Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers, 53832-53985 [2022-17724]
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Federal Register / Vol. 87, No. 169 / Thursday, September 1, 2022 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
RIN 3038–AF31
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 275 and 279
[Release No. IA–6083; File No. S7–22–22]
RIN 3235–AN13
Form PF; Reporting Requirements for
All Filers and Large Hedge Fund
Advisers
Commodity Futures Trading
Commission and Securities and
Exchange Commission.
ACTION: Joint proposed rules.
AGENCIES:
The Commodity Futures
Trading Commission (‘‘CFTC’’) and the
Securities and Exchange Commission
(‘‘SEC’’) (collectively, ‘‘we’’ or the
‘‘Commissions’’) are proposing to
amend Form PF, the confidential
reporting form for certain SEC-registered
investment advisers to private funds,
including those that also are registered
with the CFTC as a commodity pool
operator (‘‘CPO’’) or commodity trading
adviser (‘‘CTA’’). The amendments are
designed to enhance the Financial
Stability Oversight Council’s (‘‘FSOC’s’’)
ability to monitor systemic risk as well
as bolster the SEC’s regulatory oversight
of private fund advisers and investor
protection efforts. In connection with
the amendments to Form PF, the SEC
proposes to amend a rule under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’) to revise instructions
for requesting a temporary hardship
exemption. We also are soliciting
comment on the proposed rules and a
number of alternatives, including
whether certain possible changes to the
proposal should apply to Form ADV.
DATES: Comments should be received on
or before October 11, 2022.
ADDRESSES: Comments may be
submitted by any of the following
methods.
CFTC: Comments may be submitted to
the CFTC by any of the following
methods.
• CFTC Comments portal: https://
comments.cftc.gov. Follow the
instructions for submitting comments
through the website.
• Mail: Christopher Kirkpatrick,
Secretary of the Commission,
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SUMMARY:
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Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC
20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail above.
Please submit your comments using
only one method. To avoid possible
delays with mail or in-person deliveries,
submissions through the CFTC website
are encouraged. ‘‘Form PF’’ must be in
the subject field of comments submitted
via email, and clearly indicated on
written submissions. All comments
must be submitted in English, or if not,
accompanied by an English translation.
Comments will be posted as received to
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the CFTC
to consider information that may be
exempt from disclosure under the
Freedom of Information Act, a petition
for confidential treatment of the exempt
information may be submitted according
to the established procedures in 17 CFR
145.9.
The CFTC reserves the right, but shall
have no obligation, to review, prescreen,
filter, redact, refuse, or remove any or
all of your submission from
www.cftc.gov that it may deem to be
inappropriate for publication, including,
but not limited to, obscene language. All
submissions that have been redacted or
removed that contain comments on the
merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act,
5 U.S.C. 552, et seq. (‘‘FOIA’’).
SEC: Comments may be submitted to
the SEC by any of the following
methods:
Electronic Comments
• Use the SEC’s internet comment
forms (https://www.sec.gov/regulatoryactions/how-to-submit-comments); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
22–22 on the subject line.
Paper Comments
• Send paper comments to Secretary,
U.S. Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number S7–22–22. This file number
should be included on the subject line
if email is used. To help us process and
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review your comments more efficiently,
please use only one method. The SEC
will post all comments on the SEC’s
website (https://www.sec.gov/rules/
proposed.shtml). Comments also are
available for website viewing and
printing in the SEC’s Public Reference
Room, 100 F Street NE, Washington, DC
20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Operating conditions may limit access
to the SEC’s Public Reference Room. All
comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
Studies, memoranda, or other
substantive items may be added by the
SEC or staff to the comment file during
this rulemaking. A notification of the
inclusion in the comment file of any
such materials will be made available
on the SEC’s website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT:
CFTC: Pamela Geraghty, Associate
Director; Michael Ehrstein, Special
Counsel; Andrew Ruggiero, AttorneyAdvisor at (202) 418–6700, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW
Washington, DC 20581. SEC: Alexis
Palascak, Lawrence Pace, Senior
Counsels; Christine Schleppegrell,
Acting Branch Chief at (202) 551–6787
or IArules@sec.gov, Investment Adviser
Regulation Office, Division of
Investment Management, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–8549.
The CFTC
and SEC are requesting public comment
on the following under the Investment
Advisers Act of 1940 [15 U.S.C. 80b]
(‘‘Advisers Act’’).1 2
SUPPLEMENTARY INFORMATION:
1 15 U.S.C. 80b. Unless otherwise noted, when we
refer to the Advisers Act, or any section of the
Advisers Act, we are referring to 15 U.S.C. 80b, at
which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section
of these rules, we are referring to title 17, part 275
of the Code of Federal Regulations [17 CFR 275], in
which these rules are published.
2 Form PF is a joint form between the SEC and
CFTC only with respect to sections 1 and 2 of the
Form.
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Federal Register / Vol. 87, No. 169 / Thursday, September 1, 2022 / Proposed Rules
Agency
Reference
CFTC & SEC .....................................................
SEC ...................................................................
Form PF 2 .........................................................
Rule 204(b)–1 ...................................................
17 CFR 279.9.
17 CFR 275.204(b)–1.
Table of Contents
they advise.3 The proposed
amendments are designed to enhance
FSOC’s monitoring and assessment of
systemic risk and to provide additional
information for FSOC’s use in
determining whether and how to deploy
its regulatory tools. The proposed
amendments also are designed to collect
additional data for use in the
Commissions’ regulatory programs,
including examinations, investigations
and investor protection efforts relating
to private fund advisers.4 Finally, the
proposed amendments also are designed
to improve the usefulness of this data.5
An adviser must file Form PF if (1) it
is registered or required to register with
the SEC as an investment adviser, (2) it
manages one or more private funds, and
(3) the adviser and its related persons
collectively had at least $150 million in
private fund assets under management
as of the last day of its most recently
completed fiscal year.6 A CPO or CTA
that also is registered or required to
register with the SEC as an investment
adviser and satisfies the other
conditions described above must file
Form PF with respect to any commodity
pool it manages that is a private fund.
Most private fund advisers file annually
to report general information such as the
types of private funds advised (e.g.,
hedge funds, private equity funds, or
liquidity funds), fund size, use of
borrowings and derivatives, strategy,
and types of investors. Certain larger
advisers provide more information on a
more frequent basis, including more
detailed information on particular hedge
funds and liquidity funds.
Form PF provides the Commissions
and FSOC with important information
about the basic operations and strategies
of private funds and has helped
establish a baseline picture of the
private fund industry for use in
assessing systemic risk. We now have
almost a decade of experience analyzing
the information collected on Form PF.
In that time, the private fund industry
has grown in size and evolved in terms
of business practices, complexity of
fund structures, and investment
strategies and exposures.7 For example,
I. Introduction
II. Discussion
A. Proposed Amendments to the General
Instructions
1. Reporting Master-Feeder Arrangements
and Parallel Fund Structures
2. Reporting Private Funds that Invest in
Other Funds
3. Reporting Timelines
B. Proposed Amendments Concerning
Basic Information about the Adviser and
the Private Funds it Advises
1. Proposed Amendments to Section 1a of
Form PF—Identifying Information
2. Proposed Amendments to Section 1b of
Form PF—Concerning All Private Funds
3. Proposed Amendments to Section 1c of
Form PF—Concerning All Hedge Funds
C. Proposed Amendments Concerning
Information about Hedge Funds Advised
by Large Private Fund Advisers
1. Proposed Amendments to Section 2a
2. Proposed Amendments to Section 2b
D. Proposed Amendments To Enhance
Data Quality
E. Proposed Additional Amendments
III. Economic Analysis
A. Introduction
B. Economic Baseline and Affected Parties
1. Economic Baseline
2. Affected Parties
C. Benefits and Costs
1. Benefits
2. Costs
D. Reasonable Alternatives
1. Alternatives to Proposed Amendments
to General Instructions, Proposed
Amendments to Enhance Data Quality,
and Proposed Additional Amendments
2. Alternatives to Proposed Amendments
to Basic Information about the Adviser
and the Private Funds It Advises
3. Alternatives to Proposed Amendments
to Information about Hedge Funds
Advised by Large Private Fund Advisers
4. Alternatives to the Definition of the
Term ‘‘Hedge Fund’’
E. Request for Comment
IV. Paperwork Reduction Act
A. Form PF
1. Purpose and Use of the Information
Collection
2. Confidentiality
3. Burden Estimates
B. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority
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I. Introduction
The Commissions are proposing to
amend sections of Form PF, the form
that certain SEC-registered investment
advisers, including those that also are
registered with the CFTC as a CPO or
CTA, use to report confidential
information about the private funds that
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CFR citation
3 Specifically, the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (‘‘Dodd-Frank
Act’’), mandated that the SEC and the CFTC, in
consultation with the FSOC, jointly promulgate
rules governing the form and substance of reports
required by investment advisers to private funds to
be filed with the SEC, and with the CFTC for those
that are dually-registered with both Commissions.
Public Law 111–203, 124 Stat. 1376 (2010). See, 15
U.S.C. 80b–11. See also, 17 CFR 4.27(d). The result
was Sections 1 and 2 of Form PF, which were
jointly promulgated. See Reporting by Investment
Advisers to Private Funds and Certain Commodity
Pool Operators and Commodity Trading Advisors
on Form PF, Advisers Act Release No. 3308 (Oct.
31, 2011), [76 FR 71128 (Nov. 16, 2011)] (‘‘2011
Form PF Adopting Release’’) at section I. In 2014,
the SEC amended Form PF section 3 in connection
with certain money market fund reforms. See
Money Market Fund Reform; Amendments to Form
PF, Advisers Act Release No. 3879 (July 23, 2014),
[79 FR 47736 (Aug. 14, 2014)] (‘‘2014 Form PF
Amending Release’’).
4 Any reference to the ‘‘Commissions’’, or ‘‘we’’,
as it relates to the collection and use of Form PF
data are meant to refer to the agencies in their
separate or collective capacities, and such data from
filings made pursuant to 17 CFR 275.204(b)–1, by
and through Private Fund Reporting Depository, a
subsystem of the Investment Adviser Registration
Depository (‘‘IARD’’), and reports, analysis, and
memoranda produced pursuant thereto. Further, as
the collection is being made pursuant to the
Advisers Act and the IARD is subject to the
authority and control of the SEC, as of the date of
this proposal, it should not be assumed that the
CFTC has direct, or timely access to such data. The
Commissions will continue to engage in interagency
discussions on the sharing of portions of Form PF
data relevant to the CFTC consistent with the terms
of existing interagency agreements or arrangements
related to the sharing of data.
5 Additionally, the Federal Reserve Board uses
this data for research and analysis.
6 See 17 CFR 275.204(b)–1. Advisers Act section
202(a)(29) defines the term ‘‘private fund’’ as an
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issuer that would be an investment company, as
defined in section 3 of the Investment Company Act
of 1940 (‘‘Investment Company Act’’), but for
section 3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1)
of the Investment Company Act provides an
exclusion from the definition of ‘‘investment
company’’ for any issuer whose outstanding
securities (other than short-term paper) are
beneficially owned by not more than one hundred
persons (or, in the case of a qualifying venture
capital fund, 250 persons) and which is not making
and does not presently propose to make a public
offering of its securities. Section 3(c)(7) of the
Investment Company Act provides an exclusion
from the definition of ‘‘investment company’’ for
any issuer, the outstanding securities of which are
owned exclusively by persons who, at the time of
acquisition of such securities, are qualified
purchasers, and which is not making and does not
at that time propose to make a public offering of
such securities. The term ‘‘qualified purchaser’’ is
defined in section 2(a)(51) of the Investment
Company Act.
7 The value of private fund net assets reported on
Form PF has more than doubled, growing from $5
trillion (net) in 2013 to $12 trillion (net) by the end
of the third quarter of 2021, while the number of
private funds reported on the form has increased by
nearly 55 percent in that time period. Unless
otherwise noted, the private funds statistics used in
this Release are from the Private Funds Statistics
Third Quarter 2021. Division of Investment
Management, Private Fund Statistics Third Quarter
2021, (Mar. 30, 2022), available at https://
www.sec.gov/divisions/investment/private-fundsstatistics/private-funds-statistics-2021-q3.pdf
(‘‘Private Fund Statistics Q3 2021’’). Any
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certain investment strategies, including
credit, digital asset,8 litigation finance,9
and real estate strategies, have become
more common since the form was
adopted.10 Similarly, we understand
that qualifying hedge fund exposures to
repurchase agreements (‘‘repos’’),
reverse repurchase agreements (‘‘reverse
repos’’), and U.S. treasury securities
have increased in recent years.11
Experience with Form PF data also has
identified potential ways to improve
data quality, including in instances
where existing reporting may not
identify fully the potential risks, such as
in the reporting of certain master-feeder
arrangements.
Based on this experience and in light
of these changes, the Commissions and
FSOC have identified information gaps
and situations where revised
information would improve our
understanding of the private fund
industry and the potential systemic risk
within it. We believe more detailed
comparisons to earlier periods are from the private
funds statistics from that period, all of which are
available at https://www.sec.gov/divisions/
investment/private-funds-statistics.shtml. SEC staff
began publishing the private fund statistics in 2015,
including data from 2013. Therefore, many
comparisons in this Release discuss the almost nine
year span from the beginning of 2013 through third
quarter 2021. Some discussion in this Release
compares data from a shorter time span, because the
SEC staff published such data later than 2013. Staff
reports, statistics, and other staff documents
(including those cited herein) represent the views
of SEC staff and are not a rule, regulation, or
statement of the SEC. The SEC has neither approved
nor disapproved the content of these documents
and, like all staff statements, they have no legal
force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any
person.
8 See Zuckerman, Gregory, Mainstream Hedge
Funds Pour Billions of Dollars Into Crypto, The
Wall Street Journal (March 2022) available at
https://www.wsj.com/articles/mainstream-hedgefunds-pour-billions-of-dollars-into-crypto11646808223#:∼:text=Brevan%20Howard%20
launched%20a%20
cryptocurrency,and%20investing%20in%20
blockchain%20technology.
9 See Burnett, David and Pierce, John, The
Emerging Market for Litigation Funding, The Hedge
Fund Journal (June 2013) available at https://
thehedgefundjournal.com/the-emerging-market-forlitigation-funding/.
10 See Private Fund Statistics Q3 2021, supra
footnote 7, at p. 24.
11 A qualifying hedge fund is defined in Form PF
as ‘‘any hedge fund that has a net asset value
(individually or in combination with any feeder
funds, parallel funds and/or dependent parallel
managed accounts) of at least $500 million as of the
last day of any month in the fiscal quarter
immediately preceding [the adviser’s] most recently
completed fiscal quarter.’’ See Form PF Glossary of
Terms. From 2015 through the end of 2020,
qualifying hedge fund exposure to repos doubled to
$2 trillion, while from 2013 through the end of
2020, qualifying hedge fund borrowings attributable
to reverse repos more than doubled to $1.3 trillion.
For the same period, qualifying hedge fund
exposure to U.S. treasury securities increased by
almost 70 percent to $1.7 trillion in aggregate
qualifying hedge fund gross notional exposure.
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information, including with respect to
strategies and exposures, would provide
better empirical data to FSOC with
which it may assess better the extent to
which the activities of private funds or
their advisers pose systemic risks. We
expect that FSOC would use the new
information collected on Form PF,
together with market data from other
sources, to assist in determining
whether and how to deploy its
regulatory tools.12 This may include, for
instance, identifying private fund
advisers that merit further analysis or
deciding whether to recommend to a
primary financial regulator, like the SEC
or CFTC, more stringent regulation of
the financial activities that FSOC
determines may create or increase
systemic risk. This revised information
also would improve our ability to
protect investors.13
The Commissions have consulted
with FSOC to gain input on this
proposal, and to help ensure that Form
PF continues to provide FSOC with
information it can use to carry out its
monitoring obligations and assess
systemic risk in light of changes in the
private fund industry over the past
decade. The Commissions are jointly
proposing amendments to the form’s
general instructions, as well as section
1 of Form PF, which would apply to all
Form PF filers. The Commissions also
are jointly proposing amendments to
section 2 of Form PF, which would
apply to large hedge fund advisers who
advise qualifying hedge funds (i.e.,
hedge funds that have a net asset value
of at least $500 million).14
II. Discussion
A. Proposed Amendments to the
General Instructions
We are proposing amendments to the
Form PF general instructions designed
to improve data quality and
comparability and to enhance investor
12 Under the Dodd-Frank Act, FSOC must monitor
emerging risks to U.S. financial stability and
employ its regulatory tools to address those risks.
S. REP. NO. 111–176, at 2–3 (2010).
13 The SEC also recently proposed amendments to
the SEC-only sections of Form PF (sections 3, 4, 5,
and newly proposed section 6) that would (1)
require current reporting for large hedge fund
advisers and advisers to private equity funds, (2)
decrease the reporting threshold for large private
equity advisers and amend reporting requirements
for large private equity advisers, and (3) amend
reporting requirements for large liquidity fund
advisers. Amendments to Form PF to Require
Current Reporting and Amend Reporting
Requirements for Large Private Equity Advisers and
Large Liquidity Fund Advisers, Investment
Advisers Act Release No. 5950 (Jan. 26, 2022), [87
FR 9106 (Feb. 17, 2022)] (‘‘2022 SEC Form PF
Proposal’’).
14 Unless stated otherwise, terms in this release
that are defined in the Form PF Glossary of Terms
are as defined therein.
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protection efforts and systemic risk
assessment.15
1. Reporting Master-Feeder
Arrangements and Parallel Fund
Structures
Private funds often use complex
structures to invest, including masterfeeder arrangements and parallel fund
structures.16 We are proposing
amendments to Form PF that generally
would require advisers to report
separately each component fund of a
master-feeder arrangement and parallel
fund structure.17 However, an adviser
would continue to aggregate these
structures for purposes of determining
whether the adviser meets a reporting
threshold.18
Currently, Form PF provides advisers
with flexibility to respond to questions
regarding master-feeder arrangements
and parallel fund structures either in the
aggregate or separately, as long as they
do so consistently throughout Form
PF.19 In adopting this approach in 2011,
the Commission stated that requiring
advisers to aggregate or disaggregate
funds in a manner inconsistent with
their internal recordkeeping and
15 Additional proposed changes to the General
Instructions concerning amendments to enhance
data quality concerning methodologies and
additional amendments are discussed in sections
II.D and II.E of this Release, as well as the proposal
to amend Instruction 3 to reflect our proposal to
remove section 2a, which is discussed in footnote
138, and accompanying text.
16 A ‘‘master-feeder arrangement’’ is an
arrangement in which one or more funds (‘‘feeder
funds’’) invest all or substantially all of their assets
in a single private fund (‘‘master fund’’). A ‘‘parallel
fund structure’’ is a structure in which one or more
private funds (each, a ‘‘parallel fund’’) pursues
substantially the same investment objective and
strategy and invests side by side in substantially the
same positions as another private fund. See Form
PF Glossary of Terms.
17 Proposed Instruction 6. We also propose to
amend Instruction 3 to reflect the proposed
approach for reporting master-feeder arrangements
and parallel fund structures. See infra footnote 18.
18 Proposed Instruction 5. For example, an adviser
would aggregate private funds that are part of the
same master-feeder arrangement in determining
whether the adviser is a large hedge fund adviser
that must complete section 2 of Form PF. In
connection with these proposed changes, we
propose to amend the term ‘‘reporting fund’’ and
Instruction 3 so they would no longer discuss
reporting aggregated information. Additionally, we
propose to reorganize current Instruction 5 and
current Instruction 6 so they reflect the proposed
approach for when to aggregate certain funds.
Current Instruction 5 instructs advisers about when
to aggregate information about certain funds for
purposes of reporting thresholds and responding to
questions. Current Instruction 6 instructs advisers
about how to aggregate information about certain
funds. Proposed Instruction 5 would instruct
advisers on when to aggregate information about
certain funds for purposes of determining whether
they meet reporting thresholds. Proposed
Instruction 6 would instruct advisers about how to
report information about certain funds when
responding to questions.
19 Current Instruction 5.
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reporting may impose additional
burdens and that, as long as the
structure of those arrangements is
adequately disclosed, a prescriptive
approach to aggregation was not
necessary.20 However, based on
experience reviewing Form PF data, we
observed that when some advisers
report in aggregate and some advisers
report separately, this can result in
obscured risk profiles (e.g., asset size,
counterparty exposure, investor
liquidity) and made it difficult to
compare complex structures,
undermining the utility of the data
collected. We believe prescribing the
way advisers report a master-feeder
arrangement and parallel fund structure
would provide better insight into the
risks and exposures of these
arrangements.
Accordingly, we propose to require an
adviser to report each component fund
of a master-feeder arrangement and
parallel fund structure, except where a
feeder fund invests all its assets in a
single master fund and/or ‘‘cash and
cash equivalents’’ (i.e., a disregarded
feeder fund).21 In the case of a
disregarded feeder fund in Question 6,
advisers instead would identify the
disregarded feeder fund and look
through to any disregarded feeder fund’s
investors in responding to certain
questions regarding fund investors on
behalf of the applicable master fund.
The master fund effectively is a conduit
through which a disregarded feeder
fund invests and we do not believe
separate reporting for such a feeder fund
is necessary for data analysis purposes.
In addition, we propose to no longer
allow advisers to report any ‘‘parallel
managed accounts,’’ (which is
distinguished from ‘‘parallel fund
structure’’), except advisers would
continue to be required to report the
total value of all parallel managed
accounts related to each reporting
fund.22 We continue to believe that
including parallel managed accounts in
the reporting may reduce the quality of
data while imposing additional burdens
20 2011 Form PF Adopting Release, supra footnote
3, at text following n.332.
21 See proposed Instruction 6. The proposal
would revise the term ‘‘cash and cash equivalents,’’
as described in section II.B.2 in this Release.
22 Proposed Instruction 6. A ‘‘parallel managed
account’’ is any managed account or other pool of
assets managed by the adviser that pursues
substantially the same investment objective and
strategy and invests side by side in substantially the
same positions as the identified private fund. See
Form PF Glossary of Terms. Currently, advisers
may, but are not required to, report information
regarding parallel managed accounts in response to
certain questions, except they must report the total
value of all parallel managed accounts related to
each reporting fund. See current Instruction 5.
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on advisers.23 Data regarding the total
value of parallel managed accounts,
however, allow FSOC to take into
account the greater amount of assets an
adviser may be managing using a given
strategy for purposes of analyzing the
data reported on Form PF.24
We request comment on the proposed
amendments.
1. Should we amend Form PF to
require advisers to report component
funds of master-feeder arrangements
and parallel fund structures separately
except for disregarded feeder funds, as
proposed? Would the proposed
amendments lead to more accurate data
regarding the risk profiles of reporting
funds and improve comparability?
Would the proposed amendments
enhance investor protection efforts and
systemic risk assessment? Are there
better ways to meet these objectives? For
example, should Form PF require
advisers to report only at the master
fund level or the feeder fund level?
2. Do you agree that the master fund
is effectively a conduit through which a
disregarded feeder fund invests and that
separate reporting for such a feeder fund
is not necessary for data analysis
purposes? Should we require advisers to
report additional information regarding
disregarded feeder funds? For example,
should we require advisers to report the
total cash holdings of such funds?
3. Are there other exceptions for
reporting each component of a masterfeeder arrangement or parallel fund
structures separately that we should
adopt?
4. Should we continue to require
advisers to report only limited
information on parallel managed
accounts? If we should require
additional reporting from parallel
managed accounts, what additional
information should we require? Should
reporting of any such additional
information be mandatory or voluntary?
5. Should we continue to require
advisers to aggregate structures when
determining whether they meet
reporting thresholds?
6. Form PF currently does not require
an adviser to report information
regarding a private fund advised by any
of the adviser’s related persons, unless
23 See 2011 Form PF Adopting Release, supra
footnote 3, at n.334, and accompanying text (the
Commission was persuaded that aggregating
parallel managed accounts for reporting purposes
would be difficult and ‘‘result in inconsistent and
misleading data’’ because the characteristics of
parallel managed accounts are often somewhat
different from the funds with which they are
managed). For example, in a separately managed
account a client generally selects an adviser’s
strategy but tailors it to the client’s own investment
guidelines.
24 Id. at text following n.336.
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53835
the adviser identified that related
person as one for which the adviser is
filing Form PF. Should we take a
different approach and require an
adviser to include information regarding
private funds advised by any of the
adviser’s related persons if they are part
of a master-feeder arrangement or
parallel fund structure managed by the
adviser? Or, would an adviser have
difficulty gathering the information
necessary to report this information for
private funds managed by the adviser’s
related persons whose operations are
genuinely independent of the adviser’s
own operations?
7. Could ‘‘parallel managed
accounts,’’ be interpreted as overlapping
with ‘‘parallel fund structure?’’ If so,
should we remove the phrase ‘‘or other
pool of assets’’ in the definition of
‘‘parallel managed account’’ to prevent
that?
2. Reporting Private Funds That Invest
in Other Funds
We are proposing amendments to
Form PF regarding how advisers report
private fund investments in other
private funds, trading vehicles, and
other funds that are not private funds.
Investments in other private funds.
We propose to amend Instruction 7,
which addresses how advisers treat
private fund investments in other
private funds (e.g., a ‘‘fund of funds’’).
Currently, advisers include the value of
private fund investments in other
private funds in determining whether
the adviser meets the filing threshold to
file Form PF.25 We believe this
requirement is implicit in the current
form and we propose to amend
Instruction 7 to make it explicit. Current
Form PF permits an adviser to disregard
the value of a private fund’s equity
investments in other private funds for
purposes of both the form’s reporting
thresholds (e.g., whether it qualifies as
a large hedge fund adviser) and
responding to questions on Form PF, as
long as it does so consistently
throughout Form PF, subject to certain
exceptions.26 Under the proposal, the
form would continue to permit an
adviser to include or exclude the value
of investments in other private funds
(including internal and external private
funds) when determining whether the
25 Form PF Instruction 1 provides that certain
advisers meet the filing threshold if they and their
related persons, collectively, had at least $150
million in private fund assets under management as
of the last day of their most recently completed
fiscal year.
26 For example, under the current instructions, an
adviser is not permitted to disregard any liabilities
of the private fund, even if incurred in connection
with an investment in other private funds. See
current Instruction 7.
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adviser meets the thresholds for
reporting as a large hedge fund adviser,
large liquidity fund adviser, or large
private equity adviser, and whether a
hedge fund is a qualifying hedge fund.27
The Commissions continue to believe
that allowing this flexibility for these
reporting thresholds avoids duplicative
reporting, which reduces the burden of
reporting for advisers and improves the
quality of the data reported.28 For
example, under these instructions an
adviser may exclude an investment in
an external private fund that would
already be counted through another
adviser’s reporting obligations.
However, we believe the form’s
current flexibility on whether to
disregard underlying funds when
responding to questions has
undermined the utility of the data
collected, as it provides unclear,
inconsistent data on the scale of
reporting funds’ exposures. Therefore,
we propose to amend Instruction 7 to
require an adviser to include the value
of a reporting fund’s investments in
other private funds when responding to
questions on Form PF, unless otherwise
directed by the instructions to a
particular question.29 We believe that
requiring advisers to report fund of
funds arrangements in a consistent
manner would allow the Commissions
and FSOC to understand better these
fund structures by providing greater
insight into the scale and exposures of
reporting funds.
Currently, advisers are not required
to, but nonetheless have the option to,
‘‘look through’’ a reporting fund’s
investments in any other entity
(including other private funds), except
in instances when the form directs
otherwise.30 As a result, some advisers
may ‘‘look through’’ a reporting fund’s
investments in other entities, while
others do not, leading to unclear data,
inconsistent comparisons, and less
precise analysis across advisers.
Therefore, we propose to amend
Instruction 7 to provide that, when
responding to questions, advisers must
not ‘‘look through’’ a reporting fund’s
investments in internal private funds or
27 See current Instruction 7 and proposed
Instruction 7.
28 See 2011 Form PF Adopting Release, supra
footnote 3, at n.128, and accompanying text.
29 For example, an adviser would report the value
of the reporting fund’s investments in other private
funds when reporting its gross asset value and net
asset value in proposed Questions 11 and 12;
however, Question 3 would specify that advisers
must exclude the value of the reporting fund’s
investment in other internal private funds when
providing a breakdown of their regulatory assets
under management and net assets under
management.
30 See current Instruction 8.
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external private funds (other than a
trading vehicle, as described below),
unless the question instructs the adviser
to report exposure obtained indirectly
through positions in such funds or other
entities.31 We also propose to take the
same approach with regard to a
reporting fund’s investments in funds or
other entities that are not private funds
or trading vehicles.32 These proposed
amendments are designed to improve
data quality and comparisons, so the
Commissions and FSOC understand
what Form PF data is from advisers
‘‘looking through’’ a reporting fund’s
investments, which we believe would
lead to more effective systemic risk
assessments and investor protection
efforts.
Trading vehicles. Some private funds
wholly own separate legal entities that
hold assets, incur leverage, or conduct
trading or other activities as part of the
private fund’s investment activities, but
do not operate a business (each, a
‘‘trading vehicle’’).33 We propose to
amend Form PF’s general instructions to
explain how advisers would report
information if the reporting fund uses a
trading vehicle.34 Specifically, if the
reporting fund uses a trading vehicle,
and the reporting fund is its only equity
owner, the adviser would either (1)
identify the trading vehicle in section
1b, and report answers on an aggregated
basis for the reporting fund and such
trading vehicle, or (2) report the trading
vehicle as a separate reporting fund. An
adviser would have to report the trading
vehicle separately if the trading vehicle
holds assets, incurs leverage, or
conducts trading or other activities on
behalf of more than one reporting fund.
If reporting separately, (1) advisers
would report the trading vehicle as a
hedge fund if a hedge fund invests
31 See proposed Instruction 7. For example,
advisers would not ‘‘look through’’ to the creditors
of or counterparties to other private funds in
responding to questions that ask about a reporting
fund’s borrowings and counterparty exposures. See
proposed Question 18 (concerning borrowings) and
proposed Questions 27 and 28 (concerning
counterparty exposures). However, selected
questions in section 2 of the form would require
advisers to report indirect exposure resulting from
positions held through other entities including
private funds, and advisers would ‘‘look through’’
the reporting fund’s investments in internal private
funds and external private funds in responding to
those questions. See e.g., proposed Question 32
(concerning reporting fund exposures).
32 See proposed Instruction 8 and supra footnote
31 (which provides examples that also apply to
advisers to reporting funds that invest in funds and
other entities that are not private funds or trading
vehicles).
33 We propose to add ‘‘trading vehicle’’ to the
Form PF Glossary of Terms.
34 See proposed Instruction 7. We propose to
make a conforming change to Instruction 8 to
reference this new instruction.
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through the trading vehicle; (2) advisers
would report the trading vehicle as a
qualifying hedge fund if a qualifying
hedge fund invests through the trading
vehicle; (3) otherwise, advisers would
report the trading vehicle as a liquidity
fund, private equity fund, or other type
of fund based on its activities.35
Private funds may use trading
vehicles for various purposes, including
(1) for jurisdictional, tax, or other
regulatory purposes, or (2) to ‘‘ringfence’’ assets in light of liability or
bankruptcy concerns associated with a
particular investment (i.e., structure
assets so counterparties would only
have recourse against the trading
vehicle and not against the private
fund). Currently, Form PF does not
require advisers to identify trading
vehicles. As a result, Form PF does not
provide a clear window into the use of
trading vehicles and the risks they
present. For example, if a trading
vehicle is ring-fenced, current Form PF
does not provide a view into the assets
or collateral on which a counterparty to
such trading vehicle relies or the size
and nature of the trading vehicle’s
exposure. In addition, where more than
one reporting fund invests through a
particular trading vehicle, the activities
of multiple reporting funds are blended
and potentially obscured. The proposed
amendments are designed to address
these concerns by providing more
information on the extent private funds
use trading vehicles to conduct
investment activities. The proposed
amendments also are designed to
provide improved visibility into
position sizes and counterparty
exposures through trading vehicles.
Having a clear, unobscured view into
position sizes and counterparty
exposures through trading vehicles is
designed to help ensure accurate
systemic risk assessment and analysis to
further investor protection efforts, by
providing the Commissions and FSOC
with a view into the assets or collateral
on which a counterparty to such trading
vehicle relies and the size and nature of
the trading vehicle’s exposure.
Investments in funds that are not
private funds. Under the proposal,
advisers would continue to include the
value of the reporting fund’s
investments in funds and other entities
that are not private funds, in
determining reporting thresholds and
responding to questions, unless
otherwise directed, as Form PF
currently requires.36 For the reasons
discussed above, we are proposing that,
when responding to questions, however,
35 See
36 See
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advisers must not ‘‘look through’’ a
reporting fund’s investments in funds or
other entities that are not private funds,
or trading vehicles, unless the question
instructs the adviser to report exposure
obtained indirectly through positions in
such funds or other entities.37
We request comment on the proposed
amendments.
8. Would the proposed amendments
concerning reporting fund investments
in other private funds, trading vehicles,
and other funds that are not private
funds provide a better understanding of
the structure of private funds, and
improve data quality and comparability?
Is there a better way to meet these
objectives? Should Form PF provide
more or less flexibility to advisers in
how they treat these types of private
fund investments? For example, instead
of allowing advisers the flexibility to
include or exclude a private fund’s
investments in other private funds
(including internal private funds and
external private funds) in determining
whether they meet thresholds for filing
as a large hedge fund adviser, large
liquidity adviser, or large private equity
adviser, and whether a reporting fund is
a qualifying hedge fund, should we
require advisers to include or exclude
such investments? Should we require
external qualifying hedge funds to be
excluded, to avoid receiving duplicate
data? If Form PF should provide more
flexibility, how would we help ensure
data is understandable and comparable
across advisers?
9. Would the proposed amendments
regarding trading vehicles provide a
clearer picture of how private funds use
trading vehicles and their market risks?
Would the proposed amendments
provide improved visibility into
position sizes and counterparty
exposures? Is there a better way to meet
these objectives? For example, should
Form PF require advisers to report
whether a trading vehicle is ring-fenced
for liability purposes?
10. Under the proposal, if an adviser
reports a trading vehicle as a separate
reporting fund, the adviser must report
the trading vehicle as a hedge fund,
qualifying hedge fund, liquidity fund,
private equity fund, or other type of
fund, if it meets certain requirements.
Would this proposed requirement help
ensure advisers could not avoid
reporting the trading vehicle as a private
fund that is subject to additional
reporting, such as a qualifying hedge
fund? Is there a better way to meet this
objective? Should Form PF instead only
require advisers to report trading
37 See supra footnote 32, and accompanying text
(discussing proposed amendments to Instruction 8).
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vehicles as investments in another
fund?
11. Are the ‘‘look through’’
requirements concerning how to report
a reporting fund’s investments in other
entities clear? Should we require
advisers to not look through a reporting
fund’s investments in other entities,
unless the question instructs the adviser
to report exposure obtained indirectly
through positions in such funds or other
entities, as proposed?
3. Reporting Timelines
We propose to amend Instruction 9 to
require large hedge fund advisers and
large liquidity fund advisers to update
Form PF within a certain number of
days after the end of each calendar
quarter, rather than after each fiscal
quarter, as Form PF currently requires.38
All other advisers would continue to file
annual updates within 120 calendar
days after the end of their fiscal year.39
Form PF would continue to require all
advisers to use fiscal quarters and years
to determine filing thresholds because
advisers already make such calculations
under 17 CFR 279.1 (‘‘Form ADV’’),
which requires annual updates based on
fiscal year.40
Currently, fiscal quarter reporting
significantly delays the time at which
the Commissions and FSOC receive a
complete data set for a calendar quarter.
For example, large hedge fund advisers
whose first fiscal quarter ends on the
calendar quarter end of March, would
file data covering January, February, and
March by the end of May.41 However,
large hedge fund advisers whose fiscal
quarter ends in May would not file their
March data until the end of July,
delaying Commission and FSOC access
to full calendar quarter data by all large
hedge fund advisers by four months.
The proposed changes are designed to
provide a more complete data set sooner
to improve the efficiency and
effectiveness of investor protection
efforts and systemic risk assessment.
Based on Form ADV data as of
December 2021, 99.2 percent of private
fund advisers already effectively file
Form PF on a calendar basis because
38 Large hedge fund advisers generally would file
within 60 calendar days after the end of each
calendar quarter and large liquidity fund advisers
generally would file within 15 days after the end
of each calendar quarter. See proposed Instruction
9.
39 We also propose to amend the term ‘‘data
reporting date’’ to reflect this proposed approach.
See Form PF Glossary of Terms.
40 See Form PF Instructions 1 and 3; Form ADV
and [17 CFR 275.204–1] Advisers Act rule 204–1
(amendments to Form ADV).
41 See current Instruction 9 (requiring large hedge
fund advisers to update Form PF within 60 calendar
days after the end of their first, second, and third
fiscal quarters, among other things).
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their fiscal quarter or year ends on the
calendar quarter or year end,
respectively.42 The 0.8 percent of
private fund advisers that have a noncalendar fiscal approach, which could
cause a temporary data gap, represents
approximately 274 private funds,
totaling $200 billion in gross asset
value. Calendar quarter reporting also
would more closely align with reporting
on [17 CFR pt. 4, app. A] Form CPO–
PQR, which requires calendar quarterly
reporting, allowing easier integration of
these data sets.
We request comment on the proposed
amendments.
12. Should we revise the reporting
timelines, as proposed?
13. Should Form PF continue to
require advisers to determine filing
thresholds by fiscal year given
corresponding Form ADV requirements?
Alternatively, should Form PF require
all Form PF filers to use calendar years
and quarters for all Form PF purposes,
including in determining filing
thresholds and when to update Form
PF?
14. Should we reduce the number of
days by which filers must update Form
PF to receive data sooner? How would
this relieve or increase burdens? For
example, should Form PF require large
hedge fund advisers to update Form PF
within 30 calendar days after the end of
each calendar or fiscal quarter, rather
than 60 calendar days? Should Form PF
require large liquidity fund advisers to
report within 10 calendar days after the
end of each calendar quarter, rather than
15 calendar days? Should annual filers
file within 30 calendar days after the
end of their fiscal year, rather than 120
calendar days?
15. Should Form PF reporting
timelines be more or less consistent
with Form CPO–PQR?
B. Proposed Amendments Concerning
Basic Information About the Adviser
and the Private Funds it Advises
Each adviser required to file Form PF
must complete all or part of section 1.
The proposed amendments to section 1
are designed to provide greater insight
into private funds’ operations and
strategies, and assist in identifying
trends, including those that could create
systemic risk, which in turn is designed
to enhance investor protection efforts
and systemic risk assessment. The
42 We are presenting data from all private fund
advisers, not just those who would file on a
quarterly basis (i.e., large hedge fund advisers and
large liquidity fund advisers), to avoid potentially
disclosing proprietary information of individual
Form PF filers, and to be inclusive considering that
the population of quarterly filers versus annual
filers may change over time.
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proposed changes are designed to
improve comparability across advisers,
improve data quality, and reduce
reporting errors, based on our
experience with Form PF filings.
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1. Proposed Amendments to Section 1a
of Form PF—Identifying Information
Section 1a requires an adviser to
report identifying information about the
adviser and the private funds it
manages. We are proposing several
amendments to collect additional
identifying information regarding the
adviser, its related persons, as well as
their private fund assets under
management.
LEI for advisers and related persons.
Legal entity identifiers, or ‘‘LEIs,’’ help
identify entities and link data from
different sources that use LEIs.43
Currently, Form PF requires advisers to
report the LEI for certain entities, if they
have one, such as for the reporting fund
and any parallel funds.44 Form PF’s
current definition of ‘‘LEI’’ provides
that, in the case of a financial institution
that has not been assigned an LEI,
advisers must provide the RSSD ID
assigned by the National Information
Center of the Board of Governors of the
Federal Reserve System (‘‘Federal
Reserve Board’’), if the financial
institution has an RSSD ID.45 We
propose to remove this requirement and,
instead, provide that advisers must not
substitute any other identifier that does
not meet the definition of an LEI.46
However, advisers would use the RSSD
ID, if the financial institution has one,
for questions that specifically request an
RSSD ID, and for questions that require
advisers to report any other identifying
information where the type of
information is not specified.47 These
proposed amendments are designed to
43 Form PF generally defines ‘‘LEI’’ as: the ‘‘legal
entity identifier’’ assigned by or on behalf of an
internationally recognized standards setting body
and required for reporting purposes by the U.S.
Department of the Treasury’s Office of Financial
Research or a financial regulator. See Form PF
Glossary of Terms.
44 See current Question 5(d) and current Question
7(e). Current Form PF also requires large liquidity
advisers to report the LEI for each security and repo
held by the reporting fund, if they have one. See
current Question 63(d) and current Question 63(g),
respectively. Current Form PF also requires large
private equity advisers to report the LEI for each of
the reporting fund’s controlled portfolio companies
that constitute a financial industry portfolio
company. See current Question 76.
45 See current Form PF Glossary of Terms.
Currently, if an LEI has not been assigned and there
is no RSSD ID, then the adviser would leave that
line blank.
46 See proposed Form PF Glossary of Terms.
47 See e.g., proposed Question 9. We also would
add ‘‘RSSD ID’’ to the Form PF Glossary of Terms
and define it as the identifier assigned by the
National Information Center of the Federal Reserve
Board, if any. See Form PF Glossary of Terms.
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improve data quality because, based on
experience with the current form,
reporting RSSD IDs as LEIs makes it
more difficult for staff to link data
efficiently and effectively.
While Form PF currently requires
advisers to provide the LEI for entities
such as reporting funds and parallel
funds, if the entities have one, it does
not require advisers to report the LEI for
itself and its related persons.48 We
propose to require advisers to provide
the ‘‘LEI’’ for themselves and their
‘‘related persons,’’ if they have an LEI.49
This proposed amendment is designed
to help identify advisers and their
related persons and link data from other
data sources that use this identifier.
We request comment on the proposed
amendments.
16. Should we require advisers to
report ‘‘LEI’’ for financial institutions
that have one and only report ‘‘RSSD
ID’’ as a secondary identification where
asked, as proposed? Would the
proposed amendments help us improve
data quality and help link data more
efficiently and effectively from other
sources that use LEIs and RSSD IDs? Is
there a better way to meet these
objectives?
17. Should Form PF require advisers
to report the LEI for certain entities, if
they have one, as proposed, such as the
adviser and each related person, as well
as internal private funds, trading
vehicles, creditors, and counterparties,
or others? Alternatively, should Form
PF require any entities to obtain LEIs if
they do not have them? Would those
entities seek to obtain LEIs in the future
absent any regulatory requirement to do
so?
18. Are there other data sources we
also should use that would allow us to
link entities across forms?
19. Should we amend the term ‘‘LEI’’
in Form PF to match Form ADV or any
other forms that use the term or a
similar term?
Assets under management. We are
proposing to revise how advisers report
assets under management attributable to
certain private funds. Current Question
3 requires advisers to provide a
48 See e.g., current Question 5 and current
Question 7.
49 See Proposed Question 1. We also propose to
require advisers to provide the LEI for other
entities, if the other entities have one, including
internal private funds (see proposed Question 7 and
proposed Question 15), trading vehicles (see
proposed Question 9), and counterparties (see
proposed Question 27 and proposed Question 28).
A ‘‘related person’’ has the meaning provided in
Form ADV. See Form PF Glossary of Terms. Form
ADV defines a ‘‘related person’’ as any advisory
affiliate and any person that is under common
control with the adviser. See Form ADV Glossary
of Terms.
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breakdown of regulatory assets under
management and net assets under
management. These data are designed to
show the size of the adviser and the
nature of the adviser’s activities. We
propose to amend the instructions to
direct advisers to exclude the value of
private funds’ investments in other
internal private funds to avoid double
counting of fund of funds assets.50
Advisers would include the value of
trading vehicle assets because, under
the proposed definition, they would be
wholly owned by one or more reporting
funds.51 These proposed amendments
are designed to provide a more accurate
view of the assets managed by the
adviser and its related persons, as well
as the general distribution of those
assets among various types of private
funds, because accurately viewing the
scale of these managed assets is
important to effectively assess systemic
risk and further investor protection
efforts.
We request comment on the proposed
amendments.
20. Would the proposed amendments
prevent double counting fund of funds
assets? Is there a better way to meet this
objective? Should we include private
funds managed by the adviser’s related
persons in the definition of internal
private fund for these purposes? Are
there other types of investments that
should be disregarded in order to
prevent double counting? Are there
other approaches to trading vehicles?
21. Form PF currently requires
advisers to provide a breakdown of
assets under management and
regulatory assets under management
based on certain categories of private
funds. Should we require advisers to
provide a breakdown for more, fewer, or
different categories of private funds than
Form PF currently provides? For
example, should Question 3 include
categories such as special purpose
vehicles, private credit funds, or types
of fund of funds?
Explanation of assumptions. We are
proposing to amend current Question 4,
which advisers use to explain
assumptions that they make in
responding to questions on Form PF.
Specifically, we propose to add an
instruction directing advisers to provide
the question number when the
assumptions relate to a particular
question.52 This amendment is designed
to help assess data more efficiently and
50 See
proposed Question 3.
proposed Question 3. See proposed Form
PF Glossary of Terms.
52 See proposed Question 4.
51 See
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improve comparability, based on
experience with the form.
We request comment on the proposed
amendments.
22. Is there a better way to achieve our
objectives of assessing data more
efficiently and improving
comparability?
2. Proposed Amendments to Section 1b
of Form PF—Concerning All Private
Funds
Section 1b requires advisers to report
certain identifying and other basic
information about each private fund the
adviser manages. The proposal would
amend section 1b to require advisers to
report additional identifying
information about the private funds they
manage as well as the private funds’
assets, financing, investor
concentration, and performance. The
proposed changes are designed to
provide greater insight into private
funds’ operations and strategies and
assist in identifying trends that we
believe would enhance investor
protection efforts and FSOC’s systemic
risk assessment. At the same time, we
believe the proposed amendments
would help improve data quality and
comparability, based on experience with
Form PF.
