[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Proposed Rules]
[Pages 8068-8155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2175]
[[Page 8067]]
Vol. 76
Friday,
No. 29
February 11, 2011
Part V
Commodity Futures Trading Commission
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17 CFR Part 4
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Securities and Exchange Commission
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17 CFR Parts 275 and 279
Reporting by Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors on Form PF;
Proposed Rule
Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 /
Proposed Rules
[[Page 8068]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
RIN 3038-AD03
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-3145; File No. S7-05-11]
RIN 3235-AK92
Reporting by Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors on Form PF
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
the ``Commissions'') are proposing new rules under the Commodity
Exchange Act and the Investment Advisers Act of 1940 to implement
provisions of Title IV of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The proposed SEC rule would require investment
advisers registered with the SEC that advise one or more private funds
to file Form PF with the SEC. The proposed CFTC rule would require
commodity pool operators (``CPOs'') and commodity trading advisors
(``CTAs'') registered with the CFTC to satisfy certain proposed CFTC
filing requirements by filing Form PF with the SEC, but only if those
CPOs and CTAs are also registered with the SEC as investment advisers
and advise one or more private funds. The information contained in Form
PF is designed, among other things, to assist the Financial Stability
Oversight Council in its assessment of systemic risk in the U.S.
financial system. These advisers would file these reports
electronically, on a confidential basis.
DATES: Comments should be received on or before April 12, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
CFTC
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
``Form PF'' must be in the subject field of comments submitted via
e-mail, and clearly indicated on written submissions. All comments must
be submitted in English, or if not, accompanied by an English
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the CFTC to consider information that
may be exempt from disclosure under the Freedom of Information Act, a
petition for confidential treatment of the exempt information may be
submitted according to the established procedures in 17 CFR 145.9.
The CFTC reserves the right, but shall have no obligation, to
review, prescreen, filter, redact, refuse, or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, including, but not limited to, obscene
language. All submissions that have been redacted or removed that
contain comments on the merits of the rulemaking will be retained in
the public comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the Freedom of Information Act, 5 U.S.C. 552, et seq.
(``FOIA'').
SEC
Electronic Comments
Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-05-11 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-05-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The SEC will post all comments on the SEC's Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web
site viewing and printing in the SEC's Public Reference Room, 100 F
Street, NE., Washington, DC 20549 on official business days between the
hours of 10 a.m. and 3 p.m. All comments received will be posted
without change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: CFTC: Daniel S. Konar II, Attorney-
Advisor, Telephone: (202) 418-5405, E-mail: [email protected], Amanda L.
Olear, Special Counsel, Telephone: (202) 418-5283, E-mail:
[email protected], or Kevin P. Walek, Assistant Director, Telephone:
(202) 418-5405, E-mail: [email protected], Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; SEC:
David P. Bartels, Attorney-Adviser, Sarah G. ten Siethoff, Senior
Special Counsel, or David A. Vaughan, Attorney Fellow, at (202) 551-
6787 or [email protected], Office of Investment Adviser Regulation,
Division of Investment Management, U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The CFTC is requesting public comment on
proposed rule 4.27(d) [17 CFR 4.27(d)] under the Commodity Exchange Act
(``CEA'') \1\ and proposed Form PF. The SEC is requesting public
comment on proposed rule 204(b)-1 [17 CFR 275.204(b)-1] and proposed
Form PF [17 CFR 279.9] under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (``Advisers Act'').\2\
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\1\ 7 U.S.C. 1a.
\2\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to Advisers Act rule 204(b)-1, or
any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1
of the Code of Federal Regulations in which this rule would be
published. In addition, in this Release, when we refer to the
``Advisers Act,'' we refer to the Advisers Act as in effect on July
21, 2011.
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I. Background
A. The Dodd-Frank Act
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\
While the Dodd-Frank Act provides for wide-ranging reform of financial
regulation, one stated focus of this legislation is to
[[Page 8069]]
``promote the financial stability of the United States'' by, among
other measures, establishing better monitoring of emerging risks using
a system-wide perspective.\4\ To further this goal, Title I of the
Dodd-Frank Act establishes the Financial Stability Oversight Council
(``FSOC''), which is comprised of the leaders of various financial
regulators (including the Commissions' Chairmen) and other
participants.\5\ The Dodd-Frank Act directs FSOC to monitor emerging
risks to U.S. financial stability and to require that the Board of
Governors of the Federal Reserve System (``FRB'') supervise designated
nonbank financial companies that may pose risks to U.S. financial
stability in the event of their material financial distress or failure
or because of their activities.\6\ In addition, the Dodd-Frank Act
directs FSOC to recommend to the FRB heightened prudential standards
for designated nonbank financial companies.\7\
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\3\ Public Law 111-203, 124 Stat. 1376 (2010).
\4\ See S. Conf. Rep. No. 111-176, at 2-3 (2010) (``Senate
Committee Report'').
\5\ Section 111 of the Dodd-Frank Act provides that the voting
members of FSOC will be the Secretary of the Treasury, the Chairman
of the FRB, the Comptroller of the Currency, the Director of the
Bureau of Consumer Financial Protection, the Chairman of the SEC,
the Chairperson of the Federal Deposit Insurance Corporation, the
Chairperson of the CFTC, the Director of the Federal Housing Finance
Agency, the Chairman of the National Credit Union Administration
Board and an independent member appointed by the President having
insurance expertise. FSOC will also have five nonvoting members,
which are the Director of the Office of Financial Research, the
Director of the Federal Insurance Office, a state insurance
commissioner, a state banking supervisor and a state securities
commissioner.
\6\ Section 112 of the Dodd-Frank Act.
\7\ Id.
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The Dodd-Frank Act anticipates that FSOC will be supported in these
responsibilities by various regulatory agencies, including the
Commissions. To that end, the Dodd-Frank Act amends certain statutes,
including the Advisers Act, to authorize or direct certain Federal
agencies to support FSOC. Title IV of the Dodd-Frank Act amends the
Advisers Act to generally require that advisers to hedge funds and
other private funds \8\ register with the SEC.\9\ Congress required
this registration in part because it believed that ``information
regarding [the] size, strategies and positions [of large private funds]
could be crucial to regulatory attempts to deal with a future crisis.''
\10\ To that end, Section 404 of the Dodd-Frank Act, which amends
section 204(b) of the Advisers Act, directs the SEC to require private
fund advisers \11\ to maintain records and file reports containing such
information as the SEC deems necessary and appropriate in the public
interest and for investor protection or for the assessment of systemic
risk by FSOC.\12\ The records and reports must include a description of
certain information about private funds, such as the amount of assets
under management, use of leverage, counterparty credit risk exposure,
and trading and investment positions for each private fund advised by
the adviser.\13\ The SEC must issue jointly with the CFTC, after
consultation with FSOC, rules establishing the form and content of any
such reports required to be filed with respect to private fund advisers
also registered with the CFTC.\14\
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\8\ Section 202(a)(29) of the Advisers Act 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 (15
U.S.C. 80a-3) (``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 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.
\9\ The Dodd-Frank Act requires such private fund adviser
registration by amending section 203(b)(3) of the Advisers Act to
repeal the exemption from registration for any adviser that during
the course of the preceding 12 months had fewer than 15 clients and
neither held itself out to the public as an investment adviser nor
advised any registered investment company or business development
company. See section 403 of the Dodd-Frank Act. See also infra note
11 for the definition of ``private fund adviser.'' There are
exemptions from the registration requirement, including exemptions
for advisers to venture capital funds and advisers to private funds
with less than $150 million in assets under management in the United
States. There also is an exemption for ``foreign private advisers,''
which are investment advisers with no place of business in the
United States, fewer than 15 clients in the United States and
investors in the United States in private funds advised by the
adviser, and less than $25 million in assets under management from
such clients and investors. See sections 402, 407 and 408 of the
Dodd-Frank Act. See also Exemptions for Advisers to Venture Capital
Funds, Private Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers, Investment Advisers
Act Release No. IA-3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10,
2010) (``Private Fund Exemption Release''); Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Release No. IA-3110 (Nov. 19, 2010), 75 FR 77,052 (Dec.
10, 2010) (``Implementing Release''). References in this Release to
Form ADV or terms defined in Form ADV or its glossary are to the
form and glossary as they are proposed to be amended in the
Implementing Release.
\10\ See Senate Committee Report, supra note 4, at 38.
\11\ Throughout this Release, we use the term ``private fund
adviser'' to mean any investment adviser that (i) is registered or
required to register with the SEC (including any investment adviser
that is also registered or required to register with the CFTC as a
CPO or CTA) and (ii) advises one or more private funds. We are not
proposing that advisers solely to venture capital funds or advisers
to private funds that in the aggregate have less than $150 million
in assets under management in the United States (``exempt reporting
advisers'') be required to file Form PF.
\12\ While Advisers Act section 204(b)(1) could be read in
isolation to imply that the SEC requiring private fund systemic risk
reporting is discretionary, other amendments to the Advisers Act
made by the Dodd-Frank Act (such as Advisers Act section 204(b)(5)
and 211(e) suggest that Congress intended such rulemaking to be
mandatory. See also Senate Committee Report, supra note 4, at 39
(``this title requires private fund advisers * * * to disclose
information regarding their investment positions and strategies.'').
\13\ See section 404 of the Dodd-Frank Act.
\14\ See section 406 of the Dodd-Frank Act.
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This joint proposal is designed to fulfill this statutory mandate.
Under proposed Advisers Act rule 204(b)-1, private fund advisers would
be required to file Form PF with the SEC. Private fund advisers that
also are registered as CPOs or CTAs with the CFTC would file Form PF to
satisfy certain CFTC systemic risk reporting requirements.\15\
Information collected about private funds on Form PF, together with
information the SEC collects on Form ADV and the information the CFTC
separately has proposed CPOs file on Form CPO-PQR and CTAs file on Form
CTA-PR, will provide FSOC and the Commissions with important
information about the basic operations and strategies of private funds
and will be important in FSOC obtaining a baseline picture of potential
systemic risk across both the entire private fund industry and in
particular kinds of private funds, such as hedge funds.\16\
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\15\ For these private fund advisers, filing Form PF through the
Form PF filing system would be a filing with both the SEC and CFTC.
Irrespective of their filing a Form PF with the SEC, all private
fund advisers that are also registered as CPOs and CTAs with the
CFTC would be required to file Schedule A of proposed Form CPO-PQR
(for CPOs) or Schedule A of proposed Form CTA-PR (for CTAs).
Additionally, to the extent that they operate or advise commodity
pools that do not satisfy the definition of ``private fund'' under
the Dodd-Frank Act, private fund advisers that are also registered
as CPOs or CTAs would still be required to file proposed Form CPO-
PQR (for CPOs) and proposed Form CTA-PR (for CTAs), as applicable.
\16\ The information reported through the various reporting
forms is designed to be complementary, and not duplicative.
Information reported on Form ADV would be publicly available, while
information reported on Form PF and proposed Forms CPO-PQR and CTA-
PR would be confidential to the extent permitted under applicable
law. Form ADV and Form PF also have different principal purposes.
Form ADV primarily aims at providing the SEC and investors with
basic information about advisers (including private fund advisers)
and the funds they manage for investor protection purposes, although
Form ADV information also will be available to FSOC. Information on
Form ADV is designed to provide the SEC with information necessary
to its administration of the Advisers Act and to efficiently
allocate its examination resources based on the risks the SEC
discerns or the identification of common business activities from
information provided by advisers. See Implementing Release, supra
note 9. In contrast, the Commissions intend to use Form PF primarily
as a confidential systemic risk disclosure tool to assist FSOC in
monitoring and assessing systemic risk, although it also would be
available to assist the Commissions in their regulatory programs,
including examinations and investigations and investor protection
efforts relating to private fund advisers.
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Information the SEC obtains through reporting under section 404 of
the Dodd-Frank Act is to be shared with FSOC as FSOC considers
necessary for purposes of assessing the systemic risk posed by private
funds and generally is to remain confidential.\17\ Our staffs have
consulted with staff representing FSOC's members in developing this
proposal. We note that simultaneous with our staffs' FSOC consultations
relating to this rulemaking, FSOC has been building out its standards
for assessing systemic risk across different kinds of financial firms
and has recently proposed standards for determining which nonbank
financial companies should be designated as subject to FRB
supervision.\18\
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\17\ See section 404 of the Dodd-Frank Act; infra note 39 and
accompanying text.
\18\ See, e.g., Authority to Require Supervision and Regulation
of Certain Nonbank Financial Companies, Financial Stability
Oversight Council Release (Jan. 18, 2011); Advance Notice of
Proposed Rulemaking Regarding Authority to Require Supervision and
Regulation of Certain Nonbank Financial Companies, Financial
Stability Oversight Council Release (Oct. 1, 2010), 75 FR 61653
(Oct. 6, 2010) (``FSOC Designation ANPR'').
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B. International Coordination
In assessing systemic risk, the Dodd-Frank Act requires that FSOC
coordinate with foreign financial regulators.\19\ This coordination may
be particularly important in assessing systemic risk associated with
hedge funds and other private funds because they often operate globally
and make significant investments in firms and markets around the
world.\20\ As others have recognized, ``[g]iven the global nature of
the markets in which [private fund] managers and funds operate, it is
imperative that a regulatory framework be applied on an internationally
consistent basis.'' \21\ International regulatory coordination also has
been cited as a critical element in facilitating financial regulators'
formulation of a comprehensive and effective response to future
financial crises.\22\ Collecting consistent and comparable information
is of added value in private fund systemic risk reporting because it
would aid in the assessment of systemic risk on a global basis and thus
enhance the utility of information sharing among U.S. and foreign
financial regulators.\23\
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\19\ See section 175 of the Dodd-Frank Act.
\20\ See Damian Alexander, Global Hedge Fund Assets Rebound to
Just Over $1.8 Trillion, Hedge Fund Intelligence (Apr. 7, 2010)
(``HFI'').
\21\ Group of Thirty, Financial Reform: A Framework for
Financial Stability (Jan. 15, 2009).
\22\ See U.S. Department of the Treasury, Financial Regulatory
Reform: A New Foundation (2009), at 8; and Equipping Financial
Regulators with the Tools Necessary to Monitor Systemic Risk, Senate
Banking Subcommittee on Security and International Trade and
Finance, Feb. 12, 2010 (testimony of Daniel K. Tarullo, member of
the FRB). See also Group of 20 and the International Monetary Fund,
The Global P Crisis for Fure Regulation of Financial Institutions
and M arkets and for Liquidity Management (Feb. 4, 2009).
\23\ The Commissions expect that they may share information
reported on Form PF with various foreign financial regulators under
information sharing agreements in which the foreign regulator agrees
to keep the information confidential.
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Recognizing this benefit, our staffs participated in the
International Organization of Securities Commissions' (``IOSCO'')
preparation of a report regarding hedge fund oversight.\24\ Among other
matters, this report recommended that hedge fund advisers provide to
their national regulators information for the identification, analysis,
and mitigation of systemic risk. It also recommended that regulators
cooperate and share information where appropriate in order to
facilitate efficient and effective oversight of globally active hedge
funds and to help identify systemic risks, risks to market integrity,
and other risks arising from the activities or exposures of hedge
funds.\25\ The types of information that IOSCO recommended regulators
gather from hedge fund advisers is consistent with and comparable to
the types of information we propose to collect from hedge funds through
Form PF, as described in further detail below.\26\
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\24\ Technical Committee of the International Organization of
Securities Commissions, Hedge Funds O (June 2009), available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD293.pdf (``IOSCO
Report'').
\25\ Id. at 3.
\26\ See IOSCO Report, supra note 24, at 14; Press Release,
International Regulators Publish Systemic Risk Data Requirements for
Hedge Funds (Feb. 25, 2010), available at https://www.iosco.org/news/pdf/IOSCONEWS179.pdf. The IOSCO Report states that systemic
risk information that hedge fund advisers should provide to
regulators should include, for example: (1) Information on their
prime brokers, custodian, and background information on the persons
managing the assets; (2) information on the manager's larger funds
including the net asset value, predominant strategy/regional focus
and performance; (3) leverage and risk information, including
concentration risk of the hedge fund adviser's larger funds; (4)
asset and liability information for the manager's larger funds; (5)
counterparty risk, including the biggest sources of credit; (6)
product exposure for all of the manager's assets; and (7) investment
activity known to represent a significant proportion of such
activity in important markets or products. Some of this information
would be collected through the revised Form ADV, as proposed by the
SEC in the Implementing Release, rather than Form PF.
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In addition, our staffs have consulted with the United Kingdom's
Financial Services Authority (the ``FSA''), which has conducted a
voluntary semi-annual survey since October 2009 by sampling the largest
hedge fund groups based in the United Kingdom.\27\ Because many hedge
fund advisers are located in the United Kingdom and subject to the
jurisdiction of the FSA, this coordination has been particularly
important.\28\ UK hedge fund advisers complete this survey on a
voluntary basis, and the survey collects information regarding all
funds managed by the particular hedge fund adviser as well as for
individual funds with at least $500 million in assets. The information
the survey collects is designed to help the FSA better understand hedge
funds' use of leverage, ``footprints'' in various asset classes
(including concentration and liquidity issues), the scale of asset/
liability mismatches, and counterparty credit risks.\29\ In addition,
for more than five years the FSA has been conducting a semi-annual
survey of hedge fund counterparties to assist it in assessing trends in
counterparty credit risk, margin requirements, and other matters.\30\
Our staffs' consultation with the FSA as they designed and conducted
their hedge fund surveys has been very informative, and we have
incorporated into proposed Form PF many of the types of information
collected through the FSA surveys.
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\27\ The survey canvasses approximately 50 FSA-authorized
investment managers. See, e.g., Financial Services Authority,
Assessing Possible Sources of Systemic Risk from Hedge Funds: A
Report on the Findings of the Hedge Fund as Counterparty Survey and
the Hedge Fund Survey (Jul. 2010), available at http://www.fsa.gov.uk/pubs/other/hf_report.pdf (``FSA Survey'').
\28\ According to Hedge Fund Intelligence, U.K.-based advisers
manage approximately 16% of global hedge fund assets. This
concentration of hedge fund advisers is second only to the United
States (managing approximately 76% of global hedge fund assets). See
HFI, supra note 20.
\29\ FSA Survey, supra note 27.
\30\ Id.
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SEC staff also has consulted with Hong Kong's Securities and
Futures Commission regarding hedge fund oversight and data collection
because Hong Kong is an important jurisdiction for hedge funds in
Asia.\31\ This consultation also has proven helpful in designing
proposed Form PF.
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Collectively, hedge fund advisers based in the United States, the
United Kingdom, and Hong Kong represent over 92 percent of global hedge
fund assets, and thus a broad consistency among these jurisdictions'
hedge fund information collections, including our own, will facilitate
the sharing of consistent and comparable information for systemic risk
assessment purposes for most global hedge fund assets under
management.\32\ Finally, in connection with the IOSCO report, IOSCO
members (including the SEC and CFTC) agreed, on a ``best efforts''
basis, to conduct a survey of hedge fund reporting data as of the end
of September 2010 based on the guidelines established in the IOSCO
report and the FSA survey. This internationally coordinated survey
effort has also informed our proposed reporting.
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\31\ According to Hedge Fund Intelligence, Hong Kong-based
advisers manage approximately 0.54% of global hedge fund assets,
which is the largest concentration of hedge fund advisers in Asia.
See HFI, supra note 20.
\32\ See HFI, supra note 20.
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International efforts also have focused on potential systemic
considerations arising out of other types of private funds, such as
private equity funds. For example, an International Monetary Fund
(``IMF'') staff paper has focused on ``extending the perimeter'' of
effective regulatory oversight to capture all financial activities that
may pose systemic risks, regardless of the type of institution in which
they occur.\33\ The IMF paper proposed that these financial activities
be subject to reporting obligations so that regulators may assess
potential systemic risk and emphasized the need to capture all
financial activities conducted on a leveraged basis, including
activities of leveraged private equity vehicles.\34\ Others also have
recognized a need for monitoring the private equity sector because
having information on its potentially systemically important
interactions with the financial system are an important part of
regulators' obtaining the complete picture of the broader financial
system that is so vital to effective systemic risk monitoring.\35\ We
have taken these international efforts relating to systemic risk
monitoring in private equity funds into account in the proposed
reporting discussed below.
