset value for the purpose of
determining its reporting category.\35\ This modification will help
avoid double counting of reported assets, given that data for the
master fund will be separately reported on Form PF. It will also
require a more appropriate level of information from feeder funds than
we had proposed. As proposed, an adviser could have determined that a
feeder fund is a qualifying hedge fund subject to additional reporting,
even if the feeder fund's investments outside of its master fund were
trivial. This level of reporting for such a feeder fund is not
necessary for data analysis purposes, and the amended Form PF will
accordingly only require this additional reporting for feeder funds
that are determined to be qualifying hedge funds based on their
investments made outside of their master funds. Some commenters
recommended adopting an instruction for disregarded feeder fund
reporting obligations that allows for a de minimis amount of a
disregarded feeder fund's investments to be in other assets, such as up
to 10 or 20 percent of a fund's capital, rather than the proposed
instruction, which would require all of the disregarded feeder fund's
assets to be invested in a single master fund, U.S. treasury bills, or
cash and cash
[[Page 17989]]
equivalents.\36\ We do not believe that these recommended exceptions
would be appropriate. The adopted instruction, which provides that a
feeder fund that invests all of its assets in a single master fund,
U.S. treasury bills, or cash and cash equivalents is a disregarded
feeder fund, is more appropriate because such a feeder fund is
effectively investing only through its associated master fund.
Disaggregated reporting of such a disregarded feeder fund is not
necessary for data analysis purposes, because such reporting would not
convey additional information about the feeder fund's exposures, as the
feeder fund's investments are limited to its investments through its
master fund, which are required to be reported on the amended Form PF.
In contrast, a feeder fund that does not invest all of its assets in a
single master fund, U.S. treasury bills, or cash and cash equivalents
operates and invests in a different manner, and it is critical to our
understanding of these funds and the risks that they may pose to
receive disaggregated reporting of these fund arrangements because such
feeder funds will generally have distinct risk exposures than their
associated master funds. Further, the modified instructions we are
adopting, which provide that a reporting feeder fund is to disregard
its holdings in the master fund's equity for the purpose of determining
its reporting threshold, are responsive to commenter concerns that the
burdens on feeder funds with de minimis non-cash or cash equivalent
holdings would be significant. For example, under the adopted
instructions, a feeder fund with minimal holdings outside of the master
fund's equity may only be required to complete section 1 of Form PF,
when it may have otherwise been required to complete additional
sections if its holdings in the equity of the master fund were included
in its reporting threshold determination, as proposed. The modified
instructions take into consideration the potential burden of reporting
feeder funds on a separate basis and allows the Commissions to receive
important reporting on the exposures of feeder funds other than to its
equity in its master fund.
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\34\ USCC Comment Letter.
\35\ See Instruction 6.
\36\ See AIMA/ACC Comment Letter; MFA Comment Letter II.
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In addition, we are adopting, as proposed, an amendment to no
longer allow advisers to separately report any ``parallel managed
accounts'' (which is distinguished from a ``parallel fund structure''),
provided that advisers will continue to be required to report the total
value of all parallel managed accounts related to each reporting
fund.\37\ Including parallel managed accounts in the reporting may
reduce the quality of data for our analyses while also imposing
additional burdens on advisers.\38\ Data regarding the total value of
parallel managed accounts, however, will allow FSOC to take into
account the greater amount of assets an adviser may be managing using a
given strategy for purposes of analyzing the data reported on Form PF
for systemic risk purposes.
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\37\ See Instruction 6. A ``parallel managed account'' is any
managed account or other pool of assets managed by the adviser that
pursues substantially the same investment objective and strategy and
invests side by side in substantially the same positions as the
identified private fund. See Form PF Glossary of Terms.
\38\ See 2011 Form PF Adopting Release, supra footnote 4, at
n.334, and accompanying text (the Commissions were persuaded that
aggregating parallel managed accounts for reporting purposes would
be difficult and ``result in inconsistent and misleading data''
because the characteristics of parallel managed accounts are often
somewhat different from the funds with which they are managed). For
example, in a separately managed account a client generally selects
an adviser's strategy but tailors it to the client's own investment
guidelines.
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We are adopting, as proposed, an instruction to provide that a
dependent parallel managed account must be aggregated with the largest
private fund to which it relates and, unchanged from the current Form
PF, with respect to any private fund, a ``dependent parallel managed
account'' remains defined as any related 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 the private fund is
a parallel fund, the gross asset value of the parallel fund
structure).\39\ One commenter sought clarification that a parallel
managed account should be aggregated with the single largest private
fund to which it relates.\40\ We continue to believe that this approach
will more effectively support systemic risk analyses and our investor
protection efforts, particularly given the growth in parallel managed
accounts in recent years.\41\
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\39\ See Instruction 5; Form PF Glossary of Terms.
\40\ AIMA/ACC Comment Letter.
\41\ See David C. Johnson & Francis A. Martinez, Form PF
Insights on Private Equity Funds and Their Portfolio Companies,
Office of Financial Research, June 14, 2018, at 3-4, available at
https://www.financialresearch.gov/briefs/files/OFRBr_2018_01_Form-PF.pdf (stating that fund investments in other funds increased from
$227 billion in 2013 to $319 billion in 2016 and noting that the
existing reporting on parallel managed accounts may be underreported
because parallel managed accounts are not currently required to be
reported).
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2. Reporting Private Funds That Invest in Other Funds
We are adopting amendments to Form PF regarding how advisers report
private fund investments in other private funds, trading vehicles, and
other funds that are not private funds.
Investments in other private funds. We are adopting, with
modifications from the proposal, amendments to Instruction 7, which
addresses how advisers treat private fund investments in other private
funds (e.g., a ``fund of funds''). Currently, advisers include the
value of private fund investments in other private funds in determining
whether the adviser meets the filing threshold to file Form PF.\42\
This requirement is implicit in the current form, and we are amending
this aspect of Instruction 7, as proposed, to make it explicit.
Further, current Form PF generally permits an adviser to disregard the
value of a private fund's equity investments in other private funds for
purposes of both the form's reporting thresholds (e.g., whether it
qualifies as a large hedge fund adviser) and responding to questions on
Form PF, as long as the adviser does so consistently throughout Form
PF, subject to certain exceptions.\43\ We proposed continuing to permit
an adviser to either include or exclude the value of such investments
for the purpose of determining its reporting thresholds but requiring
an adviser to include the value of such investments for the purpose of
responding to questions on Form PF.
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\42\ Form PF Instruction 1 provides that certain advisers meet
the filing threshold if they and their related persons,
collectively, had at least $150 million in private fund assets under
management as of the last day of their most recently completed
fiscal year.
\43\ For example, under the current instructions, an adviser is
not permitted to disregard any liabilities of the private fund, even
if incurred in connection with an investment in other private funds.
See current Instruction 7.
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In a modification from the proposal, we are adopting an amendment
to Instruction 7 to require an adviser to include the value of
investments in other private funds (including internal and external
private funds) when determining whether the adviser is required to file
Form PF, whether it meets the thresholds for reporting as a large hedge
fund adviser, large liquidity fund adviser, or large private equity
fund adviser, and whether a hedge fund is a qualifying hedge fund,
rather than permit an adviser to either include or exclude the value of
investments in other private funds for the purpose of determining its
reporting threshold, as
[[Page 17990]]
proposed.\44\ As discussed further below, as proposed, an adviser will
no longer have flexibility on whether to include or exclude a reporting
fund's investments in other private funds for purposes of responding to
questions on Form PF.\45\ Instead, we are amending Instruction 7 to
require an adviser to include the value of a reporting fund's
investments in other private funds when responding to questions on Form
PF, unless otherwise directed by the instructions to a particular
question.
---------------------------------------------------------------------------
\44\ See Instruction 7. In connection with this Instruction 7,
we are also not adopting the proposed revision to the definition of
``qualifying hedge fund,'' which would have instructed advisers that
they may exclude the fund's investments in other private funds in
determining whether a hedge fund meets the ``qualifying hedge fund''
definition. See Form PF Glossary of Terms.
\45\ Id.
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Requiring advisers to report fund of funds arrangements in a more
consistent manner will allow the Commissions and FSOC to understand
these fund structures more effectively by providing greater insight
into the scale of reporting funds' exposures. The form's current
flexibility on whether to disregard underlying funds for the purpose of
determining a reporting fund's reporting threshold and when responding
to questions provides unclear and inconsistent reporting and data on
the scale of reporting funds' exposures.
One commenter stated that allowing an adviser to determine whether
to include or exclude a reporting fund's investment in other private
funds could result in distortions in the data collected on Form PF.\46\
This commenter recommended revising the instructions to prohibit an
adviser from including a reporting fund's investment in other private
funds for the purpose of determining its reporting threshold. We agree
with this commenter that permitting advisers the flexibility to include
or exclude the value of the reporting fund's investment in other
private funds could result in distortions in the data and inconsistent
reporting. Therefore, we have modified the instructions to remove this
proposed flexibility. However, we have modified the instructions to
provide that an adviser must include the reporting fund's investment in
other private funds for determining its reporting threshold. For the
same reasons that Instruction 7 currently (and will continue to)
provide that an adviser must include the reporting fund's investments
in other private funds in determining whether it is required to file
Form PF, we believe it is appropriate for an adviser to use this same
approach to determine the reporting fund's appropriate reporting
category. This modification will provide for consistent treatment of
investments in other private funds for all Form PF purposes by
specifying that these investments should be included for the purpose of
determining reporting threshold, determining filing threshold, and
responding to questions on Form PF (unless otherwise instructed by a
particular question). We do not believe that this modification will
materially increase filing burdens because advisers are currently (and
will continue to be) required to include the value of the reporting
fund's investments in other private funds for the purpose of
determining whether it is required to file Form PF and, as discussed
further below, will be required, as proposed, to include the value of
the reporting fund's investments in other private funds in answering
questions on Form PF (unless otherwise instructed by a particular
question). Some commenters opposed the proposed amendment to include
the value of a reporting fund's investment in other external private
funds when responding to questions because of the burden of obtaining
information about the underlying investments and their view on the
limited value of the data.\47\ Data about underlying investments in
external private funds is important to provide the Commissions and FSOC
with sufficient information to understand a fund structure to be able
to assess systemic risk. We disagree that reporting the value of a
reporting fund's investments in other external private funds is
significantly more burdensome to report because an adviser is currently
required to calculate the value of its investment in other private
funds in determining whether the adviser meets the threshold to file
Form PF. One commenter stated that investments in private funds should
be treated like a disregarded feeder fund and not require disaggregated
reporting.\48\ We disagree that a fund of funds structure presents the
same risks as a disregarded feeder fund because, in a fund of funds
structure, the feeder fund is itself engaging in direct investment,
whereas a disregarded feeder fund invests its assets at the master fund
level.
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\46\ AIMA/ACC Comment Letter.
\47\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
\48\ AIMA/ACC Comment Letter.
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Currently, Instruction 7 specifies that, in the case of a fund that
invests substantially all of its assets in other private funds and,
other than its investments in other private funds, only holds cash and
cash equivalents and instruments acquired for the purpose of hedging
currency exposure, an adviser is only required to complete section 1b
of Form PF for that fund.\49\ One commenter recommended modifying this
instruction to replace the reference to ``substantially all of its
assets'' in other private funds to 80% of its assets and to remove the
reference to only holding cash and cash equivalents and instruments
acquired for the purpose of hedging currency exposure.\50\ This
commenter stated that there are circumstances that may cause an adviser
to invest a small portion of a fund of fund's assets directly, such as
for tax purposes or for an investor's preference, which would cause the
fund to no longer be considered a fund that invests substantially all
of its assets in other private funds for purposes of Form PF, which
allows the adviser to only complete section 1b for that fund.\51\
Although we agree that the meaning of ``substantially all of its
assets'' should be clarified for purposes of this form, so as to
generally improve data quality and comparability, we disagree that the
reference to only holding cash and cash equivalents and instruments
acquired for the purpose of hedging currency exposure should be
removed. The exclusion from completing section 1c is intended to be
limited to funds that invest only through other private funds for which
we receive separate reporting. Allowing an exclusion for funds that
invest in investments other than private funds would create a data gap
because we would not receive separate reporting about investments that
are not private funds. Accordingly, in a change from the proposal, we
are modifying Instruction 7 only to replace the instruction
``substantially all of its assets'' to ``80% or more of its assets.''
This modification will help clarify which funds will need to complete
only section 1b of Form PF.
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\49\ See current Instruction 7.
\50\ AIMA/ACC Comment Letter.
\51\ Id.
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Currently, advisers are not required to, but nonetheless have the
option to, ``look through'' a reporting fund's investments in any other
entity (including other private funds), except in instances when the
form directs otherwise.\52\ As a result, some advisers may ``look
through'' a reporting fund's investments in other entities, while
others do not, leading to unclear data, inconsistent comparisons, and
less precise analysis across advisers. Therefore, we are amending,
largely as proposed, Instruction 7 to provide that, when responding to
questions, advisers must not ``look through'' a reporting fund's
investments in internal private
[[Page 17991]]
funds or external private funds (other than a trading vehicle, as
described below), unless the question instructs the adviser to report
exposure obtained indirectly through positions in such funds or other
entities.\53\ In a modification from the proposal, we are adding an
instruction that provides if an adviser cannot avoid ``looking
through'' to the reporting fund's investments in internal private funds
or external private funds in responding to a particular question, then
the adviser must provide an explanation of its responses in Question 4.
This instruction is responsive to certain commenters' concerns
regarding the burden of disaggregated reporting where look-through
aggregation may be unavoidable and will provide additional context for
the data reported. Further, after consideration of commenter
recommendations, in a modification from the proposal, we are revising
certain questions related to exposures to instruct advisers to select
the exposure that ``best represents'' the indirect investment of the
reporting fund, as discussed more fully below in section II.C.\54\ This
modification will reduce the burden on advisers in reporting exposure
information about these investments in private funds, while providing
reporting on indirect investments that is important for effective
systemic risk assessment and investor protection efforts.
---------------------------------------------------------------------------
\52\ See current Instruction 8.
\53\ See Instruction 7. For example, advisers will not ``look
through'' to the creditors of or counterparties to other private
funds in responding to questions that ask about a reporting fund's
borrowings and counterparty exposures. See Question 18 (concerning
borrowings) and Questions 27 and 28 (concerning counterparty
exposures). However, selected questions in section 2 of the form
require advisers to report indirect exposure resulting from
positions held through other entities including private funds, and
advisers will ``look through'' the reporting fund's investments in
internal private funds and external private funds in responding to
those questions. See, e.g., Question 32 (concerning reporting fund
exposures).
\54\ See Questions 33, 35, 36, and 47.
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As discussed further below, we are modifying from the proposal the
reporting instructions for trading vehicles to require an adviser to
``look through'' trading vehicles for all questions. Given this
modification, we are also adopting amendments to Instruction 8 to
exclude trading vehicles from the general requirement that an adviser
must not ``look through'' a reporting fund's investments in funds or
other entities unless the question instructs the adviser to report
exposure obtained indirectly through positions in such funds or other
entities. These amendments are designed to improve data quality and
comparisons, so the Commissions and FSOC understand what Form PF data
is from advisers ``looking through'' a reporting fund's investments,
which will lead to more effective systemic risk assessments and
investor protection efforts.
Trading vehicles. Some private funds wholly or partially own
separate legal entities that hold assets, incur leverage, or conduct
trading or other activities as part of the private fund's investment
activities, but do not operate a business (each, a ``trading
vehicle'').\55\ Private funds may use trading vehicles for various
purposes, including (1) for jurisdictional, tax, or other regulatory
purposes or (2) to ``ring-fence'' assets in light of liability or
bankruptcy concerns associated with a particular investment (i.e.,
structure assets so counterparties would only have recourse against the
trading vehicle and not against the private fund). Currently, Form PF
does not require advisers to identify trading vehicles. As a result,
Form PF does not provide a clear window into the existence or use of
trading vehicles and the risks that they present. Because private funds
may use trading vehicles for a wide variety of purposes, more complete
and accurate visibility into asset class exposures, position sizes, and
counterparty exposures relied on by trading vehicles can enhance the
Commissions' and FSOC's systemic risk and financial stability
assessment efforts and the Commissions' efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
We are adopting amendments designed to address these concerns by
requiring advisers to identify any trading vehicles of the reporting
fund, how the reporting fund uses the trading vehicle, and the position
sizes and counterparty exposures of the reporting fund that are
attributable to the trading vehicle.
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\55\ We are adopting a definition of ``trading vehicle'' to the
Form PF Glossary of Terms. In a modification from the proposed
definition, we are specifying that a trading vehicle may be wholly
or partially owned by a reporting fund. See Form PF Glossary of
Terms (definition of ``trading vehicle''). The concept of a
partially owned trading vehicle (i.e., if the reporting fund is not
the trading vehicle's only equity owner) was implicit in the
proposed instructions, which would have provided for different
treatment for a wholly owned or partially owned trading vehicle. See
proposed Instruction 7. We are modifying the definition of ``trading
vehicle'' to make this explicit.
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We are adopting amendments, with certain modifications from the
proposal, to Form PF's general instructions to explain how advisers
report information if the reporting fund uses a trading vehicle.\56\
Specifically, if the reporting fund uses a trading vehicle, the adviser
will be required to identify the trading vehicle in section 1b and
report answers on an aggregated basis for the reporting fund and such
trading vehicle.\57\ Advisers will be instructed to ``look through''
the trading vehicle's holdings on Form PF, adjusted for the reporting
fund's percentage ownership interest of the trading vehicle, in
responding to questions on Form PF for the reporting fund, as discussed
further below.\58\ As discussed more fully in section II.B below, an
adviser will also be required to specify if the reporting fund holds
assets through a trading vehicle, incurs leverage through a trading
vehicle, or conducts trading or other activities through a trading
vehicle.\59\ Finally, advisers will be required to report trading
vehicles on a consolidated basis but in response to certain questions
will be required to identify the positions and counterparty exposures
that are held through a trading vehicle, which will help differentiate
the reporting fund's exposures and risks from those of its trading
vehicles, as discussed more fully in sections II.B.3 and II.C.2
below.\60\
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\56\ See Instruction 7. We are also making a conforming change
to Instruction 8 to reference this new instruction.
\57\ We proposed the following for reporting requirements for
trading vehicles: if the reporting fund uses a trading vehicle, and
the reporting fund is its only equity owner, the adviser would have
been required to either (1) identify the trading vehicle in section
1b and report answers on an aggregated basis for the reporting fund
and such trading vehicle, or (2) report the trading vehicle as a
separate reporting fund. An adviser would have been required to
report the trading vehicle separately if the trading vehicle holds
assets, incurs leverage, or conducts trading or other activities on
behalf of more than one reporting fund. If reporting separately, (1)
advisers would have been required to report the trading vehicle as a
hedge fund if a hedge fund invests through the trading vehicle; (2)
advisers would have been required to report the trading vehicle as a
qualifying hedge fund if a qualifying hedge fund invests through the
trading vehicle; or (3) otherwise, advisers would have been required
to report the trading vehicle as a liquidity fund, private equity
fund, or other type of fund based on its activities.
\58\ See Instruction 7. We had proposed to permit disaggregated
reporting for wholly-owned trading vehicles and to require
disaggregated reporting for partially-owned trading vehicles. As
discussed below, the final amendments will instead require advisers
to report all trading vehicles, whether wholly or partially owned,
on a consolidated basis. In connection with this change, the final
amendments specify that an adviser must adjust trading vehicle
information to reflect the reporting fund's percentage ownership
interest of the trading vehicle.
\59\ See Questions 9(d) through (f). A trading vehicle is
defined as a separate legal entity, wholly or partially owned by one
or more reporting funds, that holds assets, incurs leverage, or
conducts trading or other activities as part of a reporting fund's
investment activities but does not operate a business. See Form PF
Glossary of Terms (definition of ``trading vehicle''). Questions
9(d) through (f) ask the reporting fund to identify the vehicle's
activities that results in it being a ``trading vehicle,'' as
defined in the Form PF Glossary of Terms.
\60\ See, e.g., Questions 27 and 28, which are required for all
hedge fund advisers, and Questions 42, 43, and 44, which are
required for large hedge fund advisers.
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[[Page 17992]]
We are not adopting proposed amendments that would have permitted
an adviser to select whether to report a wholly owned trading vehicle
on either a consolidated or disaggregated basis and would have required
advisers to report a partially owned trading vehicle on a disaggregated
basis. One commenter stated the proposed disaggregated reporting for
trading vehicles would provide the Commissions and FSOC with insights
into a private fund's assets and activities that are not currently
reported on Form PF, which would support assessment of potential
systemic risk.\61\ Other commenters opposed the proposed requirements
to disclose trading vehicles on a disaggregated basis because of the
significant cost and burdens for such reporting and their view on the
limited benefit of such reporting to the Commissions.\62\ Some
commenters stated that disaggregated reporting of trading vehicles
would be misleading because advisers do not account for risk on a
disaggregated basis.\63\ Another commenter stated that allowing
consolidated reporting of trading vehicles would provide the
Commissions with a clearer and more accurate depiction of a fund's
characteristics and exposures than disaggregated reporting.\64\ Some
commenters stated that separate reporting for trading vehicles is not
necessary because trading vehicles are often used for administrative
purposes, such as for tax or efficiency purposes, but are managed on a
consolidated basis and regarded as a single entity for investment
purposes.\65\ Another commenter recommended limiting disaggregated
reporting of trading vehicles to only vehicles that engage in leverage
or borrowing to reduce the cost of implementation of separate
reporting.\66\ Another commenter recommended that we focus on specific
questions on Form PF to gain information about trading vehicles instead
of requiring full separate reporting of trading vehicles to reduce
burdens and provide clearer reporting.\67\ Another commenter
recommended permitting aggregated reporting for trading vehicles that
are at least 90% owned by a single reporting fund.\68\
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\61\ NASAA Comment Letter.
\62\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter.
\63\ See, e.g., MFA Comment Letter II; MFA/NAPFM Comment Letter.
\64\ AIMA/ACC Comment Letter.
\65\ See, e.g., MFA Comment Letter II; Schulte Comment Letter.
\66\ SIFMA Comment Letter.
\67\ Schulte Comment Letter.
\68\ MFA Comment Letter II.
---------------------------------------------------------------------------
After considering such comments, we are not adopting the proposed
requirement that would have permitted advisers to report fully owned
trading vehicles on a disaggregated basis and required them to do so in
the case of partially owned trading vehicles. Instead, we are requiring
advisers to report all trading vehicles, whether wholly owned or
partially owned, on a consolidated basis. Requiring advisers to instead
``look through'' the reporting fund's investment in all trading
vehicles on a consistent basis is appropriate because receiving
disaggregated data for some but not all trading vehicles could result
in distorted data. Requiring all reporting funds to report their
trading vehicles, whether fully or partially owned, on an aggregated
basis will improve data comparability and allow us to better understand
the holdings and exposures of the fund structure for our assessments of
potential systemic risk. We also understand from commenters that a
consolidated reporting better aligns with how advisers regard trading
vehicles internally. However, after considering a commenter's
recommendation to include specific questions on trading vehicles rather
than full disaggregated reporting,\69\ we are adopting amendments to
include specific questions relating to a reporting fund's trading
vehicle use and a trading vehicle's position size and risk exposure, as
opposed to requiring the greater burden of full separate reporting on
Form PF for trading vehicles. We are also requiring advisers to
identify the relevant party that bears certain risk exposures, which
will allow us to understand how the reporting fund makes use of its
fund structure, including any trading vehicles.\70\ This approach will
result in greater insight into the overall fund structure and support
of FSOC's systemic risk assessments than under the existing reporting
requirements, and it will also be less burdensome than the approach we
had proposed to require separate full reporting for certain trading
vehicles. We disagree that any trading vehicle reporting should be
limited to only vehicles that are used for leverage and borrowing
activities because the amendments are intended to support systemic risk
assessments more broadly on and provide insight into how trading
vehicles are used, which includes trading vehicles that are used for
other purposes, such as holding assets or trading. This reporting is
important for systemic risk assessment because it provides visibility
into private funds' operations and can assist the Commissions and FSOC
in identifying trends across the industry.
---------------------------------------------------------------------------
\69\ Schulte Comment Letter.
\70\ See, e.g., Questions 27 and 28, which are applicable to all
hedge funds, and Questions 42, 43, and 44, which are applicable to
only large hedge funds.
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Investments in funds that are not private funds. Advisers will
continue to include the value of the reporting fund's investments in
funds and other entities that are not private funds, in determining
reporting thresholds and responding to questions, unless otherwise
directed, as Form PF currently requires.\71\ For the reasons discussed
above, we are revising the instructions, substantially as proposed, to
indicate that, when responding to questions, however, advisers must not
``look through'' a reporting fund's investments in funds or other
entities that are not private funds, or trading vehicles, unless the
question instructs the adviser to report exposure obtained indirectly
through positions in such funds or other entities.\72\
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\71\ See Instruction 8. In a modification from the proposal, we
are removing the erroneous reference to Questions 39 and 40 from
Instructions 7 and 8, which implied that these questions require
advisers to look-through the reporting fund's investments.
\72\ We are also specifying that advisers should ``look
through'' trading vehicles for all questions, as provided in
Instruction 7 and discussed above.
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3. Reporting Timelines
We are amending, as proposed, Instruction 9 to require large hedge
fund advisers and large liquidity fund advisers to update Form PF
within a certain number of days after the end of each calendar quarter,
rather than after each fiscal quarter, as Form PF currently
requires.\73\ One commenter stated that for quarterly filers who have a
fiscal year ending in a non-calendar quarter month, the proposed
instructions do not specify the procedure for a filer who, during the
transition from fiscal to calendar quarter reporting, would otherwise
be required to report twice in one calendar quarter.\74\ As suggested
by this commenter, we are requiring that such filers transition to the
new timing requirement by their first calendar quarter-end filing for
the first full quarterly reporting period after the compliance
date.\75\
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\73\ Large hedge fund advisers generally are required to file
within 60 calendar days after the end of each calendar quarter and
large liquidity fund advisers generally are required to file within
15 calendar days after the end of each calendar quarter. See
Instruction 9.
\74\ AIMA/ACC Comment Letter.
\75\ See infra section II.F (Effective and Compliance Dates).
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[[Page 17993]]
All other advisers will continue to file annual updates within 120
calendar days after the end of their fiscal year.\76\ Private equity
fund advisers will continue to file any required quarterly private
equity event reports on a fiscal quarter basis, as applicable.\77\ Form
PF will continue to require all advisers to use fiscal quarters and
years to determine filing thresholds because advisers already make such
calculations under 17 CFR 279.1 (``Form ADV''), which requires annual
updates based on fiscal year.\78\
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\76\ We also are adopting amendments to the term ``data
reporting date'' to reflect this approach. See Form PF Glossary of
Terms.
\77\ See Form PF Section 6 and Instruction 9.
\78\ See Form PF Instructions 1 and 3; Form ADV and [17 CFR
275.204-1] Advisers Act rule 204-1 (amendments to Form ADV).
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Currently, routine fiscal quarter reporting by large hedge fund
advisers and large liquidity fund advisers significantly delays the
time at which the Commissions and FSOC receive a complete data set for
a calendar quarter. For example, large hedge fund advisers whose first
fiscal quarter ends on the calendar quarter end of March, would file
data covering January, February, and March by the end of May.\79\
However, large hedge fund advisers whose fiscal quarter ends in May
would not file their March data until the end of July, delaying
Commission and FSOC access to full calendar quarter data by all large
hedge fund advisers by four months. The adopted changes are designed to
provide a more complete data set sooner to improve the efficiency and
effectiveness of investor protection efforts and systemic risk
assessment. Based on Form ADV data as of December 2022, 99.6 percent of
private fund advisers already effectively file Form PF on a calendar
basis because their fiscal quarter or year ends on the calendar quarter
or year end, respectively.\80\ The 0.4 percent of private fund advisers
that have a non-calendar fiscal approach, which could cause a temporary
data gap, represents approximately 224 private funds, totaling
approximately $80 billion in gross asset value. Calendar quarter
reporting also will more closely align with reporting on Form CPO-
PQR,\81\ which requires calendar quarterly reporting, allowing easier
integration of these data sets.
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\79\ See current Instruction 9 (requiring large hedge fund
advisers to update Form PF within 60 calendar days after the end of
their first, second, and third fiscal quarters, among other things).
\80\ We are presenting data from all private fund advisers, not
just those who would file their routine filings on a quarterly basis
(i.e., large hedge fund advisers and large liquidity fund advisers),
to avoid potentially disclosing proprietary information of
individual Form PF filers, and to be inclusive considering that the
population of quarterly filers versus annual filers may change over
time.
\81\ See 17 CFR pt 4, app A.
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In response to a request for comment whether reporting deadlines
for large hedge fund advisers to complete their routine annual filing
should be shortened to 30 calendar days (from 60 calendar days) after
the end of each quarter, one commenter stated that shorter reporting
timelines would provide FSOC and the Commissions with the most current
information to monitor systemic risk.\82\ Another commenter opposed
shortened reporting timelines and stated that the existing requirements
are already burdensome and requiring shorter deadlines could undermine
data quality.\83\ After the 2022 Joint Form PF Proposing Release, the
SEC adopted amendments to Form PF, which require large hedge fund
advisers to file current reports and private equity fund advisers to
file event reports upon the occurrence of certain events.\84\ The
amendment to require calendar quarter, rather than fiscal quarter,
basis reporting will improve data comparability and will provide the
Commissions with more timely information for those large hedge advisers
that currently do not report on a calendar quarter basis.
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\82\ Comment Letter of Mohammed R. (Sept. 9, 2022).
\83\ Schulte Comment Letter.
\84\ May 2023 SEC Form PF Amending Release, supra footnote 4.
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B. Amendments Concerning Basic Information About the Adviser and the
Private Funds It Advises
Each adviser required to file Form PF must complete all or part of
section 1. We are adopting amendments to section 1 to provide greater
insight into private funds' operations and strategies and to assist in
identifying trends, including those that could create systemic risk and
which are as such designed to enhance investor protection efforts and
systemic risk assessment. The amendments are designed to improve
comparability across advisers, improve data quality, and reduce
reporting errors, based on our experience with Form PF filings.
1. Amendments to Section 1a of Form PF--Identifying Information
Section 1a requires an adviser to report identifying information
about the adviser and the private funds it manages. We are adopting, as
proposed, several amendments to collect additional identifying
information regarding the adviser, its related persons, and their
private fund assets under management.
Legal entity identifiers. We are adopting, as proposed, amendments
to the definition of ``LEI'' to exclude the use of any non-LEI
identifier, such as an RSSD ID, as a substitute for LEI. Legal entity
identifiers, or ``LEIs,'' help identify entities and link data from
different sources that use LEIs.\85\ These amendments will improve data
quality because, based on our experience with the current form,
reporting RSSD IDs as LEIs makes it more difficult for our staff to
link data efficiently and effectively.
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\85\ Form PF generally defines ``LEI'' as, with respect to any
company, the ``legal entity identifier'' assigned by or on behalf of
an internationally recognized standards setting body and required
for reporting purposes by the U.S. Department of the Treasury's
Office of Financial Research or a financial regulator. See Form PF
Glossary of Terms (definition of ``LEI'').
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Current Form PF requires advisers to report the LEI for certain
entities, such as for the reporting fund, and any parallel funds if
they have an assigned LEI. It currently instructs advisers, in the case
of an entity that is a financial institution and does not have an
assigned LEI, to provide the RSSD ID assigned to the financial
institution by the National Information Center of the FRB.\86\ We are
adopting an amendment to the definition of ``LEI'' to remove the
instruction that an adviser provide an RSSD ID with respect to an
entity that is a financial institution and that has not been assigned
an LEI. Accordingly, an adviser will no longer be permitted to
substitute an RSSD ID or any other financial identifier for any
requirement in Form PF to provide an LEI, if one has been assigned.\87\
An adviser may continue to use an RSSD ID, if the financial institution
has one, or another financial identifier for any question that requires
an adviser to report other identifying information, where the form of
identifying information is not specified.\88\
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\86\ Currently, if an adviser has not been assigned an LEI and
does not have an RSSD ID, then the adviser would leave that line
blank.
\87\ See, e.g., Questions 5(d) and 7(e).
\88\ See, e.g., Question 9(c). We also added ``RSSD ID'' to the
Form PF Glossary of Terms and have defined it as the identifier
assigned by the National Information Center of the Board of
Governors of the Federal Reserve System, if any. See Form PF
Glossary of Terms.
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We are also adopting, as proposed, an amendment to require advisers
to provide LEIs for themselves and their ``related persons,'' if they
have an LEI.\89\
[[Page 17994]]
This amendment will help identify advisers and their related persons
and link data from other data sources that use LEI as an identifier.
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\89\ See Question 1. We are also adopting amendments to require
advisers to provide the LEI for other entities, if the other
entities have one, including internal private funds (see Question 7
and Question 15), trading vehicles (see Question 9), and
counterparties (see Question 27 and Question 28). A ``related
person'' has the meaning provided in Form ADV. See Form PF Glossary
of Terms. Form ADV defines a ``related person'' as any advisory
affiliate and any person that is under common control with the
adviser. See Form ADV Glossary of Terms.
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One commenter supported an expanded use of LEI as a legal
identifier in Form PF and stated that more comprehensive inclusion of
LEI would create a more complete identification scheme for the
Commissions.\90\ The commenter also stated that the LEI field in the
existing Form PF should be used only for an LEI and not substitute any
other identifier for an LEI.\91\ The commenter also supported the
creation of a separate field for the RSSD ID.\92\ Another commenter
stated that requirements in Form PF to use a particular financial
identifier may increase costs and reduce innovation and competition
among financial identifier providers and that increased competition
among financial identifiers would improve overall transparency and data
quality and reduce costs.\93\ As stated above, based on our experience
with the current form, however, permitting the reporting of other
financial identifiers (namely, RSSD IDs) as LEIs has generally made it
more difficult for our staff to link data efficiently and effectively.
The amendments to the ``LEI'' definition will thus improve data quality
and comparability on Form PF, which supports effective assessment of
systemic risk and investor protection efforts. Additionally, Form PF
continues to not require an adviser to obtain or use LEI or any other
particular financial identifier (other than private fund identification
numbers for reporting funds), as our amendments provide only that any
identifier that does not meet the definition of ``LEI'' may not be
substituted for an LEI where a question requests an LEI. Form PF
continues to permit advisers to use other financial identifiers
elsewhere on Form PF where the reporting of LEI is either not specified
or not required. The amendments to Form PF we are adopting do not
require any entity that does not already have an LEI to obtain one and
clarifies that an identifier that does not meet the ``LEI'' definition
may not be substituted for an LEI where an LEI, if available, is
requested on Form PF.
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\90\ See GLEIF Comment Letter.
\91\ See id.
\92\ Id.
\93\ See Comment Letter of Bloomberg, L.P. (Oct. 13, 2022)
(``Bloomberg Comment Letter'').
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Assets under management. We are adopting, substantially as
proposed, amendments to Question 3 to revise how advisers report assets
under management attributable to certain private funds. Current
Question 3 requires advisers to provide a breakdown of regulatory
assets under management and net assets under management. These data are
designed to show the size of the adviser and the nature of the
adviser's activities. We did not receive comment on the proposed
amendments to Question 3. We are amending the instructions to direct
advisers to exclude the value of private funds' investments in other
internal private funds to avoid double counting of fund of funds
assets, as proposed.\94\ Advisers are required to include the value of
trading vehicle assets because, under the amended instructions for
reporting trading vehicle assets, as discussed more fully in section
II.A.2 above, advisers are required to ``look through'' the reporting
fund's investment in any trading vehicles.\95\ We did not receive
comment on the proposed change in instructions to Question 3. These
amendments are designed to provide a more accurate view of the assets
managed by the adviser and its related persons, as well as the general
distribution of those assets among various types of private funds,
because accurately viewing the scale of these managed assets is
important to effectively assess systemic risk and further investor
protection efforts.
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\94\ See Question 3.
\95\ Id. We have also modified the proposed instructions to
Question 3 to remove a reference to the proposed requirement to
report trading vehicles on a disaggregated basis, which we are not
adopting in this Release. See also Form PF Glossary of Terms.
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Explanation of assumptions. We are amending, as proposed, Question
4, which advisers use to explain assumptions that they make in
responding to questions on Form PF, to add an instruction directing
advisers to provide the question number when the assumptions relate to
a particular question. We did not receive comments on this change. This
amendment is designed to help assess data more efficiently and improve
comparability, based on experience with the form.
We asked in the proposal whether there are other data sources we
should use to link entities across forms and to assess data more
efficiently. In a further modification from the proposal, we are
adopting an amendment to require an adviser to indicate whether it, or
any of its related persons, is registered or required to be registered
as a CPO and/or a CTA and to provide the legal name of the entity.\96\
This information will help more accurately and efficiently identify
dual registrants, including those that might be implicated in the
identification of threats to financial stability, increase the
usefulness and interoperability of the data collected by the
Commissions on Form PF and by the CFTC on Form CPO-PQR, and facilitate
collaboration between the Commissions with respect to dual registrants.
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\96\ See Question 1(c).
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2. Amendments to Section 1b of Form PF--Concerning All Private Funds
Section 1b requires advisers to report certain identifying and
other basic information about each private fund the adviser manages. We
are adopting, largely as proposed, amendments to section 1b to require
advisers to report additional identifying information about the private
funds they manage as well as other basic information about the private
funds' assets, financing, investor concentration, and performance. The
amendments are designed to provide greater insight into private funds'
operations and strategies and assist in identifying trends, which will
enhance investor protection efforts and FSOC's systemic risk
assessment. At the same time, the amendments will help improve data
quality and comparability, based on our experience with Form PF.
Type of private fund. We are adopting several amendments to
identify different types of reporting funds more effectively and to
help better isolate data according to fund type, in order to allow for
more targeted analysis. Currently, advisers indicate a reporting fund's
type on the Private Fund Reporting Depository (``PFRD'') filing system,
and by filling out particular sections of the form, but they do not
report on the form itself the type of fund.\97\ We have found
instances, however, where advisers have identified a reporting fund
differently on Form PF than on Form ADV, even though the definitions of
each fund type are the same on both forms. This may be due to error, or
may be due to the fund's characteristics changing between deadlines for
Form ADV and Form PF. Accordingly, to help prevent reporting errors and
help ensure accuracy concerning the reporting fund's type, we are
adopting, as proposed, amendments to require advisers to identify the
reporting fund by selecting one type of fund from the following list:
hedge fund that is not a qualifying hedge fund, qualifying hedge fund,
liquidity fund,
[[Page 17995]]
private equity fund, real estate fund, securitized asset fund, venture
capital fund, or ``other.'' \98\ If an adviser identifies the reporting
fund as ``other,'' the adviser will be required to describe the
reporting fund in Question 4, including why it would not qualify for
any of the other options. We did not receive comments on this
amendment. This amendment will further improve data quality and data
comparability, based on our experience with Form PF.
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\97\ For advisers that are also CPOs or CTAs, filing Form PF
through PFRD is filing with both the SEC and CFTC. See Instruction 3
(instructing advisers to file particular sections of Form PF,
depending on their circumstances. For example, all Form PF filers
must file section 1 and large hedge fund advisers also must file
section 2).
\98\ Question 6(a).
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In addition, we are adopting, as proposed, amendments to require an
adviser to indicate whether the reporting fund is a ``commodity pool,''
which is categorized as a hedge fund on Form PF.\99\ Although the CFTC
does not, as of the date of this Release, consider Form PF reporting on
commodity pools as constituting substituted compliance with CFTC
reporting requirements, some CPOs may continue to report such
information on Form PF.\100\ This amendment will allow for analysis of
hedge fund data both with and without commodity pools reported on the
form. One commenter opposed the existing default treatment of a
commodity pool as a hedge fund for purposes of Form PF and recommended
allowing an adviser to categorize a commodity pool in the manner it
determines most appropriate.\101\ The amendment we are adopting will
improve data quality and comparability, based on our experience with
Form PF, and enhance our understanding of the hedge fund data collected
from Form PF by allowing for analysis of hedge fund data both including
and excluding CPOs. Additionally, as it relates to the treatment of
commodity pools as hedge funds for reporting purposes, such treatment
further aligns the consistency of questions asked across these
entities, both on Form PF, as well as on the CFTC's Form CPO-PQR.
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\99\ Question 6(b). Form PF defines ``commodity pool'' as
defined in section 1a(10) of the U.S. Commodity Exchange Act, as
amended. See Form PF Glossary of Terms.
\100\ Previously, the CFTC permitted dually registered CPO-
investment advisers to submit Form PF in lieu of certain CFTC
reporting requirements. See Compliance Requirements for Commodity
Pool Operators on Form CPO-PQR (Oct. 9, 2020) [85 FR 71772 (Nov. 10,
2020)] (``Form CPO-PQR Release'').
\101\ See MFA Comment Letter II.
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Finally, we are adopting, with a modification from the proposal,
amendments to require advisers to report whether a reporting fund
operates as a UCITS or AIF.\102\ One commenter supported the
requirement to report whether a fund is a UCITS or AIF and where a fund
is domiciled, but not where the fund is ``marketed,'' because a fund
could be marketed anywhere and a fund's marketing activity may change
over time.\103\ Another commenter recommended that references to
``marketing'' be reconsidered, because ``marketing'' is a defined term
in the UCITS Directive applicable to a UCITS and in the AIFMD and UK
AIFMR applicable to an AIF, and these definitions may differ in meaning
from the rule's references to ``marketing.'' \104\ This commenter also
stated that the references to ``marketing'' in the sense of rule
206(4)-1 and concepts of ``offers'' or ``sales'' under the Securities
Act of 1933 would be confusing in this question if the purpose of the
proposed question is to determine whether a fund calls itself a money
market fund or an equivalent term to prospective investors outside of
the United States.\105\ After considering comments, we are modifying
the question from the proposal to require reporting of a fund that
``offers,'' rather than ``markets,'' itself as a money market fund
outside the United States. This modification will more precisely
capture the type of conduct that we intend to trigger a reporting
requirement, and uses a term that we believe is commonly understood by
the industry, and which we accordingly disagree would be
confusing.\106\ Further, the modification will be less burdensome on
advisers than the proposed use of ``marketing'' by clarifying the scope
of information required to be reported and requiring a more limited
subset of conduct to be reported. For example, a money market fund may
engage in certain conduct that constitutes marketing in a particular
jurisdiction but not an offering for purposes of the form.
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\102\ See Questions 6(c) through (f). We are adopting, as
proposed, a definition for the term ``UCITS'' as Undertakings for
Collective Investment in Transferable Securities, as defined in the
UCITS Directive of the European Parliament and of the Council (No.
2009/65/EC), as amended, or as captured by the Collective Investment
Schemes (Amendment etc.) (EU Exit) Regulations 2019, as amended. We
are adopting, as proposed, a definition for the term ``AIF'' as an
alternative investment fund that is not regulated under the UCITS
Directive, as defined in the Directive of the European Parliament
and of the Council on alternative investment fund managers (No.
2011/61/EU), as amended, or an alternative investment fund that is
captured by the Alternative Investment Fund Managers (Amendment
etc.) (EU Exit) Regulations 2019, as amended. See Form PF Glossary
of Terms.
\103\ See SIFMA Comment Letter.
\104\ See AIMA/ACC Comment Letter.
\105\ Id.
\106\ ``Offer'' is defined in the Securities Act as ``every
attempt or offer to dispose of, or solicitation of an offer to buy,
a security or interest in a security, for value.'' 12 U.S.C.
77b(a)(3). For purposes of this question, activity may constitute an
``offer'' under this definition whether or not the offering is
subject to the registration requirements of the Securities Act.
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One commenter stated that proposed Question 6(c) would not enhance
the Commissions' knowledge about exposures to non-U.S. beneficial
owners that is not already included in proposed Question 22 on Form
PF.\107\ Question 6(c), however, is not intended to elicit the same
information about exposures to non-U.S. beneficial owners as proposed
Question 22, as discussed further below in section II.B.3. The
amendments to Question 6 relate to the conduct and operations of the
reporting fund, which are designed to allow the Commissions and FSOC to
filter data for more targeted analysis to better understand to what
extent and in what jurisdictions a reporting fund operates outside of
the United States. This information can help the Commissions better
understand the private fund's potential exposure to beneficial owners
outside the United States and to identify potential systemic risk
resulting from economic conditions or events in particular foreign
jurisdictions. This reporting will also help avoid double counting when
Form PF data is aggregated with other data sets that include UCITS,
AIFs, and money market funds that are offered outside the United
States. Proposed Question 22, as discussed further below in section
II.B.3, requires an adviser to report more granular information about
the fund's beneficial owners, including the percentage of beneficial
owners that are non-U.S. persons.\108\
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\107\ AIMA/ACC Comment Letter.
\108\ See Question 22.
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The amendments will improve the data we collect on fund operations
and help us better understand a fund's potential exposure to beneficial
owners outside the United States. The additional information is
necessary for a more targeted analysis of risks presented in the United
States from risks presented abroad.\109\ Another commenter stated that
the proposed amendments do not specify what conduct constitutes
operating as a UCITS or how to determine where a fund operates.\110\ A
UCITS operates under the laws mandated by the member country of its
headquarters when it is qualified as a UCITS and authorized by that
jurisdiction. This commenter also stated that the meaning of money
market fund in Question 6(g) is unclear, particularly for funds that
are established and operate as money market funds outside of the United
States. For purposes of this question, we have removed reference in
Question 6 to
[[Page 17996]]
the defined term ``money market fund'' as included in the Form PF
Glossary of Terms, which continues to have the meaning provided in rule
2a-7 under the Investment Company Act.\111\ Instead, in a modification
from the proposal, we have amended Question 6 to specify that a money
market fund for purposes of Question 6 includes money market funds more
generally, including those that operate outside of the United States in
accordance with applicable non-U.S. laws, rather than being limited to
only ``money market funds'' as defined in Form PF.
---------------------------------------------------------------------------
\109\ See Fact Coalition Comment Letter (discussing the
importance of collecting information on exposures outside of the
United States).
\110\ AIMA/ACC Comment Letter.
\111\ See Form PF Glossary of Terms (definition of ``money
market fund'').
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Master-feeder arrangements, internal private funds, external
private funds, and parallel fund structures. We are adopting, as
proposed, amendments to Form PF to require advisers to report
identifying information about master-feeder arrangements and other
private funds (e.g., funds of funds), including internal private funds,
and external private funds.\112\ These changes to the form reflect that
advisers will be required to report components of master-feeder
arrangements and parallel fund structures separately, as discussed more
fully in section II.A.1 above. Form PF currently requires advisers to
report identifying information about parallel funds, and will continue
to do so under the amended Form PF.\113\ The amendments will also
require advisers to report the value of the reporting fund's
investments in other private funds (e.g., for funds of funds) in more
detail than is currently required.\114\ Specifically, the amendments
will require advisers to report the value of the reporting fund's
equity investments in external private funds and internal private funds
(including the master fund and each internal private fund), which
together make up the total investments in other private funds.\115\
These amendments are designed to help map complex fund structures and
cross reference private fund information more effectively across Form
PF filings, in order to provide more complete and accurate information
about each fund's risk profile.
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\112\ For master-feeder arrangements, advisers will be required
to report the name of the feeder fund, its private fund
identification number, and whether the feeder fund is a separate
reporting fund or a disregarded feeder fund. For internal private
funds that invest in the reporting fund, advisers will be required
to report the name of the internal private fund, its LEI, if it has
one, and its private fund identification number. See Question 7. If
the reporting fund invests in external private funds, advisers will
be required to report the name of the master fund, its private fund
identification number, and the master fund's LEI, if it has one. If
the reporting fund invests in internal private funds, advisers will
be required to report the internal private fund's name, its private
fund identification number, and its LEI, if it has one. See Question
15.
\113\ See Question 7 and Question 8.
\114\ See Question 15.
\115\ Id.
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In connection with these amendments, in the Form PF Glossary of
Terms, we are removing the terms ``investments in external private
funds'' and ``investments in internal private funds,'' and replacing
them with the terms ``external private funds'' (i.e., private funds
that neither the adviser nor the adviser's related persons advise) and
``internal private funds'' (i.e., private funds that the adviser or any
of the adviser's related persons advise), respectively. The definitions
do not direct advisers to exclude ``cash management funds,'' as is
currently the case under the terms being removed, because we have
observed that advisers determine whether a fund is a cash management
fund inconsistently for purposes of Form PF, which reduces data
quality.
As discussed more fully above in section II.A.1, some commenters
supported requiring disaggregated reporting of master-feeder
arrangements and parallel fund structures, stating that it will allow
the Commissions to identify potential systemic risk more effectively
and increase the transparency of private fund holdings.\116\ Other
commenters opposed the proposed amendments to require reporting of the
components of parallel funds and master-feeder funds separately.\117\
We did not however receive specific comment on the proposed
definitional changes. One commenter recommended including an exclusion
in Questions 15(a) and 15(b), similar to the exclusion in Question
15(c), to avoid potentially double counting any master funds that are
external private funds.\118\ We believe the instruction in Question
15(c) to exclude any funds disclosed in Question 15(b) is sufficient to
avoid any double counting of assets in this set of questions.\119\
These amendments will improve data quality and comparability, based on
our experience with Form PF and in light of adopted changes to master-
feeder and parallel fund structure reporting on Form PF.
---------------------------------------------------------------------------
\116\ See, e.g., Better Markets Comment Letter; NASAA Comment
Letter.
\117\ See, e.g., AIC Comment Letter I; AIMA/ACC Comment Letter;
MFA Comment Letter II.
\118\ See AIMA/ACC Comment Letter.
\119\ We do not believe an instruction in Question 15(c) to
exclude funds reported in Question 15(a) is necessary because
Question 15(a) relates to external private funds only.
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Withdrawal or redemption rights. We are also adopting, with
modifications from the proposal, as specified below, amendments to
change how advisers report withdrawal and redemption rights. Form PF
currently requires only large hedge fund advisers to report whether
each qualifying hedge fund provides investors with withdrawal or
redemption rights in the ordinary course.\120\ We proposed adding a new
Question 10(a) which would generally require all advisers to report
whether a reporting fund provides investors with withdrawal and/or
redemption rights in the ordinary course.\121\ In a modification from
the proposal, we are adopting a modified Question 10, which instead
requires all advisers to indicate whether the reporting fund is an
open-end private fund in Question 10(a) or a closed-end private fund in
Question 10(b).
---------------------------------------------------------------------------
\120\ See current Question 49(a).
\121\ See proposed Question 10(a).
---------------------------------------------------------------------------
We are relatedly adopting new defined terms for ``open-end private
fund'' and ``closed-end private fund'' and modifying Question 10 to ask
whether the reporting fund is an ``open-end private fund'' or ``closed-
end private fund,'' rather than whether the reporting fund provides
investors with withdrawal and/or redemption rights in the ordinary
course. In discussing certain aspects of the proposal, some commenters
distinguished between open-end and closed-end funds.\122\ One commenter
indicated that the term ``closed-end fund'' refers to funds that do not
offer withdrawal or redemption rights in the ordinary course.\123\ We
are defining a ``closed-end private fund'' as any private fund that
only issues securities, the terms of which do not provide a holder with
any right, except in extraordinary circumstances, to withdraw, redeem,
or require the repurchase of such securities, but which may entitle
holders to receive distributions made to all holders pro rata.\124\ We
are defining an ``open-end private fund'' as a private fund that offers
redemption rights to its investors in the ordinary course, which may be
paid in cash or in kind, irrespective of redemption frequency or notice
periods and without regard to any suspensions, gates, lock-ups, or side
pockets that may be employed by the fund.\125\ These terms are commonly
used in the market,
[[Page 17997]]
based on staff experience, and will be used in place of the existing
question that asks whether the reporting fund provides investors with
withdrawal/redemption rights in the ordinary course.
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\122\ See, e.g., AIMA/ACC Comment Letter; Comment Letter of
Ropes & Gray LLP (Oct. 11, 2022) (``Ropes & Gray Comment Letter'').
\123\ AIMA/ACC Comment Letter.
\124\ See Form PF Glossary of Terms (definition of ``closed-end
private fund''). The definition of ``closed-end private fund'' is
adapted from the definition of ``venture capital fund'' in rule
203(l)-1 under the Advisers Act. See 17 CFR 275.203(l)-1.
\125\ See Form PF Glossary of Terms (definition of ``open-end
private fund'').
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Although the proposed question and the adopted question lead to
substantively identical results in most cases, the adopted question
will improve data quality by more precisely specifying what is meant by
``offer[ing] withdrawal and/or redemption rights in the ordinary
course'' and, accordingly, how an adviser should classify a reporting
fund that offers limited withdrawal or redemption rights. In a
modification from the proposal, an adviser that selects in Question 10
that the reporting fund is neither an open-end private fund nor a
closed-end private fund will be required to provide a detailed
explanation of these responses in Question 4.\126\ We requested comment
on whether we should include an additional category of ``other''
withdrawal and/or redemption frequency.\127\ Some commenters stated
that the proposed question 10 was unclear on how to report withdrawal
and redemption rights properly, particularly for funds with rights that
do not fit within a single frequency category.\128\ Instead of
including an ``other'' category, as stated above, advisers that respond
``no'' to both Questions 10(a) and 10(b) will be required to provide a
detailed explanation of these responses in Question 4, which will
enable us to understand the circumstances of the fund's withdrawal and/
or redemption rights and will improve data quality. It will also help
an adviser that might otherwise feel constrained by these two
categories if the fund it advises does not fit into either. We are
requiring advisers to identify whether a reporting fund is an open-end
private fund or a closed-end private fund to inform the Commissions and
FSOC better of all reporting funds' susceptibility to stress related to
investor redemptions, in order to help identify more effectively how
widespread the potential stress may be.\129\
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\126\ See Questions 10(a) and 10(b).
\127\ See 2022 Joint Form PF Proposing Release supra footnote 4,
at 32.
\128\ See, e.g., AIMA/ACC Comment Letter; SIFMA Comment Letter.
\129\ To implement this change, we have moved current Questions
49(a) through (e) from section 2b, which required only large hedge
fund advisers to report withdrawal and redemption information about
qualifying hedge funds, to section 1b, which requires all advisers
to report withdrawal and redemption information about all the
reporting funds they advise, and we have redesignated Questions
49(a) through (e) as part of new Question 10.
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In a modification from the proposal, if the reporting fund is an
open-end private fund under Question 10(a), the adviser will be
required to indicate (i) how often withdrawals or redemptions are
permitted by selecting from a list of categories pursuant to Question
10(c) \130\ and (ii) what percentage of the reporting fund's net asset
value may be, or is, subject to a suspension of, or material
restrictions on, investor withdrawals/redemptions by an adviser or fund
governing body pursuant to Question 10(d).\131\ The adviser will be
required to report this information regardless of whether there are
notice requirements, gates, lock-ups, or other restrictions on
withdrawals or redemptions.\132\ These amendments will allow the
Commissions and FSOC to identify more effectively the reporting funds
that may be affected by investor withdrawals during certain market
events and/or are vulnerable to failure as a result of investor
redemptions. This information will also provide insight into other data
that all reporting funds report. For example, we understand that
closed-end private equity funds may have certain patterns of
subscriptions and withdrawals, despite not offering redemption rights
in the ordinary course, and also may report performance to investors
and prospective investors as an internal rate of return as opposed to
as a measure of the changes in the fund's portfolio market value.
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\130\ See Question 10(c). The categories are: (1) on any
business day, (2) at intervals of at least two business days and up
to a month, (3) at intervals longer than monthly up to quarterly,
(4) at intervals longer than quarterly up to annually, and (5) at
intervals of more than one year.
\131\ We are redesignating current Questions 49(a) through (e)
as new Question 10. Currently, all advisers to qualifying hedge
funds that provided investors with withdrawal/redemption rights in
the ordinary course are required to respond to Questions 52(a)
through (e) in section 2(b). We are moving proposed Questions 52(a)
through (e) to section 1(b) and redesignating it as part of new
Question 10, so that all advisers to open-end private funds, rather
than only advisers to qualifying hedge funds that provide investors
with withdrawal/redemption rights in the ordinary course, will need
to respond to this question.
\132\ For example, if the reporting fund allows quarterly
redemptions that are subject to a gate, then the adviser would
select ``at intervals longer than monthly up to quarterly.''
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One commenter stated that expanding the classes of private funds
that are required to disclose withdrawal and redemption rights would
allow FSOC to better identify systemic risks, particularly resulting
from market events.\133\ Another commenter opposed the proposed
requirement for all advisers to report on withdrawal and redemption
rights, asserting that the data would be of limited benefit for
systemic risk monitoring due to the inclusion of data from smaller
funds, as well as that the types of withdrawal and redemption
restrictions referenced in proposed Question 10(b) (which has been
redesignated as Question 10(c)) do not reflect the practices of many
hedge funds.\134\ A private fund of any size that provides for
withdrawal or redemption rights may be affected by increased investor
withdrawals during certain market events and/or vulnerable to failure
as a result of investor redemptions. This reporting will allow the
Commissions and FSOC to assess withdrawal and redemption patterns to
identify potential signals of stress at a particular fund or across
many funds, or related to a particular investment strategy or
strategies, which is relevant for assessing broader systemic risk.
Information on withdrawal and redemption rights from all private funds,
including smaller private funds or funds that are not included in the
definition of a ``hedge fund,'' will improve FSOC's ability to monitor
potential systemic risk and support the Commissions' investor
protection efforts.
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\133\ See Fact Coalition Comment Letter.
\134\ See Schulte Comment Letter.