Type of private fund. We are
proposing several amendments to
identify different types of reporting
funds better, and help isolate data
according to fund type, to allow for
more targeted analysis. Currently,
advisers indicate a reporting fund’s type
on the Private Fund Reporting
Depository (‘‘PFRD’’) filing system, and
by filling out particular sections of the
form.53 We have found instances,
however, where advisers have identified
a reporting fund differently on Form PF
than on Form ADV, even though the
definitions of each fund type are the
same on both forms. This may be due
to error, or may be due to the fund’s
characteristics changing between
deadlines for Form ADV and Form PF.
Accordingly, to help prevent reporting
errors and help ensure accuracy
concerning the reporting fund’s type, we
propose to require advisers to identify
the reporting fund by selecting one type
of fund from a list: hedge fund that is
not a qualifying hedge fund, qualifying
hedge fund, liquidity fund, private
equity fund, real estate fund, securitized
asset fund, venture capital fund, or
53 For advisers that are also CPOs or CTAs, filing
Form PF through PFRD is filing with both the SEC
and CFTC. See Instruction 3 (instructing advisers to
file particular sections of Form PF, depending on
their circumstances. For example, all Form PF filers
must file section 1 and large hedge fund advisers
also must file section 2).
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‘‘other.’’ 54 If an adviser identifies the
reporting fund as ‘‘other,’’ the adviser
would describe the reporting fund in
Question 4, including why it would not
qualify for any of the other options.
In addition, we propose to require an
adviser to indicate whether the
reporting fund is a ‘‘commodity pool,’’
which is categorized as a hedge fund on
Form PF.55 Although the CFTC does
not, as of the date of this proposal,
consider Form PF reporting on
commodity pools as constituting
substituted compliance with CFTC
reporting requirements, some CPOs may
continue to report such information on
Form PF.56 This proposed amendment
would allow for analysis of hedge fund
data both with and without commodity
pools reported on the form.
Finally, we propose to require
advisers to report whether a reporting
fund operates as a UCITS or AIF, or
markets itself as a money market fund
outside the United States, and in which
countries (if applicable).57 These
proposed amendments are designed to
allow the Commissions and FSOC to
filter data for more targeted analysis to
better understand the potential exposure
to beneficial owners outside the United
States and to avoid double counting
when Form PF data is aggregated with
other data sets that include UCITS,
AIFs, and money market funds that are
marketed outside the United States.
We request comment on the proposed
amendments.
23. Should Form PF require advisers
to report additional identifying
information about the private funds they
advise, as proposed? Would the
proposed amendments help identify
each type of reporting fund, allow the
54 Proposed
Question 6(a).
Question 6(b). Form PF defines
‘‘commodity pool’’ as defined in section 1a(10) of
the U.S. Commodity Exchange Act, as amended.
See Form PF Glossary of Terms.
56 Previously, the CFTC permitted dually
registered CPO-investment advisers to submit Form
PF in lieu of certain CFTC reporting requirements.
See Compliance Requirements for Commodity Pool
Operators on Form CPO–PQR, (Oct. 9, 2020) [85 FR
71772 (Nov. 10, 2020)] (‘‘Form CPO–PQR Release’’).
57 See proposed Question 6(c) through (h). We
propose to define the term ‘‘UCITS’’ as
Undertakings for Collective Investment in
Transferable Securities, as defined in the UCITS
Directive of the European Parliament and of the
Council (No. 2009/65/EC), as amended, or as
captured by the Collective Investment Schemes
(Amendment etc.) (EU Exit) Regulations 2019, as
amended. We propose to define ‘‘AIF’’ as an
alternative investment fund that is not regulated
under the UCITS Directive, as defined in the
Directive of the European Parliament and of the
Council on alternative investment fund managers
(No. 2011/61/EU), as amended, or an alternative
investment fund that is captured by the Alternative
Investment Fund Managers (Amendment etc.) (EU
Exit) Regulations 2019, as amended. See Form PF
Glossary of Terms.
55 Proposed
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Commissions and FSOC to filter data
concerning types of funds, and conduct
more targeted analysis? Is there a better
way to meet these objectives?
24. Should proposed Question 6
include more, fewer, or different
categories of private funds? For
example, should the form include a
category for funds that may be ‘‘hybrid’’
funds that may have characteristics of
different types of private funds? Should
proposed Question 6 include an ‘‘other’’
category, as proposed? Alternatively,
should proposed Question 6 not include
an ‘‘other’’ category and instead require
that advisers select the best fit among
the specific categories? Are there other
ways to limit the types of funds that
may report as ‘‘other?’’
25. Should Form PF require advisers
to explain in Question 4 why they
choose ‘‘other’’ as a category, as
proposed? Would this proposed
requirement clarify what type of fund
the reporting fund is, if it does not fit
within the other categories? Is there a
better way of identifying what type of
fund the reporting fund is? Should Form
PF require the adviser to include more,
less, or different information in the
explanation?
26. Should Form PF require advisers
to identify if the reporting fund is a
commodity pool, as proposed? Are any
CPOs currently reporting information
regarding any commodity pools, even if
they are not private funds? If so, why?
Alternatively, should we revise the
definition of ‘‘hedge fund’’ so it would
not include commodity pools? If we
exclude commodity pools from the
definition of ‘‘hedge fund,’’ should we
amend Form PF to require advisers to
report the same or different information
about commodity pools as they do for
hedge funds?
27. Should Form PF require advisers
to report whether and in which
countries the reporting company
operates as a UCITS or AIF, or markets
itself as a money market fund outside
the United States, as proposed? Would
the proposed amendment allow us and
FSOC to filter data for more targeted
analysis to better understand the
potential exposure to beneficial owners
outside the United States and to avoid
double counting when Form PF data is
aggregated with other data sets that
include UCITS and AIFs? Is there a
better way to meet these objectives?
28. Should Form PF define UCITS
and AIF, as proposed? Would the
proposed definitions keep the terms
evergreen if directives change or new
ones apply? If not, how should we
define these terms? For example, should
we provide less detail in the definition
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about the directives to keep the
definitions evergreen?
Master-feeder arrangements, internal
private funds, external private funds,
and parallel fund structures. To reflect
that advisers would report components
of master-feeder arrangements and
parallel fund structures separately, we
propose to amend Form PF to require
advisers to report identifying
information about master-feeder
arrangements and other private funds
(e.g., funds of funds), including internal
private funds, and external private
funds.58 Form PF currently requires
advisers to report identifying
information about parallel funds, and
would continue to do so under the
proposal.59 The proposal also would
require advisers to report the value of
the reporting fund’s investments in
other private funds (e.g., funds of
funds), as current Question 10 requires,
but with more detail.60 Specifically, the
proposal would require advisers to
report the value of the reporting fund’s
equity investments in external private
funds and internal private funds
(including the master fund and each
internal private fund), which would
comprise the total investments in other
private funds.61 These amendments are
designed to help map complex fund
structures and cross reference private
fund information across Form PF filings,
to provide more complete and accurate
information about each fund’s risk
profile.
In connection with these proposed
amendments, in the Form PF Glossary
of Terms, we propose to remove the
terms ‘‘investments in external private
funds’’ and ‘‘investments in internal
private funds,’’ and replace them with
‘‘external private funds’’ (private funds
that neither the adviser nor the adviser’s
related persons advise) and ‘‘internal
private funds’’ (private funds that the
adviser or any of the adviser’s related
persons advise), respectively. The
58 For master-feeder arrangements, advisers
would report the name of the feeder fund, its
private fund identification number, and whether
the feeder fund is a separate reporting fund or a
disregarded feeder fund. For internal private funds
that invest in the reporting fund, advisers would
report the name of the internal private fund, its LEI,
if it has one, and its private fund identification
number. See proposed Question 7. If the reporting
fund invests in external private funds, advisers
would report the name of the master fund, its
private fund identification number, and the master
fund’s LEI, if it has one. If the reporting fund
invests in internal private funds, advisers would
report the internal private fund’s name, its private
fund identification number, and its LEI, if it has
one. Proposed Question 15.
59 See current Question 7 and proposed Question
8.
60 This requirement would be part of proposed
Question 15.
61 See proposed Question 15.
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proposed definitions would not direct
advisers to exclude ‘‘cash management
funds,’’ as is currently the case under
the terms being removed, because we
observed that advisers determine
whether a fund is a cash management
fund inconsistently. Therefore, this
proposed amendment is designed to
improve data quality.
We request comments on the
proposed amendments.
29. Would the proposed amendments
help to map complex fund structures
and cross reference them to private fund
information across Form PF filings?
Would the proposed amendments
provide more complete and accurate
information about each fund’s risk
profile? Is there a better way to meet
these objectives?
30. Should the form require different
or additional identifying information to
identify a master fund, feeder fund,
internal private fund, or external private
fund?
31. Should Form PF require advisers
to report the private fund identification
number for any feeder funds, as
proposed, even though advisers
annually report the private fund
identification number of any feeder
funds that invest in a private fund they
advise on Form ADV? 62
32. Should Form PF define ‘‘internal
private funds,’’ ‘‘external private
funds,’’ and ‘‘trading vehicle,’’ as
proposed? Are there alternative
definitions we should adopt? For
example, should we define ‘‘internal
private funds’’ and ‘‘external private
funds’’ to exclude cash management
funds as the current definitions of
‘‘investments in internal private funds’’
and ‘‘investments in external private
funds’’ do?
Withdrawal or redemption rights. The
proposal would change how advisers
report withdrawal and redemption
rights. Form PF currently requires only
large hedge fund advisers to report
whether each qualifying hedge fund
provides investors with withdrawal or
redemption rights in the ordinary
course.63 We propose to require all
advisers to provide this information for
each reporting fund to inform the
Commissions and FSOC better of all
reporting funds’ susceptibility to stress
through investor redemptions, to help
identify how widespread the stress is.64
62 Form
ADV, section 7.B.(1).A.6.
Question 49(a).
64 To implement this, the proposal would move
current Question 49(a) from section 2b, which
requires large hedge fund advisers to report
information about qualifying hedge funds, to
section 1b which requires all advisers to report
information about all the reporting funds they
advise, and redesignate it as Question 10. To
63 Current
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If the reporting fund provides investors
with withdrawal or redemption rights in
the ordinary course, we propose to
require advisers to indicate how often
withdrawals or redemptions are
permitted by selecting from a list of
categories.65 Advisers would report this
information regardless of whether there
are notice requirements, gates, lock-ups,
or other restrictions on withdrawals or
redemptions.66 We believe these
proposed amendments would allow us
and FSOC to identify better reporting
funds that may be affected by investor
withdrawals during certain market
events, or vulnerable to failure as a
result of investor redemptions. We
believe this information also would
provide insight into other data that all
reporting funds report. For example, we
understand that private equity funds
that do not typically offer redemption
rights in the ordinary course likely have
certain patterns of subscriptions and
withdrawals, and also report
performance to investors and
prospective investors as an internal rate
of return, rather than reporting based on
changes in the portfolio market value.
We propose to define ‘‘internal rate of
return’’ in the proposed Form PF
Glossary of Terms as the discount rate
that causes the net present value of all
cash flows throughout the life of the
fund to be equal to zero. Analyzing
reported information about investor
withdrawal or redemption rights
together with reported information
about subscriptions and withdrawals or
performance is designed to help us
identify developing trends relevant to
identifying systemic risk and would
help us further investor protection
efforts. We request comment on the
proposed amendments.
33. Should we require all advisers to
report information about withdrawal
and redemption rights about all the
reporting funds they advise, as
proposed? Alternatively, should only
certain advisers report this information
for only certain reporting funds? If so,
which ones and why?
34. Should Form PF include more,
fewer, or different categories for the
schedule of withdrawal or redemption
accommodate moving the question, the proposal
would make corresponding amendments to the
instructions in current Question 49, which we
would redesignate as Question 52.
65 Proposed Question 10(b). The categories would
be (1) any business day, (2) at intervals of at least
two business days and up to a month, (3) at
intervals longer than monthly up to quarterly, (4)
at intervals longer than quarterly up to annually,
and (5) at intervals of more than one year.
66 For example, if the reporting fund allows
quarterly redemptions that are subject to a gate,
then the adviser would select ‘‘at intervals longer
than monthly up to quarterly.’’
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rights? As an alternative, should
advisers be able to select ‘‘other’’ as a
schedule category? Under what
circumstances would an adviser select
‘‘other?’’
35. Should we define ‘‘internal rate of
return’’ as proposed? If not, what
alternative definitions should we use?
Trading vehicles. We are proposing to
require advisers to provide identifying
information for any trading vehicle in
which the reporting fund holds
investments or conducts activities.67
Advisers would disclose the trading
vehicle’s legal name; LEI, if it has one;
and any other identifying information
about the trading vehicle, such as the
RSSD ID, if it has one. This proposed
amendment is designed to help the
Commissions and FSOC understand the
reporting fund’s activities, including
how it interacts with the market if the
fund trades through a trading vehicle
and related counterparty exposures. The
identifying information also is designed
to allow comparisons of Form PF data
with data from other sources that use
such information to identify entities.
Enhancing the ability to compare Form
PF data in this way is designed to
provide a more comprehensive view of
the market, and therefore, enhance
investor protection efforts and systemic
risk assessment.
We request comment on the proposed
amendments.
36. Should all advisers provide
identifying information for a trading
vehicle, including an LEI if it has one,
as proposed? Alternatively, should only
certain advisers report it for certain
reporting funds?
37. Do any trading vehicles not have
an LEI?
38. Should Form PF require more,
less, or different identifying information
for the trading vehicle?
Gross asset value and net asset value.
We propose several amendments to the
way advisers report gross asset value
and net asset value. We propose to
require advisers who are filing quarterly
updates to report gross asset value and
net asset value as of the end of each
month of the reporting period, rather
than only reporting the information as
of the end of the reporting period, as
Form PF currently requires.68 This
proposed amendment is designed to
facilitate analysis of other monthly
67 Proposed
Question 9.
current Questions 8 and 9, and proposed
Questions 11 and 12. We also propose to make
amendments to the instructions in current Question
8 (which we would redesignate as proposed
Question 11) to correspond with the proposed
instructions that would no longer allow advisers to
aggregate master-feeder arrangements, as discussed
above.
68 See
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Form PF data, including certain fund
performance and risk metrics.69
We also propose to add new Question
13 to require advisers to separately
report the value of unfunded
commitments included in the gross and
net asset value reported in proposed
Questions 11 and 12.70 Current
Questions 8 and 9 require valuations
based on the instruction in Form ADV
for calculating regulatory assets under
management, which requires advisers to
include the amount of any unfunded
commitments.71 This approach reflects
that, in the early years of a private
fund’s life, its adviser typically earns
fees based on the total amount of capital
commitments, which we presume
reflects compensation for efforts
expended on behalf of the fund in
preparation for the investments.72 We
continue to believe that net asset value
and gross asset value should include
unfunded commitments so Form PF
data is comparable to Form ADV data.
However, there are circumstances where
understanding the amount represented
by unfunded commitments would
enhance our understanding of changes
to a reporting fund’s net and gross asset
value over time, inform us of trends,
and improve data comparability over
the life of the fund. For example,
knowing the value of uncalled
commitments would help the
Commissions and FSOC more
accurately identify how much leverage
a fund with uncalled commitments has.
Currently, the Commissions and FSOC
69 See e.g., proposed Question 23 (requiring all
private fund advisers to report monthly
performance data, to the extent such results are
calculated for the reporting fund), supra footnote
98, and accompanying text, and proposed Question
48 (requiring large hedge funds to report monthly
data concerning the reporting fund’s portfolio
correlation), infra section II.C.2 of this Release.
70 Form PF currently defines ‘‘unfunded
commitments’’ as ‘‘committed capital’’ that has not
yet been contributed to the private equity fund by
investors. We propose to amend the definition so
it refers to all reporting funds, not only private
equity funds. Form PF defines ‘‘committed capital’’
as any commitment pursuant to which a person is
obligated to acquire an interest in, or make capital
contributions to, the private fund. See Form PF
Glossary of Terms.
71 Form PF requires advisers to calculate gross
asset value and net asset value using regulatory
assets under management, a regulatory metric from
Form ADV. See ‘‘gross asset value’’ and ‘‘net asset
value’’ as defined in Form PF Glossary of Terms;
Form ADV: Instructions for Part 1A, Instruction 5.b.
An adviser must calculate its regulatory assets
under management on a gross basis, that is, without
deduction of any outstanding indebtedness or other
accrued but unpaid liabilities. In addition, an
adviser must include the amount of any uncalled
capital commitments made to a private fund
managed by the adviser.
72 Rules Implementing Amendments to the
Investment Advisers Act of 1940, Advisers Act
Release No. 3221 (June 22, 2011) [76 FR 42950,
42956 (July 19, 2011)], at text accompanying n.90.
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only can infer this information but it is
unclear whether such inferences are
correct. Therefore, this proposed
amendment is designed to improve data
accuracy and comparability, which is
important for effective systemic risk
assessment and investor protection
efforts.
We request comment on the proposed
amendments.
39. Should Form PF require advisers
who are filing quarterly updates to
report information as of the end of each
month of the reporting period, as
proposed? Would this requirement
facilitate our and FSOC’s analysis of
such advisers’ other monthly Form PF
data? Is there a better way to meet this
objective?
40. Should Form PF require advisers
to report the value of unfunded
commitments included in the gross
asset value and net asset value, as
proposed? Would the proposed
amendment improve data accuracy and
comparability? Would the proposed
amendment more accurately identify
how much leverage a fund with
uncalled commitments has? Is there a
better way to meet this objective?
Inflows and outflows. We propose to
add a question requiring advisers to
report information concerning the
reporting fund’s activity, including
contributions to the reporting fund, as
well as withdrawals and redemptions,
which would include all withdrawals,
redemptions, or other distributions of
any kind to investors.73 Form PF would
specify that, for purposes of the
question, advisers must include all new
contributions from investors, but
exclude contributions of committed
capital that they have already included
in gross asset value calculated in
accordance with Form ADV
instructions.74 Quarterly filers would
provide this information for each month
of the reporting period. This proposed
requirement is designed to facilitate
analysis of other monthly Form PF data,
including certain fund performance and
risk metrics.75 Therefore, this
amendment is designed to improve data
accuracy, and allow the Commissions
and FSOC to analyze data more
efficiently. Inflows and outflows inform
the Commissions and FSOC of the
relationship between flows and
performance, changes to net and gross
asset value, as well as trends in the
private fund industry. Accordingly, this
question is designed to provide a more
accurate baseline understanding of
73 See
proposed Question 14.
PF would cite to Form ADV, Part 1A
Instruction 6.e.(3).
75 See supra footnote 69.
74 Form
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inflows and outflows, so the
Commissions and FSOC can, for
example, more accurately assess how
much the private fund industry has
grown from flows versus performance.
Inflows and outflows also can indicate
funding fragility, which can have
systemic risk implications. Therefore,
this amendment also is designed to
provide more accurate data of inflows
and outflows for systemic risk
assessment and investor protection
efforts, including identifying activity
that may not match investor disclosures.
We request comment on the proposed
amendments.
41. Should proposed Question 14
apply to advisers to all reporting funds,
as proposed, or only certain advisers to
only certain reporting funds?
42. Should proposed Question 14
instruct advisers to include or exclude
any other information? Would proposed
Question 14 raise operational
challenges? For example, should the
instructions specify whether to include
or exclude distributions that may be
recallable by the fund (i.e., ‘‘recyclable
capital commitments’’ or capital that
can be recalled to invest during a
portion of the investment period)?
43. Should Form PF require advisers
to provide the amount of new
redemptions or subscriptions based on
notices that would be payable or
expected after Form PF is due? If so,
should all advisers submit such data for
all reporting funds, or should only
certain advisers submit it for only
certain reporting funds?
Base currency. The proposal would
require all advisers to identify the base
currency of all reporting funds, rather
than only large hedge fund advisers
identifying this information for only
qualifying hedge funds.76 When a
reporting fund uses a base currency
other than U.S. dollars in the current
Form PF, the adviser must convert all
monetary values to U.S. dollars, unless
otherwise specified, to complete Form
PF, which may cause inconsistencies in
the data.77 Currently, the Commissions
and FSOC can identify such
inconsistencies only for qualifying
hedge funds from current Question 31.
Therefore, this proposed change is
designed to allow us and FSOC to
interpret more accurately responses to
76 To implement this, the proposal would move
current Question 31 from current section 2b, which
requires large hedge fund advisers to report
information about qualifying hedge funds, to
section 1b which requires all advisers to report
information about all the reporting funds they
advise. See proposed Question 17.
77 See current Instruction 15. We also propose to
revise Instruction 15 to provide additional
instructions concerning currency conversions. See
section II.D of this Release.
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questions regarding foreign exchange
exposures and the effect of changes in
currency rates on all reporting fund
portfolios to aid systemic risk
assessment and investor protection
efforts across all reporting fund
portfolios.
We request comment on the proposed
amendments.
44. Should we expand reporting of
base currency information for all
reporting funds, as proposed? Would
the proposed change allow us and FSOC
to interpret responses to questions
regarding foreign exchange exposures
and the effect of changes in currency
rates for these funds?
45. Would the proposed amendment
improve efficiency?
Borrowings and types of creditors.
The proposal would revise how advisers
report the reporting fund’s
‘‘borrowings.’’ We propose to revise the
term ‘‘borrowings’’ to (1) specify that it
includes ‘‘synthetic long positions,’’
which Form PF would define in the
Glossary of Terms, and (2) provide a
non-exhaustive list of types of
borrowings.78 This proposed reporting
approach is consistent with SEC staff
guidance from Form PF Frequently
Asked Questions.79 This proposed
amendment is designed to improve data
quality, based on experience with the
form. Current Question 12 requires
advisers to report the value of the
reporting fund’s borrowings and the
types of creditors. We propose to amend
this question to require advisers to
indicate whether a creditor is based in
the United States and whether it is a
‘‘U.S. depository institution,’’ rather
than a ‘‘U.S. financial institution’’ as is
currently required.80 This proposed
78 ‘‘Borrowings’’ would include, but would not be
limited to (1) cash and cash equivalents received
with an obligation to repay; (2) securities lending
transactions (count cash and cash equivalents and
securities received by the reporting fund in the
transaction, including securities borrowed by the
reporting fund for short sales); (3) repo or reverse
repo (count the cash and cash equivalents and
securities received by the reporting fund); (4)
negative mark-to-market of derivative transactions
from the reporting fund’s point of view; and (5) the
gross notional value of ‘‘synthetic long positions.’’
We propose to define a ‘‘synthetic long position’’
in the Form PF Glossary of Terms (see the proposed
Form PF Glossary of Terms for the proposed
definition.) We are proposing this definition based
on our understanding of the instruments and to
help ensure data quality to aid comparability.
79 See SEC staff Form PF Frequently Asked
Questions, available at https://www.sec.gov/
divisions/investment/pfrd/pfrdfaq.shtml (‘‘Form PF
Frequently Asked Questions’’). See Form PF
Frequently Asked Question 12.1 (which provides a
non-exhaustive list of types of borrowings).
80 See proposed Question 18. Form PF would
define ‘‘U.S. depository institution’’ as any U.S.
domiciled depository institution, including any of
the following: (1) a depository institution chartered
in the United States, including any federally-
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amendment is designed to make the
categories more consistent with the
categories the Federal Reserve Board
uses in its reports and analysis, to
enhance systemic risk assessment. The
proposal would not require advisers to
distinguish between non-U.S. creditors
that are depository institutions and
those that are not. We understand that
it is difficult for advisers to distinguish
non-U.S. creditors by type, resulting in
inconsistent data that is less valuable for
analysis.
We request comment on the proposed
amendments.
46. Should Form PF define or redefine
any terms related to proposed Question
18? For example, should Form PF define
‘‘U.S. depository institution,’’ ‘‘synthetic
long positions,’’ and revise the term
‘‘borrowings,’’ as proposed? Could the
definitions be clearer? Should Form PF
define the terms differently? For
example, should ‘‘synthetic long
position’’ provide a different list of
assets to be included or excluded? Does
the reference to deep-in-the-money
options in the definition of ‘‘synthetic
long position’’ need further
clarification? If so, what clarifications
should we make?
47. Would advisers find it difficult to
distinguish among different types of
non-U.S. creditors? Should Form PF
require advisers to distinguish between
non-U.S. creditors that are depository
institutions and those that are not, or
non-U.S. creditors that are financial
institutions and those that are not?
Fair value hierarchy. Current
Question 14 requires advisers to report
the assets and liabilities of each
chartered or state-chartered bank, savings bank,
cooperative bank, savings and loan association, or
an international banking facility established by a
depositary institution chartered in the United
States; (2) banking offices established in the United
States by a financial institution that is not organized
or chartered in the United States, including a
branch or agency located in the United States and
engaged in banking not incorporated separately
from its financial institution parent, United States
subsidiaries established to engage in international
business, and international banking facilities; (3)
any bank chartered in any of the following United
States affiliated areas: U.S. territories of American
Samoa, Guam, and the U.S. Virgin Islands; the
Commonwealth of the Northern Mariana Islands;
the Commonwealth of Puerto Rico; the Republic of
the Marshall Islands; the Federated States of
Micronesia; and the Trust Territory of the Pacific
Islands (Palau); or (4) a credit union (including a
natural person or corporate credit union). Form PF
defines ‘‘U.S. financial institution’’ as any of the
following: (1) a financial institution chartered in the
United States (whether federally-chartered or statechartered); (2) a financial institution that is
separately incorporated or otherwise organized in
the United States but has a parent that is a financial
institution chartered outside the United States; or
(3) a branch or agency that resides outside the
United States but has a parent that is a financial
institution chartered in the United States. See
proposed Form PF Glossary of Terms.
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reporting fund broken down using
categories that are based on the fair
value hierarchy established under U.S.
generally accepted accounting
principles.81 Current Question 14 is
designed to provide insight into the
illiquidity and complexity of a fund’s
portfolio and the extent to which the
fund’s value is determined using
metrics other than market
mechanisms.82 We are proposing to
revise how advisers report fair value
hierarchy in current Question 14, which
we would redesignate as proposed
Question 20, in the following ways to
improve data quality and better
understand the reporting fund’s
complexity and valuation challenges:
• We propose to require advisers to
indicate the date the categorization was
performed. This proposed amendment
is designed to show how old the data is.
Some advisers report current fair value
hierarchy, while others report a prior
year’s fair value hierarchy if the current
data is not yet available.83 This can
cause confusion when analyzing the
data, because the fair value hierarchy
data concerns a different time period
than the other data advisers report on
Form PF. Therefore, we believe that
adding a categorization date would help
ensure the data is not incorrectly
categorized as applying to the wrong
time period, and in turn, would allow
the Commissions and FSOC to correlate
data to other Form PF data and market
events more accurately.
• We propose to direct advisers to
report the absolute value of all
liabilities. Currently, advisers report
liabilities inconsistently, with some
reporting absolute values and others
reporting negative values. This
inconsistency causes errors when the
Commissions and FSOC aggregate this
data and we believe the proposed
instruction would help reduce
aggregation errors.
• We propose to direct advisers to
provide an explanation in Question 4 if
they report assets as a negative value.
We have found that some advisers have
reported negative values for assets in
81 See 2011 Form PF Adopting Release, supra
footnote 3, at text accompanying n.204.
82 See 2011 Form PF Adopting Release, supra
footnote 3, at n.204.
83 Advisers are not required to update
information that they believe in good faith properly
responded to Form PF on the date of filing even if
that information is subsequently revised for
purposes of their recordkeeping, risk management,
or investor reporting (such as estimates that are
refined after completion of a subsequent audit). See
Instruction 16.
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error.84 Therefore, this instruction is
designed to reduce inadvertent errors.
• We propose to require advisers to
separately report cash and cash
equivalents. Currently, Form PF does
not explain where advisers must report
cash and cash equivalents in current
Question 14. While SEC staff have
suggested that advisers generally should
report cash in the cost based column
and cash equivalents in the applicable
column in the fair value hierarchy or the
cost based column, depending on the
nature of the cash equivalents, we are
proposing to add a separate column for
cash and cash equivalents.85 The
proposed categorization is designed to
differentiate reported holdings of cash
and cash equivalents from harder to
value assets that may be valued at cost,
and in turn, improve data quality and
comparability.
• We propose to amend the definition
of ‘‘cash and cash equivalents.’’ The
current definition of ‘‘cash and cash
equivalents’’ includes ‘‘government
securities.’’ 86 When reporting cash and
cash equivalents, some advisers may
include government securities with
longer maturities, while others do not,
which results in inconsistent reporting
and may obscure our and FSOC’s
understanding of fund exposures.
Therefore, to improve data quality, we
propose to remove government
securities from the definition of ‘‘cash
and cash equivalents,’’ and present it as
its own line item in the proposed Form
PF Glossary of Terms.87 We also
propose to amend the term ‘‘cash and
cash equivalents’’ so it would direct
advisers to not include any digital assets
when reporting cash and cash
equivalents. As discussed in section
II.B.3 of this Release, we propose to
define ‘‘digital assets’’ and require
advisers to report them separately than
other types of assets.88 Therefore, this
proposed amendment is designed to
ensure that the categories of ‘‘cash and
84 We recognize that there may be cases when
advisers correctly report negative values, such as
when subtracting fund of fund investments.
85 See Form PF Frequently Asked Question 14.3,
Form PF Frequently Asked Questions, supra
footnote 79.
86 Current Form PF defines ‘‘government
securities’’ in the current term ‘‘cash and cash
equivalents’’ as (1) U.S. treasury securities, (2)
agency securities, and (3) any certificate of deposit
for any of the foregoing.
87 We propose to make corresponding
amendments to the definition of ‘‘unencumbered
cash’’ to reflect that ‘‘government securities’’ would
be a distinct term from ‘‘cash and cash
equivalents.’’ This proposed amendment is not
intended to change the meaning of the term
‘‘unencumbered cash.’’ See Form PF Glossary of
Terms.
88 See e.g., proposed Question 25, which would
include digital assets as a strategy category for
advisers to hedge funds.
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cash equivalents’’ and ‘‘digital assets’’
are clearly distinct to help ensure
accurate reporting.
• We propose to add instructions
directing advisers about how to report
data if their financial statement’s audit
is not yet completed when Form PF is
due. The instructions would state that
advisers should use the estimated
values for the fiscal year and explain
that the information is an estimate in
Question 4. The proposed instructions
also would provide that the adviser
may, but is not required to, amend Form
PF when the audited financial
statements are complete.89 The
instructions are consistent with
responses to Form PF Frequently Asked
Questions and are designed to provide
the Commissions and FSOC with more
recent information regarding the
reporting fund than may be possible if
the reporting fund relied solely on
audited financial statement information
(i.e., the reporting fund’s previous fiscal
year’s audited financial statements).90
Given that advisers file Form PF
sometimes months after their quarter
and year ends, depending on their size
and the type of funds they advise, we
believe the proposed instruction would
balance reporting burdens with more
timely information for assessing
potential systemic risk and investor
protection concerns.
We request comment on the proposed
amendments.
48. Should we require advisers to
indicate the date the categorization was
performed, as proposed? Would this
proposed amendment help ensure the
data is correctly categorized as applying
to the appropriate time period, and in
turn, allow the Commissions and FSOC
to correlate data to other Form PF data
and market events more accurately? Is
there a better way to meet this objective?
49. Should Form PF direct advisers to
report the absolute value of all
liabilities, as proposed? Would this
proposed amendment reduce
aggregation errors? Is there a better way
to meet this objective?
50. Should Form PF direct advisers to
provide an explanation in Question 4 if
they report assets as a negative value, as
proposed? Would this proposed
instruction reduce inadvertent errors?
51. Should advisers report cash or
cash equivalents separately from other
89 Form PF Instruction 16 would continue to
provide that an adviser is not required to update
information that it believes in good faith properly
responds to Form PF on the date of filing, even if
that information is subsequently revised, as Form
PF currently provides.
90 See Form PF Frequently Asked Question A.11,
Form PF Frequently Asked Questions, supra
footnote 79.
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assets, as proposed? Are there other
alternatives we should implement? For
example, should Form PF require
advisers to report cash in the cost based
column and cash equivalents in the
applicable column in the fair value
hierarchy or the cost based column,
depending on the nature of the cash
equivalents? 91
52. Would the proposed amendments
to the terms ‘‘cash and cash
equivalents’’ and ‘‘unencumbered
cash,’’ and the addition of ‘‘government
securities’’ allow for more precise
reporting for these types of assets?
Alternatively, should the definition of
‘‘cash and cash equivalents’’ provide
that government securities would be
included in cash equivalents if they are
eligible to be held by money market
funds under the risk-limiting condition
set forth in [17 CFR 270.2a–7(d)(1)(i)]
Investment Company Act rule 2a7(d)(1)(i), which generally prohibits a
money market fund from acquiring any
instrument with a remaining maturity of
greater than 397 calendar days? Should
this language be more comparable with
other requirements of Form PF, which
require large liquidity fund advisers to
report the dollar amount of a liquidity
fund’s assets that have a maturity
greater than 397 days? 92 Should Form
PF provide distinct line items for the
term ‘‘cash’’ and ‘‘cash equivalents,’’
and revise questions to refer to each
term, as applicable? Should the term
‘‘unencumbered cash’’ continue to refer
to government securities, as proposed,
or should we modify the term
differently? For example, should
‘‘unencumbered cash’’ refer to U.S.
treasury bills, rather than government
securities?
53. Should Form PF direct advisers to
report estimated values if their financial
statement’s audit is not yet completed
when Form PF is due, as proposed?
Alternatively, should we require
advisers to update Form PF with
updated values when the audited
financial statements are complete?
Beneficial Ownership of the Reporting
Fund. Current Question 16 requires
advisers to specify the approximate
percentage of the reporting funds’ equity
that is beneficially owned by different
groups of investors. We propose to
require advisers to provide more
granular information regarding the
following groups of beneficial owners.93
91 See
supra footnote 85.
e.g., Form PF, section 3, current Question
55(i). The SEC recently proposed amendments to
Form PF section 3, which would redesignate
current Question 55(i) to reflect new numbering.
See 2022 SEC Form PF Proposal, supra footnote 13.
93 See proposed Question 22.
92 See
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• Advisers would indicate whether
beneficial owners that are brokerdealers, insurance companies, nonprofits, pension plans, banking or thrift
institutions are U.S. persons or non-U.S.
persons.94 This proposed amendment is
designed to allow the Commissions and
FSOC to conduct more targeted analysis
about risks presented in the United
States separate from risks presented
abroad. With regard to pension plans, in
particular, it is currently unclear how
advisers must report assets in non-U.S.
pension plans: as governmental pension
plans or foreign official institutions.
Therefore, this proposed amendment
also is designed to improve data quality,
based on experience with the form.
• Advisers would indicate whether
beneficial owners that are private funds
are either internal private funds (i.e.,
managed by the adviser or its related
persons) or external private funds. This
proposed amendment is designed to
help the Commissions and FSOC
understand the interconnectedness of
private funds to each other, which
would aid systemic risk assessment and
investor protection efforts. Furthermore,
this information is designed to help the
Commissions and FSOC understand a
reporting fund’s risk from investor
demands for liquidity, because
beneficial owners that are external
private funds may have less predictable
withdrawals than internal private funds.
• We would specify that ‘‘state’’
investors are U.S. state investors to
improve data quality and reduce
potential confusion.95
The proposal would provide that if
advisers report information in the
‘‘other’’ category, they must describe in
Question 4 the type of investor, why it
would not qualify for any of the other
categories, and any other information to
explain the selection of ‘‘other.’’ This
94 We understand that, in some cases, an adviser
may not be able to determine what type of non-U.S.
entity the investor is. Current Question 16 already
provides a category that would address that
scenario in certain circumstances, and we would
maintain that approach. If investors that are not
United States persons and about which certain
beneficial ownership information is not known and
cannot reasonably be obtained because the
beneficial interest is held through a chain involving
one or more third-party intermediaries, advisers
currently report this in current Question 16(m),
which we would redesignate as proposed Question
22(s).
95 The proposal also would include instructions
to proposed Question 22, as well as current
Question 15, which we would redesignate as
proposed Question 21 (concerning a certain
percentage of beneficial ownership), providing that
if the reporting fund is the master fund in a masterfeeder arrangement, advisers must look through any
disregarded feeder fund (i.e., a feeder fund that is
not required to be separately reported). This
proposed amendment is designed to implement the
proposed master-feeder reporting. See section II.A.1
of this Release.
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proposed amendment is designed to
improve data quality by providing
context to the adviser’s selection of the
‘‘other’’ category, and help ensure that
advisers do not inadvertently report
information in the wrong category.
We request comment on the proposed
amendments.
54. Should we revise the reporting
categories as proposed? Should we
eliminate, add, or change any
categories? For example, should we add
categories for security-based swap
dealers that are U.S. persons and those
that are not? The instructions for current
Question 16 require advisers to include
each investor in only one group.
Therefore, if we require advisers to
report whether an investor is a securitybased swap dealer, how should they
report the investor if the investor also
qualifies for another category, such as
broker-dealers or ‘‘banking or thrift
institutions?’’ For example, should the
list be non-exclusive? Is there a better
way to address cases when advisers may
not be able to determine what type of
entity the investor is? 96
55. Should Form PF require advisers
to explain their response when they
select ‘‘other’’ as a category, as
proposed? Should Form PF require the
adviser to include more, less, or
different information in the
explanation? Would this proposed
change provide context to the adviser’s
selection of the ‘‘other’’ category and
help prevent misreporting?
56. Should we add instructions to
current Question 15 (which we propose
to redesignate as proposed Question 21)
to allow good faith estimates in
determining beneficial interests
outstanding before March 31, 2012 (the
effective date of Form PF), that have not
been transferred on or after that date, as
current Question 16 does and Form PF
would continue to provide in proposed
Question 22?
57. Current Question 16 includes a
category concerning broker-dealers.
Under the proposal, advisers would
distinguish between broker-dealers that
are U.S. persons and those that are not
U.S. persons. Should Form PF define
‘‘broker-dealer’’ or use different terms so
the categories would be more consistent
with the Federal Reserve Board’s reports
and analysis? Is there a way to achieve
this objective while ensuring the terms
are consistent with the SEC’s definition
of the terms? For example, should Form
PF use and define the term ‘‘broker’’ or
‘‘dealer’’ as they are defined in the
Securities Exchange Act of 1934
(‘‘Exchange Act’’)? 97 Should Form PF
96 See
97 15
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use and define the term ‘‘foreign broker
or dealer’’ as it is defined in [17 CFR
240.15a–6(b)(3)] (‘‘Exchange Act rule
15a–6(b)(3)’’)? Should Form PF use the
term ‘‘securities brokers and dealers,’’
and define it the following way: Firms
that buy and sell securities for a fee,
hold an inventory of securities for
resale, or do both? Are the firms that
make up this sector those that submit
information to the SEC on one of two
reporting forms, either [17 CFR 249.617]
Form X–17A–5, Financial and
Operational Combined Uniform Single
Report of Brokers and Dealers (‘‘FOCUS
Report’’) or [17 CFR 449.5] Form G–405,
on Finances and Operations of
Government Securities Brokers and
Dealers (‘‘FOGS Report’’)?
Fund Performance. We are proposing
several amendments regarding fund
performance reporting in current
Question 17, which we would
redesignate as proposed Question 23.98
Currently, Form PF requires all advisers
to report gross and net fund
performance for specified fiscal periods
using a table in current Question 17.
The table in current Question 17
requires advisers to provide monthly
and quarterly performance results in the
table only if such results are calculated
for the reporting fund. This requirement
would remain, but we propose to add
instructions specifying which lines to
complete depending on whether the
adviser is submitting an initial filing,
annual update, or quarterly update.99
We also propose to amend the
instructions to the table to specify that
if gross and net performance is reported
to current and prospective investors,
counterparties, or otherwise in a
currency other than U.S. dollars,
advisers must report the data using that
currency. We believe this instruction is
implied in the current form and we
propose to amend this instruction to
make it explicit. We also propose to
require advisers to identify the currency
in Question 4.100 This proposed
98 In a separate release, the SEC is proposing a
new rule under the Advisers Act to require advisers
to provide certain fund performance information to
its private funds’ investors in quarterly statements.
See Private Fund Advisers; Documentation of
Registered Investment Adviser Compliance
Reviews, Advisers Act Release No. IA–5955 (Feb. 9,
2022) [87 FR 16886, (Mar. 24, 2022)].
99 We also propose to reorganize the table so
monthly, quarterly, and yearly data is presented in
separate categories, but this change would not affect
reporting; advisers would report information
according to the same intervals, as they currently
do. We also propose to amend the table to refer to
the end date of each applicable month, quarter, and
year, rather than last day of the fiscal period, to
reflect the proposed amendments to the reporting
period, as discussed above. See supra section II.A.3
of this Release, and proposed Question 23(a).
100 See proposed Question 23(a).
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amendment is designed to inform the
Commissions and FSOC of the currency
the adviser used to report the reporting
fund’s gross and net performance, for
more accurate and informed analysis.
We also propose to create an
exception to the tabular reporting. If the
reporting fund’s performance is reported
to current and prospective investors,
counterparties, or otherwise as an
internal rate of return since inception,
the adviser would report its
performance as an internal rate of
return.101 If such information is
reported to current and prospective
investors, counterparties, or otherwise,
in a currency other than U.S. dollars,
advisers would report the data using
that currency, and identify the currency
in Question 4. This approach is
designed to acknowledge that advisers
calculate performance data differently
for different types of private funds. For
example, advisers of private equity
funds may use internal rate of return to
calculate performance data, while
advisers to liquidity funds and hedge
funds may use a periodic rate of return.
These calculations may differ in the way
they reflect realized and unrealized
gains, among other things. Therefore,
the proposed change is designed to
allow the Commissions and FSOC to
improve the usefulness and quality of
performance data to conduct more
accurate analysis, including
comparisons, and aggregations.
The proposal would require advisers
to report additional performance-related
information if the adviser calculates a
market value on a daily basis for any
position in the reporting fund’s
portfolio. In such a case, the adviser
would report the following:
• The ‘‘reporting fund aggregate
calculated value’’ at the end of the
reporting period.102 Advisers that file a
quarterly update also would report the
reporting fund aggregate calculated
value as of the end of the first and
second month of the reporting
period.103
101 See proposed Question 23 instructions, and
proposed Question 23(b). Proposed Question 23(b)
also would require that if the fund reports different
performance results to different groups, advisers
must provide the most representative results and
explain their selection in Question 4. The
instructions to proposed Question 23(b) would
specify that internal rates of return for periods
longer than one year must be annualized, while
internal rates of return for periods one year or less
must not be annualized. This instruction is
designed to help ensure consistent reporting for
accurate comparisons.
102 We would define the term ‘‘reporting fund
aggregate calculated value’’ in the Form PF Glossary
of Terms. See proposed Form PF Glossary of Terms
and proposed Question 23(c).
103 See proposed Question 23(c)(i).
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• The reporting fund’s volatility of
the natural log of the daily ‘‘rate of
return’’ for each month of the reporting
period, following a prescribed
methodology.104 Advisers would report
whether the reporting fund uses a
different methodology than is
prescribed in Form PF to report to
current and prospective investors,
counterparties, or otherwise, and if so,
they would describe it in Question 4.105
• Whether the reporting fund had one
or more days with a negative daily rate
of return during the reporting period. If
so, advisers would report (1) the most
recent peak to trough drawdown, and
indicate whether the drawdown was
continuing on the data reporting date,
(2) the largest peak to trough drawdown,
(3) the largest single day drawdown, and
(4) the number of days with a negative
daily rate of return in the reporting
period.106 These measures are designed
to help us and FSOC understand risk,
particularly in reporting funds with
unique return patterns that are poorly
measured using volatility alone. We
understand that advisers use drawdown
metrics, therefore, this question also is
designed to be more reflective of
industry practice, and in turn improve
data quality.
Together, the proposed changes are
designed to allow the Commissions and
FSOC to more accurately compare
volatility across different fund types to
identify market trends (e.g., volatility of
a specific fund type), for systemic risk
assessment and investor protection
efforts. For example, if several reporting
funds that engage in similar trading
activity experience a surge in volatility,
the volatility itself or the reporting
funds’ response to the volatility may
impact others who also are engaging in
similar trading activity, which could
pose systemic risk, and negatively affect
investors.
We request comments on the
proposed amendments.
104 We would define ‘‘rate of return’’ for a
reporting fund as the percentage change in the
reporting fund aggregate calculated value in the
reporting fund’s base currency from one date to
another, and adjusted for subscriptions and
redemptions. For a portfolio position, the ‘‘rate of
return’’ would be the percentage change in the
‘‘position calculated value,’’ adjusted for income
earned. We would define ‘‘position calculated
value’’ in the Form PF Glossary of Terms. The
prescribed methodology would be the standard
deviation of the natural log of one plus each of the
daily rates of return in the month, annualized by
the square root of 252 trading days. When
calculating the natural log of a daily rate of return,
the rate of return, which is expressed as a percent,
must first be converted to a decimal value and then
one must be added to the decimal value. See
proposed Form PF Glossary of Terms and Question
23(c)(ii).
105 See proposed Question 23(c)(iii).
106 See proposed Question 23(iv).
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58. Would the proposed changes
improve data quality and provide the
Commissions and FSOC with a more
robust picture of fund performance?
59. Should we amend the table in
current Question 17, as proposed? For
example, should we specify that if a
reporting fund’s gross and net
performance is reported to current and
prospective investors, counterparties, or
others in a currency other than U.S.
dollars, advisers must report the data
using that currency, as proposed?
Should we require advisers to identify
the currency in Question 4, as
proposed?
60. Do different types of private funds
calculate performance data differently
based on industry conventions, or
otherwise? Do the proposed
requirements and defined terms
accurately capture the right types of
performance reporting for investor
protection and systemic risk
assessment? Is there a better way to
meet these objectives?
61. As an alternative, should Form PF
require advisers to report the reporting
fund aggregate calculated value
information only for reporting funds
that meet a certain asset threshold?
