Commodity Futures Trading Commission: Vol. 76 Friday, No. 29 February 11, 2011

Vol.
76 Friday,
No. 29 February 11, 2011
Part V
Commodity Futures Trading Commission
17 CFR Part 4
Securities and Exchange Commission
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
srobinson on DSKHWCL6B1PROD with PROPOSALS3
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8068 Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Proposed Rules
COMMODITY FUTURES TRADING Commission, Three Lafayette Centre, Web site (http://www.sec.gov/rules/
COMMISSION 1155 21st Street, NW., Washington, DC proposed.shtml). Comments are also
20581. available for Web site viewing and
17 CFR Part 4 • Hand Delivery/Courier: Same as printing in the SEC’s Public Reference
RIN 3038–AD03 mail above. Room, 100 F Street, NE., Washington,
• Federal eRulemaking Portal: http:// DC 20549 on official business days
SECURITIES AND EXCHANGE www.regulations.gov. Follow the between the hours of 10 a.m. and 3 p.m.
COMMISSION instructions for submitting comments. All comments received will be posted
‘‘Form PF’’ must be in the subject field without change; we do not edit personal
17 CFR Parts 275 and 279 of comments submitted via e-mail, and identifying information from
clearly indicated on written submissions. You should submit only
[Release No. IA–3145; File No. S7–05–11] submissions. All comments must be information that you wish to make
RIN 3235–AK92 submitted in English, or if not, available publicly.
accompanied by an English translation. FOR FURTHER INFORMATION CONTACT:
Reporting by Investment Advisers to Comments will be posted as received to CFTC: Daniel S. Konar II, Attorney-
Private Funds and Certain Commodity http://www.cftc.gov. You should submit Advisor, Telephone: (202) 418–5405,
Pool Operators and Commodity only information that you wish to make E-mail: dkonar@cftc.gov, Amanda L.
Trading Advisors on Form PF available publicly. If you wish the CFTC Olear, Special Counsel, Telephone:
to consider information that may be (202) 418–5283, E-mail: aolear@cftc.gov,
AGENCIES: Commodity Futures Trading
exempt from disclosure under the or Kevin P. Walek, Assistant Director,
Commission and Securities and
Freedom of Information Act, a petition Telephone: (202) 418–5405, E-mail:
Exchange Commission.
for confidential treatment of the exempt kwalek@cftc.gov, Division of Clearing
ACTION: Joint proposed rule.
information may be submitted according and Intermediary Oversight, Commodity
SUMMARY: The Commodity Futures to the established procedures in 17 CFR Futures Trading Commission, Three
Trading Commission (‘‘CFTC’’) and the 145.9. Lafayette Centre, 1155 21st Street, NW.,
Securities and Exchange Commission The CFTC reserves the right, but shall Washington, DC 20581; SEC: David P.
(‘‘SEC’’) (collectively, ‘‘we’’ or the have no obligation, to review, prescreen, Bartels, Attorney-Adviser, Sarah G. ten
‘‘Commissions’’) are proposing new rules filter, redact, refuse, or remove any or Siethoff, Senior Special Counsel, or
under the Commodity Exchange Act and all of your submission from http:// David A. Vaughan, Attorney Fellow, at
the Investment Advisers Act of 1940 to www.cftc.gov that it may deem to be (202) 551–6787 or IArules@sec.gov,
implement provisions of Title IV of the inappropriate for publication, including, Office of Investment Adviser
Dodd-Frank Wall Street Reform and but not limited to, obscene language. All Regulation, Division of Investment
Consumer Protection Act. The proposed submissions that have been redacted or Management, U.S. Securities and
SEC rule would require investment removed that contain comments on the Exchange Commission, 100 F Street,
advisers registered with the SEC that merits of the rulemaking will be NE., Washington, DC 20549–8549.
advise one or more private funds to file retained in the public comment file and SUPPLEMENTARY INFORMATION: The CFTC
Form PF with the SEC. The proposed will be considered as required under the is requesting public comment on
CFTC rule would require commodity Administrative Procedure Act and other proposed rule 4.27(d) [17 CFR 4.27(d)]
pool operators (‘‘CPOs’’) and commodity applicable laws, and may be accessible under the Commodity Exchange Act
trading advisors (‘‘CTAs’’) registered under the Freedom of Information Act, (‘‘CEA’’) 1 and proposed Form PF. The
with the CFTC to satisfy certain 5 U.S.C. 552, et seq. (‘‘FOIA’’). SEC is requesting public comment on
proposed CFTC filing requirements by SEC proposed rule 204(b)–1 [17 CFR
filing Form PF with the SEC, but only 275.204(b)–1] and proposed Form PF
if those CPOs and CTAs are also Electronic Comments [17 CFR 279.9] under the Investment
registered with the SEC as investment • Use the SEC’s Internet comment Advisers Act of 1940 [15 U.S.C. 80b]
advisers and advise one or more private form (http://www.sec.gov/rules/ (‘‘Advisers Act’’).2
funds. The information contained in proposed.shtml); or I. Background
Form PF is designed, among other • Send an e-mail to rule-
things, to assist the Financial Stability comments@sec.gov. Please include File A. The Dodd-Frank Act
Oversight Council in its assessment of Number S7–05–11 on the subject line; On July 21, 2010, President Obama
systemic risk in the U.S. financial or signed into law the Dodd-Frank Wall
system. These advisers would file these • Use the Federal eRulemaking Portal Street Reform and Consumer Protection
reports electronically, on a confidential (http://www.regulations.gov). Follow the Act (‘‘Dodd-Frank Act’’).3 While the
basis. instructions for submitting comments. Dodd-Frank Act provides for wide-
DATES: Comments should be received on ranging reform of financial regulation,
Paper Comments
or before April 12, 2011. one stated focus of this legislation is to
ADDRESSES: Comments may be
• Send paper comments in triplicate
submitted by any of the following to Elizabeth M. Murphy, Secretary, 17 U.S.C. 1a.
methods: Securities and Exchange Commission, 2 15 U.S.C. 80b. Unless otherwise noted, when we
100 F Street, NE., Washington, DC refer to the Advisers Act, or any paragraph of the
CFTC 20549–1090. Advisers Act, we are referring to 15 U.S.C. 80b of
the United States Code, at which the Advisers Act
• Agency Web site, via its Comments All submissions should refer to File is codified, and when we refer to Advisers Act rule
Online process: http:// Number S7–05–11. This file number 204(b)–1, or any paragraph of this rule, we are
comments.cftc.gov. Follow the should be included on the subject line referring to 17 CFR 275.204(b)–1 of the Code of
if e-mail is used. To help us process and Federal Regulations in which this rule would be
instructions for submitting comments published. In addition, in this Release, when we
through the Web site. review your comments more efficiently, refer to the ‘‘Advisers Act,’’ we refer to the Advisers
• Mail: David A. Stawick, Secretary, please use only one method. The SEC Act as in effect on July 21, 2011.
Commodity Futures Trading will post all comments on the SEC’s 3 Public Law 111–203, 124 Stat. 1376 (2010).
Federal Register / Vol. 76, No. 29 / Friday, February 11, 2011 / Proposed Rules 8069
‘‘promote the financial stability of the SEC.9 Congress required this registration and reports must include a description
United States’’ by, among other in part because it believed that of certain information about private
measures, establishing better monitoring ‘‘information regarding [the] size, funds, such as the amount of assets
of emerging risks using a system-wide strategies and positions [of large private under management, use of leverage,
perspective.4 To further this goal, Title funds] could be crucial to regulatory counterparty credit risk exposure, and
I of the Dodd-Frank Act establishes the attempts to deal with a future crisis.’’ 10 trading and investment positions for
Financial Stability Oversight Council To that end, Section 404 of the Dodd- each private fund advised by the
(‘‘FSOC’’), which is comprised of the Frank Act, which amends section 204(b) adviser.13 The SEC must issue jointly
leaders of various financial regulators of the Advisers Act, directs the SEC to with the CFTC, after consultation with
(including the Commissions’ Chairmen) require private fund advisers 11 to FSOC, rules establishing the form and
and other participants.5 The Dodd- maintain records and file reports content of any such reports required to
Frank Act directs FSOC to monitor containing such information as the SEC be filed with respect to private fund
emerging risks to U.S. financial stability deems necessary and appropriate in the advisers also registered with the
and to require that the Board of public interest and for investor CFTC.14
Governors of the Federal Reserve protection or for the assessment of This joint proposal is designed to
System (‘‘FRB’’) supervise designated systemic risk by FSOC.12 The records fulfill this statutory mandate. Under
nonbank financial companies that may proposed Advisers Act rule 204(b)–1,
pose risks to U.S. financial stability in acquisition of such securities, are qualified private fund advisers would be required
the event of their material financial purchasers, and which is not making and does not to file Form PF with the SEC. Private
at that time propose to make a public offering of
distress or failure or because of their such securities.’’ The term ‘‘qualified purchaser’’ is fund advisers that also are registered as
activities.6 In addition, the Dodd-Frank defined in section 2(a)(51) of the Investment CPOs or CTAs with the CFTC would file
Act directs FSOC to recommend to the Company Act. Form PF to satisfy certain CFTC
FRB heightened prudential standards 9 The Dodd-Frank Act requires such private fund
systemic risk reporting requirements.15
for designated nonbank financial adviser registration by amending section 203(b)(3)
of the Advisers Act to repeal the exemption from Information collected about private
companies.7 registration for any adviser that during the course funds on Form PF, together with
The Dodd-Frank Act anticipates that of the preceding 12 months had fewer than 15 information the SEC collects on Form
FSOC will be supported in these clients and neither held itself out to the public as ADV and the information the CFTC
responsibilities by various regulatory an investment adviser nor advised any registered
investment company or business development separately has proposed CPOs file on
agencies, including the Commissions. company. See section 403 of the Dodd-Frank Act. Form CPO–PQR and CTAs file on Form
To that end, the Dodd-Frank Act See also infra note 11 for the definition of ‘‘private CTA–PR, will provide FSOC and the
amends certain statutes, including the fund adviser.’’ There are exemptions from the
Commissions with important
Advisers Act, to authorize or direct registration requirement, including exemptions for
advisers to venture capital funds and advisers to information about the basic operations
certain Federal agencies to support private funds with less than $150 million in assets and strategies of private funds and will
FSOC. Title IV of the Dodd-Frank Act under management in the United States. There also be important in FSOC obtaining a
amends the Advisers Act to generally is an exemption for ‘‘foreign private advisers,’’
baseline picture of potential systemic
require that advisers to hedge funds and which are investment advisers with no place of
business in the United States, fewer than 15 clients risk across both the entire private fund
other private funds 8 register with the in the United States and investors in the United industry and in particular kinds of
States in private funds advised by the adviser, and private funds, such as hedge funds.16
4 See S. Conf. Rep. No. 111–176, at 2–3 (2010) less than $25 million in assets under management
(‘‘Senate Committee Report’’). from such clients and investors. See sections 402,
5 Section 111 of the Dodd-Frank Act provides that 407 and 408 of the Dodd-Frank Act. See also mandatory. See also Senate Committee Report,
Exemptions for Advisers to Venture Capital Funds, supra note 4, at 39 (‘‘this title requires private fund
the voting members of FSOC will be the Secretary
Private Fund Advisers With Less Than $150 Million advisers * * * to disclose information regarding
of the Treasury, the Chairman of the FRB, the
in Assets Under Management, and Foreign Private their investment positions and strategies.’’).
Comptroller of the Currency, the Director of the 13 See section 404 of the Dodd-Frank Act.
Bureau of Consumer Financial Protection, the Advisers, Investment Advisers Act Release No. IA–
Chairman of the SEC, the Chairperson of the 3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10, 2010) 14 See section 406 of the Dodd-Frank Act.
Federal Deposit Insurance Corporation, the (‘‘Private Fund Exemption Release’’); Rules 15 For these private fund advisers, filing Form PF
Chairperson of the CFTC, the Director of the Federal Implementing Amendments to the Investment through the Form PF filing system would be a filing
Housing Finance Agency, the Chairman of the Advisers Act of 1940, Investment Advisers Act with both the SEC and CFTC. Irrespective of their
National Credit Union Administration Board and an Release No. IA–3110 (Nov. 19, 2010), 75 FR 77,052 filing a Form PF with the SEC, all private fund
independent member appointed by the President (Dec. 10, 2010) (‘‘Implementing Release’’). advisers that are also registered as CPOs and CTAs
having insurance expertise. FSOC will also have References in this Release to Form ADV or terms with the CFTC would be required to file Schedule
five nonvoting members, which are the Director of defined in Form ADV or its glossary are to the form A of proposed Form CPO–PQR (for CPOs) or
the Office of Financial Research, the Director of the and glossary as they are proposed to be amended Schedule A of proposed Form CTA–PR (for CTAs).
Federal Insurance Office, a state insurance in the Implementing Release. Additionally, to the extent that they operate or
10 See Senate Committee Report, supra note 4, at
commissioner, a state banking supervisor and a advise commodity pools that do not satisfy the
state securities commissioner. 38. definition of ‘‘private fund’’ under the Dodd-Frank
6 Section 112 of the Dodd-Frank Act. 11 Throughout this Release, we use the term Act, private fund advisers that are also registered
7 Id. ‘‘private fund adviser’’ to mean any investment as CPOs or CTAs would still be required to file
8 Section 202(a)(29) of the Advisers Act defines adviser that (i) is registered or required to register proposed Form CPO–PQR (for CPOs) and proposed
the term ‘‘private fund’’ as ‘‘an issuer that would be with the SEC (including any investment adviser Form CTA–PR (for CTAs), as applicable.
an investment company, as defined in section 3 of that is also registered or required to register with 16 The information reported through the various
the Investment Company Act of 1940 (15 U.S.C. the CFTC as a CPO or CTA) and (ii) advises one or reporting forms is designed to be complementary,
80a–3) (‘‘Investment Company Act’’), but for section more private funds. We are not proposing that and not duplicative. Information reported on Form
3(c)(1) or 3(c)(7) of that Act.’’ Section 3(c)(1) of the advisers solely to venture capital funds or advisers ADV would be publicly available, while
Investment Company Act provides an exclusion to private funds that in the aggregate have less than information reported on Form PF and proposed
from the definition of ‘‘investment company’’ for $150 million in assets under management in the Forms CPO–PQR and CTA–PR would be
any ‘‘issuer whose outstanding securities (other than United States (‘‘exempt reporting advisers’’) be confidential to the extent permitted under
short-term paper) are beneficially owned by not required to file Form PF. applicable law. Form ADV and Form PF also have
more than one hundred persons and which is not 12 While Advisers Act section 204(b)(1) could be different principal purposes. Form ADV primarily
making and does not presently propose to make a read in isolation to imply that the SEC requiring aims at providing the SEC and investors with basic
public offering of its securities.’’ Section 3(c)(7) of private fund systemic risk reporting is information about advisers (including private fund
the Investment Company Act provides an exclusion discretionary, other amendments to the Advisers advisers) and the funds they manage for investor
from the definition of ‘‘investment company’’ for Act made by the Dodd-Frank Act (such as Advisers protection purposes, although Form ADV
any ‘‘issuer, the outstanding securities of which are Act section 204(b)(5) and 211(e) suggest that information also will be available to FSOC.
owned exclusively by persons who, at the time of Congress intended such rulemaking to be Continued
Information the SEC obtains through future financial crises.22 Collecting In addition, our staffs have consulted
reporting under section 404 of the consistent and comparable information with the United Kingdom’s Financial
Dodd-Frank Act is to be shared with is of added value in private fund Services Authority (the ‘‘FSA’’), which
FSOC as FSOC considers necessary for systemic risk reporting because it would has conducted a voluntary semi-annual
purposes of assessing the systemic risk aid in the assessment of systemic risk on survey since October 2009 by sampling
posed by private funds and generally is a global basis and thus enhance the the largest hedge fund groups based in
to remain confidential.17 Our staffs have utility of information sharing among the United Kingdom.27 Because many
consulted with staff representing U.S. and foreign financial regulators.23 hedge fund advisers are located in the
FSOC’s members in developing this Recognizing this benefit, our staffs United Kingdom and subject to the
proposal. We note that simultaneous participated in the International jurisdiction of the FSA, this
with our staffs’ FSOC consultations Organization of Securities Commissions’ coordination has been particularly
relating to this rulemaking, FSOC has (‘‘IOSCO’’) preparation of a report important.28 UK hedge fund advisers
been building out its standards for regarding hedge fund oversight.24 complete this survey on a voluntary
assessing systemic risk across different Among other matters, this report basis, and the survey collects
kinds of financial firms and has recently recommended that hedge fund advisers information regarding all funds
proposed standards for determining provide to their national regulators managed by the particular hedge fund
which nonbank financial companies information for the identification, adviser as well as for individual funds
should be designated as subject to FRB analysis, and mitigation of systemic with at least $500 million in assets. The
supervision.18 risk. It also recommended that information the survey collects is
regulators cooperate and share designed to help the FSA better
B. International Coordination information where appropriate in order understand hedge funds’ use of
In assessing systemic risk, the Dodd- to facilitate efficient and effective leverage, ‘‘footprints’’ in various asset
Frank Act requires that FSOC oversight of globally active hedge funds classes (including concentration and
coordinate with foreign financial and to help identify systemic risks, risks liquidity issues), the scale of asset/
regulators.19 This coordination may be to market integrity, and other risks liability mismatches, and counterparty
particularly important in assessing arising from the activities or exposures credit risks.29 In addition, for more than
systemic risk associated with hedge of hedge funds.25 The types of five years the FSA has been conducting
funds and other private funds because information that IOSCO recommended a semi-annual survey of hedge fund
they often operate globally and make regulators gather from hedge fund counterparties to assist it in assessing
significant investments in firms and advisers is consistent with and trends in counterparty credit risk,
markets around the world.20 As others comparable to the types of information margin requirements, and other
have recognized, ‘‘[g]iven the global we propose to collect from hedge funds matters.30 Our staffs’ consultation with
nature of the markets in which [private through Form PF, as described in the FSA as they designed and
fund] managers and funds operate, it is further detail below.26 conducted their hedge fund surveys has
imperative that a regulatory framework been very informative, and we have
be applied on an internationally 22 See U.S. Department of the Treasury, Financial incorporated into proposed Form PF
consistent basis.’’ 21 International Regulatory Reform: A New Foundation (2009), at 8; many of the types of information
and Equipping Financial Regulators with the Tools
regulatory coordination also has been Necessary to Monitor Systemic Risk, Senate
collected through the FSA surveys.
cited as a critical element in facilitating Banking Subcommittee on Security and SEC staff also has consulted with
financial regulators’ formulation of a International Trade and Finance, Feb. 12, 2010 Hong Kong’s Securities and Futures
comprehensive and effective response to (testimony of Daniel K. Tarullo, member of the Commission regarding hedge fund
FRB). See also Group of 20 and the International
Monetary Fund, The Global P Crisis for Fure
oversight and data collection because
Information on Form ADV is designed to provide Regulation of Financial Institutions and M arkets Hong Kong is an important jurisdiction
the SEC with information necessary to its and for Liquidity Management (Feb. 4, 2009). for hedge funds in Asia.31 This
administration of the Advisers Act and to efficiently 23 The Commissions expect that they may share
consultation also has proven helpful in
allocate its examination resources based on the information reported on Form PF with various
risks the SEC discerns or the identification of designing proposed Form PF.
foreign financial regulators under information
common business activities from information sharing agreements in which the foreign regulator
provided by advisers. See Implementing Release, agrees to keep the information confidential. represent a significant proportion of such activity
supra note 9. In contrast, the Commissions intend 24 Technical Committee of the International in important markets or products. Some of this
to use Form PF primarily as a confidential systemic Organization of Securities Commissions, Hedge information would be collected through the revised
risk disclosure tool to assist FSOC in monitoring Funds O (June 2009), available at https:// Form ADV, as proposed by the SEC in the
and assessing systemic risk, although it also would www.iosco.org/library/pubdocs/pdf/ Implementing Release, rather than Form PF.
be available to assist the Commissions in their IOSCOPD293.pdf (‘‘IOSCO Report’’).
27 The survey canvasses approximately 50 FSA-
regulatory programs, including examinations and 25 Id. at 3. authorized investment managers. See, e.g.,
investigations and investor protection efforts 26 See IOSCO Report, supra note 24, at 14; Press Financial Services Authority, Assessing Possible
relating to private fund advisers. Sources of Systemic Risk from Hedge Funds: A
17 See section 404 of the Dodd-Frank Act; infra Release, International Regulators Publish Systemic
Report on the Findings of the Hedge Fund as
Risk Data Requirements for Hedge Funds (Feb. 25,
note 39 and accompanying text. Counterparty Survey and the Hedge Fund Survey
2010), available at https://www.iosco.org/news/pdf/
18 See, e.g., Authority to Require Supervision and (Jul. 2010), available at http://www.fsa.gov.uk/
IOSCONEWS179.pdf. The IOSCO Report states that
Regulation of Certain Nonbank Financial pubs/other/hf_report.pdf (‘‘FSA Survey’’).
systemic risk information that hedge fund advisers
Companies, Financial Stability Oversight Council should provide to regulators should include, for
28 According to Hedge Fund Intelligence, U.K.-
Release (Jan. 18, 2011); Advance Notice of Proposed example: (1) Information on their prime brokers, based advisers manage approximately 16% of global
Rulemaking Regarding Authority to Require custodian, and background information on the hedge fund assets. This concentration of hedge fund
Supervision and Regulation of Certain Nonbank persons managing the assets; (2) information on the advisers is second only to the United States
Financial Companies, Financial Stability Oversight manager’s larger funds including the net asset (managing approximately 76% of global hedge fund
Council Release (Oct. 1, 2010), 75 FR 61653 (Oct. value, predominant strategy/regional focus and assets). See HFI, supra note 20.
6, 2010) (‘‘FSOC Designation ANPR’’). performance; (3) leverage and risk information,
29 FSA Survey, supra note 27.
19 See section 175 of the Dodd-Frank Act. 30 Id.
including concentration risk of the hedge fund
20 See Damian Alexander, Global Hedge Fund 31 According to Hedge Fund Intelligence, Hong
adviser’s larger funds; (4) asset and liability
Assets Rebound to Just Over $1.8 Trillion, Hedge information for the manager’s larger funds; (5) Kong-based advisers manage approximately 0.54%
Fund Intelligence (Apr. 7, 2010) (‘‘HFI’’). counterparty risk, including the biggest sources of of global hedge fund assets, which is the largest
21 Group of Thirty, Financial Reform: A credit; (6) product exposure for all of the manager’s concentration of hedge fund advisers in Asia. See
Framework for Financial Stability (Jan. 15, 2009). assets; and (7) investment activity known to HFI, supra note 20.
Collectively, hedge fund advisers based have taken these international efforts form only with respect to those
in the United States, the United relating to systemic risk monitoring in sections.38
Kingdom, and Hong Kong represent private equity funds into account in the Form PF would elicit non-public
over 92 percent of global hedge fund proposed reporting discussed below. information about private funds and
assets, and thus a broad consistency their trading strategies the public
among these jurisdictions’ hedge fund II. Discussion disclosure of which, in many cases,
information collections, including our could adversely affect the funds and
The SEC is proposing a new rule their investors. The SEC does not intend
own, will facilitate the sharing of
204(b)–1 under the Advisers Act to to make public Form PF information
consistent and comparable information
require that SEC-registered investment identifiable to any particular adviser or
for systemic risk assessment purposes
advisers report systemic risk private fund, although the SEC may use
for most global hedge fund assets under
management.32 Finally, in connection information to the SEC on Form PF if Form PF information in an enforcement
with the IOSCO report, IOSCO members they advise one or more private funds.36 action. Amendments to the Advisers Act
(including the SEC and CFTC) agreed, For registered CPOs and CTAs that are added by the Dodd-Frank Act preclude
on a ‘‘best efforts’’ basis, to conduct a also registered as investment advisers the SEC from being compelled to reveal
survey of hedge fund reporting data as with the SEC and advise a private fund, the information except in very limited
of the end of September 2010 based on this report also would serve as circumstances.39 Similarly, the Dodd-
the guidelines established in the IOSCO substitute compliance for a portion of Frank Act exempts the CFTC from being
report and the FSA survey. This the CFTC’s proposed systemic risk compelled under FOIA to disclose to the
internationally coordinated survey effort reporting requirements under proposed public any information collected
has also informed our proposed Commodity Exchange Act rule through Form PF and requires that the
reporting. 4.27(d).37 Because commodity pools CFTC maintain the confidentiality of
International efforts also have focused that meet the definition of a private that information consistent with the
on potential systemic considerations fund are categorized as hedge funds for level of confidentiality established for
arising out of other types of private purposes of Form PF as discussed the SEC in section 404 of the Dodd-
funds, such as private equity funds. For below, CPOs and CTAs filing Form PF Frank Act. The Commissions would
example, an International Monetary would need to complete only the make information collected through
Fund (‘‘IMF’’) staff paper has focused on sections applicable to hedge fund Form PF available to FSOC, as is
‘‘extending the perimeter’’ of effective advisers, and the form would be a joint required by the Dodd-Frank Act, subject
regulatory oversight to capture all to the confidentiality provisions of the
financial activities that may pose Dodd-Frank Act.40
financial markets, are not subject to micro-
systemic risks, regardless of the type of prudential supervision. But they need to be part of
We propose that each private fund
macro-prudential analysis and risk assessments, as adviser report basic information about
institution in which they occur.33 The
they influence the overall behaviour of the financial the operations of its private funds on
IMF paper proposed that these financial system. To gain a truly ‘‘systemic’’ perspective on Form PF once each year. We propose
activities be subject to reporting the financial system, no material element should be that a relatively small number of Large
obligations so that regulators may assess left out.’’); Private Equity and Leveraged Finance
Markets, Bank for International Settlements Private Fund Advisers (described in
potential systemic risk and emphasized
Committee on the Global Financial System Working section II.B below) instead be required
the need to capture all financial Paper No. 30 (Jul. 2008), available at http:// to submit this basic information each
activities conducted on a leveraged www.bis.org/publ/cgfs30.pdf (‘‘BIS Private Equity quarter along with additional systemic
basis, including activities of leveraged Paper’’) (‘‘Going forward, the Working Group
believes that enhancing transparency and risk related information required by
private equity vehicles.34 Others also
strengthening risk management practices [relating Form PF concerning certain of their
have recognized a need for monitoring to private equity and leveraged finance markets]
the private equity sector because having require special attention. * * * The recent market 38 Thus, private fund advisers that also are CPOs
information on its potentially turmoil has demonstrated that a number of the risks or CTAs would be obligated to complete only
systemically important interactions with in the leveraged finance market are likely to section 1 and, if they met the applicable threshold,
materialise in combination with other financial section 2 of Form PF. Accordingly, Form PF is a
the financial system are an important market risks in stressed market conditions. * * * joint form between the SEC and the CFTC only with
part of regulators’ obtaining the In the public sector, there is a stronger case for respect to sections 1 and 2 of the form.
complete picture of the broader developing early warning indicators and devoting 39 See section 404 of the Dodd-Frank Act stating
financial system that is so vital to more research efforts to modelling the dynamic that ‘‘[n]otwithstanding any other provision of law,
relationships between risk factors with a view to the Commission [SEC] may not be compelled to
effective systemic risk monitoring.35 We understanding the interrelationships across markets disclose any report or information contained
and their impact on the financial sector.’’). See also therein required to be filed with the Commission
32 See HFI, supra note 20. Macroeconomic Assessment Group established by [SEC] under this subsection’’ except to Congress
33 See Ana Carvajal et al., The Perimeter of the Financial Stability Board and the Basel upon agreement of confidentiality. Section 404 also
Financial Regulation, IMF Staff Position Note SPN/ Committee on Banking Supervision, Interim Report: provides that nothing prevents the SEC from
09/07 (Mar. 26, 2009), available at http:// Assessing the Macroeconomic Impact of the complying with a request for information from any
www.imf.org/external/pubs/ft/spn/2009/ Transition to Stronger Capital and Liquidity other federal department or agency or any self-
spn0907.pdf. Requirements (Aug. 2010), at section 5.2, available regulatory organization requesting the report or
34 Id., at 8. at http://www.financialstabilityboard.org/ information for purposes within the scope of its
35 See, e.g., Lorenzo Bini Smaghi, Member of the publications/r_100818b.pdf. jurisdiction or an order of a court of the U.S. in an
36 See proposed Advisers Act rule 204(b)–1. action brought by the U.S. or the SEC. Section 404
Executive Board of the European Central Bank,
Going Forward—Regulation and Supervision after 37 See proposed Commodity Exchange Act rule of the Dodd-Frank Act also states that the SEC shall
the Financial Turmoil, Speech by at the 4th 4.27(d), which provides that these CPOs and CTAs make available to FSOC copies of all reports,
International Conference of Financial Regulation would need to file other reports as required under documents, records, and information filed with or
and Supervision (Jun. 19, 2009), available at rule 4.27 with respect to pools that are not private provided to the SEC by an investment adviser under
http://www.bis.org/review/r090623e.pdf (stating funds. For purposes of this proposed rule, it is the section 404 of the Dodd-Frank Act as FSOC may
‘‘macro-prudential analysis needs to capture all CFTC’s position that any false or misleading consider necessary for the purpose of assessing the
components of financial systems and how they statement of a material fact or material omission in systemic risk posed by a private fund and that
interact. This includes all intermediaries, markets the jointly proposed sections (sections 1 and 2) of FSOC shall maintain the confidentiality of that
and infrastructures underpinning them. In this proposed Form PF that is filed by these CPOs and information consistent with the level of
respect, it is important to consider that at present CTAs shall constitute a violation of section 6(c)(2) confidentiality established for the SEC in section
some of these components, such as hedge funds, of the Commodity Exchange Act. Proposed Form PF 404 of the Dodd-Frank Act.
private equity firms or over-the-counter (OTC) contains an oath consistent with this position. 40 See section 404 of the Dodd-Frank Act.
private funds.41 In the sections below, market positions. The SEC also does not the FRB.50 Such a form, if feasible,
we describe the principal reasons we currently collect data to assess the risk likely would require substantial
believe that FSOC needs this of a run on a private liquidity fund, a additional and more detailed data
information in order to monitor the risk that could transfer into registered addressing a wider range of possible
systemic risk that may be associated money market funds and into the fund profiles, since it could not be
with the operation of private funds. broader short term funding markets and tailored to a particular adviser, and
those that rely on those markets.47 would impose correspondingly greater
A. Purposes of Form PF While we are proposing to collect burdens on private fund advisers. This
The Dodd-Frank Act tasks FSOC with information on Form PF to assist FSOC type of information gathering may be
monitoring the financial services in its monitoring obligations under the better accomplished by OFR through
marketplace in order to identify Dodd-Frank Act, the information targeted information requests to specific
potential threats to the financial collected on Form PF would be private fund advisers identified through
stability of the United States.42 It also available to assist the Commissions in Form PF, rather than through a general
requires FSOC to collect information their regulatory programs, including reporting form.51
from member agencies to support its examinations and investigations and The amount of information a private
functions.43 Section 404 of the Dodd- investor protection efforts relating to fund adviser would be required to
Frank Act directs the SEC to support private fund advisers.48 report on the proposed form would vary
this effort by collecting from investment We have designed Form PF, in based on both the size of the adviser and
advisers to private funds such consultation with staff representing the type of funds it advises. This
information as the SEC deems necessary FSOC’s members, to provide FSOC with approach reflects our initial view after
and appropriate in the public interest such information so that it may carry consulting with staff representing
and for the protection of investors or for out its monitoring obligations.49 Based FSOC’s members that a smaller private
the assessment of systemic risk.44 FSOC upon the information we propose to fund adviser may present less risk to the
may, if it deems necessary, direct the obtain from advisers about the private stability of the U.S. financial system and
Office of Financial Research (‘‘OFR’’) to funds they advise, together with market thus merit reporting of less
collect additional information from data it collects from other sources, information.52 It also reflects our
nonbank financial companies.45 FSOC should be able to identify understanding that different types of
The Commissions are jointly whether any private funds merit further private funds could present different
proposing sections 1 and 2 of Form PF, analysis or whether OFR should collect implications for systemic risk and that
and the SEC is proposing sections 3 and additional information. We have not reporting requirements should be
4 of Form PF, to collect information sought to design a form that would appropriately calibrated.53 As discussed
necessary to permit FSOC to monitor provide FSOC in all cases with all the in more detail below, Form PF would
private funds in order to identify any information it may need to make a require more detailed information from
potential systemic threats arising from determination that a particular entity advisers managing a large amount of
their activities. The information we should be designated for supervision by hedge fund or liquidity fund assets. Less
currently collect about private funds information would be required
and their activities is very limited and 47 See section II.A.3 of this Release for a regarding advisers managing a large
is not designed for the purpose of discussion of liquidity funds and their potential amount of private equity fund assets
risks. because, after a review of available
monitoring systemic risk.46 We do not 48 See SEC section VI.A of this Release for a
currently collect information, for literature and consultation with staff
discussion of how the SEC could use proposed
example, about hedge funds’ primary Form PF data for its regulatory activities and
representing FSOC’s members, it
trading counterparties or significant investor protection efforts. appears that private equity funds may
49 Industry participants (in response to FSOC present less potential risk to U.S.
41 See proposed Instructions to Form PF. Our Designation ANPR, supra note 18) acknowledged financial stability. The principal reasons
proposed reporting thus complies with the Dodd- the potentially important function that such for Form PF’s proposed reporting
Frank Act directive that, in formulating systemic reporting may play in allowing FSOC to monitor the
private fund industry more generally and to assess specific to hedge funds, liquidity funds,
risk reporting and recordkeeping for investment
advisers to mid-sized private funds, the the extent to which any private funds may pose and private equity funds are discussed
Commission take into account the size, governance, systemic risk more specifically. See, e.g., Comment below.
and investment strategy of such funds to determine Letter of the Managed Funds Association (Nov. 5,
whether they pose systemic risk. See section 408 of 2010) (‘‘the enhanced regulation of hedge fund 1. Hedge Funds
the Dodd-Frank Act. The Dodd-Frank Act also managers and the markets in which they participate
following the passage of the Dodd-Frank Act We believe that Congress expected
states that the SEC may establish different reporting
requirements for different classes of fund advisers, ensures that regulators will have a timely and hedge fund advisers would be required
based on the type or size of private fund being complete picture of hedge funds and their to report information to the
advised. See section 404 of the Dodd-Frank Act. activities’’), Comment Letter of the Coalition of Commissions under Title IV of the
Private Investment Companies (Nov. 5, 2010) (‘‘the
42 See section 112(a)(2)(C) of the Dodd-Frank Act.
registration and reporting structure for private
Dodd-Frank Act.54 After consulting with
43 See section 112(d)(1) of the Dodd-Frank Act.
funds subject to SEC oversight will result in an
44 Section 404 of the Dodd-Frank Act requires that 50 See section 113 of the Dodd-Frank Act for a
unprecedented range and depth of data to the
reports and records that the SEC mandates be Council, its constituent members and the newly discussion of the matters that FSOC must consider
maintained for these purposes include a description created Office of Financial Research. From this when determining whether a U.S. nonbank
of certain categories of information, such as assets information, in addition to the information gathered financial company shall be supervised by the FRB
under management, use of leverage, counterparty by the Council, the Council should be able to and subject to prudential standards.
credit risk exposure, and trading and investment assemble a clear picture of the overall U.S. financial 51 Recordkeeping requirements specific to private
positions for each private fund advised by the network and how private investment funds fit into fund advisers for systemic risk assessment purposes
adviser. it, both on an individual and overall basis’’), will be addressed in a future release pursuant to our
45 See sections 153 and 154 of the Dodd-Frank
Comment Letter of the Private Equity Growth authority under section 404 of the Dodd-Frank Act.
Act. Council (Nov. 5, 2010) (‘‘regulators also now have 52 We discuss the information we propose
46 We note that the SEC has proposed the authority to require all private equity firms and requiring smaller private fund advisers report in
amendments to Form ADV that also would require private equity funds to provide any additional data section II.D.1 of this Release.
private funds to report certain basic information, needed to assess systemic risk’’) (‘‘PE Council 53 Congress recognized this need as well. See
such as the fund’s prime broker and its gross and Letter’’). Comment letters in response to the FSOC supra note 41.
net asset values. See Implementing Release, supra Designation ANPR are available at http:// 54 See Senate Committee Report, supra note 4, at
note 9. www.regulations.gov. 38 (‘‘While hedge funds are generally not thought
staff representing FSOC’s members, our or both) could result in material losses and discuss their implications for the
initial view is that the investment at the financial institutions that lend to reporting we propose on Form PF.
activities of hedge funds 55 may have the them if collateral securing this lending
potential to pose systemic risk for is inadequate.58 These losses could have 2. Liquidity Funds
several reasons and, accordingly, that systemic implications if they require ‘‘Liquidity funds’’ also may be
advisers to these hedge funds should these financial institutions to scale back important to FSOC’s monitoring and
provide targeted information on Form their lending efforts or other financing assessment of potential systemic risks,
PF to allow FSOC to gain a better activities generally.59 The simultaneous and the SEC believes information
picture of the potential systemic risks failure of several similarly positioned
concerning them, therefore, should be
posed by the hedge fund industry. hedge funds could create contagion
included on Form PF.63 The proposed
Hedge funds may be important sources, through the financial markets if the
Form PF would define a liquidity fund
and users, of liquidity in certain failing funds liquidate their investment
markets. Hedge funds often use positions in parallel at firesale prices, as a private fund that seeks to generate
financial institutions that may have thereby depressing the mark-to-market income by investing in a portfolio of
systemic importance to obtain leverage valuations of securities that may be short-term obligations in order to
and enter into other types of widely held by other financial maintain a stable net asset value per
transactions. Hedge funds employ institutions and investors.60 Many of unit or minimize principal volatility for
investment strategies that may use these concerns were raised in investors.64 Liquidity funds thus can
leverage, derivatives, complex September 1998 by the near collapse of resemble money market funds, which
structured products, and short selling in Long Term Capital Management, a are registered under the Investment
an effort to generate returns. Hedge highly leveraged hedge fund that Company Act of 1940 and seek to
funds also may employ strategies experienced significant losses stemming maintain a ‘‘stable’’ net asset value per
involving high volumes of trading and from the 1997 Russian financial crisis.61 share, typically $1, through the use of
concentrated investments. These Accordingly, proposed Form PF the ‘‘amortized cost’’ method of
strategies, and in particular high levels would include questions about large valuation.65
of leverage, can increase the likelihood hedge funds’ investments, use of A report recently released by the
that the fund will experience stress or leverage and collateral practices, President’s Working Group on Financial
fail, and amplify the effects on financial counterparty exposures, and market Markets (the ‘‘PWG MMF Report’’)
markets.56 While many hedge funds are positions that are designed to assist discussed in detail how certain features
not highly leveraged, certain hedge fund FSOC in monitoring and assessing the of registered money market funds, many
strategies employ substantial amounts of extent to which stresses at those hedge of which are shared by liquidity funds,
leverage.57 Significant hedge fund funds could have systemic implications may make them susceptible to runs and
failures (whether caused by their by spreading to prime brokers, credit or thus create the potential for systemic
investment positions or use of leverage trading counterparties, or financial risk.66 The PWG MMF Report describes
markets.62 This information also is how some investors may consider
to have caused the current financial crisis,
information regarding their size, strategies, and
designed to help FSOC observe how liquidity funds to function as substitutes
positions could be crucial to regulatory attempts to hedge funds behave in response to for registered money market funds and
deal with a future crisis. The case of Long-Term certain stresses in the markets or the potential for systemic risk that
Capital Management, a hedge fund that was rescued economy. We request comment on this
through Federal Reserve intervention in 1998
because of concerns that it was ‘‘too-interconnected-
analysis of the potential systemic risk 63 Form PF is a joint form between the SEC and
to-fail,’’ shows that the activities of even a single posed by hedge funds. Does it the CFTC only with respect to sections 1 and 2 of
hedge fund may have systemic consequences.’’). adequately identify the ways in which the form. Section 3 of the form, which would
55 See section II.B of this Release for a discussion
hedge funds might generate systemic require more specific reporting regarding liquidity
of the definition of ‘‘hedge fund’’ in proposed Form funds, would only be required by the SEC.
risk? Are there other ways that hedge
PF. To prevent duplicative reporting, commodity 64 See section II.B of this Release for a discussion
pools that meet the definition of a private fund funds could create systemic risk? Are of the definition of ‘‘liquidity fund’’ in proposed
would be treated as hedge funds for purposes of hedge funds not a potential source of Form PF.
Form PF. CPOs and CTAs that are not also systemic risk? Please explain your views 65 Under the amortized cost method, securities are
registered as an investment adviser with the SEC valued at acquisition cost, with adjustments for
would be required to file proposed Form CPO–PQR amortization of premium or accretion of discount,
58 See, e.g., Id.; Ben S. Bernanke, Hedge Funds
(for CPOs) and proposed Form CTA–PR (for CTAs) instead of at fair market value. To prevent
reporting similar information as Form PF requires and Systemic Risk, Speech at the Federal Reserve substantial deviations between the amortized cost
for private fund advisers that advise one or more Bank of Atlanta’s 2006 Financial Market’s share price and the mark-to-market per-share value
hedge funds. See Commodity Pool Operators and Conference (May 16, 2006), available at http:// of the fund’s assets (its ‘‘shadow NAV’’), a money
Commodity Trading Advisors: Amendments to www.federalreserve.gov/newsevents/speech/ market fund must periodically compare the two. If
Compliance Obligations, CFTC Release (Jan. l, bernanke20060516a.htm (‘‘Bernanke’’); Nicholas there is a difference of more than one-half of 1
2011). Deeming commodity pools that meet the Chan et al., Systemic Risk and Hedge Funds, percent (typically, $0.005 per share), the fund must
definition of a private fund to be hedge funds for National Bureau of Economic Research Working re-price its shares, an event colloquially known as
purposes of Form PF, therefore, is designed to Paper 11200 (Mar. 2005), available at http:// ‘‘breaking the buck.’’ See Money Market Fund
ensure that the CFTC obtains similar reporting www.nber.org/papers/w11200.pdf; Andrew Lo, Reform, Investment Company Act Release No.
regarding commodity pools that satisfy CFTC Regulatory Reform in the Wake of the Financial 28807 (June 30, 2009), 74 FR 32688 (July 8, 2009),
reporting obligations by the CPO or CTA filing Crisis of 2007–2008, 1 J. Fin. Econ. P. 4 (2009); and at section III (‘‘MMF Reform Proposing Release’’).
proposed Form PF. John Kambhu et al., Hedge Funds, Financial 66 Report of the President’s Working Group on
Intermediation, and Systemic Risk, FRBNY Econ. P.
56 See President’s Working Group on Financial