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Some commenters stated that the proposed Question 10(b) (which has
been redesignated as Question 10(c)) does not address how to report a
fund with multiple types of redemption rights.\135\ Some commenters
recommended permitting an adviser to select multiple options for
withdrawal and redemption rights in Question 10.\136\ However, it would
not support or enhance our data analysis efforts to modify Question
10(c) to allow for multiple selections, given that other questions on
Form PF require reporting of a fund's withdrawal and redemption
activity.\137\ Instead, we are modifying Question 10(c) to ask for the
interval on which withdrawals or redemptions are ``most commonly''
permitted (i.e., with respect to most investors). We also encourage an
adviser to report any additional details on a fund's withdrawal or
redemption schedule in response to Question 4, as appropriate.
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\135\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter;
USCC Comment Letter.
\136\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
\137\ See, e.g., Question 14.
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Trading vehicles. We are adopting, with modifications from the
proposal as specified below, amendments to require advisers to provide
identifying information for any trading vehicle in
[[Page 17998]]
which the reporting fund holds assets, incurs leverage, or conducts
trading or other activities.\138\ Advisers will be required to disclose
the trading vehicle's legal name; LEI, if it has one; and any other
identifying information about the trading vehicle, such as the RSSD ID,
if it has any. In a change from the proposal, an adviser will also be
required to specify if the reporting fund holds assets through a
trading vehicle, incurs leverage through a trading vehicle, or conducts
trading or other activities through a trading vehicle.\139\ As
discussed above, the final amendments will include specific questions
to target specified information related to a reporting fund's use of
trading vehicles, leveraging information used to answer Questions 9(a)
through (c), as opposed to requiring a full separate reporting on Form
PF for trading vehicles.\140\ These questions are intended to identify
what conduct requires the vehicle to be reported as a trading vehicle
for purposes of Form PF and will help improve our understanding of a
reporting fund's trading vehicle use. This amendment will help the
Commissions and FSOC understand the reporting fund's activities,
including how it interacts with the market if the fund trades through a
trading vehicle, as well as its related counterparty exposures. The
identifying information will also allow comparisons of Form PF data
with data from other sources that use such information to identify
entities. Enhancing the ability to compare Form PF data in this way,
including with respect to the use of trading vehicles, will provide a
more comprehensive view of the market that enhances systemic risk
assessment and our investor protection efforts.
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\138\ See Question 9.
\139\ See Questions 9(d) through (f).
\140\ See supra section II.A.2 of this Release for further
discussion.
---------------------------------------------------------------------------
As discussed more fully above in section II.A.2 of this Release, we
received comments regarding proposed Instruction 7 regarding the
proposed disaggregated reporting of trading vehicles. One commenter
recommended that a threshold question of whether the reporting fund
uses a trading vehicle should be added to proposed Question 9.\141\
Such an instruction is not necessary because it is generally understood
that an adviser may leave blank any inapplicable question.
---------------------------------------------------------------------------
\141\ AIMA/ACC Comment Letter.
---------------------------------------------------------------------------
Gross asset value and net asset value. We are adopting, with
changes from the proposal, several amendments to the way advisers
report gross asset value and net asset value. We are adopting
amendments to require large hedge fund advisers and large liquidity
fund advisers to report net asset value and gross asset value (or, if
such values are not calculated monthly, the reporting fund aggregate
calculated value and the gross reporting fund aggregate calculated
value, respectively) as of the end of each month of the reporting
period in their quarterly filings, rather than only reporting the
information as of the end of the reporting period, as Form PF currently
requires.\142\ This amendment is designed to facilitate analysis of
other monthly Form PF data, including certain fund performance and risk
metrics.\143\
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\142\ See Questions 11 and 12. We also are adopting amendments
to the instructions in Question 11 to correspond with the
instructions that no longer allow advisers to aggregate master-
feeder arrangements, as discussed above. In a modification from the
proposal, we are adding an instruction to specify that for feeder
funds responding to Questions 11 and 12, the gross asset value or
gross reporting fund aggregate calculated value and net asset value
or reporting fund aggregate calculated value calculations should be
inclusive of its equity holdings in the master fund, along with its
other holdings, to more accurately represent the value of the feeder
fund's holdings.
\143\ See, e.g., Question 23 (requiring all private fund
advisers to report monthly performance data, to the extent such
results are calculated for the reporting fund).
---------------------------------------------------------------------------
Some commenters expressed concerns that calculating net asset value
(or gross asset value) on a monthly basis would be overly
burdensome.\144\ Another commenter asserted that the net asset value or
gross asset value of a fund or a fund's investments may not be
available on a monthly basis in the case of investments made into other
funds or entities that are not advised by the filer or its related
persons, in which case the timing of the reporting may not match a
monthly reporting obligation.\145\ One commenter recommended requiring
reporting on net asset value and gross asset value on a quarterly,
rather than monthly, basis to lessen the burden on advisers.\146\
---------------------------------------------------------------------------
\144\ See, e.g., MFA Comment Letter II.
\145\ See AIMA/ACC Comment Letter.
\146\ See MFA Comment Letter II.
---------------------------------------------------------------------------
Monthly asset value data is important to allow analysis of other
monthly basis data collected on Form PF for systemic risk monitoring
and to support our investor protection efforts. However, after
considering comments, and in a change from the proposal, an adviser may
report in response to Questions 11 and 12 a fund's ``gross reporting
fund aggregate calculated value'' (``GRFACV'') or ``reporting fund
aggregate calculated value'' (``RFACV''), rather than gross asset value
or net asset value, respectively and as applicable, if its net asset
value and gross asset value are not calculated on a monthly basis.\147\
Permitting an adviser to report GRFACV or RFACV will reduce the need
for advisers to report the net asset value or gross asset value on a
monthly basis, as proposed. As discussed more fully below, in
connection with proposed amendments to fund performance reporting, we
proposed adding a requirement for certain advisers to report additional
performance information, including RFACV. We are adding the option for
advisers to report RFACV for Question 12 and GRFACV for Question 11
because use of RFACV and GRFACV will reduce burdens on advisers while
allowing us to continue to receive useful monthly valuation data to
allow for effective systemic risk monitoring and investor protection
efforts.\148\ RFACV and GRFACV may be calculated using the adviser's
own methodologies or those of its service providers, provided that the
methodologies used to calculate RFACV and GRFACV are consistent with
information reported internally.\149\ Advisers will be required to
indicate whether the reported data represents RFACV or GRFACV, rather
than a net asset value or gross asset value, as applicable, to maintain
data comparability. Requiring monthly data will help facilitate
analysis of the other monthly data reported on Form PF, such as fund
performance, and help identify trends for systemic risk analysis and
investor protection efforts.
---------------------------------------------------------------------------
\147\ The amendments to Form PF adopted in the May 2023 SEC Form
PF Amending Release, supra footnote 4, adopted a definition for
``reporting fund aggregate calculated value.'' 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. See Form PF Glossary
of Terms (definition of ``reporting fund aggregate calculated
value''). Because we are now, after considering comments, adding the
new GRFACV term, we are also modifying the definition of RFACV to
clarify that it is a signed (i.e., positive or negative) value where
all positions are summed. GRFACV, which is used solely in Question
11 is calculated in the same manner as RFACV, except that instead of
summing each position's signed value, GRFACV converts each
position's value to an absolute value prior to summing these
absolute values.
\148\ This change is also consistent with the recent amendments
adopted by the SEC which require a large hedge fund adviser to
monitor and in certain instances report, the fund's RFACV in
compliance with its current reporting obligation. See May 2023 SEC
Form PF Amending Release, supra footnote 4.
\149\ See Form PF Glossary of Terms. Advisers will continue to
be required to report gross asset value and net asset value as of
the end of the reporting period. See current Questions 8 and 9,
which have been redesignated as Questions 11(a) and 12(a).
---------------------------------------------------------------------------
We also are adopting, as proposed, amendments to add new Question
13, which requires advisers to separately
[[Page 17999]]
report the value of unfunded commitments included in the net and gross
asset values reported in Questions 12 and 11.\150\ Advisers that
provide an RFACV or GRFACV in response to Questions 12 and 11 will
report the value of unfunded commitments that are included in the RFACV
or GFRACV figures. Current Questions 8 and 9 (which have been replaced
by Questions 11 and 12) require valuations based on the instruction in
Form ADV for calculating regulatory assets under management, which
requires advisers to include the amount of any unfunded
commitments.\151\ This approach reflects that, in the early years of a
private fund's life, its adviser typically earns fees based on the
total amount of capital commitments, which we presume reflects
compensation for efforts expended on behalf of the fund in preparation
for the investments.\152\ The asset value calculations in Questions 11
and 12 should include unfunded commitments, so that Form PF data is
comparable to Form ADV data. However, there are circumstances where
understanding the amount represented by unfunded commitments will
enhance our understanding of changes to a reporting fund's net and
gross asset value over time, inform us of trends, and improve data
comparability over the life of the fund. For example, knowing the value
of uncalled commitments will help the Commissions and FSOC more
accurately identify the leverage of a fund with uncalled commitments.
We did not receive specific comment on the proposed addition of
Question 13. We continue to believe that receiving this information on
uncalled commitments will improve data accuracy and comparability,
which is important for effective systemic risk assessment and investor
protection efforts.
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\150\ We are adopting amendments to the definition of ``unfunded
commitments'' as committed capital that has not yet been contributed
to the reporting fund by investors. Currently, the definition refers
only to private equity funds, and we are adopting amendments to
amend the definition to refer to all reporting funds. Form PF
defines ``committed capital'' as any commitment pursuant to which a
person is obligated to acquire an interest in, or make capital
contributions to, the private fund. See Form PF Glossary of Terms.
\151\ Form PF requires advisers to calculate gross asset value
and net asset value using regulatory assets under management, a
regulatory metric from Form ADV. See ``gross asset value'' and ``net
asset value'' as defined in Form PF Glossary of Terms; Form ADV:
Instructions for Part 1A, Instruction 5.b. An adviser must calculate
its regulatory assets under management on a gross basis, that is,
without deduction of any outstanding indebtedness or other accrued
but unpaid liabilities. In addition, an adviser must include the
amount of any uncalled capital commitments made to a private fund
managed by the adviser.
\152\ Rules Implementing Amendments to the Investment Advisers
Act of 1940, Advisers Act Release No. 3221 (June 22, 2011) [76 FR
42950, 42956 (July 19, 2011)], at text accompanying n.90.
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Inflows and outflows. We are adopting, as proposed, an amendment to
add a question requiring advisers to report information concerning the
reporting fund's activity, including contributions to the reporting
fund, as well as withdrawals and redemptions, which includes all
withdrawals, redemptions, or other distributions of any kind to
investors.\153\ Amended Form PF specifies that, for purposes of the
question, advisers must include all new contributions from investors
and exclude contributions of committed capital that they have already
included in gross asset value calculated in accordance with Form ADV
instructions.\154\ Large hedge fund advisers and large liquidity fund
advisers are required to provide this information for each month of the
reporting period. This requirement will facilitate analysis of other
monthly Form PF data, including certain fund performance and risk
metrics, improve data accuracy, and allow the Commissions and FSOC to
analyze data more efficiently. Inflows and outflows inform the
Commissions and FSOC of the relationship between flows and performance,
changes to net and gross asset value, as well as trends in the private
fund industry. Accordingly, this question will provide a more accurate
baseline understanding of inflows and outflows, so the Commissions and
FSOC can, for example, more accurately assess how much the private fund
industry has grown from flows versus performance. Inflows and outflows
also can indicate funding fragility, which can have systemic risk
implications. Therefore, this amendment will provide more accurate data
of inflows and outflows for systemic risk assessment and investor
protection efforts, including identifying activity that may not match
investor disclosures.
---------------------------------------------------------------------------
\153\ See Question 14.
\154\ Form PF, as amended, cites to Form ADV, Part 1A
Instruction 6.e.(3).
---------------------------------------------------------------------------
One commenter stated that recent global events have demonstrated
the importance of FSOC's assessment of the potential systemic risks
created by inflows into private investment markets.\155\ Another
commenter stated that reporting inflows and outflows on a monthly basis
would create additional burdens with limited benefits for systemic risk
monitoring purposes and recommended an annual reporting
requirement.\156\ However, based on our experience, receiving fund
activity data on a monthly basis for large hedge fund advisers is
important for systemic risk analysis and investor protection efforts.
Currently, large hedge fund advisers file quarterly but only report
changes in inflows or outflows on an annual basis, which causes this
data to be stale and less effective than more frequently reported data
for monitoring systemic risk. We also currently cannot differentiate
between changes in value resulting from performance and changes in
value resulting from inflows and outflows. Inflow and outflow
information on a monthly basis will allow us to better understand the
meaning of interim changes in investment inflows and outflows that may
be relevant to systemic risk assessment. We also understand that
advisers generally maintain this information on a monthly basis for
internal recordkeeping purposes.
---------------------------------------------------------------------------
\155\ Fact Coalition Comment Letter.
\156\ Schulte Comment Letter.
---------------------------------------------------------------------------
Base currency. We are adopting, as proposed, amendments to require
all advisers to identify the base currency of all reporting funds,
rather than only requiring large hedge fund advisers to identify this
information for qualifying hedge funds.\157\ As discussed more fully in
section II.D below, Instruction 15 will continue to require all
advisers to convert monetary values reported on the form to U.S.
dollars for any reporting fund that uses a base currency other than
U.S. dollars.\158\ The Commissions and FSOC are able to currently
identify whether monetary value information has been converted from
another base currency and whether there may have been inconsistencies
in the converted information only with respect to qualifying hedge
funds reported by large hedge fund advisers in response to current
Question 31. Therefore, this change will allow the Commissions and FSOC
to interpret more accurately responses to questions regarding foreign
exchange exposures and the effect of changes in currency rates on all
reporting fund portfolios, which will aid systemic risk assessment and
investor protection efforts across all reporting fund portfolios.
---------------------------------------------------------------------------
\157\ To implement this, current Question 31 has been
redesignated as Question 17 and has been moved from existing section
2b, which required only large hedge fund advisers to report
information about qualifying hedge funds, to section 1b, which
requires all advisers to report information about all the reporting
funds they advise. See Question 17.
\158\ See Instruction 15. We are revising, as proposed,
Instruction 15 to provide additional instructions concerning
currency conversions. See section II.D (Amendments to Enhance Data
Quality) of this Release.
---------------------------------------------------------------------------
Although we received comments regarding the proposed amendment to
require advisers to report using U.S.
[[Page 18000]]
dollars for any private fund that has a base currency other than U.S.
dollars,\159\ we did not receive comments to the proposed amendment to
require all advisers to report the reporting fund's base currency. We
continue to believe our adopted approach will allow for more accurate
responses to other questions on Form PF regarding currency exposures
and improve data comparability to aid systemic risk assessment and our
investor protection efforts.\160\
---------------------------------------------------------------------------
\159\ See infra section II.D of this Release.
\160\ As discussed more fully below in section II.C.2.a, we are
also adopting amendments to require currency exposure reporting for
qualifying hedge fund advisers.
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Borrowings and types of creditors. We are adopting, largely as
proposed, amendments to revise how advisers report the reporting fund's
``borrowings.'' First, we are revising the term ``borrowings'' to (1)
specify that it includes ``synthetic long positions,'' which is defined
in the Glossary of Terms, and (2) provide a non-exhaustive list of
types of borrowings.\161\ This reporting approach is consistent with
SEC staff Form PF Frequently Asked Questions.\162\ This amendment is
designed to improve data quality, based on our experience with the
form.
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\161\ ``Borrowings'' include, but are not limited to (1) cash
and cash equivalents received with an obligation to repay; (2)
securities lending transactions (count cash and cash equivalents and
securities received by the reporting fund in the transaction,
including securities borrowed by the reporting fund for short
sales); (3) repo or reverse repo (count cash and cash equivalents
and securities received by the reporting fund); (4) negative mark-
to-market of derivative transactions from the reporting fund's point
of view; and (5) the gross notional value of ``synthetic long
positions.'' The term ``synthetic long position'' is defined in the
Form PF Glossary of Terms. We are adopting, with modifications from
the proposal, the definition of ``synthetic long position'' based on
our understanding of the instruments and to help ensure data quality
to aid comparability.
\162\ See SEC staff Form PF Frequently Asked Questions,
available at https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml (``Form PF Frequently Asked Questions''). See Form PF
Frequently Asked Question 12.1 (which provides a non-exhaustive list
of types of borrowings).
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Some commenters stated that it is not clear how an adviser should
report cross-collateralized agreements.\163\ A modification to the
instructions to address this comment is not warranted. The instructions
to Questions 26 and 41,\164\ as applicable, specify how margin for
these arrangements should be reported. For example, the instructions to
these questions indicate that the adviser is to classify borrowing and
collateral received and lending and posted collateral according to type
and the governing legal agreement, such as a prime brokerage or other
brokerage agreement, for cash margin and securities lending and
borrowing. Additionally, the instructions for each of these questions
allow respondents to indicate whether cross margining is in effect and
indicate how to treat the collateral in such cases. One commenter
stated that the Commissions should establish a threshold for when a
position is considered ``deep-in-the-money'' and recommended including
a definition for ``deep-in-the-money'' positions in the definitions of
``synthetic long position'' and ``synthetic short position.'' \165\ In
consideration of this comment and in order to improve data quality, we
are revising the definitions of the ``synthetic long position'' and the
``synthetic short position'' to more clearly specify, as an example,
that a position with a delta of 98% or higher is considered to be
``deep-in-the-money.'' \166\ Based on our experience, we believe that a
delta of 98% or higher is typically the most appropriate threshold for
both long and short expiry option exposures for reporting purposes and
will furthermore be generally consistent with advisers' expectations
and accommodate their internal practices, where many advisers already
use a lower threshold. Although other thresholds could potentially be
used, a delta of 98% or higher will generally provide us with more
reliable and accurate information for systemic risk assessment
purposes. If set lower than this level, the threshold could trigger
inappropriately due to the impact of the delta's rate of change (i.e.,
its gamma) and capture options that should not constitute synthetic
short or long positions, such as options with little time left to
expiry that may be close to their strike level. If set higher (e.g., to
99%), the threshold could miss longer-dated options that should
constitute synthetic short positions, but where the lengthy time to
expiry allows the possibility that the options will go unexercised,
such that the threshold will not be met, and the options will
inappropriately be not included.
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\163\ See AIMA/ACC Comment Letter; USCC Comment Letter.
\164\ For hedge funds, other than qualifying hedge funds,
advisers complete Question 26. For qualifying hedge funds, advisers
complete Question 41.
\165\ MFA Comment Letter II.
\166\ See Form PF Glossary of Terms (definitions of ``synthetic
long position'' and ``synthetic short position'').
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Second, we are adopting amendments to Question 18, which requires
advisers to report the value of the reporting fund's borrowings and the
types of creditors, to require advisers to indicate whether a creditor
is based in the United States and whether it is a ``U.S. depository
institution,'' rather than a ``U.S. financial institution'' as is
currently required.\167\ This amendment will make the categories more
consistent with the categories that the FRB uses in its reports and
analysis, which will enhance systemic risk assessment. Advisers are not
required to distinguish between non-U.S. creditors that are depository
institutions and those that are not. We understand that it is difficult
for advisers to distinguish non-U.S. creditors by type, which can
result in inconsistent data that is less valuable for analysis. We did
not receive specific comment on this amendment.
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\167\ See Question 18. Form PF defines ``U.S. depository
institution'' as any U.S. domiciled depository institution,
including any of the following: (1) a depository institution
chartered in the United States, including any Federally-chartered or
State-chartered bank, savings bank, cooperative bank, savings and
loan association, or an international banking facility established
by a depositary institution chartered in the United States; (2)
banking offices established in the United States by a financial
institution that is not organized or chartered in the United States,
including a branch or agency located in the United States and
engaged in banking not incorporated separately from its financial
institution parent, United States subsidiaries established to engage
in international business, and international banking facilities; (3)
any bank chartered in any of the following United States affiliated
areas: U.S. territories of American Samoa, Guam, and the U.S. Virgin
Islands; the Commonwealth of the Northern Mariana Islands; the
Commonwealth of Puerto Rico; the Republic of the Marshall Islands;
the Federated States of Micronesia; and the Trust Territory of the
Pacific Islands (Palau); or (4) a credit union (including a natural
person or corporate credit union). Form PF defines ``U.S. financial
institution'' as any of the following: (1) a financial institution
chartered in the United States (whether Federally-chartered or
State-chartered); (2) a financial institution that is separately
incorporated or otherwise organized in the United States but has a
parent that is a financial institution chartered outside the United
States; or (3) a branch or agency that resides outside the United
States but has a parent that is a financial institution chartered in
the United States. See Form PF Glossary of Terms.
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Fair value hierarchy. We are adopting, largely as proposed, a
number of amendments to revise how advisers report fair value hierarchy
in Question 20, to improve data quality and better understand the
reporting fund's complexity and valuation challenges.\168\
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\168\ We have redesignated current Question 14 to Question 20.
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First, we are adopting amendments that require advisers to indicate
the date on which the categorization was performed. This amendment is
designed to show how old the data is. Some advisers report current fair
value hierarchy, while others report a prior year's fair value
hierarchy if the current data is not yet available.\169\ This can
[[Page 18001]]
cause confusion when analyzing the data, because the fair value
hierarchy data concerns a different time period than the other data
advisers report on Form PF. Therefore, we believe that adding a
categorization date will help prevent the data from being incorrectly
categorized as applying to the wrong time period, and in turn, will
allow the Commissions and FSOC to correlate data to other Form PF data
and market events more accurately. We did not receive specific comment
on this amendment.
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\169\ Advisers are not required to update information that they
believe in good faith properly responded to Form PF on the date of
filing even if that information is subsequently revised for purposes
of their recordkeeping, risk management, or investor reporting (such
as estimates that are refined after completion of a subsequent
audit). See Instruction 16.
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Second, we are adopting amendments to direct advisers to report the
absolute value of all liabilities. Currently, advisers report
liabilities inconsistently, with some reporting absolute values and
others reporting negative values. This inconsistency causes errors when
the Commissions and FSOC aggregate this data, and the amended
instruction will help reduce aggregation errors. We did not receive
specific comment on this amendment.
Third, we are adopting amendments to direct advisers to provide an
explanation in Question 4 if they report assets as a negative value. We
have found that some advisers have reported negative values for assets
in error.\170\ Therefore, this instruction is designed to reduce
inadvertent errors. We did not receive specific comment on this
amendment.
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\170\ We recognize that there may be cases when advisers
correctly report negative values, such as when subtracting fund of
fund investments.
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Fourth, we are adopting amendments to require advisers to
separately report cash and cash equivalents. Currently, Form PF does
not explain where advisers must report cash and cash equivalents in
current Question 14. SEC staff have recommended that advisers generally
should report cash in the cost based column and cash equivalents in the
applicable column in the fair value hierarchy or the cost based column,
depending on the nature of the cash equivalents, but now we are adding
a separate column for cash and cash equivalents.\171\ The amended
categorization is designed to differentiate reported holdings of cash
and cash equivalents from harder-to-value assets that may be valued at
cost, and in turn, improve data quality and comparability. We did not
receive specific comment on this amendment.
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\171\ See Form PF Frequently Asked Question 14.3, Form PF
Frequently Asked Questions, supra footnote 162.
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Fifth, we are adopting amendments to the definition of ``cash and
cash equivalents.'' The current definition of ``cash and cash
equivalents'' includes ``government securities.'' \172\ When reporting
cash and cash equivalents, some advisers may include government
securities with longer maturities, while others do not, which results
in inconsistent reporting and may obscure our and FSOC's understanding
of fund exposures. Therefore, to improve data quality, we are removing
government securities from the definition of ``cash and cash
equivalents'' and presenting government securities as its own line item
in the Form PF Glossary of Terms.\173\ Some commenters opposed the
proposed removal of government securities from the definition of ``cash
and cash equivalents,'' stating that the revised definition is
inconsistent with market practice and internal fund practices, which
generally treat government securities as cash equivalents.\174\ One
commenter recommended that the definition of ``cash and cash
equivalents'' should include U.S. treasury securities with maturity of
90 days or less to the extent that the adviser treats these as cash
equivalents.\175\ We continue to believe that the removal of all
government securities from the definition of ``cash and cash
equivalents'' and requiring reporting of government securities holdings
separately will improve data quality and our and FSOC's understanding
of fund holdings. The amended definition is intended to provide more
granular detail on a fund's exposure and is not intended to change any
commercial understanding or accounting treatment of cash equivalents or
result in any fund investment changes. It is appropriate to require
advisers to list all government securities, including U.S. treasury
securities with maturity of 90 days or less, under a separate category
because they represent a different asset type and market that are
relevant for purposes of assessing systemic risk.
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\172\ Form PF defines ``government securities'' as (1) U.S.
Treasury securities, (2) agency securities, and (3) any certificate
of deposit for any of the foregoing. See Form PF Glossary of Terms.
\173\ We are adopting corresponding amendments to the definition
of ``unencumbered cash'' to reflect that ``government securities''
are a distinct term from ``cash and cash equivalents.'' This
amendment does not change the meaning of the term ``unencumbered
cash.'' See Form PF Glossary of Terms.
\174\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
\175\ MFA Comment Letter II.
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Further, we are adopting, as proposed, an amendment to the term
``cash and cash equivalents'' that directs advisers to exclude digital
assets when reporting cash and cash equivalents.\176\ One commenter
recommended that the Commissions clarify how to report an asset that
may be reasonably included in multiple categories and stated that,
digital assets, as proposed to be defined, may overlap with multiple
reporting categories.\177\ This amendment to the ``cash and cash
equivalent'' definition will facilitate appropriate classifications.
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\176\ As discussed further in section II.B.3 of this Release, in
a modification from the proposal, we are not adopting the proposed
definition of ``digital asset.''
\177\ MFA Comment Letter II.
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We are adopting amendments to add instructions directing advisers
about how to report data if their financial statement's audit is not
yet completed when Form PF is due. The instructions state that advisers
should use the estimated values for the fiscal year and explain that
the information is an estimate in Question 4. The instructions also
provide that the adviser may, but is not required to, amend Form PF
when the audited financial statements are complete.\178\ The
instructions are consistent with responses to Form PF Frequently Asked
Questions and are designed to provide the Commissions and FSOC with
more recent information regarding the reporting fund than may be
possible if the reporting fund relied solely on audited financial
statement information (i.e., the reporting fund's previous fiscal
year's audited financial statements).\179\ Given that advisers file
Form PF sometimes months after their quarter and year ends, depending
on their size and the type of funds they advise, the amended
instruction balances reporting burdens with the need for more timely
information for assessing potential systemic risk and investor
protection concerns. We did not receive specific comment on this
amendment.
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\178\ Instruction 16 continues to provide that an adviser is not
required to update information that it believes in good faith
properly responds to Form PF on the date of filing, even if that
information is subsequently revised.
\179\ See Form PF Frequently Asked Question A.11, Form PF
Frequently Asked Questions, supra footnote 162.
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Beneficial Ownership of the Reporting Fund. Form PF currently
requires advisers to specify the approximate percentage of the
reporting fund's equity that is beneficially owned by different groups
of investors. We are redesignating current Question 16 as Question 22
and amending the question, as proposed, to require advisers to provide
more granular information regarding the following groups of beneficial
owners.
[[Page 18002]]
Advisers will be required to indicate whether beneficial
owners that are broker-dealers, insurance companies, non-profits,
pension plans, banking or thrift institutions are U.S. persons or non-
U.S. persons.\180\ This amendment will allow the Commissions and FSOC
to conduct more targeted analysis about risks presented in the United
States separate from risks presented abroad. With regard to pension
plans, in particular, it is currently unclear whether advisers must
report assets in non-U.S. pension plans as governmental pension plans
or foreign official institutions. Therefore, this amendment also is
designed to improve data quality, based on our experience with the
form.
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\180\ We understand that, in some cases, an adviser may not be
able to determine what type of non-U.S. entity the investor is.
Current Question 16 provides a category that addressed that scenario
in certain circumstances, and we are maintaining this approach. If
investors that are not United States persons and about which certain
beneficial ownership information is not known and cannot reasonably
be obtained because the beneficial interest is held through a chain
involving one or more third-party intermediaries, advisers currently
report this in current Question 16(m), which we redesignated as
Question 22(s).
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Advisers will be required to indicate whether beneficial
owners that are private funds are either internal private funds (i.e.,
managed by the adviser or its related persons) or external private
funds. This amendment is designed to help the Commissions and FSOC
understand the interconnectedness of private funds to each other, which
will aid systemic risk assessment and investor protection efforts.
Furthermore, this information will help the Commissions and FSOC
understand a reporting fund's risk from investor demands for liquidity,
because beneficial owners that are external private funds may have less
predictable withdrawals than internal private funds.
We are specifying that ``state'' investors are U.S. state
investors to improve data quality and reduce potential confusion.\181\
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\181\ As proposed, we are also including instructions to
Question 22, as well as Question 21, which is current Question 15
(concerning a certain percentage of beneficial ownership), providing
that if the reporting fund is the master fund in a master-feeder
arrangement, advisers must look through any disregarded feeder fund
(i.e., a feeder fund that is not required to be separately
reported). This amendment is designed to implement the adopted
master-feeder reporting requirements. See section II.A.1 (Reporting
Master-Feeder Arrangements and Parallel Fund Structures) of this
Release.
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The amendments provide that if advisers report information in the
``other'' category, they must describe in Question 4 the type of
investor, why it would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' This
amendment is designed to improve data quality by providing context to
the adviser's selection of the ``other'' category and help ensure that
advisers do not inadvertently report information in the wrong category.
One commenter stated that more granular reporting on beneficial
ownership would support FSOC's analysis of potential sources of
systemic risk.\182\ This commenter supported requiring additional
disclosure of beneficial ownership and recommended requiring additional
disclosures of any politically exposed persons and, for each private
fund, the percentage of fund investors and fund equity that originated
from certain countries. Another commenter recommended allowing advisers
to report beneficial ownership on good faith estimates based on the
data that they have from investors and stated that the Commissions had
not provided a reasonable justification for requiring the proposed,
more granular information.\183\ We understand from this commenter that
advisers may not have information for all beneficial owners of a
reporting fund by country and that it may be burdensome to obtain this
information.
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\182\ Fact Coalition Comment Letter.
\183\ MFA Comment Letter II.
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Country-level information on a fund's beneficial owners is not
required to be reported on Form ADV. As proposed, we are thus not
requiring reporting of this information on Form PF. We continue to
believe that requiring reporting on percentage of the reporting fund's
beneficial ownership that is held by U.S. and non-U.S. persons will
improve data quality, based on our experience with the form, and will
allow for more effective systemic risk analysis. For example, this
information will increase the usefulness of the FRB's Financial
Accounts, a tool that is used for evaluating trends in and risks to the
U.S. financial system.\184\ If an adviser is unable to determine the
required beneficial ownership data, the amendments specify that an
adviser may provide additional explanatory information in its response
to Question 4.
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\184\ See Financial Accounts of the United States, available at
http://www.federalreserve.gov/releases/z1/.
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Fund Performance. We are adopting several amendments, with
modifications, regarding fund performance reporting in current Question
17, which we have redesignated as Question 23.\185\ We are adopting, as
proposed, amendments to require all advisers to provide gross and net
fund performance as reported to current and prospective investors,
counterparties, or otherwise for specified fiscal periods using the
table in redesignated Question 23 with added instructions specifying
which lines to complete depending on whether the adviser is submitting
an initial filing, annual update, or quarterly update.\186\ These
amendments will improve data quality by specifying which fields an
adviser should use to report fund performance for the specified filing
period.
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\185\ In a separate release, the SEC adopted a new rule under
the Advisers Act to require advisers to provide certain fund
performance information to its private funds' investors in quarterly
statements. See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Advisers Act Release No. IA-
6383 (Aug. 23, 2023) [88 FR 63206 (Sept. 14, 2023)] (``SEC Private
Fund Advisers Adopting Release'').
\186\ As proposed, we also are reorganizing the table so
monthly, quarterly, and yearly data is presented in separate
categories, but this change will not affect reporting frequency;
advisers will continue to report information according to the same
intervals. We are also amending the table to refer to the end date
of each applicable month, quarter, and year, rather than last day of
the fiscal period, to reflect the amendments to the reporting
period, as discussed above. See supra section II.A.3 (Reporting
Timelines) of this Release, and Question 23(a).
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As discussed further below, the amendments will require an adviser
to report its performance as a money-weighted internal rate of return
(instead of a time-weighted return), if the reporting fund's
performance is reported to investors, counterparties or otherwise as an
internal rate of return since inception. This results from a
modification from the proposal in which we added an instruction to
proposed Question 23 to specify that the reporting fund may report
performance as either a time-weighted return or an internal rate of
return, but the methodology used for reporting performance should be
consistent over time.
In an additional modification from the proposal that is similarly
intended to promote data quality through reporting comparability, we
are amending the instructions to the table to specify that gross and
net performance should be reported using the reporting fund's base
currency. This instruction is implicit in the current form, which
requires that performance data be provided as reported to investors or
as calculated for other purposes, and we are amending the instruction
to make it explicit. Accordingly, pursuant to this modification to the
proposed instructions, for example, if a reporting fund uses Japanese
yen as its base currency, the fund should report its performance using
its base currency,
[[Page 18003]]
which is Japanese yen. We also are adopting, as proposed, amendments to
require advisers to identify the currency in Question 4.\187\ This
amendment is designed to inform the Commissions and FSOC of the
currency the adviser used to report the reporting fund's gross and net
performance, for more accurate and informed analysis.
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\187\ See Question 23(a).
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One commenter stated the proposed requirement does not specify
whether net performance should be net of all fund fees and expenses or
net of only management fees, incentive fees and allocations, which are
referenced in the column header for net performance in Question 23(a);
and that it is relatedly unclear whether gross performance should
reflect the deduction of all other fund fees and expenses.\188\ This
commenter suggested that such a result would be inconsistent with the
treatment of gross performance in the SEC investment adviser marketing
and the private fund adviser rules, which do not require that gross
performance reflect the deduction of any fees or expenses. This
commenter also stated that the Global Investment Performance Standards
require that gross returns reflect the deduction of only transaction
costs and that the deduction of any additional fees and expenses is
optional. For purposes of Form PF, advisers must provide the net
performance and gross performance information that they provide to
investors, counterparties, or otherwise (or the most representative set
of performance information if the adviser reports different fund
performance results to different groups, with an explanation of its
selection to be provided in Question 4). Consistent with the reference
to management fees, incentive fees, and allocations in the column
header for net performance in Question 23(a), net performance should
always reflect the deduction of adviser compensation. In addition, Form
PF provides confidential reporting to the Commissions, rather than
reporting of performance information to current investors. Given these
different purposes and audiences for the information, it is not
necessary for us to further specify how to calculate gross performance
or net performance for purposes of Form PF. These amendments are
designed to allow the Commissions and FSOC to compare performance
volatility to identify market trends for systemic risk analysis and
investor protection efforts.
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\188\ Comment Letter of CFA Institute (Oct. 11, 2022) (``CFA
Institute Comment Letter'').
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We are also adopting, as proposed, amendments to create an
alternative to the gross and net performance tabular reporting. If the
reporting fund's performance is reported to current and prospective
investors, counterparties, or otherwise as an internal rate of return
since inception, the adviser will be required to report its performance
as an internal rate of return.\189\ If such information is reported to
current and prospective investors, counterparties, or otherwise, in a
currency other than U.S. dollars, advisers will be required to report
the data using that currency, and identify the currency in Question
4.\190\ This approach is designed to acknowledge that advisers
calculate performance data differently for different types of private
funds. For example, advisers of private equity funds may use a money-
weighted rate of return, such as an internal rate of return, to
calculate performance data, while advisers to liquidity funds and hedge
funds may use a time-weighted rate of return. These calculations may
differ in the way they reflect the impact of the timing of external
cash flows, among other things. Therefore, the adopted change will
allow the Commissions and FSOC to improve the usefulness and quality of
performance data to conduct more accurate analysis, including
comparisons, and aggregations.
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\189\ See instructions to Question 23 and Question 23(b).
Question 23(b) also requires that if the fund reports different
performance results to different groups, advisers must provide the
most representative results and explain their selection in Question
4. The instructions to Question 23(b) specify that internal rates of
return for periods longer than one year must be annualized, while
internal rates of return for periods one year or less must not be
annualized. This instruction is designed to help ensure consistent
reporting for accurate comparisons.
\190\ See supra in this section II.A.2 of the Release for
further discussion of this amendment.
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One commenter noted that proposed Questions 23(a) (gross and net
performance) and 23(b) (internal rate of return) may be mutually
exclusive for some reporting funds.\191\ This commenter recommended
allowing either Question 23(a) or Question 23(b) to be left blank, as
appropriate. We do not believe such a specification is necessary
because the instructions provide that an adviser should respond to
either Question 23(a) or 23(b), as applicable, and it is generally
understood that an adviser may leave blank any inapplicable question.
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\191\ AIMA/ACC Comment Letter.
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The instructions to Question 23 provide that an adviser may report
the reporting fund's performance either as a time-weighted return or a
money-weighted return, such as an internal rate of return.\192\ We are
adopting defined terms for ``rate of return'' and ``internal rate of
return'' in the Form PF Glossary of Terms. In a modification from the
proposal, ``rate of return'' is generally defined as the percentage
change in the reporting fund's net asset value (or, when a net asset
value is not available, in the reporting fund aggregate calculated
value) in the reporting fund's base currency from one date to another
and adjusted for subscriptions and redemptions.\193\ Further, in a
modification from the proposal, the rate of return for a portfolio
position is defined as the percentage change in the position calculated
value, adjusted for income earned and for changes in the quantity held
resulting from activity, such as purchases, sales, or splits.\194\ As
proposed, ``internal rate of return'' is defined as the discount rate
that causes the net present value of all cash flows throughout the life
of the fund to be equal to zero. One commenter supported the proposed
``internal rate of return'' definition and recommended clarifying how
the terms reporting fund aggregate calculated value and currency, which
are referenced in the ``rate of return'' definition, apply to the
``internal rate of return'' definition.\195\ ``Internal rate of
return'' and ``rate of return'' are distinct defined terms in the Form
PF Glossary of Terms, and reporting fund aggregate calculated value and
currency are not referenced in and do not apply to the definition of
``internal rate of return.'' \196\ Further, reporting fund aggregate
calculated value is only used when a net asset
[[Page 18004]]
value is not available for calculation of a rate of return. In a
modification from the proposal, we are adding an instruction to
Questions 23(a) and 23(b) to specify that the reporting fund's
performance should not be calculated using a reporting fund aggregate
calculated value because this question is intended to report
performance, as reported to investors. One commenter recommended
requiring funds to consistently report the same type of returns over
time and not switch between a rate of return calculation, which is time
weighted, and an internal rate of return, which is money weighted.\197\
We agree with this commenter and believe that consistent reporting of
returns is important for data comparability. Therefore, in a change
from the proposal, Question 23 includes an instruction that the
methodology used to report performance should remain consistent over
time. One commenter stated the proposed definition does not specify
whether to include the impact of subscription facilities \198\ in the
internal rate of return calculation and requested that we specify
whether returns should be reported with or without the impact of any
subscription facilities.\199\ In a change from the proposal, we are
requiring advisers in responding to Question 23 to indicate whether the
reported internal rate of return includes or does not include the
impact of subscription facilities to allow for improved data
comparability. It is necessary for an adviser to specify whether the
reported rate of return includes or excludes the impact of subscription
facilities to be able to accurately compare data between reporting
periods. For example, an adviser that reports an internal rate of
return with the impact of fund-level subscription facilities in one
reporting period but reported without the impact of subscription
facilities in a prior period could report artificially increased
performance metrics.
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\192\ See Question 23. The instructions provide that the
methodology used for reporting performance (i.e., as a time-weighted
return or money-weighted return, such as an internal rate of return)
should be consistent over time.
\193\ The proposed definition of ``rate of return'' was
generally the percentage change in the reporting fund aggregate
market value in the reporting fund's base currency from one date to
another and adjusted for subscriptions and redemptions. The modified
definition we are adopting includes reference to a change in the
fund's net asset value and modifies the reference to reporting fund
aggregate market value to use the defined term in Form PF, reporting
fund aggregate calculated value.
\194\ The proposed definition generally was that the rate of
return for a portfolio position is the percentage change in the
position market value, adjusted for income earned. One commenter
recommended that we modify this definition stating that a position
return cannot be calculated by considering only changes in a
portfolio's position value adjusted for income and should also
consider changes in quantity resulting from transactions. See CFA
Institute Comment Letter. After considering comments, we have
changed the reference to ``position market value'' in the adopted
definition to refer instead to the defined term in Form PF,
``position calculated value,'' and we have added reference to
adjustments for changes in quantity resulting from activity such as
purchases, sales, or splits.
\195\ See CFA Institute Comment Letter.
\196\ See Form PF Glossary of Terms (definitions of ``internal
rate of return'' and ``rate of return'').
\197\ See CFA Institute Comment Letter.
\198\ Subscription facilities (or subscription lines) generally
refer to credit lines that are guaranteed by committed but uncalled
capital.
\199\ See CFA Institute Comment Letter.
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We are also adopting amendments, as proposed except as indicated
below, that require advisers to report additional performance-related
information if the adviser calculates a market value on a daily basis
for any position in the reporting fund's portfolio. In such a case, the
adviser will be required to report several items. First, it would
report the ``reporting fund aggregate calculated value'' at the end of
the reporting period.\200\ Advisers that file a quarterly update also
will report the reporting fund aggregate calculated value as of the end
of the first and second month of the reporting period.\201\ Second, the
adviser will report the reporting fund's volatility of the natural log
of the daily ``rate of return'' for each month of the reporting period,
following a prescribed methodology.\202\ Advisers will be required to
report whether the reporting fund uses a different methodology than is
prescribed in Form PF to report to current and prospective investors,
counterparties, or otherwise, and if so, describe it in Question
4.\203\ One commenter recommended requiring volatility measurements
over longer periods, such as quarterly or annually, stating that
requiring daily measurements would result in a smaller population size
and less meaningful information.\204\ We believe receiving reporting on
the volatility of daily returns on a monthly basis is important because
significant volatility swings that occur over a short timeframe may not
be discernible from quarterly or annual data but can pose systemic
risk. Further, receiving higher frequency volatility data will give
more context to a fund's reported monthly returns and will allow us to
assess risk-adjusted returns. We understand that it is common practice
for advisers to annualize volatility calculations and compare across
different time intervals.\205\
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\200\ The amendments to Form PF adopted in the May 2023 SEC Form
PF Amending Release, supra footnote 4, added a definition for
``reporting fund aggregate calculated value.'' See Form PF Glossary
of Terms. See also Question 23(c). We have modified the reference in
the proposed Question to ``reporting fund aggregate market value''
to the defined term in Form PF, the reporting fund aggregate
calculated value.
\201\ See Question 23(c)(i).
\202\ See discussion of definitions of ``rate of return'' and
``position market value,'' supra footnotes 193 and 194. The
prescribed methodology is the standard deviation of the natural log
of one plus each of the daily rates of return in the month,
annualized by the square root of 252 trading days. When calculating
the natural log of a daily rate of return, the rate of return, which
is expressed as a percent, must first be converted to a decimal
value and then one must be added to the decimal value. See Form PF
Glossary of Terms and Question 23(c)(ii). Although the reference to
``of one plus each'' was in the proposing release, it was
inadvertently left out of the proposed form. We are revising the
form to include this language. To reduce potential confusion, we are
also specifying in the instruction to this question that, when
calculating the natural log of a daily rate-of-return, the rate of
return, which is expressed as a percent, must first be converted to
a decimal value and then one must be added to the decimal value.
\203\ See Question 23(c)(iii).
\204\ CFA Institute Comment Letter.
\205\ We have also modified the table in Question 23(c)(ii) to
refer to ``annualized'' volatility of returns, rather than monthly,
as proposed, to correspond with the instructions which require the
adviser to report the volatility data for each month of the
reporting period, on an annualized basis.
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Third, the adviser must report whether the reporting fund had one
or more days with a negative daily rate of return during the reporting
period. If so, advisers will be required to report (1) the most recent
peak to trough drawdown, and indicate whether the drawdown was
continuing on the data reporting date, (2) the largest peak to trough
drawdown, (3) the largest single day drawdown, and (4) the number of
days with a negative daily rate of return in the reporting period.\206\
These measures are designed to help us and FSOC understand risk,
particularly in reporting funds with unique return patterns that are
poorly measured using volatility alone. We understand that advisers use
drawdown metrics, therefore, this question also is designed to be more
reflective of industry practice, and in turn improve data quality.
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\206\ See Question 23(c)(iv).
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Advisers are required to report these figures as an amount in the
fund's base currency and, in a modification from the proposal, as a
percentage in the fund's base currency. One commenter recommended
changing amount in base currency to percent in base currency.\207\ We
agree with requiring reporting of percent in base currency to improve
data comparability, and we do not believe requiring percent in addition
to amount is incrementally more burdensome to report because the
adviser can leverage existing reporting of the amount in base currency
and NAV to provide this metric. Requiring an adviser to also report the
percent in base currency will improve data comparability because it
will provide consistency across data reported by the adviser, rather
than potentially using a different exchange rate than the adviser used.
This commenter also recommended providing definitions and examples of
how to calculate the most recent and largest peak-to-trough drawdown
and provided a recommended definition. We do not believe it is
necessary to specify a particular methodology to calculate these
metrics, which we understand advisers commonly calculate for their
funds. Together, the adopted changes are designed to allow the
Commissions and FSOC to compare volatility more accurately across
different fund types to identify market trends (e.g., volatility of a
specific fund type), for systemic risk assessment and investor
protection efforts. For example, if several reporting
[[Page 18005]]
funds that engage in similar trading activity experience a surge in
volatility, the volatility itself or the reporting funds' response to
the volatility may impact others who also are engaging in similar
trading activity, which could pose systemic risk, and negatively affect
investors.
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\207\ CFA Institute Comment Letter.
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3. Amendments to Section 1c of Form PF--Concerning All Hedge Funds
Section 1c requires advisers to report information about the hedge
funds they advise. We are adopting, as proposed except as specified
below, amendments to require advisers to report additional information
about hedge funds to provide greater insight into hedge funds'
operations and strategies, assist in identifying trends, and improve
data quality and data comparability for purposes of systemic risk
assessments and to further investor protection efforts. We are also
removing certain questions where other questions provide the same or
more useful data to streamline reporting and reduce reporting burdens
without compromising investor protection efforts and systemic risk
analysis.
Investment Strategies. We are adopting, as proposed except as
specified below, amendments to how advisers report hedge fund
investment strategies.\208\ We are adopting, as proposed, amendments to
require advisers to indicate which investment strategies best describe
the reporting fund's strategies on the last day of the reporting
period, rather than allowing advisers flexibility to report information
as of the data reporting date or throughout the reporting period, as
Form PF currently provides.\209\ This amendment is designed to improve
data quality by specifying how to report information if the reporting
fund changes strategies over time. Relatedly, in a modification from
the proposal, we are also including an instruction that specifies the
methodology an adviser uses for selecting reporting strategies should
be consistent over time. This instruction is designed to improve data
quality and comparability by specifying that an investment strategy
should be categorized consistently from one reporting period to the
next. This instruction will also simplify the categorization process
for an adviser because it will require an adviser to only determine
once how to categorize an ongoing investment strategy.
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\208\ We are amending current Question 20 and redesignating it
as Question 25.
\209\ See current Question 20.
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We also are adopting, as proposed except as specified below,
amendments to update the strategy categories that advisers can select
to reflect our understanding of hedge fund strategies better and to
improve data quality and comparability, based on experience with the
form. For example, we are including more granular categories for equity
strategies, such as factor driven, statistical arbitrage, and emerging
markets. Similarly, we are including more granular categories for
credit strategies, such as litigation finance, emerging markets, and
asset-backed/structured products. These more granular categories are
designed to allow the Commissions and FSOC to conduct more targeted
analysis and improve comparability among advisers and hedge funds,
which the Commissions and FSOC can use to identify and address systemic
risk and investor protection issues in times of stress more accurately.
In a modification from the proposal, to facilitate completion of this
question and alleviate challenges filers face in choosing among a
limited list of investment strategy types, filers will be able to
choose from a ``drop-down'' menu that includes all investment strategy
categories for Form PF.\210\
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\210\ For purposes of this question, investment strategies
generally include equity (and associated sub-strategies such as
long/short market neutral, long only, long/short short bias, and
long/short long bias), macro (and associated sub-strategies such as
active trading, commodity, currency, and global macro), convertible
arbitrage, relative value (and associated strategies such as fixed
income asset backed, fixed income convertible arbitrage, fixed
income corporate, fixed income sovereign, fixed income arbitrage,
and volatility arbitrage), event driven (and associated sub-sub-
strategies such as distressed, distressed/restructuring, risk
arbitrage/merger arbitrage, equity special situations, and special
situations), credit (and associated sub-strategies such as asset
based lending, litigation finance, emerging markets, and asset
backed/structured products), managed futures/CTA (and associated
sub-strategies such as fundamental, quantitative), investment in
other funds, private credit (and associated sub-strategies such as
direct lending/mid-market lending, distressed debt, junior/
subordinate debt, mezzanine financing, senior debt, senior
subordinated debt, special situations, venture debt, and other),
private equity (and associated sub-strategies such as early stage,
expansion/late stage, buyout, distressed, growth, private investment
in private equity, secondaries, and turnaround), real estate, real
estate investment trusts, real assets excluding real estate, annuity
and life insurance policies, litigation finance, digital assets,
general partner stakes investing, cash and cash equivalents, and
other.
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We also are adding, as proposed, categories that have become more
commonly pursued by hedge funds since Form PF was adopted, such as
categories concerning real estate and digital assets.\211\ Currently,
advisers may report information regarding these strategies in the
``other'' category, resulting in less robust Form PF data for analysis,
especially when such analysis filters results based on strategy.\212\
The additional categories are designed to improve reporting quality and
data comparability across advisers, based on our experience with the
form. If an adviser selects the ``other'' category, the adviser will be
required to describe in Question 4 the investment strategy, why the
reporting fund would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' The
requirement to provide an explanation in Question 4 is designed to
improve data quality by providing additional context to the adviser's
selection of the ``other'' category and will improve our understanding
of the adviser's strategies, which may present systemic risk. It also
is designed to help us ensure that advisers are not misreporting
information in the ``other'' category when they should be reporting
information in a different category.
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\211\ For example, aggregate qualifying hedge fund gross
notional exposure to physical real estate has grown by 47% from the
second quarter 2021 through the first quarter 2023, to $191 billion.
See Private Funds Statistics, supra footnote 5.
\212\ The amount of hedge fund exposure that advisers attribute
to the ``other'' category has grown by 30% to $114 billion, from the
second quarter 2021 through the first quarter 2023. See Private
Funds Statistics, supra footnote 5.
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In addition to the investment strategy category additions described
above that we are adopting as proposed, in a modification from the
proposal, we are adopting certain additional strategy categories. We
are adopting certain additional strategy categories that are currently
included in the available categories in Question 66, which is
structured similarly to Question 25 and is used to collect information
about private equity fund investment strategies.\213\ To facilitate
completion of Question 25 and alleviate challenges filers may face in
choosing among a limited list of investment strategy types, in a
modification from the proposal, filers will be able to choose from a
drop-down menu that includes all investment strategy categories for
Form PF. The inclusion of these additional categories recognizes that
funds classified as hedge funds on Form PF may pursue
[[Page 18006]]
investment strategies more commonly associated with private equity
funds and vice versa. This change will allow advisers to categorize
their investment strategies more accurately and will improve data
quality by reducing the number of strategies that would otherwise be
categorized as ``other.'' For similar reasons, in a modification from
the proposal, we are also retaining certain investment strategy
categories that are included in the current Form PF, which we had
proposed to remove, to provide more granular information and maintain
existing data comparability.\214\ In addition, we are adopting strategy
categories for ``Equity Long/Short Market Neutral,'' ``Equity Long/
Short Long Bias,'' and ``Equity Long/Short Short Bias,'' and adding
separate categories for ``Equity Long Only'' and ``Credit Long/Short,''
as discussed further below.
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\213\ The additional strategy categories are private credit (and
associated sub-strategies such as direct lending/mid-market lending,
distressed debt, junior/subordinate debt, mezzanine financing,
senior debt, senior subordinated debt, special situations, venture
debt, and other), private equity (and associated sub-strategies such
as early stage, expansion/late stage, buyout, distressed, growth,
private investment in private equity, secondaries, and turnaround),
annuity and life insurance policies, litigation finance, and general
partner stakes investing. See also May 2023 SEC Form PF Amending
Release, supra footnote 4, at n. 216. Question 66 was added as a new
question in the amendments adopted in the May 2023 SEC Form PF
Amending Release.
\214\ We are retaining the existing investment strategies listed
in current Question 20 for the following categories: Macro, Active
Trading; Macro, Commodity; Macro, Currency; Relative Value, Fixed
Income Asset Backed; Relative Value, Fixed Income Convertible
Arbitrage; Relative Value, Fixed Income Sovereign; Event Driven,
Distressed/Restructuring; Event Driven, Equity Special Situations;
and Credit, Long/Short. See Question 25.
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One commenter opposed including more granular strategy categories
stating that some proposed categories are not clear and may require
advisers to make subjective decisions on how to report a fund's
strategy that could result in inconsistent reporting.\215\ This
commenter recommended that the strategy categories be revised to better
track industry conventions. The amended strategy categories conform
more closely to industry conventions than the current categories and
will allow advisers to categorize their strategies more accurately. One
commenter opposed the increased granularity in strategy categories,
stating they could disclose a fund's proprietary investment information
and present data security concerns.\216\ The data reported on Form PF,
which is filed on a non-public basis, is neither sufficiently detailed
nor reported on such a frequent basis as to present risk of misuse or
enable reverse engineering of a particular fund's investment strategy.
One commenter recommended reverting the category for the ``Equity Long/
Short'' strategy from the proposed categories of ``Equity Long Bias''
and ``Equity Short Bias'' because of the burden and potential for
misreporting of long/short equity funds or portfolios. In a change from
the proposal, as recommended by this commenter, we are amending the
proposed categories for ``Equity Long Bias'' and ``Equity Short Bias''
and replacing with ``Equity Long/Short Market Neutral,'' ``Equity Long/
Short Long Bias,'' and ``Equity Long/Short Short Bias,'' and adding
separate categories for ``Equity Long Only'' and ``Credit Long/Short.''
We believe these additional categories better align the strategy
categories with industry conventions and addresses the concern with
appropriately reporting the strategy category for long/short equity
funds or portfolios.
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\215\ MFA Comment Letter II.
\216\ SIFMA Comment Letter.
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As proposed, digital assets will be included as a reportable
investment strategy.\217\ In a change from the proposal, however, we
are not adopting a defined term for ``digital assets'' in the Glossary
of Terms. Some commenters supported adding a defined term for digital
assets and emphasized the growing impact of digital assets on the
financial sector more broadly and the systemic risk that they may
pose.\218\ Other commenters stated that the proposed definition of
digital asset is too broad and may overlap with other existing
reporting categories.\219\ One commenter recommended excluding from the
digital asset definition references to any specific types of digital
assets because of the evolving terminology used in the sector.\220\
Another commenter recommended that the references to digital assets be
consistent across usages by the SEC.\221\ This commenter also
recommended adopting distinct defined terms for different types of
digital assets to differentiate between different asset categories that
may present different risks, such as differentiating between
established digital assets and newer digital assets. Another commenter
recommended distinguishing between so-called ``stablecoins'' and other
digital assets on the basis that stablecoins may be less volatile than
other digital assets.\222\
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\217\ As discussed further below in section II.C.2 of this
Release, we are also adopting amendments to Question 32 to add
digital assets as a reportable sub-asset class.
\218\ See, e.g., Better Markets Comment Letter; NASAA Comment
Letter.
\219\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
USCC Comment Letter.
\220\ Comment Letter of Rohan G. et al. (Dec. 8, 2022) (``Rohan
G. Comment Letter'').
\221\ NASAA Comment Letter.
\222\ AFREF Comment Letter I.
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The Commissions and staff are continuing to consider the issues
raised by these comments, and we are not adopting a definition as part
of this rule at this time. However, we agree with commenters stating
that certain strategies could be categorized as either a digital asset
strategy or another listed strategy, and so in those instances the
digital asset strategy is duplicative.\223\ Accordingly, we are
including an instruction to Question 25 to specify that, if a
particular strategy could be classified as both a digital asset
strategy and another strategy, an adviser should report the strategy as
the non-digital asset strategy. This is designed to reduce potential
confusion and improve data quality.
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\223\ For example, a crypto asset security is not a separate
type or category of security for purposes of Federal securities laws
based solely on the use of distributed ledger technology. See
Supplemental Information and Reopening of Comment Period for
Amendments Regarding the Definition of ``Exchange,'' 88 FR 29448,
29450 (May 5, 2023) (stating ``a crypto asset that is a security is
not a separate type or category of security (e.g., NMS stock,
corporate bond) for purposes of federal securities laws based solely
on the use of DLT.'').
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Counterparty exposures. Counterparty exposure informs the
Commissions and FSOC of the interconnectedness of hedge funds with the
broader financial services industry, which is a critical part of
systemic risk assessment and investor protection efforts. Understanding
counterparty exposures allows the Commissions and FSOC to assess who
may be impacted by a reporting fund's failure, and which reporting
funds may be impacted by a counterparty's failure. Counterparty
exposure concerning central clearing counterparties (``CCPs'') is of
importance to FSOC's systemic risk assessment efforts as evidenced by
the fact that FSOC has designated many CCP institutions as
``systemically important,'' and recommended that regulators continue to
coordinate to evaluate threats from both default and non-default losses
associated with CCPs.\224\
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\224\ Form PF defines ``CCP'' as central clearing counterparties
(or central clearing houses) (for example, CME Clearing, The
Depository Trust & Clearing Corporation, Fedwire and LCH Clearnet
Limited). See Financial Stability Oversight Council, 2012 Annual
Report, Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf (concerning the designations);
Financial Stability Oversight Council, 2021 Annual Report, p. 14,
available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf (concerning the recommendation).
