Rule2024-03473
Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 12, 2024
Effective
March 12, 2025
Issuing agencies
Commodity Futures Trading CommissionSecurities and Exchange Commission
Abstract
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.
Full Text
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<title>Federal Register, Volume 89 Issue 49 (Tuesday, March 12, 2024)</title>
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[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 [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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 <a href="/cdn-cgi/l/email-protection#327b7340475e5741724157511c555d44"><span class="__cf_email__" data-cfemail="94ddd5e6e1f8f1e7d4e7f1f7baf3fbe2">[email protected]</span></a>, 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 <a href="https://www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf">https://www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf</a> (``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 <a href="https://www.sec.gov/divisions/investment/private-funds-statistics.shtml">https://www.sec.gov/divisions/investment/private-funds-statistics.shtml</a>. 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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[[Page 17986]]
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
<a href="https://www.sec.gov/comments/s7-22-22/s72222.htm">https://www.sec.gov/comments/s7-22-22/s72222.htm</a>. The comment
letters that the CFTC received are available at <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7312">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7312</a>. 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:
<bullet> 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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<bullet> 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
[[Page 17987]]
private funds' assets, financing, investor concentration, and
performance.
<bullet> 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.
<bullet> 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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<bullet> 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\
---------------------------------------------------------------------------
\27\ See, e.g., AFREF Comment Letter I; Better Markets Comment
Letter.
\28\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\29\ See current Instruction 5.
\30\ See, e.g., MFA Comment Letter II; USCC Comment Letter.
---------------------------------------------------------------------------
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 <a href="https://publicplansdata.org/quick-facts/national/">https://publicplansdata.org/quick-facts/national/</a>.
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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.
---------------------------------------------------------------------------
\34\ USCC Comment Letter.
\35\ See Instruction 6.
\36\ See AIMA/ACC Comment Letter; MFA Comment Letter II.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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
<a href="https://www.financialresearch.gov/briefs/files/OFRBr_2018_01_Form-PF.pdf">https://www.financialresearch.gov/briefs/files/OFRBr_2018_01_Form-PF.pdf</a> (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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\46\ AIMA/ACC Comment Letter.
\47\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter II.
\48\ AIMA/ACC Comment Letter.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
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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.
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\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.
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\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).
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\120\ See current Question 49(a).
\121\ See proposed Question 10(a).
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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.
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\133\ See Fact Coalition Comment Letter.
\134\ See Schulte Comment Letter.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 <a href="https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml">https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml</a> (``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]]
<bullet> 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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<bullet> 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.
<bullet> 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
<a href="http://www.federalreserve.gov/releases/z1/">http://www.federalreserve.gov/releases/z1/</a>.
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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 becaus
[…truncated; see source link]Indexed from Federal Register on March 12, 2024.
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