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\33\ See Ana Carvajal et al., The Perimeter of Financial
Regulation, IMF Staff Position Note SPN/09/07 (Mar. 26, 2009),
available at http://www.imf.org/external/pubs/ft/spn/2009/spn0907.pdf.
\34\ Id., at 8.
\35\ See, e.g., Lorenzo Bini Smaghi, Member of the Executive
Board of the European Central Bank, Going Forward--Regulation and
Supervision after the Financial Turmoil, Speech by at the 4th
International Conference of Financial Regulation and Supervision
(Jun. 19, 2009), available at http://www.bis.org/review/r090623e.pdf
(stating ``macro-prudential analysis needs to capture all components
of financial systems and how they interact. This includes all
intermediaries, markets and infrastructures underpinning them. In
this respect, it is important to consider that at present some of
these components, such as hedge funds, private equity firms or over-
the-counter (OTC) financial markets, are not subject to micro-
prudential supervision. But they need to be part of macro-prudential
analysis and risk assessments, as they influence the overall
behaviour of the financial system. To gain a truly ``systemic''
perspective on the financial system, no material element should be
left out.''); Private Equity and Leveraged Finance Markets, Bank for
International Settlements Committee on the Global Financial System
Working Paper No. 30 (Jul. 2008), available at http://www.bis.org/publ/cgfs30.pdf (``BIS Private Equity Paper'') (``Going forward, the
Working Group believes that enhancing transparency and strengthening
risk management practices [relating to private equity and leveraged
finance markets] require special attention. * * * The recent market
turmoil has demonstrated that a number of the risks in the leveraged
finance market are likely to materialise in combination with other
financial market risks in stressed market conditions. * * * In the
public sector, there is a stronger case for developing early warning
indicators and devoting more research efforts to modelling the
dynamic relationships between risk factors with a view to
understanding the interrelationships across markets and their impact
on the financial sector.''). See also Macroeconomic Assessment Group
established by the Financial Stability Board and the Basel Committee
on Banking Supervision, Interim Report: Assessing the Macroeconomic
Impact of the Transition to Stronger Capital and Liquidity
Requirements (Aug. 2010), at section 5.2, available at http://www.financialstabilityboard.org/publications/r_100818b.pdf.
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II. Discussion
The SEC is proposing a new rule 204(b)-1 under the Advisers Act to
require that SEC-registered investment advisers report systemic risk
information to the SEC on Form PF if they advise one or more private
funds.\36\ For registered CPOs and CTAs that are also registered as
investment advisers with the SEC and advise a private fund, this report
also would serve as substitute compliance for a portion of the CFTC's
proposed systemic risk reporting requirements under proposed Commodity
Exchange Act rule 4.27(d).\37\ Because commodity pools that meet the
definition of a private fund are categorized as hedge funds for
purposes of Form PF as discussed below, CPOs and CTAs filing Form PF
would need to complete only the sections applicable to hedge fund
advisers, and the form would be a joint form only with respect to those
sections.\38\
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\36\ See proposed Advisers Act rule 204(b)-1.
\37\ See proposed Commodity Exchange Act rule 4.27(d), which
provides that these CPOs and CTAs would need to file other reports
as required under rule 4.27 with respect to pools that are not
private funds. For purposes of this proposed rule, it is the CFTC's
position that any false or misleading statement of a material fact
or material omission in the jointly proposed sections (sections 1
and 2) of proposed Form PF that is filed by these CPOs and CTAs
shall constitute a violation of section 6(c)(2) of the Commodity
Exchange Act. Proposed Form PF contains an oath consistent with this
position.
\38\ Thus, private fund advisers that also are CPOs or CTAs
would be obligated to complete only section 1 and, if they met the
applicable threshold, section 2 of Form PF. Accordingly, Form PF is
a joint form between the SEC and the CFTC only with respect to
sections 1 and 2 of the form.
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Form PF would elicit non-public information about private funds and
their trading strategies the public disclosure of which, in many cases,
could adversely affect the funds and their investors. The SEC does not
intend to make public Form PF information identifiable to any
particular adviser or private fund, although the SEC may use Form PF
information in an enforcement action. Amendments to the Advisers Act
added by the Dodd-Frank Act preclude the SEC from being compelled to
reveal the information except in very limited circumstances.\39\
Similarly, the Dodd-Frank Act exempts the CFTC from being compelled
under FOIA to disclose to the public any information collected through
Form PF and requires that the CFTC maintain the confidentiality of that
information consistent with the level of confidentiality established
for the SEC in section 404 of the Dodd-Frank Act. The Commissions would
make information collected through Form PF available to FSOC, as is
required by the Dodd-Frank Act, subject to the confidentiality
provisions of the Dodd-Frank Act.\40\
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\39\ See section 404 of the Dodd-Frank Act stating that
``[n]otwithstanding any other provision of law, the Commission [SEC]
may not be compelled to disclose any report or information contained
therein required to be filed with the Commission [SEC] under this
subsection'' except to Congress upon agreement of confidentiality.
Section 404 also provides that nothing prevents the SEC from
complying with a request for information from any other federal
department or agency or any self-regulatory organization requesting
the report or information for purposes within the scope of its
jurisdiction or an order of a court of the U.S. in an action brought
by the U.S. or the SEC. Section 404 of the Dodd-Frank Act also
states that the SEC shall make available to FSOC copies of all
reports, documents, records, and information filed with or provided
to the SEC by an investment adviser under section 404 of the Dodd-
Frank Act as FSOC may consider necessary for the purpose of
assessing the systemic risk posed by a private fund and that FSOC
shall maintain the confidentiality of that information consistent
with the level of confidentiality established for the SEC in section
404 of the Dodd-Frank Act.
\40\ See section 404 of the Dodd-Frank Act.
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We propose that each private fund adviser report basic information
about the operations of its private funds on Form PF once each year. We
propose that a relatively small number of Large Private Fund Advisers
(described in section II.B below) instead be required to submit this
basic information each quarter along with additional systemic risk
related information required by Form PF concerning certain of their
[[Page 8072]]
private funds.\41\ In the sections below, we describe the principal
reasons we believe that FSOC needs this information in order to monitor
the systemic risk that may be associated with the operation of private
funds.
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\41\ See proposed Instructions to Form PF. Our proposed
reporting thus complies with the Dodd-Frank Act directive that, in
formulating systemic risk reporting and recordkeeping for investment
advisers to mid-sized private funds, the Commission take into
account the size, governance, and investment strategy of such funds
to determine whether they pose systemic risk. See section 408 of the
Dodd-Frank Act. The Dodd-Frank Act also states that the SEC may
establish different reporting requirements for different classes of
fund advisers, based on the type or size of private fund being
advised. See section 404 of the Dodd-Frank Act.
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A. Purposes of Form PF
The Dodd-Frank Act tasks FSOC with monitoring the financial
services marketplace in order to identify potential threats to the
financial stability of the United States.\42\ It also requires FSOC to
collect information from member agencies to support its functions.\43\
Section 404 of the Dodd-Frank Act directs the SEC to support this
effort by collecting from investment advisers to private funds such
information as the SEC deems necessary and appropriate in the public
interest and for the protection of investors or for the assessment of
systemic risk.\44\ FSOC may, if it deems necessary, direct the Office
of Financial Research (``OFR'') to collect additional information from
nonbank financial companies.\45\
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\42\ See section 112(a)(2)(C) of the Dodd-Frank Act.
\43\ See section 112(d)(1) of the Dodd-Frank Act.
\44\ Section 404 of the Dodd-Frank Act requires that reports and
records that the SEC mandates be maintained for these purposes
include a description of certain categories of information, such as
assets under management, use of leverage, counterparty credit risk
exposure, and trading and investment positions for each private fund
advised by the adviser.
\45\ See sections 153 and 154 of the Dodd-Frank Act.
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The Commissions are jointly proposing sections 1 and 2 of Form PF,
and the SEC is proposing sections 3 and 4 of Form PF, to collect
information necessary to permit FSOC to monitor private funds in order
to identify any potential systemic threats arising from their
activities. The information we currently collect about private funds
and their activities is very limited and is not designed for the
purpose of monitoring systemic risk.\46\ We do not currently collect
information, for example, about hedge funds' primary trading
counterparties or significant market positions. The SEC also does not
currently collect data to assess the risk of a run on a private
liquidity fund, a risk that could transfer into registered money market
funds and into the broader short term funding markets and those that
rely on those markets.\47\ While we are proposing to collect
information on Form PF to assist FSOC in its monitoring obligations
under the Dodd-Frank Act, the information collected on Form PF would be
available to assist the Commissions in their regulatory programs,
including examinations and investigations and investor protection
efforts relating to private fund advisers.\48\
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\46\ We note that the SEC has proposed amendments to Form ADV
that also would require private funds to report certain basic
information, such as the fund's prime broker and its gross and net
asset values. See Implementing Release, supra note 9.
\47\ See section II.A.3 of this Release for a discussion of
liquidity funds and their potential risks.
\48\ See SEC section VI.A of this Release for a discussion of
how the SEC could use proposed Form PF data for its regulatory
activities and investor protection efforts.
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We have designed Form PF, in consultation with staff representing
FSOC's members, to provide FSOC with such information so that it may
carry out its monitoring obligations.\49\ Based upon the information we
propose to obtain from advisers about the private funds they advise,
together with market data it collects from other sources, FSOC should
be able to identify whether any private funds merit further analysis or
whether OFR should collect additional information. We have not sought
to design a form that would provide FSOC in all cases with all the
information it may need to make a determination that a particular
entity should be designated for supervision by the FRB.\50\ Such a
form, if feasible, likely would require substantial additional and more
detailed data addressing a wider range of possible fund profiles, since
it could not be tailored to a particular adviser, and would impose
correspondingly greater burdens on private fund advisers. This type of
information gathering may be better accomplished by OFR through
targeted information requests to specific private fund advisers
identified through Form PF, rather than through a general reporting
form.\51\
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\49\ Industry participants (in response to FSOC Designation
ANPR, supra note 18) acknowledged the potentially important function
that such reporting may play in allowing FSOC to monitor the private
fund industry more generally and to assess the extent to which any
private funds may pose systemic risk more specifically. See, e.g.,
Comment Letter of the Managed Funds Association (Nov. 5, 2010)
(``the enhanced regulation of hedge fund managers and the markets in
which they participate following the passage of the Dodd-Frank Act
ensures that regulators will have a timely and complete picture of
hedge funds and their activities''), Comment Letter of the Coalition
of Private Investment Companies (Nov. 5, 2010) (``the registration
and reporting structure for private funds subject to SEC oversight
will result in an unprecedented range and depth of data to the
Council, its constituent members and the newly created Office of
Financial Research. From this information, in addition to the
information gathered by the Council, the Council should be able to
assemble a clear picture of the overall U.S. financial network and
how private investment funds fit into it, both on an individual and
overall basis''), Comment Letter of the Private Equity Growth
Council (Nov. 5, 2010) (``regulators also now have the authority to
require all private equity firms and private equity funds to provide
any additional data needed to assess systemic risk'') (``PE Council
Letter''). Comment letters in response to the FSOC Designation ANPR
are available at http://www.regulations.gov.
\50\ See section 113 of the Dodd-Frank Act for a discussion of
the matters that FSOC must consider when determining whether a U.S.
nonbank financial company shall be supervised by the FRB and subject
to prudential standards.
\51\ Recordkeeping requirements specific to private fund
advisers for systemic risk assessment purposes will be addressed in
a future release pursuant to our authority under section 404 of the
Dodd-Frank Act.
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The amount of information a private fund adviser would be required
to report on the proposed form would vary based on both the size of the
adviser and the type of funds it advises. This approach reflects our
initial view after consulting with staff representing FSOC's members
that a smaller private fund adviser may present less risk to the
stability of the U.S. financial system and thus merit reporting of less
information.\52\ It also reflects our understanding that different
types of private funds could present different implications for
systemic risk and that reporting requirements should be appropriately
calibrated.\53\ As discussed in more detail below, Form PF would
require more detailed information from advisers managing a large amount
of hedge fund or liquidity fund assets. Less information would be
required regarding advisers managing a large amount of private equity
fund assets because, after a review of available literature and
consultation with staff representing FSOC's members, it appears that
private equity funds may present less potential risk to U.S. financial
stability. The principal reasons for Form PF's proposed reporting
specific to hedge funds, liquidity funds, and private equity funds are
discussed below.
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\52\ We discuss the information we propose requiring smaller
private fund advisers report in section II.D.1 of this Release.
\53\ Congress recognized this need as well. See supra note 41.
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1. Hedge Funds
We believe that Congress expected hedge fund advisers would be
required to report information to the Commissions under Title IV of the
Dodd-Frank Act.\54\ After consulting with
[[Page 8073]]
staff representing FSOC's members, our initial view is that the
investment activities of hedge funds \55\ may have the potential to
pose systemic risk for several reasons and, accordingly, that advisers
to these hedge funds should provide targeted information on Form PF to
allow FSOC to gain a better picture of the potential systemic risks
posed by the hedge fund industry. Hedge funds may be important sources,
and users, of liquidity in certain markets. Hedge funds often use
financial institutions that may have systemic importance to obtain
leverage and enter into other types of transactions. Hedge funds employ
investment strategies that may use leverage, derivatives, complex
structured products, and short selling in an effort to generate
returns. Hedge funds also may employ strategies involving high volumes
of trading and concentrated investments. These strategies, and in
particular high levels of leverage, can increase the likelihood that
the fund will experience stress or fail, and amplify the effects on
financial markets.\56\ While many hedge funds are not highly leveraged,
certain hedge fund strategies employ substantial amounts of
leverage.\57\ Significant hedge fund failures (whether caused by their
investment positions or use of leverage or both) could result in
material losses at the financial institutions that lend to them if
collateral securing this lending is inadequate.\58\ These losses could
have systemic implications if they require these financial institutions
to scale back their lending efforts or other financing activities
generally.\59\ The simultaneous failure of several similarly positioned
hedge funds could create contagion through the financial markets if the
failing funds liquidate their investment positions in parallel at
firesale prices, thereby depressing the mark-to-market valuations of
securities that may be widely held by other financial institutions and
investors.\60\ Many of these concerns were raised in September 1998 by
the near collapse of Long Term Capital Management, a highly leveraged
hedge fund that experienced significant losses stemming from the 1997
Russian financial crisis.\61\
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\54\ See Senate Committee Report, supra note 4, at 38 (``While
hedge funds are generally not thought to have caused the current
financial crisis, information regarding their size, strategies, and
positions could be crucial to regulatory attempts to deal with a
future crisis. The case of Long-Term Capital Management, a hedge
fund that was rescued through Federal Reserve intervention in 1998
because of concerns that it was ``too-interconnected-to-fail,''
shows that the activities of even a single hedge fund may have
systemic consequences.'').
\55\ See section II.B of this Release for a discussion of the
definition of ``hedge fund'' in proposed Form PF. To prevent
duplicative reporting, commodity pools that meet the definition of a
private fund would be treated as hedge funds for purposes of Form
PF. CPOs and CTAs that are not also registered as an investment
adviser with the SEC would be required to file proposed Form CPO-PQR
(for CPOs) and proposed Form CTA-PR (for CTAs) reporting similar
information as Form PF requires for private fund advisers that
advise one or more hedge funds. See Commodity Pool Operators and
Commodity Trading Advisors: Amendments to Compliance Obligations,
CFTC Release (Jan. --, 2011). Deeming commodity pools that meet the
definition of a private fund to be hedge funds for purposes of Form
PF, therefore, is designed to ensure that the CFTC obtains similar
reporting regarding commodity pools that satisfy CFTC reporting
obligations by the CPO or CTA filing proposed Form PF.
\56\ See President's Working Group on Financial Markets, Hedge
Funds, Leverage, and the Lessons of Long Term Capital Management
(Apr. 1999), at 23, available at http://www.ustreas.gov/press/releases/reports/hedgfund.pdf (``PWG LTCM Report'').
\57\ See FSA Survey, supra note 27, at 5 (showing borrowings as
a multiple of net equity ranging from 100% in strategies such as
managed futures to 1400% in the fixed income arbitrage hedge fund
strategy).
\58\ See, e.g., Id.; Ben S. Bernanke, Hedge Funds and Systemic
Risk, Speech at the Federal Reserve Bank of Atlanta's 2006 Financial
Market's Conference (May 16, 2006), available at http://www.federalreserve.gov/newsevents/speech/bernanke20060516a.htm
(``Bernanke''); Nicholas Chan et al., Systemic Risk and Hedge Funds,
National Bureau of Economic Research Working Paper 11200 (Mar.
2005), available at http://www.nber.org/papers/w11200.pdf; Andrew
Lo, Regulatory Reform in the Wake of the Financial Crisis of 2007-
2008, 1 J. Fin. Econ. P. 4 (2009); and John Kambhu et al., Hedge
Funds, Financial Intermediation, and Systemic Risk, FRBNY Econ. P.
Rev. (Dec. 2007) (``Kambhu'').
\59\ Kambhu, supra note 58; Financial Stability Forum, Update of
the FSF Report on Highly Leveraged Institutions (May 19, 2007).
\60\ See Bernanke, supra note 58; David Stowell, An Introduction
to Investment Banks, Hedge Funds & Private Equity: The New Paradigm
259-261 (2010).
\61\ See PWG LTCM Report, supra note 56.
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Accordingly, proposed Form PF would include questions about large
hedge funds' investments, use of leverage and collateral practices,
counterparty exposures, and market positions that are designed to
assist FSOC in monitoring and assessing the extent to which stresses at
those hedge funds could have systemic implications by spreading to
prime brokers, credit or trading counterparties, or financial
markets.\62\ This information also is designed to help FSOC observe how
hedge funds behave in response to certain stresses in the markets or
economy. We request comment on this analysis of the potential systemic
risk posed by hedge funds. Does it adequately identify the ways in
which hedge funds might generate systemic risk? Are there other ways
that hedge funds could create systemic risk? Are hedge funds not a
potential source of systemic risk? Please explain your views and
discuss their implications for the reporting we propose on Form PF.
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\62\ See section II.D.2 of this Release.
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2. Liquidity Funds
``Liquidity funds'' also may be important to FSOC's monitoring and
assessment of potential systemic risks, and the SEC believes
information concerning them, therefore, should be included on Form
PF.\63\ The proposed Form PF would define a liquidity fund as a private
fund that seeks to generate income by investing in a portfolio of
short-term obligations in order to maintain a stable net asset value
per unit or minimize principal volatility for investors.\64\ Liquidity
funds thus can resemble money market funds, which are registered under
the Investment Company Act of 1940 and seek to maintain a ``stable''
net asset value per share, typically $1, through the use of the
``amortized cost'' method of valuation.\65\
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\63\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the form. Section 3 of the form,
which would require more specific reporting regarding liquidity
funds, would only be required by the SEC.
\64\ See section II.B of this Release for a discussion of the
definition of ``liquidity fund'' in proposed Form PF.
\65\ Under the amortized cost method, securities are valued at
acquisition cost, with adjustments for amortization of premium or
accretion of discount, instead of at fair market value. To prevent
substantial deviations between the amortized cost share price and
the mark-to-market per-share value of the fund's assets (its
``shadow NAV''), a money market fund must periodically compare the
two. If there is a difference of more than one-half of 1 percent
(typically, $0.005 per share), the fund must re-price its shares, an
event colloquially known as ``breaking the buck.'' See Money Market
Fund Reform, Investment Company Act Release No. 28807 (June 30,
2009), 74 FR 32688 (July 8, 2009), at section III (``MMF Reform
Proposing Release'').
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A report recently released by the President's Working Group on
Financial Markets (the ``PWG MMF Report'') discussed in detail how
certain features of registered money market funds, many of which are
shared by liquidity funds, may make them susceptible to runs and thus
create the potential for systemic risk.\66\ The PWG MMF Report
describes how some investors may consider liquidity funds to function
as substitutes for registered money market funds and the potential for
systemic risk that
[[Page 8074]]
results.\67\ During the financial crisis, several sponsors of
``enhanced cash funds,'' a type of liquidity fund, committed capital to
those funds to prevent investors from realizing losses in the
funds.\68\ The fact that sponsors of certain liquidity funds felt the
need to support the stable value of those funds suggests that they may
be susceptible to runs like registered money market funds.