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We are adopting, as proposed except as indicated below, amendments
to add Question 26 and revise current Questions 22 and 23, which have
been redesignated as Questions 27 and 28, to provide better insight
into hedge funds' borrowing and financing arrangements with
counterparties, including CCPs. Question 26 requires advisers to hedge
funds (other than qualifying hedge funds) to complete a new table
(``consolidated counterparty exposure table'') concerning exposures
that (1) the reporting fund has to creditors and
[[Page 18007]]
counterparties, and (2) creditors and other counterparties have to the
reporting fund.\225\ Advisers will be required to report the U.S.
dollar value of the reporting fund's ``borrowing and collateral
received (B/CR),'' as well as its ``lending and posted collateral (L/
PC),'' aggregated across all counterparties, including CCPs, as of the
end of the reporting period.\226\ The form explains what exposures to
net.\227\ Advisers will be required to classify information according
to type (e.g., unsecured borrowing, secured borrowing, derivatives
cleared by a CCP, and uncleared derivatives) and the governing legal
agreement (e.g., a prime brokerage or other brokerage agreement for
cash margin and securities lending and borrowing, a global master
repurchase agreement for repo/reverse repo, and International Swaps and
Derivatives Association (``ISDA'') master agreement for synthetic long
positions, ``synthetic short positions,'' and derivatives).\228\
Advisers will be required to report transactions under a master
securities loan agreement as secured borrowings. Advisers will be
required to check a box if one or more prime brokerage agreements
provide for cross-margining of derivatives and secured financing
transactions. If advisers check the box, the instructions specify how
to report secured financing and derivatives in the consolidated
counterparty exposure table.
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\225\ Qualifying hedge funds are not required to complete this
table because section 2, as revised, includes similar questions that
require additional detail. See discussion at section II.C of this
Release. Together the questions in section 1c and similar questions
at section 2 will allow the Commissions and FSOC to consolidate
information relating to hedge funds' and qualifying hedge funds'
arrangements with creditors and other counterparties, to support
systemic risk assessment and investor protection efforts. We are
defining the term ``consolidated counterparty exposure table'' in
the Form PF Glossary of Terms. For hedge funds other than qualifying
hedge funds, it means the section 1c table (at Question 26) that
collects the reporting fund's borrowing and collateral received and
lending and posted collateral aggregated across all creditors and
counterparties as of the end of the reporting period. For qualifying
hedge funds, it means the section 2 table (at Question 41) that
collects the reporting fund's borrowing and collateral received and
lending and posted collateral aggregated across all creditors and
counterparties as of the end of the reporting period.
\226\ We are defining ``borrowing and collateral received (B/
CR)'' and ``lending and posted collateral (L/PC)'' in the Form PF
Glossary of Terms. We are adopting these definitions based on our
understanding of borrowing and lending and to help ensure data
quality and comparability. We also are amending the term ``gross
notional value'' to provide more detail on how to report it to aid
advisers completing the consolidated counterparty exposure table.
See Form PF Glossary of Terms.
\227\ Advisers will net the reporting fund's exposure with each
counterparty and among affiliated entities of a counterparty to the
extent such exposures may be contractually or legally set-off or
netted across those entities or one affiliate guarantees or may
otherwise be obligated to satisfy the obligations of another under
the agreements governing the transactions. Instructions provide that
netting must be used to reflect net cash borrowed from or lent to a
counterparty but must not be used to offset securities borrowed and
lent against one another, when reporting prime brokerage and repo/
reverse repo transactions. These instructions are designed to help
ensure data quality and comparability. See Question 26.
\228\ We are adopting, as proposed, a definition of ``ISDA'' as
the International Swaps and Derivatives Association. We are also
adopting a definition of ``synthetic short positions'' in the Form
PF Glossary of Terms (see the Form PF Glossary of Terms). We are
adopting this definition based on our understanding of the
instruments and to help ensure data quality to aid comparability.
See supra footnote 161 (discussing the definition of ``synthetic
long position'').
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Some commenters opposed more granular disclosure of counterparty
exposures, stating that the information is burdensome to obtain and of
limited value.\229\ One commenter stated that reporting on exposures to
central clearing counterparties should be on an aggregate basis, rather
than on an individual basis, because of the cost to report and limited
value of the disaggregated data.\230\ We continue to believe that this
additional information is important to understanding counterparty risk
exposure, which is needed for systemic risk assessment because of the
potential contagion risks of any particular counterparty failure, and
that the value of this information justifies the associated burdens in
reporting.\231\ We believe that the associated burdens are justified
because detailed reporting of counterparty risk exposure will provide
the Commissions and FSOC with increased transparency into risk profiles
and the interconnectedness of hedge funds with the broader financial
services industry, which will improve our ability to assess systemic
risk and protect investors.
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\229\ See, e.g., AIMA/ACC Comment Letter.
\230\ MFA Comment Letter II.
\231\ See infra section IV.C of this Release for discussion of
costs and benefits.
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We are adopting, largely as proposed, several amendments to
Questions 26, 27 and 28, which require advisers to hedge funds to
provide information about the reporting fund's counterparty exposure,
as follows:
We are adopting, as proposed except as specifically
indicated below, amendments to Questions 27 and 28 to provide more
detailed instructions for advisers to use to identify the individual
counterparties. For both Questions 27 and 28, advisers are instructed
to use the calculations from the consolidated counterparty exposure
table to identify the counterparties.\232\ This amendment is designed
to help ensure that the Commissions' and FSOC's analysis can identify
true data differences, without the distraction of methodology
differences, which can suggest differences where there are none, and
reduce circumstances where advisers misidentify lending relationships.
In a modification from the proposal, we are adding an instruction to
specify the entity that has the reported exposure.\233\ This
modification will allow us to determine the relevant entity that bears
such exposure (e.g., a trading vehicle), which will improve our data
quality and our ability to monitor systemic risk.\234\ The amended
instructions provide that if the entity that has the exposure is not
the reporting fund, the filer must provide the legal name of the
relevant entity and LEI, if available.\235\ This instruction will allow
us to better understand the scope of the reporting fund's
exposure.\236\ We did not receive specific comment on these amendments
to the instructions. These amendments will improve data quality and
comparability and reduce adviser burden.
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\232\ See Question 26 for the consolidated counterparty exposure
table. We are also adopting, substantively as proposed, definitions
for the following terms related to the consolidated counterparty
exposure table: ``cash borrowing entries,'' ``cash lending
entries,'' ``collateral posted entries,'' and ``collateral received
entries.'' See Form PF Glossary of Terms.
\233\ See Question 27.
\234\ As discussed more fully above in section II.A.2, we are
adopting amendments to include specific questions relating to a
reporting fund's trading vehicle use and a trading vehicle's
position size and risk exposure, as opposed to requiring full
separate reporting on Form PF for trading vehicles. This
modification will allow us to understand which entity holds the
exposure.
\235\ See Question 27.
\236\ This modification is related to our modification from the
proposal to require aggregated reporting and focusing certain
questions on trading vehicles, rather than disaggregated reporting
as proposed, discussed above in section II.A.2. This modification to
the instructions will allow us to understand whether the reporting
fund or a trading vehicle holds the exposure.
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We are adopting, as proposed, amendments to add Question
27, which requires advisers to identify each creditor or other
counterparty (including CCPs) to which the reporting fund owes a
certain amount (before posted collateral) equal to or greater than
either (1) five percent of net asset value as of the data reporting
date or (2) $1 billion. If there are more than five such
counterparties, the adviser only will report the five counterparties to
which the reporting fund owes the largest dollar amount, before taking
into account collateral that the reporting fund posted. If there are
fewer than five such counterparties, the adviser only will report the
counterparties that meet the threshold. For example, if only three
[[Page 18008]]
counterparties meet the threshold, the adviser would report only three
counterparties. This is a change from current Question 22, which
required advisers to identify five counterparties to which the
reporting fund has the greatest mark-to-market net counterparty credit
exposure, regardless of the actual size of the exposure. The adopted
threshold is designed to highlight two different, significant,
potentially systemic risks: five percent of net asset value represents
an amount of borrowing by a reporting fund that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Additionally, the $1 billion represents an amount that, in the case of
a very large fund, may not represent five percent of its net assets,
but may be large enough to create stress for certain of its
counterparties. One commenter recommended that the additional reporting
on counterparties should be limited to a fund's three largest
counterparties to reduce the burden on advisers but provide the
Commissions with sufficiently detailed information on counterparty
exposure.\237\ We continue to believe that requiring reporting of the
five largest counterparties is appropriate and do not believe that
limiting the required reporting to a fund's three largest
counterparties would provide sufficient counterparty risk data for the
purposes discussed above. Furthermore, we do not believe that reporting
on a fund's five largest counterparties would be significantly more
burdensome than reporting on the three largest counterparties because
an adviser could leverage its systems for reporting on the three
largest counterparties to provide reporting on the five largest
counterparties.
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\237\ MFA Comment Letter II.
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In a modification from the proposal, advisers will also be
required to provide the legal name and the LEI, if any, of the entity
that has the exposure. This information will allow us to determine the
relevant entity that bears such exposure (e.g., a trading vehicle),
which will improve our data quality and our ability to monitor systemic
risk.\238\
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\238\ See also supra section II.A.2 of this Release for further
discussion of trading vehicle reporting.
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In a modification from the proposal, the instructions to
Question 26 provide that an adviser is required to report the reporting
fund's counterparty exposure without netting any trading vehicle
exposures if the reporting fund does not guarantee and is not
contractually obligated to fulfill those counterparty obligations.\239\
The instructions will further provide that if the reporting fund
guarantees or is obligated to fulfill the trading vehicle's
counterparty obligations, then those obligations must be reported net
with the obligations of the reporting fund. These modified instructions
are intended to address the aggregated reporting of trading vehicles
and improve data quality by isolating only the reporting fund's
counterparty exposures. In a modification from the proposal, the
instructions also provide that any affiliated private fund should
exclude any exposures that have been reported in the reporting fund's
filing. This modified instruction is intended to reduce filing burdens
by eliminating duplicate reporting and to improve data quality.
---------------------------------------------------------------------------
\239\ See Question 26.
---------------------------------------------------------------------------
We are adopting, largely as proposed except as specified
below, amendments to add Question 28, which requires advisers to
provide information for counterparties to which the reporting fund has
net mark-to-market counterparty credit exposure which is equal to or
greater than either (1) five percent of the reporting fund's net asset
value as of the data reporting date or (2) $1 billion, after taking
into account collateral received or posted by the reporting fund. If
there are more than five such counterparties, the adviser would only
report the five to which the reporting fund has the greatest mark-to-
market exposure after taking into account collateral received. If there
are fewer than five such counterparties, the adviser only would report
the counterparties that meet the threshold. This is a change from
current Question 23, which required advisers to identify five
counterparties to which the reporting fund has the greatest mark-to-
market net counterparty credit exposure, regardless of the actual size
of the exposure. The threshold is designed to represent an amount of
lending from a reporting fund that, if a default occurred, could cause
a significant loss that could result in a forced unwind and forced
sales from the reporting fund's portfolio. Furthermore, we believe that
the five percent threshold level is large enough to constitute a shock
to a reporting fund's net asset value and is an often-used industry
metric. The $1 billion threshold represents an amount that, in the case
of a very large counterparty, may not represent five percent of its net
assets, but may be large enough to create stress for the reporting
fund. In a modification from the proposal, we are adding an instruction
to specify the entity that has the reported exposure.\240\ The amended
instructions provide that if the entity that has the exposure is not
the reporting fund, the filer must provide the legal name of the
relevant entity and LEI, if available. This instruction will allow us
to better understand the scope of the reporting fund's exposure. One
commenter recommended a threshold of 10 percent of a fund's net asset
value, rather than five percent, for all reporting related to
exposures, including counterparty exposure, on the basis that 10
percent of net asset value better represents a magnitude that could
have broader systemic effects and a five percent threshold would
produce data that is not meaningful for risk assessments.\241\ We
disagree and continue to believe that the impact on a fund's returns
resulting from a counterparty exposure of greater than five percent
could be significant enough to present systemic risk and contagion
risk. Currently, advisers report exposures that the reporting fund has
to counterparties as a percentage of the reporting fund's net asset
value, and advisers report exposures that counterparties have to the
reporting fund in U.S. dollars.\242\ We are adopting, as proposed, an
amendment that requires advisers to report both data sets in U.S.
dollars for consistency and comparability.\243\ We did not receive
specific comment on this amendment.
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\240\ See Question 28.
\241\ MFA Comment Letter II.
\242\ See current Questions 22 and 23.
\243\ See Questions 27 and 28.
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We are adopting, as proposed, an amendment to require
advisers to report the amount of collateral posted, to help inform the
Commissions and FSOC of the potential impact of a reporting fund or
counterparty default. We did not receive specific comment on this
amendment.
We are adopting, as proposed, an amendment to require
advisers to report the counterparty's LEI, if it has one, to help
identify counterparties and more efficiently link data from other data
sources that use this identifier. We did not receive specific comment
on this amendment.
Advisers will continue to indicate if a counterparty is
affiliated with a major financial institution, as Form PF currently
provides.\244\ If the financial institution is not listed on Form PF,
advisers would continue to have the option of selecting ``other'' and
naming the entity in the chart, as Form PF currently provides. However,
we are adopting, as proposed, an amendment to require advisers to
describe the financial
[[Page 18009]]
institution in Question 4. This amendment is designed to help the
Commissions and FSOC efficiently and accurately identify the entity,
without having to contact advisers individually. We did not receive
specific comment on this amendment.
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\244\ See current Questions 22 and 23.
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Together, the amendments are designed to allow the Commissions and
FSOC to identify and align sources of borrowing and lending to identify
significant counterparty exposures, so that different styles of
borrowing will not be obscured by methodology differences or
misidentified lending relationships, based on our experience with the
form.
Form PF continues to require advisers to report information about
individual counterparties that present the greatest exposure to and
from hedge funds.\245\ Under the amended Form PF, however, advisers to
qualifying hedge funds will not be required to complete Questions 27
and 28, if they complete certain similar questions in Form PF section
2, to avoid duplication.\246\
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\245\ See Questions 27 and 28.
\246\ See Questions 42 and 43 in Form PF section 2 and supra
footnote 225.
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Trading and clearing mechanisms. We are adopting, as proposed,
amendments to revise how advisers report information about trading and
clearing mechanisms.\247\ These types of data inform the Commissions
and FSOC of the extent of private fund activities that are conducted on
and away from regulated exchanges and clearing systems, which is
important to understanding systemic risk that could be transmitted
through counterparty exposures.\248\ We are adopting amendments to
require advisers to report (1) the value traded and (2) the value of
positions at the end of the reporting period, rather than requiring
advisers to report information as a percentage in terms of value and
trade volumes, as Form PF currently requires.\249\ This change is
designed to simplify reporting because advisers compute the value
before they convert it into a percentage; therefore, this change
eliminates an extra calculation for advisers. It also is designed to
provide the Commissions and FSOC with data that can be more efficiently
compared and aggregated among advisers and other data sources. With
data in dollar values, the Commissions and FSOC could more effectively
estimate the size, extent, and pace of each hedge fund's participation
in activity on or away from regulated exchanges and clearing systems in
relation to total values. Understanding the size of hedge fund
participation in activity on and away from regulated exchanges and
clearing systems is important to assessing systemic risk, because
activity that takes place on regulated exchanges and clearing systems
presents different risks than activity that takes places away from
regulated exchange and clearing systems. For example, activity that
takes place away from a regulated exchange or clearing system may be
less transparent, and may present more credit risk, than activity that
takes place on a regulated exchange and a clearing system that acts as
a central counterparty that guarantees trades. Commenters generally
supported amendments that simplify reporting requirements.\250\ This
amendment will reduce burdens on advisers by eliminating an additional
calculation and will improve data comparability.
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\247\ See current Questions 24 and 25, which we redesignated as
Questions 29 and 30.
\248\ See supra footnote 224 and accompanying text (discussing
the role of CCPs); 2011 Form PF Adopting Release, supra footnote 4,
at n.228, and accompanying text.
\249\ Question 29 specifies that ``value traded'' is the total
value in U.S. dollars of the reporting fund's transactions in the
instrument category and trading mode during the reporting period.
Question 29 also specifies that, for derivatives, value traded is
the weighted average of the notional amount of aggregate derivatives
transactions entered into by the reporting fund during the reporting
period, except for the following: (1) for options, advisers would
use the delta adjusted notional value, and (2) for interest rate
derivatives, advisers would use the ``10-year bond equivalent.''
This measurement is designed to track standard industry convention.
We also are adding the term ``10-year bond equivalent'' to the Form
PF Glossary of Terms, as discussed in section II.C.2 of this
Release. See infra footnote 293.
\250\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter.
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We also are adopting amendments to require advisers to report
information about trading and clearing mechanisms for transactions in
interest rate derivatives separately from other types of derivatives.
Form PF data show that interest rate derivatives represent the largest
gross investment exposure of qualifying hedge funds.\251\ Therefore,
this amendment is designed to help ensure that the Commissions and FSOC
can identify risks of such a significant volume of activity on and away
from regulated exchanges and clearing systems, without the data being
obscured by other types of derivatives. Advisers will be required to
report interest rate derivatives and other types of derivatives, by
indicating the estimated amounts that were (1) traded on a regulated
exchange or swap execution facility, (2) traded over-the-counter and
cleared by a CCP, and (3) traded over the counter or bilaterally
transacted (and not cleared by a CCP). These categories reflect our
understanding of how derivatives may be traded.
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\251\ See Private Funds Statistics, supra footnote 5.
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Advisers continue to be required to report clearing information
concerning repos, but we are adopting amendments to specify how to
report sponsored repos and to specify that advisers must report reverse
repos with repos.\252\ According to the Fixed Income Clearing
Corporation (``FICC''), FICC's sponsored repo service has expanded in
2017 and 2019, ultimately resulting in daily volume up to $300 million
per day as of 2021, with a peak in June 2023 of $750 billion.\253\
Sponsored repos incorporate a different structure than other repos, in
that FICC serves as a counterparty to any sponsored trade and the
sponsored member bears responsibility for meeting the obligations of
the sponsored member on all transactions that it submits for clearing.
Adding a particular reference to sponsored repos ensures that advisers
understand how sponsored repos cleared by a CCP should be reported,
i.e., as trades cleared at a CCP.\254\ Therefore, we are providing a
separate line item for sponsored repos. The amendment is designed to
improve data quality concerning repos and sponsored repos to allow the
Commissions and FSOC to conduct more accurate and targeted systemic
risk assessments and analysis concerning investor protection efforts.
We are also adopting amendments to specify that advisers must report
reverse repos with repos. Current Question 24 required advisers to
report ``repos,'' which some advisers could interpret to include
reverse repos, while others could interpret as
[[Page 18010]]
excluding reverse repos. Therefore, this amendment is designed to
improve data quality.\255\
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\252\ The amendments also explain that ``repo'' means
``securities in'' transactions and ``reverse repo'' means
``securities out'' transactions. Sponsored repos and sponsored
reverse repos apply to transactions in which the reporting fund has
been sponsored by a sponsoring member of the Fixed Income Clearing
Corporation. We have revised how Form PF explains tri-party repos to
help ensure they do not exclude sponsored tri-party repos.
Currently, Form PF explains that a tri-party repo applies where repo
collateral is held at a custodian (not including a CCP) that acts as
a third party agent to both the repo buyer and the repo seller. We
are amending Form PF to explain that tri-party repo applies where
the repo or reverse repo collateral is executed using collateral
management and settlement services of a third party that does not
act as a CCP. See Form PF Glossary of Terms (amended definitions of
``repo'' and ``reverse repo'') and Question 29 instructions
(discussing sponsored repos, sponsored reverse repos, and tri-party
repos).
\253\ See FICC Sponsored Repo in 2021, by DTCC Connection Staff
(Feb. 9, 2021), available at https://www.dtcc.com/dtcc-connection/articles/2021/february/09/ficc-sponsored-repo-in-2021. See also DTC:
DTCC's FICC Sponsored Service Reaches New Milestone Clearing Over
USD$750 Billion in Daily Sponsored Activity (June 14, 2023),
available at https://www.dtcc.com/news/2023/june/14/dtccs-ficc-sponsored-service-reaches-new-milestone.
\254\ Current Question 24.
\255\ See Question 29.
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We are also adopting amendments to revise current Question 25,
which requires advisers to report the percentage of the reporting
fund's net asset value related to transactions not described in current
Question 24, which we have redesignated as Question 29. Advisers will
be required to report both the value traded and the position value as
of the end of the reporting period for transactions not described in
Question 29. These amendments are designed to make Question 30 data
comparable with data from Question 29, so that together Questions 29
and 30 will provide the Commissions and FSOC with a complete data set
of the adviser's trading and clearing mechanisms during the reporting
period. We did not receive comments on these proposed amendments.
Removing Certain Questions Concerning Hedge Funds. We are removing,
as proposed, current Questions 19 and 21 from the form. Current
Question 19 required advisers to hedge funds to report whether the
hedge fund has a single primary investment strategy or multiple
strategies. Question 25, which requires hedge fund advisers to disclose
certain information about each investment strategy, will provide this
information, as discussed above in this section II.B.3 of the Release.
We are also removing current Question 21, which required hedge fund
advisers to approximate what percentage of the hedge fund's net asset
value was managed using high frequency trading strategies. We believe
the form's question on portfolio turnover, with the adopted revisions,
will better inform our and FSOC's understanding of the extent of
trading by large hedge fund advisers and will better show how larger
hedge funds interact with the markets and provide trading
liquidity.\256\
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\256\ See revisions to current Question 27 (redesignated as
Question 34), as discussed in section II.C of this Release.
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Commenters generally supported amendments that eliminate questions
and streamline reporting requirements.\257\ One commenter stated that,
by eliminating the collection of duplicative data, FSOC will be better
able to assess systemic risk and the Commissions will be better able to
protect investors.\258\ One commenter supported removing current
Question 21 regarding the percentage of a hedge fund's net asset value
managed using high frequency trading strategies.\259\ We believe that
removing certain questions concerning hedge funds will reduce the
burdens on these advisers and the adoption of new and revised questions
elsewhere on Form PF will improve our understanding of hedge fund
operations to allow for systemic risk analysis and investor protection
efforts.
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\257\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter.
\258\ Better Markets Comment Letter.
\259\ MFA Comment Letter II.
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C. Amendments Concerning Information About Hedge Funds Advised by Large
Private Fund Advisers
We are adopting, as proposed except as specifically indicated
below, several amendments to section 2, including amendments that
remove aggregate reporting currently required in existing section 2a,
which we have found to be less meaningful for analysis and more
burdensome for advisers to report, while preserving and enhancing
reporting on a per fund basis in existing section 2b, which we are
redesignating as section 2. We are also retaining certain questions
currently reported by advisers on an aggregate basis that are important
for data analysis and systemic risk assessment but are requiring
reporting on a per fund basis. Collectively, the changes to section 2
are designed to provide better insight into the operations and
strategies employed by qualifying hedge funds and their advisers and
improve data quality and comparability to enable FSOC to monitor
systemic risk better and enhance the Commissions' regulatory programs
and investor protection efforts. Furthermore, we are also removing
certain other reporting requirements that we have found to be less
useful based on our experience with Form PF since adoption, which will
help reduce reporting burdens for advisers while preserving the
Commissions' and FSOC's regulatory oversight.
1. Removal of Existing Section 2a
Removal of aggregate reporting. We are adopting, as proposed,
amendments to eliminate the current requirement for large hedge fund
advisers to report certain aggregated information about the hedge funds
they manage.\260\ Based on our experience using data obtained from Form
PF since its adoption, we have found that aggregated adviser level
information combines funds with different strategies and activities,
thus making analyses less meaningful. Aggregation can mask the
directional exposures of individual funds (e.g., positions held by one
reporting fund may appear to be offset by positions held in a different
fund). Additionally, there can be inconsistencies between data
currently reported in the aggregate in existing section 2a and on a per
fund basis in existing section 2b (e.g., we have observed in some
instances that the sum of fund exposures advisers report in current
Question 30 on a per fund basis exceeds the aggregate figure reported
in current Question 26). Aggregating information across funds may be
burdensome for some advisers because certain advisers may keep fund
records on different systems and ``rolling-up'' the data from different
sources to report on the form may be complex and time consuming. While
advisers may be required to aggregate certain types of investment
holdings across their funds for other regulatory purposes (e.g.,
certain U.S. registered equities for Form 13F reporting), advisers
generally do not aggregate all portfolio investment exposure
information across their funds other than for Form PF reporting
purposes, given that counterparties, markets, and investors tend to
interact with funds on an individual basis and not in the aggregate at
the adviser level.
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\260\ We are removing existing section 2a and redesignating
existing section 2b as section 2. In connection with the removal of
section 2a, we are revising the general instructions to make
corresponding changes (including amending Instruction 3 to reflect
the removal of section 2a), and are revising current Question 27
(reporting on the value of turnover in certain asset classes in
advisers' hedge funds' portfolios) and current Question 28
(reporting on the geographical breakdown of investments held by
advisers' hedge funds), moving each of these questions to new
section 2, and redesignating them as Question 34 and Question 35,
respectively. Furthermore, in connection with these changes, we are
revising the term ``sub-asset class'' to refer to Question 32,
rather than current Question 26, which we have removed.
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Commenters generally supported proposed amendments to eliminate
questions and streamline reporting requirements.\261\ One commenter
stated that the aggregate reporting of certain positions may make it
difficult to understand the operations of hedge funds, especially
during periods of market instability.\262\ Another commenter stated
that reporting on an aggregate basis does not result in obscuring
material data.\263\
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\261\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter.
\262\ See Better Markets Comment Letter.
\263\ See AIC Comment Letter I.
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We continue to believe that eliminating aggregate reporting
questions for large hedge fund advisers will lessen the burden on these
advisers and focus Form PF reporting on more valuable information for
systemic risk assessment purposes. Removing existing
[[Page 18011]]
section 2a will not result in a meaningful deterioration in the
information collected because the vast majority of gross hedge fund
assets on which advisers currently report in the aggregate in section
2a constitute the gross assets of qualifying hedge funds that will
continue to be reported elsewhere in amended section 2. For example,
large hedge fund advisers currently report total gross notional
exposure for qualifying hedge funds in section 2b that constituted
approximately 91 percent of the total gross notional exposure reported
on an aggregate basis by large hedge fund advisers currently in section
2a as of the same date.\264\ Furthermore, as discussed in section
II.B.3 above, we are also adopting amendments to enhance reporting for
all hedge funds in section 1 (particularly section 1c), which will
mitigate against potential data gaps that could result from the removal
of section 2a, given that advisers currently report information on all
their hedge funds in section 2a but only report on qualifying hedge
funds in section 2b. Additionally, certain information currently
collected in section 2a is duplicative of information that will
continue to be collected on a per fund basis in the consolidated
section 2.\265\ By continuing to require reporting on a per fund basis,
information reported elsewhere in the revised section 2 will allow the
Commissions and FSOC to compile aggregate figures, as appropriate.\266\
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\264\ As noted above, based on experience with Form PF since
adoption, we have found information currently gathered in section 2a
for the remaining 9% of funds to not be very useful given that it is
aggregated data across different funds.
\265\ For example, current Question 26 of section 2a requires
large hedge fund advisers to report aggregated information on
exposure to different types of assets, which is effectively the same
exposure information that will be reported on a per fund basis for
each qualifying hedge fund in Question 32 of section 2.
\266\ Additionally, we are moving current Question 31 (base
currency) and current Question 49 (withdrawals and redemptions)
required only for qualifying hedge funds to section 1b, which is
required to be completed by all advisers, and redesignating them as
Question 17 and Question 10(d), respectively. We are also adopting
amendments to enhance section 1c to require more detailed
information about hedge funds' borrowing and financing arrangements
(including posted collateral) and also revising current Question 26
(redesignated Question 32) and current Question 27 (redesignated
Question 34) to require end of period reporting of the value of
certain instrument categories (including listed equities, interest
rate derivatives and other derivatives, and repo/reverse repos).
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2. Amendments to Section 2
We are redesignating existing section 2b as section 2 and adopting,
as proposed except as specified below, amendments to section 2 to do
the following:
(1) Enhance, expand, and simplify investment exposure reporting;
(2) Revise open and large position reporting;
(3) Revise borrowing and counterparty exposure reporting;
(4) Revise market factor effects reporting; and
(5) Make certain other changes designed to streamline and enhance
the value of data collected on qualifying hedge funds by: (a) adding
reporting on currency exposure, turnover, country, and industry
exposure; (b) adding new reporting on CCPs; (c) streamlining risk
metric reporting and collecting new information on investment
performance by strategy; and (d) enhancing portfolio and financing
liquidity reporting.
a. Investment Exposure Reporting
We are adopting, largely as proposed except as specified below,
amendments to: (1) replace the table format of current Question 30,
which we are redesignating as Question 32, with narrative instructions
and a ``drop-down'' menu while also revising the instructions to
specify how to report certain positions, (2) require reporting based on
``instrument type'' within sub-asset classes to identify whether the
fund's investment exposure is achieved through cash or physical
investment exposure, through derivatives or other synthetic positions,
or indirectly (e.g., through a pooled investment such as an ETF, an
investment company, or a private fund), (3) require the calculation of
``adjusted exposure'' for each sub-asset class (i.e., require (in
addition to value as currently reported) the calculation of ``adjusted
exposure'' for each sub-asset class that allows netting across
instrument types representing the same reference asset within each sub-
asset class, and, for fixed income, within a prescribed set of maturity
buckets), (4) require uniform interest rate risk measure reporting for
sub-asset classes that have interest rate risk (while eliminating the
current option to report one of duration, weighted average tenor (WAT),
or 10-year equivalents), and (5) amend the list of reportable sub-asset
classes consistent with these other changes and collect enhanced
information for some asset types.\267\
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\267\ In connection with the amendments, we are also removing
current Question 44 because it is duplicative of the new reporting
requirements in redesignated Question 32.
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Narrative reporting instructions and additional information on how
to report.
We are adopting, as proposed, amendments to the redesignated
Question 32 which will require advisers to use a series of ``drop-
down'' menu selections for each sub-asset class and the applicable
information required for each sub-asset class. These changes and new
format will simplify and specify how to report the required information
in redesignated Question 32. These changes will reduce filer burdens
compared to the current format because advisers will only be required
to provide information for sub-asset classes in which their qualifying
hedge funds hold relevant positions. Furthermore, advisers will be
required to report the absolute value of short positions, include
positions held in side-pockets as positions of the reporting fund, and
include any closed out and OTC forward positions that have not yet
expired or matured. We did not receive comment on these amendments.
We are adopting, as proposed, amendments to the instructions to
redesignated Question 32 to specify how advisers should classify
certain positions. This change is designed to instruct advisers how to
classify positions that could be accurately classified in multiple sub-
asset classes and is consistent with SEC staff Form PF Frequently Asked
Questions.\268\ Specifically, the instructions require advisers to
choose the sub-asset class that describes the position with the highest
degree of precision, which will result in more accurate classification
of positions and therefore better data, rather than simply noting that
any particular position should only be included in a single sub-asset
class. We did not receive comment on this instruction.
---------------------------------------------------------------------------
\268\ See Form PF Frequently Asked Questions, supra footnote
162, Question 26.2.
---------------------------------------------------------------------------
We are also adopting, as proposed, a new instruction that directs
advisers to report cash borrowed via reverse repo as the short value of
repos and refers advisers to the revised definitions of ``repo'' and
``reverse repo'' in the Glossary of Terms, consistent with SEC staff
Form PF Frequently Asked Questions.\269\ This change will help reduce
confusion on how to report repo information and help reduce filer
errors. We did not receive comment on this instruction or the revised
definitions. Finally, the amended instructions also include a revised
list of sub-asset classes.\270\
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\269\ See Form PF Frequently Asked Questions, supra footnote
162, Question 26.5.
\270\ The amendments to the sub-asset class list, as well as
other changes to instructions in specific parts of Question 32, are
discussed below.
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We are also adopting, as proposed, amendments to require advisers
to
[[Page 18012]]
provide additional explanatory information in situations where a
qualifying hedge fund reports long or short dollar value exposure to
``catch-all'' sub-asset class categories \271\ equal to or exceeding
either (1) five percent of the reporting fund's net asset value or (2)
$1 billion.\272\ We have observed that some funds report significant
amounts of assets in these ``catch-all'' categories. This new
explanatory requirement will inform our understanding of significant
exposure reported in these ``other'' sub-asset classes better, which is
important for assessing systemic risk. One commenter recommended a
threshold of 10 percent of a fund's net asset value, rather than five
percent, for all reporting related to exposures, including to ``catch-
all'' sub-asset classes.\273\ We chose the five percent threshold level
because it represents a level of exposure that is material to a fund's
investment performance. We also continue to believe that the impact on
a fund's returns resulting from an exposure of greater than five
percent of its net asset value could be significant enough to present
broader systemic risk and contagion risk. The $1 billion threshold
represents a level for large funds (e.g., those with net asset values
in excess of $20 billion) that is large enough so as to have potential
systemic risk implications even if the position is less than five
percent of the fund's net asset value.
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\271\ These sub-asset classes include loans (excluding leveraged
loans and repo), other structured products, other derivatives, other
commodities, digital assets, and investments in other sub-asset
classes.
\272\ Some filers report significant exposure to these ``other''
categories. For example, the public Private Fund Statistics Q1 2023
(Table 46) shows about $153 billion in aggregate QHF GNE reported as
``other loans,'' more than other asset categories of interest, such
as ABS/structured products (ex. MBS but excluding CLO/CDOs) (about
$56 billion) and convertible bonds ($122 billion) as of Q1 2023. See
Private Fund Statistics Q1 2023, supra footnote 5.
\273\ See MFA Comment Letter II.
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Separate reporting for positions held physically, synthetically or
through derivatives and indirect exposure. We are adopting, as proposed
except as specifically indicated below, amendments to require advisers
to report the dollar value of a qualifying hedge fund's long positions
and the dollar value of the fund's short positions in certain sub-asset
classes by ``instrument type'' (i.e., cash/physical instruments,
futures, forwards, swaps, listed options, unlisted options, and other
derivative products, ETFs, exchange traded products, U.S. registered
investment companies (excluding ETFs and money market funds), non-U.S.
registered investment companies, internal private fund or external
private fund, commodity pool, or other company, fund, or entity).\274\
For each month of the reporting period, advisers will be required to
report long and short positions in these sub-asset classes held
physically, synthetically or through derivatives, and indirectly
through certain entities, separately in order to provide the
Commissions and FSOC sufficient information to understand, monitor, and
assess qualifying hedge funds' exposures to certain types of assets and
investment products. The current instructions (and the associated
definitions) require advisers to combine exposures held physically,
synthetically, or through derivatives when reporting certain fixed
income and other sub-asset classes.\275\ Even when certain sub-asset
classes currently separate physical and derivative exposures (e.g.,
listed equities), all derivative instrument types are currently
combined regardless of each derivative instrument type's risk
characteristics. Furthermore, the form's current instructions for
reporting investment exposure obtained through funds or other entities
are different. For example, the current instructions require advisers
to categorize ETFs based on the assets the ETF holds, while other
registered investment companies are reported as a separate sub-asset
class and may obscure the extent of a reporting fund's exposure to
particular sub-asset classes.
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\274\ See Form PF Glossary of Terms (definition of ``instrument
type''). See also Question 32(a). Sub-asset classes that require
reporting by instrument type (see Question 32(a)(1)) generally
include: listed equity issued by financial institutions; American
Depositary Receipts; other single name listed equity; indices on
listed equity; other listed equity; unlisted equity issued by
financial institutions; other unlisted equity; investment grade
corporate bonds issued by financial institutions (other than
convertible bonds); investment grade corporate bonds not issued by
financial institutions (other than convertible bonds); non-
investment grade corporate bonds issued by financial institutions
(other than convertible bonds); non-investment grade corporate bonds
not issued by financial institutions (other than convertible bonds);
investment grade convertible bonds issued by financial institutions;
investment grade convertible bonds not issued by financial
institutions; non-investment grade convertible bonds issued by
financial institutions; non-investment grade convertible bonds not
issued by financial institutions; U.S. Treasury bills; U.S. Treasury
notes and bonds; agency securities; GSE bonds; sovereign bonds
issued by G10 countries other than the U.S; other sovereign bonds
(including supranational bonds); U.S. state and local bonds; MBS;
ABCP; CDO (senior or higher); CDO (mezzanine); CDO (junior equity);
CLO (senior or higher); CLO (mezzanine); CLO (junior equity); other
ABS; other structured products; U.S. dollar interest rate
derivatives; non-U.S. currency interest rate derivatives; foreign
exchange derivatives; correlation derivatives; inflation
derivatives; volatility derivatives; variance derivatives; other
derivatives; agricultural commodities; crude oil commodities;
natural gas commodities; power and other energy commodities; gold
commodities; other (non-gold) precious metal commodities; base metal
commodities; other commodities; real estate; digital assets;
investments in other sub-asset classes. These sub-asset classes are
reported at the sub-asset class level and not by instrument type
(see Question 32(a)(2)): leveraged loans; loans (excluding leveraged
loans and repo); overnight repo; term repo (other than overnight);
open repo; sovereign single name CDS; financial institution single
name CDS; other single name CDS; index CDS; exotic CDS; U.S.
currency holdings; non-U.S. currency holdings; certificates of
deposit; other deposits; money market funds; other cash and cash
equivalents (excluding bank deposits, certificates of deposit, and
money market funds). We are also amending the Glossary of Terms to
(i) amend the definitions of agency securities, convertible bonds,
corporate bonds, GSE bonds, leveraged loans, sovereign bonds, and
U.S. Treasury securities, in each case to include positions held
indirectly through another entity, (ii) remove the definitions of
crude oil, derivative exposures to unlisted equities, gold, natural
gas, and power, and (iii) amend the definitions of commodities and
other commodities. See Form PF Glossary of Terms. Additionally, for
foreign exchange derivatives, advisers will be required to report
foreign exchange swaps and currency swaps separately, and in
determining dollar value, will not net long and short positions
within sub-asset classes or instrument types (with the exception of
spot foreign exchange longs and shorts).
\275\ Advisers are required to report the dollar value of long
and short positions for the sub-asset class (and not instrument
type) for the following sub-asset classes: leveraged loans, loans
(excluding leveraged loans and repo); overnight repo, term repo
(other than overnight), open repo, sovereign single name CDS,
financial institution single name CDS, other single name CDS, index
CDS, exotic CDS, U.S. currency holdings, non-U.S. currency holdings,
certificates of deposit, other deposits, money market funds, and
other cash and cash equivalents (excluding bank deposits,
certificates of deposit, and money market funds). See Question
32(a).
---------------------------------------------------------------------------
As proposed, in determining the reporting fund's exposure to sub-
asset classes for positions held indirectly through entities, advisers
are permitted to allocate the position among sub-asset classes and
instrument types using reasonable estimates consistent with their
internal methodologies and conventions of service providers. In a
modification from the proposal, advisers are also permitted to report
an entirely indirectly held entity position in one sub-asset class and
instrument type that best represents the sub-asset class exposure of
the indirectly held entity, unless the adviser would allocate the
exposure of the indirectly held entity more granularly under its own
internal methodologies and conventions of its service providers.\276\
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\276\ The proposed instructions would limit the ``best
represents'' standard to reporting of positions that represent both
less than (1) 5% of the reporting fund's net asset value and (2) $1
billion. The adopted instruction removes the proposed position size
condition and applies the ``best represents'' standard to all
indirectly held exposures.
---------------------------------------------------------------------------
Some commenters stated that obtaining information about a fund's
indirect exposures through investments in other funds could be
difficult or
[[Page 18013]]
burdensome.\277\ One commenter recommended allowing an adviser to
select the sub-asset class that ``best represents'' the position.\278\
We believe that adopting a ``best represents'' standard, regardless of
the position size, balances the importance of obtaining more accurate
and granular data with a reporting standard that is less burdensome for
advisers than the proposed standard.
---------------------------------------------------------------------------
\277\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter.
\278\ MFA Comment Letter II.
---------------------------------------------------------------------------
The increased granularity in reporting will allow for a better
understanding of the activities of qualifying hedge funds and increase
the utility of data collected for purposes of understanding the role
qualifying hedge funds play in certain market events. For example, when
monitoring funds' activities during recent market events like the March
2020 COVID-19 turmoil, the existing aggregation of U.S. treasury
securities with related derivatives did not reflect the role hedge
funds played in the U.S treasury market. Some commenters supported the
proposed amendments to require hedge fund advisers to report their long
and short holdings on a disaggregated basis.\279\ One commenter stated
that requiring private fund advisers to report both long and short
positions will allow FSOC to have a complete picture of the risk
exposure across private funds.\280\ Another commenter supported
disaggregated reporting of physical and synthetically held positions,
stating that allowing advisers to aggregate their positions between
physically held and synthetically held positions can make it difficult
to understand the impact of hedge fund activity especially during
periods of market instability.\281\ We agree that the existing
reporting, which allows advisers to aggregate their physical and
synthetically held positions, as well as long and short exposures,
obscures our understanding of the fund's overall exposure because of
the risk differences between such holdings, which reduces our ability
to effectively assess systemic risk. One commenter stated that more
granular disclosure of long and short holdings can help ensure that
FSOC has a complete understanding of systemic risk across private
funds.\282\ Another commenter opposed all proposed requirements to
report additional monthly data, including the proposed requirement to
provide additional monthly exposure reporting, on the basis that such
monthly data would be costly to produce and would not be more
beneficial than the existing quarterly basis reporting
requirements.\283\ Obtaining more granular data on a hedge fund's long
and short positions is needed in order to provide the Commissions and
FSOC sufficient information to understand, monitor, and assess
qualifying hedge funds' exposures and assess systemic risk. Further,
receiving this data on a monthly basis, rather than only as of quarter
end, will give us better insight into trends that may indicate systemic
risk. One commenter recommended that the Commissions define ``synthetic
long position'' and ``synthetic short position'' and include a
threshold for when a position is considered deep-in-the-money.\284\ As
discussed more fully in section II.B.2 above, we are adopting
definitions for ``synthetic long position'' and ``synthetic short
position'' in the Glossary of Terms and specifying as an example when a
position is considered deep-in-the-money.
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\279\ See AFREF Comment Letter I; Better Markets Comment Letter.
\280\ AFREF Comment Letter I.
\281\ See Better Markets Comment Letter.
\282\ AFREF Comment Letter I.
\283\ SIFMA Comment Letter.
\284\ MFA Comment Letter II.
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Adjusted exposure reporting. While we will continue to require
advisers to report ``gross'' long and short exposure, i.e., the dollar
value of a qualifying hedge fund's long positions and dollar value of
the fund's short positions for various sub-asset classes (and by
instrument type for certain sub-asset classes as explained above), we
are adopting, as proposed, amendments to require advisers to also
report the ``adjusted'' exposure of long and short positions for each
sub-asset class in which a fund has a reportable position.\285\ Based
on our experience, we have found that gross exposure reporting, while
useful because the information indicates fund size on a comparable
basis among funds, may inflate some qualifying hedge funds' reported
long and short exposures in a way that does not properly represent the
economic exposure and market risk of a reporting fund's portfolio. For
example, when only looking at gross exposure, certain relative value
strategies that are designed to match long and short exposures in the
same or similar (highly correlated) assets may reflect very high
leverage, but not have the same level of risk as portfolios with less
leverage but that are more exposed directionally. Furthermore, some
advisers, for purposes of managing risk, do not view their portfolio on
a ``gross'' basis because they do not believe it provides a meaningful
measure of risk. ``Gross'' exposure reporting by itself presents an
incomplete picture that represents a significant data gap for purposes
of systemic risk analysis.
---------------------------------------------------------------------------
\285\ Question 32(b). See also Form PF Glossary of Terms
(definition of ``adjusted exposure'').
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Advisers will be required to determine adjusted exposure for each
``sub-asset'' using a specified methodology that is designed to
facilitate comparisons of the reported data, as proposed. Specifically,
advisers will be required to calculate and report ``adjusted exposure''
of long and short positions for each sub-asset class by netting (1)
positions that have the same underlying ``reference asset'' across
``instrument type'' (i.e., cash/physical instruments, futures,
forwards, swaps, listed options, unlisted options, other derivative
products, and positions held indirectly through another entity such as
ETFs, other exchange traded products,\286\ U.S. registered investment
companies (excluding ETFs and money market funds), investments in non-
U.S. registered investment companies,\287\ other private funds,
commodity pools, or other companies, funds or entities)and (2) fixed
income positions that fall within certain predefined maturity buckets
(i.e., 0 to 1 year, 1 to 2 year, 2 to 5 year, 5 to 10 year, 10 to 15
year, 15 to 20 year, and 20+ year).\288\
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\286\ In connection with this amendment, as proposed, we are
also defining ``exchange traded product'' as ``an investment traded
on a stock exchange that invests in underlying securities or assets,
such as an ETF or exchange traded note.'' See Form PF Glossary of
Terms. Given that the exchange traded product market has grown
significantly since Form PF was first adopted, we believe that
activity in exchange traded products may present different systemic
risks than traditional listed equities and other instruments that
might be used to obtain exposure to underlying assets owned within
an ETF. Furthermore, we believe added insight into whether the
underlying sub-asset class exposure is held through an ETF will
enhance FSOC's analysis of systemic risk associated with this asset
class.
\287\ See Form PF Glossary of Terms (definition of ``investments
in non-U.S. registered investment companies''). Furthermore, we are
also removing the term ``U.S. registered investment companies'' from
the Form PF Glossary of Terms.
\288\ See Form PF Glossary of Terms. We are adopting, as
proposed, a definition of ``reference asset'' as a security or other
investment asset to which a fund is exposed through direct ownership
(i.e., a physical or cash position), synthetically (i.e. the subject
of a derivative or similar instrument held by the fund), or indirect
ownership (e.g., through ETFs, other exchange traded products, U.S.
registered investment companies, non-U.S. registered investment
companies, internal private funds, external private funds, commodity
pools, or other companies, funds, or entities). An adviser may
identify a reporting fund's reference assets according to its
internal methodologies and the conventions of service providers,
provided that these methodologies and conventions are consistently
applied, do not conflict with any instructions or guidance relating
to Form PF and reported information is consistent with information
it reports internally and to investors and counterparties. In a
change from the proposal, we are modifying the defined maturity
buckets to remove the 10 -year and 15-year buckets to reduce
potential confusion.
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[[Page 18014]]
For purposes of determining ``adjusted exposure,'' a fund may use
cross counterparty netting consistent with information reported by the
fund internally and to current and prospective investors, because we
believe it better reflects the fund's economic exposure. For example, a
fund with market-neutral trades may lose substantial amounts of capital
in a period of market stress if prices diverge, regardless of the
identities of the counterparties. Additionally, counterparty
identification may be ambiguous for some positions, such as when a fund
simply has a long position in an equity security traded over an
exchange or purchased from a broker without the use of any financing.
Finally, if a fund does not net across all instrument types in
monitoring the economic exposure of the fund's investment positions for
purposes of internal reporting and reporting to investors, we will (in
addition to adjusted exposure determined as specified above) also
require the adviser to report adjusted exposure based on an adviser's
internal methodology and describe in Question 4 how the adviser's
internal methodology differs from the standard approach in Question 32.
This additional information will provide better insight into how these
advisers assess the economic exposure of their reporting fund's
portfolio, while still ensuring an adviser provides information that
supports our and FSOC's ability to aggregate and compare the data
across funds.
One commenter stated that the prescribed methodology for
calculating netted exposure would be burdensome and that the
Commissions underestimated the costs associated with this
calculation.\289\ One commenter stated that requiring monthly sub-asset
class information, including adjusted exposure data, would not
facilitate systemic risk monitoring because existing quarterly
reporting provides the Commissions with similar information.\290\
Receiving exposure data on a monthly basis will allow us to better
understand interim changes in exposures that may be relevant to
systemic risk assessment that are not visible from the existing
quarterly data.\291\ As discussed more fully in section IV.C below,
identifying sub-asset classes will not be significantly burdensome
because advisers will generally only need to make this determination
once, with ongoing monitoring (and any reclassifications) relatively
limited.\292\ Further, because a fund may use cross counterparty
netting consistent with information reported by the fund internally for
purposes of determining adjusted exposure, the adjusted exposure
reporting should not be significantly burdensome, particularly for
funds using common aggregator protocols, because a fund can leverage
its existing internal reporting methodology.
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\289\ MFA Comment Letter II.
\290\ SIFMA Comment Letter.
\291\ See infra section IV.C of this Release for discussion of
costs and benefits.
\292\ Id. See also infra section V of this Release for
discussion of our increased cost estimates.
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Require advisers to report a uniform interest rate risk measure. We
are adopting, as proposed, amendments to require advisers to report the
10-year zero coupon bond equivalent \293\ for all sub-asset classes
with interest rate risk (by instrument type if applicable) \294\ rather
than providing advisers with a choice to report duration, weighted
average tenor (``WAT''), or an unspecified 10-year bond
equivalent.\295\ Advisers will be required to report the 10-year zero
coupon bond equivalent of the dollar value of long and short positions
in each sub-asset class (and by instrument type, if applicable) as well
as for the adjusted exposure of long and short exposures for each sub-
asset class for each monthly period.
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\293\ As discussed further below in section II.D of this
Release, we are adopting, with a modification from the proposal, a
new glossary definition of 10-year bond equivalent to explain that
the term 10-year bond equivalent means ``the equivalent position in
a 10-year zero coupon bond, expressed in U.S. dollars.'' See Form PF
Glossary of Terms (definition of ``10-year bond equivalent''). We
are also making a conforming change to the definition of interest
rate derivative to use this new definition.
\294\ We are adopting amendments to require advisers to report
the 10-year zero coupon bond equivalent for the following sub-asset
classes: investment grade corporate bonds issued by financial
institutions (other than convertible bonds); investment grade
corporate bonds not issued by financial institutions (other than
convertible bonds); non-investment grade corporate bonds issued by
financial institutions (other than convertible bonds); non-
investment grade corporate bonds not issued by financial
institutions (other than convertible bonds); investment grade
convertible bonds issued by financial institutions; investment grade
convertible bonds not issued by financial institutions; non-
investment grade convertible bonds issued by financial institutions;
non-investment grade convertible bonds not issued by financial
institutions; U.S. Treasury bills; U.S. Treasury notes and bonds;
U.S. agency securities; GSE bonds; sovereign bonds issued by G10
countries other than the U.S; other sovereign bonds (including
supranational bonds); U.S. state and local bonds; leveraged loans;
loans (excluding leveraged loans and repo); overnight repo; term
repo (other than overnight); open repo; MBS; ABCP; Senior or higher
CDO; Mezzanine CDO; Junior equity CDO; Senior or higher CLO;
Mezzanine CLO; Junior equity CLO; other ABS; other structured
products ; U.S. dollar interest rate derivatives; non-U.S. currency
interest rate derivatives; and certificates of deposit. See Question
32(c).
\295\ See Question 32(c).
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The amendment will improve reporting and allow us to obtain better
data, because the current approach, while providing optionality, makes
it difficult to compare and aggregate data reported by different funds
effectively. Furthermore, the 10-year zero coupon bond equivalent is
appropriate because it is commonly used by hedge fund advisers and will
be a better and more consistent measure of interest rate risk than
duration, WAT, or the current unspecified 10-year equivalent. WAT may
be an incomplete measure because it does not always reflect the
presence of options embedded in bonds or differing sensitivity to
interest rate changes in circumstances where base currencies are
subject to a higher or lower risk-free rate, and it also may not be
meaningful for interest rate derivative products. Duration can tend
toward infinity for certain derivatives and so can provide little
meaning or utility. In addition, methodologies for calculations of
duration and a 10-year equivalent (if not standardized to a zero coupon
bond) may vary, which can result in variability among calculations, and
requiring use of the 10-year zero coupon bond equivalent will provide
comparability across the reported data. Therefore, eliminating
additional reporting options and requiring the 10-year zero coupon bond
equivalent will provide a common denominator across funds that advisers
will be able to easily calculate and that will provide a consistent and
comparable metric. In this regard, the requirement should not create an
additional burden for advisers that currently report based on a 10-year
equivalent for these types of assets, which we estimate represents
roughly 42 percent of the total number of advisers responding to
Question 32.\296\
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\296\ Based on analysis of Form PF data 2022Q4, 2021Q4, and
2020Q4.
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One commenter stated that because the definition of ``10-year bond
equivalent'' specifies the expression in the fund's base currency, for
transactions not in the fund's base currency, there would need to be a
foreign exchange conversion into the base currency and an additional
conversion into U.S. dollars for certain questions, which would be
burdensome.\297\ As discussed further below in section II.D below, we
are modifying the ``10-year bond equivalent'' definition to reference
U.S. dollars, rather than the reporting fund's base currency.
Therefore, an adviser in this scenario would not be required to
[[Page 18015]]
perform any additional exchange conversions.
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\297\ See AIMA/ACC Comment Letter.
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Amended list of sub-asset classes.
We are adopting, as proposed, amendments to the list of reportable
sub-asset classes in Question 32 in two respects. First, some sub-asset
classes are consolidated and tailored to reflect the adopted reporting
of the dollar value of long and short positions by instrument type. For
example, sub-asset classes for listed and unlisted equity derivatives
are combined with sub-asset classes for listed and unlisted equities,
and similarly, sub-asset classes for physical commodities and commodity
derivatives are combined.\298\ Likewise, some current sub-asset classes
will now be reflected as instrument types, such as internal private
funds, external private funds, and registered investment companies (now
separated into ETFs, U.S. registered investment companies, and non-U.S.
registered investment companies). Second, we are adding new sub-asset
classes to provide additional information to help the Commissions and
FSOC better understand qualifying hedge funds' investment exposures to
certain asset types and reduce reporting in certain ``catch-all'' sub-
asset classes, such as ``other listed equity.''
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\298\ In connection with these amendments, we are amending the
definitions of ``listed equity'' and ``unlisted equity'' to reflect
that filers should include synthetic or derivative exposure as well
as positions held indirectly through another entity (e.g., through
an ETF, exchange traded product, U.S.-registered investment
companies, non-U.S. registered investment companies, internal
private fund or external private fund, commodity pool, or other
company, fund, or entity). Additionally, we are amending the
definition of ``listed equity derivatives'' to include derivatives
relating to ADRs, and other derivatives relating to indices on
listed equities. See Form PF Glossary of Terms (definition of
``listed equity,'' ``unlisted equity,'' and ``listed equity
derivatives'').
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We are also adopting amendments to: (1) expand equity exposure
reporting to add sub-asset classes for (a) listed equity securities
(including new sub-asset classes for other single name listed equities
and indices on listed equities), and (b) American depository receipts
(``ADRs''); (2) add additional sub-asset classes for reporting ``repo''
and ``reverse repo'' positions, based on term; (3) add additional sub-
asset classes for asset backed securities (``ABS'') and other
structured products; (4) add new sub-asset classes and revise existing
sub-asset classes that capture certain derivatives, including certain
credit derivatives and volatility and variance derivatives; (5) specify
sub-asset classes pertaining to investments in cash and cash
equivalents and commodities; and (6) add a new sub-asset class for
digital assets.
One commenter opposed requiring more detailed disclosure of a
fund's holdings and recommended that the Commissions leverage existing
data sources, such as existing Form PF, Form 13F and 13H, and CFTC Form
CPO-PQR reporting, to obtain more granular information about a fund's
holdings.\299\ We disagree that existing data sources can provide the
amended fund-specific sub-asset class information. As discussed above,
we have identified information gaps in the data reported on the
existing Form PF based on our experience. From these data sets, we are
unable to determine the full extent of a fund's exposure because the
different types of exposures are combined, despite different exposures
having differing risk characteristics.\300\ This commenter also stated
that the requirement to report more granular sub-asset class data would
be overly burdensome and costly to report and that we should use other
data sources for this information.\301\ These amendments to the sub-
asset class list more accurately reflect a fund's holding than other
data sources and current Form PF reporting, which does not provide this
level of specificity. Identifying sub-asset classes will not be
significantly burdensome to report because advisers will generally only
have to make this determination once and their ongoing monitoring (and
any reclassifications) should be relatively limited. This commenter
also raised confidentiality concerns and stated that the detailed sub-
asset class data could enable a person with access to the data to
recreate a private fund's investment strategy.\302\ The asset class
level data reported on Form PF, which is filed on a non-public basis,
is not sufficiently detailed or reported on a basis frequent enough to
present significant risk of misuse or enable reverse engineering of a
particular fund's investment strategy.
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\299\ See SIFMA Comment Letter.
\300\ For example, Forms 13F and 13H do not collect fund-
specific information, and only a small sub-set of Form PF filers
(commodity pool operators and commodity trading advisors) are
required to file Form CPO-PQR. As discussed above, we have
identified information gaps in the data reported on the existing
Form PF based on our experience.
\301\ See SIFMA Comment Letter. See also infra at section IV.C
of this Release for discussion of costs and benefits.
\302\ See SIFMA Comment Letter.
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Listed equity securities.