Financial Markets: Money Market Fund Reform
Markets, Hedge Funds, Leverage, and the Lessons Rev. (Dec. 2007) (‘‘Kambhu’’).
59 Kambhu, supra note 58; Financial Stability
Options (Oct. 2010), available at http://treas.gov/
of Long Term Capital Management (Apr. 1999), at press/releases/docs/
23, available at http://www.ustreas.gov/press/ Forum, Update of the FSF Report on Highly 10.21%20PWG%20Report%20Final.pdf. The PWG
releases/reports/hedgfund.pdf (‘‘PWG LTCM Leveraged Institutions (May 19, 2007). MMF Report states that the work of the President’s
60 See Bernanke, supra note 58; David Stowell,
Report’’). Working Group on Financial Reform relating to
57 See FSA Survey, supra note 27, at 5 (showing An Introduction to Investment Banks, Hedge Funds money market funds is now being taken over by
borrowings as a multiple of net equity ranging from & Private Equity: The New Paradigm 259–261 FSOC. The SEC has discussed previously registered
100% in strategies such as managed futures to (2010). money market funds’ susceptibility to runs. See
61 See PWG LTCM Report, supra note 56.
1400% in the fixed income arbitrage hedge fund MMF Reform Proposing Release, supra note 65, at
strategy). 62 See section II.D.2 of this Release. section III.
results.67 During the financial crisis, private equity funds, certain of their recent financial crisis, a trend in private
several sponsors of ‘‘enhanced cash portfolio companies, or creditors equity transactions was for private
funds,’’ a type of liquidity fund, involved in financing private equity equity firms to enter into buyout
committed capital to those funds to transactions also may be important to transactions with seller-favorable
prevent investors from realizing losses the assessment of systemic risk and, financing conditions and terms that
in the funds.68 The fact that sponsors of therefore, that large advisers to these placed much of the risk of market
certain liquidity funds felt the need to funds should provide targeted deterioration after the transaction
support the stable value of those funds information on Form PF to allow FSOC agreement was signed on the financing
suggests that they may be susceptible to to conduct basic systemic risk institutions and the private equity
runs like registered money market monitoring.70 adviser.73
funds. One aspect of the private equity In addition, some industry observers
Registered money market funds are business model that some have have noted that the leveraged buyout
subject to extensive regulation under identified as potentially having systemic investment model of imposing
Investment Company Act rule 2a–7, implications is its method of financing significant amounts of leverage on their
which imposes credit-quality, maturity, buyouts of companies. Leveraged portfolio companies in an effort to meet
and diversification requirements on private equity transactions often rely on investment return objectives subjects
money market fund portfolios designed banks to provide bridge financing until those portfolio companies to greater risk
to ensure that the funds’ investing the permanent debt financing for the in the event of economic stress.74 If
remains consistent with the objective of transaction is completed, whether private equity funds conduct a
maintaining a stable net asset value.69 through a syndicated bank loan or
While liquidity funds are not required issuance of high yield bonds by the risks has resulted in significant mark to market
to comply with rule 2a–7, we portfolio company or both.71 When losses to banks’’); Bank of England, Financial
Stability Report, at 19 (Oct. 2007), available at
understand that many liquidity funds market conditions suddenly turn, these http://www.bankofengland.co.uk/publications/fsr/
can suspend redemptions or impose institutions can be left holding this 2007/fsrfull0710.pdf (‘‘Bank of England’’) (‘‘The near
gates on shareholder redemptions upon potentially risky bridge financing (or closure of primary issuance markets for
indications of stress at the fund. As a committed to provide the final bank collateralised loan obligations, and an increase in
risk aversion among investors, left banks unable to
result, the risk of runs at liquidity funds financing, but no longer able to distribute leveraged loans that they had originated
may be mitigated. The information that syndicate or securitize it and thus earlier in the year. This exacerbated a problem
the SEC is proposing to require advisers forced to hold it) at precisely the time banks already faced, as debt used to finance a
number of high-profile private-equity sponsored
to liquidity funds report is designed to when credit market conditions, and leveraged buyouts (LBOs) had remained on their
allow FSOC to assess liquidity funds’ therefore the institutions’ own general balance sheets.’’).
susceptibility to runs and ability to exposure to private equity transactions 73 See Davidoff, supra note 71, at 495–496 (noting
otherwise pose systemic risk. and other committed financings, have the trend in private equity transaction agreements
The SEC requests comment on this worsened.72 For example, prior to the signed prior to the financial crisis to have no
financing condition and to have limited ‘‘market
analysis of the potential systemic risk outs’’ and ‘‘lender outs’’ in the debt commitment
posed by liquidity funds. Does it 70 See section II.B of this Release for a discussion
letters and further noting that ‘‘by agreeing to a more
adequately identify the ways in which of the definition of ‘‘private equity fund’’ in Form certain debt commitment letter and providing
PF. Form PF is a joint form between the SEC and bridge financing, the banks now took on the risk of
liquidity funds might generate systemic the CFTC only with respect to sections 1 and 2 of market deterioration between the time of signing
risk? Are there other ways that liquidity the form. Section 4 of the form, which would and closing.’’). Bank regulators and industry
funds could create systemic risk? Do require more specific reporting regarding private observers also noted the trend in private equity
liquidity funds lack any potential to equity funds, would only be required by the SEC. financing prior to the financial crisis for banks to
71 See Steven M. Davidoff, The Failure of Private
create systemic risk? Please explain enter into ‘‘covenant lite’’ loans, which did not
Equity, 82 S. Cal. L. Rev. 481, 494 (2009) require borrowers to meet certain performance
your views and discuss their (‘‘Davidoff’’). metrics for cash flow or profits. See The Economics
implications for the reporting proposed 72 See Senior Supervisors Group, Observations on of Private Equity Investments: Symposium
on Form PF. Risk Management Practices during the Recent Summary, FRBSF Economic Letter (Feb. 29, 2008),
Market Turbulence, at 2 (Mar. 6, 2008), available at available at http://www.frbsf.org/publications/
3. Private Equity Funds http://www.occ.gov/publications/publications-by- economics/letter/2008/el2008-08.html (noting
type/other-publications/pub-other-risk-mgt- growth in the first half of 2007 in such ‘‘covenant
It is the SEC’s initial view, after practices-2008.pdf (‘‘Firms likewise found that they lite’’ loans); Financial Stability Forum, Report of the
consultation with staff representing could neither syndicate to external investors their Financial Stability Forum on Enhancing Market and
FSOC’s members, that the activities of leveraged loan commitments to corporate borrowers Institutional Resilience, at 7 (Apr. 7, 2008),
nor cancel their commitments to fund those loans available at http://www.financialstabilityboard.org/
67 PWG MMF Report, supra note 66, at section 3.h
despite material and adverse changes in the publications/r_0804.pdf (‘‘Another segment that saw
availability of funding from other investors in the rapid growth in volume accompanied by a decline
(‘‘These vehicles typically invest in the same types market’’); BIS Private Equity Paper, supra note 35, in standards was the corporate leveraged loan
of short-term instruments that MMFs hold and at 1–2 (‘‘Conditions in the leveraged loan market market, where lenders agreed to weakened loan
share many of the features that make MMFs deteriorated in the second half of 2007, and demand covenants to obtain the business of private equity
vulnerable to runs, so growth of unregulated MMF for leveraged finance declined sharply. An initial funds.’’); Bank of England, supra note 73, at 27
substitutes would likely increase systemic risks. temporary adverse investor reaction to loose (‘‘Market intelligence suggested that private equity
However, such funds need not comply with rule lending terms and low credit spreads prevailing in sponsors had considerable market power to impose
2a–7 or other [Investment Company Act] early 2007 became more protracted over the course aggressive capital structures, tight spreads and weak
protections and in general are subject to little or no of the second half of the year as the turbulence in covenants because investor demand was so strong.
regulatory oversight. In addition, the risks posed by financial markets deepened and contraction in But in August, the flow of new LBOs came to a
MMF substitutes are difficult to monitor, since they demand for leveraged loans became more severe. virtual standstill and the debt of a sequence of high-
provide far less market transparency than MMFs.’’). Global primary market leveraged loan volumes profile companies could not be sold [by banks].’’).
68 See, e.g., Sree Vidya Bhaktavatsalam,
shrank by more than 50% in the second half of 74 See, e.g., Paying the Price, The Economist (Jul.
BlackRock Earnings Beat Estimates on Hedge-Fund 2007. The contraction in demand for leveraged 31, 2010) (‘‘Pension funds could decide to make a
Fees, Bloomberg (Jan. 17, 2008) (‘‘During the fourth loans revealed substantial exposure of arranger geared bet on equities by borrowing money and
quarter, BlackRock spent $18 million to support the banks to warehouse risk. Undistributed loans will investing in the S&P 500 index. But they would
net asset value of two enhanced cash funds whose contribute to increased funding costs and capital understandably regard such a strategy as highly
values fell as the credit markets got squeezed’’); Sree requirements for banks in 2008, on top of other risky. Giving money to private-equity managers,
Vidya Bhaktavatsalam & Christopher Condon, offbalance sheet products that they have been who then use debt to acquire quoted companies, is
Federated Investors Bails Out Cash Fund After forced to bring on-balance sheet. Moreover, with viewed in an entirely different light but amounts to
Losses, Bloomberg (Nov. 20, 2007). leveraged loan indices trading close to 90 cents on the same gamble’’). See also BIS Private Equity
69 See 17 CFR 270.2a–7. a dollar in March 2008, realisation of warehouse Paper, supra note 35, at 24–25.
leveraged buyout of an entity that could B. Who Must File Form PF asset value (including any committed
be systemically important, information We propose that any investment capital) or may have gross notional
about that investment could be adviser registered or required to register exposure in excess of twice its net asset
important in FSOC monitoring and with the SEC that advises one or more value (including any committed
assessing potential systemic risk.75 private funds must file a Form PF with capital); or (3) may sell securities or
For these reasons, the SEC believes the SEC.78 A CPO or CTA that also is other assets short.81 As noted above,
certain information on the activities of a registered investment adviser that ‘‘liquidity fund’’ would be defined as
private equity funds and their portfolio advises one or more private funds any private fund that seeks to generate
companies is relevant for purposes of would be required to file Form PF with income by investing in a portfolio of
monitoring potential systemic risk.76 In respect to any advised commodity pool short term obligations in order to
addition, based on the SEC’s that is a ‘‘private fund.’’ By filing Form maintain a stable net asset value per
consultations with staff representing PF with respect to these private funds, unit or minimize principal volatility for
FSOC’s members, private equity a CPO will be deemed to have satisfied investors.82 ‘‘Private equity fund’’ would
transaction financings, and their certain of its filing requirements for be defined as any private fund that is
interconnected impact on the lending these funds.79 Under these rules, most not a hedge fund, liquidity fund, real
institutions, could be a useful area for private fund advisers would be required estate fund, securitized asset fund or
FSOC to monitor in fulfilling its duty to to complete only section 1 of Form PF, venture capital fund and does not
gain a comprehensive picture of the providing certain basic information provide investors with redemption
financial services marketplace in order regarding any hedge funds they advise rights in the ordinary course.83
to identify potential threats to the in addition to information about their Our proposed definition of hedge
stability of the U.S. financial system. private fund assets under management fund would cover any private fund that
and more generally about their funds’ has any one of three common
The SEC requests comment on this performance and use of leverage. The
analysis of the potential systemic risk characteristics of a hedge fund: A
information collected under section 1 of performance fee using market value
posed by the activities of private equity Form PF is described in further detail in
funds. Does it identify the ways in (instead of only realized gains), high
section II.D.1 of this Release. Certain leverage or short selling. We are not
which private equity fund activities larger private fund advisers would be
might generate systemic risk? Are there aware of any standard definition of a
required to complete additional sections hedge fund,84 although we note that our
other ways that private equity funds or of Form PF, which require more
their activities could create systemic proposed definition is broadly based on
detailed information.
risk? Is the preliminary view that those used in the FSA survey and in the
Three types of ‘‘Large Private Fund
private equity fund activities may have IOSCO report described in section I.B
Advisers’’ would be required to
less potential to create systemic risk complete certain additional sections of above and thus generally would
than hedge funds and liquidity funds Form PF: 80 promote international consistency in
correct? Many advisers to private equity • Advisers managing hedge funds
81 See proposed Glossary of Terms to Form PF.
funds have noted that certain features of that collectively have at least $1 billion
This definition also is the same as the SEC has
the private equity business model, such in assets as of the close of business on proposed in amendments to Form ADV. See
as its reliance on long-term capital any day during the reporting period for Implementing Release, supra note 9. For purposes
commitments from investors, lack of the required report; of the definition, the fund should not net long and
substantial debt at the private equity • Advisers managing a liquidity fund short positions in calculating its borrowings but
should include any borrowings or notional
fund level, and investment primarily in and having combined liquidity fund and exposure of another person that are guaranteed by
the equity of a diverse range of private registered money market fund assets of the fund or that the fund may otherwise be
companies, mitigate its potential to pose at least $1 billion as of the close of obligated to satisfy. In addition, a commodity pool
business on any day during the that meets the definition of a private fund is treated
systemic risk.77 Do private equity funds as a hedge fund for purposes of Form PF.
not have any potential to create reporting period for the required report; 82 See proposed Glossary of Terms to Form PF.
systemic risk? Is the monitoring of and 83 See proposed Glossary of Terms to Form PF.
private equity fund activities • Advisers managing private equity Proposed Form PF would define ‘‘real estate fund’’
funds that collectively have at least $1 as any private fund that is not a hedge fund, that
unnecessary to assess systemic risk
billion in assets as of the close of does not provide investors with redemption rights
generally? Please explain your views in the ordinary course and that invests primarily in
business on the last day of the quarterly
and discuss their implications for the real estate and real estate-related assets. Proposed
reporting period for the required report. Form PF would define ‘‘securitized asset fund’’ as
reporting proposed on Form PF.
any private fund that is not a hedge fund and that
1. Types of Funds issues asset backed securities and whose investors
75 For example, some noted the role of private Proposed Form PF would define are primarily debt-holders. These definitions are
equity investments in companies that the designed to encompass entities that we believe are
government ultimately bailed out during the ‘‘hedge fund’’ as any private fund that (1) typically considered real estate or securitized asset
financial crisis. See, e.g., Casey Ross, Cerberus’ has a performance fee or allocation funds, respectively, and are primarily intended to
Success Hurt by a Pair of Gambles, The Boston calculated by taking into account exclude these types of funds from our definition of
Globe (Mar. 25, 2010) (discussing private equity unrealized gains; (2) may borrow an private equity fund to improve the quality of data
investments in GMAC and Chrysler Corp., both of reported on Form PF relating to private equity
which received government bailouts); and Louise amount in excess of one-half of its net funds. Proposed Form PF would define ‘‘venture
Story, For Private Equity, A Very Public Disaster, capital fund’’ as any private fund meeting the
N.Y. Times (Aug. 8, 2009) (same). 78 Proposed Advisers Act rule 204(b)–1. definition of venture capital fund in rule 203(l)-1
76 See section II.D.4 of this Release for a 79 Proposed CEA rule 4.27(d). A CPO registered of the Advisers Act for consistency. See proposed
discussion of the information we propose requiring with the CFTC that is also registered as a private Glossary of Terms to Form PF. See also Private
certain private equity fund advisers report on Form fund adviser with the SEC will be deemed to have Fund Exemption Release, supra note 9, for a
PF. satisfied its filing requirements for Schedules B and discussion of proposed Advisers Act rule 203(l)–1.
77 See, e.g., PE Council Letter, supra note 49; C of proposed Form CPO–PQR by completing and 84 See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC
Testimony of Mark Tresnowksi, General Counsel, filing the applicable portions of Form PF for each Cir. 2006) (‘‘ ‘Hedge funds’ are notoriously difficult
Madison Dearborn Partners, before the Senate of its commodity pools that satisfy the definition of to define. The term appears nowhere in the federal
Banking Subcommittee on Securities, Insurance and ‘‘private fund’’ in the Dodd-Frank Act. securities laws, and even industry participants do
Investment, July 15, 2009. 80 See proposed Instruction 3 to Form PF. not agree upon a single definition.’’)
hedge fund reporting.85 Moreover, we systemic risk that FSOC will want to approximately 250 U.S.-based advisers
believe that any fund meeting this monitor. The SEC recognizes that its managing over $1 billion in private
definition is an appropriate subject for proposed definition of liquidity fund equity fund assets represent
this higher level of reporting even if the potentially could capture some short- approximately 85 percent of the U.S.
fund would not otherwise be considered term bond funds. Are there ways that private equity fund industry based on
a hedge fund. the SEC could define a liquidity fund to committed capital.88
The Commissions request comment capture all potential substitutes for The SEC is proposing that private
on the hedge fund definition proposed money market funds, but not short-term fund advisers combine liquidity fund
in Form PF.86 Does this proposed bond funds? The SEC requests comment and registered money market fund
definition capture the appropriate on the liquidity fund definition assets for purposes of determining
features of funds that should be subject proposed in Form PF. whether the adviser meets the threshold
to more detailed reporting as ‘‘hedge Our proposed definition of a private for more extensive reporting regarding
funds’’? Many private funds sell short. Is equity fund is intended to distinguish its liquidity funds because it
the bright line of classifying any private private equity funds from other private understands that an adviser’s liquidity
fund that engages in short selling as a funds based upon the lack of funds and registered money market
hedge fund appropriate? Is the proposed redemption rights and their not being funds often pursue similar strategies
leverage threshold for hedge funds set at engaged in certain investment strategies and invest in the same securities and
the appropriate level? One alternative (such as securitization, real estate or thus are subject to many of the same
approach we could take is to not define venture capital), while these funds risks. Historically, most advisers of
a hedge fund in Form PF and simply would typically have performance fees enhanced cash funds or other
require that all advisers managing in based on realized gains. Has the SEC unregistered money market funds also
excess of $1 billion in private fund appropriately distinguished private advised a substantial amount of
assets (regardless of strategy) complete equity funds from other types of private registered money market fund assets,
section 2 of Form PF. Would this be a funds in its proposed definition? Should and so the SEC’s criteria for liquidity
more effective approach? For purposes others be excluded? The SEC requests fund reporting is expected to encompass
of Form PF, a commodity pool satisfying comment on the private equity fund most significant managers of liquidity
the definition of a ‘‘private fund’’ is definition proposed in Form PF. funds, which it estimates number
categorized as a hedge fund. Is this around 80 advisers.89
2. Large Private Fund Adviser
treatment appropriate?
Thresholds We believe that requiring basic
The proposed definition of liquidity
As noted above, we are proposing $1 information from all advisers about all
fund is designed to capture all potential
billion in hedge fund assets under private funds but more extensive and
substitutes for money market funds
because we believe these funds may be management as the threshold for large detailed information only from advisers
susceptible to runs and otherwise pose hedge fund adviser reporting, $1 billion with these amounts of assets under
in combined liquidity fund and management in hedge funds, private
85 The FSA survey is voluntary and does not registered money market fund assets equity funds, and liquidity funds would
proscriptively define a hedge fund, but states that under management as the threshold for allow FSOC to effectively conduct basic
if a fund generally satisfies a number of the large liquidity fund adviser reporting, monitoring for potential systemic risk in
following criteria, it should be deemed to fall these private fund industries and to
within the scope of the FSA hedge fund survey: and $1 billion in private equity fund
(1) Employs investment management techniques assets under management as the identify areas where OFR may want to
that can include the use of short selling, derivatives, threshold for large private equity fund obtain additional information. In
and leverage; (2) takes in external investor money; adviser reporting. Advisers would be addition, requiring that only these Large
(3) are not UCITS funds; (4) pursue absolute Private Fund Advisers complete
returns; (5) charge performance-based fees; (6) have required to measure whether these
broader mandates than traditional funds which give thresholds have been crossed daily for additional reporting requirements under
managers more flexibility to shift strategy; (7) have hedge funds and liquidity funds and Form PF would provide systemic risk
higher trading volumes/fund turnover; and (8)
quarterly for private equity funds based information for most private fund assets
frequently set a high minimum investment limit.
The IOSCO Report generally considered as a hedge on our belief that, as a matter of while minimizing burdens on smaller
fund all investment schemes displaying a ordinary business practice, advisers are private fund advisers that are less likely
combination of some of the following aware of hedge fund and liquidity fund to pose systemic risk concerns. The
characteristics: (1) Borrowing and leverage proposed approach thus incorporates
restrictions are not applied; (2) significant
assets under management on a daily
performance fees are paid to the manager in basis, but are likely to be aware of Congress’ directive in section 408 of the
addition to an annual management fee; (3) investors private equity fund assets under Dodd-Frank Act to take into account the
are typically permitted to redeem their interests management only on a quarterly basis. size, governance, and investment
periodically, e.g., quarterly, semi-annually or strategy of advisers to mid-sized private
annually; (4) often significant ‘own’ funds are
We designed these thresholds so that
invested by the manager; (5) derivatives are used, the group of Large Private Fund funds in determining whether they pose
often for speculative purposes, and there is an Advisers that would be included based systemic risk and formulating systemic
ability to short sell securities; and (6) more diverse on the proposed thresholds is relatively risk reporting and recordkeeping
risks or complex underlying products are involved. requirements for private funds.90
See IOSCO Report, supra note 24, at 4–5.
small in number but represents the large
86 The SEC previously defined private fund for majority of their respective industries
purposes of registration of advisers to hedge funds based on assets under management. For 88 Preqin. The Preqin data relating to private
by focusing on the structure of the fund to example, we understand that the equity fund committed capital is available in File
differentiate it from other pooled investment No. S7–05–11.
approximately 200 U.S.-based advisers 89 See, e.g., iMoneyNet, Enhanced Cash Report
vehicles, while the definition of hedge fund we
propose today for purposes of Form PF reporting managing at least $1 billion in hedge (3rd quarter 2009). The estimate of the number of
focuses on the strategy of the fund in order to fund assets represent over 80 percent of large liquidity fund advisers is based on the number
monitor trading strategies and behaviors which the U.S. hedge fund industry based on of advisers with at least $1 billion in registered
could contribute to systemic risk. See Registration money market fund assets under management.
assets under management.87 Similarly,
under the Advisers Act of Certain Hedge Fund 90 We note that the SEC has proposed to collect
Advisers, Investment Advisers Act Release No. 2333 SEC staff estimates that the information regarding the governance of private
(Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) fund advisers through Form ADV. See
(rulemaking vacated, Goldstein, 451 F.3d at 884). 87 See HFI, supra note 20. Implementing Release, supra note 9.
We request comment on the proposed These proposed aggregation Form PF.95 This would allow affiliated
thresholds. Are there more appropriate requirements are designed to prevent an entities that share reporting and risk
dividing lines as to when a private fund adviser from avoiding the proposed management systems to report jointly
adviser should be required to report Large Private Fund Adviser reporting while also permitting affiliated entities
more information? Should any of the requirements by re-structuring the that operate separately to report
assets under management thresholds be manner of providing private fund advice separately. With respect to sub-advised
lower or higher? Are the daily (for hedge internally within the private fund funds, to prevent duplicative reporting,
fund and liquidity fund managers) and manager group. The adviser also would only one adviser would report
quarterly (for private equity fund be required to exclude any assets in any information on Form PF with respect to
managers) measurement periods for the account that are solely invested in other that fund. For reporting efficiency and
assets under management thresholds set funds (i.e., internal or external fund of to prevent duplicative reporting, we are
appropriately? Should we, as proposed, funds) in order to avoid duplicative proposing that if an adviser completes
base the threshold on the amount of reporting.93 We request comment on information on Schedule D of Form
assets under management? If not, what these proposed aggregation ADV with respect to any private fund,