---------------------------------------------------------------------------
\66\ Report of the President's Working Group on Financial
Markets: Money Market Fund Reform Options (Oct. 2010), available at
http://treas.gov/press/releases/docs/10.21%20PWG%20Report%20Final.pdf. The PWG MMF Report states that the
work of the President's Working Group on Financial Reform relating
to money market funds is now being taken over by FSOC. The SEC has
discussed previously registered money market funds' susceptibility
to runs. See MMF Reform Proposing Release, supra note 65, at section
III.
\67\ PWG MMF Report, supra note 66, at section 3.h (``These
vehicles typically invest in the same types of short-term
instruments that MMFs hold and share many of the features that make
MMFs vulnerable to runs, so growth of unregulated MMF substitutes
would likely increase systemic risks. However, such funds need not
comply with rule 2a-7 or other [Investment Company Act] protections
and in general are subject to little or no regulatory oversight. In
addition, the risks posed by MMF substitutes are difficult to
monitor, since they provide far less market transparency than
MMFs.'').
\68\ See, e.g., Sree Vidya Bhaktavatsalam, BlackRock Earnings
Beat Estimates on Hedge-Fund Fees, Bloomberg (Jan. 17, 2008)
(``During the fourth quarter, BlackRock spent $18 million to support
the net asset value of two enhanced cash funds whose values fell as
the credit markets got squeezed''); Sree Vidya Bhaktavatsalam &
Christopher Condon, Federated Investors Bails Out Cash Fund After
Losses, Bloomberg (Nov. 20, 2007).
---------------------------------------------------------------------------
Registered money market funds are subject to extensive regulation
under Investment Company Act rule 2a-7, which imposes credit-quality,
maturity, and diversification requirements on money market fund
portfolios designed to ensure that the funds' investing remains
consistent with the objective of maintaining a stable net asset
value.\69\ While liquidity funds are not required to comply with rule
2a-7, we understand that many liquidity funds can suspend redemptions
or impose gates on shareholder redemptions upon indications of stress
at the fund. As a result, the risk of runs at liquidity funds may be
mitigated. The information that the SEC is proposing to require
advisers to liquidity funds report is designed to allow FSOC to assess
liquidity funds' susceptibility to runs and ability to otherwise pose
systemic risk.
---------------------------------------------------------------------------
\69\ See 17 CFR 270.2a-7.
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The SEC requests comment on this analysis of the potential systemic
risk posed by liquidity funds. Does it adequately identify the ways in
which liquidity funds might generate systemic risk? Are there other
ways that liquidity funds could create systemic risk? Do liquidity
funds lack any potential to create systemic risk? Please explain your
views and discuss their implications for the reporting proposed on Form
PF.
3. Private Equity Funds
It is the SEC's initial view, after consultation with staff
representing FSOC's members, that the activities of private equity
funds, certain of their portfolio companies, or creditors involved in
financing private equity transactions also may be important to the
assessment of systemic risk and, therefore, that large advisers to
these funds should provide targeted information on Form PF to allow
FSOC to conduct basic systemic risk monitoring.\70\
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\70\ See section II.B of this Release for a discussion of the
definition of ``private equity fund'' in Form PF. Form PF is a joint
form between the SEC and the CFTC only with respect to sections 1
and 2 of the form. Section 4 of the form, which would require more
specific reporting regarding private equity funds, would only be
required by the SEC.
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One aspect of the private equity business model that some have
identified as potentially having systemic implications is its method of
financing buyouts of companies. Leveraged private equity transactions
often rely on banks to provide bridge financing until the permanent
debt financing for the transaction is completed, whether through a
syndicated bank loan or issuance of high yield bonds by the portfolio
company or both.\71\ When market conditions suddenly turn, these
institutions can be left holding this potentially risky bridge
financing (or committed to provide the final bank financing, but no
longer able to syndicate or securitize it and thus forced to hold it)
at precisely the time when credit market conditions, and therefore the
institutions' own general exposure to private equity transactions and
other committed financings, have worsened.\72\ For example, prior to
the recent financial crisis, a trend in private equity transactions was
for private equity firms to enter into buyout transactions with seller-
favorable financing conditions and terms that placed much of the risk
of market deterioration after the transaction agreement was signed on
the financing institutions and the private equity adviser.\73\
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\71\ See Steven M. Davidoff, The Failure of Private Equity, 82
S. Cal. L. Rev. 481, 494 (2009) (``Davidoff'').
\72\ See Senior Supervisors Group, Observations on Risk
Management Practices during the Recent Market Turbulence, at 2 (Mar.
6, 2008), available at http://www.occ.gov/publications/publications-by-type/other-publications/pub-other-risk-mgt-practices-2008.pdf
(``Firms likewise found that they could neither syndicate to
external investors their leveraged loan commitments to corporate
borrowers nor cancel their commitments to fund those loans despite
material and adverse changes in the availability of funding from
other investors in the market''); BIS Private Equity Paper, supra
note 35, at 1-2 (``Conditions in the leveraged loan market
deteriorated in the second half of 2007, and demand for leveraged
finance declined sharply. An initial temporary adverse investor
reaction to loose lending terms and low credit spreads prevailing in
early 2007 became more protracted over the course of the second half
of the year as the turbulence in financial markets deepened and
contraction in demand for leveraged loans became more severe. Global
primary market leveraged loan volumes shrank by more than 50% in the
second half of 2007. The contraction in demand for leveraged loans
revealed substantial exposure of arranger banks to warehouse risk.
Undistributed loans will contribute to increased funding costs and
capital requirements for banks in 2008, on top of other offbalance
sheet products that they have been forced to bring on-balance sheet.
Moreover, with leveraged loan indices trading close to 90 cents on a
dollar in March 2008, realisation of warehouse risks has resulted in
significant mark to market losses to banks''); Bank of England,
Financial Stability Report, at 19 (Oct. 2007), available at http://www.bankofengland.co.uk/publications/fsr/2007/fsrfull0710.pdf
(``Bank of England'') (``The near closure of primary issuance
markets for collateralised loan obligations, and an increase in risk
aversion among investors, left banks unable to distribute leveraged
loans that they had originated earlier in the year. This exacerbated
a problem banks already faced, as debt used to finance a number of
high-profile private-equity sponsored leveraged buyouts (LBOs) had
remained on their balance sheets.'').
\73\ See Davidoff, supra note 71, at 495-496 (noting the trend
in private equity transaction agreements signed prior to the
financial crisis to have no financing condition and to have limited
``market outs'' and ``lender outs'' in the debt commitment letters
and further noting that ``by agreeing to a more certain debt
commitment letter and providing bridge financing, the banks now took
on the risk of market deterioration between the time of signing and
closing.''). Bank regulators and industry observers also noted the
trend in private equity financing prior to the financial crisis for
banks to enter into ``covenant lite'' loans, which did not require
borrowers to meet certain performance metrics for cash flow or
profits. See The Economics of Private Equity Investments: Symposium
Summary, FRBSF Economic Letter (Feb. 29, 2008), available at http://www.frbsf.org/publications/economics/letter/2008/el2008-08.html
(noting growth in the first half of 2007 in such ``covenant lite''
loans); Financial Stability Forum, Report of the Financial Stability
Forum on Enhancing Market and Institutional Resilience, at 7 (Apr.
7, 2008), available at http://www.financialstabilityboard.org/publications/r_0804.pdf (``Another segment that saw rapid growth in
volume accompanied by a decline in standards was the corporate
leveraged loan market, where lenders agreed to weakened loan
covenants to obtain the business of private equity funds.''); Bank
of England, supra note 73, at 27 (``Market intelligence suggested
that private equity sponsors had considerable market power to impose
aggressive capital structures, tight spreads and weak covenants
because investor demand was so strong. But in August, the flow of
new LBOs came to a virtual standstill and the debt of a sequence of
high-profile companies could not be sold [by banks].'').
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In addition, some industry observers have noted that the leveraged
buyout investment model of imposing significant amounts of leverage on
their portfolio companies in an effort to meet investment return
objectives subjects those portfolio companies to greater risk in the
event of economic stress.\74\ If private equity funds conduct a
[[Page 8075]]
leveraged buyout of an entity that could be systemically important,
information about that investment could be important in FSOC monitoring
and assessing potential systemic risk.\75\
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\74\ See, e.g., Paying the Price, The Economist (Jul. 31, 2010)
(``Pension funds could decide to make a geared bet on equities by
borrowing money and investing in the S&P 500 index. But they would
understandably regard such a strategy as highly risky. Giving money
to private-equity managers, who then use debt to acquire quoted
companies, is viewed in an entirely different light but amounts to
the same gamble''). See also BIS Private Equity Paper, supra note
35, at 24-25.
\75\ For example, some noted the role of private equity
investments in companies that the government ultimately bailed out
during the financial crisis. See, e.g., Casey Ross, Cerberus'
Success Hurt by a Pair of Gambles, The Boston Globe (Mar. 25, 2010)
(discussing private equity investments in GMAC and Chrysler Corp.,
both of which received government bailouts); and Louise Story, For
Private Equity, A Very Public Disaster, N.Y. Times (Aug. 8, 2009)
(same).
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For these reasons, the SEC believes certain information on the
activities of private equity funds and their portfolio companies is
relevant for purposes of monitoring potential systemic risk.\76\ In
addition, based on the SEC's consultations with staff representing
FSOC's members, private equity transaction financings, and their
interconnected impact on the lending institutions, could be a useful
area for FSOC to monitor in fulfilling its duty to gain a comprehensive
picture of the financial services marketplace in order to identify
potential threats to the stability of the U.S. financial system.
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\76\ See section II.D.4 of this Release for a discussion of the
information we propose requiring certain private equity fund
advisers report on Form PF.
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The SEC requests comment on this analysis of the potential systemic
risk posed by the activities of private equity funds. Does it identify
the ways in which private equity fund activities might generate
systemic risk? Are there other ways that private equity funds or their
activities could create systemic risk? Is the preliminary view that
private equity fund activities may have less potential to create
systemic risk than hedge funds and liquidity funds correct? Many
advisers to private equity funds have noted that certain features of
the private equity business model, such as its reliance on long-term
capital commitments from investors, lack of substantial debt at the
private equity fund level, and investment primarily in the equity of a
diverse range of private companies, mitigate its potential to pose
systemic risk.\77\ Do private equity funds not have any potential to
create systemic risk? Is the monitoring of private equity fund
activities unnecessary to assess systemic risk generally? Please
explain your views and discuss their implications for the reporting
proposed on Form PF.
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\77\ See, e.g., PE Council Letter, supra note 49; Testimony of
Mark Tresnowksi, General Counsel, Madison Dearborn Partners, before
the Senate Banking Subcommittee on Securities, Insurance and
Investment, July 15, 2009.
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B. Who Must File Form PF
We propose that any investment adviser registered or required to
register with the SEC that advises one or more private funds must file
a Form PF with the SEC.\78\ A CPO or CTA that also is a registered
investment adviser that advises one or more private funds would be
required to file Form PF with respect to any advised commodity pool
that is a ``private fund.'' By filing Form PF with respect to these
private funds, a CPO will be deemed to have satisfied certain of its
filing requirements for these funds.\79\ Under these rules, most
private fund advisers would be required to complete only section 1 of
Form PF, providing certain basic information regarding any hedge funds
they advise in addition to information about their private fund assets
under management and more generally about their funds' performance and
use of leverage. The information collected under section 1 of Form PF
is described in further detail in section II.D.1 of this Release.
Certain larger private fund advisers would be required to complete
additional sections of Form PF, which require more detailed
information.
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\78\ Proposed Advisers Act rule 204(b)-1.
\79\ Proposed CEA rule 4.27(d). A CPO registered with the CFTC
that is also registered as a private fund adviser with the SEC will
be deemed to have satisfied its filing requirements for Schedules B
and C of proposed Form CPO-PQR by completing and filing the
applicable portions of Form PF for each of its commodity pools that
satisfy the definition of ``private fund'' in the Dodd-Frank Act.
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Three types of ``Large Private Fund Advisers'' would be required to
complete certain additional sections of Form PF: \80\
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\80\ See proposed Instruction 3 to Form PF.
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Advisers managing hedge funds that collectively have at
least $1 billion in assets as of the close of business on any day
during the reporting period for the required report;
Advisers managing a liquidity fund and having combined
liquidity fund and registered money market fund assets of at least $1
billion as of the close of business on any day during the reporting
period for the required report; and
Advisers managing private equity funds that collectively
have at least $1 billion in assets as of the close of business on the
last day of the quarterly reporting period for the required report.
1. Types of Funds
Proposed Form PF would define ``hedge fund'' as any private fund
that (1) has a performance fee or allocation calculated by taking into
account unrealized gains; (2) may borrow an amount in excess of one-
half of its net asset value (including any committed capital) or may
have gross notional exposure in excess of twice its net asset value
(including any committed capital); or (3) may sell securities or other
assets short.\81\ As noted above, ``liquidity fund'' would be defined
as any private fund that seeks to generate income by investing in a
portfolio of short term obligations in order to maintain a stable net
asset value per unit or minimize principal volatility for
investors.\82\ ``Private equity fund'' would be defined as any private
fund that is not a hedge fund, liquidity fund, real estate fund,
securitized asset fund or venture capital fund and does not provide
investors with redemption rights in the ordinary course.\83\
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\81\ See proposed Glossary of Terms to Form PF. This definition
also is the same as the SEC has proposed in amendments to Form ADV.
See Implementing Release, supra note 9. For purposes of the
definition, the fund should not net long and short positions in
calculating its borrowings but should include any borrowings or
notional exposure of another person that are guaranteed by the fund
or that the fund may otherwise be obligated to satisfy. In addition,
a commodity pool that meets the definition of a private fund is
treated as a hedge fund for purposes of Form PF.
\82\ See proposed Glossary of Terms to Form PF.
\83\ See proposed Glossary of Terms to Form PF. Proposed Form PF
would define ``real estate fund'' as any private fund that is not a
hedge fund, that does not provide investors with redemption rights
in the ordinary course and that invests primarily in real estate and
real estate-related assets. Proposed Form PF would define
``securitized asset fund'' as any private fund that is not a hedge
fund and that issues asset backed securities and whose investors are
primarily debt-holders. These definitions are designed to encompass
entities that we believe are typically considered real estate or
securitized asset funds, respectively, and are primarily intended to
exclude these types of funds from our definition of private equity
fund to improve the quality of data reported on Form PF relating to
private equity funds. Proposed Form PF would define ``venture
capital fund'' as any private fund meeting the definition of venture
capital fund in rule 203(l)-1 of the Advisers Act for consistency.
See proposed Glossary of Terms to Form PF. See also Private Fund
Exemption Release, supra note 9, for a discussion of proposed
Advisers Act rule 203(l)-1.
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Our proposed definition of hedge fund would cover any private fund
that has any one of three common characteristics of a hedge fund: A
performance fee using market value (instead of only realized gains),
high leverage or short selling. We are not aware of any standard
definition of a hedge fund,\84\ although we note that our proposed
definition is broadly based on those used in the FSA survey and in the
IOSCO report described in section I.B above and thus generally would
promote international consistency in
[[Page 8076]]
hedge fund reporting.\85\ Moreover, we believe that any fund meeting
this definition is an appropriate subject for this higher level of
reporting even if the fund would not otherwise be considered a hedge
fund.
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\84\ See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (``
`Hedge funds' are notoriously difficult to define. The term appears
nowhere in the federal securities laws, and even industry
participants do not agree upon a single definition.'')
\85\ The FSA survey is voluntary and does not proscriptively
define a hedge fund, but states that if a fund generally satisfies a
number of the following criteria, it should be deemed to fall within
the scope of the FSA hedge fund survey: (1) Employs investment
management techniques that can include the use of short selling,
derivatives, and leverage; (2) takes in external investor money; (3)
are not UCITS funds; (4) pursue absolute returns; (5) charge
performance-based fees; (6) have broader mandates than traditional
funds which give managers more flexibility to shift strategy; (7)
have higher trading volumes/fund turnover; and (8) frequently set a
high minimum investment limit. The IOSCO Report generally considered
as a hedge fund all investment schemes displaying a combination of
some of the following characteristics: (1) Borrowing and leverage
restrictions are not applied; (2) significant performance fees are
paid to the manager in addition to an annual management fee; (3)
investors are typically permitted to redeem their interests
periodically, e.g., quarterly, semi-annually or annually; (4) often
significant `own' funds are invested by the manager; (5) derivatives
are used, often for speculative purposes, and there is an ability to
short sell securities; and (6) more diverse risks or complex
underlying products are involved. See IOSCO Report, supra note 24,
at 4-5.
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The Commissions request comment on the hedge fund definition
proposed in Form PF.\86\ Does this proposed definition capture the
appropriate features of funds that should be subject to more detailed
reporting as ``hedge funds''? Many private funds sell short. Is the
bright line of classifying any private fund that engages in short
selling as a hedge fund appropriate? Is the proposed leverage threshold
for hedge funds set at the appropriate level? One alternative approach
we could take is to not define a hedge fund in Form PF and simply
require that all advisers managing in excess of $1 billion in private
fund assets (regardless of strategy) complete section 2 of Form PF.
Would this be a more effective approach? For purposes of Form PF, a
commodity pool satisfying the definition of a ``private fund'' is
categorized as a hedge fund. Is this treatment appropriate?
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\86\ The SEC previously defined private fund for purposes of
registration of advisers to hedge funds by focusing on the structure
of the fund to differentiate it from other pooled investment
vehicles, while the definition of hedge fund we propose today for
purposes of Form PF reporting focuses on the strategy of the fund in
order to monitor trading strategies and behaviors which could
contribute to systemic risk. See Registration under the Advisers Act
of Certain Hedge Fund Advisers, Investment Advisers Act Release No.
2333 (Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) (rulemaking
vacated, Goldstein, 451 F.3d at 884).
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The proposed definition of liquidity fund is designed to capture
all potential substitutes for money market funds because we believe
these funds may be susceptible to runs and otherwise pose systemic risk
that FSOC will want to monitor. The SEC recognizes that its proposed
definition of liquidity fund potentially could capture some short-term
bond funds. Are there ways that the SEC could define a liquidity fund
to capture all potential substitutes for money market funds, but not
short-term bond funds? The SEC requests comment on the liquidity fund
definition proposed in Form PF.
Our proposed definition of a private equity fund is intended to
distinguish private equity funds from other private funds based upon
the lack of redemption rights and their not being engaged in certain
investment strategies (such as securitization, real estate or venture
capital), while these funds would typically have performance fees based
on realized gains. Has the SEC appropriately distinguished private
equity funds from other types of private funds in its proposed
definition? Should others be excluded? The SEC requests comment on the
private equity fund definition proposed in Form PF.
2. Large Private Fund Adviser Thresholds
As noted above, we are proposing $1 billion in hedge fund assets
under management as the threshold for large hedge fund adviser
reporting, $1 billion in combined liquidity fund and registered money
market fund assets under management as the threshold for large
liquidity fund adviser reporting, and $1 billion in private equity fund
assets under management as the threshold for large private equity fund
adviser reporting. Advisers would be required to measure whether these
thresholds have been crossed daily for hedge funds and liquidity funds
and quarterly for private equity funds based on our belief that, as a
matter of ordinary business practice, advisers are aware of hedge fund
and liquidity fund assets under management on a daily basis, but are
likely to be aware of private equity fund assets under management only
on a quarterly basis. We designed these thresholds so that the group of
Large Private Fund Advisers that would be included based on the
proposed thresholds is relatively small in number but represents the
large majority of their respective industries based on assets under
management. For example, we understand that the approximately 200 U.S.-
based advisers managing at least $1 billion in hedge fund assets
represent over 80 percent of the U.S. hedge fund industry based on
assets under management.\87\ Similarly, SEC staff estimates that the
approximately 250 U.S.-based advisers managing over $1 billion in
private equity fund assets represent approximately 85 percent of the
U.S. private equity fund industry based on committed capital.\88\
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\87\ See HFI, supra note 20.
\88\ Preqin. The Preqin data relating to private equity fund
committed capital is available in File No. S7-05-11.