We are adding, as proposed, new sub-asset classes for certain
categories of listed equity securities, specifically, for other single
name listed equities and indices on listed equities. This change will
provide more granularity to reporting on listed equities \303\ given
the potential impact of these new sub-asset classes from an overall
systemic risk perspective, as the form currently only requires advisers
to single out and report listed equities issued by financial
institutions with all other listed equities reported in a catch-all
category ``other listed equity.'' Identifying single equities
separately from equity index exposure can help distinguish broadly
diversified portfolios from those that could be more concentrated and
also help to identify what strategies are being pursued by multi-
strategy funds. Additionally, single equity positions may be more
vulnerable to short squeezes than index positions, so this level of
granularity will help to better identify entities that may be affected
during a short squeeze event.\304\
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\303\ See current Question 26 and Question 30, which required
reporting on listed equities but did not separate out single names
from indices. Investments in single name equities involve materially
more idiosyncratic risks, such as the potential for more extreme
price movements that are not correlated to other market movements,
than investments in indices, and therefore we have adopted
amendments to require separate reporting.
\304\ A short squeeze is a type of manipulation in which prices
are manipulated upward to force short sellers out of their
positions, as short sellers are required by brokers to maintain
margin above a certain level, and as prices rise short sellers must
add cash to their margin accounts or close out their short
positions. Single stock shorts often account for a higher portion of
the available float and/or often have a larger period of days to
cover (i.e., the number of trading days to cover a short) than do
shorts on ETFs. As a result, a potential need to cover a short could
generally have a more pronounced effect on single stocks.
---------------------------------------------------------------------------
One commenter stated that the proposed instructions do not specify
whether the reporting fund's listed equity security holdings should
include both the reporting fund's holding in shares of an ETF as well
as the listed equity holdings of the same ETF.\305\ Another commenter
stated that the proposed question is unclear how advisers should report
indirect holdings, such as positions held through entities such as
ETFs, and recommended permitting advisers to allocate its exposures
using any reasonable methodology.\306\ In consideration of this
comment, we are adopting instructions to Question 32 to provide that in
determining a reporting fund's exposure to sub-asset classes for
positions held indirectly through entities, such as through an ETF, the
adviser may allocate the position among sub-asset classes and
instrument types using reasonable estimates consistent with the
adviser's internal methodologies and conventions of service providers,
and the adviser may
[[Page 18016]]
report an entirely indirectly held entity position in one sub-asset
class and instrument type that best represents the sub-asset class
exposure of the indirectly held entity unless the adviser would
allocate the exposure of the indirectly held entity more granularly
under the adviser's own internal methodologies and conventions of its
service providers.\307\
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\305\ AIMA/ACC Comment Letter.
\306\ MFA Comment Letter II.
\307\ See Question 32.
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ADRs.
We are adding, as proposed, a new sub-asset class for ADRs in line
with how ADRs are reported on the CFTC's Form CPO-PQR.\308\ While ADRs
are purchased in U.S. dollars, these instruments have currency risk
because the underlying security is priced in its home country currency,
and the ADR's U.S. dollar price fluctuates one-for-one with each
movement in the home currency. Accordingly, advisers will be required
to report ADRs separately from other listed equity instruments. This
requirement also will help increase the utility of the information
reported under the ``other listed equity'' sub-asset class on Form PF,
which requires reporting of multiple other sub-asset classes. We did
not receive comment on the proposed addition of an ADR sub-asset class.
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\308\ As noted above, where applicable, we are adopting
amendments to align Form PF with Form CPO-PQR to (1) enable filers
that currently are required to file both Form PF and Form CPO-PQR
independently to compile and use similar data in completing both
forms, and (2) enable users of the reported data (e.g., FSOC and
other regulatory agencies) to (i) link data for funds that file both
forms, and (ii) aggregate and compare data across data sets more
easily.
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Repurchase Agreements (``Repos'').
We are adding, as proposed, additional sub-asset classes to the
``repos'' section of Question 32 to capture a breakdown of repos by
term (e.g., overnight, other than overnight, and open term). Hedge
funds often borrow cash overnight and pledge securities such as
government bonds as collateral. Collecting more information on the
different types of repos held by qualifying hedge funds will allow the
Commissions and FSOC to understand better the role of these funds in
potentially amplifying funding stresses and the risks associated with
short-term funding for certain trading strategies, particularly in
light of the issues the repo market experienced during the fall of 2019
and in March 2020.\309\ We did not receive comment on adding sub-asset
classes for repos.
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\309\ See, e.g., 2021 Financial Stability Oversight Council
Annual Report at 12 and 159, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
---------------------------------------------------------------------------
Asset Backed Securities (``ABS'')/structured products.
As proposed, we are separating the collateralized debt obligation
(``CDO'') and collateralized loan obligation (``CLO'') sub-asset class
in Question 32 into two separate sub-asset classes (one for CDOs and
one for CLOs), and further breaking out each of these new sub-asset
classes based on the seniority of the instrument (e.g., senior,
mezzanine, and junior tranches) similar to the reporting approach on
the CFTC's Form CPO-PQR.\310\ The changes are designed to provide
separate reporting for CDOs and CLOs, which is important because CDOs
and CLOs are fundamentally different financial products and the current
combined reporting obscures the specific attributes of each product.
---------------------------------------------------------------------------
\310\ See Form PF Glossary of Terms (definitions of ``CDO'' and
``CLO''). We are separating the current definition of ``CDO/CLO''
into a separate definition for each financial product. The
definition of CDO only includes collateralized debt obligations
(including cash flow and synthetic) and the definition of CLO
includes collateralized loan obligations (including cash flow and
synthetic) other than MBS and does not include any positions held
via CDS. See also supra footnote 308 (regarding the alignment of
Form PF with Form CPO-PQR).
---------------------------------------------------------------------------
One commenter supported the disclosure of CDOs and CLOs as separate
sub-asset classes because of the different investment and risk
characteristics of these assets and the systemic risks associated with
both asset classes.\311\ We agree. Furthermore, given the recent focus
on CLOs by FSOC \312\ in monitoring systemic risk, having detailed
product specific data for CDOs and CLOs is justified due to the
potential value this information can provide for systemic risk
monitoring.
---------------------------------------------------------------------------
\311\ NASAA Comment Letter.
\312\ See United States Government Accountability Office, Report
to Agency Officials, ``FINANCIAL STABILITY Agencies Have Not Found
Leveraged Lending to Significantly Threaten Stability but Remain
Cautious Amid Pandemic,'' Dec. 2020, available at https://www.gao.gov/assets/gao-21-167.pdf.
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Credit, Foreign Exchange, Interest Rate, and Other Derivatives.
We are revising, as proposed, the credit, foreign exchange, and
interest rate and other derivative sub-asset classes to provide more
detailed reporting. For example, with respect to credit derivatives,
the amended sub-asset classes will collect more detail on single name
CDS exposure to capture better information on risk signals from these
instruments by adding separate sub-asset classes for sovereign single
name CDS, financial institution single name CDS, and other single name
CDS (to capture any credit derivatives that do not fall into the other
enumerated CDS categories).\313\ An increase in single name CDS
exposure may signify a bet against an entity or the market more
generally, which may have significant systemic risk implications,
particularly with respect to concentrated single-issuer positions that
can drive more extreme price movements and face difficulties in the
unwinding process, and for counterparties on the other side of highly
leveraged trades when the market moves against these positions.\314\
Furthermore, single name CDS exposure can represent important,
concentrated risk positions for a fund, similar to large single equity
positions, which can be connected to market contagion events, and have
systemic risk and market liquidity implications.
---------------------------------------------------------------------------
\313\ See also Form PF Glossary of Terms (revised definition of
``single name CDS''). We are also removing ``credit derivatives''
and ``risk limiting conditions'' as defined terms because they are
no longer used in the form.
\314\ The CFTC's Form CPO-PQR also requests information on
single name financial CDS, and the revised IOSCO Global Fund
Investment Survey also collects this information.
---------------------------------------------------------------------------
Similarly, we are adding more detailed reporting for foreign
exchange derivatives by adding separate sub-asset classes for foreign
exchange swaps and currency swaps consistent with reporting to the Bank
for International Settlements (``BIS''), while removing the less useful
requirement of separate reporting for foreign exchange derivatives used
for investment and hedging, as we have found the data of limited value
because we do not believe that information is reported consistently
across filers.\315\ Adding separate reporting for different types of
foreign exchange instruments (e.g., foreign exchange swaps and currency
swaps) is appropriate because they have materially different risk
characteristics, including different maturity profiles, and may be
executed under different documentation which could affect their ability
to be netted against one another. We refer to the BIS framework because
we understand that it reflects a commonly accepted industry approach
for classifying these instruments. Furthermore, given the significance
of hedge funds' exposure to these instruments, more granular
information will better inform our understanding of systemic risk
issues that may arise from
[[Page 18017]]
holdings in these different types of instruments.
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\315\ In connection with these changes, we are also adopting
changes to the definition of ``foreign exchange derivative'' to
improve data quality with respect to how advisers report foreign
exchange derivative exposure. We are revising the definition to (1)
now include any derivative whose underlying asset is a currency
other than the base currency of the reporting fund, (2) provide
additional information on the treatment of cross-foreign exchange
versus regular foreign exchange, and (3) require reporting of both
legs of cross currency foreign exchange derivatives to reflect
exposures from such transactions. See Form PF Glossary of Terms
(revised definition of ``foreign exchange derivative'').
---------------------------------------------------------------------------
We are also dividing the current ``interest rate derivatives'' sub-
asset class into ``U.S. dollar interest rate derivatives'' and ``non-
U.S. currency interest rate derivatives.'' This added sub-asset class
granularity is important because we have found that Form PF data
consistently shows interest rate derivatives as the sub-asset class to
which qualifying hedge funds have the greatest exposure over time. A
better understanding of whether these exposures are related to the U.S.
dollar yield curve or other countries' yield curves is important from a
systemic risk analysis perspective. Finally, we are adding new sub-
asset classes for various types of derivatives that are regularly used
by hedge funds including correlation derivatives, inflation
derivatives, volatility derivatives, and variance derivatives, which
will both provide additional insight into how qualifying hedge funds
use these types of financial instruments and further limit the number
and type of derivatives that advisers report in the ``catch-all''
``other derivatives'' category.\316\
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\316\ In connection with these amendments, we are also adding
new definitions to the Glossary of Terms for ``correlation
derivative,'' ``inflation derivative,'' ``volatility derivative,''
and ``variance derivative.'' See Form PF Glossary of Terms.
---------------------------------------------------------------------------
More detailed reporting of currency exposure arising from foreign
exchange derivatives is important for systemic risk. The requirement to
select the sub-asset class that best represents the investment will
address concerns about any burdens associated with obtaining this
information.
Although one commenter generally opposed the inclusion of
additional sub-asset classes,\317\ we did not receive comment on these
particular sub-asset class revisions. As discussed more fully above in
the context of particular amendments to the sub-asset class list, the
amendments to the sub-asset class list that we are adopting more
accurately reflect a fund's holding than other data sources and current
Form PF reporting and are important for systemic risk analysis.
Understanding sub-asset class exposure on a more granular level will
enhance our understanding of qualifying hedge funds' investment
exposures to different asset classes and instruments that may present
different systemic risks. These amendments will also enhance data
quality by reducing the asset reporting that is currently made in
``catch-all'' categories or less precise categories, such as a
sovereign single name CDS that would currently be categorized more
generically as a single name CDS.
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\317\ See SIFMA Comment Letter.
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Cash and Commodities.
We are adopting, as proposed, revisions to the sub-asset class
categories for cash and commodities. We are adopting amendments to
require advisers to break out cash and cash equivalents \318\ between
U.S. currency holdings and non-U.S. currency holdings, while also
removing the current requirement to report on investments in funds for
cash management purposes (other than money market funds) because in our
experience advisers use inconsistent methods for determining whether a
private fund investment is being used for cash management purposes and
other information reported in section 2 is more useful for assessing
liquidity management (e.g., Question 38 with respect to unencumbered
cash).\319\
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\318\ Some advisers include treasuries in their reporting of
``cash'' because it was part of the current definition of ``cash and
cash equivalents.'' We are revising the definition of ``cash and
cash equivalents'' to reflect that treasuries should not be included
in the ``cash and cash equivalents'' sub-asset class. In connection
with this change we also are adding a new separate definition for
``government securities.'' See Form PF Glossary of Terms (revised
definition of ``cash and cash equivalents'' and definition of
``government securities''). See also discussion at section II.B.2 of
this Release regarding the revised definitions of cash and cash
equivalents and government securities.
\319\ Additionally, in many cases we will be able to obtain more
information about all internal fund investments (including whether a
fund looks like a cash management vehicle) through the new
information the amendments require to be reported in section 1b. See
discussion at section II.B.2 of this Release.
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One commenter supported separate reporting of U.S. Treasury
security holdings and cash and cash equivalents on the basis that
including these asset classes together can obscure information about a
fund's holdings.\320\ Another commenter opposed the proposed revision
to the definition of ``cash and cash equivalents'' to remove treasury
securities on the basis that such an exclusion would be inconsistent
with market practice of treating short-term treasury securities as a
cash equivalent for risk management and cash management purposes.\321\
It is important to understand a reporting fund's exposure to treasury
securities distinct from its cash and cash equivalent holdings because
of the different risk profiles of these asset categories, as
demonstrated by recent market events.\322\ We continue to believe that
removing the treasury securities from the definition of ``cash and cash
equivalents'' is appropriate and will provide more useful data and
promote consistency across filers.
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\320\ See AFREF Comment Letter I.
\321\ MFA Comment Letter II.
\322\ See, e.g., Group of Thirty Working Group on Treasury
Market Liquidity, U.S. Treasury Markets: Steps Toward Increased
Resilience, (2021), available at https://group30.org/publications/detail/4950 (discussing recent market stress events in the U.S.
Treasury securities market).
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Additionally, we are broadening the current power commodity sub-
asset classes to also capture other energy commodities and add
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities) to
provide added granularity with respect to these financial products
given their potential systemic risk implications and to better inform
our and FSOC's understanding of the activities of hedge funds in these
important commodities markets. We have found that a limitation of the
current form is that very different commodities (e.g., wheat and
nickel) are reported together in the same sub-asset class (i.e.,
``other commodities'') making the reported data less meaningful for
analysis. With added granularity, we will be in a better position to
identify concentrated exposures to particular commodities, data that
could be valuable in the event of a dislocation in a particular
commodity market.\323\ The additional commodity sub-asset classes that
we are adding, i.e., other (non-gold) precious metals, agricultural
commodities, and base metal commodities, were chosen because they are
most relevant from a systemic risk perspective given the size of these
markets and what we currently know of hedge fund exposures to these
markets.\324\ We did not receive
[[Page 18018]]
comments on these proposed changes to the commodity sub-asset classes.
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\323\ For example, we believe the addition of a base metal
commodities sub-asset class will allow for identification of large
players in the base metals market (such as those impacted by the
Mar. 2022 ``nickel squeeze''). During the Mar. 2022 ``nickel
squeeze,'' the price of nickel rose unusually steeply and rapidly in
response to commodity price increases caused by Russia's invasion of
Ukraine, and this event, coupled with one or more market
participants holding large short positions, caused prices to
increase in an extreme manner (e.g., a one-day increase of 63% for
the generic first futures contract on Mar. 7, 2022). See, e.g.,
Shabalala, Zandi, Nickel booms on short squeeze while other metals
retreat, Reuters (Mar. 2022), available at https://www.reuters.com/markets/europe/lme-nickel-jumps-another-10-after-record-rally-supply-fears-2022-03-08/; Nagarajan, Shalini, Nickel Trading Halted
at LME Until Friday After Wild Price Spike (businessinsider.com)
(Mar. 2022), available at https://markets.businessinsider.com/news/
commodities/nickel-price-london-metal-exchange-suspends-trading-
shanghai-short-squeeze-2022-
3#:~:text=The%20London%20Metal%20Exchange%20has,17%25%20to%20their%20
daily%20limit.
\324\ These adopted changes with respect to commodities sub-
asset classes will also better align Form PF with Form CPO-PQR.
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Digital Assets.
We are adopting, as proposed, a new sub-asset class for digital
assets. However, as discussed more fully above in section II.B.3 of
this Release, we are not adopting the proposed definition of ``digital
assets.'' \325\ We have observed the growth as well as the volatility
of this asset class in recent years.\326\ We understand that many hedge
funds have been formed recently to invest in digital assets, while many
existing hedge funds are also allocating a portion of their portfolios
to digital assets.\327\ Accordingly, it is important to collect
information on funds' exposures to digital assets in order to
understand better their overall market exposures. Although we are not
adopting the proposed definition of ``digital assets'' at this time, we
are adding an instruction to Question 32 that states if a particular
asset could be classified as both a digital asset and another asset,
the adviser should report the asset as the non-digital asset. For
example, a money market fund that is traded on a blockchain should be
reported as a money market fund, rather than as a digital asset. This
is designed to reduce potential confusion, narrow the assets that are
reported as digital assets under the form and improve data quality.
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\325\ See discussion at section II.B.3 of this Release.
\326\ The global market for crypto assets is valued by some
estimates at approximately $900 billion as of Dec. 2022. See, e.g.,
Global Cryptocurrency Market Cap Charts, CoinGecko, available at
https://www.coingecko.com/en/global-charts (last visited on Oct. 12,
2023). Volatility in the price of crypto assets has caused this
number to fluctuate considerably over the past few years. For
example, in July of 2020 the market was estimated to be worth
approximately $276 billion, but went on to reach a peak value of
approximately $3 trillion by Nov. 2021. Id.
\327\ See C. Williamson, Managers Taking Bigger Steps Into
Crypto, Pensions & Investments (Mar. 2022), available at at https://www.pionline.com/cryptocurrency/hedge-fund-managers-taking-bigger-steps-cryptocurrehttps://www.pionline.com/cryptocurrency/hedge-fund-managers-taking-bigger-steps-cryptocurrency.
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One commenter recommended requiring disclosure of digital asset
exposure on a quarterly or biannual basis for all filers due to the
general volatility of digital assets and the potential for systemic
risk.\328\ All large hedge fund advisers are required to file Form PF
on a quarterly basis, so we will receive data on digital asset exposure
from these filers on a quarterly basis. In addition, as discussed more
fully above in section II.B.3 of this Release, we are adopting
amendments which require all hedge fund advisers, including large hedge
fund advisers, to disclose the reporting fund's use of digital asset
investment strategies.
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\328\ AFREF Comment Letter I.
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Open and Large Position Reporting.
We are adopting, as proposed, amendments to require advisers to
qualifying hedge funds to report the top five long and short netted
positions and the top ten netted long and short positions. This
amendment will provide a holistic view of a reporting fund's portfolio
concentration. We also understand that these are commonly used industry
metrics for assessing portfolio concentration levels. We are defining
``netted exposure'' as the sum of all positions with legal and
contractual rights that provide exposure to the same reference asset,
taking into account all positions, including offsetting and partially
offsetting positions, relating to the same reference asset (without
regard to counterparties or issuers of a derivative or other instrument
that reflects the price of the reference asset), as proposed.\329\
Currently, advisers to qualifying hedge funds are required to report
(1) a fund's total number of ``open positions'' determined on the basis
of each position and not with reference to a particular issuer or
counterparty,\330\ and (2) the percentage of a fund's net asset value
and sub-asset class for each open position that represents five percent
or more of a fund's net asset value.\331\ Advisers to qualifying hedge
funds will now be required to report (1) the total number of reference
assets to which a fund holds long and short netted exposure, (2) the
percentage of net asset value represented by the aggregate netted
exposures of reference assets with the top five long and short netted
exposures, and (3) the percentage of net asset value represented by the
aggregate netted exposures of reference assets representing the top ten
long and short netted exposures. These amendments are designed to
provide insight into the extent of a fund's portfolio concentration and
large exposures to any reference assets. We have found that advisers
use different methods for identifying and counting their ``open
positions,'' which has made making meaningful comparisons among funds
difficult. This has also potentially obscured certain large exposures,
which may make concentration assessments less exact. For example, an
``open position'' might indicate a position held physically, or
synthetically through derivatives, or both.
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\329\ Netted exposure to a reference asset may either be long or
short, and advisers will be required to determine the value of each
netted exposure to each reference asset in U.S. dollars, expressed
as the delta adjusted notional value, or as the 10-year bond
equivalent for reference assets that are fixed income assets.
Advisers will not report exposure to cash and cash equivalents. See
Question 39. See also Form PF Glossary of Terms (definition of
``netted exposure'').
\330\ Current Question 34.
\331\ Current Question 35.
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Advisers will also be required to provide certain information on a
fund's reference asset to which the fund has gross exposure (as of the
end of each month of the reporting period), largely as proposed, equal
to or exceeding (1) one percent of net asset value, if the reference
asset is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the overall debt
security issuance, (2) one percent of net asset value, if the reference
asset is a listed equity and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding the reporting date, or (3) (a) five
percent of the reporting fund's net asset value or (b) $1 billion.\332\
Advisers will be required to report: (1) the dollar value (in U.S.
dollars) of all long and the dollar value (in U.S. dollars) of all
short positions with legal and contractual rights that provide exposure
to the reference asset; (2) netted exposure to the reference asset; (3)
sub-asset class and instrument type; (4) the title or description of
the reference asset; (5) the reference asset issuer (if any) name and
LEI; (6) CUSIP (if any); \333\ and (7) if the reference asset is a debt
security, the size of issue, and if the reference asset is a listed
equity, the average daily trading volume, measured over 90 days
preceding the reporting date, as proposed. Additionally, advisers may
at their option choose to provide the FIGI for the reference asset, but
they are not required to do so.\334\ We are defining ``gross exposure''
to a ``reference asset'' as the sum of the absolute value of all long
and short positions with legal and contractual rights that provide
exposure to the reference asset, as proposed.\335\ We considered
varying levels of thresholds and believe that the thresholds described
above are appropriate based on the following
[[Page 18019]]
reasoning. First, the five percent threshold has been carried over from
the current version of Form PF and is also a commonly used metric for
identifying significant positions in a portfolio.\336\ In addition,
while a portfolio is generally viewed as diversified when it holds at
least 20 different positions, when a position goes above five percent
it reduces portfolio diversification. Second, the $1 billion threshold
represents a level for large funds (e.g., those with net asset values
in excess of $20 billion) that is large enough so as to have potential
systemic risk implications even if the position is less than five
percent of the fund. Finally, the one percent of net asset value and 20
percent of issuance or average trading volume thresholds are aimed at
limiting filer burdens while still providing insight into the risks
associated with a position that may be small relative to a fund's
overall portfolio, but which constitutes a large fraction of the market
for a particular holding, given that a liquidation by one fund can
trigger a disorderly liquidation. A disorderly liquidation of this kind
may raise systemic risk concerns as it may lead to liquidation losses
at other funds for which the position is more impactful and possibly
lead to a cascade of additional unwinds.
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\332\ In a modification from the proposal, the adopted
instructions add reference to the size of the overall debt security
issuance (emphasis added) to specify the appropriate calculation.
Further, the reference to a ``listed equity security'' has been
modified to ``listed equity'' to align with the defined term used in
the Glossary of Terms.
\333\ Advisers will also be required to provide at least one of
the following other identifiers: (1) ISIN; (2) ticker if ISIN is not
available); or (3) other unique identifier (if ticker and ISIN are
not available). For reference assets with no CUSIP, or other
identifier, advisers will be required to describe the reference
asset. See Question 40(a).
\334\ See Question 40(a)(xi).
\335\ See Question 40 and Form PF Glossary of Terms (revised
definition of ``gross exposure'').
\336\ E.g., Schedule 13G/13D uses a 5% threshold.
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The purpose of these amendments is to improve our ability to assess
the magnitude of hedge fund portfolio concentration, as well as to
identify directional exposure. From a systemic risk and an investor
protection perspective, high portfolio concentration carries the risk
of amplified losses that can occur when a fund's investment represents
a large portion of a particular investment, asset class, or market
segment. Leveraged portfolios further amplify this risk. The amendments
are designed to better capture a fund's concentration risk (e.g., where
gross exposure to a reference asset is large compared to the fund's NAV
and/or compared to the market for a reference security). Reporting
positions that are large compared to market size also may provide some
insight about whether multiple firms are ``crowding'' into trades in
certain types of securities or other financial assets. Such
``crowding'' may increase the risk that one fund's forced selling may
trigger systemic effects across a particular market.
Collecting information about the composition of exposure to a
reference asset will allow us and FSOC to link the information reported
in Question 40 to exposure reporting in Question 32, which will give
the reported data added context and facilitate understanding of a
fund's investment portfolio and assessment of any implications for
systemic risk and investor protection purposes. For example, in a
convertible arbitrage trade involving a position in a convertible bond
and an offsetting position in the equity securities of the same issuer,
reference asset exposure might be obtained by positions in two
different sub-asset classes (i.e., investment grade convertible bonds
and equities) and using a combination of instrument types (e.g.,
physical ownership and futures or a swap). The combination of
information reported in Question 32 and Question 40 will facilitate our
ability to identify this type of situation, better understand a
qualifying hedge fund's investment approach and whether it is taking on
concentrated positions (potentially with leverage), and assess whether
or not a qualifying hedge fund's activities may have systemic risk or
investor protection implications.
One commenter stated that more granular disclosure of holdings,
including both long and short positions, will provide a more complete
picture of the risk exposure across private funds and can help the SEC
enforce fraud and manipulation of security-based swaps.\337\ Some
commenters opposed the requirements for more detailed disclosure of
holdings on the basis that more granular disclosure would be costly to
report and is not needed for systemic risk assessment.\338\ For reasons
discussed above, more granular information about a fund's exposure to a
reference asset will allow us and FSOC additional context to facilitate
understanding of a fund's investment portfolio and assessment of any
implications for systemic risk and investor protection purposes, which
justifies any incremental cost to advisers. One commenter recommended
not requiring reporting on exposures on a gross basis because of the
potential for gross figures to overstate a fund's exposure.\339\
Advisers are required to report exposures on a gross and net basis
because reporting on either a gross or net basis only would limit our
understanding of the total risk exposure, for example any basis risk of
the exposure.
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\337\ AFREF Comment Letter I.
\338\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter;
AIMA/ACC Comment Letter. See infra section IV.C of this Release for
discussion of costs and benefits of the amendments.
\339\ MFA Comment Letter II.
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In response to a request for comment in the proposing release
regarding the use of FIGI as a substitute for CUSIP, one commenter
recommended the inclusion of FIGI as an alternative financial
identifier in lieu of CUSIP in Question 40, which requires advisers to
report CUSIP information for each reference asset, if available.\340\
Two commenters opposed permitting the use of FIGI in lieu of CUSIP
stating that CUSIP is a single fungible identifier, whereas FIGI is not
a single fungible identifier and produces multiple identifiers
depending on the venue of execution.\341\ We agree that, for reporting
on Form PF, a fungible identifier is preferable because it will allow
for more consistent reporting of assets than a nonfungible identifier
regardless of the venue of execution, resulting in more effective
monitoring and assessment of systemic risk. We are not adopting a
change to permit the substitution of FIGI for CUSIP. Question 40
continues to require advisers to report for each reference asset the
CUSIP, if any, and at least one of the following identifiers: ISIN,
ticker, if ISIN is not available, or other unique identifier, if ISIN
and ticker are not available.\342\ Advisers may, on an optional basis,
report for each reference asset the FIGI.\343\ For reference assets
with no CUSIP or other identifier, advisers are required to describe
the reference asset.\344\
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\340\ Bloomberg Comment Letter. Form PF Question 65 also
requires large liquidity fund advisers to report the CUSIP number
for each security held by the reporting fund and for each security
subject to a repo.
\341\ See, e.g., American Bankers Association Comment Letter
(Oct. 11, 2022); Comment Letter of CUSIP Global Services (Oct. 11,
2022).
\342\ Question 40.
\343\ Id.
\344\ Id. We encourage advisers to obtain financial identifiers
for all of their assets for the benefit of their investors when
reporting their investments to regulatory authorities and others.
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b. Borrowing and Counterparty Exposure
Counterparty exposure. As noted above, we are revising and
enhancing how advisers report information about their relationships
with creditors and other counterparties (including CCPs) and the
associated collateral arrangements for their hedge funds, largely as
proposed.\345\ For qualifying hedge funds, we are adopting, as
proposed, a new consolidated counterparty exposure table, similar to
the new consolidated counterparty exposure table adopted for hedge
funds in section 1c of the form,\346\ which will capture all cash,
securities, and synthetic long and short positions by a reporting fund,
a fund's credit exposure
[[Page 18020]]
to counterparties, and amounts of collateral posted and received. This
table replaces the information currently required by current Questions
43, 44, 45, and 47, each of which has been deleted.\347\ Questions 42
and 43 will continue to collect information about a reporting fund's
key individual counterparties, but in more detail. These revisions are
designed to improve data quality and comparability, close data gaps,
and provide better insight into qualifying hedge funds' borrowing and
financing relationships, their credit exposure to counterparties and
collateral practices. They also will enhance the Commissions' and
FSOC's ability to assess the activities of qualifying hedge funds and
their counterparties for investor protection purposes and in monitoring
systemic risk.
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\345\ See discussion at section II.B.3 of this Release.
\346\ Id.
\347\ In connection with the removal of current Question 44, we
have made a corresponding amendment to current Question 13
(redesignated as Question 19), to remove an instruction that is no
longer relevant.
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The new consolidated counterparty exposure table is designed to
capture information on all non-portfolio credit exposure that a
qualifying hedge fund has to its counterparties (including CCPs) and
the exposure that creditors and other counterparties have to the fund,
taking into account netting. The new table requires advisers to report
in U.S. dollars, as of the end of each month of the reporting period, a
qualifying hedge fund's borrowings and other transactions with
creditors and other counterparties by type of borrowing or transaction
(e.g., unsecured, secured borrowing and lending under a prime brokerage
agreement, secured borrowing and lending via repo or reverse repo,
other secured borrowing and lending, derivatives cleared by a CCP, and
uncleared derivatives) and the collateral posted or received by a
reporting fund in connection with each type of borrowing or other
transaction.\348\ The table also requires advisers to qualifying hedge
funds to (1) classify each type of borrowing by creditor type (i.e.,
U.S. depository institution, U.S. creditors that are not depository
institutions, and non-U.S. creditors); (2) classify posted collateral
by type (e.g., cash and cash equivalents, government securities,
securities other than cash and cash equivalents and government
securities and other types of collateral or credit support (including
the face amount of letters of credit and similar third party credit
support) received and posted by a reporting fund, and secured borrowing
and lending (prime brokerage or other brokerage agreement)), and (3)
report, at the end of each month of the reporting period, the expected
increase in collateral required to be posted by the reporting fund if
the margin increases by one percent of position size for each type of
borrowing or other transaction, as proposed. Measuring the impact of a
one percent margin change will allow for a meaningful assessment of
qualifying hedge funds' vulnerability to changes in financing costs and
identification of funds that are most sensitive to potential margin
changes. We also believe that measuring this impact will provide a
standardized way to obtain data on funds' vulnerability to margin
increases that is easy to scale up for analysis purposes and allows for
uniform comparisons across hedge funds to see which funds have lockup
agreements and which funds do not. Furthermore, the table consolidates
current Questions and provides more specific instructions in an effort
to eliminate information gaps and improve the reliability of data
collected. This new approach will collect better information about a
qualifying hedge fund's borrowing and financing, cleared and uncleared
derivatives positions, and collateral practices as well as a fund's
credit exposure to counterparties resulting from excess margin,
haircuts, and positive mark-to-market derivatives transactions, which
will enhance FSOC's systemic risk assessments.
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\348\ The instructions direct advisers to classify borrowings
and other transactions and associated collateral based on the
governing legal agreement (e.g., a prime brokerage or other
brokerage agreement for cash margin and securities lending and
borrowing, a global master repurchase agreement for repo/reverse
repo, and ISDA master agreement for synthetic long positions,
synthetic short positions and other derivatives), and instruct
advisers how to report when there is cross-margining under a fund's
prime brokerage agreement. We are also adding new definitions of
``synthetic long position'' and ``synthetic short position'' to the
Glossary of Terms. See Form PF Glossary of Terms (definitions of
``synthetic long position'' and ``synthetic short position'').
Additionally, the instructions permit advisers to net a reporting
fund's exposure with each counterparty and across affiliated
entities of a counterparty to the extent such exposures may be
contractually or legally set-off or netted across those entities
and/or one affiliate guarantees or may otherwise be obligated to
satisfy the obligations of another under the agreements governing
the transactions. The instructions also direct advisers to classify
borrowing by creditor type (e.g., percentage borrowed from U.S
depository institutions, U.S. creditors that are not U.S depository
institutions, non-U.S. creditors) based on the legal entity that is
the contractual counterparty for such borrowing and not based on
parent company or other affiliated group.
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Some commenters opposed the requirement to provide additional
detail regarding counterparty exposure and stated that the information
would be burdensome and costly to obtain.\349\ We continue to believe
that disaggregated counterparty exposure is important to systemic risk
monitoring efforts for the reasons discussed above. This information
will not be significantly burdensome to produce as we understand
knowledge of counterparties to be a component of a fund's basic risk
management practices.
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\349\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter.
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Significant counterparty reporting. We are adopting, as proposed
except as specifically indicated below, amendments to require advisers,
for each of their qualifying hedge funds, to identify all creditors and
counterparties (including CCPs) where the amount a fund has borrowed
(including any synthetic long positions) before posted collateral
equals or is greater than either (1) five percent of the fund's net
asset value or (2) $1 billion.\350\ This threshold is appropriate
because it highlights two different but potentially significant risks.
First, five percent of a fund's net asset value represents an amount of
borrowing that, if repayment was required, could be a significant loss
of financing that could result in a forced unwind and forced sales from
the reporting fund's portfolio. Second, $1 billion represents an amount
that, in the case of a very large fund, may not represent five percent
of the fund's net asset value, but may be large enough to create stress
for certain of its counterparties.
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\350\ See Question 42. Advisers will use calculations performed
to complete the new table in Question 41 for purposes of identifying
the counterparties to be reported in Question 42 and Question 43,
and the calculation method is designed to be similar to the
calculations used to identify counterparties in Question 27 and
Question 28 in order to facilitate aggregation and analysis of data
across hedge funds and qualifying hedge funds. Furthermore, if more
than five counterparties meet the threshold, advisers will be
required to complete an individual counterparty exposure table for
the top five creditors or other counterparties to which a reporting
fund owed the greatest amount in respect of cash borrowing entries
(before posted collateral), and also identify all other creditors
and counterparties (including CCPs) to which the reporting fund owed
an amount in respect of cash borrowing entries (before posted
collateral) equal to or greater than either (1) 5% of the reporting
fund's net asset value as of the data reporting date or (2) $1
billion. See also Form PF Glossary of Terms (definitions of ``cash
borrowing entries'' and ``collateral posted entries'').
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This change is designed to specify how securities held should be
treated, avoiding a common source of error in how advisers have
completed the current form, and allowing both counterparty risks
related to collateralized transactions to be viewed in one place, i.e.,
the risk that collateral will not be returned, and the risk that the
borrower of cash will fail to repay the amount borrowed, risks that we
have found cannot be fully observed
[[Page 18021]]
based on information collected on the current form. For the top five
creditors and other counterparties from which a fund has borrowed the
most (including any synthetic long positions) before posted collateral,
advisers will be required to identify the counterparty (by name, LEI,
and financial institutional affiliation) and to provide information
detailing a fund's transactions and the associated collateral. We are
adopting a ``top five'' reporting threshold as this level is consistent
with the current threshold for reporting on collateral practices on
Form PF, and it represents a level that indicates significant
counterparty exposure.\351\
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\351\ See Question 42.
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Advisers will be required to present this information using an
individual counterparty exposure \352\ table that follows the same
format as the new consolidated counterparty exposure table described
above for Question 41, including borrowings and other transactions by
type and collateral posted and received by type. For all other
creditors and counterparties from which the amount a fund has borrowed
(including any synthetic long positions) before posted collateral that
equals or is greater than either (1) five percent of the fund's net
asset value or (2) $1 billion, advisers will be required to identify
each counterparty (by legal name, LEI, and financial institution
affiliation) and report the amount of such borrowings and the
collateral posted by the fund in U.S. dollars.\353\
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\352\ In connection with the amendment, we are adding a new
definition for ``individual counterparty exposure table'' to the
Form PF Glossary of Terms.
\353\ In a change from the proposal, we have modified the
reference from name to legal name to specify that the adviser should
report the relevant counterparty's legal name. This modification
will improve data comparability by enhancing our ability to track
any individual counterparty reporting across filings. Further, in a
change from the proposal, we have modified the question to specify
that the adviser should report the legal name of the counterparty,
the counterparty LEI, if any, the borrowing by the reporting fund,
the collateral posted by the reporting fund, and the legal name of
the entity that has the exposure and its LEI, if any. This modified
question aligns the question's wording with the information that is
required to be reported in the individual counterparty exposure
tables that follow in the form.
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As discussed more fully above in section II.A.2, we are adopting
amendments that require advisers to report all trading vehicles on a
consolidated basis. After considering one commenter's recommendation,
we are tailoring certain questions about trading vehicles to help
differentiate potential risks of the reporting fund from those of its
trading vehicles.\354\ In a modification from the proposal, we are
adding an instruction to require advisers to list counterparty
exposures of trading vehicles owned by the reporting fund based on the
reporting fund's percentage ownership of such trading vehicle without
netting these exposures with those of the reporting fund if they are
not guaranteed by the reporting fund or contractual obligations of the
reporting fund.\355\ The amended instructions provide that the adviser
must also report the legal name and LEI, if any, of the entity that has
the counterparty exposure.\356\ This amended instruction will allow us
to better understand the scope of the reporting fund's exposure and
differentiate its exposures from those held by a separate entity, such
as a trading vehicle.\357\
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\354\ See Schulte Comment Letter.
\355\ See Question 42. See also Questions 43 and 44 (requiring
providing the legal name and LEI, if any, of the relevant entity
with the exposure).
\356\ See Question 42. If the reporting fund guarantees or is
contractually obligated to fulfill obligations of a trading vehicle
or affiliated private fund, such exposures are required to be
reported net with the exposures of the reporting fund. If an adviser
to an affiliated private fund separately files Form PF, such adviser
must exclude such exposures if they have been included in the
reporting fund's filing. See Question 41.
\357\ As discussed in section II.A.2 above, in a modification
from the proposal, advisers report trading vehicles on a
consolidated basis but in response to certain questions will be
required to identify the positions and counterparty exposures that
are held through a trading vehicle, which will help differentiate
the reporting fund's exposures and risks from those of its trading
vehicles.
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As proposed, advisers will be required, for each of their
qualifying hedge funds, to identify all counterparties (including CCPs)
to which a fund has net mark-to-market counterparty credit exposure
after collateral that equals or is greater than either (1) five percent
of the fund's net asset value or (2) $1 billion.\358\ This threshold is
appropriate because both portions of the threshold highlight potential
systemic risk: five percent of net asset value is a level that
represents significant exposure (based on the impact on performance) in
the event of counterparty default, and $1 billion, while it may not
equal five percent of a large hedge fund's assets, may indicate a
larger systemic stress involving a fund's counterparties. For the top
five of these counterparties, advisers will be required to identify the
counterparty (by name, LEI and financial institution affiliation) and
provide information detailing a fund's relationship with these
counterparties including associated collateral using the same table
required for individual counterparty reporting.\359\ In a modification
from the proposal, advisers will also be required to report the
borrowing by the reporting fund and the collateral posted by the
reporting fund. These modifications are intended to align the question
text with the information that is required to be reported in the
counterparty exposure table. Further, in a modification from the
proposal, an adviser will also be required to report the legal name of
the entity that has the counterparty exposure and its LEI, if any. This
modification will allow us to better understand the scope of the
reporting fund's exposure and differentiate its exposures from those
held by a separate entity, such as a trading vehicle. As proposed,
advisers to qualifying hedge funds will also be required to identify
all other counterparties (by name, LEI, and financial institution
affiliation) to which a fund has net mark-to-market exposure after
collateral that equals or is greater than either (1) five percent of a
fund's net asset value or (2) $1 billion and will require these
advisers to report the amount of the exposure before and after
collateral posted by either the counterparty or the reporting fund as
applicable, as proposed. Further, in a modification from the proposal,
advisers will also be required to report the name and LEI, if any, of
the entity that has the counterparty exposure. The purpose of this new
requirement is to enhance our ability to understand the impact of a
particular counterparty failure, such as the counterparty failures that
occurred during the 2008 financial crisis and in the period since
(e.g., the failure of MF Global in 2011),\360\ which is important for
systemic risk assessments and from an investor protection perspective.
In assessing the risk to a fund of a counterparty default, the new data
will demonstrate whether a fund has net borrowing exposure or net
lending exposure to a counterparty. If the fund is a net borrower with
respect to a counterparty, we will measure cash borrowed by the fund
against collateral posted by fund. Alternatively, when the fund is a
net lender with respect to a counterparty, we will measure cash loaned
to the counterparty against collateral posted by the counterparty to
assess whether the counterparty has
[[Page 18022]]
posted insufficient collateral (relative to the amount borrowed).\361\
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\358\ See Question 43.
\359\ Under the amendments, however, if an adviser completes the
table in Question 42 for a particular counterparty, the adviser is
not required to complete the table twice.
\360\ See, e.g., Gapper, John and Kaminska, Izabella, Downfall
of MF Global--US broker-dealer bankruptcy highlights global reach of
eurozone crisis, Financial Times (Nov. 2011), available at https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.
\361\ See Form PF Glossary of Terms (definitions of ``cash
borrowing entries,'' ``collateral posted entries,'' ``cash lending
entries,'' and ``collateral received entries'') for a detailed
description of these calculations.
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These amendments are designed to streamline the form by
consolidating information currently collected in Question 47 into
Question 42, and to improve the quality and comparability of reported
information and our ability to integrate the data obtained for analysis
with other regulatory data sets by specifying how advisers determine
borrowing and counterparty credit exposure.\362\ The changes, in
conjunction with the new consolidated counterparty exposure table, will
also provide a better overall view of hedge funds' borrowing and other
financing arrangements and counterparty credit exposure and associated
collateral, which will provide critical insight into (1) creditor and
counterparty exposure to qualifying hedge funds through synthetic long
positions through derivatives, (2) potential gaps in margin received by
and posted by qualifying hedge funds and the size of any such gaps, (3)
qualifying hedge funds' exposure to a large counterparty failure, and
(4) the expected impact on a fund's financing arrangements of a change
in margin requirements.
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\362\ Advisers will be required to report the creditor legal
name and LEI, which will aid in the identification of counterparties
and facilitate analysis of the interconnectedness of market
participants (e.g., Form N-PORT and Form N-CEN already collect LEI
for registered investment company counterparties and including LEIs
here will facilitate analysis across data sets).
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Finally, advisers will no longer be required to report the
percentage of the total amount of collateral and other credit support
that a fund has posted to counterparties that may be re-hypothecated as
currently required in Question 38.\363\ We are adopting this change
because this reporting is burdensome for advisers, and we have found
that the data obtained is generally not reliable because advisers
cannot easily collect and report the required information as re-
hypothecation commonly occurs from omnibus accounts into which advisers
generally do not have visibility.\364\
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\363\ We are redesignating current Question 38 as Question 45.
\364\ See MFA Letter to Chairman Clayton, Sept. 17, 2018,
available at https://www.managedfunds.org/wp-content/uploads/2020/04/MFA.Form-PF-Recommendations.attachment.final.9.17.18.pdf (noting
the rehypothecated securities are taken out of an omnibus account,
which makes reporting for advisers with any certainty difficult).
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Some commenters opposed the requirement to provide additional
detail regarding counterparty exposure and state that the information
would be burdensome and costly to obtain.\365\ One commenter
recommended limiting the additional counterparty reporting to only a
fund's top three counterparties, rather than top five as proposed.\366\
For reasons discussed above, disaggregated counterparty exposure is
important to systemic risk monitoring efforts. This information will
not be significantly burdensome to produce as we understand knowledge
of counterparties to be a component of a fund's basic risk management
practices. The additional systemic risk benefits described above of
receiving data on a fund's five largest counterparties justify the
modest additional incremental burden over reporting on the largest
three counterparties, as recommended by one commenter.\367\
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\365\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter.
\366\ MFA Comment Letter II.
\367\ See also infra section IV.C for further discussion of
costs and benefits of the amendments.
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c. Market Factor Effects
We are adopting, as proposed except as specifically indicated
below, amendments to require advisers to qualifying hedge funds to
respond on Form PF to all market factors to which their portfolio is
directly exposed, rather than allowing advisers to omit a response to
any market factor that they do not regularly consider in formal testing
in connection with the reporting fund's risk management, as Form PF
currently provides.\368\ These changes are designed to enhance investor
protection efforts and systemic risk assessment by allowing the
Commissions and FSOC to track better common market factor
sensitivities, as well as correlations and trends in those market
factor sensitivities.
---------------------------------------------------------------------------
\368\ See Question 47. For market factors that have no direct
effect on a reporting fund's portfolio, we instruct filers to enter
zero.
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We are also changing the stress thresholds to (1) require advisers
to report one threshold for each market factor, rather than two as is
currently required and (2) include different thresholds for certain
market factors to capture stress scenarios that are plausible but still
infrequent market moves.\369\ Information resulting from stress testing
at thresholds in the current form (one low and one high) was not useful
because the thresholds are either too frequent (for the lower
threshold) or too extreme and may not result in accurate estimates (for
the higher threshold). Based on our experience with this information,
we do not believe that collecting data at multiple thresholds for each
market factor is significantly more meaningful than collecting market
factor sensitivity at a single plausible but still infrequent
threshold.\370\
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\369\ For example, advisers currently are required to report the
effect of an increase or decrease in equity prices by 5% and by 20%,
while under the amendments advisers will only report the effect of a
10% increase or decrease, which is a more plausible but still
infrequent scenario.
\370\ See current Question 42.
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The amendments also add a market factor test concerning non-
parallel risk-free interest rate movements. It will test hedge fund
exposure to changes in the slope of the yield curve, which is currently
untested and can be a source of systemic risk when there are sudden
interest rate changes. For example, this market factor will provide
meaningful information on hedge funds that take complex positions, such
as market neutral strategies (e.g., basis trading in particular) and
other strategies that employ trades that take advantage of spreads in
yield curves coupled with high use of leverage. In a modification from
the proposal, we are removing the risk-free interest rates market
factor reporting and instead adding an instruction to specify that,
with respect to the market factor concerning non-parallel risk-free
interest rate movements, the sum of all reported non-parallel risk-free
interest rate sensitivities for a given rate movement should total the
portfolio's sensitivity to a parallel risk-free interest rate movement
of that magnitude to reduce burdens. This modification will reduce the
burden on advisers by eliminating a required reporting item and will
not diminish data quality because with the added instruction, we can
derive the total parallel risk-free rate sensitivity from the non-
parallel risk-free interest rate movement market factor.
We are also revising the instructions so advisers will be required
to report the long component and short component consistently with
market convention, rather than opposite from market convention, as Form
PF currently requires, in order to reduce inadvertent mistakes in
completing the form.\371\
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\371\ We are amending the instructions to provide that ``risk-
free interest rates'' include interest rate swap rates in which a
fixed rate is exchanged for a risk-free floating rate such as the
secured overnight financing rate (``SOFR'') or the sterling
overnight index average (``SONIA''). Additionally, we are amending
the instructions to specify that (1) for market factors involving
interest rates and credit spreads, advisers should separate the
effect on its portfolio into long and short components where (i) the
long component represents the aggregate result of all positions
whose valuation changes in the opposite direction from the market
factor under a given stress scenario, and (ii) the short component
represents the aggregate result of all positions whose valuation
changes in the same direction as the market factor under a given
stress scenario, and (2) for market factors other than interest
rates and credit spreads, advisers should separate the effect on its
portfolio into long and short components where (i) the long
component represents the aggregate result of all positions whose
valuation changes in the same direction as the market factor under a
given stress scenario and (ii) the short component represents the
aggregate result of all positions whose valuation changes in the
opposite direction from the market factor under a given stress
scenario. See Question 47.
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[[Page 18023]]
We are making two modifications to the proposal. First, we are
adding an instruction that when reporting exposures to changes in
market factors for indirect positions, an adviser may use reasonable
estimates that best represent the exposure to the market factor,
consistent with the adviser's internal methodologies and conventions of
service providers. This is responsive to commenters that suggested the
proposal was unclear in certain questions as to whether an adviser is
required to ``look through'' the fund's investments.\372\ Second, as
discussed further above, we are removing the risk-free interest rates
market factor and instead adding an instruction to specify that, with
respect to the market factor concerning non-parallel risk-free interest
rate movements, the sum of all reported non-parallel risk-free interest
rate sensitivities for a given rate movement should total the
portfolio's sensitivity to a parallel risk-free interest rate movement
of that magnitude. Some commenters opposed the amendments requiring
advisers to report on all listed market factors, including any market
factors that the adviser does not regularly consider in its stress
testing.\373\ Currently, the wording of the instructions allows an
adviser to omit a response in the event the adviser tested a similar,
but not identical, market factor. Accurate and complete reporting of
all market factors will provide important systemic risk information. We
do not believe this amended requirement will significantly burden
advisers because an adviser will only be required to stress test risk
factors to which their portfolios are directly exposed and are
instructed to report zero for any inapplicable market factors. Further,
the modified instruction we are adopting, which permits an adviser to
use reasonable estimates that best represent the market factor exposure
for indirectly held positions, will alleviate some of the burden of
reporting this additional information.
---------------------------------------------------------------------------
\372\ MFA Comment Letter III.
\373\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
Schulte Comment Letter; USCC Comment Letter.
---------------------------------------------------------------------------
d. Additional Amendments to Section 2
Currency exposure reporting. We are adopting, as proposed except as
specifically indicated below, amendments to require qualifying hedge
funds to report for each month of the reporting period, in U.S.
dollars, (1) the net long value and short value of a fund's currency
exposure arising from foreign exchange derivatives and all other assets
and liabilities denominated in currencies other than a fund's base
currency, and (2) each currency to which the fund has long dollar value
or short dollar value exposure equal to or exceeding either (a) five
percent of a fund's net asset value or (b) $1 billion.\374\ In
responding, advisers will be required to include currency exposure
obtained indirectly through positions held in other entities (e.g.,
investment companies, other private funds, commodity pools or other
companies, funds, or entities) and may report reasonable estimates if
consistent with internal methodologies and conventions of service
providers.\375\ In a change from the proposal, we are adding an
instruction to specify that an adviser may report the data that ``best
represents'' the currency exposure from any indirect investments to
lessen the reporting burden, as long as such estimates are consistent
with the adviser's internal methodologies and conventions of service
providers. This currency exposure requirement is designed to provide
insight into whether notional currency exposures reported by qualifying
hedge funds in Question 33 represent directional exposure or are hedges
of equity and/or fixed income positions. This new question will allow
us to understand whether a qualifying hedge fund's portfolio is exposed
to a given currency, and it will also provide a view into the fund's
currency exposure resulting from holdings in foreign securities (e.g.,
Eurobonds). While current Question 30 already requires advisers to
separate currency exposure relating to hedging from other currency, we
have found that this data has not been very useful for determining
whether a currency position is speculative or a hedge. Additionally, it
is important to consider a qualifying hedge fund's currency exposure to
identify vulnerabilities to currency fluctuations and market events
that affect different countries and regions. Finally, the threshold of
either (1) five percent of a fund's net asset value or (2) $1 billion
for reporting individual currency exposure is appropriate because it
represents, in each prong of the threshold, a material level of
portfolio exposure to currency risk at which a deterioration in the
value of a particular currency could have a significant negative impact
on a fund's investors. We also believe that if multiple large funds
have significant exposure to a currency that is rapidly devaluing, this
circumstance could raise financial stability concerns, and this
reporting will better enable review of this type of situation. More
broadly, we also will be able to use the information obtained to
identify concentrations in particular currencies and assess the
potential impact of market events that affect particular currencies.
---------------------------------------------------------------------------
\374\ See Question 33.
\375\ This instruction is designed to simplify and reduce the
burdens of reporting sub-asset class exposures. Furthermore,
advisers are permitted to provide good faith estimates and take
currency hedges into account, if consistent with their internal
methodologies and information reported internally and to investors.
---------------------------------------------------------------------------
One commenter discussed the systemic risk concerns present in
currency exposures, particularly as demonstrated by recent geopolitical
events and resulting currency fluctuations.\376\ Other commenters
opposed the proposed requirement to report currency exposure stating
the information would be of limited value and burdensome to
report.\377\ Some commenters stated that reporting indirect currency
exposure accurately may be difficult because of potential variations in
timing or foreign exchange rate sources, which could lead to inaccurate
data and false indicators of risk.\378\ The modified instruction that
we are adopting, which provides that an adviser may report the data
that ``best represents'' the currency exposure from any indirect
investments, clarifies the reporting requirement and will alleviate
some of the reporting burden. More detailed reporting of currency
exposure is important for systemic risk purposes. This belief is
reinforced by recent experiences of currency fluctuation in the
aftermath of geopolitical events that we have observed.
---------------------------------------------------------------------------
\376\ Fact Coalition Comment Letter.
\377\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
USCC Comment Letter.
\378\ AIMA/ACC Comment Letter; MFA Comment Letter II.
---------------------------------------------------------------------------
Turnover. We are adopting, as proposed, amendments, to require
reporting on a per fund basis on the value of turnover in certain asset
classes rather than on an aggregate basis as currently required.\379\
Requiring this reporting on a per fund basis will provide more detailed
information to us and FSOC while at the same time
[[Page 18024]]
simplifying reporting for advisers. We understand that advisers do not
currently aggregate turnover related information among funds.
Aggregating solely for Form PF reporting is particularly burdensome as
the required data is typically on separate reporting systems and
advisers must ``roll-up'' data from these sources to report on the
form.
---------------------------------------------------------------------------
\379\ Question 34. In connection with amendments, reporting on
the value of turnover in certain asset classes and the geographical
breakdown of investments is moved from section 2a to section 2.
---------------------------------------------------------------------------
We are also adding, as proposed, new categories for turnover
reporting that disaggregate combined categories and better capture
turnover of potentially relevant securities, such as various types of
derivatives (e.g., listed equity, interest rate, foreign exchange),
which will help support analysis of hedge fund market activity.\380\
Furthermore, we are adding a new consolidated foreign exchange and
currency swaps category and making other changes, as proposed.\381\
During the March 2020 COVID-19-related market turmoil, FSOC sought to
evaluate the role hedge funds played in disruptions in the U.S.
treasury market by unwinding cash-futures basis trade positions and
taking advantage of the near-arbitrage between cash and futures prices
of U.S. Treasury securities.\382\ Because the current requirement
regarding turnover reporting on U.S. Treasury securities is highly
aggregated, the SEC staff, during retrospective analyses on the March
2020 market events, was unable to obtain a complete picture of activity
relating to long treasuries and treasury futures. Given the significant
size of hedge funds' exposures to certain derivative products, it is
important to gain more insight into trading activities with respect to
these financial instruments to better enable the Commissions and FSOC
to assess and monitor the activity of qualifying hedge funds for
systemic risk implications.\383\ Expanded reporting on turnover also
will provide better information for assessing trading frequency in lieu
of requiring advisers to report what percentage of their hedge funds'
net asset value is managed using high-frequency trading
strategies.\384\
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\380\ We are also breaking out some categories by futures,
swaps, and options as different types of derivatives have different
risk profiles and implications for systemic risk, and to add a
category for ``other derivative instrument types'' so that all
derivatives are reported.
\381\ We are revising the asset class categories to require
advisers to report turnover in derivatives separately from turnover
in physical holdings in Question 34 and are making other conforming
changes to reflect changes to defined terms in the Form PF Glossary
of Terms.
\382\ See U.S. Credit Markets Interconnectedness and the Effects
of the COVID-19 Economic Shock, U.S. Securities Exchange Commission,
Oct. 2020, available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. See also Financial Stability Oversight
Council 2021 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
\383\ As of the end of first quarter of 2023, interest rate
derivatives currently make up approximately 30% of gross notional
exposure (GNE) reported on Form PF, while foreign exchange
derivatives make up approximately 13% of GNE. Additionally,
commodity, credit, and other derivatives when combined make up 5% of
GNE or over $1.3 trillion. See Private Fund Statistics Q1 2023,
supra footnote 5.
\384\ We are removing current Question 21 as it is redundant in
light of the adopted expanded turnover reporting.
---------------------------------------------------------------------------
Some commenters opposed the proposed requirement for disaggregated
and more detailed reporting of turnover stating that such information
is of limited value and burdensome to report.\385\ As discussed above,
we continue to believe that turnover information is related to systemic
risk and observing turnover data in particular categories can help
identify affected funds and identify possible contagion risk. Moreover,
the adopted requirement of disaggregated reporting is less burdensome
than the existing reporting of turnover, which requires advisers to
aggregate data that we understand they collect on a fund-level basis.
---------------------------------------------------------------------------
\385\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
USCC Comment Letter.
---------------------------------------------------------------------------
Country and industry exposure. We are adopting, as proposed except
as specifically indicated below, amendments to require advisers to
report all countries (by ISO country code \386\) to which a reporting
fund has exposure equal to or exceeding either (1) five percent of its
net asset value or (2) $1 billion, and to report the dollar value of
long exposure and the dollar value of short exposure in U.S. dollars,
for each monthly period to improve data comparability across
funds.\387\ In a change from the proposal, we are adding an instruction
to specify that advisers may report the data that best represents the
country and industry exposure from any indirect investments and is
consistent with the advisers' internal methodologies and conventions of
services providers to lessen the reporting burden. Under the current
approach, only certain regions were identified, and these regions were
not uniformly defined, which resulted in data that was not
consistent.\388\ In addition, at times we have needed to identify
countries of interest not on this list. As such, we are adopting
amendments to replace the country of interest and regional reporting
with this new country level information. Finally, the threshold of
either (1) five percent of net asset value or (2) $1 billion is
appropriate because it represents a material level of portfolio
exposure to risk relating to individual countries and geographic
regions and is a level that could significantly impact a fund and its
investors if, for example, there are currency fluctuations or
geopolitical instability. Furthermore, the data obtained will allow for
identification of industry concentrations in particular countries and/
or regions and help assess the potential impact of market events on
these geographic segments. The five percent threshold level constitutes
a reasonable shock to a fund's net asset value. For example, to the
extent there is a market-wide event, a worst-case scenario would be for
long positions to lose their full value, in this shock case at least
five percent. Furthermore, and particularly for funds without a
benchmark, five percent is often evaluated for industry, individual
position, and country risk, and is a common and easy to measure
threshold. With respect to the $1 billion threshold, it constitutes
sufficiently large nominal value exposure from a risk perspective.