should we base it on? requirements. Would these proposed the same adviser would be responsible
We request comment on our proposed aggregation rules appropriately meet our for reporting on Form PF with respect
approach of only requiring these Large goal of preventing improper avoidance to that fund.96 We request comment on
Private Fund Advisers to report of the reporting requirements while this approach. Should we not allow
additional information on Form PF. Will giving a complete picture of private advisers to file a consolidated form with
collecting the information required by fund assets managed by a particular its related persons? Are there other
sections 2, 3, and 4 of Form PF only private fund adviser group? Would persons related to a private fund adviser
from advisers managing in excess of aggregating in a different manner be that should also be able to report on
these asset thresholds provide adequate more effective at meeting our goal? Form PF on a consolidated basis? For
information about potential systemic Should funds that invest most (e.g., 95 example, should we adjust Form PF to
risk in these industries? Should we percent), but not all, of their assets in permit consolidated reporting with
instead require that all private fund other funds be excluded from Form PF related persons that are exempt
advisers registered with the SEC reporting? Would excluding such funds reporting advisers in the event an
complete all of the information on Form still provide FSOC with a complete adviser chooses to voluntarily report
PF appropriate to the type of private enough picture of private fund activities exempt reporting adviser information?
funds they advise regardless of fund size to have an adequate baseline for Should we allow a different
or assets under management? Are there systemic risk monitoring purposes? arrangement on reporting of sub-advised
advisers to other types of private funds funds? If so, what would those
If the adviser’s principal office and
that should be required to report more arrangements be?
place of business is outside the United
information on Form PF? For example, States, the adviser could exclude any 5. Exempt Reporting Advisers and Other
should advisers to other types of private private fund that during the last fiscal Advisers Not Registered With the SEC
fund report more information if they year was neither a United States person We are proposing that only private
manage in excess of a certain threshold nor offered to, or beneficially owned by, fund advisers registered with the SEC
of that type of private fund assets? any United States person.94 This aspect (including those that are also registered
3. Aggregation of Assets Under of the proposed form is designed to with the CFTC as CPOs or CTAs) file
Management allow an adviser to report with respect Form PF.97 The Dodd-Frank Act created
to only those private funds that are more exemptions from SEC registration under
For purposes of determining whether likely to implicate U.S. regulatory
an adviser is a Large Private Fund the Advisers Act for advisers solely to
interests. We request comment on this venture capital funds or for advisers to
Adviser for purposes of Form PF, each aspect of the proposed form. Should we
adviser would have to aggregate private funds that in the aggregate have
require different reporting relating to less than $150 million in assets under
together: foreign advisers or foreign private
• Assets of managed accounts advised management in the United States
funds? (‘‘exempt reporting advisers’’).98 We are
by the firm that pursue substantially the
4. Reporting for Affiliated and not proposing that exempt reporting
same investment objective and strategy
Subadvised Funds advisers be required to file Form PF.99
and invest in substantially the same
We believe that Congress’ determination
positions as the private fund (‘‘parallel
To provide private fund advisers with to exempt these advisers from SEC
managed accounts’’); 91 and
reporting flexibility and convenience, registration indicates Congress’ belief
• Assets of that type of private fund
the adviser could, but is not required to, that they are sufficiently unlikely to
advised by any of the adviser’s ‘‘related
report the private fund assets that it pose systemic risk that regular reporting
persons.’’ 92
manages and the private fund assets that of detailed information may not be
91 See proposed Instructions 3, 5, and 6 to Form its related persons manage on a single necessary.100 Based on consultation
PF; and proposed Glossary of Terms to Form PF.
95 See proposed Instruction 2 to Form PF. See
See also definitions of ‘‘hedge fund assets under similar functions). See proposed Glossary of Terms
management,’’ ‘‘liquidity fund assets under to Form PF and Glossary of Terms to Form ADV. supra note 92 for the definition of ‘‘related person.’’
management,’’ and ‘‘private equity fund assets under 96 See proposed Instruction 4 to Form PF.
The adviser would be permitted, but not required,
management’’ in the proposed Glossary of Terms to to file one consolidated Form PF for itself and its 97 See proposed Advisers Act rule 204(b)–1.
Form PF. related persons. See section II.B.4 of this Release 98 See Private Fund Exemption Release, supra
92 See proposed Instructions 3 and 5 to Form PF. below. note 9; Implementing Release, supra note 9.
93 See proposed Instruction 7 to Form PF. 99 To the extent an exempt reporting adviser is
‘‘Related person’’ is defined generally as: (1) All of
the adviser’s officers, partners, or directors (or any 94 See proposed Instruction 1 to Form PF. ‘‘United registered with the CFTC as a CPO or CTA, that
person performing similar functions); (2) all persons States person’’ would have the meaning provided in adviser would be obligated to file either proposed
directly or indirectly controlling, controlled by, or proposed rule 203(m)-1 of the Advisers Act, and Form CPO–PQR or CTA–PR, respectively.
under common control with the adviser; and (3) all ‘‘principal office and place of business’’ would have 100 See Senate Committee Report, supra note 4, at
of the adviser’s employees (other than employees the same meaning as in Form ADV. See Private 74 (‘‘The Committee believes that venture capital
performing only clerical, administrative, support or Fund Exemption Release, supra note 9. Continued
with staff representing FSOC’s members the adviser’s fiscal year).103 This next Form PF update would be
and on the basic information that the frequency of reporting would allow the timely.106 This would allow us to
SEC has proposed requiring exempt Commissions and FSOC to periodically determine promptly whether an
reporting advisers report to the SEC on monitor certain key information adviser’s discontinuance in reporting is
Form ADV, the SEC is not proposing to relevant to assessing systemic risk posed due to it no longer meeting the form’s
extend Form PF reporting to these by these private funds on an aggregate reporting thresholds as opposed to a
advisers. basis. It also would allow these advisers lack of attention to its filing obligations.
Our proposed rules, however, would to file amendments at the same time as Advisers also would be able to avail
require some advisers managing less they file their Form ADV annual themselves of a temporary hardship
than $150 million in private fund assets updating amendment, which may make exemption in a similar manner as with
to report limited information on Form certain aspects of the reporting more other Commission filings if they are
PF. While Congress exempted from efficient, such as reporting assets under unable to file Form PF electronically in
registration with the SEC advisers solely management. Finally, this timing will a timely manner due to unanticipated
to private funds that in the aggregate facilitate FSOC’s compilation and technical difficulties.107
have less than $150 million in assets analysis of Form PF and Form ADV data We request comment on our proposed
under management, it provided no such for these filers since both sets of data filing frequency. Are the filing
exemption for advisers with less than will be reported as of the same date. requirements for private fund advisers
$150 million in private fund assets Large Private Fund Advisers would be frequent enough to assess high-level
under management that also, for required to complete and file a Form PF systemic risk posed by private funds?
example, advise individual clients with no later than 15 days after the end of Should smaller private fund advisers
over $100 million in assets under each calendar quarter.104 Our have to file more frequently or less
management. Because this latter group preliminary view is that, unlike for frequently? Should Large Private Fund
of advisers is registered with the SEC smaller private fund advisers, quarterly Advisers be required to file Form PF
and thus is subject to the full range of reporting for Large Private Fund more frequently (such as monthly) or
investor protection efforts that Advisers is necessary in order to less frequently (such as annually or
accompany registration, and because of provide FSOC with timely data to semiannually)? Is 90 days for an annual
the limited burden of the basic identify emerging trends in systemic update or 15 days for a quarterly update
reporting, we believe it is appropriate to risk. We understand that hedge fund too long to ensure reporting of timely
require these advisers to complete and advisers already collect and calculate information? Would more or less time
file section 1 of Form PF. We request much of the information that would be be more appropriate? Specifically,
comment on this approach. Should we required by Form PF relating to hedge would 15 days be enough time for Large
require that exempt reporting advisers funds on a quarterly basis.105 As a Private Fund Advisers to prepare and
file Form PF? 101 Why or why not? If so, result, quarterly reporting on Form PF file quarterly reports? Is there
which portions of Form PF should we would coincide with most hedge fund information in the form that should be
require that exempt reporting advisers advisers’ internal reporting cycles and amended promptly if it becomes
complete? leverage data collection systems and inaccurate? Should Large Private Fund
processes already existing at these Advisers be required to file Form PF as
C. Frequency of Reporting
advisers. In addition, we believe that of the end of each calendar quarter or
The Commissions propose to require most liquidity fund advisers collect on as of the end of each fiscal quarter?
that all private fund advisers other than a monthly basis much of the Currently, we anticipate that the
the Large Private Fund Advisers information that we are proposing be proposed rules requiring filing of Form
discussed above complete and file a reported in section 3 of Form PF and PF would have a compliance date of
Form PF on an annual basis. A newly thus quarterly reporting should be December 15, 2011, at which time Large
registering adviser’s initial Form PF relatively efficient for these advisers. Private Fund Advisers would begin
filing would be submitted within 15 We anticipate that Large Private Fund filing 15 days after the end of each
days of the end of its next occurring Advisers would be able to collect and quarter (i.e., Large Private Fund
calendar quarter after registering with file this information within 15 days after Advisers would need to make their
the SEC so that FSOC can begin the end of each quarter, which is initial Form PF filing by January 15,
including this data in its analysis as sufficiently timely for FSOC’s use in 2012). This timing should allow
soon as possible.102 Annual updates conducting systemic risk monitoring. sufficient time for Large Private Fund
would be due no later than the last day Advisers would be required to file Advisers to develop systems for
on which the adviser may timely file its Form PF to report that they are collecting the information required on
annual updating amendment to Form transitioning to only filing Form PF Form PF and prepare for filing. We
ADV (currently, 90 days after the end of annually with the Commissions or to currently anticipate that this timeframe
report that they no longer meet the also would give the SEC sufficient time
funds * * * do not present the same risks as the requirements for filing Form PF no later to create and program a system to accept
large private funds whose advisers are required to
register with the SEC under this title. Their than the last day on which the adviser’s filings of Form PF.108 We are proposing
activities are not interconnected with the global
financial system, and they generally rely on equity 103 See proposed Advisers Act rule 204(b)–1(e). 106 See proposed Instruction 8 to Form PF.
funding, so that losses that may occur do not ripple 104 See proposed Instruction 7 to Form PF. 107 See proposed rule 204(b) 1(f). The adviser
throughout world markets but are borne by fund 105 See Report of the Asset Manager’s Committee would check the box in Section 1a of Form PF
investors alone.’’). See also Private Fund Exemption to the President’s Working Group on Financial indicating that it was requesting a temporary
Release, supra note 9. Markets, Best Practices for the Hedge Fund Industry hardship exemption and complete Section 5 of
101 Section 404 of the Dodd-Frank Act states that Form PF no later than one business day after the
(Jan. 15, 2009), available at http://
the SEC ‘‘shall issue rules requiring each investment www.amaicmte.org/Public/AMC%20Report%20- electronic Form PF filing was due and submit the
adviser to a private fund to file reports containing %20Final.pdf (discussing best practices on filing that is the subject of the Form PF paper filing
such information as the [SEC] deems necessary and disclosing to investors performance data, assets in electronic format with the Form PF filing system
appropriate in the public interest and for the under management, risk management practices no later than seven business days after the filing
protection of investors or for the assessment of (including on asset types, geography, leverage, and was due.
systemic risk,’’ (emphasis added). concentrations of positions) with which SEC staff 108 The SEC will work closely with the firm it
102 See proposed rule 204(b)–1(a). understands many hedge funds comply). selects to create and program a system for Form PF
that the rules allow smaller private fund adviser, such as its name and the name breakdown of the fund’s borrowing
advisers until 90 days after the end of of any of its related persons whose based on whether the creditor is a U.S.
their first fiscal year occurring on or information is also reported on the financial institution, foreign financial
after the compliance date of the adviser’s Form PF. Section 1a also institution or non-financial institution
proposed rule to file their first Form PF would require reporting of basic as well as the identity of, and amount
(with the expectation that this would aggregate information about the private owed to, each creditor to which the
result in smaller private fund advisers funds managed by the adviser, such as fund owed an amount equal to or greater
with a December 31 fiscal year end total and net assets under management, than 5 percent of the fund’s net asset
filing their first Form PF by March 31, and the amount of those assets that are value as of the reporting date. This
2012) because we anticipate that some attributable to certain types of private section would require reporting of
of these advisers may require more time funds.111 This identifying information certain basic information about how
to prepare for their initial Form PF filing would assist us and FSOC in monitoring concentrated the fund’s investor base is,
and so that the first group of private the amount of assets managed by private such as the number of beneficial owners
fund advisers filing Form PF would all fund advisers and the general of the fund’s equity and the percentage
be reporting based generally on distribution of those assets among of the fund’s equity held by the five
information as of December 31, 2011.109 various types of private funds. largest equity holders.114 Finally,
Under this proposed compliance date Section 1b of Form PF would elicit section 1b would require monthly and
and transition rule, smaller private fund certain identifying and other basic quarterly performance information
advisers would have at least eight information about each private fund about each fund.
months after adoption of the proposed advised by the investment adviser. The The information required by section
form, depending on their fiscal year adviser generally would need to 1b would allow FSOC to monitor certain
end, to file their first Form PF. We complete a separate section 1b for each systemic trends for the broader private
request comment on when advisers private fund it advised. However, fund industry, such as how certain
should be required to comply with the because feeder funds typically invest kinds of private funds perform and
proposed rules and file Form PF. Do the substantially all their assets in a master exhibit correlated performance behavior
compliance dates and transition times fund, to prevent duplicative reporting under different economic and market
that we have proposed provide the adviser must report information in conditions and whether certain funds
sufficient time for smaller advisers and section 1b on an aggregated basis for are taking significant risks that may
Large Private Fund Advisers to prepare private funds that are part of a master- have systemic implications.115 It would
for filing? feeder arrangement and so would not allow FSOC to monitor borrowing
file a separate section 1b for any feeder practices for the broader private fund
D. Information Required on Form PF fund.112 industry, which may have
The questions contained in proposed Section 1b would require reporting of
interconnected impacts on banks
Form PF reflect relevant requirements each private fund’s gross and net assets
(including specific banks) and thus the
and considerations under the Dodd- and the aggregate notional value of its
broader financial system. We believe
Frank Act, consultations with staff derivative positions.113 It also would
that collecting both monthly and
representing FSOC’s members, and the require basic information about the
quarterly performance data also would
Commissions’ experience in regulating fund’s borrowings, including a
allow FSOC to monitor the data at
those private fund advisers that are 111 Section 1 would require the adviser to indicate
sufficient granularity to track trends.
already registered with the the adviser’s total ‘‘regulatory assets under Finally, section 1c would require
Commissions. As discussed above, with management,’’ using the same proposed definition reporting of certain information only
respect to hedge fund advisers in of that term as used on proposed amendments to about hedge funds managed by the
particular, the information we propose Part 1 of Form ADV, and its net assets under
management, which subtracts out any liabilities of
adviser, such as their investment
requiring registered advisers to file on the private funds. See Implementing Release, supra strategies, percentage of the fund’s
Form PF also is broadly based on the note 9. Form PF, however, would require the assets managed using computer-driven
guidelines discussed in the IOSCO adviser to aggregate parallel managed accounts with trading algorithms, significant trading
Report with many of the more detailed related private funds in reporting its assets under
management (even if the accounts are not counterparty exposures (including
items generally tracking questions ‘‘securities portfolios’’ within the meaning of identity of counterparties),116 and
contained in the surveys of large hedge proposed Instruction 5.b, Instructions to Part 1A of trading and clearing practices.117 This
fund advisers conducted by the FSA Form ADV), and thus the total and net assets under information will enable FSOC to
and other IOSCO members.110 We management figures reported in section 1a of Form
PF may differ from what the adviser reports on
expect that the information collected on Form ADV. Proposed question 2 would require the
114 See proposed question 12 on Form PF.
Form PF would assist FSOC in adviser to report what portion of these assets under 115 This information also would be useful for
monitoring and assessing any systemic management are attributable to hedge funds, advancing the Commissions’ investor protection
liquidity funds, private equity funds, real estate goals.
risk, as discussed in section II.A above, funds, securitized asset funds, venture capital 116 Specifically, proposed questions 19 and 20 on
that may be posed by private funds. We funds, other private funds, and funds and accounts Form PF would require the adviser to identify the
discuss below the information that Form other than private funds. See section II.B.1 of this five trading counterparties to which the fund has
PF would require. Release for a discussion of these different types of the greatest net counterparty credit exposure
funds and their proposed definitions for purposes (measured as a percentage of the fund’s net asset
1. Section 1 of Form PF. value) and that have the greatest net counterparty
112 See proposed Instructions 5 and 6 to Form PF. credit exposure to the fund (measured in U.S.
Section 1 would apply to all When providing responses in Form PF with respect dollars).
investment advisers required to file to a private fund, the adviser also must include any 117 More specifically, proposed question 21 on
Form PF. Item A of Section 1a seeks parallel managed accounts related to the private Form PF would require estimated breakdowns of
fund. Id. percentages of the hedge fund’s securities and
identifying information about the 113 The form would require the adviser to report derivatives traded on a regulated exchange versus
the total gross notional value of its funds’ derivative over the counter and percentages of the hedge
filings and will monitor whether it could do so on positions, except that options would be reported fund’s securities, derivatives, and repos cleared by
this timeframe. using their delta adjusted notional value. Long and a central clearing counterparty (‘‘CCP’’) versus
109 See proposed Advisers Act rule 204(b)–1(g).
short positions would not be netted. See proposed bilaterally (or, in the case of repos, that constitute
110 See supra note 24. Form PF, instructions to question 11. a tri-party repo).
monitor systemic risk that could be clearing practices sufficient to allow information also is designed to address
transmitted through counterparty FSOC to examine systemic risks relating requirements under section 404 of the
exposure, track how different strategies to trading and clearing outside of Dodd-Frank Act specifying certain
are affected by and correlated with regulated exchanges and central clearing mandatory contents for records and
different market stresses, and follow the systems? Is there information in section reports that must be maintained and
extent of private fund activities 1 that we should not require, or that we filed by advisers to private funds. For
conducted away from regulated should only require of large hedge fund example, it would provide information
exchanges and clearing systems. We advisers and why? With respect to the about the types of assets held and
have based some of this information, aggregation of master-feeder trading and investment positions and
such as information about significant arrangements for reporting purposes, are practices.
trading counterparty exposures and there common situations in which an Section 2b of Form PF would require
trading and clearing practices, on the adviser will not have sufficient access to large hedge fund advisers to report
FSA surveys, which would promote a feeder fund’s information to report certain additional information about any
international consistency in hedge fund accurately on Form PF? If so, how hedge fund they advise with a net asset
reporting.118 should the form address those value of at least $500 million as of the
We request comment on section 1 of situations? We also request comment close of business on any day during the
proposed Form PF. Is there additional more generally on the definitions of reporting period (a ‘‘qualifying hedge
basic information that we should terms we have proposed in the glossary fund’’).121 For purposes of determining
require from all advisers filing Form PF of terms for Form PF. whether a private fund is a qualifying
or regarding all of the hedge funds or hedge fund, the adviser would have to
other private funds that they manage? 2. Section 2
aggregate any parallel managed
For example, should we require any of Form PF would require private fund accounts, parallel funds, and funds that
the more detailed information about advisers who had at least $1 billion in are part of the same master-feeder
their borrowing practices that we hedge fund assets under management as arrangement, and would have to treat
require regarding large hedge funds in of the close of business on any day any private funds managed by its related
Item B of section 2b? Is a creditor during the reporting period to complete person as if they were managed by the
providing 5 percent of the fund’s section 2.119 Section 2a would require filing adviser.122 We are proposing this
borrowings an appropriate threshold for certain aggregate information about the aggregation to prevent an adviser from
significant creditors of whose identity hedge funds advised by Large Private structuring its activities to avoid the
FSOC may want to be aware for Fund Advisers, such as the market value reporting requirement. We have selected
purposes of assessing the fund’s of assets invested (on a short and long $500 million as a threshold for more
interconnectedness in the financial basis) in different types of securities and extensive individual hedge fund
system? Should the threshold be more commodities (e.g., different types of reporting because we believe that a $500
or less? Are the top five equity holders equities, fixed income securities, million hedge fund is a substantial fund
in the fund an appropriate threshold for derivatives, and structured products). It the activities of which could have an
significant investors in the fund? also would require the adviser to report impact on particular markets in which
Should the threshold be more or less? the duration of fixed income portfolio it invests or on its particular
Should we require assets under holdings (including asset backed counterparties. We also believe that
management information for other securities), to indicate the assets’ setting this threshold at this level would
private fund categories than those interest rate sensitivity, as well as the minimize reporting burdens on advisers
specified in question 4? Should we turnover rate of the adviser’s aggregate to smaller or start up hedge funds that
request that performance data be portfolios during the reporting period to are less likely to have a systemic impact.
reported on a different basis than provide an indication of the adviser’s Finally, this threshold is the same
monthly and quarterly? Are there other frequency of trading. Finally, the threshold used by the FSA in its hedge
primary investment strategies that hedge adviser would be required to report a fund surveys and thus would create a
funds use that should be included in geographic breakdown of investments certain level of consistency in reported
question 17? Is the information we have held by the hedge funds it advises. data.
proposed requiring on the fund’s This information would assist FSOC We request comment on the
borrowings necessary given that other in monitoring asset classes in which qualifying hedge fund threshold. Should
questions in section 1b ask for hedge funds may be significant it be lower or higher? If so, why? Should
information on the fund’s gross and net investors and trends in hedge funds’ large hedge fund advisers have to report
assets? Will asking for the amount and exposures to allow FSOC to identify the information for all their hedge
identity of the five trading concentrations in particular asset funds? Could all of such advisers’ hedge
counterparties to which the fund has the classes (or in particular geographic funds, in the aggregate, potentially have
greatest net counterparty credit regions) that are building or a systemic impact that would merit such
exposure and that have the greatest net transitioning over time. It would aid
counterparty credit exposure to the fund FSOC in examining large hedge fund are financial institutions and those that are not. The
appropriately track significant advisers’ role as a source of liquidity in FRB publishes flow of funds data, which is
exposures for systemic risk assessment different asset classes. In some cases, we available at http://www.federalreserve.gov/releases/
z1/.
purposes? Have we requested are proposing that the information be
121 See proposed Instruction 3 to Form PF.

