Proposed Rule: Amendments to Form PF
On January 26, 2022, the SEC proposed amendments to Form PF to enhance the ability of the Financial Stability Oversight Counsel (FSOC) to monitor systemic risk, and also to collect more information for the SEC to use in its regulatory programs, including examinations. The proposed amendments would apply to private equity advisers, and advisers to large hedge funds and large liquidity funds.
The amendments would make three significant changes:
- Current Reporting – Require new current reporting (i.e., within one business day) of certain events for large hedge fund advisers and all private equity fund advisers;
- Large Private Equity Funds – Decrease the reporting threshold for large private equity funds to $1.5B (from current $2B), and expand the scope of information required to be reported by such advisers in Section 4; and
- Large Liquidity Funds – Expand the scope of information required to be reported by large liquidity fund advisers to essentially require the same information that money market funds report on Form N-MFP.
The proposal was published in the Federal Register on February 17, 2022, and the Comment Period will remain open for 30 days.
New Current Reporting for Large Hedge Fund Advisers and All Advisers to Private Equity Funds
The proposed Rule would add new sections to Form PF that would require current reporting (i.e., within one business day) upon the occurrence of key events.
New Section 5: Nine triggering events for Large Hedge Fund Advisers
- Extraordinary Investment Losses – equal to 20% of a fund’s most recent NAV over a rolling 10 business-day period
- Margin Increases – a cumulative increase in margin of more than 20% of the reporting fund’s most recent NAV over a rolling 10 business-day period
- Margin Defaults – a fund’s margin default or inability to meet a margin call
- Counterparty Defaults – where a counterparty (1) does not meet a margin call or fails to make any other payment in the time and form required, and (2) the amount involved is more than 5% of the most recent NAV
- Material Changes in Prime Broker Relationships – material changes to a fund’s ability to trade or outright termination of the prime brokerage relationship due to default or breach of the prime brokerage agreement
- Changes in Unencumbered Cash – where unencumbered cash declines by more than 20% of the reporting fund’s most recent NAV over a rolling 10 business-day period
- Operations Events – where the adviser or fund experiences “significant disruption or degradation” of the fund’s “key operations”
- Redemptions in excess of 50% of the Fund’s NAV – cumulative redemption requests that exceed 50% of the fund’s most recent NAV
- Inability to Satisfy Redemptions – inability to satisfy or suspension of redemption requests for more than five consecutive business days
New Section 6: Three triggering events for Private Equity Fund Advisers
- Execution of an Adviser-Led Secondary Transaction
- GP or LP Clawbacks
- Investor-Led Elections: Removal of a Fund’s GP, Termination of a Fund’s Investment Period, or Termination of a Fund
Large Private Equity Fund Advisers
The proposed rule lowers the threshold for reporting as a Large Private Equity Adviser from $2 billion to $1.5 billion. At the same time, Section 4 of Form PF would be revised to require more detailed reporting regarding:
- Fund strategies
- Use of leverage and portfolio company financings
- Controlled Portfolio Companies (“CPC”) and CPC borrowings
- Fund investments in different levels of a portfolio company’s capital structure
- Portfolio Company restructuring or recapitalization
Large Liquidity Fund Advisers
The proposed rule would require large liquidity fund advisers to report substantially the same information that money market funds would be required to report on Form N-MFP (as proposed in December 2021), including:
- Operational information
- Financing information
- Investor information
- Disposition of portfolio securities
- Weighted average maturity and weighted average life
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