62. Should Form PF require advisers
to follow the prescribed methodology to
compute the reporting fund’s volatility
of the daily rate of return, as proposed,
or should Form PF require advisers to
follow a different methodology? If so,
what methodology should Form PF
prescribe and why? Should advisers
have the flexibility to use their own
methodology to compute the reporting
fund’s volatility of the daily rate of
return? If advisers use their own
methodology, how could the
Commissions and FSOC ensure data
could be aggregated and compared?
63. Could the instructions on how to
calculate the volatility of the daily rate
of return be clearer? For example,
should the form include a calculation
worksheet for advisers to fill out to help
advisers calculate the volatility of rates
of return?
64. Should we define ‘‘position
calculated value,’’ ‘‘reporting fund
aggregate calculated value,’’ and ‘‘rate of
return,’’ as proposed?
65. We are not defining the term
‘‘drawdown.’’ Should Form PF define
‘‘drawdown?’’ For example, should
Form PF define ‘‘drawdown’’ as the
maximum loss in the value over a
specified time internal? Should Form PF
define or redefine any other terms?
66. Should Form PF specify what
‘‘peak to trough’’ means? For example,
should ‘‘peak to trough’’ mean the
percentage decline from portfolio’s
highest value (peak) to lowest value
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(trough) following the establishment of
the highest value (peak)? Are there
industry standards for determining peak
to trough? For example, should Form PF
provide guidance on when the ‘‘peak’’
or ‘‘trough’’ should be reset? As an
alternative to requiring information
about ‘‘peak to trough,’’ should Form PF
require advisers to report the maximum
drawdown? If so, should Form PF
define ‘‘maximum drawdown’’ as the
largest decline over any time interval
within the reporting period?
67. Should Form PF require advisers
to report information about the negative
daily rates of return, as proposed?
Alternatively, should Form PF require
the largest peak to trough drawdown
over a rolling 10-day period, or in each
month?
68. Alternatively, should Form PF
require advisers to report the daily mark
to market calculations, or both the daily
rate of return and the daily mark to
market calculations?
69. Are the instructions clear for
reporting funds that have base
currencies other than U.S. dollars?
Should we revise the form further to
accommodate data concerning such
funds?
3. Proposed Amendments to Section 1c
of Form PF—Concerning All Hedge
Funds
Section 1c requires advisers to report
information about the hedge funds they
advise. We propose 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. We also propose to
remove certain questions where other
questions would provide the same or
more useful data to streamline reporting
and reduce reporting burdens without
compromising investor protection
efforts and systemic risk analysis.
Investment Strategies. We propose to
amend how advisers report hedge fund
investment strategies.107 We propose to
require advisers to indicate which
investment strategies best describe the
reporting fund’s strategies on the last
day of the reporting period, rather than
allowing advisers flexibility to report
information as of the data reporting date
or throughout the reporting period, as
Form PF currently provides.108 This
amendment is designed to improve data
quality by specifying how to report
107 We would amend current Question 20, and
redesignate it as proposed Question 25.
108 See current Question 20.
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information if the reporting fund
changes strategies over time.
We also propose to update the
strategy categories that advisers can
select to reflect our understanding of
hedge fund strategies better, and
improve data quality and comparability,
based on experience with the form. For
example, we propose to include more
granular categories for equity strategies,
such as factor driven, statistical
arbitrage, and emerging markets.
Similarly, we propose to include more
granular categories for credit strategies,
such as litigation finance, emerging
markets, and asset-backed/structured
products. These more granular
categories are designed to allow the
Commissions and FSOC to conduct
more targeted analysis and improve
comparability among advisers and
hedge funds, which the Commissions
and FSOC can use to more accurately
identify and address systemic risk and
investor protection issues in times of
stress. We also propose to add categories
that have become more commonly
pursued by hedge funds since Form PF
was adopted, such as categories
concerning real estate and digital
assets.109 Today, advisers may report
information regarding these strategies in
the ‘‘other’’ category, resulting in less
robust Form PF data for analysis,
especially when such analysis filters
results based on strategy.110 Therefore,
the additional categories are designed to
improve reporting quality and data
comparability across advisers, based on
experience with the form. If advisers
select the ‘‘other’’ category, we propose
to require them to describe in Question
4 the investment strategy, why the
reporting fund would not qualify for any
of the other categories, and any other
information to explain the selection of
‘‘other.’’ This proposed change is
designed to improve data quality by
providing context to the adviser’s
selection of the ‘‘other’’ category. It also
is designed to help us ensure that
advisers are not misreporting
information in the ‘‘other’’ category
when they should be reporting
information in a different category.
In connection with these proposed
amendments, we propose to define the
term ‘‘digital asset’’ as an asset that is
109 Aggregate qualifying hedge fund gross
notional exposure to physical real estate has grown
by 72 percent from the second quarter 2018 through
the third quarter of 2021, to $146 billion. See
Private Funds Statistics, supra footnote 7, First
Quarter 2020 (showing data from the second quarter
of 2018), and Third Quarter 2021.
110 The amount of hedge fund exposure that
advisers attribute to the ‘‘other’’ category has more
than doubled to $57 billion, from 2013 through
third quarter 2021. See Private Funds Statistics,
supra footnote 7.
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issued and/or transferred using
distributed ledger or blockchain
technology (‘‘distributed ledger
technology’’), including, but not limited
to, so-called ‘‘virtual currencies,’’
‘‘coins,’’ and ‘‘tokens.’’ These types of
assets also are commonly referred to as
‘‘crypto assets.’’ 111 We view these terms
as synonymous. We are proposing the
term and definition to be consistent
with the SEC’s recent statement on
digital assets, and we believe that such
term and definition would provide a
consistent understanding of the type of
assets we intend to address.112 The SEC
proposed to add the same term and
definition to SEC’s section of Form PF
in the 2022 SEC Form PF Proposal.113
The definition is designed to help
ensure that advisers report digital asset
strategies accurately.
We request comment on the proposed
amendments.
70. Should Form PF direct advisers to
report information about the reporting
fund’s strategies on the last day of the
reporting period, as proposed? Would
this proposed amendment improve data
quality, and reduce ambiguity?
71. Should Form PF continue to
provide that the strategies are mutually
exclusive and direct advisers to not
report the same assets under multiple
strategies, as it currently does?
Alternatively, should Form PF allow
advisers to report the same assets under
multiple strategies?
72. Should Form PF include more,
fewer, or different categories? Would the
proposed categories improve reporting
accuracy and data comparability across
advisers? Are there other strategies that
are important to track for assessing
systemic risk or for the protection of
investors?
73. Are there categories that advisers
report in the ‘‘other’’ category that Form
PF should include as their own
categories? Should we remove the
‘‘other’’ category?
74. Should we require more specific
disclosure of what each digital asset
represents? If so, what kinds of
descriptions would be needed and in
what detail? For example, should the
description include the rights the digital
asset provides to the holder? Should
Form PF distinguish, for example,
between digital assets that represent an
111 See e.g., FSOC 2021 Annual Report, at 184–
185, available at https://home.treasury.gov/system/
files/261/FSOC2021AnnualReport.pdf (noting that
another industry term for ‘‘digital asset’’ is ‘‘crypto
asset’’).
112 See Custody of Digital Asset Securities by
Special Purpose Broker-Dealers, Exchange Act
Release No. 90788 (Dec. 23, 2020) [86 FR 11627
(Feb. 26, 2021)], at n.1.
113 2022 SEC Form PF Proposal, supra footnote
13.
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ability to convert or exchange the digital
asset for fiat currency or another asset,
including another digital asset, and
those that do not represent such a right
to convert or exchange? For those digital
assets that represent a right to convert
or exchange for fiat currency or another
digital asset, should we distinguish
between those where the redemption
obligation is supported by an
unconditional guarantee of payment,
such as some ‘‘central bank digital
currencies,’’ and those digital assets
redeemable upon demand from the
issuer, whether or not collateralized by
a pool of assets or a reserve? Should we
identify digital assets that do not
represent any direct or indirect
obligation of any party to redeem or
those that represent an equity, profit, or
other interest in an entity?
75. Should Form PF define or redefine any terms that are listed as a
proposed strategy?
Should Form PF define ‘‘digital
asset,’’ as proposed? If not, please
identify alternative elements that would
better identify the digital assets held by
private funds. Should Form PF use the
term ‘‘crypto asset’’ instead of the term
‘‘digital asset’’?
76. Some reporting funds report as
hedge funds, but may hold commodities
that are not securities or may hold
commodity derivatives such as bitcoin
futures that would make them a
commodity pool. Should Form PF
include categories for funds that hold
digital assets regardless of how the fund
characterizes itself based on the assets it
is holding or would the proposed
categories (other than the ‘‘other’’
category) apply?
77. If advisers select the ‘‘other’’
category, should Form PF require them
to explain the selection, as proposed?
Should Form PF require the adviser to
include more, less, or different
information in the explanation?
78. Should Form PF require advisers
to provide explanations for any other
categories besides the ‘‘other’’ category,
as proposed? For example, if advisers
report digital assets, should Form PF
require advisers to provide the name of
the digital asset, or describe the
characteristics of the digital asset?
Counterparty exposures. Counterparty
exposure informs the Commissions and
FSOC of the interconnectedness of
hedge funds with the broader financial
services industry, which is a critical
part of systemic risk assessment and
investor protection efforts.
Understanding counterparty exposures
allows the Commissions and FSOC to
assess who may be impacted by a
reporting fund’s failure, and which
reporting funds may be impacted by a
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counterparty’s failure. Counterparty
exposure concerning central clearing
counterparties (‘‘CCPs’’) is of
importance to FSOC’s systemic risk
assessment efforts as evidenced by the
fact that FSOC has designated many
CCP institutions as ‘‘systemically
important,’’ and recommended that
regulators continue to coordinate to
evaluate threats from both default and
non-default losses associated with
CCPs.114
The proposal would add proposed
Question 26, and revise current
Questions 22 and 23, and redesignate
them as proposed Questions 27 and 28,
to provide better insight into hedge
funds’ borrowing and financing
arrangements with counterparties,
including CCPs. Proposed Question 26
would require advisers to hedge funds
(other than qualifying hedge funds) to
complete a new table (the ‘‘consolidated
counterparty exposure table’’)
concerning exposures that (1) the
reporting fund has to creditors and
counterparties, and (2) creditors and
other counterparties have to the
reporting fund.115 Advisers would
report the U.S. dollar value of the
reporting fund’s ‘‘borrowing and
collateral received (B/CR),’’ as well as
its ‘‘lending and posted collateral (L/
PC),’’ aggregated across all
counterparties, including CCPs, as of the
114 Form PF defines ‘‘CCP’’ as central clearing
counterparties (or central clearing houses) (for
example, CME Clearing, The Depository Trust &
Clearing Corporation, Fedwire and LCH Clearnet
Limited). See Financial Stability Oversight Council,
2012 Annual Report, Appendix A, available at
https://home.treasury.gov/system/files/261/2012Annual-Report.pdf. (concerning the designations);
Financial Stability Oversight Council, 2021 Annual
Report, p. 14, available at https://
home.treasury.gov/system/files/261/
FSOC2021AnnualReport.pdf. (concerning the
recommendation).
115 Qualifying hedge funds would not complete
this table because section 2 would be revised to
include similar questions that require additional
detail. See discussion at Section II.C of this Release.
Together the proposed questions in section 1c and
similar questions at section 2 would allow the
Commissions and FSOC to consolidate information
relating to hedge funds’ and qualifying hedge funds’
arrangements with creditors and other
counterparties, to support systemic risk assessment
and investor protection efforts. We propose to
define the term ‘‘consolidated counterparty
exposure table’’ in the Form PF Glossary of Terms.
For hedge funds, other than qualifying hedge funds,
it would mean the section 1c table (at proposed
Question 26) that collects the reporting fund’s
borrowing and collateral received and lending and
posted collateral aggregated across all creditors and
counterparties as of the end of the reporting period.
For qualifying hedge funds, it would mean the
section 2 table (at proposed Question 41) that
collects the reporting fund’s borrowing and
collateral received and lending and posted
collateral aggregated across all creditors and
counterparties as of the end of the reporting period.
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end of the reporting period.116 The form
would explain what exposures to net.117
Advisers would classify information
according to type (e.g., unsecured
borrowing, secured borrowing,
derivatives cleared by a CCP, and
uncleared derivatives) and the
governing legal agreement (e.g., a prime
brokerage or other brokerage agreement
for cash margin and securities lending
and borrowing, a global master
repurchase agreement for repo/reverse
repo, and International Swaps and
Derivatives Association (‘‘ISDA’’) master
agreement for synthetic long positions,
‘‘synthetic short positions,’’ and
derivatives).118 Advisers would report
transactions under a master securities
loan agreement as secured borrowings.
Advisers would check a box if one or
more prime brokerage agreements
provide for cross-margining of
derivatives and secured financing
transactions. If advisers check the box,
we propose to include instructions
about how to report secured financing
and derivatives in the consolidated
counterparty exposure table.
Form PF would continue to require
advisers to report information about
individual counterparties that present
the greatest exposure to and from hedge
funds.119 Under the proposal, however,
advisers to qualifying hedge funds
would not complete proposed Questions
116 We would define ‘‘borrowing and collateral
received (B/CR)’’ and ‘‘lending and posted collateral
(L/PC)’’ in the Form PF Glossary of Terms. We are
proposing these definitions based on our
understanding of borrowing and lending and to
help ensure data quality and comparability. We also
propose to amend the term ‘‘gross notional value’’
to provide more detail on how to report it to aid
advisers completing the consolidated counterparty
exposure table. See proposed Form PF Glossary of
Terms.
117 Advisers would net the reporting fund’s
exposure with each counterparty and among
affiliated entities of a counterparty to the extent
such exposures may be contractually or legally setoff or netted across those entities or one affiliate
guarantees or may otherwise be obligated to satisfy
the obligations of another under the agreements
governing the transactions. We would include
instructions providing that netting must be used to
reflect net cash borrowed from or lent to a
counterparty, but must not be used to offset
securities borrowed and lent against one another,
when reporting prime brokerage and repo/reverse
repo transactions. These instructions are designed
to help ensure data quality and comparability. See
proposed Question 26.
118 We propose to define ‘‘ISDA’’ as the
International Swaps and Derivatives Association.
We also propose to define ‘‘synthetic short
positions’’ in the Form PF Glossary of Terms (see
the proposed Form PF Glossary of Terms for the
proposed definition). We are proposing this
definition based on our understanding of the
instruments and to help ensure data quality to aid
comparability. See also supra footnote 78
(discussing the proposed definition of ‘‘synthetic
long position’’).
119 See current Questions 22 and 23, and
proposed Questions 27 and 28.
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27 and 28, if they complete certain
similar questions in Form PF section 2,
to avoid duplication.120 We also
propose to revise current Questions 22
and 23 to improve data quality.
• Although current Questions 22 and
23 provide instructions on how to
identify the counterparties, we
understand that advisers have been
using different methodologies to
identify them, and have misidentified
lending relationships, which has limited
the utility and comparability of the
reported information. Therefore, we
propose to provide more detailed
instructions for advisers to use to
identify the individual counterparties.
For both proposed Questions 27 and 28,
advisers would use the calculations
from the consolidated counterparty
exposure table to identify the
counterparties.121 This proposed
amendment is designed to help ensure
that the Commissions’ and FSOC’s
analysis can identify true data
differences, without the distraction of
methodology differences, which can
suggest differences where there are
none, and reduce circumstances where
advisers would misidentify lending
relationships.
• Proposed Question 27 would
require advisers to identify each creditor
or other counterparty (including CCPs)
to which the reporting fund owes a
certain amount (before posted collateral)
equal to or greater than either (1) five
percent of net asset value as of the data
reporting date or (2) $1 billion. If there
are more than five such counterparties,
the adviser only would report the five
counterparties to which the reporting
fund owes the largest dollar amount,
before taking into account collateral that
the reporting fund posted. If there are
fewer than five such counterparties, the
adviser only would report the
counterparties that meet the threshold.
For example, if only three
counterparties meet the threshold, the
adviser would report only three
counterparties. This would be a change
from current Question 22, which
requires advisers to identify five
counterparties to which the reporting
fund has the greatest mark-to-market net
counterparty credit exposure, regardless
of the actual size of the exposure. The
proposed threshold is designed to
highlight two different, significant,
120 See proposed Questions 42 and 43 in Form PF
section 2, and supra footnote 115.
121 See proposed Question 26 for the consolidated
counterparty exposure table. The proposal would
define new terms related to the consolidated
counterparty exposure table: ‘‘cash borrowing
entries,’’ ‘‘cash lending entries,’’ ‘‘collateral posted
entries,’’ and ‘‘collateral received entries.’’ See
proposed Form PF Glossary of Terms.
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potentially systemic, risks: five percent
of net asset value represents an amount
of borrowing by a reporting fund that, if
repayment was required, could be a
significant loss of financing that could
result in a forced unwind and forced
sales from the reporting fund’s portfolio.
Additionally, the $1 billion represents
an amount that, in the case of a very
large fund, may not represent five
percent of its net assets, but may be
large enough to create stress for certain
of its counterparties.
• Proposed Question 28 would
require advisers to provide information
for counterparties to which the
reporting fund has net mark-to-market
counterparty credit exposure which is
equal to or greater than either (1) five
percent of the reporting fund’s net asset
value as of the data reporting date or (2)
$1 billion, after taking into account
collateral received or posted by the
reporting fund. If there are more than
five such counterparties, the adviser
would only report the five to which the
reporting fund has the greatest mark-tomarket exposure after taking into
account collateral received. If there are
fewer than five such counterparties, the
adviser only would report the
counterparties that meet the threshold.
This would be a change from current
Question 23, which requires advisers to
identify five counterparties to which the
reporting fund has the greatest mark-tomarket net counterparty credit
exposure, regardless of the actual size of
the exposure. The proposed threshold is
designed to represent an amount of
lending from a reporting fund that, if a
default occurred, could cause a
significant loss that could result in a
forced unwind and forced sales from the
reporting fund’s portfolio. Furthermore,
we believe that the five percent
threshold level would be large enough
to constitute a shock to a reporting
fund’s net asset value and is an oftenused industry metric. The $1 billion
threshold represents an amount that, in
the case of a very large counterparty,
may not represent five percent of its net
assets, but may be large enough to create
stress for the reporting fund.
• Currently, advisers report exposures
that the reporting fund has to
counterparties as a percentage of the
reporting fund’s net asset value, and
advisers report exposures that
counterparties have to the reporting
fund in U.S. dollars.122 We propose to
require advisers to report both data sets
in U.S. dollars for consistency and
comparability.123
122 See
123 See
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• We propose to require advisers to
report the amount of collateral posted,
to help inform the Commissions and
FSOC of the potential impact of a
reporting fund or counterparty default.
• We also propose to require advisers
to report the counterparty’s LEI, if it has
one, to help identify counterparties and
more efficiently link data from other
data sources that use this identifier.
• Advisers would continue to
indicate if a counterparty is affiliated
with a major financial institution, as
Form PF currently provides.124 If the
financial institution is not listed on
Form PF, advisers would continue to
have the option of selecting ‘‘other’’ and
naming the entity in the chart, as Form
PF currently provides.
However, we propose to require the
adviser to also describe the financial
institution in Question 4. This proposed
amendment is designed to help the
Commissions and FSOC efficiently and
accurately identify the entity, without
having to contact advisers individually.
Together, the proposed amendments
are designed to allow the Commissions
and FSOC to identify and align sources
of borrowing and lending to identify
significant counterparty exposures, so
that different styles of borrowing would
not be not obscured by methodology
differences or misidentified lending
relationships, based on our experience
with the form. We request comment on
the proposed amendments.
79. Would the proposed amendments
help us and FSOC identify which
advisers and reporting funds may have
counterparty credit risk in the event of
a counterparty failure (including CCP
failure) or other market event that
affects performance by prime brokers or
other counterparties (including CCPs)?
Is there a better way to meet these
objectives?
80. Are the proposed consolidated
counterparty exposure table, its
instructions, and defined terms clear?
Could they be clearer? Are there
circumstances not contemplated by the
instructions that need to be addressed?
Is there an easier way for advisers to
report counterparty exposures that
would provide comparable data? Should
Form PF define the terms ‘‘counterparty
exposure table,’’ ‘‘borrowing and
collateral received (B/CR),’’ ‘‘lending
and posted collateral (L/PC),’’
‘‘synthetic short position,’’ ‘‘cash
borrowing entries,’’ ‘‘cash lending
entries,’’ ‘‘collateral posted entries,’’
‘‘collateral received entries,’’ and
redefine ‘‘gross notional value,’’ as
proposed? For example, should
124 See
current Question 22 and current Question
23.
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‘‘synthetic short position’’ provide a
different list of assets to be included or
excluded? Should Form PF define or
redefine more, fewer, or different terms?
81. Should Form PF require advisers
to identify more or less than only
significant counterparty exposures? Is
the proposed threshold for identifying
the counterparties with the most
significant exposure to and from the
reporting fund the right threshold? Does
it represent an amount of borrowing
from a reporting fund that, if repayment
was required, could be a significant loss
of financing that could result in a forced
unwind and forced sales from the
reporting fund’s portfolio? Is there a
different threshold that would meet this
objective? Should advisers report all
counterparties that meet the threshold,
even if there are more than five such
counterparties? Should advisers report
the five counterparties that the reporting
fund has the greatest exposure to and
from, even if they don’t meet the
proposed threshold?
82. Should Form PF provide more
detailed instructions for advisers to use
to identify the individual
counterparties, as proposed? Could the
instructions be clearer? If Form PF
should have less detailed instructions
on how to identify the counterparties,
how could the Commissions and FSOC
help ensure that the data would be
comparable?
83. Should we require advisers to
report values in U.S. dollars, as
proposed? Alternatively, should Form
PF require advisers to report values as
a percentage of the reporting fund’s net
asset value? Should Form PF require
advisers to report amounts as both U.S.
dollars and as a percentage of the
reporting fund’s net asset value, or
another way?
84. Should Form PF require advisers
to report collateral posted, as proposed?
Would the proposed amendment help
inform the Commissions and FSOC of
the potential impact of a reporting fund
or counterparty default? Is there a better
way to meet this objective?
85. Should Form PF require advisers
to report the counterparty’s LEI, if it has
one?
86. If an adviser selects ‘‘other,’’
should we require the adviser to
describe the entity in Question 4?
Alternatively, should we eliminate the
‘‘other’’ category?
Trading and clearing mechanisms.
We propose to revise how advisers
report information about trading and
clearing mechanisms.125 These types of
125 See current Questions 24, and 25, which we
would redesignate as proposed Questions 29 and
30.
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data inform the Commissions and FSOC
of the extent of private fund activities
that are conducted on and away from
regulated exchanges and clearing
systems, which is important to
understanding systemic risk that could
be transmitted through counterparty
exposures.126 We propose to require
advisers to report (1) the value traded
and (2) the value of positions at the end
of the reporting period, rather than
requiring advisers to report information
as a percentage in terms of value and
trade volumes, as Form PF currently
requires.127 This proposed change is
designed to simplify reporting because
advisers would compute the value
before they convert it into a percentage;
therefore, this proposed change would
eliminate an extra calculation for
advisers. It also is designed to provide
the Commissions and FSOC with data
that can be more efficiently compared
and aggregated among advisers and
other data sources. With data in dollar
values, the Commissions and FSOC
could more effectively estimate the size,
extent, and pace of each hedge fund’s
participation in activity on or away from
regulated exchanges and clearing
systems in relation to total values.
Understanding the size of hedge fund
participation in activity on and away
from regulated exchanges and clearing
systems is important to assessing
systemic risk, because activity that takes
place on regulated exchanges and
clearing systems presents different risks
than activity that takes places away
from regulated exchange and clearing
systems. For example, activity that takes
place away from a regulated exchange or
clearing system may be less transparent,
and may present more credit risk than
activity that takes place on a regulated
exchange and a clearing system that acts
as a central counterparty that guarantees
trades.
We also propose to require advisers to
report information about trading and
clearing mechanisms for transactions in
126 See supra footnote 114 and accompanying text
(discussing the role of CCPs); 2011 Form PF
Adopting Release, supra footnote 3, at n.228, and
accompanying text.
127 Proposed Question 29 would specify that
‘‘value traded’’ is the total value in U.S. dollars of
the reporting fund’s transactions in the instrument
category and trading mode during the reporting
period. Proposed Question 29 also would specify
that, for derivatives, value traded would be the
weighted average of the notional amount of
aggregate derivatives transactions entered into by
the reporting fund during the reporting period,
except for the following: (1) for options, advisers
would use the delta adjusted notional value, and (2)
for interest rate derivatives, advisers would use the
‘‘10-year bond equivalent.’’ This measurement is
designed to track standard industry convention. We
propose to add the term ‘‘10-year bond equivalent’’
to the Form PF Glossary of Terms, as discussed in
section II.C.2 of this Release. See infra footnote 159.
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interest rate derivatives separately from
other types of derivatives. Form PF data
show that interest rate derivatives
represent the largest gross investment
exposure of qualifying hedge funds.128
Therefore, this amendment is designed
to help ensure that the Commissions
and FSOC can identify risks of such a
significant volume of activity on and
away from regulated exchanges and
clearing systems, without the data being
obscured by other types of derivatives.
The proposal would require advisers to
report interest rate derivatives and other
types of derivatives, by indicating the
estimated amounts that were (1) traded
on a regulated exchange or swap
execution facility, (2) traded over-thecounter and cleared by a CCP, and (3)
traded over the counter or bilaterally
transacted (and not cleared by a CCP).
These proposed categories reflect our
understanding of how derivatives may
be traded.
The proposal would continue to
require advisers to report clearing
information concerning repos, but
would specify how to report sponsored
repos, and would specify that advisers
must report reverse repos with repos.129
According to the Fixed Income Clearing
Corporation (‘‘FICC’’), FICC’s sponsored
repo service has expanded in 2017 and
2019, ultimately resulting in daily
volume up to $300 million per day as
of 2021, with a peak in March 2020 of
$564 billion.130 Sponsored repos
incorporate a different structure than
other repos, in that FICC serves as a
counterparty to any sponsored trade and
the sponsored member bears
responsibility for meeting the
obligations of the sponsored member on
all transactions that it submits for
clearing. Adding a particular reference
to sponsored repos would ensure that
128 See
Private Funds Statistics, supra footnote 7.
proposal also would explain that ‘‘repo’’
means ‘‘securities in’’ transactions and ‘‘reverse
repo’’ means ‘‘securities out’’ transactions.
Sponsored repos and sponsored reverse repos
would apply to transactions in which the reporting
fund has been sponsored by a sponsoring member
of the Fixed Income Clearing Corporation. We
would revise how Form PF explains tri-party repos
to help ensure they do not exclude sponsored triparty repos. Currently, Form PF explains that a triparty repo applies where repo collateral is held at
a custodian (not including a CCP) that acts as a
third party agent to both the repo buyer and the
repo seller. We propose to amend Form PF so it
would explain that tri-party repo would apply
where the repo or reverse repo collateral is executed
using collateral management and settlement
services of a third party that does not act as a CCP.
See Form PF Glossary of Terms (modifying the
terms ‘‘repo’’ and ‘‘reverse repo’’) and Question 29
instructions (discussing sponsored repos, sponsored
reverse repos, and tri-party repos).
130 See FICC Sponsored Repo in 2021, by DTCC
Connection Staff (Feb. 9, 2021), available at https://
www.dtcc.com/dtcc-connection/articles/2021/
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129 The
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advisers understand how sponsored
repos cleared by a CCP should be
reported, i.e., as trades cleared at a
CCP.131 Therefore, we propose to
provide a separate line item for
sponsored repos. The proposed
amendment is designed to improve data
quality concerning repos and sponsored
repos, to allow the Commissions and
FSOC to conduct more accurate and
targeted systemic risk assessments and
analysis concerning investor protection
efforts. We also propose to specify that
advisers must report reverse repos with
repos. Current Question 24 requires
advisers to report ‘‘repos,’’ which some
advisers could interpret to include
reverse repos, while others could
interpret as excluding reverse repos.
Therefore, this proposed amendment is
designed to improve data quality.132
The proposal also would revise
current Question 25, which requires
advisers to report the percentage of the
reporting fund’s net asset value related
to transactions not described in current
Question 24, which we would
redesignate as proposed Question 29.
The proposal would, instead, require
advisers to report both the value traded
and the position value as of the end of
the reporting period for transactions not
described in proposed Question 29.
These amendments are designed to
make proposed Question 30 data
comparable with data from proposed
Question 29, so that together, Questions
29 and 30 would provide the
Commissions and FSOC with a
complete data set of the adviser’s
trading and clearing mechanisms during
the reporting period.
We request comment on the proposed
amendments.
87. Would the proposed amendments
enhance analysis of clearance and
settlement, interest rate derivatives, as
well as repos, reverse repos, and
sponsored repos?
88. Should Form PF require advisers
to add repos and reverse repos together
when reporting information about
trading and clearing mechanisms, as
proposed? Alternatively, should Form
PF require advisers to report
information about repos separately from
reverse repos?
89. Do the proposed reporting
categories cover the types of trading and
clearing mechanisms used to trade
derivatives? Should Form PF include
more or fewer trading and clearing
categories?
90. Would the proposed amendments
make data from proposed Questions 29
and 30 comparable, so that together, the
131 Current
132 See
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questions would provide the
Commissions and FSOC with a
complete data set of the adviser’s
trading and clearing mechanisms during
the reporting period? Is there a better
way to meet this objective?
91. Would the proposal to require
advisers to report the value traded and
the value of positions as of the end of
the reporting period improve our ability
to aggregate data and compare data
among advisers? Would requiring the
values, instead of the percentages,
provide the Commissions and FSOC
with a view into the extent of exposures
across reporting funds, which would
inform the Commissions and FSOC as to
how much value would be at stake,
given a market event? Are there better
ways to meet these objectives?
92. Should we amend the terms
‘‘repo’’ and ‘‘reverse repo,’’ as proposed?
Are the proposed definitions more
consistent with how the private fund
industry understands repos and reverse
repos? If not, how should we define the
terms, and would such definitions be
consistent with how the Commissions
use the terms in other contexts? Should
Form PF refer to sponsored repos, as
proposed?
Removing Certain Questions
Concerning Hedge Funds. We propose
to remove current Questions 19 and 21
from the form. Current Question 19
requires advisers to hedge funds to
report whether the hedge fund has a
single primary investment strategy or
multiple strategies. Proposed Question
25, which requires hedge fund advisers
to disclose certain information about
each investment strategy, would provide
this information, as discussed above in
this section II.B.3 of the Release.
We also propose to remove current
Question 21, which requires hedge fund
advisers to approximate what
percentage of the hedge fund’s net asset
value was managed using high
frequency trading strategies. We believe
the form’s question on portfolio
turnover, with proposed revisions,
would better inform our and FSOC’s
understanding of the extent of trading
by large hedge fund advisers and would
better show how larger hedge funds
interact with the markets and provide
trading liquidity.133
We request comments on the
proposed amendments.
93. Should we remove current
Questions 19 and 21, as proposed?
Alternatively, should Form PF keep
current Question 21, but revise it to
improve data quality? For example,
133 See proposed revisions to current Question 27,
as discussed in section II.C of this Release.
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should Form PF define ‘‘high frequency
trading?’’
94. Does the turnover data Form PF
would collect provide more informative
data than current Question 21, which
we propose to remove?
95. Should Form PF require advisers
to report more or less turnover data? For
example, should Form PF require only
large hedge fund advisers to report the
value of turnover during the month for
the qualifying hedge funds that they
advise, as proposed, or should Form PF
require such information for all advisers
who advise hedge funds of any size?
96. Should Form PF remove any other
questions that would be answered by
other questions that would provide the
same or more useful data?
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C. Proposed Amendments Concerning
Information About Hedge Funds
Advised by Large Private Fund Advisers
A private fund adviser must complete
section 2 of Form PF if it had at least
$1.5 billion in hedge fund assets under
management as of the last day of any
month in the fiscal quarter immediately
preceding the adviser’s most recently
completed fiscal quarter.134 This section
requires additional information
regarding the hedge funds these advisers
manage, which is tailored to focus on
relevant areas of financial activity that
have the potential to raise systemic
concerns. We are proposing several
amendments to this section, including
amendments that would remove
aggregate reporting in section 2a, which
we have found to be less meaningful for
analysis and more burdensome for
advisers to report, while preserving and
enhancing reporting on a per fund basis
in section 2b. We also propose to retain
certain questions previously reported by
advisers on an aggregate basis that we
believe are important for data analysis
and systemic risk assessment, but
require reporting on a per fund basis.
Collectively, the proposed changes to
section 2 are designed to provide better
insight into the operations and strategies
employed by qualifying hedge funds
and their advisers, and improve data
quality and comparability to enable
FSOC to monitor systemic risk better
and enhance the Commissions’
regulatory programs and investor
protection efforts. Furthermore, the
proposal would remove certain other
134 Section 2a requires a large hedge fund adviser
to report certain aggregate information about any
hedge fund it advises and section 2b requires a large
hedge fund adviser to report certain additional
information about any hedge fund it advises that
has a net asset value of at least $500 million as of
the last day of any month in the fiscal quarter
immediately preceding the adviser’s most recently
completed fiscal quarter (a ‘‘qualifying hedge
fund’’).
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reporting requirements that we have
found to be less useful based on our
experience with Form PF since
adoption, which would help reduce
reporting burdens for advisers while
preserving the Commissions’ and
FSOC’s regulatory oversight.
Currently, the Form PF Glossary of
Terms defines a ‘‘hedge fund’’ generally
as any private fund (other than a
securitized asset fund):
(a) with respect to which one or more
investment advisers (or related persons
of investment advisers) may be paid a
performance fee or allocation calculated
by taking into account unrealized gains
(other than a fee or allocation the
calculation of which may take into
account unrealized gains solely for the
purpose of reducing such fee or
allocation to reflect net unrealized
losses);
(b) that may borrow an amount in
excess of one-half of its net asset value
(including any committed capital) or
may have gross notional exposure in
excess of twice its net asset value
(including any committed capital); or
(c) that may sell securities or other
assets short or enter into similar
transactions (other than for the purpose
of hedging currency exposure or
managing duration).135
The definition is designed to include
any private fund having any one of three
common characteristics of a hedge fund:
(1) a performance fee that takes into
account market value (instead of only
realized gains); (2) leverage; or (3) short
selling. We request comment on
whether we should amend the
definition of ‘‘hedge fund’’ as such term
is defined in the Form PF Glossary of
Terms in order to address potential data
mismatches and improve data quality.
Specifically, we request comment on the
following:
97. We understand that some
reporting funds may consider
themselves ‘‘private equity funds,’’ but
advisers report them as hedge funds as
Form PF directs because the reporting
fund’s governing documents permit the
fund to engage in certain borrowing and
short selling (even though it did not do
so at any time in the past, for example,
12 months) (a ‘‘deemed hedge fund’’ for
purposes of this Release). Should we
amend the definition of ‘‘hedge fund’’ in
the Form PF Glossary of Terms so that
such deemed hedge funds report as
private equity funds and not hedge
funds? If so, how? Would such changes
improve data quality by excluding
private equity strategies from reporting
as hedge funds and instead requiring
135 See current Form PF Glossary of Terms for the
complete definition.
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such funds to report as private equity
funds? If so, and if we were to amend
the definition of ‘‘hedge fund’’ in Form
PF, should we amend it for all purposes
under Form PF or only certain sections
such as sections 1 and 2? Should we
concurrently make conforming
definitional changes to any other forms,
such as Form ADV (or alternatively
amend Form ADV so it would reference
any revised definition of ‘‘hedge fund’’
in Form PF)?
98. As an example, should we amend
the definition of ‘‘hedge fund’’ so that,
to qualify as a hedge fund under the
leverage prong of the definition, a fund
would have to continue to satisfy
subsection (b) of the definition, but also
must have actually borrowed or used
any leverage during the past 12 months,
excluding any borrowings secured by
unfunded commitments (i.e.,
subscription lines of credit); 136 and to
qualify as a hedge fund under the short
selling prong of the definition, the fund
must have actually engaged in the short
selling activities described in subsection
c of the definition during the past 12
months? 137 If we were to amend the
definition, would excluding actual
borrowings secured by unfunded
commitments (i.e., subscription lines of
credit) appropriately exclude private
equity funds, which typically engage in
such borrowings? Should any amended
definition require actual borrowing or
short selling in the last 12 months?
Alternatively, should any amended
definition require a longer or shorter
time period, such as 18 months or nine
months, or different time periods for
borrowing versus short selling?
99. Should any amended definition
include a requirement for the reporting
fund to provide redemption rights in the
ordinary course or exclude actual
portfolio company guarantees in the
past 12 months (or some other time
period)? What other alternative changes
to any amended definition of ‘‘hedge
fund’’ do you suggest?
100. Should any revised definition
specify that subscription lines of credit
encompass both short term and long
term subscription lines of credit? If so,
136 Subsection (b) of the current definition of
‘‘hedge fund’’ states that a hedge fund is any private
fund (other than a securitized asset fund) that may
borrow an amount in excess of one-half of its net
asset value (including any committed capital) or
may have gross notional exposure in excess of twice
its net asset value (including any committed
capital). See current Form PF Glossary of Terms.
137 Subsection (c) of the current definition of
‘‘hedge fund’’ states that a hedge fund is any private
fund (other than a securitized asset fund) that may
sell securities or other assets short or enter into
similar transactions (other than for the purpose of
hedging currency exposure or managing duration).
See current Form PF Glossary of Terms.
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should we specify what constitutes
‘‘short term’’ and ‘‘long term’’? For
example, should ‘‘short term’’ mean
three to six months, or less than the life
of the fund, and should ‘‘long term’’
mean longer than six months, or the life
of the fund?
101. Would it be appropriate for any
amended definition of ‘‘hedge fund’’ to
continue to include commodity pools or
should commodity pools be excluded?
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1. Proposed Amendments to Section 2a
Removal of aggregate reporting. We
propose to eliminate the requirement for
large hedge fund advisers to report
certain aggregated information about the
hedge funds they manage.138 Based on
our experience using data obtained from
Form PF since its adoption, we have
found that aggregated adviser level
information combines funds with
different strategies and activities, thus
making analyses less meaningful.
Aggregation can mask the directional
exposures of individual funds (e.g.,
positions held by one reporting fund
may appear to be offset by positions
held in a different fund). Additionally,
there can be inconsistencies between
data reported in the aggregate in section
2a and on a per fund basis in section 2b
(e.g., we have observed in some
instances that the sum of fund
exposures advisers report in current
Question 30 on a per fund basis exceed
the aggregate figure reported in current
Question 26). We believe that
aggregating information across funds
may be burdensome for some advisers
because certain advisers may keep fund
records on different systems, and
‘‘rolling-up’’ the data from different
sources to report on the form may be
complex and time consuming. While
advisers may be required to aggregate
certain types of investment holdings
across their funds for other regulatory
purposes (e.g., certain U.S. registered
equities for Form 13F reporting),
advisers generally do not aggregate all
portfolio investment exposure
information across their funds other
138 We propose to remove section 2a and
redesignate section 2b as section 2. In connection
with the proposed removal of section 2a, we
propose to revise the general instructions to make
corresponding changes (including amending
Instruction 3 to reflect the proposed removal of
section 2a), and propose to revise current Question
27 (reporting on the value of turnover in certain
asset classes in advisers’ hedge funds’ portfolios)
and current Question 28 (reporting on the
geographical breakdown of investments held by
advisers’ hedge funds), move each of these
questions to new section 2, and redesignate them
as Question 34 and Question 35, respectively.
Furthermore, in connection with the proposed
changes, we would revise the term ‘‘sub-asset class’’
so it no longer refers to Question 26, which the
proposal would remove.
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than for Form PF reporting purposes,
given that counterparties, markets, and
investors tend to interact with funds on
an individual basis and not in the
aggregate at the adviser level.
We do not believe that removing
section 2a would result in a meaningful
deterioration in the information
collected because the vast majority of
gross hedge fund assets on which
advisers report in the aggregate in
section 2a constitute the gross assets of
qualifying hedge funds that are reported
in section 2b. For example, large hedge
fund advisers reported total gross
notional exposure for qualifying hedge
funds in section 2b that constituted
approximately 91 percent of the total
gross notional exposure reported on an
aggregate basis by large hedge fund
advisers in section 2a as of the same
date.139 Furthermore, as discussed in
section II.B.3. above, we are also
proposing to enhance reporting for all
hedge funds in section 1 (particularly
section 1c), which we believe would
mitigate against potential data gaps that
could result from the removal of section
2a, given that advisers currently report
information on all their hedge funds in
section 2a but only report on qualifying
hedge funds in section 2b. Additionally,
certain information collected in section
2a is duplicative of information already
collected on a per fund basis in section
2b.140 By continuing to require reporting
on a per fund basis, information
reported in section 2b would allow the
Commissions and FSOC to compile
aggregate figures.141
We request comments on the
proposed amendments.
102. Should we remove aggregate
reporting by eliminating section 2a as
proposed? Alternatively, should we
retain a subset of the questions in
section 2a to be reported on an aggregate
basis? If so, which questions and why?
139 As noted above, based on experience with
Form PF since adoption, we have found
information gathered in section 2a for the remaining
9 percent of funds to not be very useful given that
it is aggregated data across different funds.
140 For example, Question 26 of section 2a
requires large hedge fund advisers to report
aggregated information on exposure to different
types of assets, which is effectively the same
exposure information reported on a per fund basis
for each qualifying hedge fund in current Question
30 of section 2b.
141 Additionally, we are proposing to move
current Question 31 (base currency) currently
required only for qualifying hedge funds to section
1b. We are also proposing to enhance section 1c to
require more detailed information about hedge
funds’ borrowing and financing arrangements
(including posted collateral) and also proposing to
revise current Question 25 and current Question 26
to require end of period reporting of the value of
certain instrument categories (including listed
equities, interest rate derivatives and other
derivatives, and repo/reverse repos).
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103. Do you agree that counterparties,
markets, and investors tend to look at
funds on an individual basis and not in
the aggregate at the adviser level and as
such the proposed removal of section 2a
would reduce the burden on advisers
having to report fund level data on an
aggregated basis?
104. Do you agree that aggregating
information across funds may be
burdensome for some advisers? Do some
advisers maintain fund records on
different systems such that ‘‘rolling-up’’
the data from different sources to report
on the form would be complex and time
consuming?
2. Proposed Amendments to Section 2b
Current section 2b requires a large
hedge fund adviser to report certain
additional information about any hedge
fund it advises that is a qualifying hedge
fund.142 As noted in the 2011 Form PF
Adopting Release, information reported
in section 2b is designed to assist FSOC
in monitoring the composition of hedge
fund exposures over time as well as the
liquidity of those exposures. The
information also aids FSOC in its
monitoring of credit counterparties’
unsecured exposure to hedge funds as
well as hedge funds’ exposure and
ability to respond to market stresses and
interconnectedness with CCPs. Based on
our experience with the data since Form
PF was first adopted and our
consultations with FSOC, we are
proposing to amend section 2b to do the
following:
(1) Enhance, expand, and simplify
investment exposure reporting;
(2) Revise open and large position
reporting;
(3) Revise borrowing and counterparty
exposure reporting;
(4) Revise market factor effects
reporting; and
(5) Make certain other changes
designed to streamline and enhance the
value of data collected on qualifying
hedge funds by: (a) adding reporting on
currency exposure, turnover, country
and industry exposure; (b) adding new
reporting on CCPs; (c) streamlining risk
metric reporting and collecting new
information on investment performance
by strategy and portfolio correlation;
and (d) enhancing portfolio and
financing liquidity reporting.
a. Investment Exposure Reporting.
Reporting on qualifying hedge fund
exposures to different types of assets has
been critical in helping to monitor the
composition of hedge fund exposures
over time, particularly as it relates to
142 In connection with the proposed amendments,
we propose to redesignate section 2b as section 2.
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systemic risk monitoring. The proposal
would (1) replace the table format of
current Question 30, which we would
redesignate as Question 32, with
narrative instructions and a ‘‘dropdown’’ menu while also revising the
instructions to specify how to report
certain positions, (2) require reporting
based on ‘‘instrument type’’ within subasset classes to identify whether the
fund’s investment exposure is achieved
through cash or physical investment
exposure, through derivatives or other
synthetic positions, or indirectly (e.g.,
through a pooled investment such as an
ETF, an investment company, or a
private fund), (3) require the calculation
of ‘‘adjusted exposure’’ for each subasset class (i.e., require (in addition to
value as currently reported) the
calculation of ‘‘adjusted exposure’’ for
each sub-asset class that allows netting
across instrument types representing the
same reference asset within each subasset class, and, for fixed income,
within a prescribed set of maturity
buckets), (4) require uniform interest
rate risk measure reporting for sub-asset
classes that have interest rate risk (while
eliminating the current option to report
one of duration, weighted average tenor
(WAT) or 10-year equivalents), and (5)
amend the list of reportable sub-asset
classes consistent with these other
changes and collect enhanced
information for some asset types.143
Narrative reporting instructions and
additional information on how to report.
The proposal would replace the existing
complex table in current Question 30
with reporting instructions that would
use a series of ‘‘drop-down’’ menu
selections for each sub-asset class and
the applicable information required for
each sub-asset class. This approach is
similar to the narrative instructions (and
drop-down menus) already in effect for
current section 3 with respect to
liquidity fund position reporting.144 We
believe that these changes and new
format would simplify and specify how
to report the required information in
proposed Question 32. Additionally, the
proposed changes may reduce filer
burdens compared to the current form
because advisers are currently required
to enter ‘‘N/A’’ in each field for which
there is not a relevant position, while
the proposal would only require
advisers to provide information for subasset classes in which their qualifying
hedge funds hold relevant positions.
Furthermore, the proposal would
143 In connection with the proposed amendments,
we also propose to remove Question 44, which
under the proposal would be duplicative of the new
reporting requirements in proposed Question 32.
