Some of the largest hedge fund managers will shortly make their initial filing for the Form PF, on August 29, 2012. This guide will recap on the previously announced and finalized Form PF obligations and provide an update on the most recent developments.
What is Form PF?
It refers to a regulatory reporting obligation upon SEC registered investment advisers i.e. hedge fund managers who advise one or more private funds relying upon the 3(c)(1) or 3(c)(7) exemptions and have at least $150 million under management in hedge funds. Hedge fund managers meeting the criteria will be required to complete and periodically file the Form PF. As it is a joint initiative with the CFTC, any Commodity Pool Operators (CPOs)/ Commodity Trading Advisors (CTAs) registered with the SEC and CFTC also must complete the Form PF. The filing obligations and the portion of the Form PF that an SEC registered hedge fund manager is obligated to complete depends upon their assets under management. By definition, Exempt Reporting Advisers (those hedge fund managers with less than $150 million under management in hedge funds) are not required to file the Form PF. The legislative basis for the Form PF regulations is Rule 204(b)-1 of the Investment Advisers Act, 1940.
What is the purpose of the Form PF?
The Form PF was one of the initiatives introduced under the U.S. Dodd-Frank legislation ("Dodd-Frank"). The purpose is to allow the Financial Stability Oversight Council (FSOC) in monitoring risks to the U.S. Financial System. According to Mary Schapiro, the SEC Chairman "The data collection form that we have adopted will address the dramatic lack of private fund information available to regulators today while easing the burden on private fund managers producing the data." In short, the purpose of the Form PF is to allow the collection of risk exposure information.
What is the meaning of "regulatory assets under management" ("RAUM") and "hedge fund"?
The RAUM for each hedge fund is gross assets under management, without subtracting any borrowings, short sales or other forms of leverage. The RAUM calculation is the basis hedge fund managers must use for calculating the assets of hedge funds managed. For the purposes of Form PF, "hedge fund" has also been defined. According to the regulations "A hedge fund is defined generally to be any private fund that has the ability to pay a performance fee to its adviser, borrow in excess of a certain amount, or sell assets short."
What are "Large Private Advisers" and "Smaller Private Advisers"?
For the purposes of completing the Form PF, the SEC has classified registered investment advisers as "Smaller Private Advisers" and "Larger Private Advisers".
"Large Private Advisers" are:
- Large hedge fund advisers with at least $1.5 billion in assets under management attributable to hedge funds.
- Liquidity fund advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds.
- Advisers with at least $2 billion in assets under management attributable to private equity funds.
Any registered investment advisers who do not meet the criteria of Large Private Advisers are deemed "Smaller Private Advisers".
What are the obligations of "Large Private Advisers" and "Smaller Private Advisers"?
Most hedge fund managers are deemed to be "Smaller Private Advisers", by virtue of their assets under management being less than $1.5billion. Smaller Private Advisers are only required to complete Part 1 of the Form PF. Large hedge fund advisers (at least $1.5 billion in assets under management attributable to hedge funds) must complete Parts 1 and 2 of Form PF. Large Private Advisers completing Part 2 of Form PF are required to include detailed descriptions of the geographic location, market, credit and liquidity risks of the hedge funds.
When is Form PF filed?
Smaller Private Advisers are required to file the Form PF annually within 120 days after the end of their fiscal year.
Large Private Advisers must file depending on which classification of the following they meet:
- Large hedge fund advisers are required to file the Form PF within 60 days of the end of each fiscal quarter.
- Large liquidity fund advisers must file Form PF to update information regarding the liquidity funds they manage within 15 days of the end of each fiscal quarter.
- Large private equity fund advisers must file Form PF annually within 120 days of the end of the fiscal year.
What are the initial filing deadlines for Form PF?
There is a two-stage implementation process. Note from the below that the largest Hedge Fund Advisers ($5billion and more under management) must file their initial Form PF by August 29, 2012.
The following will be required to submit Form PF for the end of the first fiscal quarter or year ending after June 15, 2012, as follows:
- Hedge Fund Advisers with at least $5 billion in assets under management attributable to hedge funds (initial filing required by August 29, 2012 (within 60 days of the June 30, 2012 quarter end);
- Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds (initial filing required was required by July 16, 2012 (within 15 days of the June 30, 2012);
- Advisers with at least $5 billion in assets under management attributable to private equity funds (initial filing required by April 30, 2013 (within 120 days of the December 31, 2012).
Registered Investment Advisers who do not meet any of the above criteria are required to file the Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. For most hedge fund managers this means that they will need to make their filing of the Form PF in 2013.
What liability is involved with signing off and filing a Form PF?
It was originally proposed that the Form PF had to be signed off under penalty of perjury. This obligation has been removed. However, there may still be significant legal consequences for completing and filing an intentionally or negligently misleading Form PF. It is noted that the SEC may use the Form PF for the purpose of examining SEC registered investment advisers. Therefore, if during an examination or other enquiry there is a discrepancy between the hedge fund manager's books and records and Form PF this may lead to further investigations. The Form PF information could form the basis for an enforcement action.