---------------------------------------------------------------------------
\386\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
\387\ Question 35. In connection with the amendments, reporting
on geographical breakdown of investments has moved from current
section 2a to section 2.
\388\ Currently, consistent with staff Form PF Frequently Asked
Questions 28.1 and 28.2, advisers are permitted to report
geographical exposure based on internal methods and indicate in
Question 4 if methods did not reflect risk and economic exposure.
See Form PF Frequently Asked Questions, supra footnote 162.
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We are also adding a new question that requires advisers to provide
information about each industry to which a reporting fund has exposure
equal to or exceeding either (1) five percent of its net asset value or
(2) $1 billion, as proposed.\389\ Advisers are required to report, for
each monthly period, the long dollar value and short dollar value of a
reporting fund's exposure by industry based on the NAICS \390\ code of
the underlying exposure.\391\ The purpose of this new question is to
collect information that will provide insight into hedge funds'
industry exposures in a standardized way to allow for comparability
among funds and meaningful aggregation of data to assess overall
industry-specific concentrations. Further, the threshold of either (1)
five percent of net asset value or (2) $1 billion is appropriate
because it represents a material level of portfolio exposure to risk
relating to individual
[[Page 18025]]
industries, and is a level that could significantly impact a fund and
its investors if, for example, there are market or geopolitical events
that affect performance by a particular industry, such as the burst of
the ``tech bubble'' in the early 2000s or COVID-19's impact on airline,
accommodation and food service industries. Furthermore, the data
obtained will allow for identification of industry concentrations and
help assess the potential impact of market events on industries. While
we considered a lower threshold, we continue to believe that the
adopted threshold strikes an appropriate balance between identifying
significant industry exposure and the burdens of reporting this
information on Form PF. This information will be useful to the
Commissions and FSOC in monitoring systemic risk, particularly if
multiple funds have significant concentrations in industries that are
experiencing periods of stress or disruption.
---------------------------------------------------------------------------
\389\ See Question 36.
\390\ North American Industry Classification System.
\391\ See United States Census Bureau, North American Industry
Classification System, available at https://www.census.gov/naics/.
---------------------------------------------------------------------------
When responding to these questions about country and industry
exposure, advisers are required to include exposure obtained indirectly
though positions held in other entities (e.g., investment companies,
other private funds, commodity pools or other company, funds, or
entities). Without this requirement, a fund's exposure to geographic
regions and industries could be obscured and hinder the Commissions'
and FSOC's ability to assess risks and the potential impact of events
and trends that affect a particular industry or geographic region, both
of which could have implications for investors. While advisers
typically maintain this information, the instructions to these
questions seek to minimize filer burdens by permitting advisers to
report reasonable estimates if such reporting is consistent with
internal methodologies and information reported internally and to
investors.
Some commenters opposed the proposed requirements for more granular
reporting, including amendments to require more detailed reporting on
country and industry exposure, stating that such information would be
of limited value for systemic risk analysis and burdensome to
report.\392\ Another commenter, however, discussed how geopolitical
instability and industry disruptions can contribute to systemic
risk.\393\ For reasons discussed above, country and industry exposure
reporting is important for systemic risk, and exposures in excess of
five percent of a fund's net asset value could be significant enough to
pose contagion risks. In a modification from the proposal, we are
adding an instruction to provide that an adviser is permitted to report
reasonable estimates of a fund's country and industry exposure,
provided such reporting is consistent with internal methodologies and
information reported internally and to investors, which is intended to
lessen the burden on advisers, while allowing us to continue to receive
this reporting on country and industry exposure.
---------------------------------------------------------------------------
\392\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
USCC Comment Letter.
\393\ Fact Coalition Comment Letter.
---------------------------------------------------------------------------
One commenter stated that requiring advisers to report industry
exposure by NAICS is burdensome because funds may not currently collect
this data and it may be costly to obtain.\394\ We disagree that NAICS
information is significantly burdensome to obtain and report. NAICS
codes are publicly available and is the standard used by certain
Federal agencies for classifying entities by industry.\395\
---------------------------------------------------------------------------
\394\ MFA Comment Letter II.
\395\ See, e.g., SBA Small Business Size Regulations, 13 CFR
121.101 (2023).
---------------------------------------------------------------------------
Central clearing counterparty (CCP) reporting. We are adopting, as
proposed except as specifically indicated below, amendments to require
advisers to identify each CCP or other third party holding collateral
posted by a qualifying hedge fund in respect of cleared exposures
(including tri-party repo) equal to or exceeding either (1) five
percent of a reporting fund's net asset value or (2) $1 billion.\396\
The new question excludes counterparties already reported in Question
42 and Question 43,\397\ and requires advisers to provide information
on: (1) the legal name of the CCP or third party; (2) LEI (if
available); (3) whether the CCP or third party is affiliated with a
major financial institution; (4) the reporting fund's posted margin (in
U.S. dollars); and (5) the reporting fund's net exposure (in U.S.
dollars), as proposed. In a modification from the proposal, we are also
requiring advisers to provide information on the legal name of the
collateral owner and the collateral owner LEI. This additional
identifying information will allow us to understand the reporting
fund's exposure by differentiating exposures of the reporting fund from
exposures of other reporting entities. For example, as discussed more
fully above in section II.A.2, advisers report on trading vehicles on a
consolidated basis with the reporting fund, and without identifying
information, we would be unable to differentiate a reporting fund's
counterparty risk exposure from that of its trading vehicle.
---------------------------------------------------------------------------
\396\ See Question 44.
\397\ See discussion at section II.C.2.b of this Release.
---------------------------------------------------------------------------
We are adopting this new question based on our experience with Form
PF since adoption as we have found data gaps with respect to
identifying qualifying hedge fund exposures to CCPs and other third
parties that hold collateral in connection with cleared exposures.
Furthermore, we understand that (1) many large hedge fund advisers
already track margin posted for cleared exposures because margin
requirements at any given time may well exceed the clearinghouse's
exposure to a fund and therefore are an important credit risk exposure
metric for a fund, and (2) that CCP recovery, resiliency and resolution
also are current concerns for some advisers.\398\ Given these factors,
the burden of this new question is justified by valuable insight the
data obtained will provide into an area that could have significant
implications from a systemic risk perspective. Additionally, we have
chosen a reporting threshold of equal to or exceeding either (1) five
percent of net asset value or (2) $1 billion to be consistent with the
thresholds for other counterparty exposure questions,\399\ as a
qualifying hedge fund is similarly exposed where a third party holds
collateral irrespective of whether the third party is a CCP or other
counterparty. We are also removing current Question 39, which required
information about transactions cleared directly through a CCP, as the
information collected is duplicative of information already collected
in current Question 24 (redesignated Question 29).
---------------------------------------------------------------------------
\398\ See ``A Path Forward For CCP Resilience, Recovery, And
Resolution,'' Mar. 10, 2020, available at https://www.blackrock.com/corporate/literature/whitepaper/path-forward-for-ccp-resilience-recovery-and-resolution.pdf. See also J.P. Morgan Press Release,
Mar. 10, 2020, available at https://www.jpmorgan.com/solutions/cib/markets/a-path-forward-for-ccp-resilience-recovery-and-resolution.
\399\ See discussion at section II.C.2.b of this Release.
---------------------------------------------------------------------------
One commenter recommended that exposures to CCPs should be reported
on an aggregate basis, rather than on an individual CCP basis, because
some advisers track these exposures on an aggregate basis and the
Commissions have not explained why reporting on an aggregate basis is
not sufficient and recommended clarifying whether the instruction in
Question 43 to report information for counterparties that are CCPs or
other third parties holding collateral in respect of ``cleared
exposures'' is meant to refer to ``centrally cleared exposures.'' \400\
The references to cleared exposures in the instructions to Question 43
are meant to
[[Page 18026]]
include centrally cleared exposures, as well as other cleared
exposures. Receiving data on which individual CCPs are used for
centrally cleared positions is important for understanding systemic
risk resulting from a concentrated use of the same CCPs among different
funds. Further, a CCP default may result in delayed receipt of funds
that can create spillover effects at funds, particularly highly
leveraged funds, that raise systemic risk and investor protection
concerns. While the clearing system is highly risk reducing and
transparent, default of a fund, or of a clearing member, could
nonetheless cause temporary dislocations that can become significant at
critical times. Transparency at this level is important in Form PF and
is aligned with funds' own need to be aware of exposures to individual
clearing members. For these reasons, it is appropriate to require this
reporting as proposed. This commenter also argued that the requirement
to report collateral posted by a fund to meet exchange requirements and
separately report additional collateral collected by the prime broker
would be difficult for advisers that do not actively monitor exchange
margin requirements distinctively from prime broker margin
requirements.\401\ We disagree that this information would be difficult
for advisers to report because the instructions to Question 42 specify
a simplified method of how to report such blended margin arrangements,
including where collateral is not disaggregated.\402\ The commenter
recommended that the Commissions instead require prime brokers to
provide this information in standard form and permit advisers to rely
on information provided by their prime broker.\403\ It is important for
advisers to report this information aggregated for the reporting fund
because individualized reporting from each prime broker may obscure the
fund's counterparty risk. For example, a fund that has arrangements
with multiple prime brokers may have a particular counterparty exposure
across multiple prime brokerage arrangements, which may be obscured by
separate reporting for each prime broker. Further, it is important for
a reporting fund to understand its own counterparty risk, and we
understand advisers monitor levels of counterparty concentration for
risk management purposes. Therefore, we believe it is appropriate for
advisers to report this information on Form PF with other exposure
reporting. Individual reporting on CCPs is important because aggregated
reporting would not provide sufficiently detailed information to allow
us to identify potential risks. For example, in the event of a
particular counterparty failure, we would be unable to accurately
localize a fund's risk exposure to that counterparty.
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\400\ MFA Comment Letter II.
\401\ Id.
\402\ Specifically, Question 42(a)(iii) instructs as follows:
``check this box if one or more prime brokerage agreements provide
for cross-margining of derivatives and secured financing
transactions. If you have checked this box, and collateral does not
clearly pertain to secured financing vs. derivatives transactions,
report exposures and collateral as follows: . . . enter any
additional collateral gathered by the prime broker under a cross
margining agreement on lines (iii)(B), (C), (D), and (E).
\403\ MFA Comment Letter II.
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Risk metrics. We are adopting, as proposed, amendments to eliminate
the requirement that an adviser indicate whether there are risk metrics
other than, or in addition to, Value at Risk (``VaR'') that the adviser
considers important to managing a reporting fund's risks.\404\ Advisers
generally have not reported detailed information in response to this
requirement. Currently, about 55 percent of advisers to qualifying
hedge funds (representing about 75 percent of the aggregate gross asset
value of qualifying hedge funds) report using VaR or market factor
changes in managing their hedge funds.\405\ Instead, advisers will be
required to provide additional information about a reporting fund's
portfolio risk profile, investment performance by strategy, and
volatility of returns and drawdowns.\406\ This amendment will expand
the amount of data collected by collecting risk data in circumstances
where advisers do not use VaR or market factor changes, and thus will
provide insight across all (rather than only some) qualifying hedge
funds. This new information will provide uniform and consistently
reported risk information that will enhance our ability to monitor and
assess investment risks of qualifying hedge funds to gauge systemic
risk. In particular, volatility of returns and drawdown data is a
simple measure of risk that enables us to monitor risk-adjusted
returns, changes in volatility and thereby risk profiles. We did not
receive specific comment on this amendment.
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\404\ See current Question 41.
\405\ See Private Funds Statistics Q1 2023 (Table 58/59).
Current Question 40 (redesignated Question 46) requires advisers to
report certain risk data if the adviser regularly calculates VaR of
the reporting fund. Current Question 42 (redesignated Question 47)
requires advisers, for specific market factors, to determine the
effect of specified changes on a reporting fund's portfolio but
permits advisers to omit a response to any market factor that they
do not regularly consider in formal testing in connection with a
reporting fund's risk management.
\406\ See Question 49 (investment performance breakdown by
strategy), and Question 23(c) (volatility of returns and drawdown
reporting). See discussion at section II.B.2 of this Release. We are
also revising the title of Item C. of section 2 to ``Reporting fund
risk metrics and performance'' to reflect the addition of new
questions on performance to this section of the form.
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Investment performance by strategy. We are adopting, in a
modification from the proposal, amendments to require to qualifying
hedge funds that indicate more than one investment strategy for a fund
in Question 25 to report monthly gross investment performance by
strategy if the adviser reports this data for such fund, whether to
current and prospective investors, counterparties, or otherwise, rather
than if the adviser ``calculates and reports'' such information to
third parties, as proposed.\407\ Advisers will not be required to
respond to this question if the adviser reports performance for the
fund as an internal rate of return, as proposed. This question is
designed to integrate Form PF hedge fund data with the FRB's reporting
on Financial Accounts of the United States, which the FRB uses to track
the sources and uses of funds by sector, and which are a component of a
system of macroeconomic accounts including the National Income and
Product accounts and balance of payments accounts, all of which serve
as a comprehensive set of information on the economy's performance. We
also believe that this information will be helpful to the Commissions'
and FSOC's monitoring and analysis of strategy-specific systemic risk
in the hedge fund industry. One commenter recommended that the
requirement be limited to reporting on investment strategies that the
fund reports to third parties.\408\ This commenter also stated that the
proposed instructions were not clear how an adviser should respond if
it does not report such information to third parties. After considering
comments, in a change from the proposal, advisers will be required to
respond to this question only if they actually report investment
performance to third parties; thus, advisers will not be required to
respond to this question if they only calculate (but do not report)
such information. This change will allow us to continue to receive
strategy performance information that is reported to third parties
while reducing the burden on
[[Page 18027]]
advisers. We understand that advisers may frequently calculate strategy
performance for purposes other than reporting performance to third
parties and that requiring reporting of each such calculation may be of
more limited value and may be burdensome to report.
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\407\ Question 49. The strategies in Question 49 are based on
the strategies included in the drop-down menu in Question 25 (we are
also including a drop-down menu for the strategy categories in
Question 25, to better reflect our understanding of hedge fund
strategies and to improve data quality and comparability). See
discussion at section II.B.3 of this Release.
\408\ MFA Comment Letter II.
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Portfolio Correlation. In a change from the proposal, we are not
adopting a proposed question on portfolio correlation to collect data
on the effects of a breakdown in correlation. We received several
comments stating that the proposed portfolio correlation question would
impose significant burdens on advisers because portfolio correlation is
not a commonly calculated risk measurement and can be complex to
calculate.\409\ One commenter recommended only requiring an adviser to
report portfolio correlation if correlation is a risk analysis metric
that the adviser reports to its investors.\410\ In light of comments we
received, we are persuaded that the complexity and corresponding
increased burden associated with the proposed portfolio correlation
question would be significant. The new and modified questions we are
adopting in this Release will also enhance our leverage monitoring
efforts and enhance our data insights on counterparty exposures without
including the proposed portfolio correlation question.
---------------------------------------------------------------------------
\409\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
\410\ AIMA/ACC Comment Letter.
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Portfolio Liquidity. We are adopting, as proposed, amendments to
require advisers to include cash and cash equivalents when reporting
portfolio liquidity, rather than excluding them, as the question
currently provides.\411\ We understand that reporting funds typically
include cash and cash equivalents when analyzing their portfolio
liquidity. This change will improve data quality by reducing
inadvertent errors that result from requiring advisers to report in a
way that is different from how they may report internally. This change
is more reflective of industry practice, and it is preferable to
receive reported data in a format that reflects how advisers typically
analyze portfolio liquidity.
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\411\ See Question 37.
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We are also amending the form's instructions to allow advisers to
assign each investment to more than one period, rather than directing
advisers to assign each investment to only one period, as Question 32
currently provides. We understand that directing advisers to assign an
investment to only one period may make a reporting fund's portfolio
appear less liquid than it is because it would not reflect that
reporting funds may divide up sales in different periods (e.g., a
reporting fund could sell off a portion in the first time period and
sell of the remainder in subsequent time periods). Therefore, this
change is designed to reflect the liquidity of a reporting fund's
portfolio more accurately.
While advisers will continue to be able to rely on their own
methodologies to report portfolio liquidity, we are adding an
instruction explaining that estimates must be based on a methodology
that takes into account changes in portfolio composition, position
size, and market conditions over time. Based on experience with the
form, we have found that some advisers have used static methodologies
that do not consider portfolio composition and position size relative
to the market, and therefore do not reflect a reasoned view about when
positions could be liquidated at or near carrying value. Therefore,
this change will continue to allow advisers to use their own
methodologies but improve data quality to ensure that the methodologies
generate reporting that reflects a reasonable view of portfolio
liquidity in light of changes in portfolio composition and size, and
market conditions, over time.
One commenter stated that portfolio liquidity is a metric that may
create misleading impressions when assessed on a disaggregated fund by
fund basis.\412\ As discussed more fully above in section II.A of the
Release, disaggregated reporting, rather than being misleading, allows
for a clearer understanding of the reporting fund's structure,
including its portfolio liquidity, because we can observe liquidity on
a fund by fund basis while continuing to allow aggregation of data
across the fund structure for the broader context. This commenter also
stated the proposed instruction regarding how to report the percentage
of fund's net asset value that may be liquidated within each period if
an investment is assigned to more than one period was unclear. In
consideration of this comment, we are adding an instruction to specify
that if an investment is assigned to more than one period, the adviser
should reflect the percentage of NAV that might be liquidated within
each period, rather than the percentage of NAV that the entire
investment represents.\413\ The same commenter stated that we should
clarify the meaning of the proposed instruction that estimates must be
based on a methodology that takes into account changes in portfolio
composition, position size, and market conditions over time. To address
this comment, we are also revising the instructions to specify that,
for example, estimates would change if the portfolio invests in more or
less liquid assets, if/when the portfolio investments grow to a size
relative to the liquidity of the markets in which it invests that
requires more time to liquidate, and if liquidity characteristics
change measurably and meaningfully for the assets in which the
portfolio invests.\414\ This commenter also recommended that the total
portfolio liquidity should not be expressed as a percentage of a fund's
net asset value, in light of the instruction that suggests that the
total may not add up to 100 percent.\415\ The instruction that the
total percentages should add up to approximately 100 percent is
appropriate because we recognize that rounding differences may result
in a calculated total percentage that does not equal 100 percent. We
continue to believe that portfolio liquidity should be expressed as a
percentage of net asset value because net asset value is also the unit
in which redemptions take place and would allow calculations in value,
if needed.
---------------------------------------------------------------------------
\412\ MFA Comment Letter II.
\413\ Question 37.
\414\ Id.
\415\ MFA Comment Letter II. See also Question 37.
---------------------------------------------------------------------------
Finally, to facilitate more accurate reporting, collect better
data, and reduce filer errors, we are amending the table to be included
in new Question 37 to reflect that information should be reported as a
percentage of NAV consistent with SEC staff Form PF Frequently Asked
Questions.\416\ We did not receive specific comment on this amendment.
---------------------------------------------------------------------------
\416\ See Form PF Frequently Asked Questions, supra footnote
162, Question 32.3.
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Financing and Investor Liquidity. Current Question 46 is designed
to show the extent to which financing may become rapidly unavailable
for qualifying hedge funds.\417\ We are adopting, as proposed,
amendments to current Question 46 to improve data quality thereby
supporting more effective systemic risk analysis.\418\ Advisers will be
required to provide the dollar amount of financing that is available to
the reporting fund, including financing that is available but not used,
by the following types: (1) ``unsecured borrowing,'' (2) ``secured
borrowing'' via prime brokerage, (3) secured borrowing via reverse
repo, and
[[Page 18028]]
(4) other secured borrowings.\419\ Currently, the Commissions and FSOC
infer this data from this question and current Question 43 (concerning
the reporting fund's borrowings).\420\ However, these inferences may
not be accurate given the number of assumptions that currently go into
making such inferences. This information will help us understand the
extent to which a fund's financing could be rapidly withdrawn and not
replaced. We did not receive specific comment on this amendment.
Current Question 50, which we have redesignated as Question 53,
requires an adviser to report the percentage of the fund's net asset
value that is subject to suspensions and restrictions on withdrawals/
redemptions for various time periods. In a modification from the
proposal, we are amending Question 53 to instruct the adviser to make a
good faith determination of the withdrawal and redemption restrictions
that would likely be triggered during significant market stress
conditions. This additional instruction addresses commenters' concerns
by reducing the reporting burden for advisers that advise funds with
varying redemption and withdrawal rights and improve data quality.\421\
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\417\ See 2011 Form PF Adopting Release, supra footnote 4, at
text accompanying n.281.
\418\ We redesignated current Question 46 as Question 50.
\419\ Form PF defines ``unsecured borrowing'' as obligations for
borrowed money in respect of which the borrower has not posted
collateral or other credit support. Form PF defines ``secured
borrowing'' as obligations for borrowed money in respect of which
the borrower has posted collateral or other credit support. For
purposes of this definition, reverse repos are secured borrowings.
See Form PF Glossary of Terms. These categories are designed to be
consistent with borrowing categories that qualifying hedge funds
will report on the new counterparty exposure table.
\420\ Current Question 43 collects data on the reporting fund's
borrowing by type (e.g., unsecured, and secured by type, i.e., prime
broker, reverse repo or other), while current Question 46 only
collects a total amount of financing available, both used and
unused, with no breakdown by type of financing.
\421\ As discussed more fully above in section II.B.2 of this
Release, some commenters stated that, in the context of proposed
Question 10, the proposed amendments should permit reporting of
multiple types of redemption and withdrawal rights. See, e.g., MFA
Comment Letter II; SIFMA Comment Letter; USCC Comment Letter.
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Definition of ``Hedge Fund.'' We requested comment on whether we
should amend the definition of ``hedge fund'' as it is defined in the
Form PF Glossary of Terms. After considering comments, we are not
adopting any amendments to the existing definition of ``hedge fund'' at
this time. Certain commenters generally supported revising the
definition of ``hedge fund'' to remove deemed hedge funds (i.e., a
private fund reported as a ``hedge fund'' as Form PF directs because
the fund's governing documents permit the fund to engage in certain
borrowing and short selling (even though it did not do so at any time
in the past)).\422\ These commenters supported revising the definition
of ``hedge fund'' to exclude private funds that have an ability to use
leverage or engage in shorting but do not do so in the ordinary course
of business and that the market does not generally consider to be hedge
funds. Some commenters recommended adopting a de minimis test, which
would exclude any private fund from the definition that has not
recently engaged in shorting or borrowing activity within a specified
period, such as within the last 12 months, or has not engaged in these
activities in excess of a specified amount, such as greater than 0.5%
or 1% of the fund's net asset value.\423\ One commenter recommended an
exclusion for any private fund whose borrowing activities are only
related to real estate.\424\ Another commenter recommended including a
rebuttable presumption in the definition that a private fund that holds
itself out as a hedge fund is a hedge fund, while a private equity fund
that holds itself out as pursuing a private equity strategy is not a
hedge fund, similar to the venture capital exemption under the Advisers
Act.\425\ Another commenter recommended specifying in the definition
that only private funds that provide redemption rights in the ordinary
course can be classified as hedge funds.\426\ One commenter recommended
revising the definition to remove the default treatment of commodity
pools as hedge funds.\427\
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\422\ See, e.g., AIC Comment Letter I; CFA Institute Comment
Letter; Ropes & Gray Comment Letter; Schulte Comment Letter; SIFMA
Comment Letter.
\423\ See AIC Comment Letter I; Ropes & Gray Comment Letter.
\424\ See SIFMA Comment Letter.
\425\ See Ropes & Gray Comment Letter. 17 CFR 275.203(l)-1. See
Exemptions for Advisers to Venture Capital Funds, Private Fund
Advisers with Less than $150 Million in Assets Under Management, and
Foreign Private Advisers, Advisers Act Release No. 3222 (June 22,
2011) [76 FR 39646 (July 6, 2011)].
\426\ See CFA Institute Comment Letter.
\427\ See MFA Comment Letter II.
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The existing definition is designed to include any private fund
having any one of three common characteristics of a hedge fund: (1) a
performance fee that takes into account market value (instead of only
realized gains); (2) leverage; or (3) short selling. We believe that
any private fund that has one or more of these characteristics is an
appropriate subject for the more detailed level of reporting that hedge
funds are subject to on Form PF because the questions that hedge fund
advisers are required to complete focus on these activities which bring
funds within the ``hedge fund'' definition. Without classifying these
funds as hedge funds for the purpose of Form PF, we would not receive
important reporting on these activities which may contribute to
systemic risk, particularly in the event of a fund that has the ability
to engage in borrowing or short selling activities. Incorporating any
carveouts in the definition, such as the recommended de minimis
exception for borrowing or short selling, could cause further data
mismatches and increase the burden on advisers because certain funds
could be required to fluctuate between different reporting categories
in different reporting periods depending on the fund's practices in any
given period. In our experience, such an exclusion would eliminate only
a limited number of private funds from the reporting category. We also
believe that short selling and borrowing are important distinguishing
characteristics of hedge funds and providing any exception for these
activities, including a de minimis one, could have a significant,
negative effect on reporting. Therefore, we do not believe that
including responses from these private funds in the reporting
information from hedge fund advisers impairs our data quality. We also
believe adopting a rebuttable presumption is not appropriate because it
would increase burdens on advisers by effectively requiring an adviser
to produce evidence of its filing category. Further, this approach
would effectively allow an adviser to determine whether it reports the
additional information that hedge fund advisers are required to report
on Form PF, which would diminish the quality and value of data
collected on Form PF. Additionally, as it relates to the treatment of
commodity pools as hedge funds for reporting purposes, such treatment
further aligns the consistency of questions asked across these
entities, both on this Form PF, as well as on the CFTC's Form CPO-PQR.
D. Amendments To Enhance Data Quality
We are also adopting, as proposed except as specifically provided
below, several amendments to the instructions to Form PF to enhance
data quality.\428\ Specifically, we are adopting the following changes:
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\428\ Instruction 15 (provides guidelines for advisers in
responding to questions on Form PF relying on their own
methodology).
---------------------------------------------------------------------------
Reporting of percentages. For questions that require information to
be expressed as a percentage, we are adopting, as proposed, an
amendment to
[[Page 18029]]
require that percentages be rounded to the nearest one hundredth of one
percent rather than rounded to the nearest whole percent. This
additional level of precision is important, especially for questions
where it is common for filers to report low percentage values (e.g.,
risk metric questions such as Question 40 and Question 42) to avoid
situations where advisers round to zero and no data is reported,
potentially obscuring small changes that may be meaningful from a risk
analysis or stress testing perspective. One commenter stated that the
requirement to report information expressed as a percentage to the
nearest one hundredth of one percent will significantly increase the
costs and additional burdens for reporting advisers.\429\ This
commenter also stated that, if the Commissions provide a basis for
requiring additional granularity, the Commissions should amend the
instruction to require reporting rounded to the nearest one tenth of
one percent, rather than one hundredth of one percent.
---------------------------------------------------------------------------
\429\ MFA Comment Letter II.
---------------------------------------------------------------------------
Percentages rounded to the nearest one hundredth of one percent
will allow the Commissions to obtain and analyze more precise
information that may otherwise be obscured. For example, one one-
hundredth of one percent can represent a meaningful dollar amount
depending on the size of the private fund. And, while we recognize that
this may not be the case for smaller funds, when such amounts are taken
together for a large group of smaller funds, the aggregate amount
across the fund group can represent a meaningful dollar amount for data
analysis purposes. Furthermore, as noted above, this level of detail is
particularly important for questions where it is common for filers to
report low percentage values to avoid situations where advisers round
to zero and no data is reported. Finally, we understand that many
advisers already use electronic spreadsheet programs and other tools to
generate percentages and assist with rounding, which should limit the
incremental burdens and costs on advisers. While we considered less
granular reporting, such as rounding to the nearest one tenth of one
percent, the adopted threshold strikes an appropriate balance between
enhancing Form PF data quality and the burdens and costs of reporting
this information on Form PF.
Value of investment positions and counterparty exposures. We are
amending, as proposed, the instructions to specify how private fund
advisers determine the value of investment positions (including
derivatives) and counterparty exposures. We are adopting amendments to
require derivatives trades to be reported independently on a gross
basis, consistent with derivatives reporting on Form N-PORT.\430\ We
are also amending the instruction that for all positions reported on
Form PF, to not include as ``closed-out'' a position if the position is
closed out with the same counterparty and results in no credit or
market exposure to the fund, making the approach on Form PF with
respect to closed out positions consistent with rule 18f-4 of the
Investment Company Act and our understanding of filers' current
practices.\431\ We did not receive specific comment on these
amendments. These changes will provide a more consistent presentation
of reported information on investment and counterparty exposures to
support more accurate aggregation and comparisons among private funds
by us and FSOC in assessing systemic risk.
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\430\ Specifically, Instruction 15 requires that if a question
in Form PF requests information regarding a ``position'' or
``positions,'' advisers must treat legs of a transaction even if
offsetting or partially offsetting, or even if entered into with the
same counterparty under the same master agreement as two separate
positions, even if reported internally as part of a larger
transaction. See also instructions to N-PORT, General Instruction G.
\431\ See Use of Derivatives by Registered Investment Companies
and Business Development Companies, Release No. 34084 (Nov. 2, 2020)
[85 FR 83162, 83210 (Dec. 21, 2020)]. See also Form PF Frequently
Asked Questions, supra footnote 162, Question 44.1.
---------------------------------------------------------------------------
Reporting of long and short positions. We are amending, as
proposed, the instructions regarding the reporting of long and short
positions on Form PF to improve the accuracy and consistency of
reported data used for systemic risk analysis. The amended instructions
specify that if a question requires the adviser to distinguish long
positions from short positions, the adviser should classify positions
based on the following: (1) a long position experiences a gain when the
value of the market factor to which it relates increases (and/or the
yield of that factor decreases), and (2) a short position experiences a
loss when the value of the market factor to which it relates increases
(and/or the yield of that factor decreases). Although some commenters
supported the proposed amendments to require advisers to report their
long and short holdings on a disaggregated basis \432\ and other
commenters opposed the requirements for more detailed disclosure of
holdings,\433\ we did not receive specific comment on the proposed
change to the instructions defining long and short positions. The
amended instructions will improve the data quality and comparability
used for systemic risk analysis.
---------------------------------------------------------------------------
\432\ See AFREF Comment Letter I; Better Markets Comment Letter.
See supra section II.C.2.a.
\433\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter. See supra section II.C.2.a.
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Calculating certain derivative values. We are amending, with a
modification from the proposal, the instruction to provide that, (1)
for calculating the value of interest rate derivatives, ``value'' means
the 10-year bond equivalent, and (2) for calculating the value of
options, ``value'' means the delta adjusted notional value (expressed
as a 10-year bond equivalent for options that are interest rate
derivatives).\434\ In a change from the proposal, the amended
instructions provide that the value should be expressed in U.S.
dollars, rather than the base currency of the reporting fund, to
maintain consistent currency reporting throughout Form PF. One
commenter stated that the definition of ``10-year bond equivalent''
specifies the expression of the value in the fund's base currency,
which could result in requiring multiple currency conversions for any
transactions not in the fund's base currency.\435\ We are revising the
``10-year bond equivalent'' definition to reference U.S. dollars,
rather than the fund's base currency. We are making this change because
it is important for metrics to be reported in a common currency for
data quality and comparability purposes. The amended instruction also
provides that in determining the value of these derivatives, advisers
should not net long and short positions or offset trades but should
exclude closed-out positions that are closed out with the same
counterparty provided that there is no credit or market exposure to the
fund. The amendments are designed to provide more consistent reporting
by advisers, which will help support more accurate aggregation of data,
better comparisons among funds, and a more accurate picture for
purposes of assessing systemic risk.\436\
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\434\ See Form PF Glossary of Terms (definition of ``10-year
bond equivalent'' specifies the 10-year zero coupon bond
equivalent).
\435\ AIMA/ACC Comment Letter.
\436\ This is consistent with staff Form PF Frequently Asked
Questions, see, e.g., supra footnote 162, Questions 24.3 and 26.1.
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Currency Conversions for Reporting in U.S. Dollars. We are
amending, as proposed, Instruction 15 to specify that if a question
requests a monetary value, advisers should provide the information
[[Page 18030]]
in U.S. dollars as of the data reporting date or other requested date
(as applicable) and use a foreign exchange rate for the applicable
date. We are also amending Instruction 15 to provide that if a question
requests a monetary value for transactional data that covers a
reporting period, advisers should provide the information in U.S.
dollars, rounded to the nearest thousand, using foreign exchange rates
as of the dates of any transactions to convert local currency values to
U.S. dollars.\437\
---------------------------------------------------------------------------
\437\ See Instruction 15.
---------------------------------------------------------------------------
One commenter stated that private funds should be required to
report their holdings in the fund's base currency, rather than convert
to U.S. dollars, to allow for assessment of the extent of a fund's
currency risk exposure.\438\ We agree that currency exposure reporting
is important for understanding a fund's overall risk exposure and for
systemic risk analysis and, as discussed more fully in section II.C
above, we are adopting other amendments to Form PF that require large
hedge fund advisers to report additional data on the fund's currency
risk exposure.\439\ Regarding currency reporting, however, it is
important for data comparability for advisers to report in a common
currency, rather than in a fund's base currency, and for an adviser to
determine foreign exchange rates consistent with its valuation policies
because reporting in a common currency allows the Commissions to
evaluate aggregate data, such as exposures, more readily. One commenter
recommended specifying a required time of day and methodology for
determining the applicable foreign exchange rate to avoid inconsistent
data.\440\ Although specifying a time of day and methodology could
improve data comparability, this would distort values reported on Form
PF from what advisers calculate and report to their investors because
these values are similar to prices on any other portfolio investment.
For a foreign exchange rate, the adviser is valuing a currency, but
generally should be doing so using the same source, time of day, or
other methodology for capturing foreign exchange rates as is defined in
the adviser's or fund's valuation policy. It is preferable for advisers
to report values using the foreign exchange rate practices they use
internally and to report to their investors.
---------------------------------------------------------------------------
\438\ AFREF Comment Letter I.
\439\ See Question 33.
\440\ AIMA/ACC Comment Letter.
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E. Additional Amendments
We are adopting, as proposed except as indicated below, several
additional amendments to the general instructions to Form PF. We are
adopting an amendment to Instruction 14 to allow advisers to request a
temporary hardship exemption electronically to make it easier to submit
a temporary hardship exemption.\441\ We are also adopting an amendment
to 17 CFR 275.204(b)-1(f) under the Advisers Act, that for purposes of
determining the date on which a temporary hardship exemption is filed,
``filed'' means the earlier of the date the request is postmarked or
the date it is received by the Commission.\442\ We are adopting the
latter change to assist advisers with determining what constitutes a
``filed'' temporary hardship exemption in the context of the
requirement that the request be filed no later than one business day
after a filer's electronic Form PF filing was due as required under
Instruction 14. We did not receive comments on these proposed
amendments.
---------------------------------------------------------------------------
\441\ We are also adopting amendments to update the mailing
address to which advisers requesting a temporary hardship exemption
should mail their exemption filing, include the email address for
submitting electronically the adviser's signed exemption filing in
PDF format, and add an instruction noting that filers should not
complete or file any other sections of Form PF if they are filing a
temporary hardship exemption. See Instruction 14. The reference
regarding the instruction pertaining to temporary hardship
exemptions has also been amended to refer to Instruction 14 instead
of Instruction 13 and, as a result of the amendments set forth in
the May 2023 SEC Form PF Amending Release, to refer to section 7
instead of section 5. See Form PF General Instruction 3, Section 7--
Advisers requesting a temporary hardship exemption.
\442\ We are also adopting amendments to 17 CFR 275.204(b)-1(f)
under the Advisers Act to remove certain filing instructions in the
rule for temporary hardship exemptions and instead direct filers to
the instructions in the form. See 17 CFR 275.204(b)-1(f)(2)(i)
(indicating that advisers should complete and file Form PF in
accordance with the instructions to Form PF, no later than one
business day after the electronic Form PF filing was due).
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Additionally, we are adopting, as proposed, amendments to
Instruction 18 based on recent rule changes made by the CFTC with
respect to Form CPO-PQR.\443\ While the CFTC no longer considers Form
PF reporting on commodity pools as constituting substituted compliance
with CFTC reporting requirements, some CPOs may continue to report such
information on Form PF. Although some commenters recommended that the
Commissions harmonize filing requirements between Form PF and Form CPO-
PQR,\444\ we did not receive comments on the proposed change to the
instructions on substituted compliance.
---------------------------------------------------------------------------
\443\ See Form CPO-PQR Release, supra footnote 100.
\444\ See, e.g., MFA Comment Letter II; SIFMA Comment Letter.
---------------------------------------------------------------------------
We are adopting, as proposed, amendments to the defined term
``G10,'' which Form PF defines as the Group of Ten, to (1) remove
outdated country compositions and (2) include an instruction that if
the composition of the G10 changes after the effective date of these
amendments to Form PF, advisers should use the current composition as
of the data reporting date. In a modification from the proposal, we are
not adopting the proposed amendments to the defined term ``EEA,'' as
this term is no longer used in the Form following the amendments we are
adopting to current Question 28.\445\ We are also removing ``EEA'' as a
defined term in the Glossary for the same reason. We did not receive
comments on these proposed definitional changes.
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\445\ See section II.C.2.d in this Release for further
discussion of the amendments to current Question 28.
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Additionally, the SEC is making a technical amendment to Section 5
Item B ``Extraordinary Investment Losses'' to correct a mathematical
error in the version of the form adopted as part of the May 2023 SEC
Form PF Amending Release. \446\ Specifically, the SEC is revising the
equation in the first sentence so that it accurately reflects that the
10-business-day holding period return computation should be a
percentage, rather than a value. To accomplish this, the SEC is
deleting the phrase ``of reporting fund aggregate calculated value'' in
Section 5 Item B ``Extraordinary Investment Losses'' current report for
large hedge fund advisers to qualifying hedge funds.\447\
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\446\ In May 2023, the SEC amended Form PF section 4, added new
sections 5 and 6, and redesignated prior section 5 as section 7 in
connection with certain amendments to require event reporting for
large hedge fund advisers and all private equity fund advisers and
to revise certain reporting requirements for large private equity
fund advisers. See May 2023 SEC Form PF Amending Release.
\447\ As revised, Section 5 Item B states: If on any business
day the 10-business-day holding period return of the reporting fund
is less than or equal to -20%, provide the information required by
Questions 5-4 to 5-7, below. (Current reports should not be filed
for overlapping 10-business-day periods.).
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F. Effective and Compliance Dates
In order to provide time for advisers to prepare to comply with the
amendments, including reviewing the requirements, building the
appropriate internal reporting and tracking systems, and collecting the
required information, as well as to simplify the compliance process and
reduce potential confusion, the effective date for the amendments is
[[Page 18031]]
the same as the compliance date.\448\ The effective/compliance date is
March 12, 2025, which is one year from the date of publication of the
rules in the Federal Register. We recognize that the different
effective/compliance date for these amendments from those adopted in
the May 2023 SEC Form PF Amending Release and the July 2023 SEC Form PF
Amending Release may lead to inconsistent reporting as well as
additional compliance burdens because we are amending certain existing
questions in Form PF.\449\ If a period exists during which some
advisers may be completing the old version of these questions and other
advisers are completing the amended versions, they may be providing
different types of information. This information could be difficult to
compare and thus would limit its value for the FSOC and our assessment
of systemic risk. However, the amendments we are adopting relate to
different sections of Form PF than those adopted in the May 2023 SEC
Form PF Amending Release and the July 2023 SEC Form PF Amending
Release. Therefore, we will continue to be able to review the data that
is reported in sections 1 and 2 of Form PF during the period between
the effective/compliance date of the amendments adopted in the May 2023
SEC Form PF Amending Release and the July 2023 SEC Form PF Amending
Release. For example, during the transition period between the
effective/compliance date of the amendments adopted in May and July,
the data reported on sections 1 and 2 of Form PF will retain its
comparability as all filers will report on the same sets of questions
in these sections.
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\448\ With respect to the compliance period, several commenters
requested the SEC consider interactions between the proposed rule
and other recent SEC rules. In determining compliance periods, the
SEC considers the benefits of the rules as well as the costs of
delayed compliance periods and potential overlapping compliance
periods. For the reasons discussed throughout this release, to the
extent that there are costs from overlapping compliance periods, the
benefits of the rule justify such costs. See sections IV.B.1 and
IV.C.2 of this Release for a discussion of the interactions of the
final rule with certain other Commission rules.
\449\ For the amendments adopted in the May 2023 SEC Form PF
Amending Release, the effective/compliance date for sections 5 and 6
is Dec. 11, 2023, and the effective compliance/date for the amended,
existing sections, is June 11, 2024. See May 2023 SEC Form PF
Amending Release, supra footnote 4. For the amendments adopted in
the July 2023 SEC Form PF Amending Release, the effective/compliance
date for the amendments to Form PF is also June 11, 2024. See July
2023 SEC Form PF Amending Release, supra footnote 4.
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Some commenters recommended adopting the same effective and
compliance date for the amendments proposed in the 2022 SEC Form PF
Proposing Release and the 2022 Joint Form PF Proposing Release because
it would be more efficient for advisers to implement a single set of
changes to its systems.\450\ One commenter recommended that the
Commissions provide sufficient time for advisers to comply with any new
rules arising out of the 2022 SEC Form PF Proposing Release and the
2022 Joint Form PF Proposing Release.\451\ One commenter recommended
that the Commissions adopt concurrent and overlapping compliance and
transition periods for each set of proposed amendments to lessen the
burden and expense of compliance.\452\
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\450\ See, e.g., MFA Comment Letter III; SIFMA Comment Letter.
Subsequent to these comment letters, the SEC adopted amendments to
section 3 of Form PF concerning liquidity funds. See July 2023 SEC
Form PF Amending Release, supra footnote 4.
\451\ SIFMA Comment Letter.
\452\ AIMA/ACC Comment Letter.
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We recognize that a single set of effective/compliance dates for
each set of amendments could potentially provide certain efficiencies
for advisers in modifying their existing systems. We considered earlier
effective/compliance dates for the amendments adopted in this Release
that would align with the effective/compliance dates adopted for the
May/July amendments; however, we do not believe that either of the
compliance/effective dates for the other amendments to Form PF would
provide advisers with sufficient time to comply with the distinct set
of amendments that are being adopted in this Release. The compliance/
effective dates for the distinct set of Form PF amendments that we are
adopting, which apply to different sections of the Form than the May/
July amendments to Form PF, are later than the effective/compliance
dates of the May/July amendments to allow advisers sufficient time to
comply with the amendments that are being adopted in this Release, as
well as the May/July amendments.
One commenter recommended a transition period for the change from
fiscal quarter to calendar quarter reporting for large hedge fund
advisers and large liquidity fund advisers, as discussed more fully in
section II.A.3 above.\453\ The commenter stated that for quarterly
filers who have a fiscal year ending in a non-calendar quarter month,
the proposed instructions do not specify the procedure for a filer who,
during the transition from fiscal to calendar quarter reporting, would
otherwise be required to report twice in one calendar quarter.\454\ The
commenter recommended that such filers be required to file their first
calendar quarter-end filing for the first full quarterly reporting
period after the compliance date, to avoid requiring two filings in a
single calendar quarter period.\455\ After considering comments, we
confirm that such an adviser is not required to file its quarterly
report more than once in a single calendar quarter as a result of this
amendment because advisers are not required to transition to the new
timing requirement until the first calendar quarter-end filing for the
first full quarterly reporting period after the compliance date.
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\453\ Id.
\454\ Id.
\455\ Id.
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III. Other Matters
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules as not a ``major
rule'' as defined by 5 U.S.C. 804(2). If any of the provisions of these
rules, or the application thereof to any person or circumstance, is
held to be invalid, such invalidity shall not affect other provisions
or application of such provisions to other persons or circumstances
that can be given effect without the invalid provision or application.
IV. Economic Analysis
A. Introduction
The SEC is mindful of the economic effects, including the costs and
benefits, of the final amendments. Section 202(c) of the Advisers Act
provides that when the SEC is engaging in rulemaking under the Advisers
Act and is required to consider or determine whether an action is
necessary or appropriate in the public interest, the SEC shall also
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors.\456\ The
analysis below addresses the likely economic effects of the final
amendments, including the anticipated and estimated benefits and costs
of the amendments and their likely effects on efficiency, competition,
and capital formation. The SEC also discusses the potential economic
effects of certain alternatives to the approaches taken in this
Release.
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\456\ 15 U.S.C. 80b-2(c).
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As discussed in the proposing release, many of the benefits and
costs discussed below are difficult to quantify. For example, in some
cases, data needed to quantify these economic effects are not currently
available and the SEC does not have information or data that would
allow such quantification. While the SEC has attempted to quantify
economic
[[Page 18032]]
effects where possible, much of the discussion of economic effects is
qualitative in nature.
B. Economic Baseline and Affected Parties
1. Economic Baseline
The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final amendments
are measured consists of the current state of the market, Form PF
filers' current practices, and the current regulatory framework. The
economic analysis appropriately considers existing regulatory
requirements, including recently adopted rules, as part of its economic
baseline against which the costs and benefits of the final rule are
measured.\457\
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\457\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C.
Cir. 2022). This approach also follows SEC staff guidance on
economic analysis for rulemaking. See SEC Staff, Current Guidance on
Economic Analysis in SEC Rulemaking (Mar. 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). The best assessment of how the world would look in
the absence of the proposed or final action typically does not
include recently proposed actions, because doing so would improperly
assume the adoption of those proposed actions.
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Several commenters requested the Commission consider interactions
between the economic effects of the proposed rule and other recent
Commission proposals.\458\ Commenters indicated there could be
interactions between this rulemaking and six proposals \459\ that have
since been adopted: the May 2023 SEC Form PF Amending Release,\460\ SEC
Private Funds Advisers Adopting Release,\461\ Beneficial Ownership
Amending Release,\462\ Short Position Reporting Adopting Release,\463\
Securitizations Conflicts Adopting Release,\464\ Treasury Clearing
Amending Release,\465\ and Dealer Definition Amending Release.\466\
These recently adopted rules were not included as part of the baseline
in the 2022 Joint Form PF Proposing Release because they were not
adopted at that time. In response to commenters, this economic analysis
considers potential economic effects arising from the extent to which
there is any overlap between
[[Page 18033]]
the compliance period for the final amendments and the compliance
periods for each of these recently adopted rules.\467\
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\458\ See, e.g., MFA Comment Letter III; SIFMA Comment Letter;
AIC Comment Letter I; AIC Comment Letter II; MFA/NAPFM Comment
Letter; Comment Letter of U.S. House of Representatives Committee on
Financial Services.
\459\ Amendments to Form PF to Require Current Reporting and
Amend Reporting Requirements for Large Private Equity Advisers and
Large Liquidity Fund Advisers, Release No. IA-5950 (Jan. 26, 2022)
[87 FR 9106 (Feb. 17, 2022)] (see MFA/NAPFM Comment Letter at 20,
n.21 and accompanying text; AIC Comment Letter II at 8, n.25);
Private Fund Advisers; Documentation of Registered Investment
Adviser Compliance Reviews, Release No. IA-5955 (Feb. 9, 2022) [87
FR 16886 (Mar. 24, 2022)] (see MFA/NAPFM Comment Letter at 10-12;
AIC Comment Letter II at 1, n.3, 8); Modernization of Beneficial
Ownership Reporting, Release Nos. 33-11030, 34-94211 (Feb. 10, 2022)
[87 FR 13846 (Mar. 10, 2022)] (see MFA/NAPFM Comment Letter at 14-
15); Short Position and Short Activity Reporting by Institutional
Investment Managers, Release No. 34-94313 (Feb. 25, 2022) [87 FR
14950 (Mar. 16, 2022)] (see MFA/NAPFM Comment Letter at 15-16);
Prohibition Against Conflicts of Interest in Certain
Securitizations, Release No. 33-11151 (Jan. 25, 2023) [88 FR 9678
(Feb. 14, 2023)] (see MFA/NAPFM Comment Letter at 21-22); Standards
for Covered Clearing Agencies for U.S. Treasury Securities and
Application of the Broker-Dealer Customer Protection Rule With
Respect to U.S. Treasury Securities, Release No. 34-95763 (Sept. 14,
2022) [87 FR 64610 (Oct. 25, 2022)] (see July 2023 MFA and NAPFM
Comment Letter at 16-17); Further Definition of ``As a Part of a
Regular Business'' in the Definition of Dealer and Government
Securities Dealer, Release No. 34-94524 (Mar. 28, 2022) [87 FR 23054
(Apr. 18, 2022)] (see MFA/NAPFM Comment Letter at 12-13; AIC Comment
Letter II at n.3, n.16, n.30).
\460\ May 2023 SEC Form PF Amending Release, supra footnote 4.
The Form PF amendments adopted in May 2023 require large hedge fund
advisers and all private equity fund advisers to file reports upon
the occurrence of certain reporting events. The May 2023 SEC Form PF
Amending Release revised Form PF to (i) add new current reporting
requirements for large hedge fund advisers to qualifying hedge funds
upon the occurrence of key events (new section 5); (ii) add new
quarterly reporting requirements for all private equity fund
advisers upon the occurrence of key events (new section 6); and
(iii) add and revise new regular reporting questions for large
private equity fund advisers. The compliance dates are Dec. 11,
2023, for the event reports in Form PF sections 5 and 6, and June
11, 2024, for the remainder of the Form PF amendments in the May
2023 SEC Form PF Amending Release.
\461\ SEC Private Fund Advisers Adopting Release, supra footnote
185. The Commission adopted five new rules and two rule amendments
as part of the reforms. The compliance date for the quarterly
statement rule and the audit rule is Mar. 14, 2025, for all
advisers. For the adviser-led secondaries rule, the preferential
treatment rule, and the restricted activities rule, the Commission
adopted staggered compliance dates that provide for the following
transition periods: for advisers with $1.5 billion or more in
private funds assets under management, a 12-month transition period
(ending on Sept. 14, 2024) and for advisers with less than $1.5
billion in private funds assets, an 18-month transition period
(ending on Mar. 14, 2025). The compliance date for the amended
Advisers Act compliance rule was Nov. 13, 2023.
\462\ Modernization of Beneficial Ownership Reporting, Release
No. 33-11253 (Oct. 10, 2023) (``Beneficial Ownership Amending
Release''). Among other things, the amendments generally shorten the
filing deadlines for initial and amended beneficial ownership
reports filed on Schedules 13D and 13G, and require that Schedule
13D and 13G filings be made using a structured, machine-readable
data language. The amendments are effective on Feb. 5, 2024.
Compliance with the new filing deadline for Schedule 13G will not be
required before Sept. 30, 2024, and the rule's structured data
requirements have a one-year implementation period ending Dec. 18,
2024. See Beneficial Ownership Amending Release, section II.G.
\463\ Short Position and Short Activity Reporting by
Institutional Investment Managers, Release No. 34-98738 (Oct. 13,
2023) [88 FR 75100 (Nov. 1, 2023)] (``Short Position Reporting
Adopting Release''). The new rule and related form are designed to
provide greater transparency through the publication of short sale-
related data to investors and other market participants. Under the
new rule, institutional investment managers that meet or exceed
certain specified reporting thresholds are required to report, on a
monthly basis using the related form, specified short position data
and short activity data for equity securities. The compliance date
for the rule is Jan. 2, 2025. In addition, the Short Position
Reporting Adopting Release amends the national market system plan
governing consolidated audit trail (``CAT'') to require the
reporting of reliance on the bona fide market making exception in
the Commission's short sale rules. The compliance date for the CAT
amendments is July 2, 2025.
\464\ Prohibition Against Conflicts of Interest in Certain
Securitizations, Release No. 33-11254 (Nov. 27, 2023) [88 FR 85396
(Dec. 7, 2023)] (``Securitizations Conflicts Adopting Release'').
The new rule prohibits an underwriter, placement agent, initial
purchaser, or sponsor of an asset-backed security (including a
synthetic asset-backed security), or certain affiliates or
subsidiaries of any such entity, from engaging in any transaction
that would involve or result in certain material conflicts of
interest. The compliance date is June 9, 2025.
\465\ Standards for Covered Clearing Agencies for U.S. Treasury
Securities and Application of the Broker-Dealer Customer Protection
Rule with Respect to U.S. Treasury Securities, Release No. 34-99149
(Dec. 13, 2023) [89 FR 2714 (Jan. 16, 2024)] (``Treasury Clearing
Adopting Release''). Among other things, the rules require covered
clearing agencies for U.S. Treasury securities to have written
policies and procedures reasonably designed to require that every
direct participant of the covered clearing agency submit for
clearance and settlement all eligible secondary market transactions
in U.S. Treasury securities to which it is a counterparty. The
compliance dates are 60 days after publication in the Federal
Register for each covered clearing agency to file any proposed rule
changes pursuant to final Rule 17Ad-22(e)(6)(i), 17Ad-
22(e)(18)(iv)(c), and 15c3-3, and the rule changes must be effective
by Mar. 31, 2025. With respect to the changes to Rule 17Ad-
22(e)(18)(iv)(A) and (B), (i) each covered clearing agency will be
required to file any proposed rule changes regarding those
amendments no later than 150 days after publication in the Federal
Register, and the proposed rule changes must be effective by Dec.
31, 2025, for cash market transactions encompassed by section (ii)
of the definition of an eligible secondary market transaction, and
by June 30, 2026, for repo transactions encompassed by section (i)
of the definition of an eligible secondary market transactions.
Compliance by the direct participants of a U.S. Treasury securities
covered clearing agency with the requirement to clear eligible
secondary market transactions would not be required until Dec. 31,
2025 and June 30, 2026, respectively, for cash and repo
transactions.
\466\ Further Definition of ``As a Part of a Regular Business''
in the Definition of Dealer and Government Securities Dealer in
Connection with Certain Liquidity Providers, Release No. 34-99477
(Jan. 24, 2024) (``Dealer Definition Amending Release''). The dealer
definition amendments define the phrase ``as a part of a regular
business'' as used in the statutory definitions of ``dealer'' and
``government securities dealer.'' The compliance date is one year
from the effective date, or approximately Mar. 2025, for persons
engaging in activities that meet the dealer registration
requirements to register prior to the effective date of the final
rules.
\467\ In addition, commenters indicated there could also be
overlapping compliance costs between the final amendments and
proposals that have not been adopted. See, e.g., AIC Comment Letter
II; MFA/NAPFM Comment Letter. To the extent those proposals are
adopted, the baseline in those subsequent rulemakings will reflect
the existing regulatory requirements at that time.
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Form PF complements the basic information about private fund
advisers and funds reported on Form ADV.\468\ As discussed above, the
Commissions adopted Form PF in 2011, with additional amendments made to
section 3 along with certain money market reforms in 2014,\469\ further
amendments made to sections 3 and 4 in 2023, and new sections 5 and 6
added in 2023 as well.\470\ Unlike Form ADV, Form PF is not an
investor-facing disclosure form. Information that private fund advisers
report on Form PF is provided to regulators on a confidential basis and
is nonpublic.\471\ The purpose of Form PF is to provide the Commissions
and FSOC with data that regulators can deploy in their regulatory and
oversight programs directed at assessing and managing systemic risk and
protecting investors.\472\
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\468\ Investment advisers to private funds report on Form ADV,
on a public basis, general information about private funds that they
advise, including basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv; see also Investment
Adviser Public Disclosure, available at https://adviserinfo.sec.gov/.
\469\ See supra footnote 3. When the SEC adopted the amendments
to section 3 in 2014 in connection with certain money market
reforms, it noted that under the proposal it was concerned that some
of the proposed money market reforms might result in assets shifting
from registered money market funds to unregistered products such as
liquidity funds, and that the proposed amendments were designed to
help the SEC and FSOC track any potential shift in assets and better
understand the risks associated with the proposed money market
reforms. See, e.g., D. Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators (Jan. 27, 2017), available at
https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf
(``Hiltgen Paper''); 2011 Form PF Adopting Release, supra footnote
4; 2014 Form PF Amending Release, supra footnote 4, at 466;
Commissioner Luis Aguilar Statement, Strengthening Money Market
Funds to Reduce Systemic Risk, SEC (July 23, 2014), available at
https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statment-laa.
\470\ May 2023 SEC Form PF Amending Release, supra footnote 4;
July 2023 SEC Form PF Amending Release supra footnote 4.
\471\ As discussed above, SEC staff publish quarterly reports of
aggregated and anonymized data regarding private funds on the SEC's
website. See supra footnote 5; see also Private Fund Statistics Q1
2023.
\472\ See supra section I.
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Before Form PF was adopted, the SEC and other regulators, including
the CFTC, had limited visibility into the economic activity of private
fund advisers and relied largely on private vendor databases about
private funds that covered only voluntarily provided private fund data
and did not represent the total population.\473\ Form PF represented an
improvement in available data about private funds, both in terms of its
reliability and completeness.\474\ Generally, investment advisers
registered (or required to be registered) with the SEC with at least
$150 million in private fund assets under management must file Form PF.