144 See Form PF, Section 3, Question 63(f) and (g).
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require advisers to report the absolute
value of short positions, include
positions held in side-pockets as
positions of the reporting fund, and
include any closed out and OTC
forward positions that have not yet
expired or matured.
We propose to amend the instructions
to current Question 30 to specify how
advisers should classify certain
positions. Specifically, the proposed
instructions would require advisers to
choose the sub-asset class that describes
the position with the highest degree of
precision, which we believe would
result in more accurate classification of
positions and therefore better data,
rather than simply noting that any
particular position should only be
included in a single sub-asset class. This
proposed change is designed to instruct
advisers on how to classify positions
that could be accurately classified in
multiple sub-asset classes, and is
consistent with SEC staff Form PF
Frequently Asked Questions.145 The
proposal also would add a new
instruction that directs advisers to
report cash borrowed via reverse repo as
the short value of repos, and refer
advisers to the proposed revised
definitions of ‘‘repo’’ and ‘‘reverse repo’’
in the Glossary of Terms, also consistent
with SEC staff Form PF Frequently
Asked Questions.146 We believe this
proposed change would reduce
confusion on how to report repo
information and help reduce filer errors.
Finally, the amended instructions also
would include a revised list of sub-asset
classes.147
We also propose to require advisers to
provide additional explanatory
information in situations where a
qualifying hedge fund reports long or
short dollar value exposure to ‘‘catchall’’ sub-asset class categories 148 equal
to or exceeding either (1) five percent of
a fund’s net asset value or (2) $1
billion.149 We have observed that some
145 See Form PF Frequently Asked Questions,
supra footnote 79, Question 26.2.
146 See Form PF Frequently Asked Questions,
supra footnote 79, Question 26.5. See also supra
footnote 129.
147 The proposed amendments to this list, as well
as other changes to instructions in specific parts of
proposed Question 32, are discussed below.
148 These sub-asset classes include: loans
(excluding leveraged loans and repos), other
structured products, other derivatives, other
commodities, digital assets, and investments in
other sub-asset classes.
149 Some filers report significant exposure to
these ‘‘other’’ categories. For example, the public
Private Fund Statistics Second Quarter 2020
(‘‘Private Fund Statistics Q2 2020’’) (Table 46)
shows about $100 billion in aggregate QHF GNE
reported as ‘‘other loans,’’ more than other asset
categories of interest, such as ABS/structured
products (ex. MBS but including CLO/CDOs) (about
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funds report significant amounts of
assets in these ‘‘catch-all’’ categories.
We chose the five percent threshold
level because we believe it represents a
level that would identify exposure that
could be material to a fund’s investment
performance. The $1 billion threshold
represents a level for large funds (e.g.,
those with net asset values in excess of
$20 billion) that is large enough so as to
have potential systemic risk
implications even if the position is less
than five percent of the fund. We
propose to add this explanatory
requirement to inform our
understanding of significant exposure
reported in these ‘‘other’’ sub-asset
classes better, which we believe is
important for assessing systemic risk.
We request comment on the proposed
amendments.
105. Should we amend the format of
current Question 30 as proposed? Do the
proposed narrative instructions clarify
and simplify reporting for advisers?
Alternatively, if the proposed format
creates additional complexity for filers,
should only a subset of qualifying hedge
funds be required to complete proposed
Question 32? If so, what should the
threshold be and why?
106. Do you agree that the proposed
changes requiring advisers to choose the
sub-asset class that describes positions
with the highest degree of precision
would result in more accurate
classification of positions and therefore
better data for analysis? If not, what
alternatives do you suggest?
107. Currently, most sub-asset classes
(e.g., equities, corporate bonds) are not
further divided to account for exposure
by the sub-asset class to a particular
country or region. Instead, other
questions on Form PF collect this
information (e.g., current Question 28).
Should we further divide sub-asset
classes by geographic exposure? If so,
would the separation of sub-asset
classes by U.S. and non-U.S. be helpful
or would even more granularity be
appropriate?
108. As an alternative to the proposed
requirement that advisers provide
additional explanatory information in
situations where a qualifying hedge
fund has significant exposure to ‘‘catchall’’ sub-asset class categories (i.e., if the
long or short dollar value is equal to or
exceeds either (1) five percent of a
fund’s net asset value or (2) $1 billion),
should we add additional sub-asset
classes to further break out the types of
instruments that are being classified in
$53 billion) and convertible bonds ($95 billion) as
of 2020 Q1. See Private Fund Statistics Q2 2020
available at https://www.sec.gov/divisions/
investment/private-funds-statistics/private-fundsstatistics-2020-q2.pdf.
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these ‘‘catch-all’’ buckets? If we should
add more sub-asset classes, what should
they be? Is the proposed threshold for
requiring that advisers provide
additional explanatory information set
at the appropriate level? Should it be
higher or lower?
109. With respect to sub-asset classes
pertaining to loans, should we add
additional sub-asset classes to capture
loans originated by banks versus other
entities for purposes of monitoring
systemic risk? Should we require
reporting on private funds’ origination
activities in a separate question that
would ask whether the private fund
originate loans and if so much has it
originated?
110. Should any other sub-asset
classes reflected in the proposal be
broken out separately in proposed
Question 32? If so, what sub-asset
classes and why?
111. Should the short dollar value of
repo match borrowings by reverse repo
reported in the counterparty exposure
table in Question 41, and if they do not
match, should we require explanation?
112. The current instructions to
Question 30 require advisers to include
closed out and OTC forward positions
that have not yet expired/matured.
However, SEC staff Form PF Frequently
Asked Question 44.1 states that
reporting is not required for closed out
positions if closed out with the same
counterparty if there is no remaining
legally enforceable obligation. Further,
we understand that advisers use
different internal methods to account for
closed out and OTC forward positions
not yet expired/matured, which
introduces inconsistencies in data
reported on Form PF. Should we require
advisers to report closed out and OTC
forward positions that have not yet
expired/matured even if closed out as
suggested by the current instructions?
Alternatively, should we only require
reporting unless the OTC forward
positions are closed out with the same
counterparty and there is no remaining
legally enforceable obligation
(consistent with our proposed revision
to Instruction 15)?
113. Is it clear in proposed Question
32 how to classify positions in certain
sub-asset classes as ‘‘long’’ or ‘‘short’’ in
light of the proposed changes to
Instruction 15 150 with respect to
classifying positions? Should we
provide additional guidance specific to
proposed Question 32? If so, what
additional instructions or guidance
would be helpful?
114. Current Question 30 and several
other current and/or proposed questions
150 See
discussion at Section II.D of this Release.
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in Section 2 of Form PF would not be
necessary if large hedge fund advisers
instead filed information about each
qualifying hedge fund’s portfolio
positions similar to what is required by
Section 3 for large liquidity fund
advisers or on Form N–PORT for
registered investment companies.
Should we require, or permit, large
hedge fund advisers to file this kind of
position level information for qualifying
hedge private funds instead of, or as an
optional alternative to, responding to
current Question 30 and certain other
questions concerning portfolio holdings,
such as position concentrations,
currency, geographic and industry
exposure, and market factor testing? For
example, if in lieu of completing current
Question 30 (exposure reporting),
current Question 28 (country exposure),
current Question 34 (position
concentration), current Question 35
(large positions), and current Question
44 (aggregate value of derivatives
positions), and potentially additional
questions including those concerning
counterparty exposures, advisers could
instead choose to file position level
information, would this help alleviate
the reporting burden?
Separate reporting for positions held
physically, synthetically or through
derivatives and indirect exposure. The
proposal would require advisers to
report the dollar value of a qualifying
hedge fund’s long positions and the
dollar value of the fund’s short positions
in certain sub-asset classes by
‘‘instrument type’’ (i.e., cash/physical
instruments, futures, forwards, swaps,
listed options, unlisted options, and
other derivative products, ETFs,
exchange traded product, U.S. registered
investment companies (excluding ETFs
and money market funds), non-U.S.
registered investment companies,
internal private fund or external private
fund, commodity pool, or other
company, fund or entity).151 For each
151 See Form PF Glossary of Terms (proposed
definition of ‘‘instrument type’’). See also proposed
Question 32(a). Sub-asset classes that would require
reporting by instrument type (see proposed
Question 32(a)(1)) include: listed equity issued by
financial institutions; American Depositary
Receipts; other single name listed equity; indices on
listed equity; other listed equity; unlisted equity
issued by financial institutions; other unlisted
equity, investment grade corporate bonds issued by
financial institutions (other than convertible
bonds); investment grade corporate bonds not
issued by financial institutions (other than
convertible bonds); non-investment grade corporate
bonds issued by financial institutions (other than
convertible bonds); non-investment grade corporate
bonds not issued by financial institutions (other
than convertible bonds); investment grade
convertible bonds issued by financial institutions;
investment grade convertible bonds not issued by
financial institutions; non-investment grade
convertible bonds issued by financial institutions;
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month of the reporting period, advisers
would be required to report long and
short positions in these sub-asset classes
held physically, synthetically or
through derivatives, and indirectly
through certain entities,152 separately in
order to provide the Commissions and
FSOC sufficient information to
understand, monitor, and assess
qualifying hedge funds’ exposures to
certain types of assets and investment
products. The current instructions (and
the associated definitions) require
advisers to combine exposure held
physically, synthetically, or through
non-investment grade convertible bonds not issued
by financial institutions; U.S. treasury bills; U.S.
treasury notes and bonds; agency securities; GSE
bonds; sovereign bonds issued by G10 countries
other than the U.S, other sovereign bonds
(including supranational bonds); U.S. state and
local bonds; MBS; ABCP; CDO (senior or higher);
CDO (mezzanine); CDO (junior equity); CLO (senior
or higher); CLO (mezzanine); CLO (junior equity);
other ABS, other structured products; U.S. dollar
interest rate derivatives; non-U.S. currency interest
rate derivatives; foreign exchange derivatives;
correlation derivatives; inflation derivatives;
volatility derivatives; variance derivatives; other
derivatives, agricultural commodities; crude oil
commodities; natural gas commodities; power and
other energy commodities; gold commodities; other
(non-gold) precious metal commodities; base metal
commodities; other commodities; real estate; digital
assets; investments in other sub-asset classes. These
sub-asset classes are reported at the sub-asset class
level and not by instrument type (see proposed
Question 30(a)(2)): leveraged loans, loans
(excluding leveraged loans and repo); overnight
repo, term repo (other than overnight), open repo;
sovereign single name CDS; financial institution
single name CDS; other single name CDS, index
CDS; exotic CDS; U.S. currency holdings, non-U.S.
currency holdings, certificates of deposit, other
deposits, money market funds, other cash and cash
equivalents (excluding bank deposits, certificates of
deposit and money market funds). In connection
with the proposal we also propose to amend the
Glossary of Terms to (i) amend the definitions of
agency securities, convertible bonds, corporate
bonds, GSE bonds, leveraged loans, sovereign
bonds, and U.S. treasury securities, in each case to
include positions held indirectly through another
entity, (ii) remove the definitions of crude oil,
derivative exposures to unlisted equities, gold,
natural gas, and power, and (iii) amend the
definitions of commodities and other commodities.
See Form PF Glossary of Terms. Additionally, for
foreign exchange derivatives, advisers would report
forex swaps and currency swaps separately, and in
determining dollar value, would not net long and
short positions within sub-asset classes or
instrument types (with the exception of spot foreign
exchange longs and shorts).
152 In determining the reporting fund’s exposure
to sub-asset classes for positions held indirectly
through entities, the proposal would permit
advisers to allocate the position among sub-asset
classes and instrument types using reasonable
estimates consistent with its internal methodologies
and conventions of service providers. Furthermore,
if a reporting fund’s position in any such entity
represents less than (1) 5% of the reporting fund’s
net asset value and (2) $1 billion, the proposal
would permit advisers to report an entire entity
position in one sub-asset class and instrument type
that best represents the sub-asset class exposure of
the entity, unless the adviser would allocate the
exposure more granularly under its own internal
methodologies and conventions of its service
providers.
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derivatives when reporting certain fixed
income and other sub-asset classes.153
Even when certain sub-asset classes
currently separate physical and
derivative exposure (e.g., listed
equities), all derivative instrument types
are combined regardless of each
derivative instrument type’s risk
characteristics. Furthermore, the form’s
current instructions for reporting
investment exposure obtained through
funds or other entities are different. For
example, instructions require advisers
to categorize ETFs based on the assets
the ETF holds, while other registered
investment companies are reported as a
separate sub-asset class, and may
obscure the extent of a reporting fund’s
exposure to particular sub-asset classes.
This difference and lack of granularity
in reporting makes it difficult to
understand the activities of qualifying
hedge funds and limits the utility of
data collected for purposes of
understanding the role qualifying hedge
funds play in certain market events. For
example, when monitoring funds’
activities during recent market events
like the March 2020 COVID–19 turmoil,
the existing aggregation of U.S. treasury
securities with related derivatives did
not reflect the role hedge funds played
in the U.S treasury market.
We request comment on the proposed
amendments.
115. Do advisers’ internal risk
reporting systems track long and short
positions by instrument type? Does the
proposed definition of ‘‘instrument
type’’ present different types of risk
such that it would be valuable to collect
information separately for each
instrument? Are the proposed
instrument types appropriate?
Alternatively, should we aggregate
instrument types so that there are fewer
options or should there be a different set
of instrument types for different subasset classes? If so, what should they be?
116. Should we require reporting of
dollar value by instrument type as
proposed or for fewer sub-asset classes?
117. In proposed Question 32 we
would not require advisers to report
positions in certain sub-asset classes by
instrument type 154 because we
153 We propose to require advisers to report the
dollar value of long and short positions for the subasset class (and not instrument type) for following
sub-asset classes: leveraged loans, loans (excluding
leveraged loans and repo); overnight repo, term
repo (other than overnight), open repo; sovereign
single name CDS; financial institution single name
CDS; other single name CDS, index CDS; exotic
CDS; U.S. currency holdings, non-U.S. currency
holdings, certificates of deposit, other deposits,
money market funds, other cash and cash
equivalents (excluding bank deposits, certificates of
deposit and money market funds). See proposed
Question 32(a).
154 See supra footnote 151.
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understand that exposure to these subasset classes would generally be held
physically (e.g., currency holdings) or
through a single instrument type (e.g.,
repo and credit-default swaps). Should
we also require reporting by instrument
type for any of these sub-asset classes?
118. Do the proposed amendments
better capture exposures to sub-asset
classes held physically, synthetically or
through derivatives, and indirectly
through certain entities? If not, how
should we modify the proposal to better
capture these types of exposures?
Adjusted exposure reporting. While
we would continue to require advisers
to report ‘‘gross’’ long and short
exposure, i.e., the dollar value of a
qualifying hedge fund’s long positions
and dollar value of the fund’s short
positions for various sub-asset classes
(and by instrument type for certain subasset classes as explained above), we
propose to require advisers to also
report the ‘‘adjusted’’ exposure of long
and short positions for each sub-asset
class in which a fund has a reportable
position.155 Based on our experience,
we have found that gross exposure
reporting, while useful because the
information indicates fund size on a
comparable basis among funds, may
inflate some qualifying hedge funds’
reported long and short exposures in a
way that does not properly represent the
economic exposure and market risk of a
reporting fund’s portfolio. For example,
when only looking at gross exposure,
certain relative value strategies that are
designed to match long and short
exposures in the same or similar (highly
correlated) assets may reflect very high
leverage, but not have the same level of
risk as portfolios with less leverage but
that are more exposed directionally.
Furthermore, some advisers, for
purposes of managing risk, do not view
their portfolio on a ‘‘gross’’ basis
because they do not believe it provides
a meaningful measure of risk. We
believe that ‘‘gross’’ exposure reporting
by itself presents an incomplete picture
that represents a significant data gap for
purposes of systemic risk analysis.
We propose to require advisers to
determine adjusted exposure for each
‘‘sub-asset’’ using a specified
methodology that is designed to
facilitate comparisons of the reported
data. Specifically, the proposal would
require advisers to calculate and report
‘‘adjusted exposure’’ of long and short
positions for each sub-asset class by
netting (1) positions that have the same
underlying ‘‘reference asset’’ across
155 Proposed Question 32(b). See also Form PF
Glossary of Terms (proposed definition of ‘‘adjusted
exposure’’).
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‘‘instrument type’’ (i.e., cash/physical
instruments, futures, forwards, swaps,
listed options, unlisted options, other
derivative products, and positions held
indirectly through another entity such
as ETFs, other exchange traded
products,156 U.S. registered investment
companies (excluding ETFs and money
market funds), investments in non-U.S.
registered investment companies,157
other private funds, commodity pools,
or other companies, funds or entities)
and (2) fixed income positions that fall
within certain predefined maturity
buckets (i.e., 0 to 1 year, 1 to 2 year, 2
to 5 year, 5 to 10 year, 10 year, 10 to
15 year, 15 year, 15 to 20 year, and 20+
year).158
For purposes of determining
‘‘adjusted exposure,’’ we propose to
permit cross counterparty netting
consistent with information reported by
a fund internally and to current and
prospective investors, because we
believe it would better reflect the fund’s
economic exposure. For example, a fund
with market-neutral trades may lose
substantial amounts of capital in a
period of market stress if prices diverge,
regardless of the identities of the
counterparties. Additionally,
counterparty identification may be
156 In connection with this proposed amendment,
we also propose to define ‘‘exchange traded
product’’ as ‘‘an investment traded on a stock
exchange that invests in underlying securities or
assets, such as an ETF or exchange traded note.’’
See Form PF Glossary of Terms. Given that the
exchange traded product market has grown
significantly since Form PF was first adopted, we
believe that activity in exchange traded products
may present different systemic risks than traditional
listed equities and other instruments that might be
used to obtain exposure to underlying assets owned
within an ETF. Furthermore, we believe added
insight into whether the underlying sub-asset class
exposure is held through an ETF would enhance
FSOC’s analysis of systemic risk associated with
this asset class.
157 See Form PF Glossary of Terms (proposed
definition of ‘‘investments in non-U.S. registered
investment companies’’). Furthermore, we also
propose to remove the term ‘‘U.S. registered
investment companies’’ from the Form PF Glossary
of Terms.
158 See Form PF Glossary of Terms. We propose
to define ‘‘reference asset’’ as a security or other
investment asset to which a fund is exposed
through direct ownership (i.e., a physical or cash
position), synthetically (i.e. the subject of a
derivative or similar instrument held by the fund),
or indirect ownership (e.g., through ETFs, other
exchange traded products, U.S. registered
investment companies, non-U.S. registered
investment companies, internal private funds,
external private funds, commodity pools, or other
companies, funds, or entities). An adviser may
identify a reporting fund’s reference assets
according to its internal methodologies and the
conventions of service providers, provided that
these methodologies and conventions are
consistently applied, do not conflict with any
instructions or guidance relating to Form PF and
reported information is consistent with information
it reports internally and to investors and
counterparties.
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ambiguous for some positions, such as
when a fund simply has a long position
in an equity security traded over an
exchange or purchased from a broker
without the use of any financing.
Finally, if a fund does not net across
all instrument types in monitoring the
economic exposure of the fund’s
investment positions for purposes of
internal reporting and reporting to
investors, we would (in addition to
adjusted exposure determined as
specified above) also require the adviser
to report adjusted exposure based on an
adviser’s internal methodologies and
describe in Question 4 how the adviser’s
internal methodology differs from the
standard approach in proposed
Question 32. This additional
information would provide better
insight into how these advisers assess
the economic exposure of their
reporting fund’s portfolio, while still
ensuring an adviser provides
information that supports our and
FSOC’s ability to aggregate and compare
the data across funds.
We request comment on the proposed
amendments.
119. The proposal would permit
advisers to net across counterparties
without limit if consistent with
methodologies used for internal
reporting and reporting to investors. Is
this appropriate? Alternatively, should
we only allow cross-counterparty
netting to the extent that it is permitted
by legal agreement?
120. Is the proposed definition of
‘‘reference asset’’ sufficiently clear?
Should we instead propose a definition
that tailors the definition to different
asset classes (e.g., repo exposures could
be netted in accordance with GAAP
rules for balance sheet netting, treasury
exposures could be netted within
maturity buckets)?
121. The proposed definition of
‘‘reference asset’’ specifies using the
cheapest-to-deliver security for bond
futures. Should additional or alternative
approaches for bond futures be included
in the proposed definition? Are there
other potentially ambiguous cases that
should be clarified? If so, what are they?
122. Is the proposed method for
determining adjusted exposure
appropriate? For example, is the
proposed netting of fixed income
positions that fall within certain
predefined maturity buckets
appropriate? Should we identify
additional or different maturity buckets?
If so, which maturity buckets?
123. As an alternative, should we
instead require ETFs, exchange traded
products, U.S. and non-U.S. registered
investment companies, other private
funds, commodity pools, or other
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companies, funds or entities to be
reported as stand-alone sub-asset
classes?
Require advisers to report a uniform
interest rate risk measure. We propose
to require advisers to report the 10-year
zero coupon bond equivalent 159 for all
sub-asset classes with interest rate risk
(by instrument type if applicable) 160
rather than providing advisers with a
choice to report duration, weighted
average tenor (‘‘WAT’’), or an
unspecified 10-year bond equivalent.161
The proposal would require advisers to
report the 10-year zero coupon bond
equivalent of the dollar value of long
and short positions in each sub-asset
class (and by instrument type, if
applicable) as well as for the adjusted
exposure of long and short exposures for
each sub-asset class for each monthly
period.
The proposed change is designed to
improve reporting and obtain better
data, because the current approach,
while providing optionality, makes it
difficult to compare and aggregate data
reported by different funds effectively.
Furthermore, we believe that the 10-year
zero coupon bond equivalent is
commonly used by hedge fund advisers
and would be a better and more
consistent measure of interest rate risk
than duration, WAT, or the current
unspecified 10-year equivalent. WAT
159 We are proposing a new glossary definition of
10-year bond equivalent to explain that the term 10year bond equivalent means ‘‘the equivalent
position in a 10-year zero coupon bond, expressed
in the base currency of the reporting fund.’’ See
Form PF Glossary of Terms (proposed definition of
‘‘10-year bond equivalent’’). We also would make a
conforming change to the definition of interest rate
derivative to use this new definition.
160 We propose to require advisers to report the
10-year zero coupon bond equivalent for the
following sub-asset classes: investment grade
corporate bonds issued by financial institutions
(other than convertible bonds); investment grade
corporate bonds not issued by financial institutions
(other than convertible bonds); non-investment
grade corporate bonds issued by financial
institutions (other than convertible bonds); noninvestment grade corporate bonds not issued by
financial institutions (other than convertible
bonds); investment grade convertible bonds issued
by financial institutions; investment grade
convertible bonds not issued by financial
institutions; non-investment grade convertible
bonds issued by financial institutions; noninvestment grade convertible bonds not issued by
financial institutions; U.S. treasury bills; U.S.
treasury notes and bonds; U.S. agency securities;
GSE bonds; sovereign bonds issued by G10
countries other than the U.S; other sovereign bonds
(including supranational bonds); U.S. state and
local bonds; leveraged loans; loans (excluding
leveraged loans and repo); overnight repo; term
repo (other than overnight); open repo; MBS; ABCP;
Senior or higher CDO; Mezzanine CDO; Junior
equity CDO; Senior or higher CLO; Mezzanine CLO;
Junior equity CLO; other ABS; other structured
product; U.S. dollar interest rate derivatives; nonU.S. currency interest rate derivatives; and
certificates of deposit. See proposed Question 32(c).
161 See proposed Question 32(c).
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may be an incomplete measure because
it does not always reflect the presence
of options embedded in bonds or
differing sensitivity to interest rate
changes in circumstances where base
currencies are subject to a higher or
lower risk-free rate, and it also may not
be meaningful for interest rate
derivative products. Duration can tend
toward infinity for certain derivatives,
which can provide little meaning or
utility. In addition, methodologies for
calculations of duration and a 10-year
equivalent (if not standardized to a zero
coupon bond) may vary, which can
result in variability among calculations.
Therefore, we believe that by
eliminating additional reporting
options, requiring the 10-year zero
coupon bond equivalent would provide
a common denominator across funds
that advisers would be able to easily
calculate and that would provide a
consistent and comparable metric. In
this regard, we do not believe the
proposed requirement would create an
additional burden for advisers that
currently report based on a 10-year
equivalent for these types of assets,
which we estimate represents roughly
40 percent of the total number of
advisers responding to Question 30.162
We request comment on the proposed
amendments.
124. Are the proposed changes with
respect to reporting of the 10-year zero
coupon bond appropriate? If not, what
alternative do you suggest?
125. What would be the burden on
advisers of standardizing reporting to
the 10-year zero coupon bond
equivalent for sub-asset classes with
interest rate risk, by instrument type?
126. Alternatively, should we use a
measure other than the 10-year zero
coupon bond equivalent and if so, what
measure should be used (e.g., duration,
WAT or another measure?).
127. As an alternative to the 10-year
zero coupon bond equivalent, we
considered whether to standardize the
interest rate risk measure to DV01,
which we would define as the gain or
loss for a 1 basis point decline in the
risk-free interest rate, expressed in U.S.
dollars. In this regard, we understand
that both duration and a 10-year bond
equivalent rely on an initial calculation
of DV01. Would DV01 be a better
alternative for standardization to
provide consistent reporting across all
funds compared to the 10-year zero
coupon bond equivalent? If DV01 is
preferred, should we use a different
formula (e.g., a 1 basis point increase)?
If we should use a different formula,
162 Based on analysis of Form PF data 2021Q4
and 2020Q4.
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what should it be and why? Would the
burden on advisers of standardizing
reporting to DV01 be different than
standardizing to the 10-year zero
coupon bond equivalent?
128. Should we define 10-year bond
equivalent in the Glossary of Terms as
‘‘the equivalent position in a 10-year
zero coupon bond, expressed in the base
currency of the reporting fund,’’ as
proposed? The glossary definition of
‘‘interest rate derivative’’ requires
reporting relating to interest rate
derivatives to be presented as ‘‘in terms
of 10-year bond-equivalents.’’
129. Do you agree that the 10-year
zero coupon bond equivalent is
commonly used by hedge fund advisers
and would be a better and more
consistent measure of interest rate risk
than duration, WAT, or the current
unspecified 10-year equivalent?
Amended list of sub-asset classes. In
proposed Question 32, we would revise
the list of reportable sub-asset classes in
two ways. First, some sub-asset classes
are consolidated and tailored to reflect
our proposed reporting of the dollar
value of long and short positions by
instrument type. For example, sub-asset
classes for listed and unlisted equity
derivatives are combined with sub-asset
classes for listed and unlisted equities,
and similarly, sub-asset classes for
physical commodities and commodity
derivatives are combined.163 Likewise,
some current sub-asset classes would
now be reflected as instrument types,
such as internal private funds, external
private funds and registered investment
companies (now separated in to ETFs,
U.S. registered investment companies
and non-U.S. registered investment
companies). Second, the proposal
would add new sub-asset classes to
provide additional information to help
the Commissions and FSOC better
understand qualifying hedge funds’
investment exposures to certain asset
types, and reduce reporting in certain
‘‘catch-all’’ sub-asset classes, such as
‘‘other listed equity.’’
Specifically, the proposal would: (1)
expand equity exposure reporting to add
sub-asset classes for (a) listed equity
163 In connection with the proposed amendments,
we would amend the definitions of ‘‘listed equity’’
and ‘‘unlisted equity’’ to reflect that filers should
include synthetic or derivative exposure as well as
positions held indirectly through another entity
(e.g., through an ETF, exchange traded product,
U.S.-registered investment companies, non-U.S.
registered investment companies, internal private
fund or external private fund, commodity pool, or
other company, fund or entity). Additionally, we
would amend the definition of ‘‘listed equity
derivatives’’ to include derivatives relating to ADRs,
and other derivatives relating to indices on listed
equities. See Form PF Glossary of Terms (proposed
definition of ‘‘listed equity,’’ ‘‘unlisted equity,’’ and
‘‘listed equity derivatives’’).
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securities (including new sub-asset
classes for other single name listed
equities and indices on listed equities),
and (b) American depository receipts
(‘‘ADRs’’); (2) add additional sub-asset
classes for reporting ‘‘repo’’ and
‘‘reverse repo’’ positions, based on term;
(3) add additional sub-asset classes for
asset backed securities (‘‘ABS’’) and
other structured products; (4) add new
sub-asset classes and revise existing
sub-asset classes that capture certain
derivatives, including certain credit
derivatives and volatility and variance
derivatives; (5) specify sub-asset classes
pertaining to investments in cash and
cash equivalents and commodities; and
(6) add a new sub-asset class for digital
assets.
Listed Equity Securities
We propose to add new sub-asset
classes for certain categories of listed
equity securities, specifically, for other
single name listed equities and indices
on listed equities. This change is
designed to provide added granularity
to reporting on listed equities 164 given
the potential impact of these new subasset classes from an overall systemic
risk perspective, as the form currently
only requires advisers to single out and
report for listed equities issued by
financial institutions with all other
listed equities reported in a catch-all
category ‘‘other listed equity.’’
Identifying single equities separately
from equity index exposure can help
distinguish broadly diversified
portfolios from those that could be more
concentrated, and also help to identify
what strategies are being pursued by
multi-strategy funds. Additionally,
single equity positions may be more
vulnerable to short squeezes 165 (i.e., a
type of manipulation in which prices
are manipulated upward to force short
sellers out of their positions, as short
sellers are required by brokers to
maintain margin above a certain level,
and as prices rise short sellers must add
cash to their margin accounts or close
out their short positions) than index
positions, so the level of granularity the
proposal would obtain with respect to
this information would help to identify
164 See current Question 26 and current Question
30, which require reporting on listed equities but
do not separate out single names from indices.
Investments in single name equities involve
materially more idiosyncratic risks, such as the
potential for more extreme price movements that
are not correlated to other market movements, than
investments in indices, and therefore we propose to
require separate reporting.
165 Single stock shorts often account for a higher
portion of the available float and/or often have a
larger days to cover (i.e., the number of trading days
to cover a short) than do shorts on ETFs. As a result,
a potential need to cover a short could generally
have a more pronounced effect on single stocks.
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better entities that may be affected
during a short squeeze event.
We request comments on the
proposed amendments.
130. Should we add new sub-asset
classes for other single name listed
equities and indices on listed equities as
proposed? Are the proposed categories
appropriate? If not, is there another
alternative that we should use?
ADRs
We propose to add a new sub-asset
class for ADRs in line with how ADRs
are reported on the CFTC’s Form CPO–
PQR.166 While ADRs are purchased in
U.S. dollars, these instruments have
currency risk because the underlying
security is priced in its home country
currency, and the ADR’s U.S. dollar
price fluctuates one-for-one with each
movement in the home currency.
Accordingly, the proposal would
require ADRs to be reported separately
from other listed equity instruments.
This requirement also would help
increase the utility of the information
reported under the ‘‘other listed equity’’
sub-asset class on Form PF, which
requires reporting of multiple other subasset classes.
We request comment on the proposed
amendments.
131. Should we break out ADRs
separately from the ‘‘other listed equity’’
category on Form PF as proposed?
Repurchase Agreements (‘‘Repos’’)
We propose to add additional subasset classes to the ‘‘repos’’ section of
proposed Question 32 to capture a
breakdown of repos by term (e.g.,
overnight, other than overnight, and
open term). Hedge funds often borrow
cash overnight and pledge securities
such as government bonds as collateral.
We believe that collecting more
information on the different types of
repos held by qualifying hedge funds
would allow the Commissions and
FSOC to understand better the role of
these funds in potentially amplifying
funding stresses and the risks associated
with short-term funding for certain
trading strategies, particularly in light of
the issues the repo market experienced
during the fall of 2019 and in March
2020.167
166 As noted above, where applicable, we have
proposed to align Form PF with Form CPO–PQR to
(1) enable filers that currently are required to file
both Form PF and Form CPO–PQR independently
to compile and use similar data in completing both
forms and (2) enable users of the reported data (e.g.,
FSOC and other regulatory agencies) to (i) link data
for funds that file both forms and (ii) aggregate and
compare data across data sets more easily.
167 See. e.g., 2021 Financial Stability Oversight
Council Annual Report at 12 and 159 available at
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We request comment on the proposed
amendments.
132. Should we add additional subasset classes to the ‘‘repos’’ section of
proposed Question 32 as proposed? Are
the proposed additional sub-asset
classes appropriate? If not, is there
another alternative that we should use?
133. How often do hedge funds use
‘‘open’’ repo transactions (i.e., a repo
with no defined term and which rolls
over each day) and should we combine
the open and overnight repo categories?
Alternatively, should we require a
breakdown of repo exposure by term in
a separate question in Item C ‘‘financing
information’’ of section 2 instead of in
proposed Question 32?
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Asset Backed Securities (‘‘ABS’’)/
Structured Products
We propose to separate the
collateralized debt obligation (‘‘CDO’’)
and collateralized loan obligation
(‘‘CLO’’) sub-asset class in proposed
Question 32 into two separate sub-asset
classes (one for CDOs and one for
CLOs), and further break out each of
these new sub-asset classes based on the
seniority of the instrument (e.g., senior,
mezzanine, and junior tranches) similar
to the reporting approach on the CFTC’s
Form CPO–PQR.168 The proposed
changes are designed to provide
separate reporting for CDOs and CLOs,
which we believe is important because
CDOs and CLOs are fundamentally
different financial products and the
current combined reporting obscures the
specific attributes of each product.
Furthermore, given the recent focus on
CLOs by FSOC 169 in monitoring
systemic risk, we believe that having
detailed product specific data for CDOs
and CLOs is justified due to the
potential value this information would
provide for systemic risk monitoring.
We request comment on the proposed
amendments.
134. Should we break out the CDO
and CLO sub-asset class in proposed
https://home.treasury.gov/system/files/261/
FSOC2021AnnualReport.pdf.
168 See Form PF Glossary of Terms (proposed
definitions of ‘‘CDO’’ and ‘‘CLO’’). The proposal
would separate the current definition of ‘‘CDO/
CLO’’ into a separate definition for each financial
product. The definition of CDO would only include
collateralized debt obligations (including cash flow
and synthetic) and the definition of CLO would
include collateralized loan obligations (including
cash flow and synthetic) other than MBS, and
would not include any positions held via CDS. See
also supra footnote 166 (regarding the proposed
alignment of Form PF with Form CPO–PQR).
169 See United States Government Accountability
Office, Report to Agency Officials, ‘‘FINANCIAL
STABILITY Agencies Have Not Found Leveraged
Lending to Significantly Threaten Stability but
Remain Cautious Amid Pandemic,’’ December 2020,
available at: https://www.gao.gov/assets/gao-21167.pdf.
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Question 32 into two separate sub-asset
classes (one for CDOs and one for CLOs)
as proposed? If not, what alternatives do
you suggest?
135. In proposed Question 32, we do
not break out sub-asset classes for
derivatives exposures to ABS and
structured products (e.g., forwards on
MBS). Should these types of financial
instruments be reported as ‘‘other
derivatives’’ in proposed Question 32 or
should we add additional sub-asset
classes for reporting derivative
exposures to these instruments?
136. Would more granular reporting
for CLOs and CDOs inform monitoring
and assessment of systemic risk? Instead
of senior, mezzanine, and junior
categories, would investment grade and
non-investment grade categories be
simpler and less burdensome for
advisers to report? Should other
categories be added? If so, what
categories? Should advisers separately
report securitizations and resecuritizations, as required on the
CFTC’s Form CPO–PQR?
137. Should we collect separate
information about MBS securitizations
and re-securitizations in proposed
Question 32?
138. Does the real estate sub-asset
class capture real estate exposure
through vehicles that are not MBS or
other structured products (e.g.,
commercial leases)? If not, how should
we modify the proposal to do so?
Credit, Foreign Exchange, Interest Rate,
and Other Derivatives
We propose to revise the credit,
foreign exchange (‘‘forex’’), and interest
rate and other derivative sub-asset
classes to provide more detailed
reporting. For example, with respect to
credit derivatives, the proposal would
collect more detail on single name CDS
exposure to capture better information
on risk signals from these instruments
by adding separate sub-asset classes for
sovereign single name CDS, financial
institution single name CDS, and other
single name CDS (to capture any credit
derivatives that do not fall into the other
enumerated CDS categories).170 We
believe that an increase in single name
CDS exposure may signify a bet against
an entity or the market more generally,
which may have significant systemic
risk implications, particularly with
respect to concentrated single-issuer
positions that can drive more extreme
price movements and face difficulties in
the unwinding process, and for
counterparties on the other side of
highly leveraged trades when the market
170 See also Form PF Glossary of Terms (proposed
revised definition of ‘‘single name CDS’’).
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moves against these positions.171
Furthermore, single name CDS exposure
can represent important, concentrated
risk positions for a fund, similar to large
single equity positions, which can be
connected to market contagion events,
and have systemic risk and market
liquidity implications.
Similarly, we propose to add more
detailed reporting for foreign exchange
derivatives by adding separate sub-asset
classes for forex swaps and currency
swaps consistent with reporting to the
Bank for International Settlements
(‘‘BIS’’), while removing the less useful
requirement of separate reporting for
foreign exchange derivatives used for
investment and hedging, as we have
found the data of limited value because
we do not believe that information is
reported consistently across filers.172
We believe that adding separate
reporting for different types of foreign
exchange instruments (e.g., forex swaps
and currency swaps) is appropriate
because they have materially different
risk characteristics, including different
maturity profiles, and may be executed
under different documentation which
could affect their ability to be netted
against one another. We refer to the BIS
framework because we understand that
it reflects a commonly accepted
industry approach for classifying these
instruments. Furthermore, given the
significance of hedge funds’ exposure to
these instruments, we believe that more
granular information would better
inform our understanding of systemic
risk issues that may arise from holdings
in these different types of instruments.
We also propose to divide the current
‘‘interest rate derivatives’’ sub-asset
class into ‘‘U.S. dollar interest rate
derivatives’’ and ‘‘non-U.S. currency
interest rate derivatives.’’ We believe
that added granularity would be
important because we have found that
Form PF data consistently shows
interest rate derivatives as the sub-asset
class to which qualifying hedge funds
have the greatest exposure over time. A
171 The CFTC’s Form CPO–PQR also requests
information on single name financial CDS, and the
revised IOSCO Global Fund Investment Survey also
collects this information.
172 In connection with these proposed changes,
we also propose to make changes to the definition
of ‘‘foreign exchange derivative’’ to improve data
quality with respect to how advisers report foreign
exchange derivative exposure. We propose to revise
the definition to (1) now include any derivative
whose underlying asset is a currency other than the
base currency of the reporting fund, (2) provide
additional information on the treatment of crossforeign exchange versus regular foreign exchange,
and (3) require reporting of both legs of cross
currency foreign exchange derivatives to reflect
exposures from such transactions. See Form PF
Glossary of Terms (proposed revised definition of
‘‘foreign exchange derivative’’).
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better understanding of whether these
exposures are related to the U.S. dollar
yield curve or other countries’ yield
curves is important from a systemic risk
analysis perspective. Finally, we
propose to add new sub-asset classes for
various types of derivatives that are
regularly used by hedge funds including
correlation derivatives, inflation
derivatives, volatility derivatives, and
variance derivatives, which would both
provide additional insight into how
qualifying hedge funds use these types
of financial instruments and further
limit the number and type of derivatives
that advisers report in the ‘‘catch-all’’
‘‘other derivatives’’ category.173
We request comment on the proposed
amendments.
139. As proposed, are the sub-asset
classes for reporting on types of
derivatives appropriate? For example,
for forex derivatives, should we clarify,
for cross-currency pairs (where U.S.
dollars are not involved), that each leg
of the transaction should be reported as
long and/or short? What other types of
derivatives sub-asset classes should be
included or excluded, if any? Would the
proposed sub-asset classes for reporting
on derivatives be overly burdensome for
advisers?
140. Form CPO–PQR requires separate
reporting for futures, forwards, swaps
and options. The proposed revisions
captured in proposed Question 32
would collect similar detail for the
interest rate derivative and foreign
exchange categories, but not for other
asset categories. Would it be helpful to
collect this level of detail for other
derivatives positions beyond interest
rate and foreign exchange? Additionally,
should we add additional and/or
standardization of derivative reporting
that would align with Financial
Conduct Authority/European Securities
and Markets Authority data collection
by capturing, for each sub-asset class,
the total gross notional value of
contracts including the total notional of
futures and delta-adjusted notional of
options? Finally, should we amend the
instructions to Question 30 to require
reporting of closed out and OTC forward
positions which have not yet expired/
matured?
141. Should we give guidance on
reporting total return swaps (e.g., as
‘‘other credit derivatives’’ or ‘‘interest
rate swaps’’)?
173 In connection with these proposed
amendments, we also propose to add new
definitions to the Glossary of Terms for ‘‘correlation
derivative,’’ ‘‘inflation derivative,’’ ‘‘volatility
derivative,’’ and ‘‘variance derivative.’’ See Form PF
Glossary of Terms (proposed definitions of
‘‘correlation derivatives,’’ ‘‘inflation derivative,’’
‘‘volatility derivative,’’ and ‘‘variance derivative’’).
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142. With respect to the proposed
addition of a new sub-asset class for
volatility derivatives, do hedge funds
use volatility derivatives? Additionally,
are the sub-asset class categories in the
proposed volatility derivative section
appropriate? If not, should we add other
sub-asset class categories or combine
some of these categories?
143. Should we require a more
granular break out of interest rate
derivative exposures? If so, what
categories should we include? The
definition of ‘‘interest rate derivative’’
instructs advisers to present interest rate
derivatives as 10-year bond equivalents.
As noted, the proposal would specify
that the 10-year zero coupon bond
equivalent would be required. Should
we change how interest rate derivatives
should be reported (e.g., the total gross
notional value of outstanding contracts
including the total notional value of
futures and delta-adjusted value of
options)?
144. We propose to add new
definitions for ‘‘correlation derivative,’’
‘‘inflation derivative,’’ ‘‘volatility
derivative,’’ and ‘‘variance derivative.’’
Are these definitions appropriate? If not,
how would you modify one or more
definitions?
145. As noted above, we believe
adding separate reporting for different
types of foreign exchange instruments
(e.g., forex swaps and currency swaps)
is appropriate because they have
materially different risk characteristics
and may be executed under different
documentation and we refer to the BIS
framework because we understand that
it reflects a commonly accepted
industry approach for classifying these
instruments. Do you agree with our
view, and is the proposed approach
appropriate? If not, what alternative
approach do you suggest?
Cash and Commodities
We propose to make revisions to the
sub-asset class categories for cash and
commodities.
We would require advisers to break
out cash and cash equivalents 174
between U.S. currency holdings and
non-U.S. currency holdings, while also
174 Some advisers include treasuries in their
reporting of ‘‘cash’’ because it was part of the
definition of ‘‘cash and cash equivalents.’’ We
propose to revise the definition of ‘‘cash and cash
equivalents’’ to reflect that treasuries should not be
included in ‘‘cash and cash equivalents’’ sub-asset
class. In connection with this proposed change we
also propose to add a new separate definition for
‘‘government securities.’’ See Form PF Glossary of
Terms (proposed revised definition of ‘‘cash and
cash equivalents’’ and proposed definition of
‘‘government securities’’). See also discussion at
Section II.B.2 of this Release regarding the revised
definitions of cash and cash equivalents and
government securities.
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removing the current requirement to
report on investments in funds for cash
management purposes (other than
money market funds) because in our
experience advisers use inconsistent
methods for determining whether a
private fund investment is being used
for cash management purposes and we
believe that other information reported
in current section 2b is more useful for
assessing liquidity management (e.g.,
current Question 33 with respect to
unencumbered cash).175
Additionally, we propose to broaden
the current power commodity sub-asset
classes to also capture other energy
commodities, and add additional
commodity sub-asset classes (e.g., other
(non-gold) precious metals, agricultural
commodities, and base metal
commodities) to provide added
granularity with respect to these
financial products given their potential
systemic risk implications and to better
inform our and FSOC’s understanding
of the activities of hedge funds in these
important commodities markets. We
have found that a limitation of the
current form is that very different
commodities (e.g., wheat and nickel) are
reported together in the same sub-asset
class (i.e., ‘‘other commodities’’) making
the reported data less meaningful for
analysis. We believe that, with added
granularity, we would be in a better
position to identify concentrated
exposures to particular commodities,
data that could be valuable in the event
of a dislocation in a particular
commodity market.176 The additional
175 Additionally, in many cases we would be able
obtain more information about all internal fund
investments (including whether a fund looks like a
cash management vehicle) through the new
information the proposal would require to be
reported in section 1b. See discussion at Section
II.B.2 of this Release.
176 For example, we believe the addition of a base
metal commodities sub-asset class would allow for
identification of large players in the base metals
market (such as those impacted by the March 2022
‘‘nickel squeeze’’). During the March 2022 ‘‘nickel
squeeze,’’ the price of nickel rose unusually steeply
and rapidly in response to commodity price
increases caused by Russia’s invasion of Ukraine,
and this event, coupled with one or more market
participants holding large short positions, caused
prices to increase in an extreme manner (e.g., a oneday increase of 63% for the generic first futures
contract on March 7, 2022). See e.g., Shabalala,
Zandi, Nickel booms on short squeeze while other
metals retreat, Reuters (March 2022) available at
https://www.reuters.com/markets/europe/lmenickel-jumps-another-10-after-record-rally-supplyfears-2022-03-08/; Nagarajan, Shalini, Nickel
Trading Halted at LME Until Friday After Wild
Price Spike (businessinsider.com) (March 2022)
available at https://markets.businessinsider.com/
news/commodities/nickel-price-london-metalexchange-suspends-trading-shanghai-shortsqueeze-2022-3#:∼:text=The%20London%20
Metal%20Exchange%20has,17%25%20to%20
their%20daily%20limit.
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commodity sub-asset classes that we
propose to add, i.e., other (non-gold)
precious metals, agricultural
commodities and base metal
commodities, were chosen because we
believe they are most relevant from a
systemic risk perspective given the size
of these markets and what we currently
know of hedge fund exposures to these
markets.177
We request comment on the proposed
amendments.