appropriate information on trading and broken down into categories that would Advisers should not complete section 2 with
facilitate FSOC’s use of flow of funds respect to assets managed by a fund of hedge funds.
118 For example, the FSA survey asks for information, which is an important tool See proposed Instruction 7 to Form PF.
identification of the hedge fund’s top five for evaluating trends in and risks to the 122 See proposed Instructions 5 and 6 to Form PF.
counterparties in terms of net credit exposure. It Parallel funds are a structure in which one or more
also asks for estimates of the percentage of the
U.S. financial system.120 This private funds pursues substantially the same
fund’s securities or derivatives traded on a investment objective and strategy and invests side
119 See section II.B of this Release.
regulated exchange versus over the counter and the by side in substantially the same positions as
percentage of the fund’s derivatives and repos 120 For example, we are proposing that in some another private fund. See proposed Glossary of
cleared by a CCP versus bilaterally. cases the data be broken down between issuers that Terms to Form PF.
reporting? Should Form PF have period the adviser regularly calculated a and gating arrangements and provides
different requirements regarding value at risk (‘‘VaR’’) metric for the for a breakdown of the percentage of the
aggregating parallel managed accounts, qualifying hedge fund, the adviser fund’s net asset value that is locked in
parallel funds, or feeder funds or would have to report VaR for each for different periods of time.128 We
aggregating hedge funds managed by month of the reporting period.126 The believe this information may be
affiliates? form also would require the adviser to important in allowing FSOC to monitor
Section 2b would require reporting of report the impact on the fund’s portfolio the hedge fund’s susceptibility to failure
the same information as that requested from specified changes to certain through investor redemptions in the
in section 2a regarding exposure to identified market factors, if regularly event the fund experiences stress due to
different types of assets.123 In this considered in the fund’s risk market or other factors.
section, however, this information management, broken down by the long The information in proposed section
would be reported separately for each and short components of the qualifying 2b also is designed to address
qualifying hedge fund the adviser hedge fund’s portfolio.127 This requirements under section 404 of the
manages. Section 2b also would require information is designed to allow FSOC Dodd-Frank Act for records and reports
on a per fund basis data not requested to track basic sensitivities of the hedge that the SEC requires of private fund
in section 2a. The adviser would be fund to common market sensitivities, advisers, such as monitoring the amount
required to report information regarding correlations in those factor sensitivities, of assets under management and the use
the qualifying hedge fund’s portfolio and trends in those factor sensitivities of leverage, counterparty credit risk
liquidity, concentration of positions, among large hedge funds. exposure, trading and investment
collateral practices with significant Item D of Section 2b would require positions, and the types of assets held.
counterparties, and the identity of, and reporting of certain financing We request comment on the information
clearing relationships with, the three information for each qualifying hedge that we propose requiring large hedge
central clearing counterparties to which fund, including a monthly breakdown of fund advisers to report under section 2.
the fund has the greatest net its secured and unsecured borrowing Is there additional information with
counterparty credit exposure.124 This and its derivatives exposures as well as respect to the types of their investments,
information is designed to assist FSOC information about the value of the use of leverage, or counterparties that
in monitoring the composition of hedge collateral and letters of credit we should require and why? Have we
fund exposures over time as well as the supporting the secured borrowing and asked for appropriate time period
liquidity of those exposures. The derivatives exposures and the types of breakdowns of the fund’s liquidity in
information also would aid FSOC in its creditors. It also would require a terms of asset liquidity, financing
monitoring of credit counterparties’ breakdown of the term of the fund’s liquidity, and investor liquidity? Is there
unsecured exposure to hedge funds as committed financing. This information other information we could ask to assess
well as the hedge fund’s exposure and would assist FSOC in monitoring the hedge funds’ potential impact on
ability to respond to market stresses and qualifying hedge fund’s leverage, the liquidity in particular markets? Would
interconnectedness with central clearing unsecured exposure of credit the threshold in the proposed form
counterparties. Finally, some of this counterparties to the fund, and the capture significant central clearing
information, such as information about committed term of that leverage, which counterparties? Does the proposed form
the identity of three central clearing may be important to monitor if the fund ask sufficient questions regarding the
counterparties to which the fund has the comes under stress. Collecting financing fund’s collateral practices to ensure that
greatest net counterparty credit data broken down on a monthly basis FSOC will be able to monitor the fund’s
exposure and fund asset liquidity should provide FSOC with sufficient unsecured exposure to significant
information, was broadly based on granularity to identify trends. counterparties? Should the form require
information requested by the FSA Finally, Item E of section 2b would reporting of hedge funds’ investment in
survey, which would promote require the private fund adviser to different types of instruments or
international consistency in hedge fund report information about each qualifying commodities than those proposed in
reporting.125 hedge fund’s investor composition and questions 23 and 27?
liquidity. For example, it contains Are there risk metrics or additional
Section 2b also would require for each
questions about the fund’s side pocket market factors that we should require?
qualifying hedge fund data regarding
Should we require the proposed market
certain hedge fund risk metrics,
126 If VaR was calculated, the adviser would have factors but with different specified
financing information, and investor
to report the confidence interval, time horizon, changes? Stress testing is an important
information. If during the reporting whether any weighting was used, and the method metric for FSOC’s assessment of
used to calculate VaR (historical simulation, Monte potential systemic risk posed by hedge
123 See proposed question 26 on Form PF. Carlo simulation, parametric, or other). If
124 See proposed questions 27–34 on Form PF. applicable, the adviser would have to report the
funds, but we understand that the type
For example, question 28 would require reporting historical lookback period used. The adviser would of stress testing conducted varies
of the percentage of the fund’s portfolio capable of also have to report if it did not regularly calculate
being liquidated within different time periods. VaR. See proposed question 35 on Form PF. 128 A side pocket is a type of account used by
Question 31 would require reporting, for each 127 The market factors are changes in: equity
private funds to separate illiquid assets from other
position that represents 5% or more of the fund’s prices, risk free interest rates, credit spreads, more liquid fund investments. Only investors in the
net asset value, of the position’s portion of the currency rates, commodity prices, option implied hedge fund at the time the asset is put in the side
fund’s net asset value and sub-asset class. Questions volatilities, ABS default rates, and corporate bond pocket (and not future investors) will be entitled to
32 and 33 would require reporting of initial and default rates. Advisers are permitted to omit a a share of proceeds from that investment. A gate is
variation margin for collateral securing exposure to response with respect to any market factor that it a restriction imposed by the manager of a private
the fund’s top five counterparty groups as well as did not regularly consider in the reporting fund’s fund on permissible redemptions from the fund
the face amount of letters of credit posted and risk management. However, to be ‘‘regularly during a certain period of time. The standards for
certain information on rehypothecation of such considered’’ in the fund’s risk management does not imposing suspensions and gates may vary among
collateral. require that the adviser have conducted stress funds, so in responding to these questions, an
125 For example, the FSA survey asks for the testing on that market factor (it could simply mean, adviser would be expected to make a good faith
percentage of the hedge fund’s portfolio that can be for example, that the fund’s risk managers determination as to which provisions of the
liquidated within different time periods and the recognized that such a market factor could have an reporting fund’s governing documents would likely
identity of the fund’s top three CCPs in terms of net impact on the fund’s portfolio). See proposed be triggered during conditions that it views as
credit exposure. question 36 on Form PF and related instructions. significant market stress.
substantially depending on the strategy reporting period, rather than as of the the fund as a matter of policy is
of the particular hedge fund and among last day of the month or quarter? If so managed in compliance with certain
hedge funds pursuing the same strategy. what time period should the range or provisions of rule 2a–7 under the
Is there a better way for the form to average cover and how should it be Investment Company Act of 1940,
assess the effects of stresses on hedge calculated? We note that we have which is the principal rule through
funds than the stress testing questions considered in other contexts different which the SEC regulates registered
included in the proposed form? Should ways of disclosing information that can money market funds.134 This
we request the geographic breakdown of fluctuate during a reporting period.130 information would assist FSOC in
the hedge fund’s investments for Are there approaches in these other assessing the extent to which the
different geographic regions or contexts that should be used in Form liquidity fund is being managed
countries? Are there existing collections PF? What would be the best method of consistent with restrictions imposed on
of data broken down by geographic avoiding ‘‘window dressing’’ in the form registered money market funds that
regions or countries with which we and why? Is there information that might mitigate their likelihood of posing
should be consistent? Should we require should not be reported on a monthly systemic risk.
more or less detailed information basis or, in contrast, information that Section 3 also would require reporting
regarding the types of assets in which should be reported on a monthly basis of certain information regarding the
the fund invests? (in each case, when the information is liquidity fund’s portfolio. For example,
Is there information that we should filed with the Commissions quarterly or it would ask, for each month of the
not require and why? Is there annually)? Please explain your reporting period, for the fund’s net asset
information that we should require large response. value, net asset value per share, market-
hedge fund advisers to report regarding based net asset value per share,
3. Section 3 weighted average maturity (‘‘WAM’’),
all of the hedge funds they manage that
we only propose requiring qualifying Form PF would require private fund weighted average life (‘‘WAL’’), 7-day
hedge funds to report? Is there advisers advising a liquidity fund and gross yield, amount of daily and weekly
information in proposed Form PF that is managing at least $1 billion in liquid assets, and amount of assets with
unlikely to be reported in a comparable combined liquidity fund and registered a maturity greater than 397 days.135 It
or meaningful fashion such that FSOC money market fund assets as of the close also would require the fund to report
would be unable to draw any useful of business on any day in the reporting the amount of its assets invested in
conclusions or insights for purposes of period to complete and file the different types of instruments, broken
assessing systemic risk? If so, how could information on section 3.131 As down by the maturity of those
changes to the question or instructions discussed above, to the extent that instruments, as well as information for
to the question improve the utility of the liquidity funds function as unregistered each open position of the fund that
information the form seeks? Are there substitutes for money market funds or represents 5 percent or more of the
any disclosure requirements in the otherwise share certain basic fund’s net asset value.136 This
SEC’s proposed amendments to Form characteristics of money market funds, information would assist FSOC in
ADV (which will be publicly available) they may be susceptible to runs and assessing the risks undertaken by
that should instead be reported through thus have the potential to pose systemic liquidity funds, their susceptibility to
Form PF (which will not be publicly risk.132 runs, and how their investments might
Section 3 would require that these pose systemic risks either among
available) or vice versa? 129
We request comment more generally private fund advisers report certain liquidity funds or through contagion to
on the information we propose requiring information for each liquidity fund they registered money market funds.
manage. The section includes questions Item C of Section 3 would require
in Form PF with respect to hedge funds
on whether the fund uses the amortized reporting of any secured or unsecured
and their advisers. Is there additional
cost method of valuation and/or the borrowing of the liquidity fund, broken
information that would be helpful to
penny rounding method of pricing in down by creditor type and the maturity
FSOC in monitoring for systemic risk
computing its net asset value per share profile of that borrowing, and of
with respect to hedge funds?
We note that certain data in the to help determine how the fund might whether the fund has in place a
proposed form, while filed with the try to maintain a stable net asset value committed liquidity facility. This
Commissions on an annual or quarterly that could make the fund more information would aid FSOC in
susceptible to runs.133 It asks whether monitoring leverage practices among
basis, would have to be reported on a
monthly basis. In addition to providing 130 See Short-Term Borrowings Disclosure, 134 See proposed question 45 of Form PF. The
more granular data to allow FSOC to Securities Act Release No. 9143 (Sept. 17, 2010), at restrictions in rule 2a–7 are designed to ensure,
better identify trends, this aspect of the section II.A [75 Fed. Reg. 59866 (Sept. 28, 2010)]. among other things, that money market funds’
proposal is designed to mitigate the 131 See sections II.A.2 and II.B of this Release for investing remains consistent with the objective of
ability of an adviser to ‘‘window dress,’’ a discussion of this reporting threshold and the maintaining a stable net asset value. Many liquidity
definition of liquidity fund. For purposes of the $1 funds state in investor offering documents that the
or manipulate certain reported data to billion threshold, an adviser would have to treat fund is managed in compliance with rule 2a–7 even
mask activities or risks undertaken by any liquidity funds managed by any of the adviser’s though that rule does not apply to liquidity funds.
the private funds it manages. related persons as though they were advised by the 135 See proposed question 46 of Form PF. WAM,
Is there information that should be adviser. See proposed Instruction 3 to Form PF. WAL, daily liquid assets, and weekly liquid assets
Form PF is a joint form between the SEC and the are to be calculated in accordance with rule 2a–7
broken down further and reported as of
CFTC only with respect to sections 1 and 2 of the under the Investment Company Act. The 7-day
smaller time increments, such as form. Section 3 of the form, which would require gross yield is to be calculated consistent with the
weekly, or as of larger time increments? more specific reporting regarding liquidity funds, methodology required under Form N–MFP, which
Is there information that should be would only be required by the SEC. must be filed by money market funds registered
132 See section II.A.2 of this Release. The SEC also with the SEC. See 17 CFR 274.201.
reported to show ranges, averages, high notes that institutional investors—the principal 136 See proposed question 47 of Form PF.
points, or low points during the investors in liquidity funds—were the primary Proposed question 48 of Form PF would require
participants in the run on money market funds in reporting for each month of the reporting period, for
129 See Implementing Release, supra note 9, for a September 2008, rather than retail investors. See each of the fund’s positions representing 5% or
discussion of the SEC’s proposed amendments to MMF Reform Proposing Release, supra note 65. more of its net asset value, of the position’s portion
Form ADV. 133 See proposed questions 43 and 44 of Form PF. of the fund’s net asset value and sub-asset class.
liquidity funds and their potential to companies in which the fund invests. companies.144 Finally, the form would
magnify risks undertaken by the fund. Specifically, section 4 would require require a breakdown of the fund’s
Finally, Item D of Section 3 would ask information about the outstanding investments by industry and by
for certain information regarding the balance of the fund’s borrowings and geography, which should provide FSOC
concentration of the fund’s investor guarantees.139 It also would require the with basic information about global and
base, gating and redemption policies, adviser to report the weighted average industry concentrations that may be
and investor liquidity.137 It also would debt-to-equity ratio of controlled relevant to monitoring risk exposures in
require reporting of a good faith portfolio companies in which the fund the financial system.145
estimate of the percentage of the fund invests and the range of that debt to The SEC requests comment on the
purchased using securities lending equity ratio among these portfolio information it proposes requiring
collateral. The SEC believes this companies.140 It asks for the maturity regarding private equity funds in section
information would be important in profile of its portfolio companies’ debt, 4. Is there additional information that
allowing FSOC to monitor the for the portion of that debt that is the SEC should request and why? For
susceptibility of the liquidity fund to a payment-in-kind or zero coupon, and example, are their additional lending
run in the event the fund comes under whether the fund or any of its portfolio practices used in leveraged buyouts
stress and its interconnectedness to companies experienced an event of about which the form should collect
securities lending programs. default on any of its debt during the information? Are there particular
The SEC requests comment on the reporting period.141 It also asks for the industries in which private equity funds
information that it proposes requiring in identity of the institutions providing might invest that could be systemically
section 3. Is there additional bridge financing to the adviser’s important? Should the Form ask
information that the SEC should portfolio companies and the amount of additional questions specific to those
require? For example, is there that financing.142 The SEC believes that industries? Should the form track
information that the SEC requires to be this information would allow FSOC to private equity fund investments in
reported for registered money market assess to what extent private equity different geographic and/or industry
funds on Form N–MFP that the SEC also funds use leverage and the potential concentrations than those we have
should require to be reported on Form exposure of banks and other lending proposed? Should the SEC request less
PF for liquidity funds? Should the SEC providers to the larger private equity information and why? Should the SEC
require reporting of more specific funds and their portfolio companies and not require any reporting on Form PF
information about the holdings or types leverage among portfolio companies of specific to private equity funds? Why or
of holdings of these liquidity funds? Is the larger private equity funds to why not?
the threshold for when the private fund monitor whether trends in those areas
E. Filing Fees and Format for Reporting
adviser is required to report information could pose systemic implications for the
in section 3 for an individual liquidity portfolio companies’ lenders. Under proposed Advisers Act rule
fund appropriate for purposes of FSOC Section 4 also would require reporting 204(b)–1(b), Form PF would need to be
to be able to monitor for potential of certain information if the fund invests filed through an electronic system
systemic risk in this sector? Is five in any financial industry portfolio designated by the SEC for this purpose.
percent an appropriate threshold for company, such as its name, its debt-to- There may be efficiencies realized if the
considering a liquidity fund investment equity ratio, and the percentage of the current Investment Adviser Registration
or investor to be significant for purposes portfolio company beneficially owned Depository (‘‘IARD’’) platform, which is
of Form PF reporting? Is our proposed by the fund.143 This information would operated by the Financial Industry
breakdown of the liquidity fund’s asset allow FSOC to monitor large private Regulatory Authority, were expanded
maturity and investor liquidity equity funds’ investments in companies for this purpose, such as the possible
appropriate? that may be particularly important to interconnectivity of Form ADV filings
the stability of the financial system. and Form PF filings, and possible ease
4. Section 4 Section 4 also would ask whether any of filing with one password. The filing
The SEC is proposing that section 4 of of the adviser’s related persons co-invest system would need to have certain
Form PF require private fund advisers in any of the fund’s portfolio features, including being programmed
managing at least $1 billion in private with special confidentiality protections
equity fund assets as of the close of 139 See proposed questions 57 and 58. designed to ensure the heightened
business on the last day of the reporting 140 See proposed questions 59–61. A ‘‘controlled confidentiality protections created for
portfolio company’’ is defined as a portfolio Form PF filing information under the
period to report certain information company that is controlled by the private equity
about each private equity fund they fund, either alone or together with the private
Dodd-Frank Act but to allow for secure
manage.138 Section 4 would require equity fund’s related persons or other persons that access by FSOC and other regulators as
reporting of certain information about are part of a club or consortium investing in the permitted under the Dodd-Frank Act.
the fund’s borrowings and guarantees
portfolio company. ‘‘Control’’ has the same meaning The SEC separately will decide on the
as used in Form ADV, and generally means the system to be selected for the electronic
and the leverage of the portfolio power, directly or indirectly, to direct the
management or policies of a person, whether filing of Form PF. That determination
137 For example, question 52 would require through ownership of securities, by contract, or will be reflected in a separate notice.
reporting of the percentage of the reporting fund’s otherwise. See proposed Glossary of Terms to Form Under the proposed rule, advisers
equity that is beneficially owned by the beneficial PF; Glossary of Terms to Form ADV. required to file Form PF would be
141 See proposed questions 62–64.