Smaller private fund advisers and all private equity fund advisers file
annually to report general information 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.\475\ In addition, large private equity fund
advisers provide data about each private equity fund they manage. Large
hedge fund advisers and large liquidity fund advisers also provide data
about each reporting fund they manage, and are required to file
quarterly, currently after each fiscal quarter.\476\
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\473\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\474\ Id.
\475\ Id.
\476\ Id.; see also supra section II.A.3.
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The SEC and other regulators now have almost a decade of experience
with analyzing the data collected on Form PF. The collected data has
helped FSOC establish a baseline picture of the private fund industry
for the use in assessing systemic risk \477\ and improved the SEC's
oversight of private fund advisers.\478\ Form PF data also has enhanced
the SEC's and FSOC's ability to frame regulatory policies regarding the
private fund industry, its advisers, and the markets in which they
participate, as well as more effectively evaluate the outcomes of
regulatory policies and programs directed at this sector, including the
management of systemic risk and the protection of investors.\479\
Additionally, based on the data collected through Form PF filings,
regulators have been able to regularly inform the public about ongoing
private fund industry statistics and trends by generating quarterly
Private Fund Statistics reports \480\ and by making publicly available
certain results of staff research regarding the characteristics,
activities, and risks of private funds.\481\ As discussed above, these
data may also be used by the CFTC for the purposes of its regulatory
programs, including examinations, investigations and investor
protection efforts.\482\
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\477\ See, e.g., OFR, 2021 Annual Report to Congress (Nov.
2021), available at https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf; Financial Stability
Oversight Council, 2020 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
\478\ See, e.g., SEC 2020 Staff Report, supra footnote 473.
\479\ See supra footnotes 477, 478.
\480\ See supra footnote 471.
\481\ See, e.g., David C. Johnson & Francis A. Martinez, Form PF
Insights on Private Equity Funds and Their Portfolio Companies, OFR
Brief Series No. 18-01 (June 14, 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; Hiltgen Paper, supra footnote 470; George
Aragon, A. Tolga Ergun, Mila Getmansky & Giulio Girardi, Hedge
Funds: Portfolio, Investor, and Financing Liquidity (May 17, 2017),
available at https://www.sec.gov/files/dera_hf-liquidity.pdf; George
Aragon, Tolga Ergun & Giulio Girardi, Hedge Fund Liquidity
Management: Insights for Fund Performance and Systemic Risk
Oversight (May 2017), available at https://www.sec.gov/files/dera_hf-liquidity-management.pdf; Mathis S. Kruttli, Phillip J.
Monin & Sumudu W. Watugala, The Life of the Counterparty: Shock
Propagation in Hedge Fund-Prime Broker Credit Networks (OFR Working
Paper No. 19-03, Oct. 2019), available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-03_the-life-of-the-counterparty.pdf; Mathias S. Kruttli, Phillip J. Monin,
Lubomir Petrasek & Sumudu W. Watugala, Hedge Fund Treasury Trading
and Funding Fragility: Evidence from the COVID-19 Crisis, Fed. Rsrv.
Bd., Fin. and Econ. Discussion Series No. 2021-038 (Apr. 2021),
available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; Mathias S. Kruttli, Phillip J. Monin & Sumudu W.
Watugala, Investor Concentration, Flows, and Cash Holdings: Evidence
from Hedge Funds, Fed. Rsrv. Bd., Fin. and Econ. Discussion Series
No. 2017-121 (Dec. 15, 2017), available at https://www.federalreserve.gov/econres/feds/investor-concentration-flows-and-cash-holdings-evidence-from-hedge-funds.htm.
\482\ See supra section I.
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However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where more granular and
timely information would improve the SEC's and FSOC's understanding of
the private fund industry and the potential systemic risk relating to
its activities, and improve regulators' ability to protect
investors.\483\ For example, as discussed above, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. Treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S. Treasury
[[Page 18034]]
market.\484\ Also during the COVID-19 market turmoil, FSOC sought to
evaluate the role hedge funds played in disruptions in the U.S.
Treasury market by unwinding cash-futures basis trade positions and
taking advantage of the near-arbitrage between cash and futures prices
of U.S. Treasury securities. Because the existing requirement regarding
turnover reporting on U.S. Treasury securities is highly aggregated,
the SEC staff, during retrospective analyses on the March 2020 market
events, was unable to obtain a complete picture of activity relating to
long treasuries and treasury futures.\485\ The need for more granular
information collected on Form PF is further heightened by the
increasing significance of the private fund industry to financial
markets, and resulting regulatory concerns regarding potential risks to
U.S. financial stability from this sector.\486\ The SEC's and FSOC's
experiences analyzing Form PF data has also identified certain areas of
Form PF where questions result in data received that is redundant to
other questions, or instructions that result in unnecessary reporting
burden for some advisers.\487\
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\483\ See supra section I.
\484\ See supra section II.C.2.a.
\485\ See supra section II.C.2.d. This also includes the SEC's
and FSOC's experience analyzing data from multiple regulatory
filings. For example, one SEC staff paper has used Form PF data and
Form N-MPF data to study rule 2a-7 risk limits and implications of
money market reforms. See, e.g., Hiltgen Paper, supra footnote 470.
\486\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. See supra footnote 5; see also
Financial Stability Oversight Council Update on Review of Asset
Management Product and Activities (2014), available at https://home.treasury.gov/system/files/261/Financial%20Stability%20Oversight%20Council%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
\487\ Based on the analysis in section V.C., the current costs
associated with filing Form PF report are estimated to be $4,815
annually for smaller private fund advisers, $48,150 per quarterly
filing or $192,600 annually for large hedge fund advisers, $22,470
per quarterly filing or $89,880 annually for large liquidity fund
advisers, and $41,730 annually for large private equity fund
advisers. A 2018 industry survey of large hedge fund advisers
observed filing costs that ranged from 35% to 72% higher than SEC
cost estimates. See MFA Letter to Chairman Clayton, supra footnote
164. However, a 2015 academic survey of SEC-registered investment
advisers to private funds affirmed the SEC's cost estimates for
smaller private fund advisers' Form PF compliance costs, and
observed that the SEC overestimated Form PF compliance costs for
larger private fund advisers. See Wulf Kaal, Private Fund
Disclosures Under the Dodd-Frank Act, 9 Brooklyn J. Corp., Fin., and
Com. L. 428 (2015).
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2. Affected Parties
The final rule amends the general instructions and basic
information reporting requirements facing all categories of private
fund advisers. As discussed above, these include, but are not limited
to, advisers to hedge funds, private equity funds, real estate funds,
securitized asset funds, liquidity funds, and venture capital
funds.\488\ The final rule further amends reporting requirements for
large hedge fund advisers, including specific revisions for large hedge
fund advisers to qualifying hedge funds.\489\
---------------------------------------------------------------------------
\488\ See supra section I.
\489\ Form PF currently defines ``hedge fund'' broadly to
include any private fund (other than a securitized asset fund) that
has any of the following three characteristics: (1) a performance
fee or allocation that takes into account unrealized gains, or (2) a
high leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notional
exposure in excess of twice its net asset value (including committed
capital)), or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary of Terms. ``Large'' hedge fund
advisers are those, collectively with their related persons, with at
least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter. Qualifying
hedge funds are hedge funds that have 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 adviser's most recently completed fiscal
quarter. See supra section II.C.
---------------------------------------------------------------------------
Hedge funds, the focus of part of the release, are one of the
largest categories of private funds,\490\ and as such play an important
role in the U.S. financial system due to their ability to mobilize
large pools of capital, take economically important positions in a
market, and their extensive use of leverage, derivatives, complex
structured products, and short selling.\491\ While these features may
enable hedge funds to generate higher returns as compared to other
investment alternatives, the same features may also create spillover
effects in the event of losses (whether caused by their investment and
derivatives positions or use of leverage or both) that might lead to
significant stress or failure not just at the affected fund but also
across financial markets.\492\
---------------------------------------------------------------------------
\490\ See infra footnote 493.
\491\ See, e.g., Lloyd Dixon, Noreen Clancy & Krishna B. Kumar,
Hedge Fund and Systemic Risk, RAND Corp. (2012); John Kambhu, Til
Schuermann & Kevin Stiroh, Hedge Funds, Financial Intermediation,
and Systemic Risk, Fed. Rsrv. Bank of NY's Econ. Policy Rev. (2007).
\492\ See supra footnotes 477, 486.
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In the first quarter of 2023, there were 9,846 hedge funds reported
on Form PF, managed by 1,856 advisers, with almost $9.5 trillion in
gross assets under management, which represented almost half of gross
assets reported by private fund advisers.\493\ Currently, hedge fund
advisers with between $150 million and $2 billion in regulatory assets
(that do not qualify as large hedge fund advisers) file Form PF
annually, in which they provide general information about funds they
advise such as the types of private funds advised, fund size, their use
of borrowings and derivatives, strategy, and types of investors. Large
hedge fund advisers (those with at least $1.5 billion in regulatory
assets under management attributable to hedge funds) \494\ file Form PF
quarterly, in which they provide data about each hedge fund they
managed during the reporting period (irrespective of the size of the
fund).\495\ Large hedge fund advisers must report more information on
Form PF about qualifying hedge funds (those with at least $500 million
as of the last day of any month in the fiscal quarter immediately
preceding the adviser's most recently completed fiscal quarter) \496\
than other hedge funds they manage during the reporting period. In the
first quarter of 2023, there were 2,034 qualifying hedge funds reported
on Form PF, managed by 570 advisers, with almost $8 trillion in gross
assets under management, which represented almost 84 percent of the
reported hedge fund assets.\497\
---------------------------------------------------------------------------
\493\ In the first quarter of 2023, hedge fund assets accounted
for approximately 46.3% of the gross asset value (``GAV'') ($9.5/
$20.5 trillion) and approximately 34.8% of the net asset value
(``NAV'') ($4.9/14.0 trillion) of all private funds reported on Form
PF. Private Fund Statistics Q1 2023, at 5.
\494\ See supra footnote 489.
\495\ Currently, Instruction 9 requires large hedge fund
advisers to update Form PF within 60 days after the end of each
fiscal quarter. See supra section II.A.3.
\496\ Id.
\497\ In the first quarter of 2023, qualifying hedge fund assets
accounted for 84% of the GAV ($8.0/$9.5 trillion) and 79% of the NAV
($3.9/$4.9 trillion) of all hedge funds reported on Form PF. Private
Fund Statistics Q1 2023, at 4-5.
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Private equity funds are another large category of funds in the
private fund industry. In the first quarter of 2023, there were 20,917
private equity funds reported on Form PF, managed by 1,755 advisers,
with $6.6 trillion in gross assets under management, which represented
almost one third of the reported gross assets in the private fund
industry.\498\ Many private equity funds focus on long-term returns by
investing in a private, non-publicly traded
[[Page 18035]]
company or business--the portfolio company--and engage actively in the
management and direction of that company or business in order to
increase its value.\499\ Other private equity funds may specialize in
making minority investments in fast-growing companies or startups.\500\
---------------------------------------------------------------------------
\498\ In the first quarter of 2023, private equity assets
accounted for 32.4% of the GAV ($6.6/$20.5 trillion) and 42.7% of
the NAV ($6.0/$14.0 trillion) of all private funds reported on Form
PF. Private Fund Statistics Q1 2023, at 5.
\499\ After purchasing controlling interests in portfolio
companies, private equity fund advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., SEC, Private Equity Funds, Investor.gov,
available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
\500\ Id.
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For the remaining categories of funds (real estate funds,
securitized asset funds, liquidity funds, venture capital funds, and
other private funds), advisers required to file Form PF had, in the
first quarter of 2023, investment discretion over almost $4.4 trillion
in gross assets under management.\501\ These assets were managed by
1,709 fund advisers managing 16,668 funds.\502\
---------------------------------------------------------------------------
\501\ Private Fund Statistics Q1 2023, at 5.
\502\ Private Fund Statistics Q1 2023, at 4.
---------------------------------------------------------------------------
Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\503\ Private funds that rely on the exclusion from the
definition of ``investment company'' provided in section 3(c)(7) of the
Investment Company Act are limited to investors that are also qualified
purchasers (as defined in section 2(a)(51) of the Investment Company
Act). Retail U.S. investors with exposure to private funds are
typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\504\ In the
first quarter of 2023, public pension plans had $1,905 billion invested
in reporting private funds while private pension plans had $1,302
billion invested in reporting private funds, making up 13.6 percent and
9.3 percent of the overall beneficial ownership in the private fund
industry, respectively.\505\ Private fund advisers have also sought to
be included in individual investors' retirement plans, including their
401(k)s.\506\
---------------------------------------------------------------------------
\503\ See, e.g., Private Equity Funds, supra footnote 499; SEC,
Hedge Funds, Investor.gov, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
\504\ See supra footnote 503.
\505\ Private Fund Statistics Q1 2023, at 15.
\506\ See, e.g., Dep't of Labor, Information Letter (June 3,
2020), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.
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C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital
Formation
1. Benefits
The final amendments are designed to facilitate two primary goals
the SEC sought to achieve with reporting on Form PF as articulated in
the original adopting release, namely: (1) facilitating FSOC's
understanding and monitoring of potential systemic risk relating to
activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the SEC's abilities
to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the SEC's efforts to protect investors
and maintain fair, orderly, and efficient markets.\507\
---------------------------------------------------------------------------
\507\ See supra section I. While the final amendments are also
designed to improve the usefulness of this data for the CFTC, this
economic analysis does not include the benefits associated with
enhancements to the CFTC's use of reporting on Form PF.
---------------------------------------------------------------------------
The SEC believes the final amendments will accomplish these goals
in three key ways, each discussed in detail in the following sections.
First, the final amendments will provide solutions to potential
reporting errors and issues of data quality when analyzing Form PF
filings across advisers and when analyzing multiple different
regulatory filings. Higher quality data across different funds and
across different regulatory filings can allow the SEC and FSOC to
develop an understanding of one set of advisers and apply it to other
advisers more rapidly, or apply lessons from one financial market to
other financial markets. This can help the SEC and FSOC develop more
effective regulatory responses and oversight, and help the SEC protect
investors by identifying areas in need of outreach, examinations, and
investigations in response to potential systemic risks, conflicting
arrangements between advisers and investors, and other sources of
investor harm.
Second, the final amendments will help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry in terms of ownership, size, investment
strategies, and exposures. This can improve the SEC's and FSOC's
understanding of new developing systemic risks and potential
conflicting arrangements, thereby further aiding in the development of
regulatory responses, and also aiding the SEC in efforts to protect
investors by identifying areas in need of outreach, examinations, and
investigations.
Third, the final amendments will take certain steps to streamline
certain reporting and reduce certain reporting burdens without
compromising investor protection efforts and systemic risk analysis.
This will improve the efficiency and effectiveness of the SEC's efforts
to protect investors and maintain fair, orderly and efficient markets.
The SEC anticipates that the increased ability for the SEC's and
FSOC's oversight, resulting from the final amendments, might promote
better functioning and more stable financial markets, which may lead to
efficiency improvements. The SEC does not anticipate significant
benefits on competition in the private fund industry from the final
amendments because the reported information generally will be nonpublic
and similar types of advisers will have comparable burdens under the
amended Form. For similar reasons, the SEC does not anticipate
significant effects of the amendments on capital formation.
Several of these amendments have been revised relative to the
proposal. The revisions include changes to instructions for purposes of
clarification, revising framing or explanation of questions where
commenters made suggestions to improve data quality, revising
instructions to avoid duplicative reporting or to otherwise ease
burden, or forgoing adopting certain amendments entirely. We include in
the discussion in this section how the benefits are impacted by changes
made in response to commenters. In general, revisions either (1)
enhance the benefits or (2) may reduce the benefits but substantially
reduce the costs.\508\
---------------------------------------------------------------------------
\508\ We discuss the impacts on costs below. See infra section
IV.C.2.
---------------------------------------------------------------------------
The final amendments revise the general instructions (as well as
implement additional amendments), section 1 (requiring basic
information about advisers and the private funds they advise), and
section 2 (requiring information about hedge funds advised by large
private fund advisers) of Form PF. The benefits associated with each of
these specific elements are discussed in greater detail below.
a. Amendments to General Instructions, Amendments To Enhance Data
Quality, and Additional Amendments
The amendments update the Form PF general instructions to revise
how all private fund advisers satisfy certain requirements on Form PF,
issue a series of amendments to enhance data quality,
[[Page 18036]]
and issue a series of additional amendments.\509\ There are five
categories of these amendments.
---------------------------------------------------------------------------
\509\ See supra sections II.A, II.D, II.E.
---------------------------------------------------------------------------
First, the amendments revise the general instructions for reporting
of master-feeder arrangements and parallel fund structures.\510\ These
revisions to the general instructions will improve consistency of
reporting associated with measuring private fund interconnectedness and
investment in other private funds by revising instructions for
reporting of ownership structures and revising instructions that are
currently ambiguous and result in reporting errors and issues of data
quality across advisers. For example, as discussed above, Form PF
currently provides advisers with flexibility to respond to questions
regarding master-feeder arrangements, parallel fund structures either
in the aggregate or separately, as long as they do so consistently
throughout Form PF. The revised instructions will specify how to
respond to these questions to prevent some advisers from responding in
the aggregate and some advisers from responding separately.\511\ The
revised instructions will also require reporting on the total value of
parallel managed accounts.\512\ The SEC anticipates these improved data
will assist the SEC and FSOC in assessing potential risks to financial
stability resulting from increasingly complex ownership and investment
structures of private funds. While master-feeder arrangements, parallel
fund structures, and use of funds of funds all allow private funds to
benefit from larger pools of capital, diversify risk, and enjoy shared
returns,\513\ these same features have inherent risks of spillovers in
losses, as losses in a master fund or underlying investment of a fund
of funds cause losses in connected funds as well. Complex ownership
structures may also create conflicts of interest when the same
individuals serve as directors on boards of both master and feeder
funds under a single owner,\514\ and may also mask instances of fraud
and a private fund's methods for committing fraud.\515\ Investor
protection efforts will therefore benefit from more consistent data
providing connections from master funds to feeder funds and other
ownership information.
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\510\ See supra section II.A.1. However, an adviser will
continue to aggregate these structures for purposes of determining
whether the adviser meets a reporting threshold.
\511\ Similar benefits will be obtained from revisions to
Instruction 7, which requires advisers to include the value of
investments in other private funds when determining whether the
adviser meets the thresholds for reporting as a large hedge fund
adviser, large liquidity fund adviser, or large private equity fund
adviser, and whether a private fund is a qualifying hedge fund; and
generally requires an adviser to include the value of a reporting
fund's investments in other private funds when responding to
questions on Form PF. Other revisions could also provide benefits
associated with consistency of reporting by revising instructions to
avoid error across filers, including amending instructions to
provide that advisers must not ``look through'' its investments in
other private funds when responding to questions and adding an
instruction when ``looking through'' cannot be avoided; providing
general instructions to explain how advisers will report information
if the reporting fund uses a trading vehicle; and amending
instructions to indicate that advisers must not ``look through'' a
reporting fund's investments in funds or other entities that are not
private funds, or trading vehicles. See supra section II.A.2.
Similar benefits will also be obtained from the amendments updating
instructions to provide conformity with CFTC's amendments to Form
CPO-PQR, including those that specify when advisers that are also
CPOs should complete particular sections of Form PF. See supra
section II.E; see also Revised Instruction 18.
\512\ See supra section II.A.1.
\513\ See, e.g., Robert Harris, Tim Jenkinson, Steven Kaplan &
Ruediger Stucke, Financial Intermediation in Private Equity: How
Well Do Funds of Funds Perform?, 129 J. Fin. Econ. 2, 287-305 (Aug.
2018).
\514\ See, e.g., Todd Ehret, Platinum Fraud Charges Shine Light
On Cayman Director Responsibilities, Reuters Fin. Reg. Forum (Mar.
30, 2017), available at https://www.reuters.com/article/bc-finreg-cayman-private-structure/platinum-fraud-charges-shine-light-on-cayman-director-responsibilities-idUSKBN17030J.
\515\ See, e.g., Melvyn Teo, Lessons Learned from Hedge Fund
Fraud, Eureka Hedge (Oct. 2009), available at https://www.eurekahedge.com/Research/News/506/Lessons-Learned-From-Hedge-Fund-Fraud.
---------------------------------------------------------------------------
While some commenters supported the proposed amendments on this
topic,\516\ other commenters opposed the proposed amendments as of
limited benefit to the Commissions and/or FSOC.\517\ For example, as
discussed above, disaggregated data of these structures will provide
the Commissions and FSOC with increased transparency into risk profiles
and complex fund structures, which will improve our ability to monitor
systemic risk and protect investors.\518\ We also disagree that
disaggregated reporting of master-feeder funds and parallel fund
structures will be of limited value based on our experience with Form
PF, which currently obscures our understanding of their fund structures
and the risk exposure of their component funds.\519\ We also believe
that the disaggregated reporting will allow for a clearer understanding
of a fund's structure.\520\
---------------------------------------------------------------------------
\516\ See supra section II.A.1; see also AFREF Comment Letter I;
Better Markets Comment Letter.
\517\ See supra section II.A.1; see also AIC Comment Letter I;
AIMA/ACC Comment Letter; MFA Comment Letter II.
\518\ See supra section II.A.1.
\519\ Id.
\520\ Id.
---------------------------------------------------------------------------
Commenters also stated that disaggregated data would provide
misleading information by reporting data in isolation as opposed to as
part of an overall fund or investment program.\521\ We disagree, and
think that disaggregated data will not be misleading to the Commissions
or FSOC in comparison to aggregated data because the Commissions and
FSOC could, if necessary, aggregate the data to understand the overall
fund.\522\ Similarly, as another example, data regarding the total
value of parallel managed accounts, however, will allow FSOC to take
into account the greater amount of assets an adviser may be managing
using a given strategy for purposes of analyzing the data reported on
Form PF for systemic risk purposes.\523\
---------------------------------------------------------------------------
\521\ See, e.g., MFA Comment Letter II; USCC Comment Letter.
\522\ See supra section II.A.1.
\523\ Id.
---------------------------------------------------------------------------
Certain changes made in response to commenters' concerns will also
enhance these benefits relative to the proposal. For example, by
modifying the instructions for how a feeder fund determines its
reporting category to specify that the feeder fund should exclude any
of its holdings in the master fund's equity when calculating its total
asset value for the purpose of determining its reporting category, the
amendments will avoid double counting of reported assets, given that
data for the master fund will be separately reported on Form PF.\524\
---------------------------------------------------------------------------
\524\ Id.
---------------------------------------------------------------------------
Second, the amendments revise the general instructions for
reporting for private funds that invest in other funds or trading
vehicles.\525\ Specifically, the amendments revise Instruction 7 and 8
to require advisers to include information pertaining to their trading
vehicles when completing Form PF.\526\
[[Page 18037]]
Because private funds may use trading vehicles for a wide variety of
purposes, more complete and accurate visibility into asset class
exposures, position sizes, and counterparty exposures relied on by
trading vehicles can enhance the SEC's and FSOC's systemic risk and
financial stability assessment efforts and the SEC's efforts to protect
investors by identifying areas in need of outreach, examination, or
investigation.
---------------------------------------------------------------------------
\525\ These final amendments will include requiring advisers to
include the value of investments in other private funds in
determining whether the adviser is required to file Form PF and when
determining whether the adviser meets the thresholds for reporting
as a large hedge fund adviser, large liquidity fund adviser, or
large private equity fund adviser, and whether a private fund is a
qualifying hedge fund; generally requiring an adviser to include the
value of a reporting fund's investments in other private funds when
responding to questions on Form PF; provide that generally advisers
must not ``look through'' its investments in other private funds
(other than a trading vehicle) when responding to questions and
adding an instruction to provide that advisers must provide an
explanation if ``looking through'' cannot be avoided; amending the
general instructions to explain how advisers will report information
if the reporting fund uses a trading vehicle; requiring advisers to
report all trading vehicles, whether wholly owned or partially
owned, on a consolidated bases; and amending instructions to
indicate that advisers must not ``look through'' a reporting fund's
investments in funds or other entities that are not private funds or
trading vehicles. See supra section II.A.2.
\526\ See supra section II.A.2.
---------------------------------------------------------------------------
Certain changes made in response to commenters' concerns will also
enhance these benefits relative to the proposal. For example, one
commenter stated that allowing an adviser to determine whether to
include or exclude a reporting fund's investment in other private funds
could result in distortions in the data collected on Form PF.\527\ By
modifying the instructions to provide specific instructions, such
distortion can be avoided, which will improve data quality.\528\
---------------------------------------------------------------------------
\527\ See supra section II.A.2.
\528\ Id.
---------------------------------------------------------------------------
As another example, commenters opposed proposed amendments that
would have permitted an adviser to select whether to report a wholly
owned trading vehicle on either a consolidated or disaggregated basis
and would have required advisers to report a partially owned trading
vehicle on a disaggregated basis.\529\ These commenters questioned the
benefits of these proposed amendments, for example stating that
separate reporting for trading vehicles is not necessary because
trading vehicles are often used for administrative purposes, such as
for tax or efficiency purposes, but are managed on a consolidated basis
and regarded as a single entity for investment purposes.\530\ By
instead requiring advisers to report all trading vehicles, whether
wholly owned or partially owned, on a consolidated basis, and by
specific questions relating to a reporting fund's trading vehicle use
and a trading vehicle's position size and risk exposure, we will
improve data comparability and allow us to better understand the
holdings and exposures of the fund structure for our assessments of
potential systemic risk.
---------------------------------------------------------------------------
\529\ Id.
\530\ Id.; see also, e.g., MFA Comment Letter II; Schulte
Comment Letter.
---------------------------------------------------------------------------
Third, the amendments will revise the general instructions for
reporting timelines by revising Instruction 9 to require large hedge
fund advisers and large liquidity fund advisers to update Form PF
within a certain number of days after the end of each calendar quarter,
rather than each fiscal quarter, as Form PF currently requires.\531\
The SEC anticipates that these amendments will improve the consistency
of reporting across different private fund advisers, across quarterly
and annual filings, and across different regulatory forms,\532\ which
may improve the ability of regulators to analyze filing data across
fund advisers and across different regulatory forms by resolving
reporting errors and issues of data quality. These data analyses are
important contributors to the SEC's and FSOC's efforts to assess
systemic risk and develop a complete picture of private fund markets.
The SEC anticipates that these improved reporting alignments may
enhance the SEC's and FSOC's abilities to assess potential risks
presented by private funds.\533\ For example, as discussed above,
academic research has used Form PF data and Form N-MPF data to study
rule 2a-7 risk limits and implications of money market reforms.\534\
Standardizing data across regulatory filings can lead to further
industry insights from combined regulatory filing data, and these
industry insights may improve systemic risk assessment and regulator
investor protection efforts. However, as discussed above, because
almost all large hedge fund advisers and large liquidity fund advisers
already effectively file on a calendar quarter basis because their
fiscal quarter ends on the calendar quarter, the SEC anticipates that
these benefits will be marginal.\535\
---------------------------------------------------------------------------
\531\ See supra section II.A.3.
\532\ Id.
\533\ While the amendments to general instructions associated
with reporting timelines will primarily offer economic benefits
associated with improvement in data quality and resolutions to data
gaps, the amendments to reporting timelines will also provide a
potential improvement to regulators' ability to evaluate markets for
investor protection efforts and systemic risk assessment, in that
they accelerate the provision of data from quarterly reporting. See
supra section II.A.3. Moreover, as the amendments will make
reporting timelines more consistent, there could be reduced costs
associated with regulatory filings, as private fund advisers reduce
their need to track differentiated calendar quarter and fiscal
quarter data.
\534\ See supra section IV.B.1.
\535\ See supra section II.A.3. Specifically, and as discussed
above, based on staff analysis of Form ADV data as of Dec. 2021,
99.2% of private fund advisers already effectively file on a
calendar basis because their fiscal quarter or year ends on the
calendar quarter or year end, respectively. The 0.8% of private fund
advisers that have a non-calendar fiscal approach represents
approximately 274 private funds, totaling $200 billion in gross
asset value. See supra section II.A.3.
---------------------------------------------------------------------------
Fourth, the amendments issue a series of revisions that impact
several sections of Form PF, which will broadly enhance data quality,
for example by potentially resolving reporting errors. These amendments
will specify that reported percentages be rounded to the nearest one
hundredth of one percent, provide consistent instruction for reporting
of investment and counterparty exposures, provide consistent
instruction on the reporting of long and short positions, and provide
consistent instruction for reporting of derivative values.\536\ The
resulting improved data quality will improve the ability of the SEC and
FSOC to evaluate market risk and measure industry trends, thereby
increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulator programs to
protect investors.
---------------------------------------------------------------------------
\536\ See supra section II.D.
---------------------------------------------------------------------------
We did not receive specific comments on certain of these proposed
amendments, such as the amended instructions to specify how private
fund advisers determine the value of investment positions (including
derivatives) and counterparty exposures.\537\ Some commenters expressed
support for the amendments to require advisers to report their long and
short holdings on a disaggregated basis,\538\ and other commenters
opposed the requirements for more detailed disclosures of
holdings.\539\
---------------------------------------------------------------------------
\537\ Id.
\538\ Id.
\539\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter. See supra section II.C.2.a.
---------------------------------------------------------------------------
Certain changes made in response to commenters will enhance the
benefits of these amendments. For example, one commenter stated that
the definition of ``10-year bond equivalent'' specifies the expression
of the value in the fund's base currency.\540\ By revising the ``10-
year bond equivalent'' definition to reference U.S. dollars, rather
than the fund's base currency, resulting metrics will be reported in a
common currency, which will enhance data quality and comparability
purposes.\541\
---------------------------------------------------------------------------
\540\ Id.; see also AIMA/ACC Comment Letter.
\541\ See supra section II.D.
---------------------------------------------------------------------------
Lastly, the amendments issue a series of additional revisions that
will amend instructions related to temporary hardship exemptions,
provide conformity with the CFTC's amendments to Form CPO-PQR
(including those that specify when advisers that are also CPOs should
complete particular sections of Form PF), and revise definitions of the
terms EEA and G10 within Form PF.\542\ The additional amendments
updating instructions to the temporary hardship exemption to Form PF,
by way of an amendment to 17 CFR 275.204(b)-1(f) under the Advisers
Act, will make it easier to submit a temporary hardship exemption and
will assist advisers in
[[Page 18038]]
determining what constitutes a ``filed'' temporary hardship
exemption.\543\ These amendments may facilitate more successful
submissions of temporary hardship exemptions by private fund advisers
who require one, and may thereby benefit those advisers, and by
extension their investors, by reducing costs. Similarly, by providing
conformity with the CFTC's amendments to Form CPO-PQR, including those
that specify when advisers that are also CPOs should complete
particular sections of Form PF, and revising definitions associated
with the terms EEA and G10, the amendments may reduce confusion for
advisers filing Form PF, thereby reducing the burden of filing.\544\ We
did not receive comments on this aspect of the proposed changes.\545\
---------------------------------------------------------------------------
\542\ See supra section II.E, Revised Instruction 18.
\543\ See supra section II.E.
\544\ See supra section II.E, Revised Instruction 18.
\545\ See supra section II.E.
---------------------------------------------------------------------------
b. Amendments to Basic Information About the Adviser and the Private
Funds It Advises
The amendments to section 1, which requires all private fund
advisers to report information about the adviser and the private funds
they manage, include revisions to section 1a (concerning basic
identifying information),\546\ revisions to section 1b (concerning all
of a private fund adviser's private funds),\547\ and revisions to
section 1c (more specifically concerning all of a private fund
adviser's hedge funds).\548\ The changes will provide greater insight
into all private funds' operations and strategies, and will further
assist in assessing industry trends. This section discusses how the SEC
believes the changes will thereby enhance the SEC's and FSOC's systemic
risk assessment efforts and the SEC's efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
This will be accomplished in four key ways.
---------------------------------------------------------------------------
\546\ See supra section II.B.1.
\547\ See supra section II.B.2.
\548\ See supra section II.B.3.
---------------------------------------------------------------------------
First, the changes will provide more prescriptive requirements to
improve comparability across advisers and reduce reporting errors and
issues of data quality by aligning data across filers and across
regulatory filings, based on our experience with the form. This greater
alignment is designed to improve the efficiency with which the SEC and
FSOC evaluate market risk and measure industry trends, thereby
increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulator programs to
protect investors. For example, revisions to section 1a (relating to
adviser reporting of identifying information for all private funds they
advise) will revise instructions on the use of LEIs and RSSD IDs for
advisers and related persons, and might help link data more efficiently
between Form PF and other regulatory filings that use these universal
identifiers.\549\ Several revisions to section 1b (relating to adviser
reporting of basic information for all private funds they advise) will
modify instructions and might prevent advisers from inadvertently
reporting different fund types on different regulatory filings (or,
when different reporting on two different forms is appropriate, the
revised instructions are designed to solicit the reason for
differentiated reporting), facilitating more robust data analyses that
use combined data from multiple regulatory forms.\550\ Revisions to
section 1c will require advisers to indicate which investment
strategies best describe the reporting fund's strategies on the last
day of the reporting period, addressing any ambiguity about how to
report information if the reporting fund changes strategies over
time.\551\ The SEC believes these revisions to section 1, and
others,\552\ will improve the accuracy and reliability of Form PF data,
thereby potentially improving the SEC's and FSOC's efforts to assess
developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improving the SEC's
efforts to protect investors by identifying areas in need of outreach,
examination, or investigation.
---------------------------------------------------------------------------
\549\ See supra section II.B.1. For example, the reporting of a
fund's and its adviser's LEI is consistent with the way fund
relationships are reported in the Global LEI system. See, e.g., LEI
ROC, Policy on Fund Relationships and Guidelines for the
Registration of Investment Funds in the Global LEI System (May 20,
2019), available at https://www.leiroc.org/publications/gls/roc_20190520-1.pdf.
\550\ See supra section II.B.2. For example, the Division of
Investment Management relies on Form PF and Form ADV filings in
providing quarterly summaries of private fund industry statistics
and trends. See, e.g., SEC, Division of Investment Management,
Private Fund Statistics (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\551\ See supra section II.B.3.
\552\ Other revisions that will provide this benefit include
revising reporting of regulatory versus net assets under management;
reporting of assumptions the adviser makes in responding to
questions on Form PF; reporting of types of fund; reporting of
master-feeder arrangements, internal/external private funds, and
parallel fund structures; reporting of monthly gross and net asset
values; reporting of the value of unfunded commitments; reporting on
the value of borrowing activity; reporting of fair value hierarchy;
reporting of beneficial ownership; reporting of fund performance;
more granular reporting of hedge fund strategies; more granular
reporting of hedge fund counterparty exposures including
identification of counterparties representing a fund's greatest
exposure; and more granular reporting of hedge fund trading and
clearing mechanisms. See supra section II.B.
---------------------------------------------------------------------------
While commenters who criticized these changes generally emphasized
the costs of the changes, along with the overall costs of the
amendments,\553\ certain commenters also questioned the benefits. For
example, one commenter opposed including more granular strategy
categories stating that some proposed categories are not clear and may
require advisers to make subjective decisions on how to report a fund's
strategy that could result in inconsistent reporting.\554\ While
certain advisers may have to make certain subjective decisions, the
amended strategy categories conform more closely to industry
conventions than the current categories and will allow advisers to more
accurately categorize their strategies. Any remaining ambiguity in
these strategy categories will only mitigate the benefits of the
resulting reporting, not eliminate the benefits.
---------------------------------------------------------------------------
\553\ See infra section IV.C.2.
\554\ See supra section II.B.3; see also MFA Comment Letter II.
---------------------------------------------------------------------------
Certain other commenters agreed with the benefits of certain
proposed provisions. For example, one commenter supported an expanded
use of LEI as a legal identifier in Form PF and stated that more
comprehensive inclusion of LEI would create a more complete
identification scheme for the Commissions.\555\ Still other commenters
suggested further revisions, and certain changes made in response to
those commenters will enhance these benefits. For example, some
commenters stated that proposed questions on withdrawal and redemption
rights did not address how to report a fund with multiple types of
redemption rights.\556\ In response, we are modifying the question to
ask for the interval on which withdrawals or redemptions are ``most
commonly'' permitted (i.e., with respect to most investors). We also
encourage an adviser to report any additional details on a fund's
withdrawal or redemption schedule in response to Question 4, as
appropriate. This will likely improve comparability across advisers and
reduce reporting errors and issues of data quality. Still other
amendments did not receive specific comments, such as the amendment
requiring an adviser to identify the fund type for a reporting fund as
``other'' and explaining why the
[[Page 18039]]
fund does not qualify for any of the other options.\557\
---------------------------------------------------------------------------
\555\ See supra section II.B.1; see also GLEIF Comment Letter.
\556\ See supra section II.B.2; see also, e.g., MFA Comment
Letter II; SIFMA Comment Letter.
\557\ See supra section II.B.2.
---------------------------------------------------------------------------
Second, the amendments will expand the data collected by the forms,
thereby facilitating the Commissions and FSOC to assess newly emerging
areas of potential systemic risk. These expanded areas of reporting
broadly capture key trends in (i) private fund advisers' ownership
structures, and (ii) private fund advisers' investment and trading
strategies, including increasing exposures to new asset classes,
changing exposures across different categories of counterparties, and
increasing use of financial tools for increasing fund performance.
With respect to updated reporting on ownership structures, as
discussed above, interconnected ownership structures have inherent
risks of spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well,
and so the enhanced data on detailed ownership structures from the
final amendments are designed to improve systemic risk assessment
efforts.\558\ Improved data will also contribute to efforts to protect
investors from conflicts of interest and other sources of potential
harm.\559\ The types of enhancements to Form PF's data on
interconnected ownership structures include, for example, requiring
advisers to provide LEIs for themselves and any of their related
persons, such as reporting funds and parallel funds,\560\ and expanding
the required reporting detail on the value of the reporting fund's
investments in funds of funds.\561\ Similar to the amendments to
general instructions, the SEC believes that these revisions will
improve measurement of these complex ownership structures. The SEC
believes this will potentially improve the SEC's and FSOC's efforts to
assess developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improve the SEC's efforts
to protect investors from conflicting arrangements and identify other
areas in need of outreach, examination, or investigation.\562\
---------------------------------------------------------------------------
\558\ See supra section IV.C.1.a.
\559\ Id.
\560\ See supra section II.B.1.
\561\ See supra section II.B.2.
\562\ See supra section IV.C.1.a.
---------------------------------------------------------------------------
Many revisions will also keep Form PF filings up to date with key
developing trends among private fund advisers' investing and trading
practices. These revisions will improve consistency of reporting of
modern private fund issues across fund advisers, provide more complete
and accurate information on developing trends, and improve the SEC's
and FSOC's abilities to effectively and efficiently assess new systemic
risks and other potential sources of investor harm, as well as inform
the SEC's and FSOC's broader views on the private fund landscape.
For example, in Form PF section 1c, the amendments will require
hedge funds to report whether their investment strategy includes
digital assets,\563\ which are a growing and increasingly important
area of hedge fund strategy.\564\ The amendments will therefore help
the SEC and FSOC to assess new sources of potential systemic risk and
develop regulatory responses, and will further allow the SEC to analyze
new areas of potential investor harm to determine any necessary
outreach, examination, or investigation.
---------------------------------------------------------------------------
\563\ See supra section II.B.3.
\564\ See, e.g., AIMA, PWC & Elwood Asset Management, Annual
Global Crypto Hedge Fund Report (2023), available at https://www.pwc.com/gx/en/news-room/press-releases/2023/pwc-2023-global-crypto-hedge-fund-report.htmlhttps://www.pwc.com/gx/en/news-room/press-releases/2023/pwc-2023-global-crypto-hedge-fund-report.html
(concluding that almost a third of traditional hedge funds were
investing in such assets in 2023, with average allocations of 7%,
representing increases relative to 2021); AIMA, PWC & Elwood Asset
Management, 3rd Annual Global Crypto Hedge Fund Report (2021),
available at https://www.aima.org/educate/aima-research/third-annual-global-crypto-hedge-fund-report-2021.html (concluding that
approximately a fifth of hedge funds were investing in such assets
in 2021, with on average 3% of their total hedge fund assets under
management invested, and 86% of those hedge funds intended to deploy
more capital into this asset class by the end of 2021); see also
supra section II.B.3.
---------------------------------------------------------------------------
As another example, the amendments will introduce several questions
on counterparty exposures, corresponding to both CCP exposures and
bilateral counterparty (i.e., non-CCP) exposures. These additions to
Form PF include requiring advisers to report hedge fund borrowing,
lending, and collateral with respect to transactions involving both
their bilateral counterparties and CCPs, requiring reporting of hedge
fund derivative and repo activity that was cleared by a CCP (as well as
activity not cleared by a CCP), and instructing advisers on what
exposures to net.\565\ There are two economic considerations associated
with counterparty exposure reporting on Form PF. First, bilateral
exposures and CCP exposures have different risk profiles, with CCPs
offering risk reduction mechanisms and other economic benefits by
netting trading across counterparties and across different assets
within an asset class or by centralizing clearance and settlement
activities.\566\ The final amendments are designed to help Form PF
provide insight into relative trends in bilateral trading versus
central counterparty trading and resulting systemic risks from
counterparty exposures. Second, while CCPs reduce the systemic risk
associated with the failure of any single hedge fund or other private
fund, the failure of a large CCP itself could potentially represent a
substantial systemic risk event in the future.\567\ While a systemic
risk event such as the failure of a CCP has never occurred in the
United States, CCPs in other countries have failed,\568\ and the final
amendments are designed to help Form PF provide new insights into the
potential for such systemic risk events in the future. FSOC has also
designated many CCP institutions as ``systemically important,'' \569\
and recommends that regulators continue to coordinate to evaluate
threats from both default and non-default losses associated with
CCPs.\570\
---------------------------------------------------------------------------
\565\ See supra section II.B.3.
\566\ Siro Aramonte & Wenqian Huang, Costs and Benefits of
Switching to Central Clearing, BIS Q. Rev. (Dec. 2019), available at
https://www.bis.org/publ/qtrpdf/r_qt1912z.htm; Albert J. Menkveld &
Guillaume Vuillemey, The Economics of Central Clearing, 13 Ann. Rev.
Fin. Econ. 153 (2021).
\567\ Id.
\568\ For example, the Hong Kong Futures Guarantee Corporation
failed during the stock market crash of 1987. See Menkveld &
Vuillemey, supra footnote 566.
\569\ Fin. Stability Oversight Council, 2012 Annual Rep.,
Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.
\570\ Id. at 14.
---------------------------------------------------------------------------
As a final example, we are adopting amendments that require
advisers to report additional performance-related information if the
adviser calculates a market value on a daily basis for any position in
the reporting fund's portfolio.\571\ These include, among other items,
the reporting fund's volatility of the natural log of the daily ``rate
of return'' for each month of the reporting period.\572\ Investors will
benefit from systemic risk assessment efforts and investor protection
efforts facilitated by these reporting items. For example, allowing the
Commission and FSOC to compare volatility across different fund types
to identify market trends (e.g., volatility of a specific fund type)
will help the Commission and FSOC verify which strategies are the most
volatile and therefore pose the greatest default risk to bank and
broker/dealer counterparties. Comparing volatility data on Form PF and
risk metric data on Form PF, such as VaR (Value-at-Risk) data, will
also help the Commission to
[[Page 18040]]
detect misleading uses of risk metrics by funds in disclosures to
investors.
---------------------------------------------------------------------------
\571\ See supra section II.B.2.
\572\ Id.
---------------------------------------------------------------------------
The SEC therefore believes these revisions, and others like
them,\573\ will help the SEC and FSOC better understand the modern
landscape of the private fund industry, thereby potentially improving
the SEC's and FSOC's efforts to assess developing systemic risks and
FSOC's efforts to assess broader financial instability, as well as
potentially improving the SEC's efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\573\ Other revisions that will provide this benefit include the
reporting of withdrawal and redemption rights; reporting of other
inflows and outflows; more granular reporting of hedge fund
strategies; more granular reporting of hedge fund counterparty
exposures including identification of counterparties representing a
fund's greatest exposure; and more granular reporting of hedge fund
trading and clearing mechanisms. See supra section II.B.
---------------------------------------------------------------------------
Some commenters questioned the benefits of these types of
amendments. For example, some commenters stated that disclosure of
counterparty exposures is of limited value.\574\ However, we continue
to believe that this additional information is important to
understanding counterparty risk exposure, and counterparty risk
exposures represent substantial sources of systemic risk.\575\ Certain
others of these proposed amendments did not receive significant comment
on their proposed benefits. For example, the amendments requiring
additional performance-related information if the adviser calculates
market value did not receive significant comment. One commenter
recommended requiring volatility measurements over longer periods, such
as quarterly or annually, stating that requiring daily measurements
would result in a smaller population size and less meaningful
information.\576\ As discussed above, higher frequency volatility
information is important because significant volatility swings that
occur over a short timeframe may not be discernible from quarterly or
annual data but can pose systemic risk.\577\ Further, receiving higher
frequency volatility data will give more context to a fund's reported
monthly returns and will allow us to assess risk-adjusted returns.\578\
In still other cases, the benefits from the final amendments will be
enhanced by changes made in response to commenters. For example, one
commenter recommended, for reporting of certain drawdown metrics
associated with days with a negative daily rate of return, changing
reporting of amount in base currency to percent in base currency, and
the final amendments implement this change to be more reflective of
industry practice, and in turn improve data quality.\579\
---------------------------------------------------------------------------
\574\ See supra section II.B.3; see also, e.g., AIMA/ACC Comment
Letter.
\575\ See supra footnotes 565 through 570 and accompanying text.
\576\ See supra section II.B.2; see also CFA Institute Comment
Letter.
\577\ See supra section II.B.2.
\578\ Id.
\579\ Id.; see also CFA Institute Comment Letter.
---------------------------------------------------------------------------
Third, there are revisions that will expand the scope of certain
questions from only covering qualifying hedge funds advised by large
hedge fund advisers to covering all hedge funds advised by any private
fund adviser. By expanding the universe of private funds that are
covered by several questions, the amendments will enhance the SEC's and
FSOC's ability to conduct broad, representative measurements regarding
the private fund industry. For example, the amendments will require all
advisers to indicate whether the reporting fund is an open-end private
fund in Question 10(a) or a closed-end private fund in Question
10(b).\580\ Because the activities of private fund advisers may differ
significantly depending on their size, this enhanced coverage will
potentially enhance regulators' abilities to obtain a representative
picture of the private fund industry and lead to more robust
conclusions regarding emerging industry trends and characteristics. The
SEC believes these amendments, and others,\581\ will enhance
regulators' picture of the private fund industry, thereby potentially
improving the SEC's and FSOC's efforts to assess developing systemic
risks and FSOC's efforts to assess broader financial instability, as
well as potentially improving the SEC's efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\580\ See supra section II.B.2.
\581\ The revisions to reporting of base currency will provide
similar benefits. See supra section II.B.
---------------------------------------------------------------------------
Some commenters questioned these benefits. For example, one
commenter asserted that the data would be of limited benefit for
systemic risk monitoring because of the inclusion of data from smaller
funds.\582\ However, we continue to believe that a private fund of any
size that provides for withdrawal or redemption rights may be affected
by increased investor withdrawals during certain market events and/or
vulnerable to failure as a result of investor redemptions, and so the
additional data will be relevant for assessing broader systemic risk,
for example by allowing the Commissions and FSOC to assess the
prevalence of the exercise of withdrawal and redemption rights to
identify potential patterns among affected funds that may signal stress
at a particular fund or across many funds.\583\ Information on
withdrawal and redemption rights from all private funds, including
smaller private funds or funds that are not included in the definition
of a ``hedge fund,'' will improve FSOC's ability to monitor potential
systemic risk and support the Commissions' investor protection efforts.
---------------------------------------------------------------------------
\582\ See supra section II.B.2; see also Schulte Comment Letter.
\583\ See supra section II.B.2.
---------------------------------------------------------------------------
One commenter supported the proposed amendments and agreed with the
potential benefits, stating that expanding the classes of private funds
that are required to disclose withdrawal and redemption rights would
allow FSOC to better identify systemic risks, particularly resulting
from market events.\584\ Lastly, certain changes will streamline
reporting and reduce the reporting burden by removing certain questions
where other questions provide the same or superseding information. For
example, the amendments will remove current Question 19, which requires
advisers to hedge funds to report whether the hedge fund has a single
primary investment strategy or multiple strategies, and will also
remove current Question 21, which requires advisers to hedge funds to
approximate what percentage of the hedge fund's net asset value was
managed using high frequency trading strategies.\585\ The SEC believes
that these revisions will benefit advisers and investors by directly
lowering the costs and reducing part of the burden on advisers of
completing Form PF filings.\586\ Commenters generally supported
amendments that eliminate questions and streamline reporting
requirements.\587\
---------------------------------------------------------------------------
\584\ See supra section II.B.2; see also Fact Coalition Comment
Letter.
\585\ See supra section II.B.3.
\586\ These benefits from streamlined reporting and reduced
reporting burden will be offset by increased costs associated with
the additional and more granular detail that will be required on
Form PF under the amendments. See infra sections IV.C.2, V.C.
\587\ See supra section II.B.3; see also, e.g., MFA Comment
Letter II; SIFMA Comment Letter; Better Markets Comment Letter.
---------------------------------------------------------------------------
c. Amendments to Information About Hedge Funds Advised by Large Private
Fund Advisers
The changes to section 2 will provide greater insight into
operations and strategies into hedge funds advised by large private
fund advisers specifically, and will also assist in assessing broader
hedge fund industry trends. This section
[[Page 18041]]
discusses how the SEC believes the changes will thereby enhance the
SEC's and FSOC's investor protection and systemic risk assessment
efforts. This will be accomplished in three key ways.
As with section 1, first, the changes will provide more
prescriptive requirements to improve comparability across advisers and
reduce reporting errors and issues of data quality, based on experience
with the form. This will be accomplished by standardizing reporting of
information across different advisers and across different regulatory
filings. For example, the amendments to current Question 30 (on
qualifying hedge fund exposures to different types of assets) will
replace the existing complex table in current Question 30 with a
redesignated Question 32 with reporting instructions that will use a
series of drop-down menu selections and provide additional narrative
reporting instructions and additional information on how to report
exposures.\588\ Similarly, advisers to qualifying hedge funds will now
be required to report the 10-year zero coupon bond equivalent for all
sub-asset classes with interest rate risk, rather than providing
advisers with a choice to report duration, WAT, or an unspecified 10-
year equivalent.\589\ Several revisions (relating to adviser reporting
of basic information for all hedge funds that it advises) will revise
instructions relating to reporting of adjusted long and short exposures
and market factor effects on a hedge fund's portfolio.\590\ These
revisions can potentially prevent, for example, data errors associated
with reporting of long and short components of a portfolio or
discrepancies across advisers in their choices of which market factors
to report (as Form PF currently allows advisers to omit a response to
any market factor that they do not regularly consider in formal risk
management testing).\591\ As another example, the changes will provide
for a new sub-asset class in investment exposure reporting for ADRs, in
line with how ADRs are reported on the CFTC's Form CPO-PQR, potentially
improving assessment of currency risk across regulatory filings.\592\
As a final example, the changes will revise reporting for positions
held physically, synthetically, or through derivatives and indirect
exposure, and will require reporting turnover on a per fund basis
instead of in the aggregate as well as providing for more granular
reporting of turnover.\593\ The SEC believes these revisions, and
others,\594\ will align Form PF data across filers, thereby potentially
improving the efficiency with which the SEC and FSOC evaluate market
risk and measure industry trends, thereby increasing the efficiency
with which regulatory responses are developed, improving systemic risk
assessment and regulatory programs to protect investors.
---------------------------------------------------------------------------
\588\ See supra section II.C.2.
\589\ Id.
\590\ See supra sections II.C.2.a; II.C.2.c.
\591\ Id. For example, higher quality data on short positions
can facilitate more accurate and timely identification of
significant market participants during periods of volatility related
to shorting activity, such as the Jan. 2021 ``meme stock'' episodes.
See, e.g., SEC, Staff Rep. on Equity and Options Market Structure
Conditions in Early 2021 (Oct. 14, 2021), available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
\592\ See supra section II.C.2.a.
\593\ As discussed above, when monitoring funds' activities
during recent market events like the Mar. 2020 COVID-19 turmoil, the
existing aggregation of U.S. Treasury securities with related
derivatives did not reflect the role hedge funds played in the U.S.
Treasury market. See supra sections II.C.2.a, IV.B.1. Also during
the COVID-19 market turmoil, FSOC sought to evaluate the role hedge
funds played in disruptions in the U.S. Treasury market by unwinding
cash-futures basis trade positions and taking advantage of the near-
arbitrage between cash and futures prices of U.S. Treasury
securities. Because the existing requirement regarding turnover
reporting on U.S. Treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the Mar. 2020 market events,
was unable to obtain a complete picture of activity relating to long
treasuries and treasury futures. See supra sections II.C.2.d,
IV.B.1.
\594\ Other revisions that will provide this benefit include the
amendments revising reporting of reportable sub-asset classes,
including those for certain categories of listed equity securities,
repos, asset-backed securities and other structured products,
derivatives, and cash and commodities; revising reporting of open
and large position reporting; revising reporting of counterparty
exposures including reporting of significant counterparties;
revising currency reporting; requiring significant country and
industry exposure; requiring additional reporting on fund portfolio
risk profiles; requiring more granular reporting of investment
performance by strategy; amending reporting of portfolio liquidity;
and amending reporting of financing liquidity. See supra section
II.C.
---------------------------------------------------------------------------
Several changes in response to commenters will either enhance these
benefits or will provide substantially the same benefits relative to
the proposal but at reduced burden to advisers. For example, in
response to commenters, under the final amendments advisers are
permitted to report an entirely indirectly held entity position in one
sub-asset class and instrument type that best represents the sub-asset
class exposure of the indirectly held entity, unless the adviser would
allocate the exposure of the indirectly held entity more granularly
under its own internal methodologies and conventions of its service
providers.\595\ This modification balances the importance of obtaining
more accurate and granular data with a reporting standard that is less
burdensome for advisers than the proposed standard. Similarly, in the
final amendments, in response to commenters we are modifying the ``10-
year bond equivalent'' definition to reference U.S. dollars, rather
than the fund's base currency, so that advisers will not be required to
perform any additional exchange conversions.\596\ As a final example,
with respect to market factor reporting, commenters suggested that the
proposal was unclear in certain questions as to whether an adviser is
required to ``look through'' the fund's investments.\597\ In response,
we are adding an instruction that when reporting exposures to changes
in market factors for indirect positions, an adviser may use reasonable
estimates that best represent the exposure to the market factor,
consistent with the adviser's internal methodologies and conventions of
service providers.\598\
---------------------------------------------------------------------------
\595\ See supra section II.C.2.a.
\596\ Id.
\597\ See supra section II.C.2.c; see also MFA Comment Letter
III.
\598\ See supra section II.C.2.a.
---------------------------------------------------------------------------
Many commenters also agreed with the benefits of certain proposed
amendments. For example, commenters supported the amendments to require
hedge fund advisers to report their long and short holdings on a
disaggregated basis, or stated that requiring private fund advisers to
report both long and short positions will allow FSOC to have a complete
picture of the risk exposure across private funds, or stated that
allowing advisers to aggregate their positions between physically held
and synthetically held positions can make it difficult to understand
the impact of hedge fund activity especially during periods of market
instability.\599\ Several of these amendments did not receive comments.
For example, we did not receive comments on many aspects of the
amendments to redesignated Question 32.\600\
---------------------------------------------------------------------------
\599\ Id.; see also AFREF Comment Letter I; Better Markets
Comment Letter.
\600\ See supra section II.C.2.a.
---------------------------------------------------------------------------
Second, the changes will help Form PF provide greater insight into
newly emerging areas of risk, including increasing exposures to new
asset classes, changing exposures across different categories of
counterparties, and changing risk management practices (such as
changing practices around posting of collateral). The SEC believes
these changes will help Form PF more completely and accurately capture
information relevant to ongoing trends in the private fund industry.
For example, in addition to the more general investment strategy
questions in section 1c described above,\601\ section 2b will
[[Page 18042]]
require large advisers to qualifying hedge funds to report their total
exposures to digital assets.\602\ As another example, large advisers to
qualifying hedge funds will be required to report exposures to
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities).\603\
They will also be required to report all other counterparties (by name,
LEI, and financial institution affiliation) to which a fund has net
mark-to-market exposure after collateral that equals or is greater than
either (1) five percent of a fund's net asset value or (2) $1 billion,
facilitating regulators' abilities to understand the impact of a
particular counterparty failure like those that occurred during the
2008 financial crisis and in the period since (e.g., the failure of MF
Global in 2011).\604\ Advisers will also be required to report certain
of their exposures to CCPs,\605\ and will be required to report each
CCP (or other third party) holding collateral in respect of cleared
exposures in excess of five percent of the fund's net asset value, or
$1 billion.\606\
---------------------------------------------------------------------------
\601\ See supra section IV.C.1.b.
\602\ See supra section II.C.2.a.
\603\ Id.
\604\ See supra section II.C.2.a, footnote 360 and accompanying
text.
\605\ See supra section II.C.2.b.
\606\ See supra section II.C.2.d.
---------------------------------------------------------------------------
As a final example, advisers will be required to determine adjusted
exposure for each ``sub-asset'' using a specified methodology, as
proposed. This methodology will include, among other specifications,
netting positions that have the same underlying reference asset across
instrument type, including positions held indirectly through another
entity such as ETFs and other exchange traded products.\607\ These
amendments will also include defining ``exchange traded product'' to
better facilitate exchange traded product and ETF exposure reporting.
These types of funds are important avenues of investing for many types
of investors but can represent different systemic risks than other
types of investments, potentially increasing certain types of risk and
decreasing other types of risk.