146. With respect to reporting on cash
and cash equivalents, should we request
separate reporting for US and non-US
deposits? Would additional detail be
burdensome for advisers? With respect
to the proposed category ‘‘other cash
and cash equivalents (excluding bank
deposits, certificates of deposit, money
market funds and U.S. treasury bills,
notes and bonds),’’ should we require
advisers to provide a description in
Question 4 of what is reported in this
sub-asset class?
147. We propose to add additional
sub-asset classes for commodities. Are
the proposed additional commodities
sub-asset classes appropriate? If not,
what alternatives do you suggest?
Should we add more or fewer sub-asset
classes for commodities? If we should
add more, what additional sub-asset
classes do you recommend? Should we
add a sub-asset class for other physical
assets?
Digital Assets
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The proposal would add a new subasset class for digital assets and define
the term ‘‘digital asset.’’ 178 We have
observed the growth as well as the
volatility of this asset class in recent
years.179 We understand that many
hedge funds have been formed recently
to invest in digital assets, while many
existing hedge funds are also allocating
a portion of their portfolios to digital
assets.180 Accordingly, we believe it is
important to collect information on
funds’ exposures to digital assets in
177 These proposed change with respect to
commodities sub-asset classes would also better
align Form PF with Form CPO–PQR.
178 See discussion at Section II.B.3 of this Release.
See also Form PF Glossary of Terms (proposed
definitions of ‘‘digital asset’’).
179 In early 2021 the digital asset market
surpassed $1 trillion, mostly driven by the rise in
Bitcoin’s price, which some speculate may be
driven in part by hedge fund investments. See
Brettell, Karen and Chavez-Dreyfuss, Crypto market
cap surges above $1 trillion for first time, Reuters
(January 2021) available at https://
www.reuters.com/world/china/crypto-market-capsurges-above-1-trillion-first-time-2021-01-07/.
180 See C. Williamson, Managers Taking Bigger
Steps Into Crypto, Pensions&Investments (March
2022) available at https://www.pionline.com/crypto
currency/hedge-fund-managers-taking-bigger-stepscryptocurrency.
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order to understand better their overall
market exposures.
We request comment on the proposed
amendments.
148. Should the sub-asset class for
‘‘digital assets’’ provide more
granularity? For example, should we
have separate sub-asset classes for
digital assets that represent an ability to
convert or exchange the digital asset for
fiat currency or another asset, including
another digital asset, and those that do
not represent such a right to convert or
exchange; for digital assets that
represent a right to convert or exchange
for fiat currency or another digital asset,
those where the redemption obligation
is supported by an unconditional
guarantee of payment, such as some
‘‘central bank digital currencies,’’ and
those redeemable upon demand from
the issuer, whether or not collateralized
by a pool of assets or a reserve; for
digital assets that do not represent any
direct or indirect obligation of any party
to redeem; and for digital assets that
represent an equity, profit, or other
interest in an entity? Should we require
advisers to report the digital asset by
name (e.g., Bitcoin and Ether) or
describe its characteristics?
Open and Large Position Reporting
Advisers to qualifying hedge funds
currently report (1) a fund’s total
number of ‘‘open positions’’ determined
on the basis of each position and not
with reference to a particular issuer or
counterparty,181 and (2) the percentage
of a fund’s net asset value and sub-asset
class for each open position that
represents five percent or more of a
fund’s net asset value.182 We have found
that advisers use different methods for
identifying and counting their ‘‘open
positions,’’ which has made making
meaningful comparisons among funds
difficult. This has also potentially
obscured certain large exposures, which
may make concentration assessments
less exact. For example, an ‘‘open
position’’ might indicate a position held
physically, or synthetically through
derivatives, or both. As such, we
propose to require that advisers provide
information about a fund’s investment
exposures based on ‘‘reference assets,’’
which would capture securities or other
assets to which a fund has exposure, be
it direct or indirect ownership, synthetic
exposure, or exposure through
derivatives.183 The proposal is designed
to provide insight into the extent of a
fund’s portfolio concentration and large
exposures to any reference assets. The
181 Current
Question 34.
Question 35.
183 See proposed Question 39.
182 Current
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proposal would require advisers to
report (1) the total number of reference
assets to which a fund holds long and
short netted exposure, (2) the percentage
of net asset value represented by the
aggregated netted exposures of reference
assets with the top five long and short
netted exposures, and (3) the percentage
of net asset value represented by the
aggregate netted exposures of reference
assets representing the top ten long and
short netted exposures. We are
proposing to require reporting for the
top five long and short netted positions
and the top ten netted long and short
positions because combined these two
metrics provide a holistic view of a
reporting fund’s portfolio concentration.
We also understand that these are
commonly used industry metrics for
assessing portfolio concentration levels.
We propose to define ‘‘netted exposure’’
as the sum of all positions with legal
and contractual rights that provide
exposure to the same reference asset,
taking into account all positions,
including offsetting and partially
offsetting positions, relating to the same
reference asset (without regard to
counterparties or issuers of a derivative
or other instrument that reflects the
price of the reference asset).184
The proposal also would require
advisers to provide certain information
on a fund’s reference asset to which the
fund has gross exposure (as of the end
of each month of the reporting period)
equal to or exceeding (1) one percent of
net asset value, if the reference asset is
a debt security and the reporting fund’s
gross exposure to the reference asset
exceeds 20 percent of the size of the
debt security issuance, (2) one percent
of net asset value, if the reference asset
is a listed equity security and the
reporting fund’s gross exposure to the
reference asset exceeds 20 percent of
average daily trading volume measured
over 90 days preceding the reporting
date, or (3) (a) five percent of the
reporting fund’s net asset value or (b) $1
billion. Advisers would be required to
report: (1) the dollar value (in U.S.
dollars) of all long and the dollar value
(in U.S. dollars) of all short positions
with legal and contractual rights that
provide exposure to the reference asset;
(2) netted exposure to the reference
asset; (3) sub-asset class and instrument
184 Netted exposure to a reference asset would
either be long or short, and advisers would
determine the value of each netted exposure to each
reference asset in U.S. dollars, expressed as the
delta adjusted notional value, or as the 10-year
bond equivalent for reference assets that are fixed
income assets. Advisers would not report exposure
to cash and cash equivalents. See proposed
Question 39. See also Form PF Glossary of Terms
(proposed definition of ‘‘netted exposure’’).
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type; (4) the title or description of the
reference asset; (5) the reference asset
issuer (if any) name and LEI; (6) CUSIP
(if any); 185 and (7) if the reference asset
is a debt security, the size of issue, and
if the reference asset is a listed equity,
the average daily trading volume,
measured over 90 days preceding the
reporting date. Additionally, advisers
may at their option choose to provide
the FIGI for the reference asset, but they
are not required to do so.186 We propose
to define ‘‘gross exposure’’ to a
‘‘reference asset’’ as the sum of the
absolute value of all long and short
positions with legal and contractual
rights that provide exposure to the
reference asset.187 We considered
varying levels of thresholds and believe
that the proposed thresholds described
above are appropriate based on the
following reasoning. First, the five
percent threshold has been carried over
from the current version of Form PF and
is also a commonly used metric for
identifying significant positions in a
portfolio.188 In addition, while a
portfolio is generally viewed as
diversified when it holds at least 20
different positions, when a position goes
above five percent it reduces portfolio
diversification. Second, the $1 billion
threshold represents a level for large
funds (e.g., those with net asset values
in excess of $20 billion) that is large
enough so as to have potential systemic
risk implications even if the position is
less than five percent of the fund.
Finally, the proposed one percent
threshold is aimed at limiting filer
burdens while still providing insight
into the risks associated with a position
that may be small relative to a fund’s
overall portfolio but which constitutes a
large fraction of the market for a
particular holding, given that a
liquidation by one fund can trigger a
disorderly liquidation. A disorderly
liquidation of this kind may raise
systemic risk concerns as it may lead to
liquidation losses at other funds for
which the position is more impactful
and possibly lead to a cascade of
additional unwinds.
The purpose of these amendments is
to improve our ability to assess the
magnitude of hedge fund portfolio
185 Advisers would also be required to provide at
least one of the following other identifiers: (1) ISIN;
(2) ticker if ISIN is not available); (3) other unique
identifier (if ticker and ISIN are not available). For
reference assets with no CUSIP, or other identifier,
advisers would be required to describe the reference
asset. See proposed Question 40(a).
186 See proposed Question 40(a)(xi).
187 See proposed Question 40 and Form PF
Glossary of Terms (proposed revised definition of
‘‘gross exposure’’).
188 E.g., Schedule 13G/13D uses a five percent
threshold.
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concentration, as well as to identify
directional exposure. From a systemic
risk and an investor protection
perspective, high portfolio
concentration carries the risk of
amplified losses that can occur when a
fund’s investment represents a large
portion of a particular investment, asset
class, or market segment. Leveraged
portfolios further amplify this risk. The
proposed amendments are designed to
better capture a fund’s concentration
risk (e.g., where gross exposure to a
reference asset is large compared to the
fund’s NAV and/or compared to the
market for a reference security).
Reporting positions that are large
compared to market size also may
provide some insight about whether
multiple firms are ‘‘crowding’’ into
trades in certain types of securities or
other financial assets. We believe that
such ‘‘crowding’’ may increase the risk
that one fund’s forced selling may
trigger systemic effects across a
particular market. We also believe that
collecting information about the
composition of exposure to a reference
asset would allow us and FSOC to link
the information reported in proposed
Question 40 to exposure reporting in
proposed Question 32, which would
give the reported data added context
and facilitate understanding of a fund’s
investment portfolio and assessment of
any implications for systemic risk and
investor protection purposes. For
example, in a convertible arbitrage trade
involving a position in a convertible
bond and an offsetting position in the
equity securities of the same issuer,
reference asset exposure might be
obtained by positions in two different
sub-asset classes (i.e., investment grade
convertible bonds and equities) and
using a combination of instrument types
(e.g., physical ownership and futures or
a swap). The combination of
information reported in proposed
Question 32 and proposed Question 40
would facilitate our ability to identify
this type of situation, better understand
a qualifying hedge fund’s investment
approach and whether it is taking on
concentrated positions (potentially with
leverage), and assess whether or not a
qualifying hedge fund’s activities may
have systemic risk or investor protection
implications.
We request comment on these
proposed amendments.
149. The proposal would require
advisers to report (1) the total number
of reference assets to which a fund
holds long and short netted exposure,
(2) the percent of net asset value
represented by the aggregated netted
exposures of reference assets with the
top five long and short netted
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exposures, and (3) the percent of net
asset value represented by the aggregate
netted exposures of reference assets
representing the top ten long and short
netted exposures. Are these
requirements appropriate? If not, how
should we modify them? For example,
should we require reporting on more or
fewer long and short netted exposures
rather than just the top five and the top
ten? Instead of requiring disclosure on
specific exposures described above,
should we require a full position
disclosure filing similar to Form N–
PORT?
150. Does our proposed ‘‘reference
asset’’ definition work in the context of
these questions? For example, does the
definition capture interest rate
derivatives? If not, how should we
modify the definition or these questions
to capture interest rate derivatives? If we
should collect information about
interest rate derivatives, should we
specify reporting by maturity bucket
and currency? If so, should we use the
same maturity buckets that we have
proposed for purposes of calculating
‘‘adjusted’’ exposure in proposed
Question 32?
151. Should the ‘‘reference asset’’
definition be more specific or provide
more guidance on how to ‘‘look
through’’ certain instruments (e.g., a
correlation basket or an index (such as
the NASDAQ) or ETFs or other pooled
vehicles and private funds)?
152. Should we provide additional
guidance in the definition of ‘‘reference
asset’’ such as instructing advisers to
refer to the ‘‘issuer’’? Should we provide
instructions or guidance on how
advisers should address ‘‘reference
assets’’ that have varying term structures
(e.g., use maturity buckets)?
153. The proposal would require
advisers to provide certain information
on a fund’s reference asset to which the
fund has gross exposure (as of the end
of each month of the reporting period)
equal to or exceeding (1) one percent of
net asset value, if the reference asset is
a debt security and the reporting fund’s
gross exposure to the reference asset
exceeds 20 percent of the size of the
debt security issuance, (2) one percent
of net asset value, if the reference asset
is a listed equity security and the
reporting fund’s gross exposure to the
reference asset exceeds 20 percent of
average daily trading volume measured
over 90 days preceding, or (3) either (a)
five percent of the reporting fund’s net
asset value or (b) $1 billion. Are these
thresholds appropriate? If not, how
should they be modified? Should
separate thresholds be used to compare
netted exposures, and gross exposures,
to equity volume and debt issue size?
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For fixed income, is the reference to
‘‘debt security issuance’’ clear? While
this reference is designed to capture a
full issue size, should it instead
reference individual tranches of an
issue?
154. For position reporting in
Question 40, should we also require
advisers to report the number of shares,
principal amount or other unit, currency
value and percent of value compared to
NAV? Would this be burdensome to
report?
155. In Question 40, are there other
unique identifiers, in addition to or in
lieu of LEI or CUSIP that we should add
in addition to those proposed (e.g., for
commodities or indices)? Alternatively,
should we permit advisers to report FIGI
in lieu of CUSIP in Question 40 rather
the requiring advisers to report CUSIP?
b. Borrowing and Counterparty
Exposure
Counterparty exposure. As noted
above, we propose to revise and
enhance how advisers report
information about their relationships
with creditors and other counterparties
(including CCPs) and the associated
collateral arrangements for their hedge
funds.189 For qualifying hedge funds,
we propose to include a new
consolidated counterparty exposure
table, similar to the new consolidated
counterparty exposure table proposed
for hedge funds in section 1c of the
form,190 which would capture all cash,
securities, and synthetic long and short
positions by a reporting fund, a fund’s
credit exposure to counterparties, and
amounts of collateral posted and
received. This table would replace the
information currently required by
Questions 43, 44, 45, and 47, each of
which would be deleted under the
proposal.191 Under the proposal,
proposed Questions 42 and 43 would
continue to collect information about a
reporting fund’s key individual
counterparties, but in more detail. These
revisions are designed to improve data
quality and comparability, close data
gaps and provide better insight into
qualifying hedge funds’ borrowing and
financing relationships, their credit
exposure to counterparties and
collateral practices, and also would
enhance the Commissions’ and FSOC’s
ability to assess the activities of
qualifying hedge funds and their
189 See
discussion at Section II.B.3 of this Release.
discussion at Section II.B.3 of this Release.
191 In connection with the proposed removal of
current Question 44, we propose to make a
corresponding amendment to current Question 13,
which would be redesignated as Question 19, to
remove an instruction that would no longer be
relevant.
190 See
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counterparties for investor protection
purposes and in monitoring systemic
risk.
The proposed new consolidated
counterparty exposure table would be
designed to capture information on all
non-portfolio credit exposure that a
qualifying hedge fund has to its
counterparties (including CCPs) and the
exposure that creditors and other
counterparties have to the fund, taking
into account netting. The new table
would require advisers to report in U.S.
dollars, as of the end of each month of
the reporting period, a qualifying hedge
fund’s borrowings and other
transactions with creditors and other
counterparties by type of borrowing or
transaction (e.g., unsecured, secured
borrowing and lending under a prime
brokerage agreement, secured borrowing
and lending via repo or reverse repo,
other secured borrowing and lending,
derivatives cleared by a CCP, and
uncleared derivatives) and the collateral
posted or received by a reporting fund
in connection with each type of
borrowing or other transaction.192 The
proposed table also would require
advisers to qualifying hedge funds to (1)
classify each type of borrowing by
creditor type (i.e., U.S. depository
institution, U.S. creditors that are not
depository institutions, and non-U.S.
creditors); (2) classify posted collateral
by type (e.g., cash and cash equivalents,
government securities, securities other
than cash and cash equivalents and
government securities and other types of
collateral or credit support (including
the face amount of letters of credit and
192 The instructions would direct advisers to
classify borrowings and other transactions and
associated collateral based on the governing legal
agreement (e.g., a prime brokerage or other
brokerage agreement for cash margin and securities
lending and borrowing, a global master repurchase
agreement for repo/reverse repo, and ISDA master
agreement for synthetic long positions, synthetic
short positions and other derivatives), and instruct
advisers how to report when there is crossmargining under a fund’s prime brokerage
agreement. We are also proposing to add new
definitions of ‘‘synthetic long position’’ and
‘‘synthetic short position’’ to the Glossary of Terms.
See Form PF Glossary of Terms (proposed
definitions of ‘‘synthetic long position’’ and
‘‘synthetic short position’’). Additionally, the
instructions would permit advisers to net a
reporting fund’s exposure with each counterparty
and among affiliated entities of a counterparty to
the extent such exposures may be contractually or
legally set-off or netted across those entities and/or
one affiliate guarantees or may otherwise be
obligated to satisfy the obligations of another under
the agreements governing the transactions. The
instructions would also direct advisers to classify
borrowing by creditor type (e.g., percentage
borrowed from U.S. depository institutions, U.S.
creditors that are not U.S. depository institutions,
non-U.S. creditors) based on the legal entity that is
the contractual counterparty for such borrowing
and not based on parent company or other affiliated
group.
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similar third party credit support)
received and posted by a reporting fund,
and secured borrowing and lending
(prime brokerage or other brokerage
agreement), and (3) report, at the end of
each month of the reporting period, the
expected increase in collateral required
to be posted by the reporting fund if the
margin increases by one percent of
position size for each type of borrowing
or other transaction. We believe that
measuring the impact of a one percent
margin change will allow for a
meaningful assessment of qualifying
hedge funds’ vulnerability to changes in
financing costs and identification of
funds that are most sensitive to
potential margin changes. We also
believe that measuring this impact
would provide a conventional way to
obtain data on funds’ vulnerability to
margin increases that is easy to scale up
for analysis purposes and allows for
uniform comparisons across hedge
funds to see which funds have lockup
agreements and which funds do not.
Furthermore, the proposed table is
designed to consolidate existing
questions and provide more specific
instructions in an effort to eliminate
information gaps and improve the
reliability of data collected. We believe
that this new approach would collect
better information about a qualifying
hedge fund’s borrowing and financing,
cleared and uncleared derivatives
positions, and collateral practices as
well as a fund’s credit exposure to
counterparties resulting from excess
margin, haircuts and positive mark-tomarket derivatives transactions, which
we believe would enhance FSOC’s
systemic risk assessments.
We request comment on the proposed
addition of this new table.
156. Is the information to be collected
in the proposed new table appropriate?
If not, how should we modify the
proposed reporting requirements?
Would reporting in the proposed new
table be overly burdensome for
advisers? If so, how should we modify
the proposed table to reduce burdens on
advisers?
157. Would the proposed table
capture an accurate overall view of the
non-portfolio credit exposure that a
qualifying hedge fund has in aggregate
to its counterparties (including CCPs)
and the exposure that creditors and
other counterparties have to the fund?
Are the table instructions clear? Would
the instructions properly capture a
reporting fund’s borrowing and other
transactions with creditors? Do we need
to modify the proposed instructions for
calculating and reporting associated
collateral to clarify any matters? Do we
need to modify the instructions with
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respect to netting to increase clarity or
avoid undue burden?
158. We propose to specify how to
classify certain types of transactions
based on legal agreement. We are
proposing to classify all transactions
under a master securities loan
agreement (‘‘MSLA’’) as other secured
borrowing. Is another classification
more appropriate? If so, what
classification do you suggest? For
example, should borrowing and
collateral received and lending and
posted collateral under an MSLA be
reported in a separate category of
borrowing or consolidated with prime
broker borrowing? Are the instructions
provided for cross margining reasonable
and practicable, or should they be
changed in any way?
159. In connection with the proposal,
we propose to add a new definition for
‘‘synthetic short position.’’ Is the list of
assets to be included or excluded from
the definition appropriate or should we
provide a different list of assets? If we
should provide a different list, what
assets should be included and
excluded?
160. Is it clear that advisers should
calculate the expected increase or
decrease based on a margin increase of
one percent of position size in proposed
Question 41 or should we provide
further guidance or clarify the question?
Should the metric be something other
than the expected increase or decrease
based on a margin increase of one
percent of position size? If so, what
metric should be used?
161. As an alternative, should we
include a drop-down box with possible
types of other secured borrowings (e.g.,
letters of credit, loans secured by other
collateral such as real estate, equipment,
receivables, etc.) and also include an
‘‘other’’ ‘‘catch-all’’ category that would
need to be explained in Question 4?
Significant counterparty reporting.
The proposal would require advisers,
for each of their qualifying hedge funds,
to identify all creditors and
counterparties (including CCPs) where
the amount a fund has borrowed
(including any synthetic long positions)
before posted collateral equals or is
greater than either (1) five percent of the
fund’s net asset value or (2) $1
billion.193 We believe this threshold is
193 See proposed Question 42. Advisers would
use calculations performed to complete the new
table in proposed Question 41 for purposes of
identifying the counterparties to be reported in
proposed Question 42 and Question 43, and the
calculation method would be designed to be similar
to the calculations used to identify counterparties
in proposed Question 27 and proposed Question 28
in order to facilitate aggregation and analysis of data
across hedge funds and qualifying hedge funds.
Furthermore, if more than five counterparties meet
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appropriate because it highlights two
different but potentially significant
risks. First, five percent of a fund’s net
asset value represents an amount of
borrowing that, if repayment was
required, could be a significant loss of
financing that could result in a forced
unwind and forced sales from the
reporting fund’s portfolio. Second, $1
billion represents an amount that, in the
case of a very large fund, may not
represent five percent of the fund’s net
asset value, but may be large enough to
create stress for certain of its
counterparties. This change is designed
to specify how securities held should be
treated, avoiding a common source of
error in how advisers have completed
the current form, and allowing both
counterparty risks related to
collateralized transactions to be viewed
in one place, i.e., the risk that collateral
will not be returned, and the risk that
the borrower of cash will fail to repay
the amount borrowed, risks that we
have found cannot be fully observed
based on information collected on the
current form. For the top five creditors
and other counterparties from which a
fund has borrowed the most (including
any synthetic long positions) before
posted collateral, advisers would be
required to identify the counterparty (by
name, LEI, and financial institutional
affiliation) and to provide information
detailing a fund’s transactions and the
associated collateral. We have proposed
a ‘‘top five’’ reporting threshold as this
level is consistent with the current
threshold for reporting on collateral
practices on Form PF.194 Advisers
would be required to present this
information using a proposed individual
counterparty exposure 195 table that
follows the same format as the new
consolidated counterparty exposure
table described above for Question 41,
including borrowings and other
transactions by type and collateral
posted and received by type. For all
other creditors and counterparties from
which the amount a fund has borrowed
the threshold, advisers would complete an
individual counterparty exposure table for the top
five creditors or other counterparties to which a
reporting fund owed the greatest amount in respect
of cash borrowing entries (before posted collateral),
and also identify all other creditors and
counterparties (including CCPs) to which the
reporting fund owed an amount in respect of cash
borrowing entries (before posted collateral) equal to
or greater than either (1) five percent of the
reporting fund’s net asset value as of the data
reporting date or (2) $1 billion. See also Form PF
Glossary of Terms (proposed definitions of ‘‘cash
borrowing entries’’ and ‘‘collateral posted entries’’).
194 See current Question 36.
195 In connection with the proposal, we propose
to add a new definition for ‘‘individual
counterparty exposure table’’ to the Form PF
Glossary of Terms.
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(including any synthetic long positions)
before posted collateral that equals or is
greater than either (1) five percent of the
fund’s net asset value or (2) $1 billion,
advisers would be required to identify
each counterparty (by name, LEI, and
financial institution affiliation) and
report the amount of such borrowings
and the collateral posted by the fund in
U.S. dollars.
Similarly, the proposal would require
advisers, for each of their qualifying
hedge funds, to identify all
counterparties (including CCPs) to
which a fund has net mark-to-market
counterparty credit exposure after
collateral that equals or is greater than
either (1) five percent of the fund’s net
asset value or (2) $1 billion.196 We
believe this threshold is appropriate
because both portions of the threshold
highlight potential systemic risk: five
percent of net asset value is a level that
we believe represents significant
exposure (based on the impact on
performance) in the event of
counterparty default, and $1 billion,
while it may not equal five percent of
a large hedge fund’s assets, may indicate
a larger systemic stress involving a
fund’s counterparties. For the top five of
these counterparties, advisers would
identify the counterparty (by name, LEI
and financial institution affiliation) and
provide information detailing a fund’s
relationship with these counterparties
including associated collateral using the
same table required for individual
counterparty reporting.197 The proposal
also would require qualifying hedge
funds to identify all other counterparties
(by name, LEI, and financial institution
affiliation) to which a fund has net
mark-to-market exposure after collateral
that equals or is greater than either (1)
five percent of a fund’s net asset value
or (2) $1 billion and would require these
advisers to report the amount of the
exposure before and after collateral
posted by either the counterparty or the
reporting fund as applicable. The
purpose of this new requirement is to
enhance our ability to understand the
impact a particular counterparty failure
like those that occurred during the 2008
financial crisis and in the period since
(e.g., the failure of MF Global in
2011),198 which we believe is important
196 See
proposed Question 43.
the proposal, however, if an adviser
completes the table in Question 42 for a particular
counterparty, the adviser would not be required to
complete the table twice.
198 See e.g., Gapper, John and Kaminska, Izabella,
Downfall of MF Global—US broker-dealer
bankruptcy highlights global reach of eurozone
crisis, Financial Times (November 2011) available
at https://www.ft.com/content/2882d766-06fb-11e190de-00144feabdc0.
197 Under
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for systemic risk assessments and from
an investor protection perspective. In
assessing the risk to a fund of a
counterparty default, the proposal
would look at whether a fund has net
borrowing exposure or net lending
exposure to a counterparty. If the fund
is a net borrower with respect to a
counterparty, we would measure cash
borrowed by the fund against collateral
posted by fund. Alternatively, when the
fund is a net lender with respect to a
counterparty, we would measure cash
loaned to the counterparty against
collateral posted by the counterparty to
assess whether the counterparty has
posted insufficient collateral (relative to
the amount borrowed).199
These proposed amendments are
designed to streamline the form by
consolidating information currently
collected in Question 47 into proposed
Question 42, and to improve the quality
and comparability of reported
information and our ability to integrate
the data obtained for analysis with other
regulatory data sets by specifying how
advisers determine borrowing and
counterparty credit exposure.200 The
proposed changes, in conjunction with
the proposed new consolidated
counterparty exposure table, would also
provide a better overall view of hedge
funds’ borrowing and other financing
arrangements and counterparty credit
exposure and associated collateral,
which we believe would provide critical
insight into (1) creditor and
counterparty exposure to qualifying
hedge funds through synthetic long
positions through derivatives, (2)
potential gaps in margin received by
and posted by qualifying hedge funds
and the size of any such gaps, (3)
qualifying hedge funds’ exposure to a
large counterparty failure, and (4) the
expected impact on a fund’s financing
arrangements of a change in margin
requirements.
Finally, the proposal would remove
the requirement from current Question
38 for advisers to report the percentage
of the total amount of collateral and
other credit support that a fund has
posted to counterparties that may be re199 See Form PF Glossary of Terms (proposed
definitions of ‘‘cash borrowing entries,’’ ‘‘collateral
posted entries,’’ ‘‘cash lending entries,’’ and
‘‘collateral received entries’’) for a detailed
description of these calculations.
200 The proposal would require creditor legal
name and LEI, which would aid in the
identification of counterparties and facilitate
analysis of the interconnectedness of market
participants (e.g., Form N–PORT and Form N–CEN
already collect LEI for registered investment
company counterparties, and including LEIs here
would facilitate analysis across data sets).
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hypothecated.201 We are proposing this
change because we believe that this
reporting is burdensome for advisers,
and we have found that the data
obtained is generally not reliable
because advisers cannot easily collect
and report the required information as
re-hypothecation commonly occurs
from omnibus accounts into which
advisers generally do not have
visibility.202 We request comment on
the proposed amendments.
162. Should we amend counterparty
reporting as proposed, including the
proposed counterparty identifying
information? Is the proposed identifying
information appropriate? If not, what
alternatives do you suggest? Would the
proposed amendments lead to more
accurate data regarding counterparties?
163. We have proposed to limit more
detailed reporting in proposed Question
42 to the top five creditor and
counterparties from which a fund has
borrowed the most (including any
synthetic long positions) before posted
collateral, and in proposed Question 43
to the top five counterparties to which
a fund has the greatest net mark to
market counterparty credit exposure
after collateral. Should we expand this
question to require more detailed
reporting for the top, for example, ten
creditors and/or counterparties, as
applicable? Alternatively, should we
further limit the scope of creditor and/
or counterparty reporting? Should we
require that all creditor and/or
counterparties be listed?
164. Do advisers find the rehypothecation reporting burdensome?
Are advisers able to collect and report
information currently required by
Question 38 given omnibus accounts?
165. Are securities lending and
borrowing different from other types of
trading and financing activities (e.g.,
repo/reverse repo, prime broker
borrowing) for purposes of counterparty
monitoring and risk assessment? If so,
should we treat them differently?
166. As proposed, calculations in
these questions would exclude
collateral that is not cash and cash
equivalents or other securities to avoid
including letters of credit and other
illiquid assets (e.g., real estate) posted as
collateral. What other types of collateral
would be omitted under this
instruction? Would it omit types of
201 We would redesignate Question 38 as
Question 45.
202 See MFA Letter to Chairman Clayton, Sept. 17,
2018, available at https://www.managedfunds.org/
wp-content/uploads/2020/04/MFA.Form-PFRecommendations.attachment.final_.9.17.18.pdf
(noting the rehypothecated securities are taken out
of an omnibus account, which makes reporting for
advisers with any certainty difficult).
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collateral commonly accepted by
creditors and other counterparties? If so,
how should we modify the question?
167. This proposal would collect
information about top counterparties
based on a fund’s borrowing from each
counterparty legal entity, rather than
borrowing from all entities affiliated
with a major financial institution. Could
this approach result in data gaps where
a fund borrows from different
counterparties with one affiliated group
below the reporting threshold?
Alternatively, should we require funds
to aggregate borrowings from all
affiliates of major counterparties, and
report on each affiliate in this
counterparty reporting? What data gaps
might occur using this alternative
approach? Is the proposed threshold
(i.e., equal to or greater than either (1)
five percent of the fund’s net asset value
or (2) $1 billion) for identifying
counterparties to which the fund is
exposed appropriate? Will it capture
those counterparties to which the fund
may have material counterparty credit
exposure? Should we adopt a
combination of thresholds (e.g., greater
than five percent or $1 billion for
individual counterparties and greater
than 10 percent or $1 billion for any
affiliated group of counterparties)?
c. Market Factor Effects
The proposal would require advisers
to qualifying hedge funds to respond to
all market factors to which their
portfolio is directly exposed, rather than
allowing advisers to omit a response to
any market factor that they do not
regularly consider in formal testing in
connection with the reporting fund’s
risk management, as Form PF currently
provides.203 These proposed changes
are designed to enhance investor
protection efforts and systemic risk
assessment by allowing the
Commissions and FSOC to track better
common market factor sensitivities, as
well as correlations and trends in those
market factor sensitivities.
We also propose to change the stress
thresholds to (1) require advisers to
report one threshold for each market
factor, rather than two as is currently
required, and (2) propose different
thresholds for certain market factors to
capture stress scenarios that are
plausible but still infrequent market
moves.204 Information resulting from
203 See current Question 42 and proposed
Question 47. For market factors that have no direct
effect on a reporting fund’s portfolio, we propose
to instruct filers to enter zero.
204 For example, on the current form, advisers
must report the effect of an increase or decrease in
equity prices by five percent and by 20 percent,
while under the proposal advisers would only
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stress testing at thresholds in the current
form (one low and one high) is not
useful because the thresholds are either
too frequent (for the lower threshold) or
too extreme and may not result in
accurate estimates (for the higher
threshold). Based on our experience
with this information, we do not believe
that collecting data at multiple
thresholds 205 for each market factor is
significantly more meaningful than
collecting market factor sensitivity at a
single plausible but still infrequent
threshold.
The proposal also would add a market
factor test concerning non-parallel risk
free interest rate movements. It would
test hedge fund exposure to changes in
the slope of the yield curve, which is
currently untested and can be a source
of systemic risk when there are sudden
interest rate changes. For example, this
market factor could provide meaningful
information on hedge funds that take
complex positions, such as market
neutral strategies (e.g., basis trading in
particular) and other strategies that
employ trades that take advantage of
spreads in yield curves coupled with
high use of leverage.
The proposal also would revise the
instructions so advisers would report
the long component and short
component consistently with market
convention, rather than opposite from
market convention, as Form PF
currently provides in order to reduce
inadvertent mistakes in completing the
form.206 We request comment on the
proposed amendments.
report the effect of a 10 percent increase or
decrease, which is a more plausible but still
infrequent scenario.
205 See current Question 42.
206 The proposal would amend the instructions to
provide that ‘‘risk free interest rates’’ would include
interest rate swap rates in which a fixed rate is
exchanged for a risk-free floating rate such as the
secured overnight financing rate (‘‘SOFR’’) or the
sterling overnight index average (‘‘SONIA’’).
Additionally, the proposal would amend the
instructions to specify that (1) for market factors
involving interest rates and credit spreads, advisers
should separate the effect on its portfolio into long
and short components where (i) the long
component represents the aggregate result of all
positions whose valuation changes in the opposite
direction from the market factor under a given
stress scenario, and (ii) the short component
represents the aggregate result of all positions
whose valuation changes in the same direction as
the market factor under a given stress scenario, and
(2) for market factors other than interest rates and
credit spreads, advisers should separate the effect
on its portfolio into long and short components
where (i) the long component represents the
aggregate result of all positions whose valuation
changes in the same direction as the market factor
under a given stress scenario and (ii) the short
component represents the aggregate result of all
positions whose valuation changes in the opposite
direction from the market factor under a given
stress scenario. See proposed Question 47.
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168. Should Form PF require advisers
to qualifying hedge funds to respond to
all market factors, as proposed?
Alternatively, should Form PF allow
advisers to omit a response to any
market factor that it does not regularly
consider in formal testing in connection
with the reporting fund’s risk
management? Do advisers or their
reporting funds regularly consider all,
some, or other market factors we are
proposing? If so which ones and why?
Are adjustments needed for advisers
that use a different stress test
methodology than that required by the
question as proposed?
169. Should we revise the stress
thresholds, as proposed? Would the
proposed thresholds capture stress
scenarios that are plausible but still
infrequent market moves? Is there a
better way to meet this objective? Are
adjustments needed for advisers that
test thresholds similar, but not identical
to, those proposed?
170. Should Form PF include a
market factor concerning non-parallel
risk free interest rate movements, as
proposed? Would this proposed
amendment provide meaningful
exposure information for hedge funds
that take complex positions, such as
market neutral strategies (e.g., basis
trading in particular) and other
strategies that employ trades that take
advantage of spreads in yield curves
coupled with a high use of leverage?
Would any of the other market factors
better describe the risks such strategies
are exposed to?
171. Are the proposed amendments to
how advisers would report long and
short components consistent with
market convention? Do market
conventions vary by asset type? Would
the proposed change relieve or increase
burdens? Please provide supportive
data. Is there a more effective way to
require advisers to report long and short
components that would be consistent
with market conventions and allow for
data comparability?
172. Are there any definitions or
instructions that we should clarify or
change in this question?
173. As an alternative, should Form
PF require all advisers to all types of
reporting funds to report market factor
data? Which ones and why?
d. Additional Amendments to Section
2b
Currency exposure reporting. The
proposal would require qualifying
hedge funds to report for each month of
the reporting period, in U.S. dollars, (1)
the net long value and short value of a
fund’s currency exposure arising from
foreign exchange derivatives and all
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other assets and liabilities denominated
in currencies other than a fund’s base
currency, and (2) each currency to
which the fund has long dollar value or
short dollar value exposure equal to or
exceeding either (a) five percent of a
fund’s net asset value or (b) $1
billion.207 In responding, advisers
would be required to include currency
exposure obtained indirectly though
positions held in other entities (e.g.,
investment companies, other private
funds, commodity pools or other
companies, funds or entities) and could
report reasonable estimates if consistent
with internal methodologies and
conventions of service providers.208
This proposed requirement is designed
to provide insight into whether notional
currency exposures reported by
qualifying hedge funds in Question 30
represent directional exposure or are
hedges of equity and/or fixed income
positions. This new question would
allow us to understand whether a
qualifying hedge fund’s portfolio is
exposed to a given currency, and it
would also provide a view into the
fund’s currency exposure resulting from
holdings in foreign securities (e.g.,
Eurobonds). While current Question 30
requires advisers to separate currency
exposure relating to hedging from other
currency, we have found that this data
has not been very useful for determining
whether a currency position is
speculative or a hedge. Additionally, we
believe that it is important to consider
a qualifying hedge fund’s currency
exposure to identify vulnerabilities to
currency fluctuations and market events
that affect different countries and
regions. Finally, we believe the
proposed threshold of either (1) five
percent of a fund’s net asset value or (2)
$1 billion for reporting individual
currency exposure is appropriate
because it represents, in each prong of
the threshold, a material level of
portfolio exposure to currency risk at
which we believe a deterioration in the
value of a particular currency could
have a significant negative impact on a
fund’s investors. We also believe that if
multiple large funds have significant
exposure to a currency that is rapidly
devaluing, this circumstance could raise
financial stability concerns, and this
proposed reporting would better enable
review of this type of situation. More
broadly, we also would be able to use
207 Proposed
Question 33.
instruction is designed to simplify and
reduce the burdens of reporting sub-asset class
exposures. Furthermore, the proposal would permit
advisers to provide good faith estimates and take
currency hedges into account, if consistent with
their internal methodologies and information
reported internally and to investors.
208 This
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the information obtained to identify
concentrations in particular currencies
and assess the potential impact of
market events that affect particular
currencies. We request comment on the
proposed amendments.
174. Should we add new Question 33,
as proposed?
175. Would this new question
enhance systemic risk analysis,
including the impact of currency risk? Is
there a better way to meet this objective?
How could we modify the proposed
question to better meet its objective?
176. Is the proposed threshold of
either (1) five percent of a fund’s net
asset value or (2) $1 billion for reporting
individual currency exposure
appropriate? If not, what threshold is
appropriate?
Turnover. The proposal would require
reporting on a per fund basis on the
value of turnover in certain asset classes
rather than on an aggregate basis as
currently required.209 We believe that
requiring this reporting on a per fund
basis would provide more detailed
information to us and FSOC while at the
same time simplifying reporting for
advisers. We understand that advisers
do not currently aggregate turnover
related information among funds.
Aggregating solely for Form PF
reporting is particularly burdensome as
the required data is typically on
separate reporting systems and advisers
must ‘‘roll-up’’ data from these sources
to report on the form.
We also propose to add new
categories for turnover reporting that
would disaggregate combined categories
and better capture turnover of
potentially relevant securities, such as
various types of derivatives (e.g., listed
equity, interest rate, foreign exchange),
which we believe would help support
analysis of hedge fund market
activity.210 Furthermore, we propose to
add a new consolidated foreign
exchange and currency swaps category
and make other changes.211 During the
March 2020 COVID–19-related market
turmoil, FSOC sought to evaluate the
role hedge funds played in disruptions
209 Proposed Question 34. In connection with the
proposed amendments, the proposal would move
reporting on the value of turnover in certain asset
classes and the geographical breakdown of
investments from section 2a to section 2b.
210 We also propose to break out some categories
by futures, swaps, and options as different types of
derivatives have different risk profiles and
implications for systemic risk, and to add a category
for ‘‘other derivative instrument types’’ so that all
derivatives are reported.
211 We propose to add instructions requiring
advisers to report turnover in derivatives separately
from turnover in physical holdings for asset classes
in proposed Question 32 and to make other
conforming changes to reflect changes to defined
terms in the Form PF Glossary of Terms.
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in the U.S. treasury market by
unwinding cash-futures basis trade
positions and taking advantage of the
near-arbitrage between cash and futures
prices of U.S. treasury securities.212
Because the existing requirement
regarding turnover reporting on U.S.
treasury securities is highly aggregated,
the SEC staff, during retrospective
analyses on the March 2020 market
events, was unable to obtain a complete
picture of activity relating to long
treasuries and treasury futures. Given
the significant size of hedge funds’
exposures to certain derivative
products, we believe it is important to
gain more insight into trading activities
with respect to these financial
instruments to better enable the
Commissions and FSOC to assess and
monitor the activity of qualifying hedge
funds for systemic risk implications.213
Expanded reporting on turnover also
would provide better information for
assessing trading frequency in lieu of
requiring advisers to report what
percentage of their hedge funds’ net
asset value is managed using highfrequency trading strategies.214
We request comment on the proposed
Question 34.
177. Would the proposed detailed
turnover reporting provide additional
insight into a fund’s activities in key
markets? Should additional categories
be added to provide a clearer view of
turnover and its potential to help us and
FSOC identify and monitor activities
that could indicate systemic risk in the
market? If so, what categories do you
suggest and why? Should we exclude
any of the proposed categories? If so,
why?
178. The current instructions state
that turnover value should be reported
as the sum of the absolute value of
transactions, and as such the reported
value of turnover for certain derivatives
may be very large (reflecting notional
value). Should we use a different
measure for valuing turnover (e.g.,
212 See U.S. Credit Markets Interconnectedness
and the Effects of the COVID–19 Economic Shock,
U.S. Securities Exchange Commission, October
2020 available at https://www.sec.gov/files/USCredit-Markets_COVID-19_Report.pdf. See
Financial Stability Oversight Council 2021 Annual
Report, available at https://home.treasury.gov/
system/files/261/FSOC2021AnnualReport.pdf.
213 As of the end of the third quarter of 2021,
interest rate derivatives currently make up
approximately 25 percent of gross notional
exposure (GNE) reported on Form PF, while foreign
exchange derivatives make up 15 percent of GNE.
Additionally, commodity, credit, and other
derivatives when combined make up five percent,
or nearly $1.5 trillion. See Private Fund Statistics
Q3 2021, supra footnote 7.
214 See current Question 21. We propose to
remove Question 21 as it would be redundant in
light of the proposed expanded turnover reporting.
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market value)? Recognizing that the
current instructions result in
consistency in reported value among
questions on Form PF, would a different
measure be more or less useful?
179. Do you agree that aggregating
information may be burdensome for
some advisers? Do some advisers
maintain the required data on different
systems such that ‘‘rolling-up’’ the data
from different sources to report on the
form would be complex and time
consuming?
Country and industry exposure. We
are proposing to require advisers to
report all countries (by ISO country
code) 215 to which a reporting fund has
exposure equal to or exceeding either (1)
five percent of its net asset value or (2)
$1 billion, and to report the dollar value
of long exposure and the dollar value of
short exposure in U.S. dollars, for each
monthly period to improve data
comparability across funds.216 Under
the current approach, only certain
regions are identified and these regions
are not uniformly defined, which results
in data that is not consistent.217 In
addition, at times we have needed to
identify countries of interest not on this
list. As such, we propose to replace the
country of interest and regional
reporting with this new country level
information. Finally, we believe that the
proposed threshold of either (1) five
percent of net asset value or (2) $1
billion is appropriate because it
represents a material level of portfolio
exposure to risk relating to individual
countries and geographic regions, and is
a level that could significantly impact a
fund and its investors if, for example,
there are currency fluctuations or
geopolitical instability. Furthermore, the
data obtained would allow for
identification of industry concentrations
in particular countries and/or regions
and help assess the potential impact of
market events on these geographic
segments. We believe that the five
percent threshold level constitutes a
reasonable shock to a fund’s net asset
value. For example, to the extent there
is a market-wide event, a worst-case
scenario would be for long positions to
lose their full value, in this shock case
215 This is similar to reporting on Form N–PORT
and will improve the comparability of data between
Form PF and Form N–PORT.
216 Proposed Question 35. In connection with the
proposed amendments, the proposal would move
reporting on geographical breakdown of
investments from section 2a to section 2b.
217 Currently, consistent with staff guidance in
Form PF Frequently Asked Questions 28.1 and 28.2
advisers may report geographical exposure based on
internal methods and indicate in Question 4 if
methods do not reflect risk and economic exposure.
See Form PF Frequently Asked Questions, supra
footnote 79.
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at least five percent. Furthermore, and
particularly for funds without a
benchmark, five percent is often
evaluated for industry, individual
position, and country risk, and is a
common and easy to measure threshold.
With respect to the $1 billion threshold,
we believe it constitutes sufficiently
large nominal value exposure from a
risk perspective.
We also propose to add a new
question that would require advisers to
provide information about each industry
to which a reporting fund has exposure
equal to or exceeding either (1) five
percent of its net asset value or (2) $1
billion.218 Advisers would be required
to report, for each monthly period, the
long dollar value and short dollar value
of a reporting fund’s exposure by
industry based on the NAICS 219 code of
the underlying exposure. The purpose
of this new question would be to collect
information that would provide insight
into hedge funds’ industry exposures in
a standardized way to allow for
comparability among funds and
meaningful aggregation of data to assess
overall industry-specific concentrations.
Further, we believe the proposed
threshold of either (1) five percent of net
asset value or (2) $1 billion is
appropriate because it represents a
material level of portfolio exposure to
risk relating to individual industries,
and is a level that could significantly
impact a fund and its investors if, for
example, there are market or
geopolitical events that affect
performance by a particular industry,
such as the burst of the ‘‘tech bubble’’
in the early 2000s or COVID–19’s
impact on airline, accommodation and
food service industries. Furthermore,
the data obtained would allow for
identification of industry concentrations
and help assess the potential impact of
market events on industries. While we
considered a lower threshold, we
believe that the proposed threshold
strikes an appropriate balance between
identifying significant industry
exposure and the burdens of reporting
this information on Form PF. We
believe this information would be useful
to the Commissions and FSOC in
monitoring systemic risk, particularly if
multiple funds have significant
concentrations in industries that are
experiencing periods of stress or
disruption.
When responding to these questions
about country and industry exposure,
advisers would be required to include
exposure obtained indirectly though
218 Proposed
219 North
Questions 36.
