Proposed Form PF updates will extend reporting obligations for hedge fund advisers
07 February 2022 US
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The Securities and Exchange Commission’s proposed changes to Form PF will apply new reporting requirements for large hedge fund advisers and advisers to private equity funds if enacted, requiring advisers to report specified events to the SEC within one business day of their occurrence.
Form PF is a confidential reporting template for specified advisers to private funds that are registered with the SEC.
The proposed amendments are targeted at large hedge fund advisers, private equity advisers and advisers to large liquidity funds. They are designed to reinforce the ability of the SEC and the Financial Stability Oversight Council to monitor systemic risk and to provide effective oversight of private fund advisers in the name of investor protection.
The SEC indicates that these changes are driven by its experience in overseeing recent market events, including the COVID-19 pandemic and the January 2021 market volatility linked to meme stocks. This, says the Commission, reinforces the importance of receiving “current and robust information” from market participants.
If the changes are adopted as proposed, large hedge fund advisers will be required to report extraordinary investment losses for any qualifying hedge fund — representing aggregate losses of 20 per cent or more of the most recent net asset value over a 10-day rolling business period.
A large hedge fund adviser is an adviser that has at least US$1.5 billion in hedge fund assets under management.
A fund’s “most recent NAV” is the NAV reported on the fund’s most recent Form PF filing.
Advisers will also be required to report any significant margin or default events. This will include a margin default or a fund’s inability to meet a call for margin or collateral. It will include any increase in margin or collateral (or its equivalent) of more than 20 per cent of a fund’s NAV over a 10-day rolling business period.
The adviser must also report when a counterparty fails to meet a collateral call or the amount involved exceeds 5 per cent of the fund’s most-recent NAV.
With respect to unencumbered cash, a decline in value of the reporting fund’s unencumbered cash of more than 20 per cent of its most recent NAV over a rolling 10-day period must be reported via Form PF, along with the factors relating to this change.
The adviser must report all withdrawals and redemptions from the hedge fund that exceed 50 per cent of the fund’s most recent NAV — along with any instance where the fund is unable to meet redemption requests that extend longer than 5 days.
More broadly, the proposed changes will require all significant operational events involving significant disruption or degradation to be reported to the Commission via the Section 5 provisions of Form PF, specifically those applying to qualifying hedge funds.
This may include cybersecurity events which disrupt trading volume of a reporting fund by 20 per cent its normal capacity, for example, or events which impair an adviser’s ability to value a fund’s assets.
Additionally, a large hedge fund adviser must report circumstances where there is any material change in a fund’s relationship with its prime broker(s), including termination of the relationship or when material trading limits or investment restrictions are imposed on the reporting fund.
The SEC has submitted the proposed changes for market consultation, with respondents asked to file their comments on the Release within 30 days of the release being published in the Federal Register.
The Release also proposed changes to the reporting obligations borne by private equity fund advisers under Section 6 of Form PF (the section applicable to private equity funds). Among other amendments, this will lower the reporting threshold for large private equity advisers from US$2 billion to US$1.5 billion in private equity fund assets under management.
Form PF is a confidential reporting template for specified advisers to private funds that are registered with the SEC.
The proposed amendments are targeted at large hedge fund advisers, private equity advisers and advisers to large liquidity funds. They are designed to reinforce the ability of the SEC and the Financial Stability Oversight Council to monitor systemic risk and to provide effective oversight of private fund advisers in the name of investor protection.
The SEC indicates that these changes are driven by its experience in overseeing recent market events, including the COVID-19 pandemic and the January 2021 market volatility linked to meme stocks. This, says the Commission, reinforces the importance of receiving “current and robust information” from market participants.
If the changes are adopted as proposed, large hedge fund advisers will be required to report extraordinary investment losses for any qualifying hedge fund — representing aggregate losses of 20 per cent or more of the most recent net asset value over a 10-day rolling business period.
A large hedge fund adviser is an adviser that has at least US$1.5 billion in hedge fund assets under management.
A fund’s “most recent NAV” is the NAV reported on the fund’s most recent Form PF filing.
Advisers will also be required to report any significant margin or default events. This will include a margin default or a fund’s inability to meet a call for margin or collateral. It will include any increase in margin or collateral (or its equivalent) of more than 20 per cent of a fund’s NAV over a 10-day rolling business period.
The adviser must also report when a counterparty fails to meet a collateral call or the amount involved exceeds 5 per cent of the fund’s most-recent NAV.
With respect to unencumbered cash, a decline in value of the reporting fund’s unencumbered cash of more than 20 per cent of its most recent NAV over a rolling 10-day period must be reported via Form PF, along with the factors relating to this change.
The adviser must report all withdrawals and redemptions from the hedge fund that exceed 50 per cent of the fund’s most recent NAV — along with any instance where the fund is unable to meet redemption requests that extend longer than 5 days.
More broadly, the proposed changes will require all significant operational events involving significant disruption or degradation to be reported to the Commission via the Section 5 provisions of Form PF, specifically those applying to qualifying hedge funds.
This may include cybersecurity events which disrupt trading volume of a reporting fund by 20 per cent its normal capacity, for example, or events which impair an adviser’s ability to value a fund’s assets.
Additionally, a large hedge fund adviser must report circumstances where there is any material change in a fund’s relationship with its prime broker(s), including termination of the relationship or when material trading limits or investment restrictions are imposed on the reporting fund.
The SEC has submitted the proposed changes for market consultation, with respondents asked to file their comments on the Release within 30 days of the release being published in the Federal Register.
The Release also proposed changes to the reporting obligations borne by private equity fund advisers under Section 6 of Form PF (the section applicable to private equity funds). Among other amendments, this will lower the reporting threshold for large private equity advisers from US$2 billion to US$1.5 billion in private equity fund assets under management.
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