The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have jointly adopted amendments to Form PF that should both enhance the Financial Stability Oversight Council’s (FSOC) ability to monitor and assess risk and improve the SEC’s oversight of private fund advisers.
Form PF is an essential source of information for both the SEC and CFTC (the Commissions), as well as the FSOC. It allows them to understand not just the operations and strategies of individual private funds, but also paint a broader picture of the private fund industry that’s useful in assessing systemic risk.
The amendments to Form PF, approved on Feb. 8, 2024, will both help enhance the reporting required of private funds and their advisers, as well as streamline certain aspects to help both improve data quality and reduce reporting errors.
The following are some of the most important components of the final rule:
Reporting by Large Hedge Fund Advisers on Qualifying Hedge Funds
As part of an effort to improve reporting by large hedge fund advisers on hedge funds with a net asset value of at least $500 million, the Commissions are adopting several amendments to section 2, including a reorganization: Section 2a will be removed, and section 2b will redesignated as section 2.
The new section 2 will be amended to enhance and simplify investment exposure reporting; revise borrowing and counterparty exposure reporting; revise market factor effects reporting; add reporting on currency exposure, turnover, country and industry exposure; add new reporting on central counterparty clearing houses (CCPs); streamline risk metric reporting and collect new information on investment performance by strategy; and enhance portfolio and finance liquidity reporting.
Reporting on Basic Information About Advisers and the Private Funds They Advise
The Commissions approved several amendments requiring advisers to report additional information about themselves and their private funds. The goal, the Commissions say, is to “improve comparability across advisers, improve data quality, and reduce reporting errors, based on our experience with Form PF filings.”
Among the areas of reporting covered by these amendments are identifying information, assets under management, withdrawal and redemption rights, gross asset value and net asset value, inflows and outflows, base currency, borrowings, and types of creditors, fair value hierarchy, beneficial ownership and fund performance.
As a for-instance, the Commissions are amending Question 3 to direct advisers to exclude the value of private funds’ investments in other internal private funds to help prevent double counting of fund-of-funds assets, and to require advisers to include the value of trading vehicle assets.
Reporting Concerning Hedge Funds
The Commissions are also amending section 1c of Form PF to require advisers to report additional information about hedge funds “to provide greater insight into hedge funds’ operations and strategies, assist in identifying trends, and improve data quality and data comparability for purposes of systemic risk assessments and to further investor protection efforts.”
One departure from the original proposed rule is that while digital assets will be considered a reportable investment strategy, the SEC and CFTC are not adopting a defined term for “digital assets” in the Glossary of Terms. The Commissions say they agree that certain strategies could be categorized as either a digital asset strategy or another listed strategy, and so they’ve added an instruction to Question 25 specifying that in such an instance, the adviser should report the strategy as the non-digital asset strategy.
How Advisers Report Complex Structures
Form PF currently gives advisers the flexibility to respond to questions about master-feeder arrangements and parallel structures either separately or in aggregate – whichever option they choose, though, they must use consistently throughout Form PF. But the SEC observed that this optionality sometimes obscured risk profiles and made it difficult to compare complex structures.
As a result, the new amendments will require separate reporting for each component fund of a master-feeder arrangement and parallel fund structure. (Exception: Instances where a feeder fund invests all of its assets in a single master fund, U.S. Treasuries, and/or “cash and cash equivalents.”) Advisers also will have to identify trading vehicles used by reporting funds and report them on an aggregated basis. This should improve visibility for both the Commissions and the Financial Stability Oversight Council (FSOC).
Data Quality
The Commission also green-lit amendments requiring more detailed reporting on Form PF that are expected to enhance data quality.
The rules cover everything from value of investment positions and counterparty exposures to reporting of long and short positions to currency conversions and calculating derivative values. The amendments even step up the level of precision in listing percentages – currently, they’re required to be rounded to the nearest whole percent, but under the new amendments, percentages must be reported to the nearest one-hundredth of one percent.
Additional Information
The final amendments will become effective one year after publication in the Federal Register. The compliance date is the same as the effective date.
You can view the SEC’s press release, rule details and fact sheet on SEC.gov.