American Industry Classification
System.
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positions held in other entities (e.g.,
investment companies, other private
funds, commodity pools or other
company, funds or entities). Without
this requirement, a fund’s exposure to
geographic regions and industries could
be obscured and hinder the
Commissions’ and FSOC’s ability to
assess risks and the potential impact of
events and trends that affect a particular
industry or geographic region, both of
which could have implications for
investors. While we believe that
advisers typically maintain this
information, the proposed instructions
to these questions seek to minimize filer
burdens by permitting advisers to report
reasonable estimates if such reporting is
consistent with internal methodologies
and information reported internally and
to investors.
We request comment on the proposed
Question 35 and proposed Question 36.
180. Should we require advisers to
report all countries (by ISO country
code) 220 to which a reporting fund has
exposure of equal to or exceeding (1)
five percent or more of its net asset
value or (2) $1 billion, and to report
exposure in U.S. dollars? Is this
threshold appropriate? If not, should the
threshold be higher or lower? Do you
agree that removing regional level
reporting is appropriate? Are there any
other alternatives? If so, what
alternatives?
181. Should we require advisers to
provide information about each industry
to which a reporting fund has exposure
equal to or exceeding (1) five percent or
more of its net asset value or (2) $1
billion? Is this threshold appropriate? If
not, should the threshold be higher or
lower?
182. With respect to requiring
advisers to provide information about
portfolio industry exposure, what level
of industry detail should be gathered
(for example, 2-digit NAICS codes
represent 20 unique industries)? Is it
more burdensome to provide more
detail, or does aggregation to broader
industry categories create additional
burden?
183. We propose to modify the
instructions to require that investments
be categorized based on concentration of
risk and economic exposure. Should we
add instructions or guidance for
currency crosses or dollar denominated
non-U.S. sovereign debt? Furthermore,
current Question 77 (for private equity
funds) also uses NAICS codes for
reporting industry exposure. Should we
use Global Industry Classification
220 This is similar to reporting on Form N–PORT
and will improve the comparability of data between
Form PF and Form N–PORT.
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Standard (GICS) codes or another
classification standard? Finally, how
should ETFs and other exchange traded
products be reported in this question?
Are these financial instruments
typically coded to industry sector? If
not, what alternatives do you suggest
and why?
184. We propose to require advisers,
when responding to proposed Question
35 and proposed Question 36 to include
exposure obtained indirectly though
positions held in other entities (e.g.,
investment companies, other private
funds, commodity pools or other funds
or entities). Is this appropriate? If not,
why? Would this be overly burdensome
for advisers?
Central clearing counterparty (CCP)
reporting. We propose to require
advisers to identify each CCP or other
third party holding collateral posted by
a qualifying hedge fund in respect of
cleared exposures (including tri-party
repo) equal to or exceeding either (1)
five percent of a reporting fund’s net
asset value or (2) $1 billion.221 The
proposed new question would exclude
counterparties already reported in
proposed Question 42 and proposed
Question 43,222 and require advisers to
provide information on: (1) the legal
name of the CCP or third party; (2) LEI
(if available); (3) whether the CCP or
third party is affiliated with a major
financial institution; (4) the reporting
fund’s posted margin (in U.S. dollars);
and (5) the reporting fund’s net
exposure (in U.S. dollars). We are
proposing this new question based on
our experience with Form PF since
adoption as we have found data gaps
with respect to identifying qualifying
hedge fund exposures to CCPs and other
third parties that hold collateral in
connection with cleared exposures.
Furthermore, we understand that (1)
many large hedge fund advisers already
track margin posted for cleared
exposures because margin requirements
at any given time may well exceed the
clearinghouse’s exposure to a fund and
therefore are an important credit risk
exposure metric for a fund, and (2) that
CCP recovery, resiliency and resolution
also are current concerns for some
advisers.223 Given these factors, we
221 Proposed
222 See
Question 44.
discussion at Section II.C.2.b of this
Release.
223 See ‘‘A Path Forward For CCP Resilience,
Recovery, And Resolution,’’ March 10, 2020
available at https://www.blackrock.com/corporate/
literature/whitepaper/path-forward-for-ccpresilience-recovery-and-resolution.pdf. See also J.P.
Morgan Press Release, March 10, 2020, available at
https://www.jpmorgan.com/solutions/cib/markets/
a-path-forward-for-ccp-resilience-recovery-andresolution.
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believe that the burden of this proposed
new question would be justified by
valuable insight the data obtained
would provide into an area that could
have significant implications from a
systemic risk perspective. Additionally,
we have chosen a reporting threshold of
equal to or exceeding either (1) five
percent of net asset value or (2) $1
billion to be consistent with the
thresholds for other counterparty
exposure questions,224 as we believe
that a qualifying hedge fund is similarly
exposed where a third party holds
collateral irrespective of whether the
third party is a CCP or other
counterparty. The proposal would also
remove current Question 39, which
requires information about transactions
cleared directly through a CCP, as the
information collected is duplicative of
information already collected in current
Question 24. We request comment on
the proposed addition of new Question
44.
185. Should we collect information
about the exposure of qualifying hedge
funds to CCPs and other third parties
holding collateral in respect of cleared
exposures? If so, what information
should be collected on these exposures?
Does the proposed question collect
helpful information? Should we collect
different information, more information
or less information? Is the proposed
reported threshold of equal to or
exceeding either (1) five percent of a
reporting fund’s net asset value or (2) $1
billion appropriate? If not, how should
the threshold be modified?
186. Do you agree that many large
hedge fund advisers already track
margin posted for cleared exposures
because margin requirements at any
given time may well exceed the
clearinghouse’s exposure to a fund and
therefore are an important credit risk
exposure metric for a fund?
Additionally, do you agree that CCP
recovery, resiliency, and resolution also
are current concerns for some advisers?
Risk metrics. We propose to eliminate
the requirement that an adviser indicate
whether there are risk metrics other
than, or in addition to, Value at Risk
(‘‘VaR’’) that the adviser considers
important to managing a reporting
fund’s risks.225 Advisers generally do
not report detailed information in
response to this requirement. Currently,
about 60 percent of advisers to
qualifying hedge funds (representing
about 75 percent of the aggregate gross
asset value of qualifying hedge funds)
report using VaR or market factor
224 See discussion at Section II.C.2.b of this
Release.
225 See current Question 41.
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changes in managing their hedge
funds.226 Instead, we propose to require
advisers to provide additional
information about a reporting fund’s
portfolio risk profile, including
reporting on portfolio correlation,
investment performance by strategy and
volatility of returns and drawdowns.227
The proposal would expand the amount
of data collected by collecting risk data
in circumstances where advisers do not
use VaR or market factor changes, and
thus provide insight across all (rather
than only some) qualifying hedge funds.
This new information would provide
uniform and consistently reported risk
information that will enhance our
ability to monitor and assess investment
risks of qualifying hedge funds to gauge
systemic risk. In particular, volatility of
returns and drawdown data is a simple
measure of risk that enables us to
monitor risk-adjusted returns, changes
in volatility and thereby risk profiles.
We request comment on the proposed
removal of Question 41.
187. Do you agree with the proposed
removal of Question 41? Instead, should
we change this question to make it
easier for advisers to report more
detailed information? Do you believe
that new Questions 48, 49 and 23(c) will
provide better information about the
risk profiles of qualifying hedge funds?
Investment performance by strategy.
The proposal would require advisers to
qualifying hedge funds that indicate
more than one investment strategy for a
fund in proposed Question 25 to report
monthly gross investment performance
by strategy if the adviser calculates and
reports this data for such fund, whether
to current and prospective investors,
counterparties, or otherwise.228 An
226 See Private Funds Statistics Q2 2020 (Table
58/59). Current Question 40 requires advisers to
report certain risk data if the adviser regularly
calculates VaR of the reporting fund. Current
Question 42 requires advisers, for specific market
factors, to determine the effect of specified changes
on a reporting fund’s portfolio, but permits advisers
to omit a response to any market factor that they
do not regularly consider in formal testing in
connection with a reporting fund’s risk
management.
227 See Proposed Question 48 (portfolio
correlation), proposed Question 49 (investment
performance breakdown by strategy), and proposed
Question 23(c) (volatility of returns and drawdown
reporting). See discussion at Section II.B.2 of this
Release. We propose to also revise the title of Item
C. of current section 2b to ‘‘Reporting fund risk
metrics and performance’’ to reflect that the
proposal would add new questions on performance
to this section of the form.
228 Proposed Question 49. The strategies in
proposed Question 49 would be based on the
strategies set forth in proposed Question 25 (the
proposal would also revise the strategy categories
in current Question 20, which we would
redesignate as Question 25, to better reflect our
understanding of hedge fund strategies and to
improve data quality and comparability). See
discussion at Section II.B.3 of this Release.
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adviser would be required to provide
monthly performance results only if
such results are calculated for a
reporting fund (whether for purposes of
reporting to current and prospective
investors, counterparties, or otherwise),
but would not be required to respond to
this question if the adviser reports
performance for the fund as an internal
rate of return. This question is designed
to integrate Form PF hedge fund data
with the Federal Reserve Board’s
reporting on Financial Accounts of the
United States, which the Federal
Reserve uses to track the sources and
uses of funds by sector, and which are
a component of a system of
macroeconomic accounts including the
National Income and Product accounts
and balance of payments accounts, all of
which serve as a comprehensive set of
information on the economy’s
performance. We also believe that this
information could be helpful to the
Commissions’ and FSOC’s monitoring
and analysis of strategy-specific
systemic risk in the hedge fund
industry. We request comment on the
proposed addition of new Question 49.
188. Do you agree with the addition
of new Question 49 as proposed? If not,
what alternatives would you suggest
and why? Would responding to this
question be burdensome? If it would be
overly burdensome, how would you
suggest we modify the proposal?
Portfolio correlation. The proposal
would add a new question on portfolio
correlation to collect data on the effects
of a breakdown in correlation.229 Based
on feedback from advisers filing Form
PF and data reported on Form PF, it
appears that hedge funds using the most
leverage tend to engage in long/short,
relative value, and similar strategies that
seek to pair trades in highly correlated
instruments, possibly with a focus on
factor models. For these hedge funds,
VaR calculations that rely on static
correlation matrices may not factor in
periods of market turmoil when
assumed correlations break down.
Therefore, a breakdown in assumed
correlations could cause these funds to
de-lever and could have a significant
impact on financial stability,
particularly if there are ‘‘crowded’’ or
overlapping positions across funds,
which could lead to cascade effects. We
recommend a new question that gathers
data on the effects of a breakdown in
assumed correlations rather than just
historical correlations. The proposed
new question would focus on assessing
the risks associated with a correlation
breakdown, and would require
qualifying hedge funds to report for
229 Proposed
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their portfolios (as of the end of each
month of the reporting period) (1) the
average pairwise 3-month realized prior
Pearson correlation of each portfolio
position’s periodic (e.g., daily or
weekly) total rates of return using the
greatest available frequency of data over
the measurement window (e.g., daily or
weekly), (2) the frequency of the data
used over the prior 3-month window
(e.g., daily or weekly) (3) the expected
annualized volatility utilizing 3-month
realized prior Pearson correlations of
each portfolio position’s periodic (e.g.,
daily or weekly) total rates of return and
assuming realized prior volatilities of
portfolio positions with the same
frequency window as that chosen when
computing 3-month realized
correlations, and (4) what the resulting
annualized volatility would be if a
reporting fund uniformly reduced or
increased pairwise correlations by 20
percentage points utilizing 3-month
realized prior Pearson correlations of
portfolio positions’ periodic rates of
return and assuming 3-month realized
prior volatilities of portfolio positions’
periodic rates of return with the same
frequency window as that chosen when
computing 3-month realized
correlations. This question is designed
to (1) isolate the impact of a breakdown
in correlation on the volatility of long/
short funds that may de-lever if there is
an increase in their volatility, (2) avoid
some of the pitfalls of VaR models such
as relying on backwards looking
assumptions on the relationship
between securities, and (3) provide a
measure of volatility sensitivity in
addition to one-day VaR. We believe
that this new question would not create
a significant burden for advisers because
portfolio positions’ periodic total rates
of return and corresponding correlation
matrices are likely available for most
qualifying hedge funds. We request
comment on the proposed addition of
new Question 48.
189. Are the effects of a breakdown in
correlations useful for monitoring
systemic risk? Would this question
provide helpful information for
purposes of comparing fund activities
and assessing risk? Does it offer insight
into funds with a range of strategies or
is it useful for only some strategies?
What other questions could isolate the
effects of a breakdown in correlations?
Will it be burdensome for advisers to
qualifying hedge funds to respond to
this question and, if so, what burdens
will be imposed? Are total rates of
return and corresponding correlation
matrices readily available for most
qualifying hedge funds? If not, what
strategies would have the most
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difficulty completing this question? Are
there less burdensome questions that
could help isolate the effects of a
breakdown in correlations?
190. As an alternative or in addition
to measuring sensitivity to correlation,
would any of the following approaches
be preferable to our proposal: (1)
subtract aggregate portfolio VaR from
the sum of VaR computed at the asset
class level, or some other sub-portfolio
level, to measure the impact of
diversification and the sensitivity to
correlation, or (2) combine single factor
stress tests for the portfolio assuming
zero correlation?
191. As proposed, would responding
to new Question 48 create an undue
burden for advisers? If so, how should
we modify the question to make it less
burdensome for respondents? Does the
flexibility embedded in the proposed
question (i.e., the flexibility for a fund
to choose its own frequency of position
marks (be it daily, weekly, monthly))
make it easier for funds to respond?
192. Is the proposed 20 percentage
point sensitivity metric appropriate? If
not, what alternative do you suggest?
Portfolio Liquidity. We propose to
require advisers to include cash and
cash equivalents when reporting
portfolio liquidity, rather than
excluding them, as the question
currently provides.230 We understand
that reporting funds typically include
cash and cash equivalents when
analyzing their portfolio liquidity. We
believe the proposed change would
improve data quality by reducing
inadvertent errors that result from
requiring advisers to report in a way
that is different from how they may
report internally. We believe this
proposed change is more reflective of
industry practice, and it is preferable to
receive reported data in a format that
reflects how advisers typically analyze
portfolio liquidity.
We also propose to amend the form’s
instructions to allow advisers to assign
each investment to more than one
period, rather than directing advisers to
assign each investment to only one
period, as Question 32 currently
provides. We understand that directing
advisers to assign an investment to only
one period may make a reporting fund’s
portfolio appear less liquid than it is
because it would not reflect that
reporting funds may divide up sales in
different periods (e.g., a reporting fund
could sell off a portion in the first time
period, and sell of the remainder in
subsequent time periods). Therefore,
this proposed change is designed to
reflect the liquidity of a reporting fund’s
portfolio more accurately.
While advisers would continue to be
able to rely on their own methodologies
to report portfolio liquidity, we propose
to add an instruction explaining that
estimates must be based on a
methodology that takes into account
changes in portfolio composition,
position size, and market conditions
over time. Based on experience with the
form, we have found that some advisers
have used static methodologies that do
not consider portfolio composition and
position size relative to the market, and
therefore do not reflect a reasoned view
about when positions could be
liquidated at or near carrying value.
Therefore, this proposed change is
designed to continue to allow advisers
to use their own methodologies, but
improve data quality to ensure that the
methodologies generate reporting that
reflects a reasonable view of portfolio
liquidity in light of changes in portfolio
composition and size, and market
conditions, over time.
Finally, to facilitate more accurate
reporting, collect better data, and reduce
filer errors, we propose to amend the
table to be included in proposed
Question 37 to reflect that information
should be reported as a percentage of
NAV consistent with SEC staff Form PF
Frequently Asked Questions.231
We request comment on the proposed
amendments.
193. Should proposed Question 37’s
portfolio liquidity requirements include
cash and cash equivalents, as proposed,
regardless of what types of advisers
would complete it? Would this
proposed amendment help the
Commissions and FSOC better analyze
portfolio liquidity? Would this proposed
change make Form PF more consistent
with how the industry analyzes
portfolio liquidity? Is there a better way
to meet these objectives? For example,
should Form PF instead require advisers
to report cash and cash equivalents for
all reporting funds separately than other
positions when reporting portfolio
liquidity?
194. Do you agree that reporting funds
typically include cash and cash
equivalents when analyzing their
portfolio’s liquidity?
195. Should Form PF allow advisers
to assign investments to more than one
period, as proposed? Would this
proposed change more accurately reflect
the liquidity of a reporting fund’s
portfolio?
196. Should Form PF continue to
allow advisers to rely on their own
230 See current Question 32 and proposed
Question 37.
231 See Form PF Frequently Asked Questions,
supra footnote 79, Question 32.3.
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methodologies in reporting on portfolio
liquidity?
197. Should Form PF include an
instruction that provides that estimates
must be based on a methodology that
takes into account changes in portfolio
composition, position size, and market
conditions over time, as proposed?
Would this proposed change improve
data quality? Is there a better way to
achieve this objective? If we add the
instruction to this question, in
particular, would it suggest that the
instruction would not apply to other
liquidity analysis, or other portfolio
metrics?
198. As an alternative, should Form
PF require all advisers to report
portfolio liquidity for all reporting
funds?
199. Should Form PF change how
advisers report portfolio liquidity in any
other ways? For example, should we
require advisers to report information in
dollars, in addition to or instead of
reporting as a percentage of the
portfolio, as Form PF currently requires?
Would such a requirement help the
Commissions and FSOC to compare
portfolio liquidity with other data on
Form PF that advisers report in dollars?
Financing Liquidity. Question 46 is
designed to show the extent to which
financing may become rapidly
unavailable for qualifying hedge
funds.232 We propose to amend current
Question 46 to improve data quality
thereby supporting more effective
systemic risk analysis.233 Advisers
would provide the dollar amount of
financing that is available to the
reporting fund, including financing that
is available but not used, by the
following types: (1) ‘‘unsecured
borrowing,’’ (2) ‘‘secured borrowing’’ via
prime brokerage, (3) secured borrowing
via reverse repo, and (4) other secured
borrowings.234 Currently, the
Commissions and FSOC infer this data
from this question and current Question
43 (concerning the reporting fund’s
borrowings).235 However, these
232 See 2011 Form PF Adopting Release, supra
footnote 3, at text accompanying n.281.
233 We would redesignate Question 46 as
Question 50.
234 Form PF defines ‘‘unsecured borrowing’’ as
obligations for borrowed money in respect of which
the borrower has not posted collateral or other
credit support. Form PF defines ‘‘secured
borrowing’’ as obligations for borrowed money in
respect of which the borrower has posted collateral
or other credit support. For purposes of this
definition, reverse repos are secured borrowings.
See Form PF Glossary of Terms. These categories
are designed to be consistent with borrowing
categories that qualifying hedge funds would report
on the new counterparty exposure table.
235 Current Question 43 collects data on the
reporting fund’s borrowing by type (e.g., unsecured,
and secured by type, i.e., prime broker, reverse repo
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inferences may not be accurate given the
number of assumptions that currently go
into making such inferences. This
proposed information would help us
understand the extent to which a fund’s
financing could be rapidly withdrawn
and not replaced.
We request comment on the proposed
amendments.
200. Should Form PF require advisers
to report the amount of financing that is
available to the reporting fund but not
used, as a dollar amount, as proposed?
Alternatively, should Form PF require
advisers to report this information in a
different way? For example, should
Form PF require advisers to report the
amount of financing that is available to
the reporting fund but not used, as a
percentage of total financing? Would it
be more or less burdensome for advisers
to report this information as a dollar
amount than as a percentage of total
financing? Please provide supportive
data.
201. As an alternative, should Form
PF require all advisers to report
financing liquidity for any size hedge
funds they advise? If so, why?
D. Proposed Amendments To Enhance
Data Quality
We are also proposing several
amendments to the instructions to Form
PF to enhance data quality.236
Specifically, we are proposing the
following changes:
Reporting of percentages. For
questions that require information to be
expressed as a percentage, we propose
to require that percentages be rounded
to the nearest one hundredth of one
percent rather than rounded to the
nearest whole percent. We believe that
this additional level of precision is
important, especially for questions
where it is common for filers to report
low percentage values (e.g., risk metric
questions such as current Question 40
and current Question 42) to avoid
situations where advisers round to zero
and no data is reported, potentially
obscuring small changes that may be
meaningful from a risk analysis or stress
testing perspective.
Value of investment positions and
counterparty exposures. We propose to
specify how private fund advisers
determine the value of investment
positions (including derivatives) and
counterparty exposures. The proposed
changes are designed to provide a more
consistent presentation of reported
or other), while current Question 46 only collects
a total amount of financing available, both used and
unused, with no breakdown by type of financing.
236 Proposed Instruction 15 (provides guidelines
for advisers in responding to questions on Form PF
relying on their own methodology).
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information on investment and
counterparty exposures to support more
accurate aggregation and comparisons
among private funds by us and FSOC in
assessing systemic risk. Under the
form’s current instructions, advisers
may report portfolios with similar
exposures differently.237 We understand
that some advisers net legs of partially
offsetting trades when calculating the
value of derivatives positions in
accordance with internal
methodologies, but others do not,
resulting in inconsistent reporting that
may obscure a fund’s risk profile. We
propose to require these trades to be
reported independently on a gross basis,
consistent with derivatives reporting on
Form N–PORT.238 We also propose to
instruct advisers that for all positions
reported on Form PF, advisers should
not include as ‘‘closed-out’’ a position if
the position is closed out with the same
counterparty and results in no credit or
market exposure to the fund, making the
approach on Form PF with respect to
closed out positions consistent with rule
18f–4 of the Investment Company Act
and our understanding of filers’ current
practices.239
Reporting of long and short positions.
We propose to amend the instructions
regarding the reporting of long and short
positions on Form PF to improve the
accuracy and consistency of reported
data used for systemic risk analysis. We
propose to specify that if a question
requires the adviser to distinguish long
positions from short positions, the
adviser should classify positions based
on the following: (1) a long position
experiences a gain when the value of the
market factor to which it relates
increases (and/or the yield of that factor
decreases), and (2) a short position
experiences a loss when the value of the
market factor to which it relates
increases (and/or the yield of that factor
decreases).
Calculating certain derivative values.
We propose to amend the instruction to
provide that, (1) for calculating the
value of interest rate derivatives,
‘‘value’’ means the 10-year bond
237 See
Form PF: General Instruction 15.
proposed Instruction 15 requires
that if a question in Form PF requests information
regarding a ‘‘position’’ or ‘‘positions,’’ advisers must
treat legs of a transaction even if offsetting or
partially offsetting, or even if entered into with the
same counterparty under the same master
agreement as two separate positions, even if
reported internally as part of a larger transaction.
See also instructions to N–PORT, General
Instruction G.
239 See Use of Derivatives by Registered
Investment Companies and Business Development
Companies, IC Release No. 34084 (Nov. 2, 2020),
Section II.E.2.c. [85 FR 83162, 83210] Dec. 21, 2020.
See also Form PF Frequently Asked Questions,
supra footnote 79, Question 44.1.
238 Specifically,
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equivalent, and (2) for calculating the
value of options, ‘‘value’’ means the
delta adjusted notional value (expressed
as a 10-year bond equivalent for options
that are interest rate derivatives).240 The
amended instruction would also
provide that in determining the value of
these derivatives, advisers should not
net long and short positions or offset
trades, but should exclude closed-out
positions that are closed out with the
same counterparty provided that there is
no credit or market exposure to the
fund. The proposed amendments are
designed to provide more consistent
reporting by advisers, which we believe
would help support more accurate
aggregation of data, better comparisons
among funds, and a more accurate
picture for purposes of assessing
systemic risk.241
Currency Conversions for Reporting in
U.S. Dollars. We propose to amend
Instruction 15 to clarify that if a
question requests a monetary value,
advisers should provide the information
in U.S. dollars as of the data reporting
date or other requested date (as
applicable) and use a foreign exchange
rate for the applicable date. We also
propose to amend Instruction 15 to
provide that if a question requests a
monetary value for transactional data
that covers a reporting period, advisers
should provide the information in U.S.
dollars, rounded to the nearest
thousand, using foreign exchange rates
as of the dates of any transactions to
convert local currency values to U.S.
dollars.242
We request comment on the proposed
amendments to Instruction 15.
202. Should we require reporting of
‘‘gross’’ positions and exposure as
proposed? Would the proposed
approach cause advisers to report
misleading data? Would the proposed
approach cause compliance or
operational issues? What other approach
could we take to obtain consistent data
that would better reveal risks associated
with a particular fund? We understand
that most advisers’ risk management
systems incorporate offsetting or netting
methods, but they may take different
approaches. Should we permit advisers
to report using the offsetting or netting
methods they use internally? Would
that provide useful data? Should we
instead require advisers to offset and net
based on a consistent, prescribed
method?
240 See Form PF Glossary of Terms (proposed
definition of ‘‘10-year bond equivalent’’ specifies
the zero coupon bond equivalent).
241 This is consistent with prior staff positions.
See Form PF Frequently Asked Questions, supra
footnote 79, Questions 24.3 and 26.1.
242 See proposed Instruction 15.
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203. The proposal would instruct
advisers to not include as ‘‘closed-out’’
a position if the position is closed out
with the same counterparty and results
in no credit or market exposure to the
fund. Do you agree that the proposed
changes would make the approach on
Form PF with respect to closed out
positions consistent with rule 18f–4 of
the Investment Company Act and filers’
current practices? If not, what
alternative approach do you suggest?
204. Should we capture derivative
exposure differently or request
additional measures of derivatives? For
example, the CFTC’s Form CPO–PQR
requires reporting of positive/negative
open trade equity (OTE), which refers to
the amount of unrealized gain/loss on
open derivative positions. Would this
measure improve our ability to assess
and compare private fund activities and
assess systemic risk?
205. Does reporting to the nearest one
hundredth of one percent involve
additional burdens compared to the
current requirement to round to the
nearest one percent? Would it
meaningfully increase the accuracy of
the reporting? Would permitting
rounding to the nearest one percent on
any of the questions on Form PF that
request information expressed as a
percentage reduce burdens on filers?
206. Are the proposed instructions
with respect to classifying long and
short positions consistent with industry
conventions? Are these instructions
clear for different types of products? If
not, how should they be modified? For
example, are there any elements of the
Alternative Investment Fund Managers
Directive or Open Protocol Enabling
Risk Aggregation that would be helpful
to incorporate?
207. The proposal would require that
advisers report two or more legs of a
transaction—even if offsetting—as
separate positions. This proposed
amendment is designed to elicit a more
consistent presentation of investment
and counterparty exposures. We
understand, however, that this approach
may inflate the value of a reporting
fund’s long and short investment
exposures in a way that does not
represent the adviser’s view of a
reporting fund’s investment exposures
and the associated risks. Is this a valid
concern? Are there other approaches we
should use for investment exposure
reporting? For example, should we
require netting of long and short
positions under certain conditions (e.g.,
identical underlying securities and same
counterparty) when consistent with the
adviser’s internal recordkeeping and
risk management? Should we require
advisers to report exposures on both a
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53871
‘‘gross’’ basis as well as after all netting
consistent with the adviser’s internal
recordkeeping and risk management?
208. The proposal would amend the
instruction to provide that, (1) for
calculating the value of interest rate
derivatives, ‘‘value’’ means the 10-year
bond equivalent, and (2) for calculating
the value of options, ‘‘value’’ means the
delta adjusted notional value (expressed
as a 10-year bond equivalent for options
that are interest rate derivatives). Is this
approach appropriate? If not, what
alternatives do you suggest?
209. Are the proposed instructions
with respect to reporting in U.S. dollars
when a question requests a monetary
value appropriate? If not, how should
they be modified? If a reporting fund’s
base currency is not U.S. dollars, how
and when do advisers convert the base
currency to U.S. dollars? Should Form
PF include additional instructions on
how or when to convert base currency
to U.S. dollars? For example, should
Form PF require advisers to report the
conversion rate? Is further specificity
needed regarding return series, volatility
and other percentage measures for funds
that have base currencies other than the
U.S. dollar?
E. Proposed Additional Amendments
The proposal would make several
additional amendments to the general
instructions to Form PF. Specifically,
we propose to amend Instruction 14 to
allow advisers to request a hardship
exemption electronically to make it
easier to submit a temporary hardship
exemption,243 and provide, by way of an
amendment to rule 204(b)–1(f) under
the Advisers Act, that for purposes of
determining the date on which a
temporary hardship exemption is filed,
‘‘filed’’ means the earlier of the date the
request is postmarked or the date it is
received by the Commission.244 We are
243 The proposal would also update the mailing
address to which advisers requesting a temporary
hardship exemption should mail their exemption
filing, include the email address for submitting
electronically the adviser’s signed exemption filing
in PDF format, add an instruction noting that filers
should not complete or file any other sections of
Form PF if they are filing a temporary hardship
exemption. See Proposed Instruction 14. The
proposal would indicate that the reference
regarding the instruction pertaining to temporary
hardship exemptions should refer to Instruction 14
instead of Instruction 13. See Form PF General
Instruction 3, Section 5—Advisers requesting a
temporary hardship exemption.
244 We are also amending rule 204(b)–1(f) under
the Advisers Act to remove certain filing
instructions in the rule for temporary hardship
exemptions and instead direct filers to the
instructions in the form. See 204(b)–1(f)(2)(i)
(indicating that advisers should complete and file
Form PF in accordance with the instructions to
Form PF, no later than one business day after the
electronic Form PF filing was due).
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proposing the latter change to assist
advisers with determining what
constitutes a ‘‘filed’’ temporary hardship
exemption in the context of the
requirement that the request be filed no
later than one business day after a filer’s
electronic Form PF filing was due as
required under Instruction 14.
Additionally, the proposal would
amend Instruction 18 based on recent
rule changes made by the CFTC with
respect to Form CPO–PQR.245 While the
CFTC no longer considers Form PF
reporting on commodity pools as
constituting substituted compliance
with CFTC reporting requirements,
some CPOs may continue to report such
information on Form PF.
The proposal would revise the terms
‘‘EEA,’’ which Form PF defines as the
European Economic Area and ‘‘G10,’’
which Form PF defines as The Group of
Ten, to (1) remove outdated country
compositions and (2) include an
instruction that if the composition of the
EEA or G10 changes after the effective
date of these proposed amendments to
Form PF if adopted, advisers would use
the current composition as of the data
reporting date. This proposed
amendment is designed to address
questions from advisers about whether
to report data based on the composition
of the EEA and G10 as of the effective
date of these proposed amendments to
Form PF if adopted, or the current
composition of the EEA and G10, if it
changes.
We request comment on the proposed
amendments.
210. Would the proposed
amendments to Instruction 14 and to
rule 204(b)–1(f) under the Advisers Act
make it easier to submit a temporary
hardship exemption and assist advisers
in determining the date on which a
temporary hardship exemption is filed?
If not, are there alternatives?
211. Would the proposed
amendments to the Glossary of Terms
appropriately update the terms and
provide clarification? Is there a better
way to meet these objectives? If so,
please provide examples.
212. The proposal would amend
Instruction 18 based on recent rule
changes made by the CFTC with respect
to Form CPO–PQR. Is this proposed
change appropriate?
213. The proposal would remove the
list of country compositions and include
an instruction that if the composition of
the EEA or G10 changes after the
effective date of these proposed
amendments to Form PF (if adopted),
advisers would use the current
245 See
composition as of the data reporting
date. Is this approach appropriate? If
not, what alternative approach do you
suggest?
III. Economic Analysis
A. Introduction
The SEC is mindful of the economic
effects, including the costs and benefits,
of the proposed amendments. Section
202(c) of the Advisers Act provides that
when the SEC is engaging in rulemaking
under the Advisers Act and is required
to consider or determine whether an
action is necessary or appropriate in the
public interest, the SEC shall also
consider whether the action will
promote efficiency, competition, and
capital formation, in addition to the
protection of investors.246 The analysis
below addresses the likely economic
effects of the proposed amendments,
including the anticipated and estimated
benefits and costs of the amendments
and their likely effects on efficiency,
competition, and capital formation. The
SEC also discusses the potential
economic effects of certain alternatives
to the approaches taken in this proposal.
Many of the benefits and costs
discussed below are difficult to
quantify. For example, the SEC cannot
quantify the effects of how regulators
may adjust their policies and oversight
of the private fund industry in response
to the additional data collected under
the proposed rule. Also, in some cases,
data needed to quantify these economic
effects are not currently available and
the SEC does not have information or
data that would allow such
quantification. For example, costs
associated with the proposal may
depend on existing systems and levels
of technological expertise within the
private fund advisers, which could
differ across reporting persons. While
the SEC has attempted to quantify
economic effects where possible, much
of the discussion of economic effects is
qualitative in nature. The SEC seeks
comment on all aspects of the economic
analysis, especially any data or
information that would enable a
quantification of the proposal’s
economic effects.
B. Economic Baseline and Affected
Parties
1. Economic Baseline
As discussed above, the Commissions
adopted Form PF in 2011, with
additional amendments made to section
3 along with certain money market
Form CPO–PQR Release, supra footnote
246 15
56.
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reforms in 2014.247 Form PF
complements the basic information
about private fund advisers and funds
reported on Form ADV.248 Unlike Form
ADV, Form PF is not an investor-facing
disclosure form. Information that
private fund advisers report on Form PF
is provided to regulators on a
confidential basis and is nonpublic.249
The purpose of Form PF is to provide
the Commissions and FSOC with data
that regulators can deploy in their
regulatory and oversight programs
directed at assessing and managing
systemic risk and protecting
investors.250
Private funds and their advisers play
an important role in both private and
public capital markets. These funds,
including hedge funds, currently have
more than $18.0 trillion in gross private
fund assets.251 Hedge funds in
particular have more than $9.7 trillion
in gross private fund assets.252 Private
funds invest in large and small
businesses and use strategies that range
from long-term investments in equity
247 See supra footnote 3. When the SEC adopted
the amendments to section 3 in 2014 in connection
with certain money market reforms, it noted that
under the proposal it was concerned that some of
the proposed money market reforms could result in
assets shifting from registered money market funds
to unregistered products such as liquidity funds,
and that the proposed amendments were designed
to help the SEC and FSOC track any potential shift
in assets and better understand the risks associated
with the proposed money market reforms. See, e.g.,
D. Hiltgen, Private Liquidity Funds: Characteristics
and Risk Indicators (DERA White Paper Jan. 2017)
(‘‘Hiltgen Paper’’), available at https://www.sec.gov/
files/2017-03/Liquidity%20Fund%20Study.pdf;
2011 Form PF Adopting Release; 2014 Form PF
Amending Release at 466; Commissioner Aguilar
Statement, July 23, 2014, available at https://
www.sec.gov/news/public-statement/2014-07-23open-meeting-statment-laa.
248 Investment advisers to private funds report on
Form ADV, on a public basis, general information
about private funds that they advise, including
basic organizational, operational information, and
information about the fund’s key service providers.
Information on Form ADV is available to the public
through the Investment Adviser Public Disclosure
System, which allows the public to access the most
recent Form ADV filing made by an investment
adviser. See, e.g., Form ADV, available at https://
www.investor.gov/introduction-investing/investingbasics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://
adviserinfo.sec.gov/.
249 As discussed above, SEC staff publish
quarterly reports of aggregated and anonymized
data regarding private funds on the SEC’s website.
See supra footnote 7; see also Private Fund
Statistics Q3 2021
250 See supra section I.
251 These estimates are based on staff review of
data from the Private Fund Statistics report for the
third quarter of 2021, issued in March 2022. Private
fund advisers who file Form PF currently have
$18.1 trillion in gross assets. See Private Fund
Statistics Q3 2021.
252 See Division of Investment Management,
Private Fund Statistics, (Aug. 21, 2021), available at
https://www.sec.gov/divisions/investment/privatefunds-statistics.shtml.
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securities to frequent trading and
investments in complex instruments.
Their investors include individuals,
institutions, governmental and private
pension funds, and non-profit
organizations.
Before Form PF was adopted, the SEC
and other regulators, including the
CFTC, had limited visibility into the
economic activity of private fund
advisers and relied largely on private
vendor databases about private funds
that covered only voluntarily provided
private fund data and did not represent
the total population.253 Form PF
represented an improvement in
available data about private funds, both
in terms of its reliability and
completeness.254 Generally, investment
advisers registered (or required to be
registered) with the Commission with at
least $150 million in private fund assets
under management must file Form PF.
Smaller private fund advisers and all
private equity fund advisers file
annually to report general information
such as the types of private funds
advised (e.g., hedge funds, private
equity funds, or liquidity funds), fund
size, use of borrowings and derivatives,
strategy, and types of investors.255 In
addition, large private equity advisers
provide data about each private equity
fund they manage. Large hedge fund
and liquidity fund advisers also provide
data about each reporting fund they
manage, and are required to file
quarterly.256
The SEC and other regulators now
have almost a decade of experience with
analyzing the data collected on Form
PF. The collected data has helped FSOC
establish a baseline picture of the
private fund industry for the use in
assessing systemic risk 257 and improved
the SEC’s oversight of private fund
advisers.258 Form PF data also has
enhanced the SEC’s and FSOC’s ability
to frame regulatory policies regarding
the private fund industry, its advisers,
and the markets in which they
participate, as well as more effectively
evaluate the outcomes of regulatory
253 See, e.g., SEC 2020 Annual Staff Report
Relating to the Use of Form PF Data (Nov. 2020),
available at https://www.sec.gov/files/2020-pfreport-to-congress.pdf.
254 Id.
255 Id.
256 Id.
257 See, e.g., OFR, 2021 Annual Report to
Congress (Nov. 2021), available at https://
www.financialresearch.gov/annual-reports/files/
OFR-Annual-Report-2021.pdf; Financial Stability
Oversight Council, 2020 Annual Report, available
at https://home.treasury.gov/system/files/261/FSOC
2020AnnualReport.pdf.
258 See, e.g., SEC 2020 Annual Staff Report
Relating to the Use of Form PF Data (Nov. 2020),
available at https://www.sec.gov/files/2020-pfreport-to-congress.pdf.
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policies and programs directed at this
sector, including the management of
systemic risk and the protection of
investors.259 Additionally, based on the
data collected through Form PF filings,
regulators have been able to regularly
inform the public about ongoing private
fund industry statistics and trends by
generating quarterly Private Fund
Statistics reports 260 and by making
publicly available certain results of staff
research regarding the characteristics,
activities, and risks of private funds.261
As discussed above, these data may also
be used by the CFTC for the purposes
of its regulatory programs, including
examinations, investigations and
investor protection efforts.262
However, this decade of experience
with analyzing Form PF data has also
highlighted certain limitations of
information collected on Form PF,
including information gaps and
situations where more granular and
timely information would improve the
SEC’s and FSOC’s understanding of the
private fund industry and the potential
systemic risk relating to its activities,
and improve regulators’ ability to
protect investors.263 For example, as
discussed above, when monitoring
funds’ activities during recent market
events like the March 2020 COVID–19
259 See
supra footnotes 257, 258.
supra footnote 249.
261 See, e.g., David C. Johnson and Francis A.
Martinez, Form PF Insights on Private Equity Funds
and Their Portfolio Companies (OFR Brief Series
No. 18–01, June 14, 2018), available at https://
www.financialresearch.gov/briefs/2018/06/14/formpf-insights-on-private-equity-funds/; Hiltgen Paper;
G. Aragon, T. Ergun, M. Getmansky, and G. Girardi,
Hedge Funds: Portfolio, Investor, and Financing
Liquidity, (DERA White Paper, May 2017), available
at https://www.sec.gov/files/dera_hf-liquidity.pdf;
George Aragon, Tolga Ergun, and Giulio Girardi,
Hedge Fund Liquidity Management: Insights for
Fund Performance and Systemic Risk Oversight
(DERA White Paper, Apr. 2021), available at
https://www.sec.gov/files/dera_hf-liquiditymanagement.pdf; Mathis S. Kruttli, Phillip J.
Monin, and Sumudu W. Watugala, The Life of the
Counterparty: Shock Propagation in Hedge FundPrime Broker Credit Networks (OFR Working Paper
No. 19–03, Oct., 2019), available at https://
www.financialresearch.gov/working-papers/files/
OFRwp-19-03_the-life-of-the-counterparty.pdf;
Mathias S. Kruttli, Phillip J. Monin, Lubomir
Petrasek, and Sumudu W. Watugala, Hedge Fund
Treasury Trading and Funding Fragility: Evidence
from the COVID–19 Crisis (Federal Reserve Board,
Finance and Economics Discussion Series No.
2021–038, Apr. 2021), available at https://
www.federalreserve.gov/econres/feds/hedge-fundtreasury-trading-and-funding-fragility-evidencefrom-the-covid-19-crisis.htm; Mathias S. Kruttli,
Phillip J. Monin, and Sumudu W. Watugala,
Investor Concentration, Flows, and Cash Holdings:
Evidence from Hedge Funds (Federal Reserve
Board, Finance and Economics Discussion Series
No. 2017–121 Dec. 15, 2017), available at https://
www.federalreserve.gov/econres/feds/investorconcentration-flows-and-cash-holdings-evidencefrom-hedge-funds.htm.
262 See supra section I.
263 See supra section I.
260 See
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turmoil, the existing aggregation of U.S.
treasury securities with related
derivatives did not reflect the role hedge
funds played in the U.S treasury
market.264 Also during the COVID–19
market turmoil, FSOC sought to
evaluate the role hedge funds played in
disruptions in the U.S. treasury market
by unwinding cash-futures basis trade
positions and taking advantage of the
near-arbitrage between cash and futures
prices of U.S. treasury securities.
Because the existing requirement
regarding turnover reporting on U.S.
treasury securities is highly aggregated,
the SEC staff, during retrospective
analyses on the March 2020 market
events, was unable to obtain a complete
picture of activity relating to long
treasuries and treasury futures.265 The
need for more granular and timely
information collected on Form PF is
further heightened by the increasing
significance of the private fund industry
to financial markets, and resulting
regulatory concerns regarding potential
risks to U.S. financial stability from this
sector.266 The SEC’s and FSOC’s
experiences analyzing Form PF data has
also identified certain areas of Form PF
where questions result in data received
that is redundant to other questions, or
instructions that result in unnecessary
reporting burden for some advisers.267
264 See
supra section II.C.2.a.
supra section II.C.2.d. This also includes
the SEC’s and FSOC’s experience analyzing data
from multiple regulatory filings. For example, one
SEC staff paper has used Form PF data and Form
N–MPF data to study rule 2a–7 risk limits and
implications of money market reforms. See, e.g.,
Hiltgen Paper.
266 The private fund industry has experienced
significant growth in size and changes in terms of
business practices, complexity of fund structures,
and investment strategies and exposures in the past
decade. See supra footnote 7. See also Financial
Stability Oversight Council Update on Review of
Asset Management Product and Activities (2014),
available at https://www.treasury.gov/initiatives/
fsoc/news/Documents/FSOC%20Update%20
on%20Review%20of%20Asset%20
Management%20Products%20and%20
Activities.pdf.
267 Based on the PRA analysis in section IV.A.3,
the current costs associated with filing Form PF
report are estimated to be $4,173.75 per quarterly
filing or $16,695 annually for smaller private fund
advisers, $41,737.50 per quarterly filing or $166,950
annually for large hedge fund advisers, $19,477.50
per quarterly filing or $77,910 annually for large
liquidity fund advisers, and $27,825 per quarterly
filing or $111,300 annually for large private equity
advisers. The calculation for large liquidity fund
advisers incorporates the adjustment explained in
footnote 9 to Table 6 (yielding an estimate of costs
prior to the proposal of $29,216.25/105*70 =
$19477.50). See Table 6. A 2018 industry survey of
large hedge fund advisers observed filing costs that
ranged from 35% to 72% higher than SEC cost
estimates. See Managed Funds Association, ‘‘A
Streamlined Form PF: Reducing Regulatory
Burden,’’ September 17, 2018, p. 3, available at
https://www.managedfunds.org/wp-content/
265 See
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2. Affected Parties
The proposal amends the general
instructions and basic information
reporting requirements facing all
categories of private fund advisers. As
discussed above, these include, but are
not limited to, advisers to hedge funds,
private equity funds, real estate funds,
securitized asset funds, liquidity funds,
and venture capital funds.268 The
proposal further amends reporting
requirements for large hedge fund
advisers, including specific revisions for
large hedge fund advisers to qualifying
hedge funds.269
Hedge funds, the focus of part of the
proposal, are one of the largest
categories of private funds,270 and as
such play an important role in the U.S.
financial system due to their ability to
mobilize large pools of capital, take
economically important positions in a
market, and their extensive use of
leverage, derivatives, complex
structured products, and short
selling.271 While these features may
uploads/2018/09/MFA.Form-PFRecommendations.attachment.final_.9.17.18.pdf.
However, a 2015 academic survey of SEC-registered
investment advisers to private funds affirmed the
SEC’s cost estimates for smaller private fund
advisers’ Form PF compliance costs, and observed
that the SEC overestimated Form PF compliance
costs for larger private fund advisers. See Wulf
Kaal, Private Fund Disclosures Under the DoddFrank Act, 9 Brooklyn Journal of Corporate,
Financial, and Commercial Law 428 (2015).
268 See supra section I.
269 Form PF currently defines ‘‘hedge fund’’
broadly to include any private fund (other than a
securitized asset fund) that has any of the following
three characteristics: (1) a performance fee or
allocation that takes into account unrealized gains,
or (2) a high leverage (i.e., the ability to borrow
more than half of its net asset value (including
committed capital) or have gross notional exposure
in excess of twice its net asset value (including
committed capital)) or (3) the ability to short sell
securities or enter into similar transactions (other
than for the purpose of hedging currency exposure
or managing duration). Any non-exempt commodity
pools about which an investment adviser is
reporting or required to report are automatically
categorized as hedge funds. Excluded from the
‘‘hedge fund’’ definition in Form PF are vehicles
established for the purpose of issuing asset backed
securities (‘‘securitized asset funds’’). See Form PF
Glossary of Terms. ‘‘Large’’ hedge fund advisers are
those, collectively with their related persons, with
at least $1.5 billion in hedge fund assets under
management as of the last day of any month in the
fiscal quarter immediately preceding the adviser’s
most recently completed fiscal quarter. Qualifying
hedge funds are hedge funds that have a net asset
value (individually or in combination with any
feeder funds, parallel funds and/or dependent
parallel managed accounts) of at least $500 million
as of the last day of any month in the fiscal quarter
immediately preceding the adviser’s most recently
completed fiscal quarter. See supra section II.C.
