Recent SEC-Proposed Amendments to Form PF Represent a Potential Significant Overhaul to Hedge Fund and Private Equity Fund Regulatory Reporting

On August 10, 2022, amendments to Form PF (“Proposed Amendments”) were proposed by the SEC and CFTC. Form PF is a form that is used by certain SEC-registered investment advisors to report required information about private funds that they advise. The Proposed Amendments, in our opinion, represent the most significant potential overhaul to Form PF reporting since the adoption of Form PF in 2011 in connection with the Dodd-Frank Act.

As suggested in the proposal, the Proposed Amendments would:

1. Increase reporting requirements for large hedge fund advisers on qualifying hedge funds (which generally includes those with a net asset value of at least $500 million)

2. Update and enhance reporting requirements on private funds

3. Modify reporting on master-feeder arrangements, parallel fund structures and funds of funds

The following includes details of several of the Proposed Amendments:

1. Increase required reporting by large hedge fund advisers on qualifying hedge funds - The Proposed Amendments would largely increase the required information to be reported by large hedge fund advisers on qualifying hedge funds. This includes, but is not limited to,  the following:

a.     Reporting on investment exposure

i.     Requirement of reporting on “instrument type” within sub-asset classes

ii.     Requirement of the calculation of “adjusted exposure” for each sub-asset class

iii.     Requirement of the uniform interest rate risk measure reporting for sub-asset classes that have interest rate risk

b.     Reporting on borrowing and counterparty exposure

i.     Requirement of reporting borrowings and other transactions with creditors/counterparties by type of borrowing and other transaction and the collateral posted or received by a reporting fund, as of each month of the reporting period

ii.     Requirement of the classification of each type of borrowing by creditor type and classification of posted collateral by type

iii.     Requirement of reporting of 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, , at the end of each month of the reporting period

c.     Reporting on significant counterparties - Requiring advisers to identify:

i.     All creditors and counterparties (including CCPs) where the amount a fund has borrowed before posted collateral equals or is greater than either 5% of the fund’s net asset value or $1 billion

ii.     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 5% of the fund’s net asset value or $1 billion

2. Update reporting requirements on “private funds” – The Proposed Amendments would require advisers to report additional information about themselves and the private funds they advise, including, but not limited to the following:

a.     Requiring advisers who file quarterly updates to report gross asset value and net asset value as of the end of each month of the reporting period, rather than only at reporting period end

b.     Requiring advisers to report certain fund activity information including contributions, withdrawals, and redemptions to and from the reporting fund

c.     Requiring advisers to report its performance as an internal rate of return if the reporting fund’s performance is reported to current and prospective investors, counterparties or otherwise as an “internal rate of return” since inception

d.     Requiring 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

3. Increase reporting requirements on “hedge funds” – The Proposed Amendments would require advisers to report additional information about themselves and the hedge funds they advise, including, but not limited to the following:

a.     Updating the strategy categories that advisers to hedge funds can select, including more specific categories for equity strategies, credit strategies, real estate, and digital assets

b.     Requiring advisers to provide detail concerning exposures that the reporting fund has to creditors and counterparties and creditors and other counterparties have to the reporting fund for hedge funds (other than qualifying hedge funds)

c.     Requiring advisers to report the value traded and the value of positions at the end of the reporting period

d.     Requiring advisers to report information about trading and clearing mechanisms for transactions in interest rate derivatives independently from other types of derivatives

4.     Modify reporting on “master-feeder arrangements,” “parallel fund structures” and funds of funds - The Proposed Amendments would require advisers to separately report all fund components of a master-feeder arrangement and parallel fund structure, in most instances. In addition, advisers would no longer be able to report any “parallel managed accounts” (which is distinguished from “parallel fund structure”), except advisers would continue to be required to report the total value of all parallel managed accounts related to each reporting fund. The Proposed Amendments would require the following reporting by advisers that advise a private fund that invests in other private funds (a “fund of funds”):

a.     Inclusion of the value of fund of funds investments in determining whether it is required to file Form PF and when responding to questions on Form PF

b.     Exclusion of adviser’s ability to “look through” a reporting fund’s investments in internal private funds or external private funds (other than a trading vehicle), unless the question instructs the adviser to report exposure obtained indirectly through positions in such funds or other entities.

CONCLUSION

While the SEC is soliciting feedback on the proposal, industry constituents largely anticipate that some significant amendments to the Form PF will be adopted.  The amendments will create the need for fund managers to reevaluate existing regulatory reporting processes.

Professionals at Caroprese & Company have been actively assisting alternative investment fund managers with their Form PF reporting obligations since Dodd-Frank was originally adopted.  From advising on technical interpretations to working with technology teams to develop systematic processes for form generation, Caroprese has the practical experience to help fund managers navigate these changes.