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The SEC is proposing that private fund advisers combine liquidity
fund and registered money market fund assets for purposes of
determining whether the adviser meets the threshold for more extensive
reporting regarding its liquidity funds because it understands that an
adviser's liquidity funds and registered money market funds often
pursue similar strategies and invest in the same securities and thus
are subject to many of the same risks. Historically, most advisers of
enhanced cash funds or other unregistered money market funds also
advised a substantial amount of registered money market fund assets,
and so the SEC's criteria for liquidity fund reporting is expected to
encompass most significant managers of liquidity funds, which it
estimates number around 80 advisers.\89\
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\89\ See, e.g., iMoneyNet, Enhanced Cash Report (3rd quarter
2009). The estimate of the number of large liquidity fund advisers
is based on the number of advisers with at least $1 billion in
registered money market fund assets under management.
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We believe that requiring basic information from all advisers about
all private funds but more extensive and detailed information only from
advisers with these amounts of assets under management in hedge funds,
private equity funds, and liquidity funds would allow FSOC to
effectively conduct basic monitoring for potential systemic risk in
these private fund industries and to identify areas where OFR may want
to obtain additional information. In addition, requiring that only
these Large Private Fund Advisers complete additional reporting
requirements under Form PF would provide systemic risk information for
most private fund assets while minimizing burdens on smaller private
fund advisers that are less likely to pose systemic risk concerns. The
proposed approach thus incorporates Congress' directive in section 408
of the Dodd-Frank Act to take into account the size, governance, and
investment strategy of advisers to mid-sized private funds in
determining whether they pose systemic risk and formulating systemic
risk reporting and recordkeeping requirements for private funds.\90\
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\90\ We note that the SEC has proposed to collect information
regarding the governance of private fund advisers through Form ADV.
See Implementing Release, supra note 9.
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[[Page 8077]]
We request comment on the proposed thresholds. Are there more
appropriate dividing lines as to when a private fund adviser should be
required to report more information? Should any of the assets under
management thresholds be lower or higher? Are the daily (for hedge fund
and liquidity fund managers) and quarterly (for private equity fund
managers) measurement periods for the assets under management
thresholds set appropriately? Should we, as proposed, base the
threshold on the amount of assets under management? If not, what should
we base it on?
We request comment on our proposed approach of only requiring these
Large Private Fund Advisers to report additional information on Form
PF. Will collecting the information required by sections 2, 3, and 4 of
Form PF only from advisers managing in excess of these asset thresholds
provide adequate information about potential systemic risk in these
industries? Should we instead require that all private fund advisers
registered with the SEC complete all of the information on Form PF
appropriate to the type of private funds they advise regardless of fund
size or assets under management? Are there advisers to other types of
private funds that should be required to report more information on
Form PF? For example, should advisers to other types of private fund
report more information if they manage in excess of a certain threshold
of that type of private fund assets?
3. Aggregation of Assets Under Management
For purposes of determining whether an adviser is a Large Private
Fund Adviser for purposes of Form PF, each adviser would have to
aggregate together:
Assets of managed accounts advised by the firm that pursue
substantially the same investment objective and strategy and invest in
substantially the same positions as the private fund (``parallel
managed accounts''); \91\ and
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\91\ See proposed Instructions 3, 5, and 6 to Form PF; and
proposed Glossary of Terms to Form PF. See also definitions of
``hedge fund assets under management,'' ``liquidity fund assets
under management,'' and ``private equity fund assets under
management'' in the proposed Glossary of Terms to Form PF.
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Assets of that type of private fund advised by any of the
adviser's ``related persons.'' \92\
\92\ See proposed Instructions 3 and 5 to Form PF. ``Related
person'' is defined generally as: (1) All of the adviser's officers,
partners, or directors (or any person performing similar functions);
(2) all persons directly or indirectly controlling, controlled by,
or under common control with the adviser; and (3) all of the
adviser's employees (other than employees performing only clerical,
administrative, support or similar functions). See proposed Glossary
of Terms to Form PF and Glossary of Terms to Form ADV. The adviser
would be permitted, but not required, to file one consolidated Form
PF for itself and its related persons. See section II.B.4 of this
Release below.
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These proposed aggregation requirements are designed to prevent an
adviser from avoiding the proposed Large Private Fund Adviser reporting
requirements by re-structuring the manner of providing private fund
advice internally within the private fund manager group. The adviser
also would be required to exclude any assets in any account that are
solely invested in other funds (i.e., internal or external fund of
funds) in order to avoid duplicative reporting.\93\ We request comment
on these proposed aggregation requirements. Would these proposed
aggregation rules appropriately meet our goal of preventing improper
avoidance of the reporting requirements while giving a complete picture
of private fund assets managed by a particular private fund adviser
group? Would aggregating in a different manner be more effective at
meeting our goal? Should funds that invest most (e.g., 95 percent), but
not all, of their assets in other funds be excluded from Form PF
reporting? Would excluding such funds still provide FSOC with a
complete enough picture of private fund activities to have an adequate
baseline for systemic risk monitoring purposes?
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\93\ See proposed Instruction 7 to Form PF.
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If the adviser's principal office and place of business is outside
the United States, the adviser could exclude any private fund that
during the last fiscal year was neither a United States person nor
offered to, or beneficially owned by, any United States person.\94\
This aspect of the proposed form is designed to allow an adviser to
report with respect to only those private funds that are more likely to
implicate U.S. regulatory interests. We request comment on this aspect
of the proposed form. Should we require different reporting relating to
foreign advisers or foreign private funds?
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\94\ See proposed Instruction 1 to Form PF. ``United States
person'' would have the meaning provided in proposed rule 203(m)-1
of the Advisers Act, and ``principal office and place of business''
would have the same meaning as in Form ADV. See Private Fund
Exemption Release, supra note 9.
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4. Reporting for Affiliated and Subadvised Funds
To provide private fund advisers with reporting flexibility and
convenience, the adviser could, but is not required to, report the
private fund assets that it manages and the private fund assets that
its related persons manage on a single Form PF.\95\ This would allow
affiliated entities that share reporting and risk management systems to
report jointly while also permitting affiliated entities that operate
separately to report separately. With respect to sub-advised funds, to
prevent duplicative reporting, only one adviser would report
information on Form PF with respect to that fund. For reporting
efficiency and to prevent duplicative reporting, we are proposing that
if an adviser completes information on Schedule D of Form ADV with
respect to any private fund, the same adviser would be responsible for
reporting on Form PF with respect to that fund.\96\ We request comment
on this approach. Should we not allow advisers to file a consolidated
form with its related persons? Are there other persons related to a
private fund adviser that should also be able to report on Form PF on a
consolidated basis? For example, should we adjust Form PF to permit
consolidated reporting with related persons that are exempt reporting
advisers in the event an adviser chooses to voluntarily report exempt
reporting adviser information? Should we allow a different arrangement
on reporting of sub-advised funds? If so, what would those arrangements
be?
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\95\ See proposed Instruction 2 to Form PF. See supra note 92
for the definition of ``related person.''
\96\ See proposed Instruction 4 to Form PF.
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5. Exempt Reporting Advisers and Other Advisers Not Registered With the
SEC
We are proposing that only private fund advisers registered with
the SEC (including those that are also registered with the CFTC as CPOs
or CTAs) file Form PF.\97\ The Dodd-Frank Act created exemptions from
SEC registration under the Advisers Act for advisers solely to venture
capital funds or for advisers to private funds that in the aggregate
have less than $150 million in assets under management in the United
States (``exempt reporting advisers'').\98\ We are not proposing that
exempt reporting advisers be required to file Form PF.\99\ We believe
that Congress' determination to exempt these advisers from SEC
registration indicates Congress' belief that they are sufficiently
unlikely to pose systemic risk that regular reporting of detailed
information may not be necessary.\100\ Based on consultation
[[Page 8078]]
with staff representing FSOC's members and on the basic information
that the SEC has proposed requiring exempt reporting advisers report to
the SEC on Form ADV, the SEC is not proposing to extend Form PF
reporting to these advisers.
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\97\ See proposed Advisers Act rule 204(b)-1.
\98\ See Private Fund Exemption Release, supra note 9;
Implementing Release, supra note 9.
\99\ To the extent an exempt reporting adviser is registered
with the CFTC as a CPO or CTA, that adviser would be obligated to
file either proposed Form CPO-PQR or CTA-PR, respectively.
\100\ See Senate Committee Report, supra note 4, at 74 (``The
Committee believes that venture capital funds * * * do not present
the same risks as the large private funds whose advisers are
required to register with the SEC under this title. Their activities
are not interconnected with the global financial system, and they
generally rely on equity funding, so that losses that may occur do
not ripple throughout world markets but are borne by fund investors
alone.''). See also Private Fund Exemption Release, supra note 9.
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Our proposed rules, however, would require some advisers managing
less than $150 million in private fund assets to report limited
information on Form PF. While Congress exempted from registration with
the SEC advisers solely to private funds that in the aggregate have
less than $150 million in assets under management, it provided no such
exemption for advisers with less than $150 million in private fund
assets under management that also, for example, advise individual
clients with over $100 million in assets under management. Because this
latter group of advisers is registered with the SEC and thus is subject
to the full range of investor protection efforts that accompany
registration, and because of the limited burden of the basic reporting,
we believe it is appropriate to require these advisers to complete and
file section 1 of Form PF. We request comment on this approach. Should
we require that exempt reporting advisers file Form PF? \101\ Why or
why not? If so, which portions of Form PF should we require that exempt
reporting advisers complete?
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\101\ Section 404 of the Dodd-Frank Act states that the SEC
``shall issue rules requiring each investment adviser to a private
fund to file reports containing such information as the [SEC] deems
necessary and appropriate in the public interest and for the
protection of investors or for the assessment of systemic risk,''
(emphasis added).
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C. Frequency of Reporting
The Commissions propose to require that all private fund advisers
other than the Large Private Fund Advisers discussed above complete and
file a Form PF on an annual basis. A newly registering adviser's
initial Form PF filing would be submitted within 15 days of the end of
its next occurring calendar quarter after registering with the SEC so
that FSOC can begin including this data in its analysis as soon as
possible.\102\ Annual updates would be due no later than the last day
on which the adviser may timely file its annual updating amendment to
Form ADV (currently, 90 days after the end of the adviser's fiscal
year).\103\ This frequency of reporting would allow the Commissions and
FSOC to periodically monitor certain key information relevant to
assessing systemic risk posed by these private funds on an aggregate
basis. It also would allow these advisers to file amendments at the
same time as they file their Form ADV annual updating amendment, which
may make certain aspects of the reporting more efficient, such as
reporting assets under management. Finally, this timing will facilitate
FSOC's compilation and analysis of Form PF and Form ADV data for these
filers since both sets of data will be reported as of the same date.
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\102\ See proposed rule 204(b)-1(a).
\103\ See proposed Advisers Act rule 204(b)-1(e).
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Large Private Fund Advisers would be required to complete and file
a Form PF no later than 15 days after the end of each calendar
quarter.\104\ Our preliminary view is that, unlike for smaller private
fund advisers, quarterly reporting for Large Private Fund Advisers is
necessary in order to provide FSOC with timely data to identify
emerging trends in systemic risk. We understand that hedge fund
advisers already collect and calculate much of the information that
would be required by Form PF relating to hedge funds on a quarterly
basis.\105\ As a result, quarterly reporting on Form PF would coincide
with most hedge fund advisers' internal reporting cycles and leverage
data collection systems and processes already existing at these
advisers. In addition, we believe that most liquidity fund advisers
collect on a monthly basis much of the information that we are
proposing be reported in section 3 of Form PF and thus quarterly
reporting should be relatively efficient for these advisers. We
anticipate that Large Private Fund Advisers would be able to collect
and file this information within 15 days after the end of each quarter,
which is sufficiently timely for FSOC's use in conducting systemic risk
monitoring.
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\104\ See proposed Instruction 7 to Form PF.
\105\ See Report of the Asset Manager's Committee to the
President's Working Group on Financial Markets, Best Practices for
the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing
best practices on disclosing to investors performance data, assets
under management, risk management practices (including on asset
types, geography, leverage, and concentrations of positions) with
which SEC staff understands many hedge funds comply).
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Advisers would be required to file Form PF to report that they are
transitioning to only filing Form PF annually with the Commissions or
to report that they no longer meet the requirements for filing Form PF
no later than the last day on which the adviser's next Form PF update
would be timely.\106\ This would allow us to determine promptly whether
an adviser's discontinuance in reporting is due to it no longer meeting
the form's reporting thresholds as opposed to a lack of attention to
its filing obligations. Advisers also would be able to avail themselves
of a temporary hardship exemption in a similar manner as with other
Commission filings if they are unable to file Form PF electronically in
a timely manner due to unanticipated technical difficulties.\107\
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\106\ See proposed Instruction 8 to Form PF.
\107\ See proposed rule 204(b) 1(f). The adviser would check the
box in Section 1a of Form PF indicating that it was requesting a
temporary hardship exemption and complete Section 5 of Form PF no
later than one business day after the electronic Form PF filing was
due and submit the filing that is the subject of the Form PF paper
filing in electronic format with the Form PF filing system no later
than seven business days after the filing was due.
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We request comment on our proposed filing frequency. Are the filing
requirements for private fund advisers frequent enough to assess high-
level systemic risk posed by private funds? Should smaller private fund
advisers have to file more frequently or less frequently? Should Large
Private Fund Advisers be required to file Form PF more frequently (such
as monthly) or less frequently (such as annually or semiannually)? Is
90 days for an annual update or 15 days for a quarterly update too long
to ensure reporting of timely information? Would more or less time be
more appropriate? Specifically, would 15 days be enough time for Large
Private Fund Advisers to prepare and file quarterly reports? Is there
information in the form that should be amended promptly if it becomes
inaccurate? Should Large Private Fund Advisers be required to file Form
PF as of the end of each calendar quarter or as of the end of each
fiscal quarter?
Currently, we anticipate that the proposed rules requiring filing
of Form PF would have a compliance date of December 15, 2011, at which
time Large Private Fund Advisers would begin filing 15 days after the
end of each quarter (i.e., Large Private Fund Advisers would need to
make their initial Form PF filing by January 15, 2012). This timing
should allow sufficient time for Large Private Fund Advisers to develop
systems for collecting the information required on Form PF and prepare
for filing. We currently anticipate that this timeframe also would give
the SEC sufficient time to create and program a system to accept
filings of Form PF.\108\ We are proposing
[[Page 8079]]
that the rules allow smaller private fund advisers until 90 days after
the end of their first fiscal year occurring on or after the compliance
date of the proposed rule to file their first Form PF (with the
expectation that this would result in smaller private fund advisers
with a December 31 fiscal year end filing their first Form PF by March
31, 2012) because we anticipate that some of these advisers may require
more time to prepare for their initial Form PF filing and so that the
first group of private fund advisers filing Form PF would all be
reporting based generally on information as of December 31, 2011.\109\
Under this proposed compliance date and transition rule, smaller
private fund advisers would have at least eight months after adoption
of the proposed form, depending on their fiscal year end, to file their
first Form PF. We request comment on when advisers should be required
to comply with the proposed rules and file Form PF. Do the compliance
dates and transition times that we have proposed provide sufficient
time for smaller advisers and Large Private Fund Advisers to prepare
for filing?
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\108\ The SEC will work closely with the firm it selects to
create and program a system for Form PF filings and will monitor
whether it could do so on this timeframe.
\109\ See proposed Advisers Act rule 204(b)-1(g).
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D. Information Required on Form PF
The questions contained in proposed Form PF reflect relevant
requirements and considerations under the Dodd-Frank Act, consultations
with staff representing FSOC's members, and the Commissions' experience
in regulating those private fund advisers that are already registered
with the Commissions. As discussed above, with respect to hedge fund
advisers in particular, the information we propose requiring registered
advisers to file on Form PF also is broadly based on the guidelines
discussed in the IOSCO Report with many of the more detailed items
generally tracking questions contained in the surveys of large hedge
fund advisers conducted by the FSA and other IOSCO members.\110\ We
expect that the information collected on Form PF would assist FSOC in
monitoring and assessing any systemic risk, as discussed in section
II.A above, that may be posed by private funds. We discuss below the
information that Form PF would require.
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\110\ See supra note 24.
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1. Section 1
Section 1 would apply to all investment advisers required to file
Form PF. Item A of Section 1a seeks identifying information about the
adviser, such as its name and the name of any of its related persons
whose information is also reported on the adviser's Form PF. Section 1a
also would require reporting of basic aggregate information about the
private funds managed by the adviser, such as total and net assets
under management, and the amount of those assets that are attributable
to certain types of private funds.\111\ This identifying information
would assist us and FSOC in monitoring the amount of assets managed by
private fund advisers and the general distribution of those assets
among various types of private funds.
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\111\ Section 1 would require the adviser to indicate the
adviser's total ``regulatory assets under management,'' using the
same proposed definition of that term as used on proposed amendments
to Part 1 of Form ADV, and its net assets under management, which
subtracts out any liabilities of the private funds. See Implementing
Release, supra note 9. Form PF, however, would require the adviser
to aggregate parallel managed accounts with related private funds in
reporting its assets under management (even if the accounts are not
``securities portfolios'' within the meaning of proposed Instruction
5.b, Instructions to Part 1A of Form ADV), and thus the total and
net assets under management figures reported in section 1a of Form
PF may differ from what the adviser reports on Form ADV. Proposed
question 2 would require the adviser to report what portion of these
assets under management are attributable to hedge funds, liquidity
funds, private equity funds, real estate funds, securitized asset
funds, venture capital funds, other private funds, and funds and
accounts other than private funds. See section II.B.1 of this
Release for a discussion of these different types of funds and their
proposed definitions for purposes of Form PF.
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Section 1b of Form PF would elicit certain identifying and other
basic information about each private fund advised by the investment
adviser. The adviser generally would need to complete a separate
section 1b for each private fund it advised. However, because feeder
funds typically invest substantially all their assets in a master fund,
to prevent duplicative reporting the adviser must report information in
section 1b on an aggregated basis for private funds that are part of a
master-feeder arrangement and so would not file a separate section 1b
for any feeder fund.\112\
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\112\ See proposed Instructions 5 and 6 to Form PF. When
providing responses in Form PF with respect to a private fund, the
adviser also must include any parallel managed accounts related to
the private fund. Id.
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Section 1b would require reporting of each private fund's gross and
net assets and the aggregate notional value of its derivative
positions.\113\ It also would require basic information about the
fund's borrowings, including a breakdown of the fund's borrowing based
on whether the creditor is a U.S. financial institution, foreign
financial institution or non-financial institution as well as the
identity of, and amount owed to, each creditor to which the fund owed
an amount equal to or greater than 5 percent of the fund's net asset
value as of the reporting date. This section would require reporting of
certain basic information about how concentrated the fund's investor
base is, such as the number of beneficial owners of the fund's equity
and the percentage of the fund's equity held by the five largest equity
holders.\114\ Finally, section 1b would require monthly and quarterly
performance information about each fund.
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\113\ The form would require the adviser to report the total
gross notional value of its funds' derivative positions, except that
options would be reported using their delta adjusted notional value.
Long and short positions would not be netted. See proposed Form PF,
instructions to question 11.
\114\ See proposed question 12 on Form PF.
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The information required by section 1b would allow FSOC to monitor
certain systemic trends for the broader private fund industry, such as
how certain kinds of private funds perform and exhibit correlated
performance behavior under different economic and market conditions and
whether certain funds are taking significant risks that may have
systemic implications.\115\ It would allow FSOC to monitor borrowing
practices for the broader private fund industry, which may have
interconnected impacts on banks (including specific banks) and thus the
broader financial system. We believe that collecting both monthly and
quarterly performance data also would allow FSOC to monitor the data at
sufficient granularity to track trends.
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\115\ This information also would be useful for advancing the
Commissions' investor protection goals.
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Finally, section 1c would require reporting of certain information
only about hedge funds managed by the adviser, such as their investment
strategies, percentage of the fund's assets managed using computer-
driven trading algorithms, significant trading counterparty exposures
(including identity of counterparties),\116\ and trading and clearing
practices.\117\ This information will enable FSOC to
[[Page 8080]]
monitor systemic risk that could be transmitted through counterparty
exposure, track how different strategies are affected by and correlated
with different market stresses, and follow the extent of private fund
activities conducted away from regulated exchanges and clearing
systems. We have based some of this information, such as information
about significant trading counterparty exposures and trading and
clearing practices, on the FSA surveys, which would promote
international consistency in hedge fund reporting.\118\
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\116\ Specifically, proposed questions 19 and 20 on Form PF
would require the adviser to identify the five trading
counterparties to which the fund has the greatest net counterparty
credit exposure (measured as a percentage of the fund's net asset
value) and that have the greatest net counterparty credit exposure
to the fund (measured in U.S. dollars).