270 See infra footnote 273.
271 See, e.g., Lloyd Dixon, Noreen Clancy, and
Krishna B. Kumar, Hedge Fund and Systemic Risk,
RAND Corporation (2012); John Kambhu, Til
Schuermann, and Kevin Stiroh, Hedge Funds,
Financial Intermediation, and Systemic Risk,
Federal Reserve Bank of New York’s Economic
Policy Review (2007).
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enable hedge funds to generate higher
returns as compared to other investment
alternatives, the same features may also
create spillover effects in the event of
losses (whether caused by their
investment and derivatives positions or
use of leverage or both) that could lead
to significant stress or failure not just at
the affected fund but also across
financial markets.272
In the third quarter of 2021, there
were 9,484 hedge funds reported on
Form PF, managed by 1,758 advisers,
with nearly $9.8 trillion in gross assets
under management, which represented
approximately 54% of assets reported
by private fund advisers.273 Currently,
hedge fund advisers with between $150
million and $2 billion in regulatory
assets (that do not qualify as large hedge
fund advisers) file Form PF annually, in
which they provide general information
about funds they advise such as the
types of private funds advised, fund
size, their use of borrowings and
derivatives, strategy, and types of
investors. Large hedge fund advisers
(those with at least $1.5 billion in
regulatory assets under management
attributable to hedge funds) 274 file Form
PF quarterly, in which they provide data
about each hedge fund they managed
during the reporting period (irrespective
of the size of the fund). Large hedge
fund advisers must report more
information on Form PF about
qualifying hedge funds (those with at
least $500 million as of the last day of
any month in the fiscal quarter
immediately preceding the adviser’s
most recently completed fiscal
quarter) 275 than other hedge funds they
manage during the reporting period. In
the third quarter of 2021, there were
2,013 qualifying hedge funds reported
on Form PF, managed by 592 advisers,
with $8.3 trillion in gross assets under
management, which represented
approximately 85 percent of the
reported hedge fund assets.276
Private equity funds are another large
category of funds in the private fund
industry. In the third quarter of 2021,
there were 15,835 private equity funds
reported on Form PF, managed by 1,455
advisers, with $4.8 trillion in gross
272 See
supra footnotes 257, 266.
the third quarter of 2021, hedge fund assets
accounted for 54 percent of the gross asset value
(‘‘GAV’’) ($9.8/$18.1 trillion) and 42.5 percent of
the net asset value (‘‘NAV’’) ($5.1/$12.0 trillion) of
all private funds reported on Form PF. Private Fund
Statistics Q3 2021 at p. 5.
274 See supra footnote 269.
275 Id.
276 In the third quarter of 2021, qualifying hedge
fund assets accounted for 85 percent of the GAV
($8.3/$9.8 trillion) and 82 percent of the NAV ($4.2/
$5.1 trillion) of all hedge funds reported on Form
PF. Private Fund Statistics Q3 2021 at pp. 4–5.
273 In
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assets under management, which
represented over one quarter of the
reported gross assets in the private fund
industry.277 Many private equity funds
focus on long-term returns by investing
in a private, non-publicly traded
company or business—the portfolio
company—and engage actively in the
management and direction of that
company or business in order to
increase its value.278 Other private
equity funds may specialize in making
minority investments in fast-growing
companies or startups.279
For the remaining categories of funds
(real estate funds, securitized asset
funds, liquidity funds, venture capital
funds, and other private funds), advisers
required to file Form PF had, in the
third quarter of 2021, investment
discretion over $3.5 trillion in gross
assets under management.280 These
assets were managed by 1,442 fund
advisers managing 12,019 funds.281
Private funds are typically limited to
accredited investors and qualified
clients such as pension funds, insurance
companies, foundations and
endowments, and high income and net
worth individuals.282 Private funds that
rely on the exclusion from the definition
of ‘‘investment company’’ provided in
Section 3(c)(7) of the Investment
Company Act are limited to investors
that are also qualified purchasers (as
defined in section 2(a)(51) of the
Investment Company Act). Retail U.S.
investors with exposure to private funds
are typically invested in private funds
indirectly through public and private
pension plans and other institutional
investors.283 In the third quarter of
2021, public pension plans had $1,586
277 In the third quarter of 2021, private equity
assets accounted for 26 percent of the GAV ($4.8/
$18.1 trillion) and 35 percent of the NAV ($4.1/
$12.0 trillion) of all private funds reported on Form
PF. Private Fund Statistics Q3 2021 at p. 5.
278 After purchasing controlling interests in
portfolio companies, private equity advisers
frequently get involved in managing those
companies by serving on the company’s board;
selecting and monitoring the management team;
acting as sounding boards for CEOs; and sometimes
stepping into management roles themselves. See,
e.g., Private Equity Funds, Securities and Exchange
Commission, available at https://www.investor.gov/
introduction-investing/investing-basics/investmentproducts/private-investment-funds/private-equity.
279 Id.
280 Private Fund Statistics Q3 2021 at p. 5.
281 Private Fund Statistics Q3 2021 at p. 4.
282 See, e.g., Private Equity Funds, Securities and
Exchange Commission, (Investor.gov: Private Equity
Funds), available at https://www.investor.gov/
introduction-investing/investing-basics/investmentproducts/private-investment-funds/private-equity;
Hedge Funds, Securities and Exchange Commission
(Investor.gov: Hedge Funds), available at https://
www.investor.gov/introduction-investing/investingbasics/investment-products/private-investmentfunds/hedge-funds.
283 See supra footnotes 251, 282.
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billion invested in reporting private
funds while private pension plans had
$1,263 billion invested in reporting
private funds, making up 13.2 percent
and 10.5 percent of the overall
beneficial ownership in the private
equity industry, respectively.284 Private
fund advisers have also sought to be
included in individual investors’
retirement plans, including their
401(k)s.285
C. Benefits and Costs
1. Benefits
The proposal is designed to facilitate
two primary goals the SEC sought to
achieve with reporting on Form PF as
articulated in the original adopting
release, namely: (1) facilitating FSOC’s
understanding and monitoring of
potential systemic risk relating to
activities in the private fund industry
and assisting FSOC in determining
whether and how to deploy its
regulatory tools with respect to nonbank
financial companies; and (2) enhancing
the SEC’s abilities to evaluate and
develop regulatory policies and
improving the efficiency and
effectiveness of the SEC’s efforts to
protect investors and maintain fair,
orderly, and efficient markets.286
The SEC believes the proposal would
accomplish these goals in three key
ways, each discussed in detail in the
following sections. First, the proposal
would provide for solutions to potential
reporting errors and issues of data
quality when analyzing Form PF filings
across advisers and when analyzing
multiple different regulatory filings.
Higher quality data across different
funds and across different regulatory
filings can allow the SEC and FSOC to
develop an understanding of one set of
advisers and apply it to other advisers
more rapidly, or apply lessons from one
financial market to other financial
markets. This can help the SEC and
FSOC develop more effective regulatory
responses, and help the SEC protect
investors by identifying areas in need of
outreach, examinations, and
investigations in response to potential
systemic risks, conflicting arrangements
between advisers and investors, and
other sources of investor harm.
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284 Private
Fund Statistics Q3 2021 at p. 15.
e.g., Dep’t of Labor, Information Letter
(June 3, 2020), available at https://www.dol.gov/
agencies/ebsa/about-ebsa/our-activities/resourcecenter/information-letters/06-03-2020.
286 See supra section I. While the proposed
amendments are also designed to improve the
usefulness of this data for the CFTC, this economic
analysis does not include the benefits associated
with enhancements to the CFTC’s use of reporting
on Form PF.
285 See,
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Second, the proposal would help
Form PF more completely and
accurately capture information relevant
to ongoing trends in the private fund
industry in terms of ownership, size,
investment strategies, and exposures.
This can improve the SEC’s and FSOC’s
understanding of new developing
systemic risks and potential conflicting
arrangements, thereby further aiding in
the development of regulatory
responses, and also aiding the SEC in
efforts to protect investors by
identifying areas in need of outreach,
examinations, and investigations.
Third, the proposal would streamline
reporting and reduce reporting burdens
without compromising investor
protection efforts and systemic risk
analysis. This would improve the
efficiency and effectiveness of the SEC’s
efforts to protect investors and maintain
fair, orderly and efficient markets.
The SEC anticipates that the increased
ability for the SEC’s and FSOC’s
oversight, resulting from the proposed
amendments, could promote better
functioning and more stable financial
markets, which may lead to efficiency
improvements. The SEC does not
anticipate significant effects of the
proposed amendments on competition
in the private fund industry because the
reported information generally would be
nonpublic and similar types of advisers
would have comparable burdens under
the amended Form. For similar reasons,
the SEC does not anticipate significant
effects of the proposed amendments on
capital formation.
The proposal would amend the
general instructions (as well as
implement additional amendments),
section 1 (requiring basic information
about advisers and the private funds
they advise), and section 2 (requiring
information about hedge funds advised
by large private fund advisers) of Form
PF. The benefits associated with each of
these specific elements are discussed in
greater detail below.
a. Proposed Amendments to General
Instructions, Proposed Amendments To
Enhance Data Quality, and Proposed
Additional Amendments
The proposal would update the Form
PF general instructions to revise how all
private fund advisers satisfy certain
requirements on Form PF, it would
issue a series of amendments to enhance
data quality, and it would lastly issue a
series of additional amendments.287
There are five categories of such
proposals.
First, the proposal would amend the
general instructions for reporting of
287 See
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53875
master-feeder arrangements and parallel
fund structures.288 These revisions to
the general instructions would improve
consistency of reporting associated with
measuring private fund
interconnectedness and investment in
other private funds by revising
instructions for reporting of ownership
structures and revising instructions that
were previously ambiguous and resulted
in reporting errors and issues of data
quality across advisers. For example, as
discussed above, Form PF currently
provides advisers with flexibility to
respond to questions regarding masterfeeder arrangements, parallel fund
structures, and use of funds of funds
either in the aggregate or separately, as
long as they do so consistently
throughout Form PF. The revised
instructions would specify how to
respond to these questions to prevent
some advisers from responding in the
aggregate and some advisers from
responding separately.289 The proposal
would also require reporting on the total
value of parallel managed accounts.290
The SEC anticipates these improved
data would assist the SEC and FSOC in
assessing potential risks to financial
stability resulting from increasingly
complex ownership and investment
structures of private funds. While
master-feeder arrangements, parallel
fund structures, and use of funds of
funds all allow private funds to benefit
from larger pools of capital, diversify
risk, and enjoy shared returns,291 these
same features have inherent risks of
288 See supra section II.A.1. However, an adviser
would continue to aggregate these structures for
purposes of determining whether the adviser meets
a reporting threshold.
289 Similar benefits would be obtained from
proposed revisions to Instruction 7, which address
that advisers to funds of funds currently have
flexibility to choose whether to disregard a private
fund’s equity investments in other private funds for
all Form PF purposes so long as they do so
consistently throughout Form PF. Other proposed
revisions could also provide benefits associated
with consistency of reporting by revising
instructions to avoid error across filers, such as the
revisions to Instruction 8 that the instruction on
which investments to include in determining
reporting thresholds and responding to questions
applies only to investments in funds that are not
private funds, and to provide that advisers would
not be required to look through a reporting fund’s
investments in any other fund that is not a private
fund, other than a trading vehicle. See supra section
II.A.2. Similar benefits would also be obtained from
the proposed amendments updating instructions to
provide conformity with CFTC’s amendments to
Form CPO–PQR, including those that specify when
advisers that are also CPOs should complete
particular sections of Form PF. See supra section
II.E, see also Proposed Instruction 18.
290 See supra section II.A.1.
291 See, e.g., Robert Harris, Tim Jenkinson, Steven
Kaplan, Ruediger Stucke, Financial Intermediation
in Private Equity: How Well Do Funds of Funds
Perform?, 129 Journal of Financial Economics 2,
287–305 (Aug. 2018).
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spillovers in losses, as losses in a master
fund or underlying investment of a fund
of funds cause losses in connected
funds as well. Complex ownership
structures may also create conflicts of
interest when the same individuals
serve as directors on boards of both
master and feeder funds under a single
owner,292 and may also mask instances
of fraud and a private fund’s methods
for committing fraud.293 Investor
protection efforts would therefore
benefit from more consistent data
providing connections from master
funds to feeder funds and other
ownership information.
Second, the proposal would amend
the general instructions for reporting for
private funds that invest in other funds
or trading vehicles.294 Specifically, the
proposal would revise Instructions 7
and 8 to require advisers to include
information pertaining to their trading
vehicles when completing Form PF.295
Because private funds may use trading
vehicles for a wide variety of purposes,
more complete and accurate visibility
into asset class exposures, position
sizes, and counterparty exposures relied
on by trading vehicles can enhance the
SEC’s and FSOC’s systemic risk and
financial stability assessment efforts and
the SEC’s efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation.
Third, the proposal would amend the
general instructions for reporting
timelines by revising Instruction 9 to
292 See, e.g., Todd Ehret, Platinum Fraud Charges
Shine Light On Cayman Director Responsibilities,
Reuters Financial Regulatory Forum, March 30,
2017, available at https://www.reuters.com/article/
bc-finreg-cayman-private-structure/platinum-fraudcharges-shine-light-on-cayman-directorresponsibilities-idUSKBN17030J.
293 See, e.g., Melvyn Teo, Lessons Learned from
Hedge Fund Fraud, Eureka Hedge, Oct. 2009,
available at https://www.eurekahedge.com/
Research/News/506/Lessons-Learned-From-HedgeFund-Fraud.
294 These proposed amendments would include
requiring advisers to include the value of a private
fund’s investments in other private funds when
determining whether the adviser must file Form PF;
requiring an adviser to include the value of a
reporting fund’s investments in other private funds
when responding to questions on the fund, but to
not look through its investments in other private
funds when responding to questions about the
reporting fund’s investment and other activities;
amending the general instructions to explain how
advisers would report information if the reporting
fund holds investments or conducts activities
through a trading vehicle; amending Instruction 8
to indicate that the instruction on which
investments to include in determining reporting
thresholds and responding to questions applies
only to investments in funds that are not private
funds; and providing that advisers would not be
required to look through a reporting fund’s
investments in any other fund that is not a private
fund, other than a trading vehicle. See supra section
II.A.2.
295 See supra section II.A.2.
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require large hedge fund advisers and
large liquidity fund advisers to update
Form PF within a certain number of
days after the end of each calendar
quarter, rather than each fiscal quarter,
as Form PF currently requires.296 The
SEC anticipates that these amendments
would improve the consistency of
reporting across different private fund
advisers, across quarterly and annual
filings, and across different regulatory
forms,297 which may improve the ability
of regulators to analyze filing data
across fund advisers and across different
regulatory forms by resolving reporting
errors and issues of data quality. These
data analyses are important contributors
to the SEC’s and FSOC’s efforts to assess
systemic risk and develop a complete
picture of private fund markets. The
SEC anticipates that these improved
reporting alignments may enhance the
SEC’s and FSOC’s abilities to assess
potential risks presented by private
funds.298 For example, as discussed
above, academic research has used Form
PF data and Form N–MPF data to study
rule 2a–7 risk limits and implications of
money market reforms.299 Standardizing
data across regulatory filings can lead to
further industry insights from combined
regulatory filing data, and these
industry insights may improve systemic
risk assessment and regulator investor
protection efforts. However, as
discussed above, because almost all
large hedge fund advisers and large
liquidity fund advisers already
effectively file on a calendar quarter
basis because their fiscal quarter ends
on the calendar quarter, the SEC
anticipates that these benefits may be
marginal.300
296 See
supra section II.A.3.
supra section II.A.3.
298 While the amendments to general instructions
associated with reporting timelines would primarily
offer economic benefits associated with
improvement in data quality and resolutions to data
gaps, the proposed amendments to reporting
timelines would also provide a potential
improvement to regulators’ ability to evaluate
markets for investor protection efforts and systemic
risk assessment, in that they accelerate the
provision of data from quarterly reporting. See
supra section II.A.3. Moreover, as the proposal
would make reporting timelines more consistent,
there could be reduced costs associated with
regulatory filings, as private fund advisers reduce
their need to track differentiated calendar quarter
and fiscal quarter data.
299 See supra section III.B.1.
300 See supra section II.A.3. Specifically, and as
discussed above, based on staff analysis of Form
ADV data as of December 2021, 99.2 percent of
private fund advisers already effectively file on a
calendar basis because their fiscal quarter or year
ends on the calendar quarter or year end,
respectively. The 0.8 percent of private fund
advisers that have a non-calendar fiscal approach
represents approximately 274 private funds,
totaling $200 billion in gross asset value. See supra
section II.A.3.
297 See
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Fourth, the proposal would issue a
series of amendments that impact
several sections of Form PF and which
would broadly enhance data quality by
potentially resolving reporting errors
and issues of data quality. These
amendments would specify that
reported percentages be rounded to the
nearest one hundredth of one percent,
provide consistent instruction for
reporting of investment and
counterparty exposures, provide
consistent instruction on the reporting
of long and short positions, and provide
consistent instruction for reporting of
derivative values.301 We believe the
resulting improved data quality would
improve the ability of the SEC and
FSOC to evaluate market risk and
measure industry trends, thereby
increasing the efficiency with which
regulatory responses are developed,
improving systemic risk assessment and
regulator programs to protect investors.
Lastly, the proposal would issue a
series of additional amendments that
would amend instructions related to
temporary hardship exemptions,
provide conformity with the CFTC’s
amendments to Form CPO–PQR
(including those that specify when
advisers that are also CPOs should
complete particular sections of Form
PF), and revise definitions of the terms
EEA and G10 within Form PF.302 The
additional amendments updating
instructions to the temporary hardship
exemption to Form PF, by way of an
amendment to rule 204(b)–1(f) under
the Advisers Act, would make it easier
to submit a temporary hardship
exemption and would assist advisers in
determining what constitutes a ‘‘filed’’
temporary hardship exemption.303
These amendments may facilitate more
successful submissions of temporary
hardship exemptions by private fund
advisers who require one, and may
thereby reduce costs to those private
fund advisers. Similarly, by providing
conformity with the CFTC’s
amendments to Form CPO–PQR,
including those that specify when
advisers that are also CPOs should
complete particular sections of Form PF,
and revising definitions associated with
the terms EEA and G10, the proposal
may reduce confusion for advisers filing
Form PF, thereby reducing the burden
of filing.304
301 See
302 See
supra section II.D.
supra section II.E, Proposed Instruction
18.
303 See
304 See
supra section II.E.
supra section II.E, Proposed Instruction
18.
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b. Proposed Amendments to Basic
Information About the Adviser and the
Private Funds it Advises
The proposed amendments to section
1, which requires all private fund
advisers to report information about the
adviser and the private funds they
manage, include revisions to section 1a
(concerning basic identifying
information),305 revisions to section 1b
(concerning all of a private fund
adviser’s private funds),306 and
revisions to section 1c (more
specifically concerning all of a private
fund adviser’s hedge funds).307 The
proposed changes would provide greater
insight into all private funds’ operations
and strategies, and would further assist
in assessing industry trends. This
section discusses how the SEC believes
the proposed changes would thereby
enhance the SEC’s and FSOC’s systemic
risk assessment efforts and the SEC’s
efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation. This
would be accomplished in four key
ways.
First, the proposed changes would
provide more prescriptive requirements
to improve comparability across
advisers and reduce reporting errors and
issues of data quality by aligning data
across filers and across regulatory
filings, based on experience with the
form. This greater alignment could
improve the efficiency with which the
SEC and FSOC evaluate market risk and
measure industry trends, thereby
increasing the efficiency with which
regulatory responses are developed,
improving systemic risk assessment and
regulator programs to protect investors.
For example, revisions to section 1a
(relating to adviser reporting of
identifying information for all private
funds they advise) would revise
instructions on the use of LEIs and
RSSD IDs for advisers and related
persons, and could help link data more
efficiently between Form PF and other
regulatory filings that use these
universal identifiers.308 Several
revisions to section 1b (relating to
adviser reporting of basic information
for all private funds they advise) would
modify instructions and could prevent
305 See
supra section II.B.1.
supra section II.B.2.
307 See supra section II.B.3.
308 See supra section II.B.1. For example, the
proposed reporting of a fund’s and its adviser’s LEI
is consistent with the way fund relationships are
reported in the Global LEI system. See, e.g., LEI
ROC, Policy on Fund Relationships and Guidelines
for the Registration of Investment Funds in the
Global LEI System (May 20, 2019), available at
https://www.leiroc.org/publications/gls/roc_
20190520-1.pdf.
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306 See
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advisers from inadvertently reporting
different fund types on different
regulatory filings (or, when different
reporting on two different forms is
appropriate, the revised instructions are
designed to solicit the reason for
differentiated reporting), facilitating
more robust data analyses that use
combined data from multiple regulatory
forms.309 Revisions to section 1c would
require advisers to indicate which
investment strategies best describe the
reporting fund’s strategies on the last
day of the reporting period, addressing
any ambiguity about how to report
information if the reporting fund
changes strategies over time.310 The SEC
believes these revisions to section 1, and
others,311 would improve the accuracy
and reliability of Form PF data, thereby
potentially improving the SEC’s and
FSOC’s efforts to assess developing
systemic risks and FSOC’s efforts to
assess broader financial instability, as
well as potentially improving the SEC’s
efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation.
Second, the proposal would expand
the data collected by the forms into
newly emerging areas of risk. These
expanded areas of reporting broadly
capture key trends in (i) private fund
advisers’ ownership structures, and (ii)
private fund advisers’ investment and
trading strategies, including increasing
exposures to new asset classes, changing
exposures across different categories of
counterparties, and increasing use of
financial tools for increasing fund
performance.
With respect to updated reporting on
ownership structures, as discussed
above, interconnected ownership
structures have inherent risks of
309 See supra section II.B.2. For example, the
Division of Investment Management relies on Form
PF and Form ADV filings in providing quarterly
summaries of private fund industry statistics and
trends. See, e.g., Division of Investment
Management, Private Fund Statistics, (Aug. 21,
2021), available at https://www.sec.gov/divisions/
investment/private-funds-statistics.shtml.
310 See supra section II.B.3.
311 Other proposed revisions that would provide
this benefit include the proposal revising reporting
of regulatory versus net assets under management;
reporting of assumptions the adviser makes in
responding to questions on Form PF; reporting of
types of fund; reporting of master-feeder
arrangements, internal/external private funds, and
parallel fund structures; reporting of monthly gross
and net asset values; reporting of the value of
unfunded commitments; reporting on the value of
borrowing activity; reporting of fair value hierarchy;
reporting of beneficial ownership; reporting of fund
performance; more granular reporting of hedge fund
strategies; more granular reporting of hedge fund
counterparty exposures including identification of
counterparties representing a fund’s greatest
exposure; and more granular reporting of hedge
fund trading and clearing mechanisms. See supra
section II.B.
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53877
spillovers in losses, as losses in a master
fund or underlying investment of a fund
of funds cause losses in connected
funds as well, and so enhanced data on
detailed ownership structures could
improve systemic risk assessment
efforts.312 These improved data could
also contribute to efforts to protect
investors from conflicts of interest and
other sources of potential harm.313 The
types of enhancements to Form PF’s
data on interconnected ownership
structures include, for example,
requiring advisers to provide LEIs for
themselves and any of their related
persons, such as reporting funds and
parallel funds,314 and expanding the
required reporting detail on the value of
the reporting fund’s investments in
funds of funds.315 Similar to the
amendments to general instructions, the
SEC believes that these revisions would
improve measurement of these complex
ownership structures, thereby
potentially improving the SEC’s and
FSOC’s efforts to assess developing
systemic risks and FSOC’s efforts to
assess broader financial instability, as
well as potentially improving the SEC’s
efforts to protect investors from
conflicting arrangements and identify
other areas in need of outreach,
examination, or investigation.316
Many revisions would also keep Form
PF filings up to date with key
developing trends among private fund
advisers’ investing and trading
practices. These revisions would
improve consistency of reporting of
modern private fund issues across fund
advisers, provide more complete and
accurate information on developing
trends, and improve the SEC’s and
FSOC’s abilities to effectively and
efficiently assess new systemic risks and
other potential sources of investor harm,
as well as inform the SEC’s and FSOC’s
broader views on the private fund
landscape.
For example, in Form PF section 1c,
the proposal would require hedge funds
to report whether their investment
strategy includes digital assets,317 which
are a growing and increasingly
important area of hedge fund
strategy.318 The proposal would
312 See
supra section III.C.1.a.
313 Id.
314 See
supra section II.B.1.
supra section II.B.2.
316 See supra section III.C.1.a.
317 See supra section II.B.3.
318 See, e.g., AIMA, PwC, and Elwood Asset
Management, 3rd Annual Global Crypto Hedge
Fund Report 2021, available at https://
www.aima.org/educate/aima-research/thirdannual-global-crypto-hedge-fund-report-2021.html
(concluding that approximately a fifth of hedge
funds were investing in such assets in 2021, with
315 See
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therefore help the SEC and FSOC to
assess new sources of potential systemic
risk and develop regulatory responses,
and would further allow the SEC to
analyze new areas of potential investor
harm to determine any necessary
outreach, examination, or investigation.
As another example, the proposal
would introduce several questions on
counterparty exposures, corresponding
to both CCP exposures and bilateral
counterparty (i.e., non-CCP) exposures.
These additions to Form PF include
requiring advisers to report hedge fund
borrowing, lending, and collateral with
respect to transactions involving both
their bilateral counterparties and CCPs,
requiring reporting of hedge fund
derivative and repo activity that was
cleared by a CCP (as well as activity not
cleared by a CCP), and instructing
advisers on what exposures to net.319
There are two economic considerations
associated with counterparty exposure
reporting on Form PF. First and
foremost, bilateral exposures and CCP
exposures have different risk profiles,
with CCPs offering risk reduction
mechanisms and other economic
benefits by netting trading across
counterparties and across different
assets within an asset class or by
centralizing clearance and settlement
activities.320 The SEC therefore believes
the proposal could help Form PF
provide insight into relative trends in
bilateral trading versus central
counterparty trading and resulting
systemic risks from counterparty
exposures. Second, while CCPs reduce
the systemic risk associated with the
failure of any single hedge fund or other
private fund, the failure of a large CCP
itself could potentially represent a
substantial systemic risk event in the
future.321 While a systemic risk event
such as the failure of a CCP has never
occurred in the United States, CCPs in
other countries have failed,322 and the
SEC believes the proposal could help
Form PF provide new insights into the
potential for such systemic risk events
in the future. FSOC has also designated
on average three percent of their total hedge fund
assets under management invested, and 86 percent
of those hedge funds intended to deploy more
capital into this asset class by the end of 2021); see
also supra footnote 111 and accompanying text.
319 See supra section II.B.3.
320 Siro Aramonte and Wenqian Huang, Costs and
Benefits of Switching to Central Clearing, BIS
Quarterly Review (Dec. 2019), available at https://
www.bis.org/publ/qtrpdf/r_qt1912z.htm; Albert J.
Menkveld & Guillaume Vuillemey, The Economics
of Central Clearing, 13 Ann. Rev. Fin. Econ. 153
(2021).
321 Id.
322 For example, the Hong Kong Futures
Guarantee Corporation failed during the stock
market crash of 1987. See Menkveld & Vuillemey,
supra footnote 320.
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many CCP institutions as ‘‘systemically
important,’’ 323 and recommends that
regulators continue to coordinate to
evaluate threats from both default and
non-default losses associated with
CCPs.324
The SEC therefore believes these
revisions, and others like them,325
would help the SEC and FSOC better
understand the modern landscape of the
private fund industry, thereby
potentially improving the SEC’s and
FSOC’s efforts to assess developing
systemic risks and FSOC’s efforts to
assess broader financial instability, as
well as potentially improving the SEC’s
efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation.
Third, there are revisions that would
expand the scope of certain questions
from only covering qualifying hedge
funds advised by large hedge fund
advisers to covering all hedge funds
advised by any private fund adviser. By
expanding the universe of private funds
that are covered by several questions,
the proposal would enhance the SEC’s
and FSOC’s ability to conduct broad,
representative measurements regarding
the private fund industry. For example,
the proposal would require all advisers
to report whether each reporting fund
they advise provides investors with
withdrawal or redemption rights in the
ordinary course, rather than only
requiring large hedge fund advisers to
report it for the qualifying hedge funds
they advise, as Form PF currently
requires.326 Because the activities of
private fund advisers may differ
significantly depending on their size,
this enhanced coverage would
potentially enhance regulators’ abilities
to obtain a representative picture of the
private fund industry and lead to more
robust conclusions regarding emerging
industry trends and characteristics. The
SEC believes these proposed
amendments, and others,327 would
323 Financial Stability Oversight Council, 2012
Annual Report, Appendix A, available at https://
home.treasury.gov/system/files/261/2012-AnnualReport.pdf.
324 Financial Stability Oversight Council, 2021
Annual Report, p. 14, available at https://
home.treasury.gov/system/files/261/
FSOC2021AnnualReport.pdf.
325 Other proposed revisions that would provide
this benefit include the proposal reporting of
withdrawal and redemption rights; reporting of
other inflows and outflows; more granular reporting
of hedge fund strategies; more granular reporting of
hedge fund counterparty exposures including
identification of counterparties representing a
fund’s greatest exposure; and more granular
reporting of hedge fund trading and clearing
mechanisms. See supra section II.B.
326 See supra section II.B.2.
327 The proposed revisions to reporting of base
currency would provide similar benefits. See supra
section II.B.
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enhance regulator’s picture of the
private fund industry, thereby
potentially improving the SEC’s and
FSOC’s efforts to assess developing
systemic risks and FSOC’s efforts to
assess broader financial instability, as
well as potentially improving the SEC’s
efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation.
Lastly, certain proposed changes
would streamline reporting and reduce
reporting burden by removing certain
questions where other questions provide
the same or superseding information.
For example, the proposal would
remove current Question 19, which
requires advisers to hedge funds to
report whether the hedge fund has a
single primary investment strategy or
multiple strategies, and would also
remove current Question 21, which
requires advisers to hedge funds to
approximate what percentage of the
hedge fund’s net asset value was
managed using high frequency trading
strategies.328 The SEC believes that
these revisions would directly lower the
costs and help reduce part of the burden
on advisers of completing Form PF
filings.329
c. Proposed Amendments to Information
About Hedge Funds Advised by Large
Private Fund Advisers
The proposed changes to section 2
would provide greater insight into
operations and strategies into hedge
funds advised by large private fund
advisers specifically, and would also
assist in assessing broader hedge fund
industry trends. This section discusses
how the SEC believes the proposed
changes would thereby enhance the
SEC’s and FSOC’s investor protection
and systemic risk assessment efforts.
This would be accomplished in three
key ways.
As with section 1, first, the proposed
changes would provide more
prescriptive requirements to improve
comparability across advisers and
reduce reporting errors and issues of
data quality, based on experience with
the form. This would be accomplished
by standardizing reporting of
information across different advisers
and across different regulatory filings.
For example, the proposed amendments
to Question 30 (on qualifying hedge
fund exposures to different types of
assets) would replace the existing
328 See
supra section II.B.3.
benefits from streamlined reporting and
reduced reporting burden would be offset by
increased costs associated with the additional and
more granular detail that would be required on
Form PF under the proposal. See infra section
III.C.2, IV.A.3.
329 These
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complex table in Question 30 with
reporting instructions that would use a
series of drop-down menu selections
and provide additional narrative
reporting instructions and additional
information on how to report
exposures.330 Similarly, advisers to
qualifying hedge funds would now be
required to report the 10-year zero
coupon bond equivalent for all sub-asset
classes with interest rate risk, rather
than providing advisers with a choice to
report duration, WAT, or an unspecified
10-year equivalent.331 Several revisions
(relating to adviser reporting of basic
information for all hedge funds that it
advises) would revise instructions
relating to reporting of adjusted long
and short exposures and market factor
effects on a hedge fund’s portfolio.332
These revisions could potentially
prevent, for example, data errors
associated with reporting of long and
short components of a portfolio or
discrepancies across advisers in their
choices of which market factors to
report (as Form PF currently allows
advisers to omit a response to any
market factor that they do not regularly
consider in formal risk management
testing).333 As another example, the
proposal would provide for a new subasset class in investment exposure
reporting for ADRs, in line with how
ADRs are reported on the CFTC’s Form
CPO–PQR, potentially improving
assessment of currency risk across
regulatory filings.334 As a final example,
the proposal would revise reporting for
positions held physically, synthetically,
or through derivatives and indirect
exposure, and would require reporting
turnover on a per fund basis instead of
in the aggregate as well as providing for
more granular reporting of turnover.335
330 See
supra section II.C.2.
331 Id.
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332 See
supra section II.C.2.a; II.C.2.c.
333 Id. For example, higher quality data on short
positions could facilitate more accurate and timely
identification of significant market participants
during periods of volatility related to shorting
activity, such as the January 2021 ‘‘meme stock’’
episodes. See, e.g., Staff Report on Equity and
Options Market Structure Conditions in Early 2021
(Oct. 14, 2021), available at https://www.sec.gov/
files/staff-report-equity-options-market-structionconditions-early-2021.pdf.
334 See supra section II.C.2.a.
335 As discussed above, when monitoring funds’
activities during recent market events like the
March 2020 COVID–19 turmoil, the existing
aggregation of U.S. treasury securities with related
derivatives did not reflect the role hedge funds
played in the U.S. treasury market. See supra
section II.C.2.a, III.B.1. Also during the COVID–19
market turmoil, FSOC sought to evaluate the role
hedge funds played in disruptions in the U.S.
treasury market by unwinding cash-futures basis
trade positions and taking advantage of the neararbitrage between cash and futures prices of U.S.
treasury securities. Because the existing
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The SEC believes these revisions, and
others,336 would align Form PF data
across filers, thereby potentially
improving the efficiency with which the
SEC and FSOC evaluate market risk and
measure industry trends, thereby
increasing the efficiency with which
regulatory responses are developed,
improving systemic risk assessment and
regulatory programs to protect investors.
Second, the proposed changes would
help Form PF provide greater insight
into newly emerging areas of risk,
including increasing exposures to new
asset classes, changing exposures across
different categories of counterparties,
and changing risk management practices
(such as changing practices around
posting of collateral). The SEC believes
these proposed changes would help
Form PF more completely and
accurately capture information relevant
to ongoing trends in the private fund
industry. For example, in addition to
the more general investment strategy
questions in section 1c described
above,337 section 2b would define the
term ‘‘digital asset’’ and would require
large advisers to qualifying hedge funds
to report their total exposures to digital
assets.338 As another example, large
advisers to qualifying hedge funds
would be required to report exposures
to additional commodity sub-asset
classes (e.g., other (non-gold) precious
metals, agricultural commodities, and
base metal commodities).339 They
would also be required to report all
other counterparties (by name, LEI, and
financial institution affiliation) to which
a fund has net mark-to-market exposure
after collateral that equals or is greater
than either (1) five percent of a fund’s
net asset value or (2) $1 billion,
facilitating regulators’ abilities to
understand the impact a particular
requirement regarding turnover reporting on U.S.
treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March
2020 market events, was unable to obtain a
complete picture of activity relating to long
treasuries and treasury futures. See supra section
II.C.2.d, III.B.1.
336 Other proposed revisions that would provide
this benefit include the proposal revising reporting
of reportable sub-asset classes, including those for
certain categories of listed equity securities, repos,
asset-backed securities and other structured
products, derivatives, and cash and commodities;
revising reporting of open and large position
reporting; revising reporting of counterparty
exposures including reporting of significant
counterparties; revising currency reporting;
requiring significant country and industry
exposure; requiring additional reporting on fund
portfolio risk profiles; requiring more granular
reporting of investment performance by strategy;
amending reporting of portfolio liquidity; and
amending reporting of financing liquidity. See
supra section II.C.
337 See supra section III.C.1.b.
338 See supra section II.C.2.a.
339 See supra section II.C.2.a.
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53879
counterparty failure like those that
occurred during the 2008 financial crisis
and in the period since (e.g., the failure
of MF Global in 2011).340 Advisers
would also be required to report certain
of their exposures to CCPs,341 and
would be required to report each CCP
(or other third party) holding collateral
in respect of cleared exposures in excess
of 5 percent of the fund’s net asset
value, or $1 billion.342 As discussed
above, these (and other) new granular
reporting requirements would represent
new possible sources of systemic risk
for the SEC and FSOC to evaluate, and
also new areas of focus for the SEC’s
regulatory outreach, examination, and
investigation.343 The SEC believes these
revisions, and others,344 would improve
the SEC’s and FSOC’s efforts to assess
developing systemic risks and FSOC’s
efforts to assess broader financial
stability, as well as potentially improve
the SEC’s efforts to protect investors by
identifying areas in need of outreach,
examination, or investigation.
Lastly, the proposal would remove
certain questions where other questions
provide the same or superseding
information, which the SEC believes
would streamline reporting and reduce
reporting burden. For example, the
proposal would remove section 2a
entirely, proposing that the aggregated
information in section 2a is redundant
to information required to be reported in
other sections,345 and would remove the
requirement from Question 38 for
advisers to report the percentage of the
340 See supra section II.C.2.a, footnote 198 and
accompanying text.
341 See supra section II.C.2.b.
342 See supra section II.C.2.d.
343 See supra section III.C.1.b. For example, the
SEC believes the addition of a base metal
commodities sub-asset class would allow for
identification of large players in the base metals
market (such as those impacted by the March 2022
‘‘nickel squeeze,’’ during which the price of nickel
rose unusually steeply and rapidly in response to
commodity price increases caused by Russia’s
invasion of Ukraine). See supra footnote 176.
344 Other proposed revisions that would provide
this benefit include revising reporting for positions
held physically, synthetically, or through
derivatives and indirect exposure; revising
reportable sub-asset classes, including those for
certain categories of listed equity securities, repos,
asset-backed securities and other structured
products, derivatives, and other cash and
commodities; further revising reporting of
counterparty exposures including reporting of
significant counterparties (in addition to the
revisions to CCP exposures); revising currency
reporting; requiring more granular reporting of
turnover; requiring significant country and industry
exposure; requiring additional reporting on fund
portfolio risk profiles; requiring more granular
reporting of investment performance by strategy;
requiring new reporting on portfolio correlation;
amending reporting of portfolio liquidity; and
amending reporting of financing liquidity. See
supra section II.C.
345 See supra section II.C.1.
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total amount of collateral and other
credit support that a fund has posted to
counterparties that may be rehypothecated.346 The SEC believes that
these revisions, and others,347 would
directly lower the costs and reduce the
burden to advisers of completing Form
PF filings.
2. Costs
The proposed amendments to Form
PF would lead to certain additional
costs for private fund advisers. Any
portion of these costs that is not borne
by advisers would ultimately be passed
on to private funds’ investors. These
costs would vary depending on the
scope of the required information,
which is determined based on the size
and types of funds managed by the
adviser as well as each fund’s
investment strategies, including choices
of asset classes and counterparties.
These costs are quantified, to the extent
possible, by examination of the analysis
in section IV.A.3.
The SEC anticipates that the costs to
advisers associated with Form PF would
be composed of both direct compliance
costs and indirect costs. Direct costs for
advisers would consist of internal costs
(for compliance attorneys and other
non-legal staff of an adviser, such as
computer programmers, to prepare and
review the required disclosure) and
external costs (including filing fees as
well as any costs associated with
outsourcing all or a portion of the Form
PF reporting responsibilities to a filing
agent, software consultant, or other
third-party service provider).348
The SEC believes that the direct costs
associated with the proposed
amendments would be most significant
for the first updated Form PF report that
a private fund adviser would be
required to file because the adviser
would need to familiarize itself with the
new reporting form and may need to
configure its systems to gather the
required information efficiently. In
subsequent reporting periods, the SEC
anticipates that filers would incur
significantly lower costs because much
of the work involved in the initial report
is non-recurring and because of
efficiencies realized from system
346 See
supra section II.C.1.
proposed revisions that would provide
this benefit include the proposal consolidating
Question 47 into Question 36; removing the
requirement from Question 38 for advisers to report
the percentage of the total amount of collateral and
other credit support that a fund has posted to
counterparties that may be re-hypothecated; and
requiring reporting turnover on a per fund basis
instead of in the aggregate. See supra section II.C.
348 See section IV.A.3 (for an analysis of the direct
costs associated with the new Form PF
requirements for quarterly and annual filings).
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configuration and reporting automation
efforts accounted for in the initial
reporting period. This is consistent with
the results of a survey of private fund
advisers, finding that the majority of
respondents identified the cost of
subsequent annual Form PF filings at
about half of the initial filing cost.349
The SEC anticipates that the proposed
amendments aimed at improving data
quality and comparability would
impose limited direct costs on advisers
given that advisers already
accommodate similar requirements in
their current Form PF reporting and can
utilize their existing capabilities for
preparing and submitting an updated
Form PF. The SEC expects that most of
the costs would arise from the proposed
requirements to report additional and
more granular information on Form PF.
These direct costs would mainly
include an initial cost to setup a system
for collecting, verifying additional more
granular information, and limited
ongoing costs associated with periodic
reporting of this additional
information.350 We believe that the
349 See Wulf Kaal, Private Fund Disclosures
Under the Dodd-Frank Act, 9 Brooklyn Journal of
Corporate, Financial, and Commercial Law 428
(2015).
350 Based on the PRA analysis in section IV.A.3,
initial costs associated with filing the first updated
Form PF report are estimated to increase by $4,790
for smaller private fund advisers, $15,557 for large
hedge fund advisers, $8,780 for large liquidity fund
advisers, and $8,780 for large private equity
advisers. These figures are calculated as the cost of
filing under the proposal minus the cost of filing
prior to the proposal for each category of adviser.
See Table 5. Direct internal compliance costs
associated with the proposal are estimated at
$1,866.25 per quarterly filing or $7,465 annually for
smaller private fund advisers. Direct internal
compliance costs associated with the proposal are
estimated at $6,582.5 per quarterly filing or $26,330
annually for large hedge fund advisers. Direct
internal compliance costs associated with the
proposal are estimated at $3,172.5 per quarterly
filing or $12,690 annually for large liquidity fund
advisers. Direct internal compliance costs
associated with the proposal are estimated at $3,885
per quarterly filing or $15,540 annually for large
private equity advisers. These figures are calculated
as the cost of filing under the proposal minus the
cost of filing prior to the proposal for each category
of adviser, with an additional correction for large
liquidity fund advisers to incorporate the
adjustment explained in footnote 9 to Table 6
(yielding an estimate of costs prior to the proposal
of $29,216.25/105*70 = $19477.50). See Table 6. It
is estimated that there will be no additional direct
external costs and no changes to filing fees
associated with the proposed amendments. See
Table 8. The SEC anticipates that there may be
additional first-time filing costs for filers who do
not currently file on a calendar quarter basis, but
that these costs are likely to be small and not likely
to impact subsequent filings beyond the first. As
discussed above, a 2018 industry survey of large
hedge fund advisers found filing costs that ranged
from 35% to 72% higher than SEC cost estimates.
These industry cost estimates would therefore
suggest costs associated with the proposed changes
to Form PF that are potentially 35% to 72% higher
than those estimated here. See MFA Letter to
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proposed amendment to rule 204(b)–1(f)
under the Advisers Act would have
minimal costs associated with it, as the
proposed amendment only makes it
easier to submit a temporary hardship
exemption and assists advisers in
determining what constitutes a ‘‘filed’’
temporary hardship exemption.351 As
discussed in the benefits section, the
SEC believes that part of the costs to
advisers arising from the proposed
amendments would be mitigated by the
cost savings resulting from reduced
ambiguities and inefficiencies that
currently exist in the reporting
requirements, as this may reduce the
amount of time and effort required for
some advisers to prepare and submit
Form PF information.352
Indirect costs for advisers would
include the costs associated with
additional actions that advisers may
decide to undertake in light of the
additional reporting requirements on
Form PF. Specifically, to the extent that
the proposed amendments provide an
incentive for advisers to improve
internal controls and devote additional
time and resources to managing their
risk exposures and enhancing investor
protection, this may result in additional
expenses for advisers, some of which
may be passed on to the funds and their
investors.
Form PF collects confidential
information about private funds and
their trading strategies, and the
inadvertent public disclosure of such
competitively sensitive and proprietary
information could adversely affect the
funds and their investors. However, the
SEC anticipates that these adverse
effects would be mitigated by certain
aspects of the Form PF reporting
requirements and controls and systems
designed by the SEC for handling the
data. For example, because data on
Form PF generally could not, on its
own, be used to identify individual
investment positions, the ability of a
Chairman Clayton, supra note 202, at 3. However,
a 2015 survey of SEC-registered investment advisers
to private funds affirmed the SEC’s cost estimates
for smaller private fund advisers’ Form PF
compliance costs, and found that the SEC
overestimated Form PF compliance costs for larger
private fund advisers. These academic literature
cost estimates would therefore suggest that the costs
associated with the proposed changes to Form PF
estimated here are potentially conservatively large.
See Wulf Kaal, Private Fund Disclosures Under the
Dodd-Frank Act, 9 Brooklyn Journal of Corporate,
Financial, and Commercial Law 428 (2015). See
also supra footnote 267.
351 See supra section II.E.
352 The proposal also seeks to limit unnecessary
costs by avoiding redundancies between new
questions and existing questions. For example, if
the proposal is adopted, the SEC would remove
current Question 22, as it would be redundant in
light of the proposed expanded turnover reporting.
See supra footnote 214.