Is Form PF information confidential?
Unlike the Form ADV, which is publicly available, the Form PF is not made public and the information will be treated by the SEC and CFTC as confidential. The information on the Form PF is generally accepted as sensitive and proprietary to the hedge fund manager and their operations. The Dodd-Frank legislation was amended to ensure that Form PF was confidential and excluded from Freedom of Information Act requests. The Form PF and its information can be shared with Federal agencies and SROs, subject to confidentiality. Congress may also be allowed to review the Form PF as part of their hearings or investigation, subject to respecting the non-public nature of the information.
Should you provide the Form PF to potential and/or current investors?
While this is not a regulatory issue (the Form PF is treated confidential by the SEC/CFTC) and there is no rule or requirement to do so, many managers are grappling with this question. If you provide the Form PF to be potential investor subject to a non-disclosure agreement, should it also be provided to existing investors in the interests of treating all investors equally? The answer to that question is one of considering the fact pattern involved, and namely whether any disclosure about giving some non-public information on preferential terms to certain but not all investors is disclosed in the offering materials. One option is to provide a truncated version of the Form PF. Certain managers may simply refuse to share the Form PF as they are not compelled to do so and they are so successful at attracting investors and new capital. It is certainly not without its risks to share the Form PF that is filed with investors and it is an issue that must be approached cautiously.
Are foreign hedge fund managers required to comply with the Form PF regulations?
In order to reduce duplication, if the hedge fund manager's principal office and place of business is outside of the U.S then the hedge fund manager may exclude non-U.S funds that were not offered in the U.S and are not beneficially owned by any U.S person.
What vendor options are there in the market place to assist with Form PF completion obligations?
Many hedge fund managers have reviewed and adopted data warehouse, analytic and technological tools to assist with completing the Form PF. A number of hedge fund service providers, including auditors, administrators and other technology vendors have created a number of solutions to address the needs of hedge fund managers. Form PF from a logistical point of view poses quite a considerable burden and challenge for hedge fund managers. The SEC itself acknowledged that most or if not all of the required reporting on Form PF would be outsourced for technical and technological reasons by managers. According to Brent Patterson, COO of Advise Technologies, LLC, one of the vendors working with a number of hedge fund managers on Form PF compliance, there is no option but to seek outside help with the Form PF, "Even the most sophisticated funds in the industry have realized that they don't have sufficient resources to navigate Form PF on their own." Also due to the inherent ambiguities and subjectivity of some information required it is essential that an outside vendor like Advise Technologies, LLC is consulted to gain insight into how the market place is approaching the Form PF. Patterson added "Our clients have seen tangible benefits from automating resource-intensive and error-prone processes to ensure intuitive, fast and cost-effective electronic regulatory reporting." When it comes to the possible subjectivity of certain information required it should be noted that the Form PF does allow for the use of internal methodologies. Brent Patterson of Advise Technologies, LLC may be contacted at: email@example.com or firstname.lastname@example.org.
Is there still some uncertainty surrounding what must be completed in the Form PF?
There are still a number of uncertainties and ambiguities in the questions and information required by Form PF. Part of the issue is that hedge fund managers maintain information in different formats and varying levels of detail appropriate to the type and nature of their business and funds managed by them. In order to address ambiguities the SEC have published updated FAQs, which can be found at http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml. The SEC continues to invite questions at FormPF@sec.gov.
Where does Form PF fall in the international regulatory landscape?
The SEC announced that is consulted, amongst others the U.K Financial Services Authority, IOSCO and the European Securities and Markets Authority (ESMA) in formulating the Form PF. Hedge fund managers subject to the Alternative Investment Fund Managers Directive (AIFMD) in the European Union will also need to make the European equivalent report of the Form PF. Please contact us for further details on the AIFMD.
For further information about Form PF please contact Murray LLP:
(212) 729 3045
ABOUT THE AUTHOR:
Anthony Murray is a partner of Murray LLP, a law firm based in New York City providing commercial law advice with an emphasis on servicing the financial services sector and hedge funds. Anthony has fifteen years legal experience, commencing his career as a Lawyer in the UK in 1997. In 2000 he relocated to the Netherlands and was latterly appointed as Associate General Counsel for Europe for a large fund service organization and in 2010 moved to the U.S. and assumed the position of Associate General Counsel for the Americas. He has extensive experience of legal, finance and regulatory matters in many jurisdictions, including the Netherlands, United Kingdom, Ireland, Luxembourg, Switzerland, Guernsey, Jersey, The United States, Bermuda, The Bahamas, British Virgin Islands and the Cayman Islands. He became a partner of Murray LLP in 2012. He graduated with a Bachelor of Laws (LL.B (Honors)), First Class Honors and Post Graduate Diploma in Legal Practice from the University of Dundee, Scotland. Anthony Murray is qualified as a Solicitor in Scotland and admitted as an Attorney-at-Law in New York State. Contact Anthony Murray email@example.com (212) 729 3045.
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