---------------------------------------------------------------------------
\607\ See supra section II.C.2.a.
---------------------------------------------------------------------------
As discussed above, these (and other) new granular reporting
requirements will represent new possible sources of systemic risk for
the SEC and FSOC to evaluate, and also new areas of focus for the SEC's
regulatory outreach, examination, and investigation.\608\ The SEC
believes these revisions, and others,\609\ will improve the SEC's and
FSOC's efforts to assess developing systemic risks and FSOC's efforts
to assess broader financial stability, as well as potentially improve
the SEC's efforts to protect investors by identifying areas in need of
outreach, examination, or investigation.
---------------------------------------------------------------------------
\608\ See supra section IV.C.1.b. For example, the SEC believes
the addition of a base metal commodities sub-asset class will allow
for identification of large players in the base metals market (such
as those impacted by the Mar. 2022 ``nickel squeeze,'' during which
the price of nickel rose unusually steeply and rapidly in response
to commodity price increases caused by Russia's invasion of
Ukraine). See supra footnote 323.
\609\ Other revisions that will provide this benefit include
revising reporting for positions held physically, synthetically, or
through derivatives and indirect exposure; revising reportable sub-
asset classes, including those for certain categories of listed
equity securities, repos, asset-backed securities and other
structured products, derivatives, and other cash and commodities;
further revising reporting of counterparty exposures including
reporting of significant counterparties (in addition to the
revisions to CCP exposures); revising currency reporting; requiring
more granular reporting of turnover; requiring significant country
and industry exposure; requiring additional reporting on fund
portfolio risk profiles; requiring more granular reporting of
investment performance by strategy; requiring new reporting on
portfolio correlation; amending reporting of portfolio liquidity;
and amending reporting of financing liquidity. See supra section
II.C.
---------------------------------------------------------------------------
Some commenters questioned or were skeptical of these benefits. For
example, one commenter indicated that existing data sources, such as
existing Form PF, Form 13F and 13H, and CFTC Form CPO-PQR, already
allow the Commissions to obtain granular information about a fund's
holdings with respect to the new sub-asset classes.\610\ As discussed
above, we have identified information gaps in the data reported on the
existing Form PF based on our experience, and we are unable to
determine the full extent of a fund's exposure because the different
types of exposures are combined.\611\ The final amendments will
generate the intended benefits described above.\612\
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\610\ See supra section II.C.2.a; see also SIFMA Comment Letter.
\611\ See supra section II.C.2.a. We discuss the costs of these
amendments, including comments on the proposed amendments, below.
See infra section IV.C.2.
\612\ Other commenters were opposed to these amendments, but
primarily on the basis of costs of the updated reporting. See supra
section II.C.2.b; see also AIMA/ACC Comment Letter; MFA Comment
Letter II; SIFMA Comment Letter. We discuss the costs of these
amendments, including comments on the proposed amendments, below.
See infra section IV.C.2.
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Lastly, the amendments will remove certain questions where other
questions provide the same or superseding information, which the SEC
believes will streamline reporting and reduce reporting burden. For
example, the changes will remove section 2a entirely, based on a
determination that the aggregated information in section 2a is
redundant to information required to be reported in other
sections,\613\ and will remove the requirement from Question 38 for
advisers to report the percentage of the total amount of collateral and
other credit support that a fund has posted to counterparties that may
be re-hypothecated.\614\ The SEC believes that these revisions, and
others,\615\ will directly lower the costs and reduce the burden to
advisers of completing Form PF filings. Commenters who discussed these
proposed amendments agreed that there would be benefits from reducing
the burden by eliminating questions and streamlining reporting
requirements.\616\
---------------------------------------------------------------------------
\613\ See supra section II.C.1.
\614\ Id.
\615\ Other revisions that will provide this benefit include
consolidating Question 47 into Question 36; removing the requirement
from Question 38 for advisers to report the percentage of the total
amount of collateral and other credit support that a fund has posted
to counterparties that may be re-hypothecated; and requiring
reporting turnover on a per fund basis instead of in the aggregate.
See supra section II.C.
\616\ See supra sections II.C.1, II.C.2.b; see also, e.g., MFA
Comment Letter II; SIFMA Comment Letter; Better Markets Comment
Letter.
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2. Costs
The amendments to Form PF will lead to certain additional costs for
private fund advisers. Any portion of these costs that is not borne by
advisers will ultimately be passed on to private funds' investors.
These costs will vary depending on the scope of the required
information, which is determined based on the size and types of funds
managed by the adviser as well as each fund's investment strategies,
including choices of asset classes and counterparties. These costs are
quantified, to the extent possible, by examination of the analysis in
section V.C.
The SEC anticipates that the costs to advisers associated with Form
PF will be comprised of both direct compliance costs and indirect
costs. Direct costs for advisers will consist of internal costs (for
compliance attorneys and other non-legal staff of an adviser, such as
computer programmers, to prepare and review the required disclosure)
and external costs (including filing fees as well as any costs
associated with outsourcing all or a portion of the Form PF reporting
responsibilities to a filing agent, software consultant, or other
third-party service provider).\617\
---------------------------------------------------------------------------
\617\ See section V.C. (for an analysis of the direct costs
associated with the new Form PF requirements for quarterly and
annual filings).
---------------------------------------------------------------------------
The SEC believes that the direct costs associated with the final
amendments will be most significant for the first updated Form PF
report that a private fund adviser will be required to file because the
adviser will need to
[[Page 18043]]
familiarize itself with the new reporting form and may need to
configure its systems to gather the required information efficiently.
In subsequent reporting periods, the SEC anticipates that filers will
significantly lower costs because much of the work involved in the
initial report is non-recurring and because of efficiencies realized
from system configuration and reporting automation efforts accounted
for in the initial reporting period. This is consistent with the
results of a survey of private fund advisers, finding that the majority
of respondents identified the cost of subsequent annual Form PF filings
at about half of the initial filing cost.\618\
---------------------------------------------------------------------------
\618\ See Kaal, supra footnote 487.
---------------------------------------------------------------------------
The SEC anticipates that the amendments aimed at improving data
quality and comparability will impose limited direct costs on advisers
given that advisers already accommodate similar requirements in their
current Form PF reporting and can utilize their existing capabilities
for preparing and submitting an updated Form PF. The SEC expects that
most of the costs will arise from the requirements to report additional
and more granular information on Form PF. These direct costs will
mainly include an initial cost to set up a system for collecting,
verifying additional more granular information, and limited ongoing
costs associated with periodic reporting of this additional
information.\619\ We believe that the amendment to 17 CFR 275.204(b)-
1(f) under the Advisers Act will have minimal costs associated with it,
as the amendment only makes it easier to submit a temporary hardship
exemption and assists advisers in determining what constitutes a
``filed'' temporary hardship exemption.\620\ As discussed in the
benefits section, the SEC believes that part of the costs to advisers
arising from the amendments will be mitigated by the cost savings
resulting from reduced ambiguities and inefficiencies that currently
exist in the reporting requirements, as this may reduce the amount of
time and effort required for some advisers to prepare and submit Form
PF information.\621\
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\619\ Based on the analysis in section V.C, initial costs
associated with filing the first updated Form PF report are
estimated to increase by $5,820 for smaller private fund advisers,
$20,190 for large hedge fund advisers, $10,592 for large liquidity
fund advisers, and $10,647 for large private equity fund advisers.
These figures are calculated as the cost of filing under the amended
form minus the cost of filing prior to the amendments for each
category of adviser. See Table 6. Direct internal compliance costs
associated with the amendments are estimated at $2,247 annually for
smaller private fund advisers. Direct internal compliance costs
associated with the amendments are estimated at $8,346 per quarterly
filing or $33,384 annually for large hedge fund advisers. Direct
internal compliance costs associated with the amendments are
estimated at $5,136 per quarterly filing or $20,544 annually for
large liquidity fund advisers. Direct internal compliance costs
associated with the amendments are estimated at $4,815 annually for
large private equity fund advisers. These figures are calculated as
the cost of filing under the amendments minus the cost of filing
prior to the amendments for each category of adviser. See Table 7.
It is estimated that there will be no additional direct external
costs and no changes to filing fees associated with the amendments.
See Table 9. The SEC anticipates that there may be additional first-
time filing costs for filers who do not currently file on a calendar
quarter basis, but that these costs are likely to be small and not
likely to impact subsequent filings beyond the first. As discussed
above, a 2018 industry survey of large hedge fund advisers found
filing costs that ranged from 35% to 72% higher than SEC cost
estimates. These industry cost estimates would therefore suggest
costs associated with the changes to Form PF that are potentially
35% to 72% higher than those estimated here. See MFA Letter to
Chairman Clayton, supra footnote 364, at 3. However, a 2015 survey
of SEC-registered investment advisers to private funds affirmed the
SEC's cost estimates for smaller private fund advisers' Form PF
compliance costs, and found that the SEC overestimated Form PF
compliance costs for larger private fund advisers. These academic
literature cost estimates would therefore suggest that the costs
associated with the changes to Form PF estimated here are
potentially conservatively large. See Kaal, supra footnote 487. We
were persuaded by commenters who asserted that the proposed burdens
underestimated the time and expense associated with the proposed
amendments. To address commenters' concerns and recognizing the
changes from the proposal, we have revised the estimates as
reflected here and below. See infra section V.C.
\620\ See supra section II.E.
\621\ The final amendments also seek to limit unnecessary costs
by avoiding redundancies between new questions and current
Questions. For example, the SEC will remove current Question 22, as
it would be redundant in light of the expanded turnover reporting.
See supra footnote 385.
---------------------------------------------------------------------------
Indirect costs for advisers will include the costs associated with
additional actions that advisers may decide to undertake in light of
the additional reporting requirements on Form PF. Specifically, to the
extent that the amendments provide an incentive for advisers to improve
internal controls and devote additional time and resources to managing
their risk exposures and enhancing investor protection, this may result
in additional expenses for advisers, some of which may be passed on to
the funds and their investors.
Commenters also identified other indirect costs in the form of
unintended effects, which we agree may occur. For example, one
commenter stated that requirements in Form PF to use a particular
financial identifier may increase costs and reduce innovation and
competition among financial identifier providers.\622\ However, we do
not think this effect is likely to occur, because Form PF continues to
not require an adviser to obtain or use LEI or any other particular
financial identifier (other than private fund identification numbers
for reporting funds), as our amendments provide only that any
identifier that does not meet the definition of ``LEI'' may not be
substituted for an LEI where a question requests an LEI.\623\ Form PF
continues to permit advisers to use other financial identifiers
elsewhere on Form PF where the reporting of LEI is either not specified
or not required.\624\ Therefore, financial identifier providers will
not likely experience any reduction in their incentives to innovate or
compete.
---------------------------------------------------------------------------
\622\ See supra section II.B.1; see also Bloomberg Comment
Letter.
\623\ See supra section II.B.1.
\624\ Id.
---------------------------------------------------------------------------
Some commenters stated that there will be substantial burden
including initial set-up costs, external costs, and ongoing costs
associated with amending Form PF.\625\ These commenters also stated
that the Proposing Release economic analysis understated the costs of
the amendments.\626\ Several of the changes to the final amendments
relative to the proposal are in response to commenter concerns on
costs. Specifically, the final amendments have removed certain
questions that were proposed and revised other questions in order to
reduce their burden without compromising the goals of the Commissions
and FSOC in improving the information received on the form for purposes
of their systemic risk reviews. For example, we are revising certain
questions related to exposures to instruct advisers to select the
exposure that ``best represents'' the indirect investment of the
reporting fund, based on commenter statements that obtaining
information about a fund's indirect exposures through investments in
other funds could be difficult or burdensome.\627\ As a second example,
we are also not adopting a proposed question on portfolio correlations
in response to comments that the proposed portfolio calculation
questions would have been complex and burdensome to calculate.\628\ As
a third example, one commenter stated that for quarterly filers who
have a fiscal year ending in
[[Page 18044]]
a non-calendar quarter month, the proposed instructions do not specify
the procedure for a filer who, during the transition from fiscal to
calendar quarter reporting, would otherwise be required to report twice
in one calendar quarter.\629\ In response, we are requiring that such
filers transition to the new timing requirement by their first calendar
quarter-end filing for the first full quarterly reporting period after
the compliance date.\630\ As a final example, we are permitting the use
of RFACV and GRFACV in reporting certain questions related to asset
values in Section 1b, concerning all private funds.\631\ Permitting an
adviser to report GRFACV or RFACV will reduce burden associated with
reporting of valuation data on a monthly basis.\632\
---------------------------------------------------------------------------
\625\ See, e.g., MFA Comment Letter III; AIMA/ACC Comment
Letter; MFA/NAPFM Comment Letter.
\626\ Id. The Proposing Release economic analysis' quantified
costs were based on compliance cost estimates from the Proposing
Release PRA analysis. As discussed above, industry and academic
literature from 2015-2018 has varied in its findings on whether
SEC's past PRA analysis estimates of Form PF compliance costs have
historically been overstated or understated. To address commenters'
concerns and recognizing the changes from the proposal, we are
revising the estimates as reflected here and below. See infra
section V.C; see also supra footnote 619.
\627\ See supra sections II.A.2, II.C.2.
\628\ See supra section II.C.2.
\629\ See supra section II.A.3.
\630\ Id.
\631\ See supra section II.B.2. The incremental burdens
associated with the use of these terms may be further limited
because the recent amendments adopted by the SEC require a large
hedge fund adviser to monitor and in certain instances report, the
fund's RFACV in compliance with its current reporting obligation.
See May 2023 SEC Form PF Amending Release, supra footnote 4.
\632\ Id.
---------------------------------------------------------------------------
However, there were certain proposed amendments that commenters
criticized as burdensome but are being adopted largely as proposed.
Each of these amendments is being adopted either because costs will be
limited, because benefits will be substantial, or both. For example,
commenters criticized the prescribed methodology for calculating netted
exposure as burdensome as well as the need to identify relevant sub-
asset classes and the need to measure these exposures on a monthly
basis.\633\ However, burden in the case of sub-asset classes will
likely be limited, because advisers will generally only need to make
the relevant determination of sub-asset classes once, with ongoing
monitoring (and any reclassifications) relatively limited. Further,
because a fund may use cross counterparty netting consistent with
information reported by the fund internally for purposes of determining
adjusted exposure, the adjusted exposure reporting will likely not be
significantly burdensome, particularly for funds using common
aggregator protocols.\634\ As another example, some commenters opposed
the requirement to provide additional detail regarding counterparty
exposure and state that the information would be burdensome and costly
to obtain.\635\ For reasons discussed above,\636\ we continue to
believe that disaggregated counterparty exposure is important to
systemic risk monitoring efforts, and will not be significantly
burdensome to produce as we understand knowledge of counterparties to
be a component of a fund's risk management practices. As a final
example, one commenter stated that the requirement to report
information expressed as a percentage to the nearest one hundredth of
one percent will significantly increase the costs and additional
burdens for reporting advisers.\637\ However, as discussed above,
percentages rounded to the nearest one hundredth of one percent will
allow the Commissions to obtain and analyze more precise information
that may otherwise be obscured, for example given that one one-
hundredth of one percent can represent a meaningful dollar amount
depending on the size of the private fund. And, while we recognize that
this may not be the case for smaller funds, when such amounts are taken
together for a large group of smaller funds, the aggregate amount
across the fund group can represent a meaningful dollar amount for data
analysis purposes.\638\ However, given commenters' perspectives, we
have increased our assessment of the incremental direct costs of the
final amendments relative to the proposal, even after revising certain
final amendments and questions relative to the proposal in order to
reduce incremental burden.\639\
---------------------------------------------------------------------------
\633\ See supra section II.C.2.a; see also, e.g., SIFMA Comment
Letter.
\634\ See supra section II.C.2.a.
\635\ See supra section II.C.2.b; see also, e.g., MFA Comment
Letter II; SIFMA Comment Letter; AIMA/ACC Comment Letter.
\636\ Id.
\637\ See supra section II.D; see also MFA Comment Letter II.
\638\ Id.
\639\ See supra footnotes 619 through 621 and accompanying text;
see also infra section V.C.
---------------------------------------------------------------------------
However, these costs must be analyzed alongside the important
benefits that will accrue, as receiving exposure data on a monthly
basis will allow us to better understand interim changes in exposures
that may be relevant to systemic risk assessment that are not visible
from the existing quarterly data, which may enhance the measurement of
trends that may indicate systemic risk. Receiving these data on a
monthly basis will also improve the Commissions' ability to compare
netted exposures with other monthly reported data, such as redesignated
Question 23, relating to fund performance reported by all private
funds.\640\ Being able to compare data on a monthly basis with other
data at the same frequency is important for systemic risk assessment
and to support investor protection efforts.\641\
---------------------------------------------------------------------------
\640\ See supra section II.B.2.
\641\ Id.
---------------------------------------------------------------------------
Some commenters argued that the heightened compliance costs of Form
PF may be particularly burdensome for small firms.\642\ As a result,
the final amendments may represent a barrier to entry for smaller
advisers who cannot meet the compliance costs or who cannot compete
after passing those costs on to investors. To the extent any smaller
advisers either exit or forgo entry in response to these compliance
costs, competition would be negatively affected. However, comments were
made in the context of the proposal, and the final amendments reduce
many of the costs of compliance relative to the proposal.\643\
Therefore, these effects may be mitigated, but may nonetheless occur.
---------------------------------------------------------------------------
\642\ See, e.g., MFA Comment Letter; AIMA/ACC Comment Letter.
\643\ See supra footnote 456 and accompanying text.
---------------------------------------------------------------------------
One commenter stated that the SEC should consider that ``the sheer
number and complexity of the Proposals, when considered in their
totality, if adopted, would impose staggering aggregate costs, as well
as unprecedented operational and other practical challenges.'' \644\
But, consistent with its long-standing practice, the Commission's
economic analysis in each adopting release considers the incremental
benefits and costs for the specific rule--that is, the benefits and
costs stemming from that rule compared to the baseline.\645\ In doing
so, the Commission acknowledges that in some cases resource limitations
can lead to higher compliance costs when the compliance period of the
rule being considered overlaps with the compliance period of other
rules. In determining compliance periods, the SEC considers the
benefits of the rules as well as the costs of delayed compliance
periods and potential overlapping compliance periods.
---------------------------------------------------------------------------
\644\ MFA/NAPFM Comment Letter; see also MFA Comment Letter III;
SIFMA Comment Letter; AIC Comment Letter I; AIC Comment Letter II;
Comment Letter of U.S. House of Representatives Committee on
Financial Services.
\645\ See supra section IV.C.1.
---------------------------------------------------------------------------
Specifically, some commenters, as noted above, mentioned the
proposals which culminated in the recent adoptions of the May 2023 SEC
Form PF Amending Release, SEC Private Funds Advisers Adopting Release,
Beneficial Ownership Amending Release, Short Position Reporting
Adopting Release, Securitizations Conflicts Adopting Release, Treasury
Clearing Adopting Release, and Dealer Definition Amending Release.\646\
The SEC
[[Page 18045]]
acknowledges that there are compliance dates for certain requirements
of these rules that overlap in time with the final rule, which may
impose costs on resource constrained entities affected by multiple
rules.\647\ This may be particularly true for smaller entities with
more limited compliance resources. This effect can negatively impact
competition because these entities may be less able to absorb or pass
on these additional costs, making it more difficult for them to remain
in business or compete.
---------------------------------------------------------------------------
\646\ See supra section IV.C.1; see also, e.g., AIC Comment
Letter II; MFA Comment Letter I; MFA Comment Letter III; SIFMA
Comment Letter.
\647\ The effective/compliance date of the amendments in this
rulemaking is one year from the date of publication of the rules,
which is anticipated to be in early 2025. See infra section II.F.
See supra footnotes 461 through 467 (summarizing compliance dates
for the previously adopted rules).
---------------------------------------------------------------------------
We do not think these increased costs from overlapping compliance
periods will be significant for two reasons. First, the market
participants that will be subject to the amendments in this rulemaking
and who will be subject to one or more of the other recently adopted
rules could be limited based on whether those participants' activities
fall within the scope of the other rules.\648\ Second, overlapping
compliance burdens related specifically to implementation of recent
Form PF amendments will be limited because of the scope and
implementation periods of the May 2023 SEC Form PF Amending Release.
Only the compliance period for amendments to section 4 of Form PF
overlap with the compliance periods for the Form PF amendments in this
rulemaking. As a result, smaller private fund advisers, who are the
entities more likely to be resource constrained, will not face any
heightened costs from overlapping implementation periods because only
large private equity fund advisers--meaning those, together with their
related persons that are not separately operated, with at least $2
billion in combined regulatory assets under management attributable to
private equity funds--report on section 4.
---------------------------------------------------------------------------
\648\ The Short Position Reporting Adopting Release will require
only institutional investment managers that meet or exceed certain
reporting thresholds to report short position and short activity
data for equity securities. The Securitizations Conflicts Adopting
Release will affect only certain entities--and their affiliates and
subsidiaries--that participate in securitization transactions. The
Treasury Clearing Adopting Release will affect only those Form PF
filers that participate in the secondary market for U.S. Treasury
securities. Lastly, the Dealer Definition Amending Release will
primarily affect certain principal trading firms and private funds;
private funds will bear the compliance costs associated with
registering as a broker-dealer--and those funds' advisers will have
to complete the compliance activities for their funds--only if the
funds' investment activities bring them within the scope of the
amended definitions. See supra footnotes 464 through 467.
---------------------------------------------------------------------------
Moreover, commenters' concerns about the costs of overlapping
compliance periods were raised in the context of the proposal and, as
discussed above, we have taken steps to reduce costs of the final rule
in several ways from the proposal.\649\ As a result, for both larger
and smaller entities, any higher costs or potential negative effects on
competition due to overlapping compliance periods raised in the context
of the proposal may be mitigated under the final amendments.
---------------------------------------------------------------------------
\649\ See supra footnote 625 and accompanying text.
---------------------------------------------------------------------------
Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. Some commenters expressed
concerns at this possibility. For example, one commenter opposed the
increased granularity in strategy categories, stating they could
disclose a fund's proprietary investment information and present data
security concerns.\650\ However, the SEC anticipates that any risk of
these adverse effects will be mitigated by certain aspects of the Form
PF reporting requirements and controls and systems designed by the SEC
for handling the data. For example, the SEC has controls and systems
for the use and handling of the modified and new Form PF data in a
manner that reflects the sensitivity of the data and is consistent with
the maintenance of its confidentiality. The SEC has substantial
experience with the storage and use of nonpublic information reported
on Form PF as well as other nonpublic information that the SEC handles
in the course of business.
---------------------------------------------------------------------------
\650\ SIFMA Comment Letter.
---------------------------------------------------------------------------
D. Reasonable Alternatives
1. Alternatives to Amendments to General Instructions, Amendments To
Enhance Data Quality, and Additional Amendments
The SEC considered alternatives to the amendments to general
instructions, amendments to enhance data quality, and the additional
amendments in the final rule (including the amendments to the process
for requesting temporary hardship exemptions, by way of an amendment to
17 CFR 275.204(b)-1(f) under the Advisers Act). The alternatives
considered were in the form of different choices of framing, level of
additional detail requested by Form PF, level of detail removed from
Form PF, and precise information targeted. For example, in the general
instructions, the SEC considered an alternative that would have
required advisers to report only at the master fund level or only at
the feeder fund level. As another example, the SEC considered requiring
annual filers to file within 30 calendar days after the end of their
fiscal year, rather than 120 calendar days.
While many alternatives may have been able to capture more detailed
information, or may have been able to capture relevant information with
a smaller reporting burden for advisers, the SEC believes that each of
the amendments to general instructions, amendments to enhance data
quality, and additional amendments as adopted will improve data quality
and enhance the usefulness of reported data without imposing undue
reporting burden.
2. Alternatives to Amendments to Basic Information About the Adviser
and the Private Funds It Advises
The SEC also considered alternatives to the amendments to basic
information about advisers and the private funds they advise. As above,
these alternatives were in the form of different choices of framing,
level of additional detail requested by Form PF, level of detail
removed from Form PF, and precise information targeted.
For example, with respect to identifying information for private
funds in section 1a, the SEC considered an alternative that would
provide more granularity for advisers to list categories of funds, such
as differentiating between different types of funds of funds (for
example, differentiating between multi-manager funds of funds and
multi-asset funds of funds). As another example, with respect to basic
information reported for all private funds in section 1b, the SEC
considered alternatives that would limit reporting information about
withdrawal rights, redemption rights, and contributions to only funds
and advisers of a certain size.
As a final example, with respect to basic information reported for
all hedge funds, the amendments will require advisers to identify each
creditor or other counterparty (including CCPs) to which the reporting
fund owes cash and synthetic financing borrowing (before posted
collateral) equal to or greater than either (1) five percent of net
asset value of the reporting fund as of the data reporting date or (2)
$1 billion, but the SEC considered alternatives that would have changed
the thresholds, either increasing or decreasing Form PF's definition of
what constitutes a significant counterparty. With respect to several
such questions, commenters
[[Page 18046]]
suggested the SEC consider alternative thresholds for reporting.\651\
As discussed above, this threshold is appropriate because both portions
of the threshold highlight potential systemic risk: five percent of net
asset value is a level that represents significant exposure (based on
the impact on performance) in the event of counterparty default, and $1
billion, while it may not equal five percent of a large hedge fund's
assets, may indicate a larger systemic stress involving a fund's
counterparties.\652\
---------------------------------------------------------------------------
\651\ See supra sections II.B.3, II.C.2.
\652\ Id.
---------------------------------------------------------------------------
The SEC believes that each of the amendments as adopted improve
data quality and enhance the usefulness of reported data without
imposing an undue reporting burden.
3. Alternatives to Amendments to Information About Hedge Funds Advised
by Large Private Fund Advisers
The SEC considered alternatives to the amendments to information
about hedge funds advised by large private fund advisers. As above,
these alternatives were in the form of different choices of framing,
level of additional detail requested by Form PF, level of detail
removed from Form PF, and precise information targeted.
For example, with respect to investment exposure reporting, the
final amendments will continue to require reporting on qualifying hedge
fund exposures to different types of assets, but will revise the
instructions and format of this reporting. As an alternative, the SEC
considered an amendment that would require or permit large hedge fund
advisers to file portfolio position-level information for qualifying
hedge funds similar to what is required for large liquidity fund
advisers, and large hedge fund advisers who do so would be allowed to
forgo responding to certain specific investment exposure questions in
section 2, including Question 30. The questions as adopted will improve
data quality and enhance the usefulness of reported data without
imposing an undue reporting burden.\653\
---------------------------------------------------------------------------
\653\ See supra section II.C.
---------------------------------------------------------------------------
As another example, the SEC considered alternative approaches for
instructing reporting advisers on how to net long and short positions
for each sub-asset class. One prong of the amended instructions for
netting long and short positions relies on a newly defined term
``reference asset,'' which we define as a security or other investment
asset to which the reporting fund is exposed through direct ownership,
synthetically, or indirect ownership,\654\ and instructs advisers to
net positions that have the same underlying reference asset across
instrument types. The SEC considered instead tailoring these
instructions to different asset classes. For example, the SEC
considered instructing advisers to net repo exposures in accordance
with generally accepted accounting principles (``GAAP'') rules for
balance sheet netting, or instructing advisers with exposures whose
underlying reference assets are Treasury securities to net within
predefined maturity buckets. However, the SEC believes that providing
netting instructions through the single definition of ``reference
asset'' improves data quality and enhances the usefulness of report
data without imposing undue burden.\655\
---------------------------------------------------------------------------
\654\ See Form PF Glossary of Terms. The amendments will also
instruct advisers to net fixed income positions that fall within
certain predefined maturity buckets. See supra section II.C.
\655\ See supra section II.C.
---------------------------------------------------------------------------
Commenters also suggested alternatives to questions requiring
reporting of categories of large exposures, in particular suggesting
alternative parameters or thresholds defining when exposures should be
reported.\656\ For example, for the proposed new questions requiring
advisers to provide information for counterparties to which the
reporting fund has net mark-to-market counterparty credit exposure
which is equal to or greater than either (1) five percent of the
reporting fund's net asset value as of the data reporting date or (2)
$1 billion, after taking into account collateral received or posted by
the reporting fund, one commenter suggested a threshold of 10 percent
for this question.\657\
---------------------------------------------------------------------------
\656\ See supra sections II.B.3, II.C.2.
\657\ MFA Comment Letter II.
---------------------------------------------------------------------------
For each of these questions, the thresholds were chosen to
highlight potentially significant systemic risks in keeping with
industry practice. For example, for the above counterparty credit
exposure question, five percent was identified as a level large enough
to constitute a shock to a reporting fund's net asset value, and $1
billion was identified as an amount that in the case of a very large
counterparty, may not represent five percent of its net assets, but may
be large enough to create stress for the reporting fund.\658\ As
another example, for the question on country and industry exposures,
the threshold of either (1) five percent of net asset value or (2) $1
billion is appropriate for multiple reasons, such as the fact that it
represents a material level of portfolio exposure to risk relating to
individual countries and geographic regions, and the fact that, for
funds without a benchmark, five percent is often evaluated for
industry, individual position, and country risk, and is a common and
easy-to-measure threshold.\659\ With respect to the $1 billion
threshold, it constitutes sufficiently large nominal value exposure
from a risk perspective.\660\
---------------------------------------------------------------------------
\658\ See supra section II.B.3.
\659\ See supra section II.C.2.d.
\660\ Id.
---------------------------------------------------------------------------
As a final example, the SEC also considered requiring advisers to
report Dollar Value of one basis point (DV01) instead of the 10-year
zero coupon bond equivalent. We understand that the 10-year zero coupon
bond equivalent is the most widely used duration measure currently
applied in the industry, and would require the fewest number of private
funds to update their calculations of duration to comply with the
reporting requirement.\661\
---------------------------------------------------------------------------
\661\ See supra section II.C.2.d.
---------------------------------------------------------------------------
Broadly, the SEC believes that each of the amendments as adopted
improve data quality and enhance the usefulness of reported data
without imposing undue reporting burden.\662\
---------------------------------------------------------------------------
\662\ See supra section II.C.2.d.
---------------------------------------------------------------------------
4. Alternatives to the Definition of the Term ``Hedge Fund''
The SEC also considered amending the definition of ``hedge fund''
which is defined in the Glossary of Terms as any private fund (other
than a securitized asset fund) (a) with respect to which one or more
investment advisers (or related persons of investment advisers) 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); (b)
that 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 (c) that may sell securities or other assets short or
enter into similar transactions (other than for the purpose of hedging
currency exposure or managing duration).\663\
---------------------------------------------------------------------------
\663\ Id.
---------------------------------------------------------------------------
Under the existing definition, an adviser to a fund that holds
itself out as a private equity fund and is permitted in its fund
governing documents to engage in certain short-selling, but has not
done so in the past 12 months, would be reported in Form PF data as
[[Page 18047]]
a hedge fund with zero short exposure. The SEC therefore considered a
potential alternative definition of ``hedge fund,'' under which, to
qualify as a hedge fund under the leverage prong of the potential
alternative definition, a fund would have to satisfy subsection (b) of
the definition (the leverage prong), as it does today, but also must
have actually borrowed or used any leverage during the past 12 months,
excluding any borrowings secured by unfunded commitments (i.e.,
subscription lines of credit). Additionally, to qualify as a hedge fund
under the short selling prong of the potential alternative definition
(the short selling prong), the fund would have engaged in certain short
selling during the past 12 months. The SEC also considered alternative
definitions requiring, for example, longer or shorter time periods,
different time periods for borrowing versus short selling, or
requirements for the reporting fund to provide redemption rights in the
ordinary course.
An alternative definition could reduce the unnecessary reporting
burden faced by advisers to deemed hedge funds that hold themselves out
as private equity funds but currently comply with instructions to
report information on Form PF section 2; however, this benefit would be
partially mitigated by the impacted private fund advisers who would
then need to report on necessary Form PF sections for private equity
fund advisers.\664\ Some reporting funds may consider themselves
``private equity funds,'' but advisers report them as hedge funds,
because the reporting fund's governing documents permit the fund to
engage in certain borrowing and short selling (even though it did not
do so at any time in the past 12 months), and an alternative definition
could result in these funds reporting in a manner more consistent with
their own view of their fund strategy. As discussed above, certain
commenters supported revising the definition, including offering
alternative specific definitions.\665\
---------------------------------------------------------------------------
\664\ See supra sections II.C.2; IV.C.2; see also infra section
V.C.
\665\ See supra section II.C.2.d.
---------------------------------------------------------------------------
However, the current definition of ``hedge fund'' is designed to
include any private fund having any one of three common characteristics
of a hedge fund: (1) a performance fee, (2) leverage, or (3) short
selling. Any private fund that has one or more of these characteristics
is an appropriate subject for the more detailed level of reporting that
hedge funds are subject to on Form PF because the questions that hedge
fund advisers are required to complete focus on these activities, and
these activities may contribute to systemic risk, particularly in the
case of a fund that has the ability to engage in borrowing or short
selling.
A revised definition that focuses on actual or contemplated use
could therefore have resulted in incomplete data for funds engaged in
these activities, meaning incomplete data on activities that are
important potential contributors to systemic risk. Because short
selling and borrowing are important distinguishing characteristics of
hedge funds and providing any exception for these activities, including
a de minimis one, could have a significant, negative effect on
reporting.\666\
---------------------------------------------------------------------------
\666\ Id.
---------------------------------------------------------------------------
Moreover, because a reporting fund may vary from year to year in
its use of leverage or short selling, a revised definition that focuses
on actual or contemplated use would also have caused fluctuations in
the data from year to year, depending on which funds use leverage or
short selling in a particular year, potentially impacting the quality
or usefulness of resulting data. In particular, when first adopting the
current definition, the Commissions reasoned that even a reporting fund
for which leverage or short selling is an important part of its
strategy may not engage in that practice during every reporting
period.\667\ This effect could also have increased the burden on
advisers to the extent that their funds were required to fluctuate
between different reporting categories in different reporting periods,
depending on the fund's practices in any given period.\668\ The
potential costs of this alternative definition would also have included
transition filing costs for advisers impacted by the definition, who
would have been required to update their reporting methods to capture
information from their funds relevant for reporting on Form PF as a
private equity fund instead of as a hedge fund, and completing
corresponding sections of the form targeted at each category.\669\
---------------------------------------------------------------------------
\667\ See supra footnote 3; see also 2011 Form PF Adopting
Release, at text accompanying footnote 4.
\668\ See supra section II.C.2.d.
\669\ We estimate that the average cost of a transition filing
is $20.50. See Table 9.
---------------------------------------------------------------------------
V. Paperwork Reduction Act
CFTC:
The information collection titled ``Form PF and Rule 204(b)-1''
(OMB Control No. 3235-0679) was issued to the SEC and implements
sections 404 and 406 of the Dodd-Frank Act by requiring private fund
advisers that have at least $150 million in private fund assets under
management to report certain information regarding the private funds
they advise on Form PF. The SEC makes information on Form PF available
to the CFTC, subject to the confidentiality provisions of the Dodd-
Frank Act, and the CFTC may use information collected on Form PF in its
regulatory programs, including examinations, investigations and
investor protection efforts relating to private fund advisers.
CFTC rule 4.27 \670\ does not impose any additional burden upon
registered CPOs and CTAs that are dually registered as investment
advisers with the SEC (``dual registrants''). There is no requirement
to file Form PF with the CFTC, and any filings made by dual registrants
with the SEC are made pursuant to the Advisers Act. While CFTC rule
4.27(d) states that dually registered CPOs and CTAs that file Form PF
with the SEC will be deemed to have filed Form PF with the CFTC for
purposes of any enforcement action regarding any false or misleading
statement of material fact in Form PF, the CFTC is not imposing any
additional burdens herein. Therefore, any burden imposed by Form PF on
entities registered with both the CFTC and the SEC has been fully
accounted for within the SEC's calculations regarding the impact of
this collection of information under the Paperwork Reduction Act of
1995 (``PRA''), as set forth below.\671\
---------------------------------------------------------------------------
\670\ CFTC rule 4.27, 17 CFR 4.27, was adopted pursuant to the
CFTC's authority set forth in section 4n of the Commodity Exchange
Act, 7 U.S.C. 6n. CFTC regulations are found at Title 17 Chapter I
of the Code of Federal Regulations.
\671\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------
SEC:
Certain provisions of the final Form PF and rule 204(b)-1 revise an
existing ``collection of information'' within the meaning of the
PRA.\672\ The SEC published a notice requesting comment on changes to
this collection of information in the 2022 Joint Form PF Proposing
Release and submitted the collection of information to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\673\ The title for the collection of information we are amending
is ``Form PF and Rule 204(b)-1'' (OMB Control Number 3235-0679), and
includes both Form PF and rule 204(b)-1 (``the rules'').\674\ The SEC's
solicitation of
[[Page 18048]]
public comments included estimating and requesting public comments on
the burden estimates for all information collections under this OMB
control number (i.e., both changes associated with the rulemaking and
other burden updates). These changes in burden also reflect the SEC's
revision and update of burden estimates since the proposal for all
information collections under this OMB control number (whether or not
associated with rulemaking changes) and responses to the SEC's request
for public comment on all information collection burden estimates for
this OMB control number. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------
\672\ Id.
\673\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
\674\ The SEC also submitted the collection of information to
OMB on Sept. 29, 2023, in connection with the May 2023 SEC Form PF
Amending Release (ICR Reference No. 202305-3235-023), which OMB
approved on Dec. 18, 2023, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202305-3235-023. See May 2023 SEC Form
PF Amending Release, supra footnote 4. Following this, the SEC
submitted the collection of information to OMB on Jan. 11, 2024, in
connection with the July 2023 Form PF Amending Release (ICR
Reference No. 202401-3235-005), which is currently pending,
available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202401-3235-005. See July 2023 SEC Form PF
Amending Release, supra footnote 4. The previously approved
estimates used in this PRA do not reflect this submission to OMB in
connection with the July 2023 Form PF Amending Release.
---------------------------------------------------------------------------
Compliance with the information collection titled ``Form PF and
Rule 204(b)-1'' is mandatory. The respondents are investment advisers
that (1) are registered or required to be registered under Advisers Act
section 203, (2) advise one or more private funds, and (3) managed
private fund assets of at least $150 million at the end of their most
recently completed fiscal year (collectively, with their related
persons).\675\ Form PF divides respondents into groups based on their
size and types of private funds they manage, requiring some groups to
file more information more frequently than others. The types of
respondents are (1) smaller private fund advisers, that report annually
(i.e., private fund advisers that do not qualify as large private fund
advisers), (2) large hedge fund advisers, that report more information
quarterly (i.e., advisers with at least $1.5 billion in hedge fund
assets under management), (3) large liquidity fund advisers, that
report more information quarterly (i.e., advisers that manage liquidity
funds and have at least $1 billion in combined money market and
liquidity fund assets under management), and (4) large private equity
fund advisers, that report more information annually (i.e., advisers
with at least $2 billion in private equity fund assets under
management).\676\ As discussed more fully in section II above and as
summarized in sections V.A and V.C below, the amendments revise how all
types of respondents report certain information on Form PF.
---------------------------------------------------------------------------
\675\ See 17 CFR 275.204(b)-1.
\676\ Large hedge fund advisers to qualifying hedge funds also
file current reports as soon as practicable, but no later than 72
hours from the occurrence of certain reporting events, as provided
for in Form PF section 5. Private equity fund advisers also file
private equity event reports within 60 days from fiscal quarter end
upon the occurrence of certain reporting reports, as provided for in
Form PF section 6. See May 2023 SEC Form PF Amending Release, supra
footnote 4.
---------------------------------------------------------------------------
We have revised our burden estimates in response to comments we
received, to reflect modifications from the proposal, to incorporate
the Form PF amendments that were separately adopted since the
proposal,\677\ and to take into consideration updated data. One
commenter indicated that the proposed amendments would confer more
benefits than costs.\678\ We received other comments to our time and
cost burdens indicating that we underestimated the burdens to implement
the proposed amendments to Form PF.\679\ We also received comments on
aspects of the economic analysis that implicated estimates we used to
calculate the collection of information burdens.\680\ We discuss these
comments below.
---------------------------------------------------------------------------
\677\ See May 2023 SEC Form PF Amending Release and July 2023
SEC Form PF Amending Release, supra footnote 4.
\678\ Better Markets Comment Letter.
\679\ See, e.g., AIC Comment Letter I; MFA Comment Letter II;
MFA/NAPFM Comment Letter; SIFMA Comment Letter.
\680\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II;
SIFMA Comment Letter.
---------------------------------------------------------------------------
We were persuaded by commenters who asserted that the proposed
burdens underestimated the time and expense associated with the
proposed amendments. Upon further consideration, we believe that it
will take more time than initially contemplated in the proposal to
collect the applicable data and report on Form PF. To address
commenters' concerns and recognizing the changes from the proposal
discussed above in section II, we are revising the estimates as
reflected in the charts below.
As discussed more fully in section II above, we have also modified
certain proposed requirements in a manner that changes our burden
estimates in certain respects. For example, as discussed more fully in
section II.A.2 above, we are adopting amendments to require
consolidated reporting of trading vehicles, rather than separate
reporting, as proposed, which reduces our burden estimates. One
commenter stated that the proposed amendments to require disaggregated
reporting of trading vehicles would require building of new reporting
systems and that the Commissions' estimated costs were understated,
particularly for private equity fund advisers.\681\ Some commenters
stated that certain proposed amendments requiring more granular
reporting would impose significant costs and burdens on advisers, such
as the proposed requirements for look-through reporting, exposures,
performance, and market factor reporting.\682\ As discussed more fully
in section II.C above, we have modified the proposed requirements for
large hedge fund advisers to report certain fund exposures to allow
advisers to report the exposure category that best represents the
reporting fund's exposure, which will reduce the burden on advisers in
collecting and reporting this information.\683\ We have also adopted a
modification from the proposal which permits an adviser to report a
fund's monthly asset value as a GRFACV or an RFACV, rather than gross
asset value or net asset value, in the event that these values are not
calculated on a monthly basis, which is a less burdensome metric to
calculate.\684\ Further, we are not adopting a proposed question on
portfolio correlation, as discussed more fully in section II.C.2 above,
after consideration of comments that stated the question would impose
significant burdens on advisers because the calculation would be
complex to perform and is not risk measurement that advisers currently
calculate.\685\
---------------------------------------------------------------------------
\681\ AIC Comment Letter I.
\682\ See, e.g., AIMA/ACC Comment Letter; USCC Comment Letter.
\683\ See, e.g., Questions 32, 33, 35, and 36.
\684\ See Questions 11 and 12.
\685\ Proposed Question 48; see, e.g., AIMA/ACC Comment Letter;
MFA Comment Letter II.
---------------------------------------------------------------------------
Some commenters stated that the proposed cost estimates were
understated because they do not take into consideration the costs of
the amendments proposed in the 2022 SEC Form PF Proposing Release.\686\
Our final estimates have been revised to include the effect of the Form
PF amendments that were adopted subsequent to the 2022 Joint Form PF
Proposal.\687\ Our time and cost estimates also incorporate other
adjustments, which are not based on changes from the proposed
amendments, for updated data for the estimated number of respondents
and
[[Page 18049]]
salary/wage information across all filer types.
---------------------------------------------------------------------------
\686\ See, e.g., AIC Comment Letter I; AIC Comment Letter II;
MFA Comment Letter III; SIFMA Comment Letter; see also 2022 SEC Form
PF Proposing Release, supra footnote 4.
\687\ See May 2023 SEC Form PF Amending Release and July 2023
SEC Form PF Amending Release, supra footnote 4.
---------------------------------------------------------------------------
A. Purpose and Use of the Information Collection
The rules implement provisions of Title IV of the Dodd-Frank Act,
which amended the Advisers Act to require the SEC to, among other
things, establish reporting requirements for advisers to private
funds.\688\ The information collected on Form PF is designed to
facilitate FSOC's obligations under the Dodd-Frank Act to monitor of
systemic risk in the private fund industry.\689\ The SEC also may use
information collected on Form PF in its regulatory programs, including
examinations, investigations, and investor protection efforts relating
to private fund advisers.\690\
---------------------------------------------------------------------------
\688\ See 15 U.S.C. 80b-4(b) and 15 U.S.C. 80b-11(e).
\689\ See Form PF.
\690\ Id.
---------------------------------------------------------------------------
The final amendments are designed to enhance FSOC's ability to
monitor systemic risk as well as bolster the SEC's regulatory oversight
of private fund advisers and investor protection efforts. The final
amendments amend the form's general instructions, as well as section 1
of Form PF, which apply to all Form PF filers. The final amendments
also amend section 2 of Form PF, which applies to large hedge fund
advisers that advise qualifying hedge funds (i.e., hedge funds with a
net asset value of at least $500 million).
B. Confidentiality
Responses to the information collection will be kept confidential
to the extent permitted by law.\691\ Form PF elicits non-public
information about private funds and their trading strategies, the
public disclosure of which could adversely affect the funds and their
investors. The SEC does not intend to make public Form PF information
that is identifiable to any particular adviser or private fund,
although the SEC may use Form PF information in an enforcement action
and FSOC may use it to assess potential systemic risk.\692\ SEC staff
issues certain publications designed to inform the public of the
private funds industry, all of which use only aggregated or masked
information to avoid potentially disclosing any proprietary
information.\693\ The Advisers Act precludes the SEC from being
compelled to reveal Form PF information except (1) to Congress, upon an
agreement of confidentiality, (2) to comply with a request for
information from any other Federal department or agency or self-
regulatory organization for purposes within the scope of its
jurisdiction, or (3) to comply with an order of a court of the United
States in an action brought by the United States or the SEC.\694\ Any
department, agency, or self-regulatory organization that receives Form
PF information must maintain its confidentiality consistent with the
level of confidentiality established for the SEC.\695\ The Advisers Act
requires the SEC to make Form PF information available to FSOC.\696\
For advisers that are also commodity pool operators or commodity
trading advisers, filing Form PF through the Form PF filing system is
filing with both the SEC and CFTC.\697\ Therefore, the SEC makes Form
PF information available to FSOC and the CFTC, pursuant to Advisers Act
section 204(b), making the information subject to the confidentiality
protections applicable to information required to be filed under that
section. Before sharing any Form PF information, the SEC requires that
any such department, agency, or self-regulatory organization represent
to the SEC that it has in place controls designed to ensure the use and
handling of Form PF information in a manner consistent with the
protections required by the Advisers Act. The SEC has instituted
procedures to protect the confidentiality of Form PF information in a
manner consistent with the protections required in the Advisers
Act.\698\
---------------------------------------------------------------------------
\691\ See 5 CFR 1320.5(d)(2)(vii) and (viii).
\692\ See 15 U.S.C. 80b-10(c) and 15 U.S.C. 80b-4(b).
\693\ See, e.g., Private Funds Statistics, issued by staff of
the SEC Division of Investment Management's Analytics Office, which
we have used in this PRA as a data source, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\694\ See 15 U.S.C. 80b-4(b)(8).
\695\ See 15 U.S.C. 80b-4(b)(9).
\696\ See 15 U.S.C. 80b-4(b)(7).
\697\ See 2011 Form PF Adopting Release, supra footnote 4, at
n.17.
\698\ See 5 CFR 1320.5(d)(2)(viii).
---------------------------------------------------------------------------
C. Burden Estimates
We are revising our total burden final estimates to reflect the
final amendments, updated data, new methodology for certain estimates,
subsequent Form PF amendments adopted after the 2022 Joint Form PF
Proposing Release, and comments we received to our estimates.\699\ The
tables below map out the proposed and final Form PF requirements as
they apply to each group of respondents and detail our burden
estimates.
---------------------------------------------------------------------------
\699\ For the previously approved estimates, see ICR Reference
No. 202305-3235-023 (conclusion date Dec. 18, 2023), available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202305-3235-023. The 2022 Joint Form PF Proposing Release used the then-current
previously approved estimates, see ICR Reference No. 202011-3235-019
(conclusion date Apr. 1, 2021), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202011-3235-019.
---------------------------------------------------------------------------
a. Proposed Form PF Requirements by Respondent
Table 1a--Proposed Form PF Requirements by Respondent
----------------------------------------------------------------------------------------------------------------
Large private
Form PF Smaller private Large hedge fund Large liquidity equity fund
fund advisers advisers fund advisers advisers
----------------------------------------------------------------------------------------------------------------
Section 1a and section 1b (basic Annually.......... Quarterly......... Quarterly......... Annually.
information about the adviser
and the private funds it
advises). Proposed revisions.
Section 1c (additional Annually, if they Quarterly......... Quarterly, if they Annually, if they
information concerning hedge advise hedge advise hedge advise hedge
funds). Proposed revisions. funds. funds. funds.
Section 2 (additional No................ Quarterly......... No................ No.
information concerning
qualifying hedge funds).
Proposed revisions.
[[Page 18050]]
Section 3 (additional No................ No................ Quarterly......... No.
information concerning
liquidity funds). No proposed
revisions.
Section 4 (additional No................ No................ No................ Annually.
information concerning private
equity funds).No proposed
revisions.
Section 5 (temporary hardship Optional, if they Optional, if they Optional, if they Optional, if they
request). The proposal would qualify. qualify. qualify. qualify.
revise filing instructions.
Transition Filings (indicating Not applicable.... If they cease to If they cease to Not applicable.
the adviser is no longer qualify as a qualify as a
obligated to file on a large hedge fund large liquidity
quarterly basis). No proposed adviser. fund adviser.
revisions.
Final Filings (indicating the If they qualify... If they qualify... If they qualify... If they qualify.
adviser is no longer subject to
the rules). No proposed
revisions.
----------------------------------------------------------------------------------------------------------------
b. Adopted Form PF Requirements by Respondent
Adopted Form PF Requirements by Respondent
----------------------------------------------------------------------------------------------------------------
Large private
Form PF Smaller private Large hedge fund Large liquidity equity fund
fund advisers advisers fund advisers advisers
----------------------------------------------------------------------------------------------------------------
Section 1a and section 1b (basic Annually.......... Quarterly......... Quarterly......... Annually.
information about the adviser
and the private funds it
advises). The final rules
modify section 1a and section
1b.
Section 1c (additional Annually, if they Quarterly......... Quarterly, if they Annually, if they
information concerning hedge advise hedge advise hedge advise hedge
funds). The final rules modify funds. funds. funds.
section 1c.
Section 2 (additional No................ Quarterly......... No................ No.
information concerning
qualifying hedge funds). The
final rules modify section 2.
Section 3 (additional No................ No................ Quarterly......... No.
information concerning
liquidity funds). No final
revisions.
Section 4 (additional No................ No................ No................ Annually.
information concerning private
equity funds). No final
revisions.
Section 5 (current reporting No................ As soon as No................ No.
concerning qualifying hedge practicable upon
funds). \1\ No final revisions. a current
reporting event,
but no later than
72 hours.
Section 6 (event reporting for Within 60 days of No................ No................ Within 60 days of
private equity fund fiscal quarter fiscal quarter
advisers).\1\ No final end upon a end upon a
revisions. reporting event, reporting event.
if they advise
private equity
funds.
Section 7 (temporary hardship Optional, if they Optional, if they Optional, if they Optional, if they
request)\1\ The final rules qualify. qualify. qualify. qualify.
revise the filing instructions.
[[Page 18051]]
Transition Filings (indicating Not applicable.... If they cease to If they cease to Not applicable.
the adviser is no longer qualify as a qualify as a
obligated to file on a large hedge fund large liquidity
quarterly basis). No final adviser. fund adviser.
revisions.
Final Filings (indicating the If they qualify... If they qualify... If they qualify... If they qualify.
adviser is no longer subject to
the rules). No final revisions.
----------------------------------------------------------------------------------------------------------------
Note:
\1\ The SEC adopted amendments to Form PF, which added sections 5 and 6 and redesignated the previous section 5
as section 7. See May 2023 SEC Form PF Amending Release, supra footnote 4.
c. Annual Hour Burden Estimates
Below are tables with annual hour burden estimates for (1) initial
filings, (2) ongoing annual and quarterly filings, (3) current
reporting and private equity event reporting, and (4) transition
filings, final filings, and temporary hardship requests.
Table 2--Annual Hour Burden Estimates for Initial Filings
----------------------------------------------------------------------------------------------------------------
Number of
respondents = Hours per Hours per Aggregate
Respondent \1\ aggregate response response hours
number of \3\ amortized over amortized over
responses \2\ 3 years \4\ 3 years \5\
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate................... \6\ 309 50 / 3 = 17 5,253
Final Estimate...................... \7\ 374 55 / 3 = 18 6,732
Previously Approved................. 358 40 / 3 = 13 4,654
Change.............................. 16 15 5 2,078
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate................... \8\ 15 345 / 3 = 115 1,725
Final Estimate...................... \9\ 14 380 / 3 = 127 1,778
Previously Approved................. 16 325 /3 = 108 1,728
Change.............................. (2) 55 19 50
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
Proposed Estimate................... \10\ 1 210 / 3 = 70 70
Final Estimate...................... \11\ 1 229 / 3 = 76 76
Previously Approved................. 1 200 / 3 = 67 67
Change.............................. 0 29 9 9
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund Advisers:
Proposed Estimate................... \12\ 13 210 / 3 = 70 910
Final Estimate...................... \13\ 18 281 / 3 = 94 1,692
Previously Approved................. 17 252 / 3 = 84 1,428
Change.............................. 1 29 10 264
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the hourly burden will be most significant for the initial report because the adviser will
need to familiarize itself with the new reporting form and may need to configure its systems in order to
efficiently gather the required information. In addition, we expect that some large private fund advisers will
find it efficient to automate some portion of the reporting process, which will increase the burden of the
initial filing but reduce the burden of subsequent filings.
\2\ This concerns the initial filing; therefore, we estimate one response per respondent. The proposed and final
changes are due to using updated data to estimate the number of advisers.
\3\ Hours per response changes are due to the amendments, as well as amendments to Form PF adopted subsequent to
the 2022 Joint Form PF Proposal for the final estimates and comments we received to our estimates.
\4\ We amortize the initial time burden over three years because we believe that most of the burden will be
incurred in the initial filing.
\5\ (Number of responses) x (hours per response amortized over three years) = aggregate hours amortized over
three years. Changes are due to (1) using updated data to estimate the number of advisers, (2) the amendments
adopted in this Release, (3) amendments to Form PF adopted subsequent to the 2022 Joint Form PF Proposal, and
(4) comments we received to our estimates.
\6\ In the case of the proposed estimates, Private Funds Statistics show 2,394 smaller private fund advisers
filed Form PF in the third quarter of 2021. Based on filing data from the last five years, an average of 12.9%
of them did not file for the previous due date. (2,394 x 0.129 = 309 advisers.)
\7\ In the case of the final estimates, Private Funds Statistics show 2,750 smaller private fund advisers filed
Form PF in the first quarter of 2023. Based on filing data from the last five years, an average of 13.6% of
them did not file for the previous due date. (2,750 x 0.136 = 374 advisers.)
\8\ In the case of the proposed estimates, Private Funds Statistics show 592 large hedge fund advisers filed
Form PF in the third quarter of 2021. Based on filing data from the last five years, an average of 2.6% of
them did not file for the previous due date. (592 x 0.026 = 15 advisers.)
[[Page 18052]]
\9\ In the case of the final estimates, Private Funds Statistics show 570 large hedge fund advisers filed Form
PF in the first quarter of 2023. Based on filing data from the last five years, an average of 2.5% of them did
not file for the previous due date. (570 x 0.025 = 14 advisers.)
\10\ In the case of the proposed estimates, Private Funds Statistics show 24 large liquidity fund advisers filed
Form PF in the third quarter of 2021. Based on filing data from the last five years, an average of 1.5% of
them did not file for the previous due date. (24 x 0.015 = 0.36 advisers, rounded up to 1 adviser.)
\11\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed
Form PF in the first quarter of 2023. Based on filing data from 2017 through 2021, an average of 1.5% of them
did not file for the previous due date. (21 x 0.015 = 0.32 advisers, rounded up to 1 adviser.)
\12\ In the case of the proposed estimates, Private Funds Statistics show 369 large private equity fund advisers
filed Form PF in the third quarter of 2021. Based on filing data from the last five years, an average of 3.5%
of them did not file for the previous due date. (369 x 0.035 = 13 advisers.)
\13\ In the case of the final estimates, Private Funds Statistics show 450 large private equity fund advisers
filed Form PF in the first quarter of 2023. Based on filing data from the last five years, an average of 3.9%
of them did not file for the previous due date. (450 x 0.039 = 18 advisers.)
Table 3--Annual Hour Burden Estimates for Ongoing Annual and Quarterly Filings
----------------------------------------------------------------------------------------------------------------
Number of
Respondent \1\ respondents \2\ Number of Hours per Aggregate
(advisors) responses \3\ response \4\ hours \5\
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund:
Proposed Estimate.............. \6\ 2,085 x 1 x 20 = 41,700
Final Estimate................. \7\ 2,376 x 1 x 22 = 52,272
Previously Approved............ 2,258 x 1 x 15 = 33,870
Change......................... 118 0 7 18,402
Large Hedge Fund:
Proposed Estimate.............. \8\ 577 x 4 x 160 = 369,280
Final Estimate................. \9\ 556 x 4 x 176 = 391,424
Previously Approved............ 582 x 4 x 150 = 349,200
Change......................... (26) 0 26 42,224
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund:
Proposed Estimate.............. \10\ 23 x 4 x 75 = 6,900
Final Estimate................. \11\ 20 x 4 x 86 = 6,880
Previously Approved............ 21 x 4 x 70 = 5,880
Change......................... (1) 0 16 1,000
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund:
Proposed Estimate.............. \12\ 356 x 1 x 105 = 37,380
Final Estimate................. \13\ 432 x 1 x 145 = 62,640
Previously Approved............ 418 x 1 x 128 = 53,504
Change......................... 14 0 17 9,136
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We estimate that after an adviser files its initial report, it will incur significantly lower costs to file
ongoing annual and quarterly reports, because much of the work for the initial report is non-recurring and
likely created system configuration and reporting efficiencies.