owner having the largest equity interest in the fund required to pay to the operator of the
and of how many investors beneficially own 5% or 142 See proposed question 65.
more of the fund’s equity. 143 See proposed question 66. A ‘‘financial
Form PF filing system fees that have
138 See section II.B of this Release for a discussion industry portfolio company’’ generally is defined as
144 See proposed question 69.
of this reporting threshold and the definition of a nonbank financial company, as defined by section
‘‘private equity fund.’’ Form PF is a joint form 102(a)(4) of the Dodd-Frank Act, bank or savings 145 See proposed questions 67 and 68. Industries
between the SEC and the CFTC only with respect association, bank holding company or financial would be identified using NAICS codes. ‘‘NAICS’’
to sections 1 and 2 of the form. Section 4 of the holding company, savings and loan holding stands for the ‘‘North American Industry
form, which would require more specific reporting company, credit union, or Farm Credit System Classification System,’’ and is a system of industry
regarding private equity funds, would only be institution. See proposed Glossary of Terms to Form classifications commonly used in the financial
required by the SEC. PF. industry.
been approved by the SEC.146 We IV. Paperwork Reduction Act SEC also may use the information in
anticipate that Large Private Fund connection with its regulatory and
CFTC
Advisers’ filing fees would be set at a examination programs. The respondents
higher amount because their filings Proposed CEA rule 4.27(d) does not to Form PF would be private fund
would be responsible for a larger impose any additional burden upon advisers.152 Compliance with proposed
proportion of system needs due to their registered CPOs and CTAs that are Form PF would be mandatory for any
dually registered as investment advisers private fund adviser. Smaller private
more frequent and extensive filings. The
with the SEC. By filing the Form PF fund advisers would be required to file
SEC in a separate action would approve
with the SEC, these dual registrants Form PF only on an annual basis. These
filing fees that reflect the reasonable would be deemed to have satisfied
costs associated with the filings and the smaller private fund advisers would
certain of their filing obligations with provide a limited amount of basic
establishment and maintenance of the the CFTC, and the CFTC is not imposing
filing system.147 information about the operations of the
any additional burdens herein. private funds they advise.153 Large
While we are not requiring that the Therefore, any burden imposed by Form Private Fund Advisers would be
information be filed in eXtensible PF through proposed CEA rule 4.27(d) required to file Form PF on a quarterly
Markup Language (‘‘XML’’) tagged data on entities registered with both the basis reporting additional information
format, we expect to look for a filing CFTC and the SEC has been accounted regarding the private funds they advise.
system that could accept information for within the SEC’s calculations The PRA analysis set forth below takes
filed in XML format. We intend to regarding the impact of this collection of into account the fact that the additional
establish data tags to allow Form PF to information under the Paperwork information proposed Form PF would
be submitted in XML format with the Reduction Act of 1995 (‘‘PRA’’).149 require that large hedge fund advisers
SEC. Accordingly, advisers would be SEC report would be more extensive than the
able to file the information in Form PF additional information required from
Section 404 of the Dodd-Frank Act,
in XML format if they choose. We large liquidity fund advisers, which in
which amends section 204(b) of the
believe that certain advisers may prefer turn would be more extensive than that
Advisers Act, directs the SEC to require
to report in XML format because it required from large private equity fund
private fund advisers to file reports
allows them to automate aspects of their advisers.154
containing such information as the SEC
reporting and thus minimize burdens deems necessary and appropriate in the As discussed in section II.B of this
and generate efficiencies for the adviser. public interest and for investor Release, the SEC has sought to minimize
We anticipate that we may eventually protection or for the assessment of the reporting burden on private fund
require Form PF filers to tag data systemic risk. Proposed rule 204(b)–1 advisers to the extent appropriate. In
submitted on Form PF using a refined, and Form PF under the Advisers Act, particular, the SEC has designed the
future taxonomy defined by us, working which would implement this reporting frequency based on when it
in collaboration with the industry. requirement of the Dodd-Frank Act. understands advisers to private funds
Thereafter, the usability of data Proposed Form PF contains a new are already collecting certain
contained in Form PF is expected to ‘‘collections of information’’ within the information that Form PF would
increase greatly because tagged data meaning of the PRA.150 The title for the require. In addition, the SEC has based
would be easier to sort and analyze. We new collection of information is: ‘‘Form certain more specific reporting items on
PF under the Investment Advisers Act information that it understands large
note that private initiatives are
of 1940, reporting by investment hedge fund advisers frequently collect
underway to create such taxonomies.148
We request comment on our proposed advisers to private funds.’’ For purposes
system of electronic filing. Should we of this PRA analysis, the paperwork 152 The requirement to file the form would apply
burden associated with the to investment advisers registered, or required to

