Private Fund Systemic Risk Reporting Regulation
|FINAL RULE: The SEC final rule was issued at its October 26, 2011 open meeting. The CFTC approved the final rule on October 31, 2011.|
|Final Rule Issue||Effective Date||Compliance Date|
|November 16, 2011||March 31 2012||June 15, 2012*|
On October 26, 2011, the Securities and Exchange Commission (SEC) finalized rules requiring advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system.<ref>SEC Approves Confidential Private Fund Risk Reporting. SEC. Retrieved on October 26, 2011.</ref> The Commodity Futures Trading Commission (CFTC) approved the joint final rule on October 31, 2011.<ref>CFTC and SEC Approve Confidential Private Fund Risk Reporting. CFTC. Retrieved on October 31, 2011.</ref>
Under the rules, larger private fund advisers managing hedge funds, "liquidity funds" (i.e., unregistered money market funds), and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, liquidity fund, or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would be subject to lesser reporting requirements. Information reported on Form PF would remain confidential, unlike Form ADV which is available to the public.
Form PF is the result of extensive consultation and collaboration between staff of the SEC, the CFTC, and Financial Stability Oversight Council (FSOC) members. This collaboration followed on earlier work with international regulators to conform hedge fund regulatory reporting standards. A tandem proposal was unanimously approved by the CFTC at its January 26, 2011 open meeting.
The Dodd-Frank Act established FSOC for the purpose of monitoring risks to the stability of the U.S. financial system. According to Section 404 of Dodd-Frank, the SEC and CFTC may require any investment adviser "to maintain such records of, and file with the Commission such reports regarding, private funds advised by the investment adviser, as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk by the Financial Stability Oversight Council." Working with other regulators, FSOC will gather information from many sectors of the financial system for this purpose. In order to assist FSOC in this process, the Dodd-Frank Act directs the Commission to collect information from advisers to hedge funds and other private funds as necessary for FSOC's assessment of systemic risk.<ref>Dodd-Frank Changes to Investment Adviser Regulation. Montgomery, McCracken, Walker & Rhoads, LLP. Retrieved on May 31, 2011.</ref>
The rule was proposed on January 25, 2011 and appeared in the Federal Register on February 11, 2011.<ref>SEC Approves Confidential Private Fund Risk Reporting. U.S. Securities and Exchange Commission. Retrieved on October 26, 2011.</ref> The deadline for public comments was April 12, 2011.
In formulating this proposal, the SEC and CFTC collaborated with the U.K.'s Financial Services Authority and other members of the International Organization of Securities Commissions. The resulting form is similar in many respects to surveys of large hedge fund advisers conducted by foreign financial regulators. In addition, the commissions consulted extensively with staff representing the other members of FSOC.
On January 26, 2011 the CFTC approved the joint proposal, which will require private fund advisers that are also registered with the CFTC as commodity pool operators or commodity trading advisors to file Form PF to comply with certain reporting obligations that the CFTC would impose.
"'Large private fund advisers' are:
- Advisers with at least $1.5 billion in assets under management attributable to hedge funds.
- Liquidity fund advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds.
- Advisers with at least $2 billion in assets under management attributable to private equity funds. All other respondents are considered smaller private fund advisers."
Large private fund advisers are required to file Form PF within 60 days of the end of each fiscal quarter. Large liquidity fund advisers have 15 days from the end of each fiscal quarter to file the form, and large private equity fund advisers have 120 days from the end of the fiscal year to file their annual form. Small private fund advisers are also only required to file Form PF annually, and have 120 days from the end of the fiscal year to file.
"Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012.
However, the following advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012:
- Advisers with at least $5 billion in assets under management attributable to hedge funds.
- Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds.
- Advisers with at least $5 billion in assets under management attributable to private equity funds."
Smaller Private Fund Advisers
Smaller private fund advisers would file Form PF only once a year and would report only basic information regarding the private funds they advise. This would include information regarding leverage, credit providers, investor concentration and fund performance. Smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms.
Large Private Fund Advisers
Large private fund advisers would file Form PF on a quarterly basis and would provide more detailed information than smaller advisers. The focus of the reporting would depend on the type of private fund that the adviser manages:
- Large hedge fund advisers would report on an aggregated basis information regarding exposures by asset class, geographical concentration and turnover. In addition, for each managed hedge fund having a net asset value of at least $500 million, these advisers would report certain information relating to that fund's investments, leverage, risk profile and liquidity.
- Large liquidity fund advisers would provide information on the types of assets in each of their liquidity fund's portfolios, certain information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or aspects of the Investment Company Act's principal rule concerning registered money market funds (Rule 2a-7).
- Large private equity fund advisers would respond to questions focusing primarily on the extent of leverage incurred by their funds' portfolio companies, the use of bridge financing, and their funds' investments in financial institutions.
The final rule release, the rule proposal and a copy of Form PF can be found below.