\117\ More specifically, proposed question 21 on Form PF would
require estimated breakdowns of percentages of the hedge fund's
securities and derivatives traded on a regulated exchange versus
over the counter and percentages of the hedge fund's securities,
derivatives, and repos cleared by a central clearing counterparty
(``CCP'') versus bilaterally (or, in the case of repos, that
constitute a tri-party repo).
\118\ For example, the FSA survey asks for identification of the
hedge fund's top five counterparties in terms of net credit
exposure. It also asks for estimates of the percentage of the fund's
securities or derivatives traded on a regulated exchange versus over
the counter and the percentage of the fund's derivatives and repos
cleared by a CCP versus bilaterally.
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We request comment on section 1 of proposed Form PF. Is there
additional basic information that we should require from all advisers
filing Form PF or regarding all of the hedge funds or other private
funds that they manage? For example, should we require any of the more
detailed information about their borrowing practices that we require
regarding large hedge funds in Item B of section 2b? Is a creditor
providing 5 percent of the fund's borrowings an appropriate threshold
for significant creditors of whose identity FSOC may want to be aware
for purposes of assessing the fund's interconnectedness in the
financial system? Should the threshold be more or less? Are the top
five equity holders in the fund an appropriate threshold for
significant investors in the fund? Should the threshold be more or
less? Should we require assets under management information for other
private fund categories than those specified in question 4? Should we
request that performance data be reported on a different basis than
monthly and quarterly? Are there other primary investment strategies
that hedge funds use that should be included in question 17? Is the
information we have proposed requiring on the fund's borrowings
necessary given that other questions in section 1b ask for information
on the fund's gross and net assets? Will asking for the amount and
identity of the five trading counterparties to which the fund has the
greatest net counterparty credit exposure and that have the greatest
net counterparty credit exposure to the fund appropriately track
significant exposures for systemic risk assessment purposes? Have we
requested appropriate information on trading and clearing practices
sufficient to allow FSOC to examine systemic risks relating to trading
and clearing outside of regulated exchanges and central clearing
systems? Is there information in section 1 that we should not require,
or that we should only require of large hedge fund advisers and why?
With respect to the aggregation of master-feeder arrangements for
reporting purposes, are there common situations in which an adviser
will not have sufficient access to a feeder fund's information to
report accurately on Form PF? If so, how should the form address those
situations? We also request comment more generally on the definitions
of terms we have proposed in the glossary of terms for Form PF.
2. Section 2
Form PF would require private fund advisers who had at least $1
billion in hedge fund assets under management as of the close of
business on any day during the reporting period to complete section
2.\119\ Section 2a would require certain aggregate information about
the hedge funds advised by Large Private Fund Advisers, such as the
market value of assets invested (on a short and long basis) in
different types of securities and commodities (e.g., different types of
equities, fixed income securities, derivatives, and structured
products). It also would require the adviser to report the duration of
fixed income portfolio holdings (including asset backed securities), to
indicate the assets' interest rate sensitivity, as well as the turnover
rate of the adviser's aggregate portfolios during the reporting period
to provide an indication of the adviser's frequency of trading.
Finally, the adviser would be required to report a geographic breakdown
of investments held by the hedge funds it advises.
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\119\ See section II.B of this Release.
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This information would assist FSOC in monitoring asset classes in
which hedge funds may be significant investors and trends in hedge
funds' exposures to allow FSOC to identify concentrations in particular
asset classes (or in particular geographic regions) that are building
or transitioning over time. It would aid FSOC in examining large hedge
fund advisers' role as a source of liquidity in different asset
classes. In some cases, we are proposing that the information be broken
down into categories that would facilitate FSOC's use of flow of funds
information, which is an important tool for evaluating trends in and
risks to the U.S. financial system.\120\ This information also is
designed to address requirements under section 404 of the Dodd-Frank
Act specifying certain mandatory contents for records and reports that
must be maintained and filed by advisers to private funds. For example,
it would provide information about the types of assets held and trading
and investment positions and practices.
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\120\ For example, we are proposing that in some cases the data
be broken down between issuers that are financial institutions and
those that are not. The FRB publishes flow of funds data, which is
available at http://www.federalreserve.gov/releases/z1/.
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Section 2b of Form PF would require large hedge fund advisers to
report certain additional information about any hedge fund they advise
with a net asset value of at least $500 million as of the close of
business on any day during the reporting period (a ``qualifying hedge
fund'').\121\ For purposes of determining whether a private fund is a
qualifying hedge fund, the adviser would have to aggregate any parallel
managed accounts, parallel funds, and funds that are part of the same
master-feeder arrangement, and would have to treat any private funds
managed by its related person as if they were managed by the filing
adviser.\122\ We are proposing this aggregation to prevent an adviser
from structuring its activities to avoid the reporting requirement. We
have selected $500 million as a threshold for more extensive individual
hedge fund reporting because we believe that a $500 million hedge fund
is a substantial fund the activities of which could have an impact on
particular markets in which it invests or on its particular
counterparties. We also believe that setting this threshold at this
level would minimize reporting burdens on advisers to smaller or start
up hedge funds that are less likely to have a systemic impact. Finally,
this threshold is the same threshold used by the FSA in its hedge fund
surveys and thus would create a certain level of consistency in
reported data.
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\121\ See proposed Instruction 3 to Form PF. Advisers should not
complete section 2 with respect to assets managed by a fund of hedge
funds. See proposed Instruction 7 to Form PF.
\122\ See proposed Instructions 5 and 6 to Form PF. Parallel
funds are a structure in which one or more private funds pursues
substantially the same investment objective and strategy and invests
side by side in substantially the same positions as another private
fund. See proposed Glossary of Terms to Form PF.
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We request comment on the qualifying hedge fund threshold. Should
it be lower or higher? If so, why? Should large hedge fund advisers
have to report the information for all their hedge funds? Could all of
such advisers' hedge funds, in the aggregate, potentially have a
systemic impact that would merit such
[[Page 8081]]
reporting? Should Form PF have different requirements regarding
aggregating parallel managed accounts, parallel funds, or feeder funds
or aggregating hedge funds managed by affiliates?
Section 2b would require reporting of the same information as that
requested in section 2a regarding exposure to different types of
assets.\123\ In this section, however, this information would be
reported separately for each qualifying hedge fund the adviser manages.
Section 2b also would require on a per fund basis data not requested in
section 2a. The adviser would be required to report information
regarding the qualifying hedge fund's portfolio liquidity,
concentration of positions, collateral practices with significant
counterparties, and the identity of, and clearing relationships with,
the three central clearing counterparties to which the fund has the
greatest net counterparty credit exposure.\124\ This information is
designed to assist FSOC in monitoring the composition of hedge fund
exposures over time as well as the liquidity of those exposures. The
information also would aid FSOC in its monitoring of credit
counterparties' unsecured exposure to hedge funds as well as the hedge
fund's exposure and ability to respond to market stresses and
interconnectedness with central clearing counterparties. Finally, some
of this information, such as information about the identity of three
central clearing counterparties to which the fund has the greatest net
counterparty credit exposure and fund asset liquidity information, was
broadly based on information requested by the FSA survey, which would
promote international consistency in hedge fund reporting.\125\
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\123\ See proposed question 26 on Form PF.
\124\ See proposed questions 27-34 on Form PF. For example,
question 28 would require reporting of the percentage of the fund's
portfolio capable of being liquidated within different time periods.
Question 31 would require reporting, for each position that
represents 5% or more of the fund's net asset value, of the
position's portion of the fund's net asset value and sub-asset
class. Questions 32 and 33 would require reporting of initial and
variation margin for collateral securing exposure to the fund's top
five counterparty groups as well as the face amount of letters of
credit posted and certain information on rehypothecation of such
collateral.
\125\ For example, the FSA survey asks for the percentage of the
hedge fund's portfolio that can be liquidated within different time
periods and the identity of the fund's top three CCPs in terms of
net credit exposure.
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Section 2b also would require for each qualifying hedge fund data
regarding certain hedge fund risk metrics, financing information, and
investor information. If during the reporting period the adviser
regularly calculated a value at risk (``VaR'') metric for the
qualifying hedge fund, the adviser would have to report VaR for each
month of the reporting period.\126\ The form also would require the
adviser to report the impact on the fund's portfolio from specified
changes to certain identified market factors, if regularly considered
in the fund's risk management, broken down by the long and short
components of the qualifying hedge fund's portfolio.\127\ This
information is designed to allow FSOC to track basic sensitivities of
the hedge fund to common market sensitivities, correlations in those
factor sensitivities, and trends in those factor sensitivities among
large hedge funds.
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\126\ If VaR was calculated, the adviser would have to report
the confidence interval, time horizon, whether any weighting was
used, and the method used to calculate VaR (historical simulation,
Monte Carlo simulation, parametric, or other). If applicable, the
adviser would have to report the historical lookback period used.
The adviser would also have to report if it did not regularly
calculate VaR. See proposed question 35 on Form PF.
\127\ The market factors are changes in: equity prices, risk
free interest rates, credit spreads, currency rates, commodity
prices, option implied volatilities, ABS default rates, and
corporate bond default rates. Advisers are permitted to omit a
response with respect to any market factor that it did not regularly
consider in the reporting fund's risk management. However, to be
``regularly considered'' in the fund's risk management does not
require that the adviser have conducted stress testing on that
market factor (it could simply mean, for example, that the fund's
risk managers recognized that such a market factor could have an
impact on the fund's portfolio). See proposed question 36 on Form PF
and related instructions.
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Item D of Section 2b would require reporting of certain financing
information for each qualifying hedge fund, including a monthly
breakdown of its secured and unsecured borrowing and its derivatives
exposures as well as information about the value of the collateral and
letters of credit supporting the secured borrowing and derivatives
exposures and the types of creditors. It also would require a breakdown
of the term of the fund's committed financing. This information would
assist FSOC in monitoring the qualifying hedge fund's leverage, the
unsecured exposure of credit counterparties to the fund, and the
committed term of that leverage, which may be important to monitor if
the fund comes under stress. Collecting financing data broken down on a
monthly basis should provide FSOC with sufficient granularity to
identify trends.
Finally, Item E of section 2b would require the private fund
adviser to report information about each qualifying hedge fund's
investor composition and liquidity. For example, it contains questions
about the fund's side pocket and gating arrangements and provides for a
breakdown of the percentage of the fund's net asset value that is
locked in for different periods of time.\128\ We believe this
information may be important in allowing FSOC to monitor the hedge
fund's susceptibility to failure through investor redemptions in the
event the fund experiences stress due to market or other factors.
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\128\ A side pocket is a type of account used by private funds
to separate illiquid assets from other more liquid fund investments.
Only investors in the hedge fund at the time the asset is put in the
side pocket (and not future investors) will be entitled to a share
of proceeds from that investment. A gate is a restriction imposed by
the manager of a private fund on permissible redemptions from the
fund during a certain period of time. The standards for imposing
suspensions and gates may vary among funds, so in responding to
these questions, an adviser would be expected to make a good faith
determination as to which provisions of the reporting fund's
governing documents would likely be triggered during conditions that
it views as significant market stress.
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The information in proposed section 2b also is designed to address
requirements under section 404 of the Dodd-Frank Act for records and
reports that the SEC requires of private fund advisers, such as
monitoring the amount of assets under management and the use of
leverage, counterparty credit risk exposure, trading and investment
positions, and the types of assets held. We request comment on the
information that we propose requiring large hedge fund advisers to
report under section 2. Is there additional information with respect to
the types of their investments, use of leverage, or counterparties that
we should require and why? Have we asked for appropriate time period
breakdowns of the fund's liquidity in terms of asset liquidity,
financing liquidity, and investor liquidity? Is there other information
we could ask to assess hedge funds' potential impact on liquidity in
particular markets? Would the threshold in the proposed form capture
significant central clearing counterparties? Does the proposed form ask
sufficient questions regarding the fund's collateral practices to
ensure that FSOC will be able to monitor the fund's unsecured exposure
to significant counterparties? Should the form require reporting of
hedge funds' investment in different types of instruments or
commodities than those proposed in questions 23 and 27?
Are there risk metrics or additional market factors that we should
require? Should we require the proposed market factors but with
different specified changes? Stress testing is an important metric for
FSOC's assessment of potential systemic risk posed by hedge funds, but
we understand that the type of stress testing conducted varies
[[Page 8082]]
substantially depending on the strategy of the particular hedge fund
and among hedge funds pursuing the same strategy. Is there a better way
for the form to assess the effects of stresses on hedge funds than the
stress testing questions included in the proposed form? Should we
request the geographic breakdown of the hedge fund's investments for
different geographic regions or countries? Are there existing
collections of data broken down by geographic regions or countries with
which we should be consistent? Should we require more or less detailed
information regarding the types of assets in which the fund invests?
Is there information that we should not require and why? Is there
information that we should require large hedge fund advisers to report
regarding all of the hedge funds they manage that we only propose
requiring qualifying hedge funds to report? Is there information in
proposed Form PF that is unlikely to be reported in a comparable or
meaningful fashion such that FSOC would be unable to draw any useful
conclusions or insights for purposes of assessing systemic risk? If so,
how could changes to the question or instructions to the question
improve the utility of the information the form seeks? Are there any
disclosure requirements in the SEC's proposed amendments to Form ADV
(which will be publicly available) that should instead be reported
through Form PF (which will not be publicly available) or vice versa?
\129\
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\129\ See Implementing Release, supra note 9, for a discussion
of the SEC's proposed amendments to Form ADV.
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We request comment more generally on the information we propose
requiring in Form PF with respect to hedge funds and their advisers. Is
there additional information that would be helpful to FSOC in
monitoring for systemic risk with respect to hedge funds?
We note that certain data in the proposed form, while filed with
the Commissions on an annual or quarterly basis, would have to be
reported on a monthly basis. In addition to providing more granular
data to allow FSOC to better identify trends, this aspect of the
proposal is designed to mitigate the ability of an adviser to ``window
dress,'' or manipulate certain reported data to mask activities or
risks undertaken by the private funds it manages.
Is there information that should be broken down further and
reported as of smaller time increments, such as weekly, or as of larger
time increments? Is there information that should be reported to show
ranges, averages, high points, or low points during the reporting
period, rather than as of the last day of the month or quarter? If so
what time period should the range or average cover and how should it be
calculated? We note that we have considered in other contexts different
ways of disclosing information that can fluctuate during a reporting
period.\130\ Are there approaches in these other contexts that should
be used in Form PF? What would be the best method of avoiding ``window
dressing'' in the form and why? Is there information that should not be
reported on a monthly basis or, in contrast, information that should be
reported on a monthly basis (in each case, when the information is
filed with the Commissions quarterly or annually)? Please explain your
response.
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\130\ See Short-Term Borrowings Disclosure, Securities Act
Release No. 9143 (Sept. 17, 2010), at section II.A [75 Fed. Reg.
59866 (Sept. 28, 2010)].
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3. Section 3
Form PF would require private fund advisers advising a liquidity
fund and managing at least $1 billion in combined liquidity fund and
registered money market fund assets as of the close of business on any
day in the reporting period to complete and file the information on
section 3.\131\ As discussed above, to the extent that liquidity funds
function as unregistered substitutes for money market funds or
otherwise share certain basic characteristics of money market funds,
they may be susceptible to runs and thus have the potential to pose
systemic risk.\132\
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\131\ See sections II.A.2 and II.B of this Release for a
discussion of this reporting threshold and the definition of
liquidity fund. For purposes of the $1 billion threshold, an adviser
would have to treat any liquidity funds managed by any of the
adviser's related persons as though they were advised by the
adviser. See proposed Instruction 3 to Form PF. Form PF is a joint
form between the SEC and the CFTC only with respect to sections 1
and 2 of the form. Section 3 of the form, which would require more
specific reporting regarding liquidity funds, would only be required
by the SEC.
\132\ See section II.A.2 of this Release. The SEC also notes
that institutional investors--the principal investors in liquidity
funds--were the primary participants in the run on money market
funds in September 2008, rather than retail investors. See MMF
Reform Proposing Release, supra note 65.
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Section 3 would require that these private fund advisers report
certain information for each liquidity fund they manage. The section
includes questions on whether the fund uses the amortized cost method
of valuation and/or the penny rounding method of pricing in computing
its net asset value per share to help determine how the fund might try
to maintain a stable net asset value that could make the fund more
susceptible to runs.\133\ It asks whether the fund as a matter of
policy is managed in compliance with certain provisions of rule 2a-7
under the Investment Company Act of 1940, which is the principal rule
through which the SEC regulates registered money market funds.\134\
This information would assist FSOC in assessing the extent to which the
liquidity fund is being managed consistent with restrictions imposed on
registered money market funds that might mitigate their likelihood of
posing systemic risk.
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\133\ See proposed questions 43 and 44 of Form PF.
\134\ See proposed question 45 of Form PF. The restrictions in
rule 2a-7 are designed to ensure, among other things, that money
market funds' investing remains consistent with the objective of
maintaining a stable net asset value. Many liquidity funds state in
investor offering documents that the fund is managed in compliance
with rule 2a-7 even though that rule does not apply to liquidity
funds.
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Section 3 also would require reporting of certain information
regarding the liquidity fund's portfolio. For example, it would ask,
for each month of the reporting period, for the fund's net asset value,
net asset value per share, market-based net asset value per share,
weighted average maturity (``WAM''), weighted average life (``WAL''),
7-day gross yield, amount of daily and weekly liquid assets, and amount
of assets with a maturity greater than 397 days.\135\ It also would
require the fund to report the amount of its assets invested in
different types of instruments, broken down by the maturity of those
instruments, as well as information for each open position of the fund
that represents 5 percent or more of the fund's net asset value.\136\
This information would assist FSOC in assessing the risks undertaken by
liquidity funds, their susceptibility to runs, and how their
investments might pose systemic risks either among liquidity funds or
through contagion to registered money market funds.
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\135\ See proposed question 46 of Form PF. WAM, WAL, daily
liquid assets, and weekly liquid assets are to be calculated in
accordance with rule 2a-7 under the Investment Company Act. The 7-
day gross yield is to be calculated consistent with the methodology
required under Form N-MFP, which must be filed by money market funds
registered with the SEC. See 17 CFR 274.201.
\136\ See proposed question 47 of Form PF. Proposed question 48
of Form PF would require reporting for each month of the reporting
period, for each of the fund's positions representing 5% or more of
its net asset value, of the position's portion of the fund's net
asset value and sub-asset class.
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Item C of Section 3 would require reporting of any secured or
unsecured borrowing of the liquidity fund, broken down by creditor type
and the maturity profile of that borrowing, and of whether the fund has
in place a committed liquidity facility. This information would aid
FSOC in monitoring leverage practices among
[[Page 8083]]
liquidity funds and their potential to magnify risks undertaken by the
fund. Finally, Item D of Section 3 would ask for certain information
regarding the concentration of the fund's investor base, gating and
redemption policies, and investor liquidity.\137\ It also would require
reporting of a good faith estimate of the percentage of the fund
purchased using securities lending collateral. The SEC believes this
information would be important in allowing FSOC to monitor the
susceptibility of the liquidity fund to a run in the event the fund
comes under stress and its interconnectedness to securities lending
programs.
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\137\ For example, question 52 would require reporting of the
percentage of the reporting fund's equity that is beneficially owned
by the beneficial owner having the largest equity interest in the
fund and of how many investors beneficially own 5% or more of the
fund's equity.
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The SEC requests comment on the information that it proposes
requiring in section 3. Is there additional information that the SEC
should require? For example, is there information that the SEC requires
to be reported for registered money market funds on Form N-MFP that the
SEC also should require to be reported on Form PF for liquidity funds?
Should the SEC require reporting of more specific information about the
holdings or types of holdings of these liquidity funds? Is the
threshold for when the private fund adviser is required to report
information in section 3 for an individual liquidity fund appropriate
for purposes of FSOC to be able to monitor for potential systemic risk
in this sector? Is five percent an appropriate threshold for
considering a liquidity fund investment or investor to be significant
for purposes of Form PF reporting? Is our proposed breakdown of the
liquidity fund's asset maturity and investor liquidity appropriate?