require that all filings be done in XML register, with the SEC that advise one or more
format? Should we allow or require the requirements of proposed rule 204(b)–1 private funds. See proposed rule 204(b)–1(a). It
is included in the collection of would not apply to state-registered investment
form to be provided in a format other
information burden associated with advisers or exempt reporting advisers.
than XML, such as eXtensible Business 153 See section II.B of this Release for a
proposed Form PF and thus does not
Reporting Language (‘‘XBRL’’)? Is there entail a separate collection of description of who would be required to file Form
another format that is more widely used PF, section II.C of this Release for information
information. The SEC is submitting this regarding the frequency with which smaller private
or would be more appropriate for the collection of information to the Office of fund advisers would be required to file Form PF,
required data? Should smaller and/or Management and Budget (‘‘OMB’’) for and section II.D.1 of this Release for a description
Large Private Fund Advisers be charged of the information that smaller private fund
review in accordance with 44 U.S.C. advisers would be required to report on Form PF.
different amounts than what we have 3507(d) and 5 CFR 1320.11. An agency See also proposed Instruction 8 to Form PF for
anticipated charging? If so, why? may not conduct or sponsor, and a information regarding the frequency with which
person is not required to respond to, a smaller private fund advisers would be required to
III. General Request for Comment file Form PF.
collection of information unless it 154 See section II.B of this Release for a
The Commissions request comment displays a currently valid control description of who would be required to file Form
on the rules and form proposed in this number. PF, section II.C of this Release for information
Release and comment on other matters Proposed Form PF is intended to regarding the frequency with which Large Private
provide FSOC with information that Fund Advisers would be required to file Form PF,
that might have an effect on the section II.D.2 of this Release for a description of the
proposals contained in this Release. would facilitate fulfillment of its information that large hedge fund advisers would
Commenters should provide empirical obligations under the Dodd-Frank Act be required to report on Form PF, and sections
data to support their views. relating to nonbank financial companies II.D.3 and II.D.4 of this Release for a description of
and systemic risk monitoring.151 The the information that large liquidity and private
equity fund advisers would be required to report on
146 See
Form PF. See also proposed Instruction 8 to Form
proposed Advisers Act rule 204(b)–1(d). 149 44 U.S.C. 3501–3521.
PF for information regarding the frequency with
147 See section 204(c) of the Advisers Act. 150 44 U.S.C. 3501–3521.
which Large Private Fund Advisers would be
148 See, e.g., http://www.operastandards.org. 151 See sections I.A and II.A of this Release.
required to file Form PF.
for purposes of reporting to investors in the SEC estimates that approximately advisers would be 19,600 hours for each
the funds.155 3,920 would be smaller private fund of the first three years.165
The information that Form PF would advisers, not meeting the thresholds for
require would be filed through an B. Burden Estimates for Quarterly
reporting as Large Private Fund
electronic filing system expected to be Reporting by Large Private Fund
Advisers.161
operated by an entity designated by the Advisers
Smaller private fund advisers would
SEC. Responses to the information be required to complete all or portions The SEC estimates that 530 of the
collections would be kept confidential of section 1 of Form PF and to file on private fund advisers registered with the
to the extent permitted by law.156 an annual basis. As discussed in greater SEC would meet one or more of the
detail above, section 1 would require thresholds for reporting as Large Private
A. Burden Estimates for Annual Fund Advisers.166 As discussed in
Reporting by Smaller Private Fund basic data regarding the reporting
adviser’s identity and certain section II.D above, Large Private Fund
Advisers Advisers would be required to report
information about the private funds it
In the Implementing Release, the SEC manages, such as performance, leverage, more information on Form PF than
estimated that 3,500 currently registered and investor concentration data.162 If smaller private fund advisers and would
advisers would become subject to the the reporting adviser advises any hedge be required to report on a quarterly
private fund reporting requirements funds, section 1 also would require basis. The amount of additional
included in the proposed amendments basic information regarding those funds, information reported by a Large Private
to Form ADV.157 The SEC further including their investment strategies, Fund Adviser would depend, in part, on
estimated that 200 advisers to private trading counterparty exposures, and whether it is a large hedge fund adviser,
funds would register with the SEC as a trading and clearing practices. a large liquidity fund adviser, or large
result of normal growth in the Based on the SEC’s experience with private equity fund adviser. A large
population of registered advisers and hedge fund adviser would be required to
other data filings, it estimates that
that 750 advisers to private funds would report more information with respect to
smaller private fund advisers would
register as a result of the Dodd-Frank itself and the funds it advises than
require an average of approximately 10
Act’s elimination of the private adviser would a large liquidity fund adviser,
burden hours to compile, review and
exemption.158 As a result, the SEC which in turn would report more
electronically file the required
estimates that a total of approximately information than a large private equity
information in section 1 of Form PF for
4,450 registered investment advisers fund adviser.167 Of the total number of
the initial filing and an average of
would become subject to the proposed Large Private Fund Advisers, the SEC
approximately 3 burden hours for
private fund reporting requirements in estimates that 200 are large hedge fund
subsequent filings.163 Accordingly, the
Form ADV.159 Because these advisers advisers, 80 are large liquidity fund
would also be required to report on amortized average annual burden of
advisers, and 250 are large private
Form PF, the SEC accordingly estimates periodic filings would be 5 hours per
equity fund advisers.168
that approximately 4,450 advisers smaller private fund adviser for each of Because the proposed reporting
would be required to file all or part of the first three years,164 and the requirements on Form PF for large
Form PF.160 Out of this total number, amortized aggregate annual burden of hedge fund advisers would be the most
periodic filings for smaller private fund extensive of the Large Private Fund
155 See Report of the Asset Manager’s Committee Advisers, the SEC estimates that these
to the President’s Working Group on Financial SEC does not currently have reliable data with
which to estimate the number of funds that have
advisers would require, on average,
Markets, Best Practices for the Hedge Fund Industry
(Jan. 15, 2009), available at http:// subadvisers. more hours than other Large Private
www.amaicmte.org/Public/AMC%20Report%20- 161 Based on the estimated total number of Fund Advisers to configure systems and
%20Final.pdf (discussing best practices on registered private fund advisers that would not to compile, review and electronically
disclosing to investors performance data, assets meet the thresholds to be considered Large Private file the required information.
under management, and risk management practices Fund Advisers. (4,450 estimated registered private
(including on asset types, geography, leverage, and fund advisers ¥200 large hedge fund advisers ¥80
Accordingly, the SEC estimates that
concentrations of positions) with which we large liquidity fund advisers ¥250 large private large hedge fund advisers would require
understand many hedge funds comply). equity fund advisers = 3,920 smaller private fund an average of approximately 75 burden
156 See supra note 39 and accompanying text. advisers.) hours for an initial filing and 35 burden
157 See section V.B.2.a.ii of the Implementing 162 See supra section II.D.1.
hours for each subsequent filing.169 In
Release. As proposed in the Implementing Release, 163 These estimates reflect the SEC’s
advisers to private funds would be required to understanding that much of the information in 165 5 burden hours on average per year × 3,920
complete Item 7.B and Section 7.B of Schedule D section 1 of Form PF is currently maintained by
to the amended Form ADV. most private fund advisers in the ordinary course smaller private fund advisers = 19,600 burden
158 Id. The estimates of registered private fund of business. In addition, the time required to hours per year.
166 See section II.B.2 of this Release for estimates
advisers are based in part on the number of advisers determine a private fund adviser’s aggregate assets
that reported a fund in Section 7.B of Schedule D under management and the amount of assets under of the numbers of large hedge fund advisers, large
to the current version of Form ADV. Because these management that relate to private funds of various liquidity fund advisers, and large private equity
responses include funds advised by a related person types largely is expected to be included in the fund advisers. (200 large hedge fund advisers + 80
rather than the adviser, these data may over- approved burden associated with the SEC’s Form large liquidity fund advisers + 250 large private
estimate the total number of private fund advisers. ADV (this information would only differ if the equity fund advisers = 530 Large Private Fund
159 3,500 currently registered advisers to private adviser managed parallel managed accounts). As a Advisers.)
167 See supra sections II.D.2, II.D.3 and II.D.4.
funds + 200 advisers to private funds registering as result, responding to questions on Form PF that
a result of normal growth + 750 newly registered relate to assets under management and determining 168 See supra section II.B.2.
advisers to private funds = 4,450 advisers. whether an adviser is a Large Private Fund Adviser 169 The estimates of hour burdens and costs for
160 If a private fund is advised by both an adviser should impose little or no additional burden on Large Private Fund Advisers provided in the
and one or more subadvisers, only one of these private fund advisers. Paperwork Reduction Act and cost benefit analyses
advisers would be required to complete Form PF. 164 The SEC estimates that a smaller private fund are based on burden data provided by advisers in
See section II.B.4 of this Release. As a result, it is adviser would make 3 annual filings in three years, response to the FSA hedge fund survey and on the
likely that some portion of these advisers either for an amortized average annual burden of 5 hours experience of SEC staff. These estimates also
would not be required to file Form PF or would be (1 initial filing × 10 hours + 2 subsequent filings assume that some Large Private Fund Advisers will
subject to a reporting burden lower than is × 3 hours = 16 hours; and 16 hours ÷ 3 years = find it efficient to automate some portion of the
estimated for purposes of this PRA analysis. The approximately 5 hours). After the first three years, reporting process, which would increase the burden
SEC has not attempted to adjust the burden filers generally would not incur the start-up of the initial filing but reduce the burden of
estimates downward for this purpose because the burdens applicable to the first filing. Continued
contrast, large liquidity fund advisers, ceased to be a Large Private Fund each private fund adviser over the same
which would report more information Adviser would be required to file a period.182
than smaller private fund advisers or Form PF indicating that it is no longer
E. Request for Comment
large private equity fund advisers but obligated to report on a quarterly basis.
less information than large hedge fund The SEC estimates that approximately 9 Pursuant to 44 U.S.C. 3506(c)(2)(B),
advisers, would require an average of percent of Large Private Fund Advisers the SEC solicits comments to: (i)
approximately 35 burden hours for an would need to make a transition filing Evaluate whether the proposed
initial filing and 16 burden hours for each year with a burden of 0.25 hours, amendments to the collection of
each subsequent filing. Finally, the SEC or a total of 12 burden hours per year information are necessary for the proper
estimates that large private equity fund for all private fund advisers.176 performance of the functions of the SEC,
advisers, which would report more Second, filers who are no longer including whether the information
information than smaller private fund subject to Form PF’s periodic reporting would have practical utility; (ii)
advisers but less than other Large evaluate the accuracy of the SEC’s
requirements would file a final report
Private Fund Advisers, would require estimate of the burden of the proposed
indicating that fact. The SEC estimates
an average of approximately 25 burden collection of information; (iii) determine
that approximately 8 percent of the
hours for an initial filing and 12 burden whether there are ways to enhance the
advisers required to file Form PF would
hours for each subsequent filing. Based quality, utility, and clarity of the
have to file such an amendment each
on these estimates, the amortized information to be collected; and (iv)
year with a burden of 0.25 of an hour,
average annual burden of periodic determine whether there are ways to
or a total of 89 burden hours per year
filings would be 153 hours per large minimize the burden of the collection of
for all private fund advisers.177
hedge fund adviser,170 70 hours per information on those who are to
Finally, an adviser experiencing respond, including through the use of
large liquidity fund adviser,171 and 52
hours per large private equity fund technical difficulties in submitting Form automated collection techniques or
adviser, in each case for each of the first PF may request a temporary hardship other forms of information technology.
three years.172 In the aggregate, the exemption by filing portions of Form PF In particular, would private fund
amortized annual burden of periodic in paper format.178 The information that advisers seek to automate all or part of
filings would then be 30,600 hours for must be filed is comparable to the their Form PF reporting obligations?
large hedge fund advisers,173 5,600 information that Form ADV filers Would automation be efficient only for
hours for large liquidity fund provide on Form ADV–H when Large Private Fund Advisers, or would
advisers,174 and 13,000 hours for large requesting a temporary hardship smaller private fund advisers also be
private equity fund advisers,175 in each exemption relating to that form. In the able to automate efficiently? What is the
case for each of the first three years. case of Form ADV–H, the SEC has likely burden of automation? Would
estimated that the average burden of advisers use internal personnel or pay
C. Burden Estimates for Transition filing is 1 hour and that approximately outside service providers to make
Filings, Final Filings and Temporary 1 in every 1,000 advisers will file needed system modifications or to
Hardship Exemption Requests annually.179 Assuming that Form PF perform all or part of their Form PF
In addition to periodic filings, a filers request hardship exemptions at reporting obligations? If outside service
private fund adviser would be required the same rate and that the applications providers are used, what is the likely
to file very limited information on Form impose the same burden per filing, the cost and how would it impact our
PF in three situations. SEC would expect approximately 4 estimates of internal costs and hourly
First, any adviser that transitions from filers to request a temporary hardship burdens for the proposed reporting?
quarterly to annual filing because it has exemption each year 180 for a total of 4 Persons desiring to submit comments
burden hours.181 on the collection of information
subsequent filings, which has been taken into requirements should direct them to the
consideration in our burden estimates. D. Aggregate Burden Estimates
170 The SEC estimates that a large hedge fund
Office of Management and Budget,
adviser would make 12 quarterly filings in three Based on the foregoing, the SEC Attention: Desk Officer for the
years, for an amortized average annual burden of estimates that Form PF would result in Securities and Exchange Commission,
153 hours (1 initial filing × 75 hours + 11 an aggregate of 68,905 burden hours per Office of Information and Regulatory
subsequent filings × 35 hours = 460 hours; and 460 year for all private fund advisers for Affairs, Room 10102, New Executive
hours ÷ 3 years = approximately 153 hours). After
the first three years, filers generally would not incur each of the first three years, or 15 Office Building, Washington, DC 20503,
the start-up burdens applicable to the first filing. burden hours per year on average for and also should send a copy of their
171 The SEC estimates that a large liquidity fund comments to Elizabeth M. Murphy,
adviser would make 12 quarterly filings in three 176 Estimate is based on IARD data on the Secretary, Securities and Exchange
years, for an amortized average annual burden of 70
hours (1 initial filing × 35 hours + 11 subsequent frequency of advisers to one or more private funds Commission, 100 F Street, NE.,
filings × 16 hours = 211 hours; and 211 hours ÷ 3 ceasing to have assets under management sufficient Washington, DC 20549–1090 with
to cause them to be Large Private Fund Advisers.
years = approximately 70 hours). After the first
(530 Large Private Fund Advisers × 0.09 × 0.25
reference to File No. S7–05–11.
three years, filers generally would not incur the Requests for materials submitted to
start-up burdens applicable to the first filing. hours = 12 hours.)
172 The SEC estimates that a large private equity
177 Estimate is based on IARD data on the OMB by the Commission with regard to
fund adviser would make 12 quarterly filings in frequency of advisers to one or more private funds this collection of information should be
three years, for an amortized average annual burden withdrawing from SEC registration. (4,450 private
of 52 hours (1 initial filing × 25 hours + 11 fund advisers × 0.08 × 0.25 hours = 89 hours.)
182 19,600 hours for periodic filings by smaller