\2\ Changes to the number of respondents are due to using updated data to estimate the number of advisers.
\3\ Smaller private fund advisers and large private equity fund advisers file annually. Large hedge fund
advisers and large liquidity fund advisers file quarterly.
\4\ Hours per response changes are due to the amendments.
\5\ Changes to the aggregated hours are due to (1) using updated data to estimate the number of advisers, (2)
the amendments, (3) amendments to Form PF adopted subsequent to the 2022 Joint Form PF Proposing Release, and
(4) comments we received to our estimates.
\6\ In the case of the proposed estimates, Private Funds Statistics show 2,394 smaller private fund advisers
filed Form PF in the third quarter of 2021. We estimated that 309 of them filed an initial filing, as
discussed in Table 2: Annual Hour Burden Estimates for Initial Filings. (2,394 total smaller advisers-309
advisers that made an initial filing = 2,085 advisers that make ongoing filings.)
\7\ In the case of the final estimates, Private Funds Statistics show 2,750 smaller private fund advisers filed
Form PF in the first quarter of 2023. We estimated that 374 of them filed an initial filing, as discussed in
Table 2: Annual Hour Burden Estimates for Initial Filings. (2,750 total smaller advisers-374 advisers that
made an initial filing = 2,376 advisers that make ongoing filings.)
\8\ In the case of the proposed estimates, Private Funds Statistics show 592 large hedge fund advisers filed
Form PF in the third quarter of 2021. We estimated that 15 of them filed an initial filing, as discussed in
Table 2: Annual Hour Burden Estimates for Initial Filings. (592 total large hedge fund advisers-15 advisers
that made an initial filing = 577 advisers that make ongoing filings.)
\9\ In the case of the final estimates, Private Funds Statistics show 570 large hedge fund advisers filed Form
PF in the first quarter of 2023. We estimated that 14 of them filed an initial filing, as discussed in Table
2: Annual Hour Burden Estimates for Initial Filings. (570 total large hedge fund advisers-14 advisers that
made an initial filing = 556 advisers that make ongoing filings.)
\10\ In the case of the proposed estimates, Private Funds Statistics show 24 large liquidity fund advisers filed
Form PF in the third quarter of 2021. We estimated that one of them filed an initial filing, as discussed in
Table 2: Annual Hour Burden Estimates for Initial Filings. (24 total large liquidity fund advisers-1 adviser
that made an initial filing = 23 advisers that make ongoing filings.)
\11\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed
Form PF in the first quarter of 2023. We estimated that one of them filed an initial filing, as discussed in
Table 2: Annual Hour Burden Estimates for Initial Filings. (21 total large liquidity fund advisers-1 adviser
that made an initial filing = 20 advisers that make ongoing filings.)
\12\ In the case of the proposed estimates, Private Funds Statistics show 369 large private equity fund advisers
filed Form PF in the third quarter of 2021. We estimated that 13 of them filed an initial filing, as discussed
in Table 2: Annual Hour Burden Estimates for Initial Filings. (369 total large private equity fund advisers-13
advisers that made an initial filing = 356 advisers that make ongoing filings.)
\13\ In the case of the final estimates, Private Funds Statistics show 450 large private equity fund advisers
filed Form PF in the first quarter of 2023. We estimated that 18 of them filed an initial filing, as discussed
in Table 2: Annual Hour Burden Estimates for Initial Filings. (450 total large private equity fund advisers-18
advisers that made an initial filing = 432 advisers that make ongoing filings.)
[[Page 18053]]
Table 4--Annual Hour Burden Estimates for Current Reporting and Private Equity Event Reporting \1\
----------------------------------------------------------------------------------------------------------------
Aggregate
Respondent number of Hours per Aggregate
responses response hours
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... 20 x 5 = 100
Previously Approved............................... 20 x 5 = 100
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... 60 x 10 = 600
Previously Approved............................... 60 x 10 = 600
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... 20 x 5 = 100
Previously Approved............................... 20 x 5 = 100
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Note:
\1\ Subsequent to the 2022 Joint Form PF Proposing Release, the SEC adopted amendments to Form PF, which added
Form PF section 5 (Current report for large hedge fund advisers to qualifying hedge funds) and section 6
(Quarterly report for advisers to private equity funds) to Form PF. See May 2023 SEC Form PF Amending Release,
supra footnote 4, at section V for proposed and final estimates for current reporting and private equity event
reporting. We did not propose any changes to these sections in the 2022 Joint Form PF Proposing Release and
are not adopting any changes to these sections in this Release.
Table 5--Annual Hour Burden Estimates for Transition Filings, Final Filings, and Temporary Hardship Requests
----------------------------------------------------------------------------------------------------------------
Aggregate
Filing type \1\ number of Hours per Aggregate
responses \2\ response hours \3\
----------------------------------------------------------------------------------------------------------------
Transition Filing from Quarterly to Annual:
Proposed Estimate................................. \4\ 68 x 0.25 = 17
Final Estimate.................................... \5\ 69 x 0.25 = 17.25
Previously Approved............................... 71 x 0.25 = 17.75
Change............................................ (2) 0 (0.50)
----------------------------------------------------------------------------------------------------------------
Final Filings:
Proposed Estimate................................. \6\ 233 x 0.25 = 58.25
Final Estimate.................................... \7\ 243 x 0.25 = 60.75
Previously Approved............................... 235 x 0.25 = 58.75
Change............................................ 8 0 2
----------------------------------------------------------------------------------------------------------------
Temporary Hardship Requests:
Proposed Estimate................................. \8\ 3 x 1 = 3
Final Estimate.................................... \9\ 4 x 1 = 4
Previously Approved............................... 4 x 1 = 4
Change............................................ 0 0 0
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Advisers make limited Form PF filings in three situations. First, any adviser that transitions from filing
quarterly to annually because it has ceased to qualify as a large hedge fund adviser or large liquidity fund
adviser, must file a Form PF indicating that it is no longer obligated to report on a quarterly basis. Second,
any adviser that is no longer subject to Form PF's reporting requirements, must file a final filing indicating
this. Third, an adviser may request a temporary hardship exemption if it encounters unanticipated technical
difficulties that prevent it from making a timely electronic filing. A temporary hardship exemption extends
the deadline for an electronic filing for seven business days. To request a temporary hardship exemption, the
adviser must file a request on Form PF. The final rule amends how advisers file temporary hardship exemption
requests, as discussed in section II.E of this Release; however, the amendment will not result in any changes
to the hours per response.
\2\ Changes to the aggregate number of responses are due to using updated data.
\3\ Changes to the aggregate hours are due to the changes in the aggregate number of responses.
\4\ In the case of the proposed estimates, Private Funds Statistics show 616 advisers filed quarterly reports in
the third quarter of 2021. Based on filing data from the last five years, an average of 11.1% of them filed a
transition filing. (616 x 0.111 = 68 responses.)
\5\ In the case of the final estimates, Private Funds Statistics show 591 advisers filed quarterly reports in
the first quarter of 2023. Based on filing data from the last five years, an average of 11.7% of them filed a
transition filing. (591 x 0.117 = 69 responses.)
\6\ In the case of the proposed estimates, Private Funds Statistics show 3,379 advisers filed Form PF in the
third quarter of 2021. Based on filing data from the last five years, an average of 6.9% of them filed a final
filing. (3,379 x 0.069 = approximately 233 responses.)
\7\ In the case of the final estimates, Private Funds Statistics show 3,791 advisers filed Form PF in the first
quarter of 2023. Based on filing data from the last five years, an average of 6.4% of them filed a final
filing. (3,791 x 0.064 = approximately 243 responses.)
\8\ In the case of the proposed estimates, based on experience receiving temporary hardship requests, we
estimate that 1 out of 1,000 advisers will file a temporary hardship exemption annually. Private Funds
Statistics show 3,379 advisers filed Form PF in the third quarter of 2021. (3,379/1,000 = approximately 3
responses.)
[[Page 18054]]
\9\ In the case of the final estimates, based on experience receiving temporary hardship requests, we estimate
that 1 out of 1,000 advisers will file a temporary hardship exemption annually. Private Funds Statistics show
3,791 advisers filed Form PF in the first quarter of 2023. (3,791/1,000 = approximately 4 responses.)
d. Annual Monetized Time Burden Estimates
Below are tables with annual monetized time burden proposed and
final estimates for (1) initial filings, (2) ongoing annual and
quarterly filings, (3) current reporting and private equity event
reporting, and (4) transition filings, final filings, and temporary
hardship requests.\700\
---------------------------------------------------------------------------
\700\ The hourly wage rates used in our proposed and final
estimates are based on (1) SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by SEC staff to
account for an 1,800-hour work-year and inflation, and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead; and (2) SIFMA's Office Salaries in the Securities Industry
2013, modified by SEC staff to account for an 1,800-hour work-year
and inflation, and multiplied by 2.93 to account for bonuses, firm
size, employee benefits and overhead. The final estimates are based
on the preceding SIFMA data sets, which SEC staff have updated since
the proposing release to account for current inflation rates.
Table 6--Annual Monetized Time Burden of Initial Filings
----------------------------------------------------------------------------------------------------------------
Aggregate
Per response Aggregate monetized
Respondent \1\ Per response amortized over number of time burden
\2\ 3 years \3\ responses \4\ amortized
over 3 years
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund
Advisers:
Proposed Estimate....... \5\ $18,250 / 3 = $6,083 x 309 = $1,879,647
Final Estimate.......... \6\ 21,340 / 3 = 7,113 x 374 = 2,660,262
Previously Approved..... 15,520 / 3 = 5,174 x 358 = 1,852,292
Change.................. 5,820 1,939 16 807,970
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate....... \7\ 118,680 / 3 = 39,560 x 15 = 593,400
Final Estimate.......... \8\ 139,080 / 3 = 46,360 x 14 = 649,040
Previously Approved..... 118,890 / 3 = 39,630 x 16 = 634,080
Change.................. 20,190 6,730 (2) 14,960
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund
Advisers:
Proposed Estimate....... \9\ 72,240 / 3 = 24,080 x 1 = 24,080
Final Estimate.......... \10\ 83,792 / 3 = 27,931 x 1 = 27,931
Previously Approved..... 73,200 / 3 = 24,400 x 1 = 24,400
Change.................. 10,592 3,531 0 3,531
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund
Advisers:
Proposed Estimate....... \11\ 72,240 / 3 = 24,080 x 13 = 313,040
Final Estimate.......... \12\ 102,868 / 3 = 34,289 x 18 = 617,202
Previously Approved..... 92,221 / 3 = 30,740 x 17 = 522,580
Change.................. 10,647 3,549 1 94,622
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the monetized time burden will be most significant for the initial report, for the same
reasons discussed in Table 2: Annual Hour Burden Estimates for Initial Filings. Accordingly, we anticipate
that the initial report will require more attention from senior personnel, including compliance managers and
senior risk management specialists, than will ongoing annual and quarterly filings. Changes are due to using
(1) updated hours per estimates, as discussed in Table 2: Annual Hour Burden Estimates for Initial Filings,
(2) updated aggregate number of, as discussed in Table 2: Annual Hour Burden Estimates for Initial Filings,
and (3) updated wage estimates.
\2\ For the hours per in each calculation, see Table 2: Annual Hour Burden Estimates for Initial Filings.
\3\ We amortize the monetized time burden for initial filings over three years, as we do with other initial
burdens in this PRA, because we believe that most of the burden will be incurred in the initial filing.
\4\ See Table 2: Annual Hour Burden Estimates for Initial Filings.
\5\ In the case of the proposed estimates, for smaller private fund advisers, we estimate that the initial
report will most likely be completed equally by a compliance manager at a cost of $339 per hour and a senior
risk management specialist at a cost of $391 per hour. (($339 per hour x 0.5) + ($391 per hour x 0.5)) x 50
hours per = $18,250.
\6\ In the case of the final estimates, for smaller private fund advisers, we estimate that the initial report
will most likely be completed equally by a compliance manager at a cost of $360 per hour and a senior risk
management specialist at a cost of $416 per hour. (($360 per hour x 0.5) + ($416 per hour x 0.5)) x 55 hours
per = $21,340.
\7\ In the case of the proposed estimates, for large hedge fund advisers, we estimate that for the initial
report, of a total estimated burden of 345 hours, approximately 60% will most likely be performed by
compliance professionals and 40% will most likely be performed by programmers working on system configuration
and reporting automation (that is approximately 207 hours for compliance professionals and approximately 138
hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be
performed equally by a compliance manager at a cost of $339 per hour and a senior risk management specialist
at a cost of $391 per hour. Of the work performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $362 per hour and a programmer analyst at a cost of $263 per hour.
(($339 per hour x 0.5) + ($391 per hour x 0.5)) x 207 hours = $75,555. (($362 per hour x 0.5) + ($263 per hour
x 0.5)) x 138 hours = $43,125. $75,555 + $43,125 = $118,680.
\8\ In the case of the final estimates, for large hedge fund advisers, we estimate that for the initial report,
of a total estimated burden of 380 hours, approximately 60% will most likely be performed by compliance
professionals and 40% will most likely be performed by programmers working on system configuration and
reporting automation (that is approximately 228 hours for compliance professionals and approximately 152 hours
for programmers). Of the work performed by compliance professionals, we anticipate that it will be performed
equally by a compliance manager at a cost of $360 per hour and a senior risk management specialist at a cost
of $416 per hour. Of the work performed by programmers, we anticipate that it will be performed equally by a
senior programmer at a cost of $386 per hour and a programmer analyst at a cost of $280 per hour. (($360 per
hour x 0.5) + ($416 per hour x 0.5)) x 228 hours = $88,464. (($386 per hour x 0.5) + ($280 per hour x 0.5)) x
152 hours = $50,616. $88,464 + $50,616 = $139,080.
[[Page 18055]]
\9\ In the case of the proposed estimates, for large liquidity fund advisers, we estimate that for the initial
report, of a total estimated burden of 210 hours, approximately 60% will most likely be performed by
compliance professionals and approximately 40% will most likely be performed by programmers working on system
configuration and reporting automation (that is approximately 126 hours for compliance professionals and 84
hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be
performed equally by a compliance manager at a cost of $339 per hour and a senior risk management specialist
at a cost of $391 per hour. Of the work performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $362 per hour and a programmer analyst at a cost of $263 per hour.
(($339 per hour x 0.5) + ($391 per hour x 0.5)) x 126 hours = $45,990. (($362 per hour x 0.5) + ($263 per hour
x 0.5)) x 84 hours = $26,250. $45,990 + $26,250 = $72,240.
\10\ In the case of the final estimates, for large liquidity fund advisers, we estimate that for the initial
report, of a total estimated burden of 229 hours, approximately 60% will most likely be performed by
compliance professionals and approximately 40% will most likely be performed by programmers working on system
configuration and reporting automation (that is approximately 137 hours for compliance professionals and 92
hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be
performed equally by a compliance manager at a cost of $360 per hour and a senior risk management specialist
at a cost of $416 per hour. Of the work performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $386 per hour and a programmer analyst at a cost of $280 per hour.
(($360 per hour x 0.5) + ($416 per hour x 0.5)) x 137 hours = $53,156. (($386 per hour x 0.5) + ($280 per hour
x 0.5)) x 92 hours = $30,636. $53,156 + $30,636 = $83,792.
\11\ In the case of the proposed estimates, for large private equity fund advisers, we expect that for the
initial report, of a total estimated burden of 210 hours, approximately 60% will most likely be performed by
compliance professionals and approximately 40% will most likely be performed by programmers working on system
configuration and reporting automation (that is approximately 126 hours for compliance professionals and 84
hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be
performed equally by a compliance manager at a cost of $339 per hour and a senior risk management specialist
at a cost of $391 per hour. Of the work performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $362 per hour and a programmer analyst at a cost of $263 per hour.
(($339 per hour x 0.5) + ($391 per hour x 0.5)) x 126 hours = $45,990. (($362 per hour x 0.5) + ($263 per hour
x 0.5)) x 84 hours = $26,250. $45,990 + $26,250 = $72,240.
\12\ In the case of the final estimates, for large private equity fund advisers, we expect that for the initial
report, of a total estimated burden of 281 hours, approximately 60% will most likely be performed by
compliance professionals and approximately 40% will most likely be performed by programmers working on system
configuration and reporting automation (that is approximately 169 hours for compliance professionals and 112
hours for programmers). Of the work performed by compliance professionals, we anticipate that it will be
performed equally by a compliance manager at a cost of $360 per hour and a senior risk management specialist
at a cost of $416 per hour. Of the work performed by programmers, we anticipate that it will be performed
equally by a senior programmer at a cost of $386 per hour and a programmer analyst at a cost of $280 per hour.
(($360 per hour x 0.5) + ($416 per hour x 0.5)) x 169 hours = $65,572. (($386 per hour x 0.5) + ($280 per hour
x 0.5)) x 112 hours = $37,296. $65,572 + $37,296 = $102,868.
Table 7--Annual Monetized Time Burden of Ongoing Annual and Quarterly Filings
----------------------------------------------------------------------------------------------------------------
Aggregate Aggregate
Respondent \1\ Per response number of monetized
\2\ responses time burden
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate................................. \3\ $6,040 x \4\ $2,085 = $12,593,400
Final Estimate.................................... \5\ 7,062 x \6\ 2,376 = 16,779,312
Previously Approved............................... 4,815 x 2,258 = 10,872,270
Change............................................ 2,247 118 5,907,042
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate................................. \7\ 48,320 x \8\ 2,308 = 111,522,560
Final Estimate.................................... \9\ 56,496 x \10\ 2,224 = 125,647,104
Previously Approved............................... 48,150 x 2,328 = 112,093,200
Change............................................ 8,346 (104) 13,553,904
----------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
Proposed Estimate................................. \11\ 22,650 x \12\ 92 = 2,083,800
Final Estimate.................................... \13\ 27,606 x \14\ 80 = 2,208,480
Previously Approved............................... 22,470 x 84 = 1,887,480
Change............................................ 5,136 (4) 321,000
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund Advisers:
Proposed Estimate................................. \15\ 31,710 x \16\ 356 = 11,288,760
Final Estimate.................................... \17\ 46,545 x \18\432 = 20,107,440
Previously Approved............................... 41,730 x 418 = 17,443,140
Change............................................ 4,815 14 2,664,300
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ We expect that the monetized time burden will be less costly for ongoing annual and quarterly reports than
for initial reports, for the same reasons discussed in Table 2: Annual Hour Burden Estimates for Initial
Filings. Accordingly, we anticipate that senior personnel will bear less of the reporting burden than they
would for the initial report. Changes are due to using (1) updated wage estimates, (2) updated hours per
response estimates, as discussed in Table 2: Annual Hour Burden Estimates for Initial Filings, and (3) updated
number of respondents, as discussed in Table 2: Annual Hour Burden Estimates for Initial Filings. Changes to
estimates concerning large liquidity fund advisers primarily appear to be due to correcting a calculation
error, as discussed below.
\2\ For all types of respondents, in the case of the proposed estimates, we estimate that both annual and
quarterly reports would be completed equally by (1) a compliance manager at a cost of $339 per hour, (2) a
senior compliance examiner at a cost of $260, (3) a senior risk management specialist at a cost of $391 per
hour, and (4) a risk management specialist at a cost of $218 an hour. ($339 x 0.25 = $84.75) + ($260 x 0.25 =
$65) + ($391 x 0.25 = $97.75) + ($218 x 0.25 = $54.50) = $302. In the case of the final estimates, we estimate
that both annual and quarterly reports would be completed equally by (1) a compliance manager at a cost of
$360 per hour, (2) a senior compliance examiner at a cost of $276, (3) a senior risk management specialist at
a cost of $416 per hour, and (4) a risk management specialist at a cost of $232 an hour. ($360 x 0.25 = $90) +
($276 x 0.25 = $69) + ($416 x 0.25 = $104) + ($232 x 0.25 = $58) = $321. To calculate the cost per response
for each respondent, we used the hours per response from Table 2: Annual Hour Burden Estimates for Initial
Filings.
\3\ In the case of the proposed estimates, cost per response for smaller private fund advisers: ($302 per hour x
20 hours per response = $6,040 per response.)
\4\ In the case of the proposed estimates, (2,085 smaller private fund advisers x 1 response annually = 2,085
aggregate responses.)
[[Page 18056]]
\5\ In the case of the final estimates, cost per response for smaller private fund advisers: ($321 per hour x 22
hours per response = $7,062 per response.)
\6\ In the case of the final estimates, (2,376 smaller private fund advisers x 1 response annually = 2,376
aggregate responses.)
\7\ In the case of the proposed estimates, cost per response for large hedge fund advisers: ($302 per hour x 160
hours per response = $48,320 per response.)
\8\ In the case of the proposed estimates, (577 large hedge fund advisers x 4 responses annually = 2,308
aggregate responses.)
\9\ In the case of the final estimates, cost per response for large hedge fund advisers: ($321 per hour x 176
hours per response = $56,496 per response.)
\10\ In the case of the final estimates, (556 large hedge fund advisers x 4 responses annually = 2,224 aggregate
responses.)
\11\ In the case of the proposed estimates, cost per response for large liquidity fund advisers: ($302 per hour
x 75 hours per response = $22,650 per response.)
\12\ In the case of the proposed estimates, (23 large liquidity fund advisers x 4 responses annually = 92
aggregate responses.)
\13\ In the case of the final estimates, cost per response for large liquidity fund advisers: ($321 per hour x
86 hours per response = $27,606 per response.)
\14\ In the case of the final estimates, (20 large liquidity fund advisers x 4 responses annually = 80 aggregate
responses.)
\15\ In the case of the proposed estimates, cost per response for large private equity fund advisers: ($302 per
hour x 105 hours per response = $31,710 per response.)
\16\ In the case of the proposed estimates, (356 private equity fund advisers x 1 response annually = 356
aggregate responses.)
\17\ In the case of the final estimates, cost per response for large private equity fund advisers: ($321 per
hour x 145 hours per response = $46,545 per response.)
\18\ In the case of the final estimates, (432 private equity fund advisers x 1 response annually = 432 aggregate
responses.)
Table 8--Annual Monetized Time Burden of Current Reporting and Private Equity Event Reporting \1\
----------------------------------------------------------------------------------------------------------------
Aggregate Aggregate
Respondent Per response number of monetized
responses time burden
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... $2,024 x 20 = $40,480
Previously Approved............................... 2,024 x 20 = 40,480
----------------------------------------------------------------------------------------------------------------
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... 5,160 x 60 = 309,600
Previously Approved............................... 5,160 x 60 = 309,600
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund Advisers:
Proposed Estimate................................. Not Applicable
---------------------------------------------------------
Final Estimate.................................... 2,024 x 20 = 40,480
Previously Approved............................... 2,024 x 20 = 40,480
Change............................................ 0 x 0 = 0
----------------------------------------------------------------------------------------------------------------
Note:
\1\ Subsequent to the 2022 Joint Form PF Proposing Release, the SEC adopted amendments to Form PF, which added
Form PF section 5 (Current report for large hedge fund advisers to qualifying hedge funds) and section 6
(Quarterly report for advisers to private equity funds) to Form PF. See May 2023 SEC Form PF Amending Release,
supra footnote 4, at section V for proposed and final estimates for current reporting and private equity event
reporting. We did not propose any changes to these sections in the 2022 Joint Form PF Proposing Release and
are not adopting any changes to these sections in this Release.
Table 9--Annual Monetized Time Burden for Transition Filings, Final Filings, and Temporary Hardship Requests
----------------------------------------------------------------------------------------------------------------
Aggregate Aggregate
Filing type \1\ Per response number of monetized
responses \2\ time burden
----------------------------------------------------------------------------------------------------------------
Transition Filing from Quarterly to Annual:
Proposed Estimate................................. \3\ $19.25 x 68 = $1,309
Final Estimate.................................... \4\ 20.50 x 69 = 1,414.50
Previously Approved............................... 20.50 x 71 = 1,455.50
Change............................................ 0 (2) (41)
----------------------------------------------------------------------------------------------------------------
Final Filings:
Proposed Estimate................................. \5\ 19.25 x 233 = 4,485.25
Final Estimate.................................... \3\ 20.50 x 243 = 4,981.50
Previously Approved............................... 20.50 x 235 = 4,817.50
Change............................................ 0 8 164
----------------------------------------------------------------------------------------------------------------
Temporary Hardship Requests:
Proposed Estimate................................. \7\ 237.50 x 3 = 712.50
Final Estimate.................................... \8\ 252.38 x 4 = 1,009.52
Previously Approved............................... 252.38 x 4 = 1,099.52
[[Page 18057]]
Change............................................ 0 0 (90)
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ All changes are due to using updated data concerning wage rates and the number of responses.
\2\ See Table 5: Annual Hour Burden Estimates for Transition Filings, Final Filings, and Temporary Hardship
Requests.
\3\ In the case of the proposed estimates, we estimate that each transition filing will take 0.25 hours and that
a compliance clerk would perform this work at a cost of $77 an hour. (0.25 hours x $77 = $19.25.)
\4\ In the case of the final estimates, we estimate that each transition filing will take 0.25 hours and that a
compliance clerk would perform this work at a cost of $82 an hour. (0.25 hours x $82 = $20.50.)
\5\ In the case of the proposed estimates, we estimate that each final filing will take 0.25 hours and that a
compliance clerk would perform this work at a cost of $77 an hour. (0.25 hours x $77 = $19.25.)
\6\ In the case of the final estimates, we estimate that each final filing will take 0.25 hours and that a
compliance clerk would perform this work at a cost of $82 an hour. (0.25 hours x $82 = $20.50.)
\7\ In the case of the proposed estimates, we estimate that each temporary hardship request will take 1 hour. We
estimate that a compliance manager would perform five-eighths of the work at a cost of $339 and a general
clerk would perform three-eighths of the work at a cost of $68. (1 hour x ((\5/8\ of an hour x $339 = $212) +
(\3/8\ of an hour x $68 = $25.50)) = $237.50 per response.
\8\ In the case of the final estimates, we estimate that each temporary hardship request will take 1 hour. We
estimate that a compliance manager would perform five-eighths of the work at a cost of $360 and a general
clerk would perform three-eighths of the work at a cost of $73. (1 hour x ((\5/8\ of an hour x $360 = $225) +
(\3/8\ of an hour x $73 = $27.38)) = $252.38 per response.
e. Annual External Cost Burden Estimates
Below are tables with annual external cost burden estimates for (1)
initial filings, (2) ongoing annual and quarterly filings, and (3)
current reporting and private equity event reporting. There are no
filing fees for transition filings, final filings, or temporary
hardship requests and we continue to estimate there would be no
external costs for those filings, as previously approved.
Table 10--Annual External Cost Burden for Ongoing Annual and Quarterly Filings as well as Initial Filings
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
External Aggregate
Number of External cost of external cost
responses Filing Total cost of initial Number of of initial Total
Respondent \1\ per fee per filing initial filing initial filing aggregate
respondent filing fees filing amortized filings amortized external cost
\2\ \3\ \4\ over 3 \6\ over 3 years \8\
years \5\ \7\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate............................................. 1 x $150 = $150 $10,000 / 3 = $3,333 x 309 = $1,029,897 \9\ $1,388,997
Final Estimate................................................ 1 x 150 = 150 10,000 / 3 = 3,333 x 374 = 1,246,542 \10\ 1,659,042
----------------------------------------------------------------------
Previously Approved........................................... 1 x 150 = 150 Not Applicable 392,400
----------------------------------------------------------------------
Change........................................................ 0 0 0 Not Applicable 1,266,642
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate............................................. 4 x 150 = 600 50,000 / 3 = 16,667 x 15 = 250,005 \11\ 605,205
Final Estimate................................................ 4 x 150 = 600 70,000 / 3 = 23,333 x 14 = 326,662 \12\ 668,662
Previously Approved........................................... 4 x 150 = 600 50,000 / 3 = 16,667 x 16 = 266,672 625,472
Change........................................................ 0 0 0 20,000 6,666 (2) 59,990 43,190
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Large Liquidity Fund Advisers:
Proposed Estimate............................................. 4 x 150 = 600 50,000 / 3 = 16,667 x 1 = 16,667 \13\ 31,067
Final Estimate................................................ 4 x 150 = 600 50,000 / 3 = 16,667 x 1 = 16,667 \14\ 29,267
Previously Approved........................................... 4 x 150 = 600 50,000 / 3 = 16,667 x 1 = 16,667 29,867
Change........................................................ 0 0 0 0 0 0 0 (600)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Large Private Equity Fund Advisers:
Proposed Estimate............................................. 1 x 150 = 150 50,000 / 3 = 16,667 x 13 = 216,671 \15\ 272,021
Final Estimate................................................ 1 x 150 = 150 50,000 / 3 = 16,667 x 18 = 300,006 \16\ 367,656
Previously Approved........................................... 1 x 150 = 150 50,000 / 3 = 16,667 x 17 = 283,339 348,589
Change........................................................ 0 0 0 0 0 9 16,667 19,067
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ We estimate that advisers would incur the cost of filing fees for each filing. For initial filings, advisers may incur costs to modify existing systems or deploy new systems to support
Form PF reporting, acquire or use hardware to perform computations, or otherwise process data that Form PF requires.
\2\ Smaller private fund advisers and large private equity fund advisers file annually. Large hedge fund advisers and large liquidity fund advisers file quarterly.
\3\ The SEC established Form PF filing fees in a separate order. Since 2011, filing fees have been and continue to be $150 per annual filing and $150 per quarterly filing. See Order Approving
Filing Fees for Exempt Reporting Advisers and Private Fund Advisers, Advisers Act Release No. 3305 (Oct. 24, 2011) [76 FR 67004 (Oct. 28, 2011)].
[[Page 18058]]
\4\ In the previous PRA submission for the rules, staff estimated that the external cost burden for initial filings would range from $0 to $50,000 per adviser. This range reflected the fact
that the cost to any adviser may depend on how many funds or the types of funds it manages, the state of its existing systems, the complexity of its business, the frequency of Form PF
filings, the deadlines for completion, and the amount of information the adviser must disclose on Form PF. Staff also estimated that smaller private fund advisers would be unlikely to bear
such costs because the information they must provide is limited and will, in many cases, already be maintained in the ordinary course of business. Given the proposed amendments, we estimate
that the external cost burden for smaller private fund advisers would range from $0 to $10,000, per smaller private fund adviser. This range reflects the amendments and is designed to
reflect that the cost to any smaller private fund adviser may depend on how many funds or the type of funds it manages, the state of its existing systems, and the complexity of its business.
We use the upper range to calculate the estimate for smaller private fund advisers: $10,000. Also, given the amendments, in our proposed estimates, we estimated that the external cost burden
for initial filings for large hedge fund advisers, large liquidity fund advisers, and large private equity fund advisers would continue to range from $0 to $50,000 for the same reasons as
the current estimates for those types of advisers. We used the upper range to calculate the estimates: $50,000. After considering comments we received, we estimate a range from $0 to $70,000
for large hedge fund advisers. We use the upper range to calculate cost burden for initial filings for large hedge fund advisers estimates: $70,000. We continue to estimate that the external
cost burden for initial filings for large liquidity fund advisers, and large private equity fund advisers would continue to range from $0 to $50,000 for the same reasons as the current
estimates for those types of advisers. We used the upper range to calculate the estimates: $50,000.
\5\ We amortize the external cost burden of initial filings over three years, as we do with other initial burdens in this PRA, because we believe that most of the burden will be incurred in
the initial filing.
\6\ See Table 2: Annual Hour Burden Estimates for Initial Filings.
\7\ Changes to the aggregate external cost of initial filings, amortized over three years are due to (1) the proposed amendments and (2) using updated data.
\8\ Changes to the total aggregate external cost are due to (1) the amendments, (2) using updated data, (3) the amendments to Form PF adopted subsequent to the 2022 Joint Form PF Proposing
Release, and (4) comments we received to our estimates.
\9\ In the case of the proposed estimates, Private Funds Statistics show 2,394 smaller private fund advisers filed Form PF in the third quarter of 2021. (2,394 smaller private fund advisers x
$150 total filing fees) + $1,029,897 aggregate external cost of initial filing amortized over three years = $1,388,997 total aggregate external cost.
\10\ In the case of the final estimates, Private Funds Statistics show 2,750 smaller private fund advisers filed Form PF in the first quarter of 2023. (2,750 smaller private fund advisers x
$150 total filing fees) + $1,246,542 aggregate external cost of initial filing amortized over three years = $1,659,042 total aggregate external cost.
\11\ In the case of the proposed estimates, Private Funds Statistics show 592 large hedge fund advisers filed Form PF in the third quarter of 2021. (592 large hedge fund advisers x $600 total
filing fees) + $250,005 aggregate external cost of initial filing amortized over three years = $605,205 total aggregate external cost.
\12\ In the case of the final estimates, Private Funds Statistics show 570 large hedge fund advisers filed Form PF in the first quarter of 2023. (570 large hedge fund advisers x $600 total
filing fees) + $326,662 aggregate external cost of initial filing amortized over three years = $668,662 total aggregate external cost.
\13\ In the case of the proposed estimates, Private Funds Statistics show 24 large liquidity fund advisers filed Form PF in the third quarter of 2021. (24 large liquidity fund advisers x $600
total filing fees) + $16,667 aggregate external cost of initial filing amortized over three years = $31,067 total aggregate external cost.
\14\ In the case of the final estimates, Private Funds Statistics show 21 large liquidity fund advisers filed Form PF in the first quarter of 2023. (21 large liquidity fund advisers x $600
total filing fees) + $16,667 aggregate external cost of initial filing amortized over three years = $29,267 total aggregate external cost.
\15\&thnsp;In the case of the proposed estimates, Private Funds Statistics show 369 large private equity fund advisers filed Form PF in the third quarter of 2021. (369 large private equity
fund advisers x $150 total filing fees) + $216,671 aggregate external cost of initial filing amortized over three years = $272,021 total aggregate external cost.
\16\ In the case of the final estimates, Private Funds Statistics show 450 large private equity fund advisers filed Form PF in the first quarter of 2023. (450 large private equity fund
advisers x $150 total filing fees) + $300,006 aggregate external cost of initial filing amortized over three years = $367,506 total aggregate external cost.
Table 11--Annual External Cost Burden for Current Reporting and Private Equity Event Reporting \1\
----------------------------------------------------------------------------------------------------------------
Cost of outside
Aggregate counsel per Aggregate One-time Total
Respondent number of current report or cost of cost of aggregate
responses private equity outside system external cost
event report counsel changes
----------------------------------------------------------------------------------------------------------------
Smaller Private Fund Advisers:
Proposed Estimate......... Not Applicable
---------------------------------------------------------------------------------
Final Estimate............ 20 x $1,695 = $33,900 $15,000 $48,900
Previously Approved....... 20 x 1,695 = 33,900 15,000 48,900
Change.................... 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------
Large Hedge Fund Advisers:
Proposed Estimate......... Not Applicable
---------------------------------------------------------------------------------
Final Estimate............ 60 x 1,695 = 101,700 15,000 116,700
Previously Approved....... 60 x 1,695 = 101,700 15,000 116,700
Change.................... 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------
Large Private Equity Fund
Advisers:
Proposed Estimate......... Not Applicable
---------------------------------------------------------------------------------
Final Estimate............ 20 x 1,695 = 33,900 15,000 48,900
Previously Approved....... 20 x 1,695 = 33,900 15,000 48,900
Change.................... 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------
Advisers pay filing fees, the amount of which will be determined in a separate action.
----------------------------------------------------------------------------------------------------------------
Note:
\1\ Subsequent to the 2022 Joint Form PF Proposing Release, the SEC adopted amendments to Form PF, which added
Form PF section 5 (Current report for large hedge fund advisers to qualifying hedge funds) and section 6
(Quarterly report for advisers to private equity funds) to Form PF. See May 2023 SEC Form PF Amending Release,
supra footnote 4, at section V for proposed and final estimates for current reporting and private equity event
reporting. We did not propose any changes to these sections in the 2022 Joint Form PF Proposing Release and
are not adopting any changes to these sections in this Release.
f. Summary of Estimates and Change in Burden
[[Page 18059]]
Table 12--Aggregate Annual Estimates
----------------------------------------------------------------------------------------------------------------
Proposed Previously
Description \1\ estimates Final estimates approved Change
----------------------------------------------------------------------------------------------------------------
Respondents................... 3,379 3,791 3,671 120 respondents.\4\
respondents \2\. respondents \3\. respondents.
Responses..................... 5,483 responses 5,935 responses 5,907 responses. 28 responses.\7\
\5\. \6\.
Time Burden................... 463,296 hours 524,376 hours 451,012 hours... 73,364 hours.
\8\. \9\.
Monetized Time Burden $140,305,194 $169,094,737.02 $145,721,172.52. $23,373,564.50.
(Dollars). \10\. \11\.
External Cost Burden (Dollars) $2,297,290 \12\. $2,938,977 \13\. $1,610,828...... $1,328,149.
----------------------------------------------------------------------------------------------------------------
Notes:
\1\ Changes are due to (1) the amendments, (2) using updated data, and (3) in the case of the final estimates
subsequent Form PF amendments adopted after the 2022 Joint Form PF Proposing Release and comments we received
to our estimates, as described in this PRA.
\2\ In the case of the proposed estimates, Private Funds Statistics show the following advisers filed Form PF in
the third quarter of 2021: 2,394 smaller private fund advisers + 592 large hedge fund advisers + 24 large
liquidity fund advisers + 369 large private equity fund advisers = 3,379 advisers.
\3\ In the case of the final estimates, Private Funds Statistics show the following advisers filed Form PF in
the first quarter of 2023: 2,750 smaller private fund advisers + 570 large hedge fund advisers + 21 large
liquidity fund advisers + 450 large private equity fund advisers = 3,791 advisers.
\4\ Changes are due to using updated data.
\5\ In the case of the proposed estimates, for initial filings (Table 2): (309 smaller private fund adviser
responses + 15 large hedge fund adviser responses + 1 large liquidity fund adviser response + 13 large private
equity fund adviser responses = 338 responses.) For ongoing annual and quarterly filings (Table 7): (2,085
smaller private fund adviser responses + 2,308 large hedge fund adviser responses + 92 large liquidity fund
adviser responses + 356 large private equity fund adviser responses = 4,841 responses.) (338 responses for
initial filings + 4,841 responses for ongoing annual and quarterly filings + 68 responses for transition
filings + 233 responses for final filings + 3 responses for temporary hardship requests = 5,483 responses.)
\6\ In the case of the final estimates, for initial filings (Table 2): (374 smaller private fund adviser
responses + 14 large hedge fund adviser responses + 1 large liquidity fund adviser response + 18 large private
equity fund adviser responses = 407 responses.) For ongoing annual and quarterly filings (Table 7): (2,376
smaller private fund adviser responses + 2,224 large hedge fund adviser responses + 80 large liquidity fund
adviser responses + 432 large private equity fund adviser responses = 5,112 responses.) For current reporting
and private equity event reporting (Table 8): (20 smaller private fund adviser responses + 60 large hedge fund
adviser responses + 20 large private equity fund adviser responses = 100 responses) (407 responses for initial
filings + 5,112 responses for ongoing annual and quarterly filings + 100 responses + 69 responses for
transition filings + 243 responses for final filings + 4 responses for temporary hardship requests = 5,935
responses.)
\7\ Changes are due to using updated data concerning the number of filers and, in the case of the final
estimates, the inclusion of current reporting and private equity event reporting, which was adopted after the
2022 Joint Form PF Proposing Release, and comments we received to our estimates.
\8\ In the case of the proposed estimates, for initial filings: (5,253 hours for smaller private fund advisers +
1,725 hours for large hedge fund advisers + 70 hours for large liquidity fund advisers + 910 hours for large
private equity fund advisers = 7,958 hours). For ongoing annual and quarterly filings: (41,700 hours for
smaller private fund advisers + 369,280 hours for large hedge fund advisers + 6,900 for hours large liquidity
fund advisers + 37,380 hours for large private equity fund advisers = 455,260 hours). (7,958 hours for initial
filings + 455,260 for ongoing annual and quarterly filings + 17 hours for transition filings + 58.25 hours for
final filings + 3 hours for temporary hardship requests = 463,296 hours.
\9\ In the case of the final estimates, for initial filings: (6,732 hours for smaller private fund advisers +
1,778 hours for large hedge fund advisers + 76 hours for large liquidity fund advisers + 1,692 hours for large
private equity fund advisers = 10,278 hours). For ongoing annual and quarterly filings: (52,272 hours for
smaller private fund advisers + 391,424 hours for large hedge fund advisers + 6,880 for hours large liquidity
fund advisers + 62,640 hours for large private equity fund advisers = 513,216 hours). For current reporting
and private equity event reporting: (100 hours for smaller private fund adviser + 600 hours for large hedge
fund adviser + 100 hours for large private equity fund adviser = 800 hours) (10,278 hours for initial filings
+ 513,216 for ongoing annual and quarterly filings + 800 hours for current reporting and private equity event
reporting + 17.25 hours for transition filings + 60.75 hours for final filings + 4 hours for temporary
hardship requests = 524,376 hours.
\10\ In the case of the proposed estimates, for initial filings: ($1,879,647 for smaller private fund advisers +
$593,400 for large hedge fund advisers + $24,080 for large liquidity fund advisers + $313,040 for large
private equity fund advisers = $2,810,167). For ongoing annual and quarterly filings: ($12,593,400 for smaller
private fund advisers + $111,522,560 for large hedge fund advisers + $2,083,800 for large liquidity fund
advisers + $11,288,760 for large private equity fund advisers = $137,488,520). ($2,810,167 for initial filings
+ $137,488,520 for ongoing annual and quarterly filings + $1,309 for transition filings + $4,485.25 for final
filings + $712.50 for temporary hardship requests = $140,305,194.
\11\ In the case of the final estimates, for initial filings: ($2,660,262 for smaller private fund advisers +
$649,040 for large hedge fund advisers + $27,931 for large liquidity fund advisers + $617,202 for large
private equity fund advisers = $3,954,435). For ongoing annual and quarterly filings: ($16,779,312 for smaller
private fund advisers + $125,647,104 for large hedge fund advisers + $2,208,480 for large liquidity fund
advisers + $20,107,440 for large private equity fund advisers = $164,742,336). For current reporting and
private equity event reporting: ($40,480 for smaller private equity fund advisers + $309,600 for large hedge
fund advisers + $40,480 for large private equity fund advisers = $390,560). ($3,954,435 for initial filings +
$164,742,336 for ongoing annual and quarterly filings + $390,560 for current reporting and private equity
event reporting + $1,414.50 for transition filings + $4,982 for final filings + $1,009.52 for temporary
hardship requests = $169,094,737.02.
\12\ In the case of the proposed estimates, for the external cost burden: $1,388,997 for smaller private fund
advisers + $605,205 for large hedge fund advisers + $31,067 for large liquidity fund advisers + $272,021 for
large private equity fund advisers = $2,297,290.
\13\ In the case of the final estimates, for external cost burden for annual, quarterly, and initial filing
($1,659,042 for smaller private fund advisers + $668,662 for large hedge fund advisers + $29,267 for large
liquidity fund advisers + $367,506 for large private equity fund advisers = $2,724,477). For current
reporting: ($48,900 for smaller private fund advisers + $116,700 for large hedge funds + $48,900 for large
private equity fund advisers = $214,500). $2,724,477 + $214,500 = $2,938,977.
VI. Regulatory Flexibility Act Certification
CFTC
The Regulatory Flexibility Act (``RFA'') requires that when Federal
agencies publish a proposed rulemaking pursuant to section 553 of the
Administrative Procedure Act, they consider whether the final rule will
have a significant economic impact on a substantial number of ``small
entities.'' \701\
---------------------------------------------------------------------------
\701\ 5 U.S.C. 601, et. seq.
---------------------------------------------------------------------------
Registered CPOs and CTAs that are dually registered as investment
advisers with the SEC are only required to file Form PF with the SEC
pursuant to the Advisers Act. While CFTC rule 4.27(d) provides that
dually registered CPOs and CTAs that file Form PF with the SEC will be
deemed to have filed Form PF with the CFTC, for purposes of any
enforcement action regarding any false or misleading statement of
material fact in Form PF, the CFTC is not imposing any additional
obligation herein beyond what is already required of these entities
when filing Form PF with the SEC.
Entities impacted by the Form PF are the SEC's regulated entities
and no small entity on its own would meet the
[[Page 18060]]
Form PF's minimum reporting threshold of $150 million in regulatory
assets under management attributable to private funds. Also, any
economic impact imposed by Form PF on small entities registered with
both the CFTC and the SEC has been accounted for within the SEC's
regulatory flexibility analysis regarding the impact of this collection
of information under the RFA. Accordingly, the Chairman, on behalf of
the CFTC, hereby certifies pursuant to 5 U.S.C. 605(b) that the final
rules will not have a significant economic impact on a substantial
number of small entities.
SEC
Pursuant to section 605(b) of the Regulatory Flexibility Act of
1980 (``Regulatory Flexibility Act''),\702\ the SEC certified that the
proposed amendments to Advisers Act rule 204(b)-1 and Form PF would
not, if adopted, have a significant economic impact on a substantial
number of small entities. The SEC included this certification in
section V of the 2022 Joint Form PF Proposing Release. As discussed in
more detail in the 2022 Joint Form PF Proposing Release, for the
purposes of the Advisers Act and the Regulatory Flexibility Act, an
investment adviser generally is a small entity if it (1) has assets
under management having a total value of less than $25 million, (2) did
not have total assets of $5 million or more on the last day of the most
recent fiscal year, and (3) does not control, is not controlled by, and
is not under common control with another investment adviser that has
assets under management of $25 million or more, or any person (other
than a natural person) that had total assets of $5 million or more on
the last day of its most recent fiscal year.\703\
---------------------------------------------------------------------------
\702\ 5 U.S.C. 601, et. seq.
\703\ 17 CFR 275.0-7.
---------------------------------------------------------------------------
By definition, no small entity on its own would meet rule 204(b)-1
and Form PF's minimum reporting threshold of $150 million in regulatory
assets under management attributable to private funds. Based on Form PF
and Form ADV data as of December 2022, the SEC estimates that no small
entity advisers are required to file Form PF. The SEC does not have
evidence to suggest that any small entities are required to file Form
PF but are not filing Form PF. Therefore, the SEC stated in the 2022
Joint Form PF Proposing Release there would be no significant economic
impact on a substantial number of small entities from the proposed
amendments to Advisers Act rule 204(b)-1 and Form PF.
The SEC requested comment on its certification in section V of the
2022 Joint Form PF Proposing Release. While some commenters addressed
the potential impact of the proposed amendments on smaller or mid-size
private funds,\704\ no commenters responded to this request for comment
regarding the SEC's certification. We are adopting the amendments
largely as proposed, with certain modifications from the proposal, as
discussed more fully above in section II, that do not affect the
Advisers Act rule 204(b)-1 and Form PF's minimum reporting threshold.
We do not believe that these changes alter the basis upon which the
certification in the 2022 Joint Form PF Proposing Release was made.
Accordingly, the SEC certifies that the final amendments to Advisers
Act rule 204(b)-1 and Form PF will not have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------
\704\ See, e.g., AIC Comment Letter I; AIMA/ACC Comment Letter;
USCC Comment Letter.
---------------------------------------------------------------------------
Statutory Authority
CFTC
The CFTC authority for this rulemaking is provided by 15 U.S.C.
80b-11.
SEC
The SEC is amending 17 CFR 275.204(b)-1 pursuant to its authority
set forth in sections 204(b) and 211(e) of the Advisers Act [15 U.S.C.
80b-4 and 15 U.S.C. 80b-11], respectively.
The SEC is amending 17 CFR 279.9 pursuant to its authority set
forth in sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-
4 and 15 U.S.C. 80b-11], respectively.
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for part 275 continues to read as
follows.
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
0
2. Amend Sec. 275.204(b)-1 by:
0
a. Revising paragraph (f)(2)(i) by removing the phrases ``in paper
format,'' and ``, Item A of Section 1a and Section 5 of Form PF,
checking the box in Section 1a indicating that you are requesting a
temporary hardship exemption'';
0
b. Redesignating paragraph (f)(4) as paragraph (f)(5); and
0
c. Adding new paragraph (f)(4).
The addition reads as follows:
Sec. 275.204(b)-1 Reporting by investment advisers to private funds.
* * * * *
(f) * * *
(4) A request for a temporary hardship exemption is considered
filed upon the earlier of the date the request is postmarked or the
date it is received by the Commission.
* * * * *
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
3. The authority citation for part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq., Pub. L. 111-203, 124 Stat. 1376.
Sec. 279.9 Form PF, reporting by investment advisers to private
funds.
0
4. Revise Form PF (referenced in Sec. 279.9).
Note: Form PF is attached as Appendix A to this document. Form
PF will not appear in the Code of Federal Regulations.
By the Commissions.
Dated: February 8, 2024.
Christopher Kirkpatrick,
Secretary, Commodity Futures Trading Commission.
Vanessa A. Countryman,
Secretary, Securities and Exchange Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
BILLING CODE 8011-01-P
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BILLING CODE 8011-01-C
Note: The following Commodity Futures Trading Commission (CFTC)
appendices will not appear in the Code of Federal Regulations.
CFTC Appendices to Form PF; Reporting Requirements for All Filers and
Large Hedge Fund Advisers--CFTC Voting Summary and Commissioners'
Statements
CFTC Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson and
Goldsmith Romero voted in the affirmative. Commissioners Mersinger and
Pham voted in the negative.
CFTC Appendix 2--Statement of Commissioner Kristin N. Johnson
Transparency is an integral component of the regulatory framework
that ensures the safety and soundness and enduring preeminence of our
financial markets. Our statutory mandate expressly directs the
Commodity Futures Trading Commission's (Commission or CFTC) mission to
``ensure the financial integrity of all transactions subject to [the
Commodity Exchange Act] and the avoidance of systemic risk'' and today,
consistent with this mandate, the Commission seeks to enhance oversight
and improve visibility through well-calibrated data collection
approaches.\1\
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\1\ 7 U.S.C. 5(b).
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) incorporated innovative regulatory features for
promoting the stability of the U.S. financial system, including
establishing the Financial Stability Oversight Council (FSOC) to
monitor for emerging systemic risks that may significantly impact our
financial markets and American consumers. Congress, in drafting the
Dodd-Frank Act, recognized that systemic risks are best monitored
through collaboration among prudential and market regulators, each
endowed with distinct regulatory mandates and empowered to leverage
their expertise to support FSOC's systemic risk oversight objectives.
Specifically, Section 404 of the Dodd-Frank Act amends Section 204
of the Investment Advisers Act of 1940 (Advisers Act) and grants the
Securities and Exchange Commission (SEC) the power to require an SEC-
registered investment adviser to file with the SEC reports regarding
``private funds advised by the investment adviser, as necessary and
appropriate in the public interest and for the protection of investors,
or for the assessment of systemic risk by the [FSOC].'' \2\ Section 406
of the Dodd-Frank Act, which amends Section 211 of the Advisers Act,
instructs the SEC and Commission, after consultation with FSOC, to
``jointly promulgate rules to establish the form and content of the
reports required to be filed'' with the SEC and Commission by
investment advisers registered both under the Advisers Act and the
Commodity Exchange Act.\3\
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\2\ 15 U.S.C. 80b-4(b).
\3\ 15 U.S.C. 80b-11(e).
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As directed by the Dodd-Frank Act, in 2011, the Commission and SEC
jointly issued rules to provide FSOC with important information about
private fund operations and strategies through Form PF.\4\ Form PF is a
confidential form for certain SEC-registered investment advisers to
private funds, including those that may also be dually registered with
the Commission as a commodity pool operator (CPO) or commodity trading
advisor (CTA).\5\ In 2022, the Commission and SEC adopted proposed
amendments to Form PF.\6\ As noted in the preamble, the Commission is
adopting the joint final rule to amend Form PF (Final Rule) in an
effort to address information gaps and improve the Commissions' and
FSOC's understanding of the private fund industry and the potential
systemic risk posed by it. The Final Rule seeks to clarify aspects of
the form and instructions as well as remove certain questions to
streamline reporting.
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\4\ Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128, 71129 (Nov. 16, 2011).
\5\ In 2020, the Commission adopted amendments to Form CPO-PQR
for CPOs, which is used by CPOs and CTAs for reporting purposes. In
lieu of filing the CFTC's Form CPO-PQR, CPOs and CTAs may file NFA
Form PQR, a comparable form required by the National Futures
Association.
\6\ Form PF; Reporting Requirements for All Filers and Large
Hedge Fund Advisers, 87 FR 53832 (Sept. 1, 2022).
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Appropriately-tailored regulatory disclosure is a powerful tool in
identifying vulnerabilities and trends in our markets, mitigating
systemic risk, and addressing financial stability concerns. Disclosure
of financial information to market regulators is critical to the
regulatory oversight of our financial markets, particularly when such
disclosure is accurate, timely, robust, and usable. Effective
disclosure enables regulators to monitor market activities and take
swift, decisive action to prevent or manage market stresses and crises.
I support today's Final Rule and the careful consideration of both
agencies that it reflects.
I commend the work of the staff of the Market Participants
Division--Amanda Olear, Pamela Geraghty, Michael Ehrstein, Elizabeth
Groover, and Andrew Ruggiero--for their careful work on the Final Rule.
CFTC Appendix 3--Dissenting Statement of Commissioner Caroline D. Pham
I respectfully dissent from the Joint Final Rule on Form PF and
Reporting Requirements for All Filers and Large Hedge Fund Advisers
that is being issued together with the U.S. Securities
[[Page 18161]]
and Exchange Commission (SEC) (SEC-CFTC Joint Final Rule on Form PF or
Joint Final Rule) because, overall, the rule does not achieve its
stated purpose to improve systemic risk monitoring because it will
obscure hidden risks and unacceptably increase costs for American
savers.
When this proposal was adopted in August 2022, I raised my concerns
that in a time of economic challenges, including rising inflation, we
must be careful when considering proposals that could inhibit positive
economic activity that supports American businesses and jobs.\1\ The
SEC-CFTC Joint Final Rule on Form PF charges ahead on the wrong path
with no consideration for these concerns.
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\1\ Dissenting Statement of Commissioner Caroline D. Pham
Regarding the Proposed Amendments to Form PF (Aug. 10, 2022). I also
continue to believe the cost-benefit analysis in the Final Rule is
insufficient.
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Astoundingly, all rules since the financial crisis have been based
on aggregating data for better risk management.\2\ Yet the SEC-CFTC
Joint Final Rule on Form PF continues to mandate double, and sometimes
triple, reporting,\3\ without being based on any demonstrated data or
evidence that it will improve systemic risk monitoring. To the
contrary, it will hinder the ability of both firms and regulators to
truly identify hidden risk. Effective risk management requires
aggregation to understand the risk exposure. Indeed, this is a key
pillar of Dodd-Frank reforms. But the Joint Final Rule will force firms
to disaggregate risk monitoring and reporting to the individual fund
level--obscuring the full picture.
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\2\ See e.g., Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Relationships With, Hedge
Funds and Private Equity Funds, 79 FR 5808 (Jan. 31, 2014),
available at https://www.federalregister.gov/documents/2014/01/31/2013-31476/prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with; Bank for International
Settlements (BIS) Basel Committee on Banking Supervision, Standards
for Minimum Capital Requirements for Market Risk (Jan. 2016),
available at https://www.bis.org/bcbs/publ/d352.pdf. BIS revised the
Standards in 2019. BIS Basel Committee on Banking Supervision,
Standards for Minimum Capital Requirements for Market Risk (Jan.
2019; rev. Feb. 2019), available at https://www.bis.org/bcbs/publ/d457.pdf.
\3\ An overriding basis for the CFTC and SEC joint final rule in
2011 was to support the Financial Stability Oversight Council
(FSOC), but three overlapping, or identical, data sets across the
three entities raises confidentiality and data protection concerns,
along with inefficiency issues. See Joint Final Rule, Reporting by
Investment Advisers to Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on Form PF, 76 FR 71128,
71129 (Nov. 16, 2011), available at https://www.federalregister.gov/documents/2011/11/16/2011-28549/reporting-by-investment-advisers-to-private-funds-and-certain-commodity-pool-operators-and-commodity;
see also Authority To Require Supervision and Regulation of Certain
Nonbank Financial Companies, 77 FR 21637, 21644 (Apr. 11, 2012),
available at https://www.federalregister.gov/documents/2012/04/11/2012-8627/authority-to-require-supervision-and-regulation-of-certain-nonbank-financial-companies.
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Even worse, the SEC-CFTC Joint Final Rule on Form PF will create a
flood of new information of dubious utility that will generate too much
noise and is detrimental to data quality, also making it harder to see
real risk positions. And, the Joint Final Rule does nothing to address
the many operational and practical implementation issues that will
unacceptably increase costs for American savers who have worked hard to
earn their retirement investments.
For all these reasons, I cannot support the SEC-CFTC Joint Final
Rule on Form PF and must dissent. This is an unacceptable backsliding
on the progress made since the Dodd-Frank Act to strengthen our
financial system, mitigate systemic risk, and promote financial
stability.
I appreciate the time that the staff spent with my office on this
rulemaking. I would like to thank the CFTC team of Andrew Ruggiero,
Elizabeth Groover, Michael Ehrstein, and Pamela Geraghty in the Market
Participants Division for their efforts.
[FR Doc. 2024-03473 Filed 3-11-24; 8:45 am]
BILLING CODE 8011-01-P; 6351-01-P