4. Section 4
The SEC is proposing that section 4 of Form PF require private fund
advisers managing at least $1 billion in private equity fund assets as
of the close of business on the last day of the reporting period to
report certain information about each private equity fund they
manage.\138\ Section 4 would require reporting of certain information
about the fund's borrowings and guarantees and the leverage of the
portfolio companies in which the fund invests. Specifically, section 4
would require information about the outstanding balance of the fund's
borrowings and guarantees.\139\ It also would require the adviser to
report the weighted average debt-to-equity ratio of controlled
portfolio companies in which the fund invests and the range of that
debt to equity ratio among these portfolio companies.\140\ It asks for
the maturity profile of its portfolio companies' debt, for the portion
of that debt that is payment-in-kind or zero coupon, and whether the
fund or any of its portfolio companies experienced an event of default
on any of its debt during the reporting period.\141\ It also asks for
the identity of the institutions providing bridge financing to the
adviser's portfolio companies and the amount of that financing.\142\
The SEC believes that this information would allow FSOC to assess to
what extent private equity funds use leverage and the potential
exposure of banks and other lending providers to the larger private
equity funds and their portfolio companies and leverage among portfolio
companies of the larger private equity funds to monitor whether trends
in those areas could pose systemic implications for the portfolio
companies' lenders.
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\138\ See section II.B of this Release for a discussion of this
reporting threshold and the definition of ``private equity fund.''
Form PF is a joint form between the SEC and the CFTC only with
respect to sections 1 and 2 of the form. Section 4 of the form,
which would require more specific reporting regarding private equity
funds, would only be required by the SEC.
\139\ See proposed questions 57 and 58.
\140\ See proposed questions 59-61. A ``controlled portfolio
company'' is defined as a portfolio company that is controlled by
the private equity fund, either alone or together with the private
equity fund's related persons or other persons that are part of a
club or consortium investing in the portfolio company. ``Control''
has the same meaning as used in Form ADV, and generally means the
power, directly or indirectly, to direct the management or policies
of a person, whether through ownership of securities, by contract,
or otherwise. See proposed Glossary of Terms to Form PF; Glossary of
Terms to Form ADV.
\141\ See proposed questions 62-64.
\142\ See proposed question 65.
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Section 4 also would require reporting of certain information if
the fund invests in any financial industry portfolio company, such as
its name, its debt-to-equity ratio, and the percentage of the portfolio
company beneficially owned by the fund.\143\ This information would
allow FSOC to monitor large private equity funds' investments in
companies that may be particularly important to the stability of the
financial system. Section 4 also would ask whether any of the adviser's
related persons co-invest in any of the fund's portfolio
companies.\144\ Finally, the form would require a breakdown of the
fund's investments by industry and by geography, which should provide
FSOC with basic information about global and industry concentrations
that may be relevant to monitoring risk exposures in the financial
system.\145\
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\143\ See proposed question 66. A ``financial industry portfolio
company'' generally is defined as a nonbank financial company, as
defined by section 102(a)(4) of the Dodd-Frank Act, bank or savings
association, bank holding company or financial holding company,
savings and loan holding company, credit union, or Farm Credit
System institution. See proposed Glossary of Terms to Form PF.
\144\ See proposed question 69.
\145\ See proposed questions 67 and 68. Industries would be
identified using NAICS codes. ``NAICS'' stands for the ``North
American Industry Classification System,'' and is a system of
industry classifications commonly used in the financial industry.
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The SEC requests comment on the information it proposes requiring
regarding private equity funds in section 4. Is there additional
information that the SEC should request and why? For example, are their
additional lending practices used in leveraged buyouts about which the
form should collect information? Are there particular industries in
which private equity funds might invest that could be systemically
important? Should the Form ask additional questions specific to those
industries? Should the form track private equity fund investments in
different geographic and/or industry concentrations than those we have
proposed? Should the SEC request less information and why? Should the
SEC not require any reporting on Form PF specific to private equity
funds? Why or why not?
E. Filing Fees and Format for Reporting
Under proposed Advisers Act rule 204(b)-1(b), Form PF would need to
be filed through an electronic system designated by the SEC for this
purpose. There may be efficiencies realized if the current Investment
Adviser Registration Depository (``IARD'') platform, which is operated
by the Financial Industry Regulatory Authority, were expanded for this
purpose, such as the possible interconnectivity of Form ADV filings and
Form PF filings, and possible ease of filing with one password. The
filing system would need to have certain features, including being
programmed with special confidentiality protections designed to ensure
the heightened confidentiality protections created for Form PF filing
information under the Dodd-Frank Act but to allow for secure access by
FSOC and other regulators as permitted under the Dodd-Frank Act.
The SEC separately will decide on the system to be selected for the
electronic filing of Form PF. That determination will be reflected in a
separate notice.
Under the proposed rule, advisers required to file Form PF would be
required to pay to the operator of the Form PF filing system fees that
have
[[Page 8084]]
been approved by the SEC.\146\ We anticipate that Large Private Fund
Advisers' filing fees would be set at a higher amount because their
filings would be responsible for a larger proportion of system needs
due to their more frequent and extensive filings. The SEC in a separate
action would approve filing fees that reflect the reasonable costs
associated with the filings and the establishment and maintenance of
the filing system.\147\
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\146\ See proposed Advisers Act rule 204(b)-1(d).
\147\ See section 204(c) of the Advisers Act.
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While we are not requiring that the information be filed in
eXtensible Markup Language (``XML'') tagged data format, we expect to
look for a filing system that could accept information filed in XML
format. We intend to establish data tags to allow Form PF to be
submitted in XML format with the SEC. Accordingly, advisers would be
able to file the information in Form PF in XML format if they choose.
We believe that certain advisers may prefer to report in XML format
because it allows them to automate aspects of their reporting and thus
minimize burdens and generate efficiencies for the adviser. We
anticipate that we may eventually require Form PF filers to tag data
submitted on Form PF using a refined, future taxonomy defined by us,
working in collaboration with the industry. Thereafter, the usability
of data contained in Form PF is expected to increase greatly because
tagged data would be easier to sort and analyze. We note that private
initiatives are underway to create such taxonomies.\148\ We request
comment on our proposed system of electronic filing. Should we require
that all filings be done in XML format? Should we allow or require the
form to be provided in a format other than XML, such as eXtensible
Business Reporting Language (``XBRL'')? Is there another format that is
more widely used or would be more appropriate for the required data?
Should smaller and/or Large Private Fund Advisers be charged different
amounts than what we have anticipated charging? If so, why?
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\148\ See, e.g., http://www.operastandards.org.
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III. General Request for Comment
The Commissions request comment on the rules and form proposed in
this Release and comment on other matters that might have an effect on
the proposals contained in this Release. Commenters should provide
empirical data to support their views.
IV. Paperwork Reduction Act
CFTC
Proposed CEA rule 4.27(d) does not impose any additional burden
upon registered CPOs and CTAs that are dually registered as investment
advisers with the SEC. By filing the Form PF with the SEC, these dual
registrants would be deemed to have satisfied certain of their filing
obligations with the CFTC, and the CFTC is not imposing any additional
burdens herein. Therefore, any burden imposed by Form PF through
proposed CEA rule 4.27(d) on entities registered with both the CFTC and
the SEC has been accounted for within the SEC's calculations regarding
the impact of this collection of information under the Paperwork
Reduction Act of 1995 (``PRA'').\149\
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\149\ 44 U.S.C. 3501-3521.
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SEC
Section 404 of the Dodd-Frank Act, which amends section 204(b) of
the Advisers Act, directs the SEC to require private fund advisers to
file reports containing such information as the SEC deems necessary and
appropriate in the public interest and for investor protection or for
the assessment of systemic risk. Proposed rule 204(b)-1 and Form PF
under the Advisers Act, which would implement this requirement of the
Dodd-Frank Act. Proposed Form PF contains a new ``collections of
information'' within the meaning of the PRA.\150\ The title for the new
collection of information is: ``Form PF under the Investment Advisers
Act of 1940, reporting by investment advisers to private funds.'' For
purposes of this PRA analysis, the paperwork burden associated with the
requirements of proposed rule 204(b)-1 is included in the collection of
information burden associated with proposed Form PF and thus does not
entail a separate collection of information. The SEC is submitting this
collection of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number.
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\150\ 44 U.S.C. 3501-3521.
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Proposed Form PF is intended to provide FSOC with information that
would facilitate fulfillment of its obligations under the Dodd-Frank
Act relating to nonbank financial companies and systemic risk
monitoring.\151\ The SEC also may use the information in connection
with its regulatory and examination programs. The respondents to Form
PF would be private fund advisers.\152\ Compliance with proposed Form
PF would be mandatory for any private fund adviser. Smaller private
fund advisers would be required to file Form PF only on an annual
basis. These smaller private fund advisers would provide a limited
amount of basic information about the operations of the private funds
they advise.\153\ Large Private Fund Advisers would be required to file
Form PF on a quarterly basis reporting additional information regarding
the private funds they advise. The PRA analysis set forth below takes
into account the fact that the additional information proposed Form PF
would require that large hedge fund advisers report would be more
extensive than the additional information required from large liquidity
fund advisers, which in turn would be more extensive than that required
from large private equity fund advisers.\154\
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\151\ See sections I.A and II.A of this Release.
\152\ The requirement to file the form would apply to investment
advisers registered, or required to register, with the SEC that
advise one or more private funds. See proposed rule 204(b)-1(a). It
would not apply to state-registered investment advisers or exempt
reporting advisers.
\153\ See section II.B of this Release for a description of who
would be required to file Form PF, section II.C of this Release for
information regarding the frequency with which smaller private fund
advisers would be required to file Form PF, and section II.D.1 of
this Release for a description of the information that smaller
private fund advisers would be required to report on Form PF. See
also proposed Instruction 8 to Form PF for information regarding the
frequency with which smaller private fund advisers would be required
to file Form PF.
\154\ See section II.B of this Release for a description of who
would be required to file Form PF, section II.C of this Release for
information regarding the frequency with which Large Private Fund
Advisers would be required to file Form PF, section II.D.2 of this
Release for a description of the information that large hedge fund
advisers would be required to report on Form PF, and sections II.D.3
and II.D.4 of this Release for a description of the information that
large liquidity and private equity fund advisers would be required
to report on Form PF. See also proposed Instruction 8 to Form PF for
information regarding the frequency with which Large Private Fund
Advisers would be required to file Form PF.
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As discussed in section II.B of this Release, the SEC has sought to
minimize the reporting burden on private fund advisers to the extent
appropriate. In particular, the SEC has designed the reporting
frequency based on when it understands advisers to private funds are
already collecting certain information that Form PF would require. In
addition, the SEC has based certain more specific reporting items on
information that it understands large hedge fund advisers frequently
collect
[[Page 8085]]
for purposes of reporting to investors in the funds.\155\
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\155\ See Report of the Asset Manager's Committee to the
President's Working Group on Financial Markets, Best Practices for
the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing
best practices on disclosing to investors performance data, assets
under management, and risk management practices (including on asset
types, geography, leverage, and concentrations of positions) with
which we understand many hedge funds comply).
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The information that Form PF would require would be filed through
an electronic filing system expected to be operated by an entity
designated by the SEC. Responses to the information collections would
be kept confidential to the extent permitted by law.\156\
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\156\ See supra note 39 and accompanying text.
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A. Burden Estimates for Annual Reporting by Smaller Private Fund
Advisers
In the Implementing Release, the SEC estimated that 3,500 currently
registered advisers would become subject to the private fund reporting
requirements included in the proposed amendments to Form ADV.\157\ The
SEC further estimated that 200 advisers to private funds would register
with the SEC as a result of normal growth in the population of
registered advisers and that 750 advisers to private funds would
register as a result of the Dodd-Frank Act's elimination of the private
adviser exemption.\158\ As a result, the SEC estimates that a total of
approximately 4,450 registered investment advisers would become subject
to the proposed private fund reporting requirements in Form ADV.\159\
Because these advisers would also be required to report on Form PF, the
SEC accordingly estimates that approximately 4,450 advisers would be
required to file all or part of Form PF.\160\ Out of this total number,
the SEC estimates that approximately 3,920 would be smaller private
fund advisers, not meeting the thresholds for reporting as Large
Private Fund Advisers.\161\
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\157\ See section V.B.2.a.ii of the Implementing Release. As
proposed in the Implementing Release, advisers to private funds
would be required to complete Item 7.B and Section 7.B of Schedule D
to the amended Form ADV.
\158\ Id. The estimates of registered private fund advisers are
based in part on the number of advisers that reported a fund in
Section 7.B of Schedule D to the current version of Form ADV.
Because these responses include funds advised by a related person
rather than the adviser, these data may over-estimate the total
number of private fund advisers.
\159\ 3,500 currently registered advisers to private funds + 200
advisers to private funds registering as a result of normal growth +
750 newly registered advisers to private funds = 4,450 advisers.
\160\ If a private fund is advised by both an adviser and one or
more subadvisers, only one of these advisers would be required to
complete Form PF. See section II.B.4 of this Release. As a result,
it is likely that some portion of these advisers either would not be
required to file Form PF or would be subject to a reporting burden
lower than is estimated for purposes of this PRA analysis. The SEC
has not attempted to adjust the burden estimates downward for this
purpose because the SEC does not currently have reliable data with
which to estimate the number of funds that have subadvisers.
\161\ Based on the estimated total number of registered private
fund advisers that would not meet the thresholds to be considered
Large Private Fund Advisers. (4,450 estimated registered private
fund advisers -200 large hedge fund advisers -80 large liquidity
fund advisers -250 large private equity fund advisers = 3,920
smaller private fund advisers.)
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Smaller private fund advisers would be required to complete all or
portions of section 1 of Form PF and to file on an annual basis. As
discussed in greater detail above, section 1 would require basic data
regarding the reporting adviser's identity and certain information
about the private funds it manages, such as performance, leverage, and
investor concentration data.\162\ If the reporting adviser advises any
hedge funds, section 1 also would require basic information regarding
those funds, including their investment strategies, trading
counterparty exposures, and trading and clearing practices.
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\162\ See supra section II.D.1.
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Based on the SEC's experience with other data filings, it estimates
that smaller private fund advisers would require an average of
approximately 10 burden hours to compile, review and electronically
file the required information in section 1 of Form PF for the initial
filing and an average of approximately 3 burden hours for subsequent
filings.\163\ Accordingly, the amortized average annual burden of
periodic filings would be 5 hours per smaller private fund adviser for
each of the first three years,\164\ and the amortized aggregate annual
burden of periodic filings for smaller private fund advisers would be
19,600 hours for each of the first three years.\165\
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\163\ These estimates reflect the SEC's understanding that much
of the information in section 1 of Form PF is currently maintained
by most private fund advisers in the ordinary course of business. In
addition, the time required to determine a private fund adviser's
aggregate assets under management and the amount of assets under
management that relate to private funds of various types largely is
expected to be included in the approved burden associated with the
SEC's Form ADV (this information would only differ if the adviser
managed parallel managed accounts). As a result, responding to
questions on Form PF that relate to assets under management and
determining whether an adviser is a Large Private Fund Adviser
should impose little or no additional burden on private fund
advisers.
\164\ The SEC estimates that a smaller private fund adviser
would make 3 annual filings in three years, for an amortized average
annual burden of 5 hours (1 initial filing x 10 hours + 2 subsequent
filings x 3 hours = 16 hours; and 16 hours / 3 years = approximately
5 hours). After the first three years, filers generally would not
incur the start-up burdens applicable to the first filing.
\165\ 5 burden hours on average per year x 3,920 smaller private
fund advisers = 19,600 burden hours per year.
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B. Burden Estimates for Quarterly Reporting by Large Private Fund
Advisers
The SEC estimates that 530 of the private fund advisers registered
with the SEC would meet one or more of the thresholds for reporting as
Large Private Fund Advisers.\166\ As discussed in section II.D above,
Large Private Fund Advisers would be required to report more
information on Form PF than smaller private fund advisers and would be
required to report on a quarterly basis. The amount of additional
information reported by a Large Private Fund Adviser would depend, in
part, on whether it is a large hedge fund adviser, a large liquidity
fund adviser, or large private equity fund adviser. A large hedge fund
adviser would be required to report more information with respect to
itself and the funds it advises than would a large liquidity fund
adviser, which in turn would report more information than a large
private equity fund adviser.\167\ Of the total number of Large Private
Fund Advisers, the SEC estimates that 200 are large hedge fund
advisers, 80 are large liquidity fund advisers, and 250 are large
private equity fund advisers.\168\
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\166\ See section II.B.2 of this Release for estimates of the
numbers of large hedge fund advisers, large liquidity fund advisers,
and large private equity fund advisers. (200 large hedge fund
advisers + 80 large liquidity fund advisers + 250 large private
equity fund advisers = 530 Large Private Fund Advisers.)
\167\ See supra sections II.D.2, II.D.3 and II.D.4.
\168\ See supra section II.B.2.
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Because the proposed reporting requirements on Form PF for large
hedge fund advisers would be the most extensive of the Large Private
Fund Advisers, the SEC estimates that these advisers would require, on
average, more hours than other Large Private Fund Advisers to configure
systems and to compile, review and electronically file the required
information. Accordingly, the SEC estimates that large hedge fund
advisers would require an average of approximately 75 burden hours for
an initial filing and 35 burden hours for each subsequent filing.\169\
In
[[Page 8086]]
contrast, large liquidity fund advisers, which would report more
information than smaller private fund advisers or large private equity
fund advisers but less information than large hedge fund advisers,
would require an average of approximately 35 burden hours for an
initial filing and 16 burden hours for each subsequent filing. Finally,
the SEC estimates that large private equity fund advisers, which would
report more information than smaller private fund advisers but less
than other Large Private Fund Advisers, would require an average of
approximately 25 burden hours for an initial filing and 12 burden hours
for each subsequent filing. Based on these estimates, the amortized
average annual burden of periodic filings would be 153 hours per large
hedge fund adviser,\170\ 70 hours per large liquidity fund
adviser,\171\ and 52 hours per large private equity fund adviser, in
each case for each of the first three years.\172\ In the aggregate, the
amortized annual burden of periodic filings would then be 30,600 hours
for large hedge fund advisers,\173\ 5,600 hours for large liquidity
fund advisers,\174\ and 13,000 hours for large private equity fund
advisers,\175\ in each case for each of the first three years.
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\169\ The estimates of hour burdens and costs for Large Private
Fund Advisers provided in the Paperwork Reduction Act and cost
benefit analyses are based on burden data provided by advisers in
response to the FSA hedge fund survey and on the experience of SEC
staff. These estimates also assume that some Large Private Fund
Advisers will find it efficient to automate some portion of the
reporting process, which would increase the burden of the initial
filing but reduce the burden of subsequent filings, which has been
taken into consideration in our burden estimates.
\170\ The SEC estimates that a large hedge fund adviser would
make 12 quarterly filings in three years, for an amortized average
annual burden of 153 hours (1 initial filing x 75 hours + 11
subsequent filings x 35 hours = 460 hours; and 460 hours / 3 years =
approximately 153 hours). After the first three years, filers
generally would not incur the start-up burdens applicable to the
first filing.
\171\ The SEC estimates that a large liquidity fund adviser
would make 12 quarterly filings in three years, for an amortized
average annual burden of 70 hours (1 initial filing x 35 hours + 11
subsequent filings x 16 hours = 211 hours; and 211 hours / 3 years =
approximately 70 hours). After the first three years, filers
generally would not incur the start-up burdens applicable to the
first filing.
\172\ The SEC estimates that a large private equity fund adviser
would make 12 quarterly filings in three years, for an amortized
average annual burden of 52 hours (1 initial filing x 25 hours + 11
subsequent filings x 12 hours = 157 hours; and 157 hours / 3 years =
approximately 52 hours). After the first three years, filers
generally would not incur the start-up burdens applicable to the
first filing.
\173\ 153 burden hours on average per year x 200 large hedge
fund advisers = 30,600 hours.
\174\ 70 burden hours on average per year x 80 large liquidity
fund advisers = 5,600 hours.
