On October 26, 2011 the Securities and Exchange Commission (the “SEC”) voted and approved a new rule requiring investment advisors to report information about their private funds to the SEC. The rule, which implements Sections 404 and 406 of the Dodd-Frank Act, requires SEC-registered investment advisors with at least $150 million in private fund assets under management to periodically file a new reporting form (Form PF).
Under the rule, private fund advisors are divided by size into two broad groups, large fund advisors and smaller fund advisors. Large private fund advisors are i) those with at least $1.5 billion in assets under management attributable to hedge funds; ii) liquidity fund advisors with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds; and iii) advisors with at least $2 billion in assets under management attributable to private equity funds. All other registered private fund advisors are considered smaller fund advisors.
The advisors group classification will determine the information and the frequency of reporting required of the advisor.
Large fund advisors will provide more information than smaller fund advisors, and the frequency of reporting depends on the type of fund the advisor manages. Large hedge fund advisors must file Form PF within 60 days of the end of each fiscal quarter. Large liquidity fund advisors must file Form PF within 15 days of the end of each fiscal quarter. Large private equity fund advisors must file Form PF annually within 120 days of the end of the fiscal year.
Smaller private fund advisors must file Form PF annually with 120 days of the end of the fiscal year.
Compliance with the Form PF filing requirements will have a two-stage phase-in period. The initial Form PF for private fund advisors with at least $5 billion in assets under management must be filed 60 days after the first fiscal quarter (or fiscal year) ending June 15, 2012. Large hedge fund advisors who have assets under management greater than $1.5 billion but less than $5 billion will be required to file their initial Form PF 60 days after 2012. Smaller hedge fund advisers and private equity advisors will be required to file their initial Form PF 120 days after the end of 2012.
Under the current proposal, Form PF requires smaller fund advisors to report only basic information regarding the private funds they advise. Smaller fund advisors are required to provide information regarding size, leverage, investor types and concentration, liquidity, fund performance, fund strategy, counter party credit risk, and use of trading and clearing mechanisms.
Large hedge fund advisors must report the basic information as required for smaller fund advisors and on an aggregate basis provide information regarding exposure by asset class, geographical concentration, and turnover by asset class. In addition, large hedge fund advisors who manage funds with at least $500 million in net asset value must provide certain information relating the individual fund’s exposures, leverage, risk profile, and liquidity.
Large private equity fund advisors must provide information regarding leverage used by their funds’ portfolio companies, use of bridge financing, and their funds’ investments in financial institutions.
Based on the proposed reporting requirement, fund advisors should contact their attorneys, auditors, prime brokers and administrators to discuss the information that these service providers have available to complete Form PF. For example, the information disclosed in the funds financial statements and tax returns can be used to meet the requirements of Form PF.
When the SEC publishes the final rule, EisnerAmper will provide a more detailed analysis of Form PF.