subsequent filings × 12 hours = 157 hours; and 157 178 See proposed SEC rule 204(b)–1(f). The
advisers + 30,600 hours for periodic filings by large
hours ÷ 3 years = approximately 52 hours). After the proposed rule would require that the adviser hedge fund advisers + 5,600 hours for periodic
first three years, filers generally would not incur the complete and file Item A of Section 1a and Section filings by large liquidity fund advisers + 13,000
start-up burdens applicable to the first filing. 5 of Form PF, checking the box in Section 1a hours for periodic filings by large private equity
173 153 burden hours on average per year × 200 indicating that the filing is a request for a temporary fund advisers + 12 hours per year for transition
large hedge fund advisers = 30,600 hours. hardship exemption. filings + 89 hours per year for final filings + 4 hours
174 70 burden hours on average per year × 80 large 179 See section V.F of the Implementing Release.
per year for temporary hardship requests =
liquidity fund advisers = 5,600 hours. 180 4,450 private fund advisers × 1 request per
approximately 68,905 hours per year. 68,905 hours
175 52 burden hours on average per year × 250 1,000 advisers = approximately 4 advisers. per year ÷ 4,450 total advisers = 15 hours per year
large private equity fund advisers = 13,000 hours. 181 4 advisers × 1 hour per response = 4 hours. on average.
in writing, refer to File No. S7–05–11, systemic risk related information any data and other information that they
and be submitted to the Securities and required by Form PF. may have quantifying or qualifying the
Exchange Commission, Office of As noted above, the Dodd-Frank Act perceived costs and benefits of this
Investor Education and Advocacy, 100 F tasks FSOC with monitoring the proposed rule with their comment
Street, NE., Washington, DC 20549– financial services marketplace in order letters.
0213. OMB is required to make a to identify potential threats to the
financial stability of the United VI. SEC Economic Analysis
decision concerning the collections of
information between 30 and 60 days States.184 The Dodd-Frank Act also As discussed above, the Dodd-Frank
after publication of this Release. requires FSOC to collect information Act amended the Advisers Act to,
Therefore, a comment to OMB is best from member agencies to support its among other things, authorize and direct
assured of having its full effect if OMB functions.185 The CFTC and the SEC are the SEC to promulgate reporting
receives it within 30 days after jointly proposing sections 1 and 2 of requirements for private fund advisers.
publication of this Release. Form PF as a means to collect the In enacting Sections 404 and 406 of the
information necessary to permit FSOC Dodd-Frank Act, Congress determined
V. CFTC Cost-Benefit Analysis to fulfill its obligation to monitor private to require that private fund advisers file
Section 15(a) of the CEA 183 requires funds, and in order to identify any reports with the SEC and specified
the CFTC to consider the costs and potential systemic threats arising from certain types of information that should
benefits of its actions before issuing their activities. The CFTC and the SEC be subject to reporting and/or
rules, regulations, or orders under the do not currently collect the information recordkeeping requirements, but
CEA. By its terms, section 15(a) does not that is covered in proposed sections 1 Congress left to the SEC the
require the CFTC to quantify the costs and 2 of Form PF. determination of the specific
and benefits of its rules, regulations or With respect to costs, the CFTC has information to be maintained or
orders or to determine whether the determined that: (1) Without the reported. When determining the form
benefits outweigh the costs. Rather, proposed reporting requirements and content of such reports, the SEC
section 15(a) requires that the CFTC imposed on dually-registered CPOs and may require that private fund advisers
‘‘consider’’ the costs and benefits of its CTAs, FSOC will not have sufficient file such information ‘‘as necessary and
actions. Section 15(a) further specifies information to identify and address appropriate in the public interest and
that the costs and benefits shall be potential threats to the financial for the protection of investors’’ or for the
evaluated in light of the following five stability of the United States (such as assessment of system risk.
broad areas of concern: (1) Protection of the near collapse of Long Term Capital The SEC is proposing rule 204(b)–1
market participants and the public; Management); (2) the proposed and Form PF, to implement the private
(2) efficiency, competitiveness and reporting requirements, once finalized, fund adviser reporting requirements that
financial integrity of futures markets; will provide the CFTC with better the Dodd-Frank Act contemplates.
(3) price discovery; (4) sound risk information regarding the business Under the proposed rule, private fund
management practices; and (5) other operations, creditworthiness, use of advisers would be required to file
public interest considerations. The leverage, and other material information information responsive to all or portions
CFTC may in its discretion give greater of certain registered CPOs and CTAs of Form PF on a periodic basis. The
weight to any one of the five that are also registered as investment scope of the required information and
enumerated areas and could in its advisers with the SEC; and (3) while the frequency of the reporting would be
discretion determine that, they are necessary to U.S. financial related to the amount of private fund
notwithstanding the costs, a particular stability, the proposed reporting assets that each private fund adviser
rule, regulation, or order is necessary or requirements will create additional manages and the type of private fund to
appropriate to protect the public interest compliance costs for these registrants. which those assets relate. Specifically,
or to effectuate any of the provisions or The CFTC has determined that the smaller private fund advisers would be
accomplish any of the purposes of the proposed reporting requirements will required to report annually and provide
CEA. provide a benefit to all investors and only basic information regarding their
The proposed rule 4.27(d) would market participants by providing the operations and the private funds they
deem a CPO registered with the CFTC CFTC and other policy makers with advise, while Large Private Fund
that is dually registered as a private more complete information about these Advisers would report on a quarterly
fund adviser with the SEC to have registrants and the potential risk their basis and provide more information.186
satisfied its filing requirements for activities may pose to the U.S. financial The SEC is sensitive to the costs and
Schedules B and C of proposed Form system. In turn, this information would benefits imposed by its rules. It has
CPO–PQR by completing and filing the enhance the CFTC’s ability to identified certain costs and benefits of
applicable portions of Form PF for each appropriately tailor its regulatory proposed Advisers Act rule 204(b)–1
of its commodity pools that satisfy the policies to the commodity pool industry and Form PF, and it requests comment
definition of ‘‘private fund’’ in the Dodd- and its operators and advisors. As on all aspects of the cost-benefit
Frank Act. Under the proposed rule, mentioned above, the CFTC and the SEC analysis below, including identification
most of the CPOs and CTAs that are do not have access to this information and assessment of any costs and benefits
dually registered as private fund today and have instead been made to not discussed in this analysis. In
advisers would be required to provide use information from other, less reliable
annually a limited amount of basic sources.

186 See section II.B of this Release for a
information on Form PF about the description of who would be required to file Form
The CFTC invites public comment on PF, section II.C of this Release for information
operations of their private funds. Only its cost-benefit considerations as regarding the frequency with which private fund
large CPOs and CTAs that are also concerns sections 1 and 2 of Form PF. advisers would be required to file Form PF, and
registered as private fund advisers with Commenters are also invited to submit section II.D of this Release for a description of the
the SEC would have to submit on a information that private fund advisers would be
required to report on Form PF. See also proposed
quarterly basis the full complement of 184 See section 112(a)(2)(C) of the Dodd-Frank Instruction 8 to Form PF for information regarding
Act. the frequency with which private fund advisers
183 See 5 U.S.C. 801(a)(1)(B)(i). 185 See section 112(d)(1) of the Dodd-Frank Act. would be required to file Form PF.
connection with its consideration of the financial companies that may pose risks industry and its advisers, and to more
costs and benefits, the SEC also has to U.S. financial stability in the event of effectively evaluate the outcomes of
considered whether the proposal would their material financial distress or regulatory policies and programs
promote efficiency, competition, and failure or because of their activities.189 directed at this sector, including for the
capital formation. Section 202(c) of the In addition, the Dodd-Frank Act directs protection of private fund investors.
Advisers Act requires the SEC, when FSOC to recommend to the FRB The SEC also estimates that the
engaging in rulemaking that requires it heightened prudential standards for proposed rule may improve the
to consider or determine whether an designated nonbank financial efficiency and effectiveness of the SEC’s
action is necessary or appropriate in the companies.190 oversight of private fund advisers by
public interest, to consider, in addition In enacting Sections 404 and 406 of enabling SEC staff to manage and
to the protection of investors, whether the Dodd-Frank Act, Congress analyze information related to the risks
the action will promote efficiency, recognized that FSOC would need posed by private funds more quickly,
competition, and capital formation.187 information from private fund advisers more effectively, and at a lower cost
The SEC seeks comment and data on to help it carry out its duties. As a than is currently possible. This would
the value of the benefits identified. It result, proposed Form PF is designed to allow the SEC to more efficiently and
also welcomes comments on the gather information regarding the private effectively target its examination
accuracy of the cost estimates in this fund industry that would be useful to program. The SEC would be able to use
analysis, and requests that commenters FSOC in monitoring systemic risk.191 Form PF information to generate reports
provide data that may be relevant to Systemic risk may arise from a variety on the industry, its characteristics and
these cost estimates. In addition, the of sources, including trends. These reports may help the SEC
SEC seeks estimates and views interconnectedness, changes in market anticipate regulatory problems, allocate
regarding these costs and benefits for liquidity and market concentrations, and reallocate its resources, and more
particular covered advisers, including and so the information that Form PF fully evaluate and anticipate the
small advisers, as well as any other elicits is intended to provide data that, implications of various regulatory
costs or benefits that may result from individually or in the aggregate, would actions it may consider taking, which
the adoption of the proposed rule and permit FSOC to identify where systemic should increase both the efficiency and
form. risk may arise across a range of sources. effectiveness of its programs and thus
Because proposed Advisers Act rule The SEC expects that FSOC would use increase investor protection. Responses
204(b)–1 and Form PF would this data to supplement the data that it to many of the proposed questions
implement sections 404 and 406 of the collects regarding other financial market would help the SEC better understand
Dodd-Frank Act, the benefits and costs participants and gain a broader view of the investment activities of private
considered by Congress in passing the the financial system than is currently funds and the scope of their potential
Dodd-Frank Act are not entirely available to regulators. In this manner, effect on investors and the markets that
separable from the benefits and costs the SEC believes that the information the SEC regulates.
imposed by the SEC in designing the collected through Form PF could play The coordination with the CFTC
proposed rule and form. Accordingly, an important role in FSOC’s monitoring would also result in significant
although the PRA hourly burden of systemic risk, both in the private fund efficiencies for private fund advisers
estimates discussed above, and their industry and in the financial markets that are also registered as a CPO or CTA
corresponding dollar cost estimates, are more broadly. with the CFTC because, under the
included in full below and in the PRA The proposed private fund reporting proposed rules in this Release, these
analysis above, a portion of the on Form PF would also benefit all advisers would satisfy certain reporting
reporting costs is attributable to the investors and market participants by obligations under both proposed
requirements of the Dodd-Frank Act and improving the information available to Advisers Act rule 204(b)–1 and
not specific requirements of the the SEC regarding the private fund proposed CEA rule 4.27(d) with respect
proposed rule or form. industry. Today, regulators have little to commodity pools that satisfy the
reliable data regarding this rapidly definition of ‘‘private fund’’ (as proposed
A. Benefits growing sector and frequently have to in Form PF) by filing Form PF. As
The SEC believes Form PF may create rely on data from other sources, which discussed in section I.B of this Release,
two principal classes of benefits. First, when available may be incomplete. As the SEC also has coordinated with
the information collected through Form discussed above, the more reliable data foreign financial regulators regarding
PF is expected to facilitate FSOC’s collected through Form PF would assist the reporting of systemic risk
monitoring of the systemic risks that FSOC in identifying and addressing information regarding hedge funds and
private funds may pose and to assist risks to U.S. financial stability, anticipates that this coordination, as
FSOC in carrying out its other duties potentially protecting investors and reflected in proposed Form PF, would
under the Dodd-Frank Act with respect other market participants from result in greater efficiencies in reporting
to nonbank financial companies. significant losses. In addition, this data by private fund advisers, as well as
Second, this information may enhance would provide the SEC with a more information sharing and private fund
the ability of the SEC to evaluate and complete view of the financial markets monitoring among foreign financial
form regulatory policies and improve in general and the private fund industry regulators.
the efficiency and effectiveness of the in particular. This broader perspective As discussed in section II.B of this
SEC’s monitoring of markets for investor and more reliable data may enhance its Release, the SEC has designed the
protection and market vitality. ability to form and frame regulatory reporting frequency in proposed Form
The Dodd-Frank Act directs FSOC to policies regarding the private fund PF based on when it understands
monitor emerging risks to U.S. financial advisers to private funds are already
stability 188 and to require FRB 189 Section 112(a)(2) of the Dodd-Frank Act. compiling certain information that Form
190 See supra note 7 and accompanying text.
supervision of designated nonbank PF would require, creating efficiencies
191 See section II.D of this Release for a
description of the information that private fund

for, and benefiting, the adviser in
187 15 U.S.C. 80b–2(c).
advisers would be required to report on proposed satisfying its reporting obligations. The
Form PF. SEC also has based certain more specific
reporting items on information that it would subsequent reports. In addition, (3) 75 burden hours at a cost of
understands large hedge fund advisers the SEC expects that some Large Private $23,270 197 per large hedge fund adviser
frequently calculate for purposes of Fund Advisers would find it efficient to for the initial quarterly report;
reporting to investors in the funds.192 automate some portion of the reporting (4) 35 burden hours at a cost of
The SEC does not expect that this process, which would increase the $9,700 198 per large hedge fund adviser
proposal would have an effect on burden of the initial filing but reduce for each subsequent quarterly report;
competition because the information the burden of subsequent filings. (5) 35 burden hours at a cost of
generally would be non-public and In subsequent reporting periods, the $10,860 199 per large liquidity fund
similar types of advisers would have SEC anticipates that filers would incur adviser for the initial quarterly report;
comparable burdens under the form. significantly lower costs because much (6) 16 burden hours at a cost of
The SEC also does not expect that this of the work involved in the initial report $4,440 200 per large liquidity fund
proposal would have an effect on capital is non-recurring and because of adviser for each subsequent quarterly
formation because the information efficiencies realized from system report;
generally would be non-public and thus configuration and reporting automation (7) 25 burden hours at a cost of
should not impact private fund advisers’ efforts accounted for in the initial $7,760 201 per large private equity fund
ability to raise capital or their market reporting period. In addition, the SEC 197 The SEC expects that for the initial report, of
activities. estimates that senior personnel would a total estimated burden of 75 hours, approximately
B. Costs bear less of the reporting burden in 45 hours will most likely be performed by
subsequent reporting periods, reducing compliance professionals and 30 hours will most
The proposed reporting requirement costs though not necessarily reducing likely be performed by programmers working on
also would impose certain costs on the burden hours. system configuration and reporting automation. Of
private fund advisers. In order to the work performed by compliance professionals,
Based on the foregoing, the SEC the SEC anticipates that it will be performed
minimize these costs, the scope of the
estimates 194 that, for the purposes of the equally by a compliance manager at a cost of $273
required information and the frequency per hour and a senior risk management specialist
PRA, the periodic filing requirements
of the reporting generally would be less at a cost of $409 per hour. Of the work performed
under Form PF (including configuring
for private fund advisers that manage by programmers, the SEC anticipates that it will be
systems and compiling, automating, performed equally by a senior programmer at a cost
less private fund assets or that do not
reviewing and electronically filing the of $304 per hour and a programmer analyst at a cost
manage types of private funds that may of $224 per hour. ($273/hour × 0.5 + $409/hour ×
report) would impose:
be more likely to pose systemic risk. 0.5) × 45 hours + ($304/hour × 0.5 + $224/hour ×
(1) 10 burden hours at a cost of 0.5) × 30 hours = approximately $23,270.
Specifically, smaller private fund
$3,410 195 per smaller private fund 198 The SEC expects that for subsequent reports
advisers would be required to report
adviser for the initial annual report; senior personnel will bear less of the reporting
annually and provide only basic
information regarding their operations (2) 3 burden hours at a cost of $830 196 burden and that significant system configuration
per smaller private fund adviser for each and reporting automation costs will not be incurred.
and the private funds they advise, while As a result, the SEC estimates that these activities
Large Private Fund Advisers would subsequent annual report; will most likely be performed equally by a
report on a quarterly basis and provide compliance manager at a cost of $273 per hour, a
194 The SEC understands that some advisers may senior compliance examiner at a cost of $235 per
more information.193 Further, the outsource all or a portion of their Form PF reporting hour, a senior risk management specialist at a cost
additional information required from responsibilities to a filing agent, software of $409 per hour and a risk management specialist
large hedge fund advisers would be consultant, or other third-party service provider. at a cost of $192 per hour. ($273/hour × 0.25 +
more extensive than the additional The SEC believes, however, that an adviser would $235/hour × 0.25 + $409/hour × 0.25 + $192/hour
engage third-party service providers only if the × 0.25) × 35 hours = approximately $9,700.
information required from large external costs were comparable, or less than, the 199 The SEC expects that for the initial report, of
liquidity fund advisers, which in turn estimated internal costs of compiling, reviewing, a total estimated burden of 35 hours, approximately
would be more extensive than that and filing the Form PF. The hourly wage data used 21 hours will most likely be performed by
required from large private equity fund in this Economic Analysis section of the Release is compliance professionals and 14 hours will most
based on the Securities Industry and Financial likely be performed by programmers working on
advisers. Markets Association’s Report on Management & system configuration and reporting automation. Of
The SEC expects that the costs of Professional Earnings in the Securities Industry the work performed by compliance professionals,
reporting would be most significant for 2010. This data has been modified to account for the SEC anticipates that it will be performed
the first report that a private fund an 1,800-hour work-year and multiplied by 5.35 for equally by a compliance manager at a cost of $273
management and professional employees and by per hour and a senior risk management specialist
adviser is required to file because the 2.93 for general and compliance clerks to account at a cost of $409 per hour. Of the work performed
adviser would need to familiarize itself for bonuses, firm size, employee benefits and by programmers, the SEC anticipates that it will be
with the new reporting form and may overhead. performed equally by a senior programmer at a cost
need to configure its systems in order to 195 The SEC expects that for the initial report of $304 per hour and a programmer analyst at a cost
these activities will most likely be performed of $224 per hour. ($273/hour × 0.5 + $409/hour ×
efficiently gather the required 0.5) × 21 hours + ($304/hour × 0.5 + $224/hour ×
equally by a compliance manager at a cost of $273
information. The SEC also anticipates per hour and a senior risk management specialist 0.5) × 14 hours = approximately $10,860.
that the initial report would require at a cost of $409 per hour and that, because of the 200 The SEC expects that for subsequent reports
more attention from senior personnel, limited scope of information required from smaller senior personnel will bear less of the reporting
including compliance managers and private fund advisers, these advisers generally burden and that significant system configuration
would not realize significant benefits from or incur and reporting automation costs will not be incurred.
senior risk management specialists, than significant costs for system configuration or As a result, the SEC estimates that these activities
automation. ($273/hour × 0.5 + $409/hour × 0.5) × will most likely be performed equally by a
192 See note 105 and accompanying text. 10 hours = approximately $3,410. compliance manager at a cost of $273 per hour, a
193 See section II.B of this Release for a 196 The SEC expects that for subsequent reports senior compliance examiner at a cost of $235 per
description of who would be required to file Form senior personnel will bear less of the reporting hour, a senior risk management specialist at a cost
PF, section II.C of this Release for information burden. As a result, the SEC estimates that these of $409 per hour and a risk management specialist
regarding the frequency with which private fund activities will most likely be performed equally by at a cost of $192 per hour. ($273/hour × 0.25 +
advisers would be required to file Form PF, and a compliance manager at a cost of $273 per hour, $235/hour × 0.25 + $409/hour × 0.25 + $192/hour
section II.D of this Release for a description of the a senior compliance examiner at a cost of $235 per × 0.25) × 16 hours = approximately $4,440.
information that private fund advisers would be hour, a senior risk management specialist at a cost 201 The SEC expects that for the initial report, of
required to report on Form PF. See also proposed of $409 per hour and a risk management specialist a total estimated burden of 25 hours, approximately
Instruction 8 to Form PF for information regarding at a cost of $192 per hour. ($273/hour × 0.25 + 15 hours will most likely be performed by
the frequency with which private fund advisers $235/hour × 0.25 + $409/hour × 0.25 + $192/hour compliance professionals and 10 hours will most
would be required to file Form PF. × 0.25) × 3 hours = approximately $830. Continued
adviser for the initial quarterly report; approximately $6,770 per year.205 The empirical data and other factual support
and SEC further estimates that hardship for their views to the extent possible.
(8) 12 burden hours at a cost of exemption requests would cost private
$3,330 202 per large private equity fund fund advisers as a whole approximately VII. Initial Regulatory Flexibility
adviser for each subsequent quarterly $760 per year.206 Analysis
report. Finally, firms required to file Form PF CFTC
Assuming that there are 3,920 smaller would have to pay filing fees. The
private fund advisers, 200 large hedge amount of these fees has not yet been Under proposed rule 4.27(d), the
fund advisers, 80 large liquidity fund determined.207 CFTC would not impose any additional
advisers, and 250 large private equity burden upon registered CPOs and CTAs
fund advisers, the foregoing estimates C. Request for Comment that are dually registered as investment
would suggest an annual cost of The SEC requests comments on all advisers with the SEC because such
$30,200,000 203 for all private fund aspects of the foregoing cost-benefit entities are only required to file Form
advisers in the first year of reporting analysis, including the accuracy of the PF with the SEC. Further, certain CPOs
and an annual cost of $15,800,000 in potential costs and benefits identified registered with the CFTC that are also
subsequent years.204 and assessed in this Release, as well as registered with the SEC would be
In addition, as discussed above, a any other costs or benefits that may deemed to have satisfied certain CFTC-
private fund adviser would be required result from the proposals. The SEC related filing requirements by
to file very limited information on Form encourages commenters to identify, completing and filing the applicable
PF if it needed to transition from discuss, analyze, and supply relevant sections of Form PF with the SEC.
quarterly to annual filing, if it were no data regarding these or additional costs Therefore, any burden imposed by Form
longer subject to the reporting and benefits. The SEC also requests PF through proposed rule 4.27(d) on
requirements of Form PF or if it comment on the foregoing analysis of small entities registered with both the
required a temporary hardship the likely effect of the proposed rule on CFTC and the SEC has been accounted
exemption under proposed rule 204(b)– competition, efficiency, and capital for within the SEC’s initial calculations
1(f). The SEC estimates that transition formation. Commenters are requested to regarding the impact of this collection of
and final filings would, collectively, provide empirical data to support their information under the Regulatory
cost private fund advisers as a whole views. Flexibility Act (‘‘RFA’’).209 Accordingly,
In addition, for purposes of the Small the Chairman, on behalf of the CFTC,
likely be performed by programmers working on Business Regulatory Enforcement hereby certifies pursuant to 5 U.S.C.
system configuration and reporting automation. Of 605(b) that the proposed rules will not
the work performed by compliance professionals,
Fairness Act of 1996, or ‘‘SBREFA,’’ 208
the SEC anticipates that it will be performed the SEC must advise OMB whether a have a significant impact on a
equally by a compliance manager at a cost of $273 proposed regulation constitutes a substantial number of small entities.
per hour and a senior risk management specialist ‘‘major’’ rule. Under SBREFA, a rule is
at a cost of $409 per hour. Of the work performed SEC
by programmers, the SEC anticipates that it will be
considered ‘‘major’’ where, if adopted, it
performed equally by a senior programmer at a cost results in or is likely to result in: (1) An The SEC has prepared the following
of $304 per hour and a programmer analyst at a cost annual effect on the economy of $100 Initial Regulatory Flexibility Analysis
of $224 per hour. ($273/hour × 0.5 + $409/hour × million or more; (2) a major increase in
0.5) × 15 hours + ($304/hour × 0.5 + $224/hour × (‘‘IRFA’’) regarding proposed Advisers
0.5) × 10 hours = approximately $7,760.
costs or prices for consumers or Act rule 204(b)–1 in accordance with
202 The SEC expects that for subsequent reports
individual industries; or (3) significant section 3(a) of the RFA.
senior personnel will bear less of the reporting adverse effects on competition,
burden and that significant system configuration investment, or innovation. A. Reasons for Proposed Action
and reporting automation costs will not be incurred. We request comment on the potential
As a result, the SEC estimates that these activities The SEC is proposing rule 204(b)–1
impact of the proposed new rule and
will most likely be performed equally by a and Form PF specifying information
compliance manager at a cost of $273 per hour, a proposed rule amendments on the
that private fund advisers must disclose
senior compliance examiner at a cost of $235 per economy on an annual basis.
hour, a senior risk management specialist at a cost confidentially to the SEC, which
Commenters are requested to provide
of $409 per hour and a risk management specialist information the SEC will share with
at a cost of $192 per hour. ($273/hour × 0.25 + FSOC for systemic risk assessment
$235/hour × 0.25 + $409/hour × 0.25 + $192/hour 205 The SEC estimates that, for the purposes of the
purposes to help implement sections
× 0.25) × 12 hours = approximately $3,330. PRA, transition filings will impose 12 burden hours
203 (3,920 smaller private fund advisers × $3,410 per year on private fund advisers in the aggregate 404 and 406 of the Dodd-Frank Act.
per initial annual report) + (200 large hedge fund and that final filings will impose 89 burden hours Under the proposed rule, private fund
advisers × $23,270 per initial quarterly report) + per year on private fund advisers in the aggregate. advisers would be required to file
(200 large hedge fund advisers × 3 quarterly reports The SEC anticipates that this work will most likely
be performed by a compliance clerk at a cost of $67 information responsive to all or portions
× $9,700 per subsequent quarterly report) + (80
large liquidity fund advisers × $10,860 per initial per hour. (12 burden hours + 89 burden hours) × of Form PF on a periodic basis. The
quarterly report) + (80 large liquidity fund advisers $67/hour = approximately $6,770. scope of the required information and
× 3 quarterly reports × $4,440 per subsequent 206 The SEC estimates that, for the purposes of the
the frequency of the reporting would be
quarterly report) + (250 large private equity fund PRA, requests for temporary hardship exemptions
related to the amount of private fund
advisers × $7,760 per initial quarterly report) + (250 will impose 4 burden hours per year on private
large private equity fund advisers × 3 quarterly fund advisers in the aggregate. The SEC anticipants assets that each private fund adviser
reports × $3,330 per subsequent quarterly report) = that five-eighths of this work will most likely be manages and the type of private fund to
approximately $30,200,000. performed by a compliance manager at a cost of which those assets relate. Specifically,
204 (3,920 smaller private fund advisers × $830 $273 per hour and that three-eighths of this work
will most likely be performed by a general clerk at smaller private fund advisers would be
per subsequent annual report) + (200 large hedge
fund advisers × 4 quarterly reports × $9,700 per a cost of $50 per hour. (($273 per hour × 5⁄8 of an required to report annually and provide
subsequent quarterly report) + (80 large liquidity hour) + ($50 per hour × 3⁄8 of an hour)) × 4 hours only basic information regarding their
fund advisers × 4 quarterly reports × $4,440 per = approximately $760. operations and the private funds they
subsequent quarterly report) + (250 large private advise, while Large Private Fund
equity fund advisers × 4 quarterly reports × $3,330 208 Public Law 104–121, Title II, 110 Stat. 857
per subsequent quarterly report) = approximately (1996) (codified in various sections of 5 U.S.C., 15
$15,800,000. U.S.C. and as a note to 5 U.S.C. 601). 209 5 U.S.C. 603(a).
Advisers would report on a quarterly registered with the SEC and that advise advisers also would have to pay a
basis and provide more information.210 one or more private funds to file Form smaller amount of filing fees than Large
PF, completing all or part of section 1 Private Fund Advisers. Regarding the
B. Objectives and Legal Basis
of that form. As discussed above, the second alternative, the information that
As described more fully in sections I SEC estimates that completing, would be required of small entities
and II of this Release, the general reviewing, and filing Form PF would under section 1 of Form PF is quite
objective of proposed Advisers Act rule cost $3,410 per year for each small simplified from the more extensive
204(b)–1 is to assist FSOC in its adviser in its first year of reporting and reporting that would be required of
obligations under the Dodd-Frank Act $830 per year for each subsequent Large Private Fund Advisers and is
relating to nonbank financial companies year.213 In addition, small entities consolidated in one section of the form.
and in monitoring systemic risk. The would be required to pay a filing fee
SEC is proposing rule 204(b)–1 and when submitting Form PF. The amount G. Solicitation of Comments
Form PF pursuant to the SEC’s authority of the filing fee has not yet been
set forth in sections 404 and 406 of the The SEC encourages written
determined, but we anticipate that Large comments on matters discussed in this
Dodd-Frank Act, to be codified at Private Fund Advisers’ filing fees would
sections 204(b) and 211(e) of the IRFA. In particular, the SEC seeks
be set at a higher amount than small comment on:
Advisers Act [15 U.S.C. 80b–4(b) and advisers.
80b–11(e)]. • The number of small entities that
E. Duplicative, Overlapping, or would be subject to the proposed rule;
C. Small Entities Subject to the Rule Conflicting Federal Rules and
Under SEC rules, for the purposes of The SEC has not identified any • Whether the effect of the proposed
the Advisers Act and the Regulatory Federal rules that duplicate or overlap rule on small entities would be
Flexibility Act, an investment adviser or conflict with the proposed rule. economically significant.
generally is a small entity if it: (i) Has
assets under management having a total F. Significant Alternatives Commenters are asked to describe the
value of less than $25 million; (ii) did The Regulatory Flexibility Act directs nature of any effect and provide
not have total assets of $5 million or the SEC to consider significant empirical data supporting the extent of
more on the last day of its most recent alternatives that would accomplish the the effect.
fiscal year; and (iii) does not control, is stated objective, while minimizing any VIII. Statutory Authority
not controlled by, and is not under significant impact on small entities. In
common control with another connection with the proposed rules and CFTC
investment adviser that has assets under amendments, the SEC considered the
management of $25 million or more, or following alternatives: (i) The The CFTC is proposing rule 4.27(d)
any person (other than a natural person) establishment of differing compliance or [17 CFR 4.27(d)] pursuant to its
that had total assets of $5 million or reporting requirements or timetables authority set forth in section 4n of the
more on the last day of its most recent that take into account the resources Commodity Exchange Act [7 U.S.C. 6n].
fiscal year.211 available to small entities; (ii) the SEC
Under section 203A of the Advisers clarification, consolidation, or
Act, most advisers qualifying as small simplification of compliance and The SEC is proposing rule 204(b)–1
entities are prohibited from registering reporting requirements under the rule [17 CFR 275.204(b)–1] pursuant to its
with the SEC and are instead registered for small entities; (iii) the use of authority set forth in sections 404 and
with State regulators. Therefore, few performance rather than design 406 of the Dodd-Frank Act, to be
small advisers would be subject to the standards; and (iv) an exemption from codified at sections 204(b) and 211(e) of
proposed rule and form. The SEC coverage of the rule, or any part thereof, the Advisers Act [15 U.S.C. 80b–4 and
estimates that as of December 1, 2010, for small entities. 15 U.S.C. 80b–11], respectively.
approximately 50 advisers that were Regarding the first and fourth The SEC is proposing rule 279.9
small entities were registered with the alternatives, the SEC has proposed pursuant to its authority set forth in
SEC and advised one or more private different reporting requirements and
sections 404 and 406 of the Dodd-Frank
funds.212 timetables for small entities. The
Act, to be codified at sections 204(b)
proposed rule only would require small
D. Reporting, Recordkeeping, and Other and 211(e) of the Advisers Act [15
entity advisers to file Form PF annually
Compliance Requirements U.S.C. 80b–4 and 15 U.S.C. 80b–11],
and to complete applicable portions of
The proposed rule and form would respectively.
section 1 of the form.214 These smaller
impose certain reporting and List of Subjects
compliance requirements on advisers, 213 See supra notes 195–196 and accompanying
including small advisers. The proposed text. 17 CFR Part 4
214 Ifthe adviser had no hedge fund assets under
rule would require all small advisers
management, it would not need to complete section Advertising, Brokers, Commodity
1.C of the proposed form. Advisers that manage Futures, Commodity pool operators,
210 See section II.B of this Release for a both registered money market funds and liquidity
description of who would be required to file Form funds would be required to complete section 3 of
Commodity trading advisors, Consumer
protection, Reporting and recordkeeping
PF, section II.C of this Release for information Form PF, but there are no small entities that manage
regarding the frequency with which private fund a registered money market fund. See section II.B of requirements.
advisers would be required to file Form PF, and this Release for a description of who would be
section II.D of this Release for a description of the required to file Form PF, section II.C of this Release 17 CFR Part 275
information that private fund advisers would be for information regarding the frequency with which
required to report on Form PF. See also proposed smaller private fund advisers would be required to Reporting and recordkeeping
Instruction 8 to Form PF for information regarding file Form PF, and section II.D.1 of this Release for
the frequency with which private fund advisers requirements, Securities.
a description of the information that smaller private
would be required to file Form PF. fund advisers would be required to report on Form
211 17 CFR 275.0–7(a).
PF. See also proposed Instruction 8 to Form PF for smaller private fund advisers would be required to
212 Based on IARD data. information regarding the frequency with which file Form PF.
Text of Proposed Rules 4. Section 275.204(b)–1 is added to (2) To request a temporary hardship
Commodity Futures Trading read as follows: exemption, you must:
Commission § 275.204(b)–1 Reporting by investment (i) Complete and file with the operator
For the reasons set out in the advisers to private funds. of the Form PF filing system in paper
preamble, the CFTC is proposing to (a) Reporting by investment advisers format Item A of Section 1a and Section
amend Title 17, Chapter I of the Code to private funds on Form PF. Subject to 5 of Form PF, checking the box in
of Federal Regulations as follows: paragraph (g), if you are an investment Section 1a indicating that you are
adviser registered or required to be requesting a temporary hardship
PART 4—COMMODITY POOL registered under section 203 of the Act exemption, no later than one business
OPERATORS AND COMMODITY (15 U.S.C. 80b–3) and act as an day after the electronic Form PF filing
TRADING ADVISORS investment adviser to one or more was due; and
1. The authority citation for part 4 private funds, you must complete and (ii) Submit the filing that is the
continues to read as follows: file a report on Form PF (17 CFR 279.9) subject of the Form PF paper filing in
within 15 days of the end of the next electronic format with the Form PF
Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, filing system no later than seven
6l, 6m, 6n, 6o, 12a, and 23.
calendar quarter by following the
instructions in the Form, which specify business days after the filing was due.
* * * * * the information that an investment
2. In § 4.27, as proposed to be added (3) The temporary hardship
adviser must provide. exemption will be granted when you file
elsewhere in this issue of the Federal
(b) Electronic filing. You must file Item A of Section 1a and Section 5 of
Register, add paragraph (d) to read as
Form PF electronically with the Form Form PF, checking the box in Section 1a
follows:
PF filing system. indicating that you are requesting a
§ 4.27 Additional reporting by advisors of Note to paragraph (b): Information on how temporary hardship exemption.
commodity pools. to file Form PF is available on the (g) Transition for certain filers. If you
* * * * * Commission’s Web site at http:// were an investment adviser registered or
(d) Investment advisers to private www.sec.gov/[__].
required to be registered under section
funds. CPOs and CTAs who are dually (c) When filed. Each Form PF is 203 of the Act (15 U.S.C. 80b–3), act as
registered with the Securities and considered filed with the Commission an investment adviser to one or more
Exchange Commission and advise one upon acceptance by the Form PF filing private funds immediately prior to the
or more private funds, as defined in system. compliance date of rule 204(b)–1, and
section 202 of the Investment Advisers (d) Filing fees. You must pay the are only required to complete all or
Act of 1940 (15 U.S.C. 80b–2(a)), shall operator of the Form PF filing system a portions of section 1 of Form PF, no
file Form PF with the Securities and filing fee as required by the instructions later than 90 days after the end of your
Exchange Commission. Dually to Form PF. The Commission has then-current fiscal year you must
registered CPOs and CTAs that file Form approved the amount of the filing fee. complete and file your initial report on
PF with the Securities and Exchange No portion of the filing fee is Form PF by following the instructions
Commission will be deemed to have refundable. Your completed Form PF in the Form, which specify the
filed Form PF with the Commission for will not be accepted by the operator of
purposes of any enforcement action information that an investment adviser
the Form PF filing system, and thus will must provide.
regarding any false or misleading not be considered filed with the
statement of a material fact in Form PF. PART 279—FORMS PRESCRIBED
Commission, until you have paid the
Dually registered CPOs and CTAs must UNDER THE INVESTMENT ADVISERS
filing fee.
file such other reports as are required ACT OF 1940
(e) Amendments to Form PF. You
under this section with respect to all
must amend your Form PF:
pools that are not private funds. 5. The authority citation for part 279
(1) At least annually, no later than the
* * * * * last day on which you may timely file continues to read as follows:
Securities and Exchange Commission your annual amendment to Form ADV Authority: 15 U.S.C. 80b–1, et seq.
under rule 204–1(a)(1) (17 CFR 275.204–
For the reasons set out in the 6. Section 279.9 is added to read as
1(a)(1)); and
preamble, the SEC is proposing to follows:
(2) More frequently, if required by the
amend Title 17, Chapter II of the Code
instructions to Form PF. You must file
of Federal Regulations as follows: § 279.9 Form PF, reporting by investment
all amendments to Form PF advisers to private funds.
PART 275—RULES AND electronically with the Form PF filing
system. This form shall be filed pursuant to
REGULATIONS, INVESTMENT
(f) Temporary hardship exemption. Rule 204(b)–1 (§ 275.204(b)–1 of this
ADVISERS ACT OF 1940
(1) If you have unanticipated technical chapter) by certain investment advisers
3. The authority citation for part 275 difficulties that prevent you from registered or required to register under
continues to read in part as follows: submitting Form PF on a timely basis section 203 of the Act (15 U.S.C. 80b–
Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– through the Form PF filing system, you 3) that act as an investment adviser to
may request a temporary hardship one or more private funds.
2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4),

80b–6a, and 80b–11, unless otherwise noted. exemption from the requirements of this Note: The following Form PF will not
* * * * * section to file electronically. appear in the Code of Federal Regulations.
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By the Commodity Futures Trading Dated: January 26, 2011. Dated: January 26, 2011.
Commission. David A. Stawick, Elizabeth M. Murphy,
Secretary. Secretary.
By the Securities and Exchange Appendix 1—Commodity Futures
Commission. 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
EP11FE11.137</GPH>

Commodity Futures Trading Commission: Vol. 76 Friday, No. 29 February 11, 2011

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Commodity Futures Trading Commission: Vol. 76 Friday, No. 29 February 11, 2011

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Vol.

No. 29 February 11, 2011

Commodity Futures Trading Commission

Securities and Exchange Commission

17 CFR Parts 275 and 279

note 9. www.regulations.gov. 38 (‘‘While hedge funds are generally not thought

56 See President’s Working Group on Financial

121 See proposed Instruction 3 to Form PF.

141 See proposed questions 62–64.

burden associated with the to investment advisers registered, or required to

182 19,600 hours for periodic filings by smaller

annually a limited amount of basic sources.

description of the information that private fund

2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4),

no Commissioner voted in the negative.

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