\175\ 52 burden hours on average per year x 250 large private
equity fund advisers = 13,000 hours.
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C. Burden Estimates for Transition Filings, Final Filings and Temporary
Hardship Exemption Requests
In addition to periodic filings, a private fund adviser would be
required to file very limited information on Form PF in three
situations.
First, any adviser that transitions from quarterly to annual filing
because it has ceased to be a Large Private Fund Adviser would be
required to file a Form PF indicating that it is no longer obligated to
report on a quarterly basis. The SEC estimates that approximately 9
percent of Large Private Fund Advisers would need to make a transition
filing each year with a burden of 0.25 hours, or a total of 12 burden
hours per year for all private fund advisers.\176\
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\176\ Estimate is based on IARD data on the frequency of
advisers to one or more private funds ceasing to have assets under
management sufficient to cause them to be Large Private Fund
Advisers. (530 Large Private Fund Advisers x 0.09 x 0.25 hours = 12
hours.)
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Second, filers who are no longer subject to Form PF's periodic
reporting requirements would file a final report indicating that fact.
The SEC estimates that approximately 8 percent of the advisers required
to file Form PF would have to file such an amendment each year with a
burden of 0.25 of an hour, or a total of 89 burden hours per year for
all private fund advisers.\177\
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\177\ Estimate is based on IARD data on the frequency of
advisers to one or more private funds withdrawing from SEC
registration. (4,450 private fund advisers x 0.08 x 0.25 hours = 89
hours.)
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Finally, an adviser experiencing technical difficulties in
submitting Form PF may request a temporary hardship exemption by filing
portions of Form PF in paper format.\178\ The information that must be
filed is comparable to the information that Form ADV filers provide on
Form ADV-H when requesting a temporary hardship exemption relating to
that form. In the case of Form ADV-H, the SEC has estimated that the
average burden of filing is 1 hour and that approximately 1 in every
1,000 advisers will file annually.\179\ Assuming that Form PF filers
request hardship exemptions at the same rate and that the applications
impose the same burden per filing, the SEC would expect approximately 4
filers to request a temporary hardship exemption each year \180\ for a
total of 4 burden hours.\181\
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\178\ See proposed SEC rule 204(b)-1(f). The proposed rule would
require that the adviser complete and file Item A of Section 1a and
Section 5 of Form PF, checking the box in Section 1a indicating that
the filing is a request for a temporary hardship exemption.
\179\ See section V.F of the Implementing Release.
\180\ 4,450 private fund advisers x 1 request per 1,000 advisers
= approximately 4 advisers.
\181\ 4 advisers x 1 hour per response = 4 hours.
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D. Aggregate Burden Estimates
Based on the foregoing, the SEC estimates that Form PF would result
in an aggregate of 68,905 burden hours per year for all private fund
advisers for each of the first three years, or 15 burden hours per year
on average for each private fund adviser over the same period.\182\
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\182\ 19,600 hours for periodic filings by smaller advisers +
30,600 hours for periodic filings by large hedge fund advisers +
5,600 hours for periodic filings by large liquidity fund advisers +
13,000 hours for periodic filings by large private equity fund
advisers + 12 hours per year for transition filings + 89 hours per
year for final filings + 4 hours per year for temporary hardship
requests = approximately 68,905 hours per year. 68,905 hours per
year / 4,450 total advisers = 15 hours per year on average.
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E. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to:
(i) Evaluate whether the proposed amendments to the collection of
information are necessary for the proper performance of the functions
of the SEC, including whether the information would have practical
utility; (ii) evaluate the accuracy of the SEC's estimate of the burden
of the proposed collection of information; (iii) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (iv) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology. In particular,
would private fund advisers seek to automate all or part of their Form
PF reporting obligations? Would automation be efficient only for Large
Private Fund Advisers, or would smaller private fund advisers also be
able to automate efficiently? What is the likely burden of automation?
Would advisers use internal personnel or pay outside service providers
to make needed system modifications or to perform all or part of their
Form PF reporting obligations? If outside service providers are used,
what is the likely cost and how would it impact our estimates of
internal costs and hourly burdens for the proposed reporting?
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Room 10102,
New Executive Office Building, Washington, DC 20503, and also should
send a copy of their comments to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090 with reference to File No. S7-05-11. Requests for materials
submitted to OMB by the Commission with regard to this collection of
information should be
[[Page 8087]]
in writing, refer to File No. S7-05-11, and be submitted to the
Securities and Exchange Commission, Office of Investor Education and
Advocacy, 100 F Street, NE., Washington, DC 20549-0213. OMB is required
to make a decision concerning the collections of information between 30
and 60 days after publication of this Release. Therefore, a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days after publication of this Release.
V. CFTC Cost-Benefit Analysis
Section 15(a) of the CEA \183\ requires the CFTC to consider the
costs and benefits of its actions before issuing rules, regulations, or
orders under the CEA. By its terms, section 15(a) does not require the
CFTC to quantify the costs and benefits of its rules, regulations or
orders or to determine whether the benefits outweigh the costs. Rather,
section 15(a) requires that the CFTC ``consider'' the costs and
benefits of its actions. Section 15(a) further specifies that the costs
and benefits shall be evaluated in light of the following five broad
areas of concern: (1) Protection of market participants and the public;
(2) efficiency, competitiveness and financial integrity of futures
markets; (3) price discovery; (4) sound risk management practices; and
(5) other public interest considerations. The CFTC may in its
discretion give greater weight to any one of the five enumerated areas
and could in its discretion determine that, notwithstanding the costs,
a particular rule, regulation, or order is necessary or appropriate to
protect the public interest or to effectuate any of the provisions or
accomplish any of the purposes of the CEA.
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\183\ See 5 U.S.C. 801(a)(1)(B)(i).
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The proposed rule 4.27(d) would deem a CPO registered with the CFTC
that is dually registered as a private fund adviser with the SEC to
have satisfied its filing requirements for Schedules B and C of
proposed Form CPO-PQR by completing and filing the applicable portions
of Form PF for each of its commodity pools that satisfy the definition
of ``private fund'' in the Dodd-Frank Act. Under the proposed rule,
most of the CPOs and CTAs that are dually registered as private fund
advisers would be required to provide annually a limited amount of
basic information on Form PF about the operations of their private
funds. Only large CPOs and CTAs that are also registered as private
fund advisers with the SEC would have to submit on a quarterly basis
the full complement of systemic risk related information required by
Form PF.
As noted above, the Dodd-Frank Act tasks FSOC with monitoring the
financial services marketplace in order to identify potential threats
to the financial stability of the United States.\184\ The Dodd-Frank
Act also requires FSOC to collect information from member agencies to
support its functions.\185\ The CFTC and the SEC are jointly proposing
sections 1 and 2 of Form PF as a means to collect the information
necessary to permit FSOC to fulfill its obligation to monitor private
funds, and in order to identify any potential systemic threats arising
from their activities. The CFTC and the SEC do not currently collect
the information that is covered in proposed sections 1 and 2 of Form
PF.
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\184\ See section 112(a)(2)(C) of the Dodd-Frank Act.
\185\ See section 112(d)(1) of the Dodd-Frank Act.
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With respect to costs, the CFTC has determined that: (1) Without
the proposed reporting requirements imposed on dually-registered CPOs
and CTAs, FSOC will not have sufficient information to identify and
address potential threats to the financial stability of the United
States (such as the near collapse of Long Term Capital Management); (2)
the proposed reporting requirements, once finalized, will provide the
CFTC with better information regarding the business operations,
creditworthiness, use of leverage, and other material information of
certain registered CPOs and CTAs that are also registered as investment
advisers with the SEC; and (3) while they are necessary to U.S.
financial stability, the proposed reporting requirements will create
additional compliance costs for these registrants.
The CFTC has determined that the proposed reporting requirements
will provide a benefit to all investors and market participants by
providing the CFTC and other policy makers with more complete
information about these registrants and the potential risk their
activities may pose to the U.S. financial system. In turn, this
information would enhance the CFTC's ability to appropriately tailor
its regulatory policies to the commodity pool industry and its
operators and advisors. As mentioned above, the CFTC and the SEC do not
have access to this information today and have instead been made to use
information from other, less reliable sources.
The CFTC invites public comment on its cost-benefit considerations
as concerns sections 1 and 2 of Form PF. Commenters are also invited to
submit any data and other information that they may have quantifying or
qualifying the perceived costs and benefits of this proposed rule with
their comment letters.
VI. SEC Economic Analysis
As discussed above, the Dodd-Frank Act amended the Advisers Act to,
among other things, authorize and direct the SEC to promulgate
reporting requirements for private fund advisers. In enacting Sections
404 and 406 of the Dodd-Frank Act, Congress determined to require that
private fund advisers file reports with the SEC and specified certain
types of information that should be subject to reporting and/or
recordkeeping requirements, but Congress left to the SEC the
determination of the specific information to be maintained or reported.
When determining the form and content of such reports, the SEC may
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 system risk.
The SEC is proposing rule 204(b)-1 and Form PF, to implement the
private fund adviser reporting requirements that the Dodd-Frank Act
contemplates. Under the proposed rule, private fund advisers would be
required to file information responsive to all or portions of Form PF
on a periodic basis. The scope of the required information and the
frequency of the reporting would be related to the amount of private
fund assets that each private fund adviser manages and the type of
private fund to which those assets relate. Specifically, smaller
private fund advisers would be required to report annually and provide
only basic information regarding their operations and the private funds
they advise, while Large Private Fund Advisers would report on a
quarterly basis and provide more information.\186\
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\186\ See section II.B of this Release for a description of who
would be required to file Form PF, section II.C of this Release for
information regarding the frequency with which private fund advisers
would be required to file Form PF, and section II.D of this Release
for a description of the information that private fund advisers
would be required to report on Form PF. See also proposed
Instruction 8 to Form PF for information regarding the frequency
with which private fund advisers would be required to file Form PF.
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The SEC is sensitive to the costs and benefits imposed by its
rules. It has identified certain costs and benefits of proposed
Advisers Act rule 204(b)-1 and Form PF, and it requests comment on all
aspects of the cost-benefit analysis below, including identification
and assessment of any costs and benefits not discussed in this
analysis. In
[[Page 8088]]
connection with its consideration of the costs and benefits, the SEC
also has considered whether the proposal would promote efficiency,
competition, and capital formation. Section 202(c) of the Advisers Act
requires the SEC, when engaging in rulemaking that requires it to
consider or determine whether an action is necessary or appropriate in
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation.\187\
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\187\ 15 U.S.C. 80b-2(c).
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The SEC seeks comment and data on the value of the benefits
identified. It also welcomes comments on the accuracy of the cost
estimates in this analysis, and requests that commenters provide data
that may be relevant to these cost estimates. In addition, the SEC
seeks estimates and views regarding these costs and benefits for
particular covered advisers, including small advisers, as well as any
other costs or benefits that may result from the adoption of the
proposed rule and form.
Because proposed Advisers Act rule 204(b)-1 and Form PF would
implement sections 404 and 406 of the Dodd-Frank Act, the benefits and
costs considered by Congress in passing the Dodd-Frank Act are not
entirely separable from the benefits and costs imposed by the SEC in
designing the proposed rule and form. Accordingly, although the PRA
hourly burden estimates discussed above, and their corresponding dollar
cost estimates, are included in full below and in the PRA analysis
above, a portion of the reporting costs is attributable to the
requirements of the Dodd-Frank Act and not specific requirements of the
proposed rule or form.
A. Benefits
The SEC believes Form PF may create two principal classes of
benefits. First, the information collected through Form PF is expected
to facilitate FSOC's monitoring of the systemic risks that private
funds may pose and to assist FSOC in carrying out its other duties
under the Dodd-Frank Act with respect to nonbank financial companies.
Second, this information may enhance the ability of the SEC to evaluate
and form regulatory policies and improve the efficiency and
effectiveness of the SEC's monitoring of markets for investor
protection and market vitality.
The Dodd-Frank Act directs FSOC to monitor emerging risks to U.S.
financial stability \188\ and to require FRB supervision of designated
nonbank financial companies that may pose risks to U.S. financial
stability in the event of their material financial distress or failure
or because of their activities.\189\ In addition, the Dodd-Frank Act
directs FSOC to recommend to the FRB heightened prudential standards
for designated nonbank financial companies.\190\
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\188\ See supra note 6 and accompanying text.
\189\ Section 112(a)(2) of the Dodd-Frank Act.
\190\ See supra note 7 and accompanying text.
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In enacting Sections 404 and 406 of the Dodd-Frank Act, Congress
recognized that FSOC would need information from private fund advisers
to help it carry out its duties. As a result, proposed Form PF is
designed to gather information regarding the private fund industry that
would be useful to FSOC in monitoring systemic risk.\191\ Systemic risk
may arise from a variety of sources, including interconnectedness,
changes in market liquidity and market concentrations, and so the
information that Form PF elicits is intended to provide data that,
individually or in the aggregate, would permit FSOC to identify where
systemic risk may arise across a range of sources. The SEC expects that
FSOC would use this data to supplement the data that it collects
regarding other financial market participants and gain a broader view
of the financial system than is currently available to regulators. In
this manner, the SEC believes that the information collected through
Form PF could play an important role in FSOC's monitoring of systemic
risk, both in the private fund industry and in the financial markets
more broadly.
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\191\ See section II.D of this Release for a description of the
information that private fund advisers would be required to report
on proposed Form PF.
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The proposed private fund reporting on Form PF would also benefit
all investors and market participants by improving the information
available to the SEC regarding the private fund industry. Today,
regulators have little reliable data regarding this rapidly growing
sector and frequently have to rely on data from other sources, which
when available may be incomplete. As discussed above, the more reliable
data collected through Form PF would assist FSOC in identifying and
addressing risks to U.S. financial stability, potentially protecting
investors and other market participants from significant losses. In
addition, this data would provide the SEC with a more complete view of
the financial markets in general and the private fund industry in
particular. This broader perspective and more reliable data may enhance
its ability to form and frame regulatory policies regarding the private
fund industry and its advisers, and to more effectively evaluate the
outcomes of regulatory policies and programs directed at this sector,
including for the protection of private fund investors.
The SEC also estimates that the proposed rule may improve the
efficiency and effectiveness of the SEC's oversight of private fund
advisers by enabling SEC staff to manage and analyze information
related to the risks posed by private funds more quickly, more
effectively, and at a lower cost than is currently possible. This would
allow the SEC to more efficiently and effectively target its
examination program. The SEC would be able to use Form PF information
to generate reports on the industry, its characteristics and trends.
These reports may help the SEC anticipate regulatory problems, allocate
and reallocate its resources, and more fully evaluate and anticipate
the implications of various regulatory actions it may consider taking,
which should increase both the efficiency and effectiveness of its
programs and thus increase investor protection. Responses to many of
the proposed questions would help the SEC better understand the
investment activities of private funds and the scope of their potential
effect on investors and the markets that the SEC regulates.
The coordination with the CFTC would also result in significant
efficiencies for private fund advisers that are also registered as a
CPO or CTA with the CFTC because, under the proposed rules in this
Release, these advisers would satisfy certain reporting obligations
under both proposed Advisers Act rule 204(b)-1 and proposed CEA rule
4.27(d) with respect to commodity pools that satisfy the definition of
``private fund'' (as proposed in Form PF) by filing Form PF. As
discussed in section I.B of this Release, the SEC also has coordinated
with foreign financial regulators regarding the reporting of systemic
risk information regarding hedge funds and anticipates that this
coordination, as reflected in proposed Form PF, would result in greater
efficiencies in reporting by private fund advisers, as well as
information sharing and private fund monitoring among foreign financial
regulators.
As discussed in section II.B of this Release, the SEC has designed
the reporting frequency in proposed Form PF based on when it
understands advisers to private funds are already compiling certain
information that Form PF would require, creating efficiencies for, and
benefiting, the adviser in satisfying its reporting obligations. The
SEC also has based certain more specific
[[Page 8089]]
reporting items on information that it understands large hedge fund
advisers frequently calculate for purposes of reporting to investors in
the funds.\192\
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\192\ See note 105 and accompanying text.
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The SEC does not expect that this proposal would have an effect on
competition because the information generally would be non-public and
similar types of advisers would have comparable burdens under the form.
The SEC also does not expect that this proposal would have an effect on
capital formation because the information generally would be non-public
and thus should not impact private fund advisers' ability to raise
capital or their market activities.
B. Costs
The proposed reporting requirement also would impose certain costs
on private fund advisers. In order to minimize these costs, the scope
of the required information and the frequency of the reporting
generally would be less for private fund advisers that manage less
private fund assets or that do not manage types of private funds that
may be more likely to pose systemic risk. Specifically, smaller private
fund advisers would be required to report annually and provide only
basic information regarding their operations and the private funds they
advise, while Large Private Fund Advisers would report on a quarterly
basis and provide more information.\193\ Further, the additional
information required from large hedge fund advisers would be more
extensive than the additional information required from large liquidity
fund advisers, which in turn would be more extensive than that required
from large private equity fund advisers.
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\193\ See section II.B of this Release for a description of who
would be required to file Form PF, section II.C of this Release for
information regarding the frequency with which private fund advisers
would be required to file Form PF, and section II.D of this Release
for a description of the information that private fund advisers
would be required to report on Form PF. See also proposed
Instruction 8 to Form PF for information regarding the frequency
with which private fund advisers would be required to file Form PF.
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The SEC expects that the costs of reporting would be most
significant for the first report that a private fund adviser is
required to file because the adviser would need to familiarize itself
with the new reporting form and may need to configure its systems in
order to efficiently gather the required information. The SEC also
anticipates that the initial report would require more attention from
senior personnel, including compliance managers and senior risk
management specialists, than would subsequent reports. In addition, the
SEC expects that some Large Private Fund Advisers would find it
efficient to automate some portion of the reporting process, which
would increase the burden of the initial filing but reduce the burden
of subsequent filings.
In subsequent reporting periods, the SEC anticipates that filers
would incur significantly lower costs because much of the work involved
in the initial report is non-recurring and because of efficiencies
realized from system configuration and reporting automation efforts
accounted for in the initial reporting period. In addition, the SEC
estimates that senior personnel would bear less of the reporting burden
in subsequent reporting periods, reducing costs though not necessarily
reducing the burden hours.
Based on the foregoing, the SEC estimates \194\ that, for the
purposes of the PRA, the periodic filing requirements under Form PF
(including configuring systems and compiling, automating, reviewing and
electronically filing the report) would impose:
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\194\ The SEC understands that some advisers may outsource all
or a portion of their Form PF reporting responsibilities to a filing
agent, software consultant, or other third-party service provider.
The SEC believes, however, that an adviser would engage third-party
service providers only if the external costs were comparable, or
less than, the estimated internal costs of compiling, reviewing, and
filing the Form PF. The hourly wage data used in this Economic
Analysis section of the Release is based on the Securities Industry
and Financial Markets Association's Report on Management &
Professional Earnings in the Securities Industry 2010. This data has
been modified to account for an 1,800-hour work-year and multiplied
by 5.35 for management and professional employees and by 2.93 for
general and compliance clerks to account for bonuses, firm size,
employee benefits and overhead.
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(1) 10 burden hours at a cost of $3,410 \195\ per smaller private
fund adviser for the initial annual report;
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\195\ The SEC expects that for the initial report these
activities will most likely be performed equally by a compliance
manager at a cost of $273 per hour and a senior risk management
specialist at a cost of $409 per hour and that, because of the
limited scope of information required from smaller private fund
advisers, these advisers generally would not realize significant
benefits from or incur significant costs for system configuration or
automation. ($273/hour x 0.5 + $409/hour x 0.5) x 10 hours =
approximately $3,410.
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(2) 3 burden hours at a cost of $830 \196\ per smaller private fund
adviser for each subsequent annual report;
---------------------------------------------------------------------------
\196\ The SEC expects that for subsequent reports senior
personnel will bear less of the reporting burden. As a result, the
SEC estimates that these activities will most likely be performed
equally by a compliance manager at a cost of $273 per hour, a senior
compliance examiner at a cost of $235 per hour, a senior risk
management specialist at a cost of $409 per hour and a risk
management specialist at a cost of $192 per hour. ($273/hour x 0.25
+ $235/hour x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 3 hours
= approximately $830.