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competitor to use Form PF data to
replicate a trading strategy or trade
against an adviser is limited. The SEC
has controls and systems for the use and
handling of the proposed modified and
new Form PF data in a manner that
reflects the sensitivity of the data and is
consistent with the maintenance of its
confidentiality. The SEC has substantial
experience with the storage and use of
nonpublic information reported on
Form PF as well as other nonpublic
information that the SEC handles in the
course of business.
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D. Reasonable Alternatives
1. Alternatives to Proposed
Amendments to General Instructions,
Proposed Amendments To Enhance
Data Quality, and Proposed Additional
Amendments
The SEC has considered alternatives
to the proposed amendments to general
instructions, proposed amendments to
enhance data quality, and the proposed
additional amendments considered in
this proposal (including the
amendments to the process for
requesting temporary hardship
exemptions, by way of an amendment to
rule 204(b)–1(f) under the Advisers Act).
The alternatives considered have been
in the form of different choices of
framing, level of additional detail
requested by Form PF, level of detail
removed from Form PF, and precise
information targeted.
For example, in the general
instructions, the SEC considered an
alternative that would require advisers
to report only at the master fund level
or only at the feeder fund level. As
another example, with respect to trading
vehicles, the proposal currently would
require advisers to report a trading
vehicle as a separate reporting fund, the
adviser must report the trading vehicle
as a hedge fund, qualifying hedge fund,
liquidity fund, private equity fund, or
other type of fund, if it meets certain
requirements, but the SEC considered
an alternative that would only require
advisers to report trading vehicles as
investments in another fund. As a final
example, the SEC considered requiring
annual filers to file within 30 calendar
days after the end of their fiscal year,
rather than 120 calendar days.
While many alternatives may be able
to capture more detailed information, or
may be able to capture relevant
information with a smaller reporting
burden for advisers, the SEC believes
that each of the amendments to general
instructions, amendments to enhance
data quality, and additional
amendments as proposed improve data
quality and enhance the usefulness of
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reported data without imposing undue
reporting burden. As discussed above
we request suggestions and comments
on each proposed revision and
addition.353
2. Alternatives to Proposed
Amendments to Basic Information
About the Adviser and the Private
Funds It Advises
The SEC has also considered
alternatives to the proposed
amendments to basic information about
advisers and the private funds they
advise. As above, these alternatives are
in the form of different choices of
framing, level of additional detail
requested by Form PF, level of detail
removed from Form PF, and precise
information targeted.
For example, with respect to
identifying information for private
funds in section 1a, the SEC considered
an alternative that would provide more
granularity for advisers to list categories
of funds, such as differentiating between
different types of funds of funds (for
example, differentiating between multimanager funds of funds and multi-asset
funds of funds). As another example,
with respect to basic information
reported for all private funds in section
1b, the SEC considered alternatives that
would limit reporting information about
withdrawal rights, redemption rights,
and contributions to only funds and
advisers of a certain size. The SEC also
considered various alternatives with
respect to reporting of digital assets,
such as distinguishing between digital
assets that represent an ability to
convert or exchange the digital asset for
fiat currency or another asset, including
another digital asset, and those that do
not represent such a right to convert or
exchange; for digital assets that
represent a right to convert or exchange
for fiat currency or another digital asset,
those where the redemption obligation
is supported by an unconditional
guarantee of payment, such as some
‘‘central bank digital currencies,’’ and
those redeemable upon demand from
the issuer, whether or not collateralized
by a pool of assets or a reserve; for
digital assets that do not represent any
direct or indirect obligation of any party
to redeem; and for digital assets that
represent an equity, profit, or other
interest in an entity. As a final example,
with respect to basic information
reported for all hedge funds, the
proposal would currently require
advisers to identify each creditor or
other counterparty (including CCPs) to
which the reporting fund owes cash and
synthetic financing borrowing (before
posted collateral) equal to or greater
than either (1) five percent of net asset
value of the reporting fund as of the data
reporting date or (2) $1 billion, but the
SEC considered alternatives that would
change the proposed thresholds, either
increasing or decreasing Form PF’s
definition of what constitutes a
significant counterparty.
The SEC believes that each of the
amendments as proposed improve data
quality and enhance the usefulness of
reported data without imposing undue
reporting burden, but as discussed
above we request suggestions and
comments on each proposed revision
and addition.354
3. Alternatives to Proposed
Amendments to Information About
Hedge Funds Advised by Large Private
Fund Advisers
The SEC has considered alternatives
to the proposed amendments to
information about hedge funds advised
by large private fund advisers. As above,
these alternatives are in the form of
different choices of framing, level of
additional detail requested by Form PF,
level of detail removed from Form PF,
and precise information targeted.
For example, with respect to
investment exposure reporting, the
proposal would continue to require
reporting on qualifying hedge fund
exposures to different types of assets,
but would revise the instructions and
format of this reporting. As an
alternative, the SEC considered a
proposal that would require or permit
large hedge fund advisers to file
portfolio position-level information for
qualifying hedge funds similar to what
is required for large liquidity fund
advisers, and large hedge fund advisers
who do so would be allowed to forgo
responding to certain specific
investment exposure questions in
section 2, including Question 30. We
believe that the questions as currently
proposed improve data quality and
enhance the usefulness of reported data
without imposing undue reporting
burden, but we request comment on
each proposed revision and addition.355
As another example, the SEC
considered alternative approaches for
instructing reporting advisers on how to
net long and short positions for each
sub-asset class. One prong of the
proposed instructions for netting long
and short positions relies on a newly
defined term ‘‘reference asset,’’ with
which we propose to define as ‘‘a
security or other investment asset to
which the reporting fund is exposed
354 See
353 See
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through direct ownership, synthetically,
or indirect ownership,’’ 356 and instructs
advisers to net positions that have the
same underlying reference asset across
instrument types. The SEC has
considered instead tailoring these
instructions to different asset classes.
For example, the SEC considered
instructing advisers to net repo
exposures in accordance with GAAP
rules for balance sheet netting, or
instructing advisers with exposures
whose underlying reference assets are
treasury securities to net within
predefined maturity buckets. However,
the SEC believes that providing netting
instructions through the proposed single
definition of ‘‘reference asset’’ improves
data quality and enhances the
usefulness of report data without
imposing undue burden.357
As final example, the SEC also
considered requiring advisers to report
DV01 instead of the 10-year zero coupon
bond equivalent. We understand that
the 10-year zero coupon bond
equivalent is the most widely used
duration measure currently applied in
the industry, and would require the
fewest number of private funds to
update their calculations of duration to
comply with the reporting requirement,
but as discussed above the SEC requests
comment on whether DV01 would be a
more appropriate reporting
requirement.358
Broadly, the SEC believes that each of
the amendments as proposed improve
data quality and enhance the usefulness
of reported data without imposing
undue reporting burden, but as
discussed above we request suggestions
and comments on each proposed
revision and addition.359
4. Alternatives to the Definition of the
Term ‘‘Hedge Fund’’
The SEC has also considered
amending the definition of ‘‘hedge
fund’’ which is defined in the Glossary
of Terms as any private fund (other than
a securitized asset fund) (a) with respect
to which one or more investment
advisers (or related persons of
investment advisers) may be paid a
performance fee or allocation calculated
by taking into account unrealized gains
(other than a fee or allocation the
calculation of which may take into
account unrealized gains solely for the
purpose of reducing such fee or
allocation to reflect net unrealized
356 See Proposed Form PF Glossary of Terms. The
proposal would also instruct advisers to net fixed
income positions that fall within certain predefined
maturity buckets. See supra section II.C.
357 See supra section II.C.
358 See supra section II.C.
359 See supra section II.C.
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losses); (b) that may borrow an amount
in excess of one-half of its net asset
value (including any committed capital)
or may have gross notional exposure in
excess of twice its net asset value
(including any committed capital); or (c)
that may sell securities or other assets
short or enter into similar transactions
(other than for the purpose of hedging
currency exposure or managing
duration).360 As noted above, the
current definition of ‘‘hedge fund’’ is
designed to include any private fund
having any one of three common
characteristics of a hedge fund: (1) a
performance fee, (2) leverage, or (3)
short selling. In particular, this existing
definition in Form PF of ‘‘hedge fund’’
focuses on a reporting fund’s ability to
engage in certain borrowing and short
selling, rather than actual or intended
borrowing and short selling. Some
reporting funds may consider
themselves ‘‘private equity funds,’’ but
advisers report them as hedge funds,
because the reporting fund’s governing
documents permit the fund to engage in
certain borrowing and short selling
(even though it did not do so at any time
in the past 12 months).
As discussed above, hedge funds and
private equity funds are two separate
categories of private funds, and
typically differ in their characteristics,
such as a hedge fund being more likely
to engage in extensive use of (nonsubscription lines of credit) leverage,
derivatives, complex structured
products, and short selling, and a
private equity fund being more likely to
focus on long-term returns and engage
actively in the management and
direction of the companies it invests
in.361 Under the existing definition, an
adviser to a fund that holds itself out as
a private equity fund and is permitted
in its fund governing documents to
engage in certain short-selling, but has
not done so in the past 12 months,
would be reported in Form PF data as
a hedge fund with zero short exposure.
Depending on how widespread this
definitional mismatch is, it could have
an impact on data quality.362
Accordingly, the SEC is requesting
additional information on the issue.363
In doing so, the SEC is requesting
comment on a potential alternative
definition of ‘‘hedge fund,’’ under
360 See
supra section II.C.
supra section III.B.2.
362 The SEC does not have data on how many
reporting funds would be considered deemed hedge
funds, but the SEC estimates that up to 30 percent
of qualifying hedge funds could be deemed hedge
funds that advisers should report as private equity
funds. See Form PF data from current Question
49(a), as of the third quarter of 2021.
363 See supra section II.C.
361 See
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which, to qualify as a hedge fund under
the leverage prong of the potential
alternative definition, a fund would
have to satisfy subsection (b) of the
definition (the leverage prong), as it
does today, but also must have actually
borrowed or used any leverage during
the past 12 months, excluding any
borrowings secured by unfunded
commitments (i.e., subscription lines of
credit). Additionally, to qualify as a
hedge fund under the short selling
prong of the potential alternative
definition (the short selling prong), the
fund must have actually engaged in
certain short selling during the past 12
months. The SEC also considered
alternative definitions requiring, for
example, longer or shorter time periods,
different time periods for borrowing
versus short selling, or requirements for
the reporting fund to provide
redemption rights in the ordinary
course.
A revised definition could better
ensure advisers report information in
closer accordance with their
characteristics.364 For example, an
adviser to a private fund that has
actually engaged in short selling in the
preceding 12 months would meet this
alternative definition of hedge fund and
thus report the value of its short
positions as part of section 2, Item B.365
Meanwhile, for example, an adviser to
a private fund that holds itself out as a
private equity fund, has not borrowed or
used any leverage during the preceding
12 months (excluding subscription lines
of credit), and has not sold securities or
other assets short (or entered into
similar transactions) would not meet
this alternative definition of a hedge
fund, and would report information
more relevant for a private equity fund
such as, among other items, the average
debt-to-equity ratio of its portfolio
investments.366 The SEC also believes
an alternative definition would reduce
the unnecessary reporting burden faced
by advisers to deemed hedge funds that
364 This benefit may be mitigated to the extent
that any private fund advisers deliberately seek to
fill hedge fund reporting requirements because they
believe their burden of reporting the hedge fund
sections of Form PF is lower than the burden they
would face from reporting the private equity
sections of Form PF. Any such private fund
advisers could, under the proposed definition, have
their funds take on de minimis leverage or short
selling, and therefore still be instructed to report as
a hedge fund. However, we estimate that Form PF
filing is on average more burdensome for large
hedge fund advisers than for large private equity
advisers, and so there may be very few, if any,
private fund advisers deliberately filing as a hedge
fund adviser instead of as a private equity adviser.
See infra section IV.A.3
365 See supra section II.C.2.
366 See supra section II.C.2; see also Form PF,
section 4.
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hold themselves out as private equity
funds but currently comply with
instructions to report information on
Form PF section 2; however, this benefit
would be partially mitigated by the
impacted private fund advisers who
would now need to report on necessary
Form PF sections for private equity fund
advisers.367
A potential unintended consequence
of the existing reporting approach for
hedge funds could be incomplete data
sets for private equity funds, as well as
less accurate reporting about hedge
funds. However, a revised definition
that focuses on actual or contemplated
use may also result in incomplete data
sets for hedge funds, which are a class
of funds that may be systemically
significant. In particular, when first
adopting the definition, the
Commissions reasoned that even a
reporting fund for which leverage or
short selling is an important part of its
strategy may not engage in that practice
during every reporting period.368
Because a reporting fund may vary from
year to year in its use of leverage or
short selling, a revised definition that
focuses on actual or contemplated use
would also cause fluctuations in the
data from year to year, depending on
which funds use leverage or short
selling in a particular year, potentially
367 See supra section II.C.2; III.C.2; see also infra
section IV.A.3. We estimate that for advisers who
would be required to file an initial filing as a large
private equity adviser instead of a large hedge fund
adviser because of the potential alternative
definition of ‘‘hedge fund,’’ the impact on their
filing costs would be the difference in the proposed
new cost of filing for large private equity advisers
minus the current cost of filing for large hedge fund
advisers. We estimate this figure would be negative,
reflecting a cost savings. Thus, the potential
alternative definition would reduce the costs for
initial filers who would be impacted by the
definition of ‘‘hedge fund’’ by approximately
$30,883. See infra section IV.A.3, Table 5. We
estimate that for the advisers who would be
impacted by the potential alternative definition of
‘‘hedge fund’’ and would have to make ongoing
annual filings as a large private equity adviser
instead of ongoing quarterly filings as a large hedge
fund adviser, the impact of the alternative
definition on their filing costs would be the
difference in the proposed new cost of filing for
large private equity advisers minus four times the
cost of filing prior to the proposal for large hedge
fund advisers. We again estimate this figure to be
negative, and estimate an ongoing annual cost
savings to these advisers of $135,240. See infra
section IV.A.3, Table 6. Because Form PF defines
large hedge fund advisers by considering a
threshold of $1.5 billion in assets under
management but defines large private equity
advisers by considering a threshold of $2 billion in
assets under management, there may be private
fund advisers who, under the potential alternative
definition, would no longer be required to file as
a large hedge fund adviser, and would also not be
required to instead report as a large private equity
adviser.
368 See supra footnote 3; see also 2011 Form PF
Adopting Release, at text accompanying footnote
78.
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impacting the quality or usefulness of
resulting data. The potential costs of
this alternative definition also include
transition filing costs for advisers
impacted by the definition, who would
be required to update their reporting
methods to capture information from
their funds relevant for reporting on
Form PF as a private equity fund instead
of as a hedge fund, and completing
corresponding sections of the form
targeted at each category.369
The SEC has also considered
conforming changes to the definition of
‘‘hedge fund’’ for the purposes of Form
ADV.370 Form ADV relies on a
definition of ‘‘hedge fund’’ for the
purposes of only one question, which
requires advisers to identify the type of
private fund they advise by selecting
from a list of funds, including hedge
funds.371 As a result, we do not believe
there would be any substantial
additional economic effects of making
conforming changes to Form ADV. By
amending the definition in Form ADV
so that it would be consistent with how
the proposal would define it in Form
PF, this alternative would maintain the
baseline consistency of information
between Form PF and Form ADV. The
SEC anticipates that the costs associated
with a potential alternative definition of
‘‘hedge fund’’ on Form ADV would be
de minimis, as private fund advisers
would not be required to complete any
more or fewer questions on Form ADV,
at any more or fewer intervals.
E. Request for Comment
The SEC requests comment on all
aspects of our economic analysis,
including the potential costs and
benefits of the proposed amendments
and alternatives thereto, and whether
the amendments, if the SEC were to
adopt them, would promote efficiency,
369 We estimate that the average cost of a
transition filing is $19.25. See Table 7.
370 See supra section II.C. Form ADV filers
include advisers registered with the SEC and those
applying for registration with the SEC, as well as
exempt reporting advisers. Some private fund
advisers that are required to report on Form ADV
are not required to file Form PF (for example,
exempt reporting advisers and advisers with less
than $150 million in private fund assets under
management). Other advisers are required to file
Form PF and are not required to file Form ADV (for
example, advisers to commodity pools that are not
private funds). Based on the staff review of Form
ADV filings and the Private Fund Statistics, less
than 10 percent of funds reported on Form ADV but
not on Form PF in 2020.
371 See Form ADV: Instructions for Part 1A,
Instruction 6 and Form ADV Part 1A, Schedule D,
section 7.B.(1), Question 10 (‘‘Question 10’’)
(defining the term ‘‘hedge fund,’’ and specifying
that the definition applies for purposes of Question
10). Form ADV also uses the term ‘‘hedge fund’’ in
Part 2A, but does not refer to the definition
provided for Question 10.
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competition, and capital formation. In
addition, the SEC requests comments on
our selection of data sources, empirical
methodology, and the assumptions the
SEC has made throughout the analysis.
Commenters are requested to provide
empirical data, estimation
methodologies, and other factual
support for their views, in particular, on
costs and benefits estimates. In addition,
the SEC requests comment on:
214. Whether there are any additional
costs and benefits associated with the
proposed amendments to Form PF that
we should include in our analysis?
What additional materials and data
should the SEC consider for estimating
these costs and benefits?
215. Whether our assumptions about
costs associated with the proposal are
accurate? For example, is it accurate to
assume that certain costs may be
mitigated given that advisers already
accommodate similar requirements in
their current Form PF and Form ADV
reporting and can utilize their existing
capabilities for preparing and
submitting an updated Form PF?
216. Whether there are any additional
benefits or costs that should be included
associated with the reasonable
alternatives considered?
IV. Paperwork Reduction Act
CFTC:
The information collection titled
‘‘Form PF and Rule 204(b)–1’’ (OMB
Control No. 3235–0679) was issued to
the SEC and implements sections 404
and 406 of the Dodd-Frank Act by
requiring private fund advisers that
have at least $150 million in private
fund assets under management to report
certain information regarding the
private funds they advise on Form PF.
The SEC makes information on Form PF
available to the CFTC, subject to the
confidentiality provisions of the DoddFrank Act, and the CFTC may use
information collected on Form PF in its
regulatory programs, including
examinations, investigations and
investor protection efforts relating to
private fund advisers.
CFTC rule 4.27 372 does not impose
any additional burden upon registered
CPOs and CTAs that are dually
registered as investment advisers with
the SEC (‘‘dual registrants’’). There is no
requirement to file Form PF with the
CFTC, and any filings made by dual
registrants with the SEC are made
pursuant to the Advisers Act. While
372 CFTC rule 4.27, 17 CFR 4.27, was adopted
pursuant to the CFTC’s authority set forth in section
4n of the Commodity Exchange Act (‘‘CEA’’), 7
U.S.C. 6n. CFTC regulations are found at Title 17
Chapter I of the Code of Federal Regulations
(‘‘CFR’’).
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CFTC rule 4.27(d) states that dually
registered CPOs and CTAs that file Form
PF with the SEC will be deemed to have
filed Form PF with the CFTC for
purposes of any enforcement action
regarding any false or misleading
statement of material fact in Form PF,
the CFTC is not imposing any additional
burdens herein. Therefore, any burden
imposed by Form PF on entities
registered with both the CFTC and the
SEC has been fully accounted for within
the SEC’s calculations regarding the
impact of this collection of information
under the PRA, as set forth below.373
SEC:
The proposal would revise an existing
‘‘collection of information’’ within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).374 The SEC is
submitting the collection of information
to the Office of Management and Budget
(‘‘OMB’’) for review in accordance with
the PRA.375 The title for the collection
of information is ‘‘Form PF and Rule
204(b)–1’’ (OMB Control Number 3235–
0679), and includes both Form PF and
rule 204(b)–1 (‘‘the rules’’).376 An
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless it
displays a currently valid OMB control
number.
A. Form PF
Compliance with the information
collection titled ‘‘Form PF and Rule
204(b)–1’’ is mandatory. The
respondents are investment advisers
that (1) are registered or required to be
registered under Advisers Act section
203, (2) advise one or more private
funds, and (3) managed private fund
assets of at least $150 million at the end
of their most recently completed fiscal
year (collectively, with their related
persons).377 Form PF divides
respondents into groups based on their
size and types of private funds they
manage, requiring some groups to file
more information more frequently than
others. The types of respondents are (1)
smaller private fund advisers, that
report annually (i.e., private fund
advisers that do not qualify as large
private fund advisers), (2) large hedge
fund advisers, that report more
information quarterly (i.e., advisers with
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373 44
U.S.C. 3501–3521.
374 44 U.S.C. 3501 through 3521.
375 44 U.S.C. 3507(d); 5 CFR 1320.11.
376 The SEC also submitted the collection of
information to OMB in connection with the 2022
SEC Form PF Proposal (ICR Reference No. 202202–
3235–026) (conclusion date May 17, 2022) available
at https://www.reginfo.gov/public/do/
PRAViewICR?ref_nbr=202202-3235-026; 2022 SEC
Form PF Proposal, supra footnote 3.
377 See 17 CFR 275.204(b)–1.
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at least $1.5 billion in hedge fund assets
under management), (3) large liquidity
fund advisers, that report more
information quarterly (i.e., advisers that
manage liquidity funds and have at least
$1 billion in combined money market
and liquidity fund assets under
management), and (4) large private
equity advisers, that report more
information annually (i.e., advisers with
at least $2 billion in private equity fund
assets under management). As discussed
more fully in section II above and as
summarized in sections IV.A.1 and
IV.A.3.a below, the proposal would
revise how all types of respondents
report certain information on Form PF.
1. Purpose and Use of the Information
Collection
The rules implement provisions of
Title IV of the Dodd-Frank Act, which
amended the Advisers Act to require the
SEC to, among other things, establish
reporting requirements for advisers to
private funds.378 The information
collected on Form PF is designed to
facilitate FSOC’s monitoring of systemic
risk in the private fund industry and
assist FSOC in determining whether and
how to deploy its regulatory tools with
respect to nonbank financial
companies.379 The SEC also may use
information collected on Form PF in its
regulatory programs, including
examinations, investigations, and
investor protection efforts relating to
private fund advisers.380
The proposed amendments are
designed to enhance FSOC’s ability to
monitor systemic risk as well as bolster
the SEC’s regulatory oversight of private
fund advisers and investor protection
efforts. The proposal would amend the
form’s general instructions, as well as
section 1 of Form PF, which would
apply to all Form PF filers. The proposal
also would amend section 2 of Form PF,
which would apply to large hedge fund
advisers that advise qualifying hedge
funds (i.e., hedge funds with a net asset
value of at least $500 million).
2. Confidentiality
Responses to the information
collection will be kept confidential to
the extent permitted by law.381 Form PF
elicits non-public information about
private funds and their trading
strategies, the public disclosure of
which could adversely affect the funds
and their investors. The SEC does not
intend to make public Form PF
378 See 15 U.S.C. 80b–4(b) and 15 U.S.C. 80b–
11(e).
379 See Form PF.
380 Id.
381 See 5 CFR 1320.5(d)(2)(vii) and (viii).
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information that is identifiable to any
particular adviser or private fund,
although the SEC may use Form PF
information in an enforcement action
and FSOC may use it to assess potential
systemic risk.382 SEC staff issues certain
publications designed to inform the
public of the private funds industry, all
of which use only aggregated or masked
information to avoid potentially
disclosing any proprietary
information.383 The Advisers Act
precludes the SEC from being
compelled to reveal Form PF
information except (1) to Congress,
upon an agreement of confidentiality,
(2) to comply with a request for
information from any other Federal
department or agency or self-regulatory
organization for purposes within the
scope of its jurisdiction, or (3) to comply
with an order of a court of the United
States in an action brought by the
United States or the SEC.384 Any
department, agency, or self-regulatory
organization that receives Form PF
information must maintain its
confidentiality consistent with the level
of confidentiality established for the
SEC.385 The Advisers Act requires the
SEC to make Form PF information
available to FSOC.386 For advisers that
are also commodity pool operators or
commodity trading advisers, filing Form
PF through the Form PF filing system is
filing with both the SEC and CFTC.387
Therefore, the SEC makes Form PF
information available to FSOC and the
CFTC, pursuant to Advisers Act section
204(b), making the information subject
to the confidentiality protections
applicable to information required to be
filed under that section. Before sharing
any Form PF information, the SEC
requires that any such department,
agency, or self-regulatory organization
represent to the SEC that it has in place
controls designed to ensure the use and
handling of Form PF information in a
manner consistent with the protections
required by the Advisers Act. The SEC
has instituted procedures to protect the
confidentiality of Form PF information
in a manner consistent with the
protections required in the Advisers
Act.388
382 See
15 U.S.C. 80b–10(c) and 15 U.S.C. 80b–
4(b).
383 See e.g., Private Funds Statistics, issued by
staff of the SEC Division of Investment
Management’s Analytics Office, which we have
used in this PRA as a data source, available at
https://www.sec.gov/divisions/investment/privatefunds-statistics.shtml.
384 See 15 U.S.C. 80b–4(b)(8).
385 See 15 U.S.C. 80b–4(b)(9).
386 See 15 U.S.C. 80b–4(b)(7).
387 See 2011 Form PF Adopting Release, supra
footnote 3 at n.17.
388 See 5 CFR 1320.5(d)(2)(viii).
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We are revising our total burden
estimates to reflect the proposed
amendments, updated data, and new
methodology for certain estimates.389
The tables below map out the Form PF
requirements as they apply to each
group of respondents and detail our
burden estimates.
389 For the previously approved estimates, see ICR
Reference No. 202011–3235–019 (conclusion date
Apr. 1, 2021), available at https://www.reginfo.gov/
public/do/PRAViewICR?ref_nbr=202011-3235-019.
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and (3) transition filings, final filings,
and temporary hardship requests.
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c. Annual Monetized Time Burden
Estimates
Below are tables with annual
monetized time burden estimates for (1)
initial filings, (2) ongoing annual and
quarterly filings, and (3) transition
filings, final filings, and temporary
hardship requests.390
390 The hourly wage rates are based on (1)
SIFMA’s Management & Professional Earnings in
the Securities Industry 2013, modified by SEC staff
to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead;
and (2) SIFMA’s Office Salaries in the Securities
Industry 2013, modified by SEC staff to account for
an 1,800-hour work-year and inflation, and
multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.
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d. Annual External Cost Burden
Estimates
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Below is a table with annual external
cost burden estimates for initial filings
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as well as ongoing annual and quarterly
filings. There are no filing fees for
transition filings, final filings, or
temporary hardship requests and we
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continue to estimate there would be no
external costs for those filings, as
previously approved.
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e. Summary of Estimates and Change in
Burden
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BILLING CODE 8011–01–C
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B. Request for Comments
We request comment on whether our
estimates for burden hours and external
costs as described above are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the
SEC solicits comments in order to (1)
evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the SEC, including whether
the information will have practical
utility; (2) evaluate the accuracy of the
SEC’s estimate of the burden of the
proposed collection of information; (3)
determine whether there are ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(4) determine whether there are ways to
minimize the burden of the collection of
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information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons wishing to submit comments
on the collection of information
requirements of the proposed
amendments should direct them to the
OMB Desk Officer for the Securities and
Exchange Commission,
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov, and should send a copy to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090, with
reference to File No. S7–22–22. OMB is
required to make a decision concerning
the collections of information between
30 and 60 days after publication of this
release; therefore a comment to OMB is
best assured of having its full effect if
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OMB receives it within 30 days after
publication of this release. Requests for
materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, refer to File No. S7–22–22, and
be submitted to the Securities and
Exchange Commission, Office of FOIA
Services, 100 F Street NE, Washington,
DC 20549–2736.
V. Regulatory Flexibility Act
Certification
CFTC:
The Regulatory Flexibility Act (the
‘‘RFA’’) 391 requires that Federal
agencies consider whether the rules
they propose will have a significant
economic impact on a substantial
391 5
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number of ‘‘small entities’’ 392 whenever
an agency publishes a general notice of
proposed rulemaking for any rule,
pursuant to the notice-and-comment
provisions of the Administrative
Procedure Act.393
Registered CPOs and CTAs that are
dually registered as investment advisers
with the SEC are only required to file
Form PF with the SEC pursuant to the
Advisers Act. CFTC rule 4.27(d)
provides that dually registered CPOs
and CTAs that file Form PF with the
SEC will be deemed to have filed Form
PF with the CFTC, for purposes of any
enforcement action regarding any false
or misleading statement of material fact
in Form PF. The CFTC is not imposing
any additional obligation herein beyond
what is already required of these entities
when filing Form PF with the SEC.
Entities impacted by the Form PF are
the SEC’s regulated entities and no
small entity on its own would meet the
Form PF’s minimum reporting threshold
of $150 million in regulatory assets
under management attributable to
private funds. Also, any economic
impact imposed by Form PF on small
entities registered with both the CFTC
and the SEC has been accounted for
within the SEC’s initial regulatory
flexibility analysis regarding the impact
of this collection of information under
the RFA. Accordingly, the Chairman, on
behalf of the CFTC, hereby certifies
pursuant to 5 U.S.C. 605(b) that the
proposed rules will not have a
significant economic impact on a
substantial number of small entities.
SEC:
The Regulatory Flexibility Act of 1980
(‘‘Regulatory Flexibility Act’’) 394
requires the SEC to prepare and make
available for public comment an initial
regulatory flexibility analysis of the
impact of the proposed rule
amendments on small entities, unless
the SEC certifies that the rules, if
adopted would not have a significant
economic impact on a substantial
number of small entities.395 For the
purposes of the Advisers Act and the
Regulatory Flexibility Act, an
investment adviser generally is a small
entity if it (1) has assets under
management having a total value of less
than $25 million, (2) did not have total
assets of $5 million or more on the last
day of the most recent fiscal year, and
(3) does not control, is not controlled
by, and is not under common control
with another investment adviser that
5 U.S.C. 603(a) and 5 U.S.C. 605(b).
U.S.C. 553. The Administrative Procedure
Act is found at 5 U.S.C. 551 et seq.
394 5 U.S.C. 601, et. seq.
395 See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
has assets under management of $25
million or more, or any person (other
than a natural person) that had total
assets of $5 million or more on the last
day of its most recent fiscal year.396
Pursuant to section 605(b) of the
Regulatory Flexibility Act, the SEC
hereby certifies that the proposed
amendments to Advisers Act rule
204(b)–1 and Form PF would not, if
adopted, have a significant economic
impact on a substantial number of small
entities. By definition, no small entity
on its own would meet rule 204(b)–1
and Form PF’s minimum reporting
threshold of $150 million in regulatory
assets under management attributable to
private funds. Based on Form PF and
Form ADV data as of December 2021,
the SEC estimates that no small entity
advisers are required to file Form PF.
The SEC does not have evidence to
suggest that any small entities are
required to file Form PF but are not
filing Form PF. Therefore, there would
be no significant economic impact on a
substantial number of small entities.
The SEC encourages written comments
on the certifications. Commentators are
asked to describe the nature of any
impact on small entities and provide
empirical data to support the extent of
the impact.
VI. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (‘‘SBREFA’’),397 the SEC must
advise OMB whether a proposed
regulation constitutes a ‘‘major’’ rule.
Under SBREFA, a rule is considered
‘‘major’’ where, if adopted, it results in
or is likely to result in the following:
• An annual effect on the economy of
$100 million or more;
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment, or innovation.
The SEC requests comment on
whether the proposal would be a ‘‘major
rule’’ for purposes of SBREFA. The SEC
solicits comment and empirical data on
the following:
• The potential effect on the U.S.
economy on an annual basis;
• Any potential increase in costs or
prices for consumers or individual
industries; and
• Any potential effect on competition,
investment, or innovation.
392 See
393 5
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396 17
CFR 275.0–7.
Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
397 Public
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Commenters are requested to provide
empirical data and other factual support
for their views to the extent possible.
VII. Statutory Authority
CFTC:
The CFTC is not proposing any
amendments to its rules in this
rulemaking.
SEC:
The SEC is proposing amendment to
rule 204(b)–1 [17 CFR 275.204(b)–1]
pursuant to its authority set forth in
sections 204(b) and 211(e) of the
Advisers Act [15 U.S.C. 80b–4 and 15
U.S.C. 80b–11], respectively.
The SEC is proposing amendments to
rule 279.9 pursuant to its authority set
forth in sections 204(b) and 211(e) of the
Advisers Act [15 U.S.C. 80b–4 and 15
U.S.C. 80b–11], respectively.
List of Subjects in 17 CFR Parts 275 and
279
Reporting and recordkeeping
requirements, Securities.
For the reasons set forth in the
preamble, title 17, chapter II of the Code
of Federal Regulations is proposed to be
amended as follows.
PART 275—RULES AND
REGULATIONS, INVESTMENT
ADVISERS ACT OF 1940
1. The general authority citation for
part 275 continues to read as follows.
■
Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b–
2(a)(11)(H), 80b–2(a)(17), 80b–3, 80b–4, 80b–
4a, 80b–6(4), 80b–6a, and 80b–11, unless
otherwise noted.
*
*
*
*
*
2. Amend § 275.204(b)–1 by:
■ a. Revising paragraph (f)(2)(i) to
remove the phrases ‘‘in paper format,’’
and ‘‘, Item A of Section 1a and Section
5 of Form PF, checking the box in
Section 1a indicating that you are
requesting a temporary hardship
exemption’’;
■ b. Redesignating paragraph (f)(4) as
paragraph (f)(5); and
■ c. Adding new paragraph (f)(4).
The addition reads as follows:
■
§ 275.204(b)–1 Reporting by investment
advisers to private funds.
*
*
*
*
*
(f) * * *
(4) A request for a temporary hardship
exemption is considered filed upon the
earlier of the date the request is
postmarked or the date it is received by
the Commission.
*
*
*
*
*
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3. The authority citation for part 279
continues to read as follows:
4. § 279.9 Form, PF, reporting by
investment bankers to private funds.
Form PF [referenced in § 279.9] is
revised to read as follows. The revised
version of Form PF is attached as
Appendix A.
Authority: The Investment Advisers Act of
1940, 15 U.S.C. 80b–1, et seq., Pub. L. 111–
203, 124 Stat. 1376.
Note: The text of Form PF does not, and
the amendments will not, appear in the Code
of Federal Regulations.
PART 279—FORMS PRESCRIBED
UNDER THE INVESTMENT ADVISERS
ACT OF 1940
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By the Commissions.
Dated: August 10, 2022.
Christopher Kirkpatrick,
Secretary, Commodity Futures Trading
Commission.
Vanessa A. Countryman,
Secretary, Securities and Exchange
Commission.
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BILLING CODE 8011–01–C
Note: The following Commodity Futures
Trading Commission (CFTC) appendices will
not appear in the Code of Federal
Regulations.
CFTC Appendices to Amendments to
Form PF To Amend Reporting
Requirements for All Filers and Large
Hedge Fund Advisers—CFTC Voting
Summary and Commissioners’
Statements
CFTC Appendix 1—Voting Summary
On this matter, Chairman Behnam and
Commissioners Johnson and Goldsmith
Romero voted in the affirmative.
Commissioners Mersinger and Pham voted in
the negative.
CFTC Appendix 2—Statement of
Chairman Rostin Behnam
I appreciate all of the hard work of the staff
in the Commodity Futures Trading
Commission’s Market Participants Division
as well as the staff at the Securities and
Exchange Commission, the Department of the
Treasury, the Federal Reserve Board, and the
Financial Stability Oversight Council for
their work on this proposal. I look forward
to the public’s thoughtful comments on the
proposal to improve the usefulness of Form
PF.
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CFTC Appendix 3—Statement of
Commissioner Kristin N. Johnson
Transparency is an integral component of
the regulatory framework that ensures the
safety and soundness and enduring
preeminence our financial markets.
Working in collaboration with our
colleagues at the Securities and Exchange
Commission (SEC) to enhance oversight and
improve visibility through thoughtfully
designed and well-calibrated collection
approaches is consistent with our mission
and statutory mandate—to ‘‘insure the
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financial integrity of all transactions subject
to this Act and the avoidance of systemic
risk.’’ 398
The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act) 399 incorporated innovative regulatory
features for promoting the stability of the US
financial system, including establishing the
Financial Stability Oversight Council (FSOC)
to monitor for emerging systemic risks that
could significantly impact our financial
markets and American consumers.400
Today’s proposal seeks to further our
commitment to achieving these values.
Consequently, I support issuing for comment
the proposal to amend Form PF, and look
forward to the thoughtful, substantive
contributions that the proposed amendments
will engender.
Congress in drafting the Dodd-Frank Act
recognized that risks with systemic import
are best monitored through collaboration
amongst the US financial regulators, each
with distinct regulatory mandates, and
leveraging their resources and expertise to
support FSOC’s overarching responsibilities.
Form PF reflects these statutory qualities. As
directed by the Dodd-Frank Act, the
Commission and SEC in 2011 jointly issued
rules to provide FSOC with important
information about private fund operations
and strategies through Form PF.401
The private fund industry has only grown
in size and importance since 2011. In the
third quarter of 2021, private funds reported
a staggering $12 trillion of assets on Form
PF.402 The sheer aggregate size of private
398 Section 3(b) of the Commodity Exchange Act,
7 U.S.C. 5(b).
399 Public Law 111–203, 124 Stat. 1376 (2010).
400 See Sections 111 and 120 of the Dodd-Frank
Act.
401 Reporting by Investment Advisers to Private
Funds and Certain Commodity Pool Operators and
Commodity Trading Advisors on Form PF, 76 FR
71128, 71129 (Nov. 16, 2011).
402 Amendments to Form PF to Amend Reporting
Requirements for All Filers and Large Hedge Fund
Advisers (Voting Copy—As approved by the
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funds signifies the potential for events in this
industry to produce reverberating effects on
the integrity of our financial markets and, in
turn, remarkably influence the welfare of
American consumers. Form PF over the last
decade has provided financial regulators
with needed transparency into this
potentially systemically significant sector of
the financial system.403
I support the Commissions’ endeavor to
build on data collection points that need
clarity and to propose revisions in response
to changes in financial markets as well as
market participants and regulators’
experience with Form PF as a tool for
gathering information. Over the last decade,
private funds have adopted new practices,
investment strategies and an appetite for
investing in non-traditional assets.404 The
proposed revisions to Form PF aim to adapt
to these developments as informed by
experience in administering Form PF.
Notwithstanding these important gains, I
note that it will be important to hear from
and consider the concerns raised by all
stakeholders, including for example,
concerns regarding the costs and challenges
of reporting, particularly for smaller entities.
I anticipate the proposal to amend Form PF
will engender important substantive
contributions that will refine our
understanding of the benefits of data
collection, enhance transparency, and
improve our ability to preserve the integrity
of our markets.
CFTC Appendix 4—Statement of
Commissioner Christy Goldsmith
Romero
As a U.S. financial markets regulator and
a member of the Financial Stability Oversight
Council (‘‘FSOC’’), the Commission has a
Commodity Futures Trading Commission on 8/10/
2022) (Proposed Rules) at 8 n.7, https://
www.cftc.gov/media/7536/votingdraft
081022Parts275and279/download.
403 See Proposed Rules at 150.
404 Proposed Rules at 7–8.
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Federal Register / Vol. 87, No. 169 / Thursday, September 1, 2022 / Proposed Rules
critical responsibility to monitor, identify,
and respond to systemic risks and emerging
threats to U.S. financial stability. I support
the proposed amendments to Form PF
because they will enhance one of the
Commission’s tools to fulfill that critical
responsibility and facilitate our regulatory
oversight of private funds.1
One lesson from the financial crisis was
the risk of contagion to U.S. financial markets
from private-fund activities, strategies, and
exposures, including those related to novel or
complex derivatives. This was evident with
the failure of Bear Stearns’ structured credit
funds in the lead-up to the financial crisis,
and more recently, with the failure of
Archegos Capital Management. These
examples, and others, highlight the necessity
for U.S. financial regulators to have visibility
into funds’ activities and exposures to fulfill
their regulatory responsibilities and
ultimately, to prevent or mitigate the buildup
of systemic risk in the U.S. financial system.
This proposal marks important
coordination with the Securities and
Exchange Commission (‘‘SEC’’) to enhance
joint reporting requirements and guard
against hidden risks in the U.S. financial
system.
The CFTC and SEC embark on this
proposed rulemaking after nearly a decade of
experience of private fund reporting.2 It is
particularly appropriate to revisit our
reporting framework given that, as U.S.
financial markets have evolved over the past
decade, the private fund space has grown and
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1 The data collected also supports the CFTC’s
supervision, examinations, enforcement
investigations, and customer protections.
2 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, section 112, Public Law
111–203, 124 Stat. 1376 (2010) (the ‘‘Dodd-Frank
Act’’), required the SEC and CFTC to establish joint
rules in furtherance of the FSOC’s critical mission
to monitor systemic risk through the creation of
Form PF. See Section 406 of the Dodd-Frank Act.
Since 2012, private fund advisers, including certain
commodity pool operators and commodity trading
advisors that are dually-registered with both the
CFTC and SEC, have been required to file reports
regarding their operations and holdings through
Form PF. See also Reporting by Investment
Advisers to Private Funds and Certain Commodity
Pool Operators and Commodity Trading Advisors
on Form PF, 76 FR 71128 (Nov. 16, 2011).
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evolved in tandem. This is why we seek
public comment on new or revised areas of
data—including those intended to provide
further insight into complex structures, new
types of instruments, identification data,
redemption and withdrawal rights,
ownership, and counterparty exposures,
among other subjects. It is also important that
we collect information on fund exposure to
digital assets in order to understand evolving
market risk.
Our objective is to increase the usefulness
of the data collected; to ensure that it is
actually used as Congress intended to bring
transparency to risk previously hidden. I look
forward to reviewing public comment on
whether the proposal would meet our
objective.
Thank you to Commission staff for working
with my office to improve the proposal to
facilitate effective oversight by the CFTC. I
commend staff from both agencies on this
proposal, and on future information sharing,
that will promote the financial stability of
U.S. financial markets.
CFTC Appendix 5—Dissenting
Statement of Commissioner Summer K.
Mersinger
I am respectfully voting to dissent on the
joint SEC/CFTC proposed rulemaking to
amend Form PF, the confidential reporting
form for certain SEC-registered investment
advisers to private funds. The class of
registered investment advisers required to
submit Form PF includes those that also are
registered with the CFTC as commodity pool
operators or commodity trading advisors.
As I previously stated in my concurrence
to the CFTC’s recent Request for Information
on Climate-Related Financial Risk (‘‘Climate
RFI’’),1 I support efforts to engage market
participants, industry, and the general public
in our policy-making process. And I agree
that after a decade of experience with Form
PF, it is appropriate to evaluate possible
amendments. If improvements can be made
1 See Concurring Statement of Commissioner
Summer K. Mersinger Regarding Request for
Information on Climate-Related Financial Risk
(June 2, 2022), available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/
mersingerstatement060222.
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53985
that would enable us to collect more
efficiently data that we truly need to fulfill
our responsibilities, while reducing
unnecessary burdens on those required to
supply that data, we should consider them.
However, I do not support this particular
proposal. Data and information that federal
regulators request from market participants
should be narrowly tailored to the purpose
intended under our governing statutes, and
unfortunately, that does not appear to be the
overall approach in this proposal. I am even
more concerned that constructive input the
agencies already have received over the years
from market participants that actually
complete Form PF receives little attention in
the proposal.
I look forward to receiving the public’s
comments, which I hope will inform the
Commissions’ consideration of final
amendments to Form PF that provide for the
collection of necessary data as efficiently as
possible.
CFTC Appendix 6—Dissenting
Statement of Commissioner Caroline D.
Pham
I respectfully dissent from the proposed
amendments to the Reporting Form for
Investment Advisers to Private Funds and
Certain Commodity Pool Operators and
Commodity Trading Advisors (Form PF). The
proposed joint amendments, an action of the
CFTC as well as the SEC, seem to impose
overly broad obligations that would be
unnecessarily burdensome and would
present potentially significant operational
challenges and costs without a persuasive
cost-benefit analysis under the Commodity
Exchange Act (CEA).1 In a time of economic
challenges, including rising inflation, we
must be careful when considering proposals
that could inhibit positive economic activity
that supports American businesses and jobs.
I look forward to hearing from commenters
as to the proposed amendments, including
practical implementation issues and the
relative costs and benefits of the proposal.
[FR Doc. 2022–17724 Filed 8–31–22; 8:45 am]
BILLING CODE 8011–01–P 6351–01–P
17
U.S.C. 19.
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]]>Agencies
[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Proposed Rules]
[Pages 53832-53985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17724]
[[Page 53831]]
Vol. 87
Thursday,
No. 169
September 1, 2022
Part II
Commodity Futures Trading Commission
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Securities and Exchange Commission
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17 CFR Parts 275 and 279
Form PF; Reporting Requirements for All Filers and Large Hedge Fund
Advisers; Proposed Rule
Federal Register / Vol. 87 , No. 169 / Thursday, September 1, 2022 /
Proposed Rules
[[Page 53832]]
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COMMODITY FUTURES TRADING COMMISSION
RIN 3038-AF31
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6083; File No. S7-22-22]
RIN 3235-AN13
Form PF; Reporting Requirements for All Filers and Large Hedge
Fund Advisers
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
the ``Commissions'') are proposing to amend Form PF, the confidential
reporting form for certain SEC-registered investment advisers to
private funds, including those that also are registered with the CFTC
as a commodity pool operator (``CPO'') or commodity trading adviser
(``CTA''). The amendments are designed to enhance the Financial
Stability Oversight Council's (``FSOC's'') ability to monitor systemic
risk as well as bolster the SEC's regulatory oversight of private fund
advisers and investor protection efforts. In connection with the
amendments to Form PF, the SEC proposes to amend a rule under the
Investment Advisers Act of 1940 (the ``Advisers Act'') to revise
instructions for requesting a temporary hardship exemption. We also are
soliciting comment on the proposed rules and a number of alternatives,
including whether certain possible changes to the proposal should apply
to Form ADV.
DATES: Comments should be received on or before October 11, 2022.
ADDRESSES: Comments may be submitted by any of the following methods.
CFTC: Comments may be submitted to the CFTC by any of the following
methods.
CFTC Comments portal: https://comments.cftc.gov. