February 14, 2022

On January 26, 2022, the Securities and Exchange Commission (the “SEC”) approved a proposal to amend Form Private Fund (“Form PF”) to (i) require additional reporting from advisers to large hedge funds and private equity funds, (ii) lower the threshold for reporting for large private equity fund advisers, and (iii) revise the reporting requirements for large liquidity fund advisers.  The proposed amendments would fundamentally alter the nature of Form PF, changing it from a quarterly or annual filing made in connection with a regular compliance cycle to a current report that needs to be quickly refiled on the occurrence of certain events.  It also potentially changes how the SEC would use Form PF, which historically was a tool to collect information about an industry and identify systemic risks, but could instead be used as a mechanism for the Divisions of Examinations and Enforcement to quickly mobilize in response to events that may raise red flags.

Form PF is a confidential form required by the SEC from certain private investment fund advisers that mandates reporting regulatory assets under management so that the SEC and the Financial Stability Oversight Council (the “FSOC”), an organization established under the Dodd-Frank Act, can monitor risks to the U.S. financial system. Since Form PF’s institution in 2012, SEC-registered private investment fund advisers with at least $150 million in assets under management (“AUM”) are required to periodically file Form PF.

  • Accelerated Schedule for Events Requiring Reporting. The proposed amendments would add additional reporting for large hedge fund advisers and advisers to private equity funds upon the occurrence of certain key events that cause funds to face significant stress, could result in investor harm or create systematic risk.  Under the proposed amendments, a current report would be required within only one business day of the key event.  
    • Hedge Funds. For large hedge fund advisers, key events requiring accelerated reporting include: (1) extraordinary investment losses, certain margin events, counterparty defaults, (2) material changes in prime broker relationships, changes in unencumbered cash, (3) operations events and (4) certain events associated with redemptions.
    • Private Equity Funds. For advisers to private equity funds, key events requiring accelerated reporting include (1) the execution of a GP-led secondary transaction, (2) implementation of a general partner or limited partner clawback, (3) removal of a fund’s general partner, (4) termination of a fund’s investment period or (5) termination of a fund.
  • Reduction in Large Private Equity Adviser Threshold. Additionally, the proposed amendments to Form PF would decrease the threshold for reporting as a large private equity adviser from $2 billion in private equity fund assets under management to $1.5 billion.  The decreased threshold would allow the SEC and the FSOC to require reporting from a similar proportion of the US private equity industry as when Form PF was first introduced in 2012.   
  • Expansion of Required Reporting. Reporting requirements from large private equity fund advisers would also be expanded to include more information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (“CPCs”) and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure and portfolio company restructurings or recapitalizations.
  • Conformity with Public Reporting Requirements. Finally, the proposed amendments would require large liquidity fund advisers to report substantially the same information as Form N-MFP (a public reporting form that the SEC has also proposed to amend) to create a complete picture of short-term financing markets.

If adopted as proposed, the amendments would create significant stress on the compliance departments of many fund managers.  The one business day deadline would be among the shortest, if not the shortest, deadline for any ‘reactive’ SEC reports that are required after the occurrence of an event that may be beyond a filer’s knowledge or control.  This may require smaller managers with a sole compliance officer to put backup systems in place in case the compliance officer is unavailable (or occupied with trying to fix the event resulting in the reporting requirement).  Furthermore, reducing the large private equity fund adviser threshold from $2 billion of AUM is at odds with the usual practice of increasing dollar thresholds to account for inflation.  Reporting surrounding portfolio company financing would also be significantly expanded and could require firms to coordinate responses on complex deals where there often are multiple funds advised by different registered advisers who may not all report the transaction in the same manner.

Comments to the proposed amendments to Form PF are due within 30 days of the publication of the full proposal in the Federal Register which, notably, is also an unusually short comment period for a proposal that could have such wide-ranging effect.  This is the first of a suite of SEC proposals targeting private fund managers, which also include a Division of Examinations Risk Alert regarding examinations of private fund advisers, a proposal that would require mandatory quarterly reporting to investors and prohibit other common practices, and a cybersecurity risk management proposal, all of which will be covered in further detail by future Polsinelli alerts.