---------------------------------------------------------------------------
(3) 75 burden hours at a cost of $23,270 \197\ per large hedge fund
adviser for the initial quarterly report;
---------------------------------------------------------------------------
\197\ The SEC expects that for the initial report, of a total
estimated burden of 75 hours, approximately 45 hours will most
likely be performed by compliance professionals and 30 hours will
most likely be performed by programmers working on system
configuration and reporting automation. Of the work performed by
compliance professionals, the SEC anticipates that it will be
performed equally by a compliance manager at a cost of $273 per hour
and a senior risk management specialist at a cost of $409 per hour.
Of the work performed by programmers, the SEC anticipates that it
will be performed equally by a senior programmer at a cost of $304
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 45 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 30 hours = approximately $23,270.
---------------------------------------------------------------------------
(4) 35 burden hours at a cost of $9,700 \198\ per large hedge fund
adviser for each subsequent quarterly report;
---------------------------------------------------------------------------
\198\ The SEC expects that for subsequent reports senior
personnel will bear less of the reporting burden and that
significant system configuration and reporting automation costs will
not be incurred. As a result, the SEC estimates that these
activities will most likely be performed equally by a compliance
manager at a cost of $273 per hour, a senior compliance examiner at
a cost of $235 per hour, a senior risk management specialist at a
cost of $409 per hour and a risk management specialist at a cost of
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x
0.25 + $192/hour x 0.25) x 35 hours = approximately $9,700.
---------------------------------------------------------------------------
(5) 35 burden hours at a cost of $10,860 \199\ per large liquidity
fund adviser for the initial quarterly report;
---------------------------------------------------------------------------
\199\ The SEC expects that for the initial report, of a total
estimated burden of 35 hours, approximately 21 hours will most
likely be performed by compliance professionals and 14 hours will
most likely be performed by programmers working on system
configuration and reporting automation. Of the work performed by
compliance professionals, the SEC anticipates that it will be
performed equally by a compliance manager at a cost of $273 per hour
and a senior risk management specialist at a cost of $409 per hour.
Of the work performed by programmers, the SEC anticipates that it
will be performed equally by a senior programmer at a cost of $304
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 21 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 14 hours = approximately $10,860.
---------------------------------------------------------------------------
(6) 16 burden hours at a cost of $4,440 \200\ per large liquidity
fund adviser for each subsequent quarterly report;
---------------------------------------------------------------------------
\200\ The SEC expects that for subsequent reports senior
personnel will bear less of the reporting burden and that
significant system configuration and reporting automation costs will
not be incurred. As a result, the SEC estimates that these
activities will most likely be performed equally by a compliance
manager at a cost of $273 per hour, a senior compliance examiner at
a cost of $235 per hour, a senior risk management specialist at a
cost of $409 per hour and a risk management specialist at a cost of
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x
0.25 + $192/hour x 0.25) x 16 hours = approximately $4,440.
---------------------------------------------------------------------------
(7) 25 burden hours at a cost of $7,760 \201\ per large private
equity fund
[[Page 8090]]
adviser for the initial quarterly report; and
---------------------------------------------------------------------------
\201\ The SEC expects that for the initial report, of a total
estimated burden of 25 hours, approximately 15 hours will most
likely be performed by compliance professionals and 10 hours will
most likely be performed by programmers working on system
configuration and reporting automation. Of the work performed by
compliance professionals, the SEC anticipates that it will be
performed equally by a compliance manager at a cost of $273 per hour
and a senior risk management specialist at a cost of $409 per hour.
Of the work performed by programmers, the SEC anticipates that it
will be performed equally by a senior programmer at a cost of $304
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 15 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 10 hours = approximately $7,760.
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(8) 12 burden hours at a cost of $3,330 \202\ per large private
equity fund adviser for each subsequent quarterly report.
\202\ The SEC expects that for subsequent reports senior
personnel will bear less of the reporting burden and that
significant system configuration and reporting automation costs will
not be incurred. As a result, the SEC estimates that these
activities will most likely be performed equally by a compliance
manager at a cost of $273 per hour, a senior compliance examiner at
a cost of $235 per hour, a senior risk management specialist at a
cost of $409 per hour and a risk management specialist at a cost of
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x
0.25 + $192/hour x 0.25) x 12 hours = approximately $3,330.
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Assuming that there are 3,920 smaller private fund advisers, 200 large
hedge fund advisers, 80 large liquidity fund advisers, and 250 large
private equity fund advisers, the foregoing estimates would suggest an
annual cost of $30,200,000 \203\ for all private fund advisers in the
first year of reporting and an annual cost of $15,800,000 in subsequent
years.\204\
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\203\ (3,920 smaller private fund advisers x $3,410 per initial
annual report) + (200 large hedge fund advisers x $23,270 per
initial quarterly report) + (200 large hedge fund advisers x 3
quarterly reports x $9,700 per subsequent quarterly report) + (80
large liquidity fund advisers x $10,860 per initial quarterly
report) + (80 large liquidity fund advisers x 3 quarterly reports x
$4,440 per subsequent quarterly report) + (250 large private equity
fund advisers x $7,760 per initial quarterly report) + (250 large
private equity fund advisers x 3 quarterly reports x $3,330 per
subsequent quarterly report) = approximately $30,200,000.
\204\ (3,920 smaller private fund advisers x $830 per subsequent
annual report) + (200 large hedge fund advisers x 4 quarterly
reports x $9,700 per subsequent quarterly report) + (80 large
liquidity fund advisers x 4 quarterly reports x $4,440 per
subsequent quarterly report) + (250 large private equity fund
advisers x 4 quarterly reports x $3,330 per subsequent quarterly
report) = approximately $15,800,000.
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In addition, as discussed above, a private fund adviser would be
required to file very limited information on Form PF if it needed to
transition from quarterly to annual filing, if it were no longer
subject to the reporting requirements of Form PF or if it required a
temporary hardship exemption under proposed rule 204(b)-1(f). The SEC
estimates that transition and final filings would, collectively, cost
private fund advisers as a whole approximately $6,770 per year.\205\
The SEC further estimates that hardship exemption requests would cost
private fund advisers as a whole approximately $760 per year.\206\
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\205\ The SEC estimates that, for the purposes of the PRA,
transition filings will impose 12 burden hours per year on private
fund advisers in the aggregate and that final filings will impose 89
burden hours per year on private fund advisers in the aggregate. The
SEC anticipates that this work will most likely be performed by a
compliance clerk at a cost of $67 per hour. (12 burden hours + 89
burden hours) x $67/hour = approximately $6,770.
\206\ The SEC estimates that, for the purposes of the PRA,
requests for temporary hardship exemptions will impose 4 burden
hours per year on private fund advisers in the aggregate. The SEC
anticipants that five-eighths of this work will most likely be
performed by a compliance manager at a cost of $273 per hour and
that three-eighths of this work will most likely be performed by a
general clerk at a cost of $50 per hour. (($273 per hour x \5/8\ of
an hour) + ($50 per hour x \3/8\ of an hour)) x 4 hours =
approximately $760.
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Finally, firms required to file Form PF would have to pay filing
fees. The amount of these fees has not yet been determined.\207\
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\207\ See supra note 147 and accompanying text.
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C. Request for Comment
The SEC requests comments on all aspects of the foregoing cost-
benefit analysis, including the accuracy of the potential costs and
benefits identified and assessed in this Release, as well as any other
costs or benefits that may result from the proposals. The SEC
encourages commenters to identify, discuss, analyze, and supply
relevant data regarding these or additional costs and benefits. The SEC
also requests comment on the foregoing analysis of the likely effect of
the proposed rule on competition, efficiency, and capital formation.
Commenters are requested to provide empirical data to support their
views.
In addition, for purposes of the Small Business Regulatory
Enforcement Fairness Act of 1996, or ``SBREFA,'' \208\ the SEC must
advise OMB whether a proposed regulation constitutes a ``major'' rule.
Under SBREFA, a rule is considered ``major'' where, if adopted, it
results in or is likely to result in: (1) An annual effect on the
economy of $100 million or more; (2) a major increase in costs or
prices for consumers or individual industries; or (3) significant
adverse effects on competition, investment, or innovation.
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\208\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
We request comment on the potential impact of the proposed new rule
and proposed rule amendments on the economy on an annual basis.
Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.
VII. Initial Regulatory Flexibility Analysis
CFTC
Under proposed rule 4.27(d), the CFTC would not impose any
additional burden upon registered CPOs and CTAs that are dually
registered as investment advisers with the SEC because such entities
are only required to file Form PF with the SEC. Further, certain CPOs
registered with the CFTC that are also registered with the SEC would be
deemed to have satisfied certain CFTC-related filing requirements by
completing and filing the applicable sections of Form PF with the SEC.
Therefore, any burden imposed by Form PF through proposed rule 4.27(d)
on small entities registered with both the CFTC and the SEC has been
accounted for within the SEC's initial calculations regarding the
impact of this collection of information under the Regulatory
Flexibility Act (``RFA'').\209\ Accordingly, the Chairman, on behalf of
the CFTC, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed rules will not have a significant impact on a substantial
number of small entities.
---------------------------------------------------------------------------
\209\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------
SEC
The SEC has prepared the following Initial Regulatory Flexibility
Analysis (``IRFA'') regarding proposed Advisers Act rule 204(b)-1 in
accordance with section 3(a) of the RFA.
A. Reasons for Proposed Action
The SEC is proposing rule 204(b)-1 and Form PF specifying
information that private fund advisers must disclose confidentially to
the SEC, which information the SEC will share with FSOC for systemic
risk assessment purposes to help implement sections 404 and 406 of the
Dodd-Frank Act. Under the proposed rule, private fund advisers would be
required to file information responsive to all or portions of Form PF
on a periodic basis. The scope of the required information and the
frequency of the reporting would be related to the amount of private
fund assets that each private fund adviser manages and the type of
private fund to which those assets relate. Specifically, smaller
private fund advisers would be required to report annually and provide
only basic information regarding their operations and the private funds
they advise, while Large Private Fund
[[Page 8091]]
Advisers would report on a quarterly basis and provide more
information.\210\
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\210\ See section II.B of this Release for a description of who
would be required to file Form PF, section II.C of this Release for
information regarding the frequency with which private fund advisers
would be required to file Form PF, and section II.D of this Release
for a description of the information that private fund advisers
would be required to report on Form PF. See also proposed
Instruction 8 to Form PF for information regarding the frequency
with which private fund advisers would be required to file Form PF.
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B. Objectives and Legal Basis
As described more fully in sections I and II of this Release, the
general objective of proposed Advisers Act rule 204(b)-1 is to assist
FSOC in its obligations under the Dodd-Frank Act relating to nonbank
financial companies and in monitoring systemic risk. The SEC is
proposing rule 204(b)-1 and Form PF pursuant to the SEC's authority set
forth in sections 404 and 406 of the Dodd-Frank Act, to be codified at
sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4(b) and
80b-11(e)].
C. Small Entities Subject to the Rule
Under SEC rules, for the purposes of the Advisers Act and the
Regulatory Flexibility Act, an investment adviser generally is a small
entity if it: (i) Has assets under management having a total value of
less than $25 million; (ii) did not have total assets of $5 million or
more on the last day of its most recent fiscal year; and (iii) does not
control, is not controlled by, and is not under common control with
another investment adviser that has assets under management of $25
million or more, or any person (other than a natural person) that had
total assets of $5 million or more on the last day of its most recent
fiscal year.\211\
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\211\ 17 CFR 275.0-7(a).
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Under section 203A of the Advisers Act, most advisers qualifying as
small entities are prohibited from registering with the SEC and are
instead registered with State regulators. Therefore, few small advisers
would be subject to the proposed rule and form. The SEC estimates that
as of December 1, 2010, approximately 50 advisers that were small
entities were registered with the SEC and advised one or more private
funds.\212\
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\212\ Based on IARD data.
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed rule and form would impose certain reporting and
compliance requirements on advisers, including small advisers. The
proposed rule would require all small advisers registered with the SEC
and that advise one or more private funds to file Form PF, completing
all or part of section 1 of that form. As discussed above, the SEC
estimates that completing, reviewing, and filing Form PF would cost
$3,410 per year for each small adviser in its first year of reporting
and $830 per year for each subsequent year.\213\ In addition, small
entities would be required to pay a filing fee when submitting Form PF.
The amount of the filing fee has not yet been determined, but we
anticipate that Large Private Fund Advisers' filing fees would be set
at a higher amount than small advisers.
---------------------------------------------------------------------------
\213\ See supra notes 195-196 and accompanying text.
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E. Duplicative, Overlapping, or Conflicting Federal Rules
The SEC has not identified any Federal rules that duplicate or
overlap or conflict with the proposed rule.
F. Significant Alternatives
The Regulatory Flexibility Act directs the SEC to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant impact on small entities. In
connection with the proposed rules and amendments, the SEC considered
the following alternatives: (i) The establishment of differing
compliance or reporting requirements or timetables that take into
account the resources available to small entities; (ii) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rule for small entities; (iii) the use
of performance rather than design standards; and (iv) an exemption from
coverage of the rule, or any part thereof, for small entities.
Regarding the first and fourth alternatives, the SEC has proposed
different reporting requirements and timetables for small entities. The
proposed rule only would require small entity advisers to file Form PF
annually and to complete applicable portions of section 1 of the
form.\214\ These smaller advisers also would have to pay a smaller
amount of filing fees than Large Private Fund Advisers. Regarding the
second alternative, the information that would be required of small
entities under section 1 of Form PF is quite simplified from the more
extensive reporting that would be required of Large Private Fund
Advisers and is consolidated in one section of the form.
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\214\ If the adviser had no hedge fund assets under management,
it would not need to complete section 1.C of the proposed form.
Advisers that manage both registered money market funds and
liquidity funds would be required to complete section 3 of Form PF,
but there are no small entities that manage a registered money
market fund. See section II.B of this Release for a description of
who would be required to file Form PF, section II.C of this Release
for information regarding the frequency with which smaller private
fund advisers would be required to file Form PF, and section II.D.1
of this Release for a description of the information that smaller
private fund advisers would be required to report on Form PF. See
also proposed Instruction 8 to Form PF for information regarding the
frequency with which smaller private fund advisers would be required
to file Form PF.
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G. Solicitation of Comments
The SEC encourages written comments on matters discussed in this
IRFA. In particular, the SEC seeks comment on:
The number of small entities that would be subject to the
proposed rule; and
Whether the effect of the proposed rule on small entities
would be economically significant.
Commenters are asked to describe the nature of any effect and
provide empirical data supporting the extent of the effect.
VIII. Statutory Authority
CFTC
The CFTC is proposing rule 4.27(d) [17 CFR 4.27(d)] pursuant to its
authority set forth in section 4n of the Commodity Exchange Act [7
U.S.C. 6n].
SEC
The SEC is proposing rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant
to its authority set forth in sections 404 and 406 of the Dodd-Frank
Act, to be codified at sections 204(b) and 211(e) of the Advisers Act
[15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
The SEC is proposing rule 279.9 pursuant to its authority set forth
in sections 404 and 406 of the Dodd-Frank Act, to be codified at
sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4 and 15
U.S.C. 80b-11], respectively.
List of Subjects
17 CFR Part 4
Advertising, Brokers, Commodity Futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 275
Reporting and recordkeeping requirements, Securities.
[[Page 8092]]
Text of Proposed Rules
Commodity Futures Trading Commission
For the reasons set out in the preamble, the CFTC is proposing to
amend Title 17, Chapter I of the Code of Federal Regulations as
follows:
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
1. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o,
12a, and 23.
* * * * *
2. In Sec. 4.27, as proposed to be added elsewhere in this issue
of the Federal Register, add paragraph (d) to read as follows:
Sec. 4.27 Additional reporting by advisors of commodity pools.
* * * * *
(d) Investment advisers to private funds. CPOs and CTAs who are
dually registered with the Securities and Exchange Commission and
advise one or more private funds, as defined in section 202 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)), shall file Form
PF with the Securities and Exchange Commission. Dually registered CPOs
and CTAs that file Form PF with the Securities and Exchange Commission
will be deemed to have filed Form PF with the Commission for purposes
of any enforcement action regarding any false or misleading statement
of a material fact in Form PF. Dually registered CPOs and CTAs must
file such other reports as are required under this section with respect
to all pools that are not private funds.
* * * * *
Securities and Exchange Commission
For the reasons set out in the preamble, the SEC is proposing to
amend Title 17, Chapter II of the Code of Federal Regulations as
follows:
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
3. The authority citation for part 275 continues to read in part as
follows:
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
4. Section 275.204(b)-1 is added to read as follows:
Sec. 275.204(b)-1 Reporting by investment advisers to private funds.
(a) Reporting by investment advisers to private funds on Form PF.
Subject to paragraph (g), if you are an investment adviser registered
or required to be registered under section 203 of the Act (15 U.S.C.
80b-3) and act as an investment adviser to one or more private funds,
you must complete and file a report on Form PF (17 CFR 279.9) within 15
days of the end of the next calendar quarter by following the
instructions in the Form, which specify the information that an
investment adviser must provide.
(b) Electronic filing. You must file Form PF electronically with
the Form PF filing system.
Note to paragraph (b): Information on how to file Form PF is
available on the Commission's Web site at http://www.sec.gov/[----].
(c) When filed. Each Form PF is considered filed with the
Commission upon acceptance by the Form PF filing system.
(d) Filing fees. You must pay the operator of the Form PF filing
system a filing fee as required by the instructions to Form PF. The
Commission has approved the amount of the filing fee. No portion of the
filing fee is refundable. Your completed Form PF will not be accepted
by the operator of the Form PF filing system, and thus will not be
considered filed with the Commission, until you have paid the filing
fee.
(e) Amendments to Form PF. You must amend your Form PF:
(1) At least annually, no later than the last day on which you may
timely file your annual amendment to Form ADV under rule 204-1(a)(1)
(17 CFR 275.204-1(a)(1)); and
(2) More frequently, if required by the instructions to Form PF.
You must file all amendments to Form PF electronically with the Form PF
filing system.
(f) Temporary hardship exemption. (1) If you have unanticipated
technical difficulties that prevent you from submitting Form PF on a
timely basis through the Form PF filing system, you may request a
temporary hardship exemption from the requirements of this section to
file electronically.
(2) To request a temporary hardship exemption, you must:
(i) Complete and file with the operator of the Form PF filing
system in paper format Item A of Section 1a and Section 5 of Form PF,
checking the box in Section 1a indicating that you are requesting a
temporary hardship exemption, no later than one business day after the
electronic Form PF filing was due; and
(ii) Submit the filing that is the subject of the Form PF paper
filing in electronic format with the Form PF filing system no later
than seven business days after the filing was due.
(3) The temporary hardship exemption will be granted when you file
Item A of Section 1a and Section 5 of Form PF, checking the box in
Section 1a indicating that you are requesting a temporary hardship
exemption.
(g) Transition for certain filers. If you were an investment
adviser registered or required to be registered under section 203 of
the Act (15 U.S.C. 80b-3), act as an investment adviser to one or more
private funds immediately prior to the compliance date of rule 204(b)-
1, and are only required to complete all or portions of section 1 of
Form PF, no later than 90 days after the end of your then-current
fiscal year you must complete and file your initial report on Form PF
by following the instructions in the Form, which specify the
information that an investment adviser must provide.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
5. The authority citation for part 279 continues to read as
follows:
Authority: 15 U.S.C. 80b-1, et seq.
6. Section 279.9 is added to read as follows:
Sec. 279.9 Form PF, reporting by investment advisers to private
funds.
This form shall be filed pursuant to Rule 204(b)-1 (Sec.
275.204(b)-1 of this chapter) by certain investment advisers registered
or required to register under section 203 of the Act (15 U.S.C. 80b-3)
that act as an investment adviser to one or more private funds.
Note: The following Form PF will not appear in the Code of
Federal Regulations.
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By the Commodity Futures Trading Commission.
Dated: January 26, 2011.
David A. Stawick,
Secretary.
By the Securities and Exchange Commission.
Dated: January 26, 2011.
Elizabeth M. Murphy,
Secretary.
Appendix 1--Commodity Futures Trading Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn, Sommers
(by proxy), Chilton and O'Malia voted in the affirmative; no
Commissioner voted in the negative.
[FR Doc. 2011-2175 Filed 2-10-11; 8:45 am]
BILLING CODE 8011-01-P; 6351-01-P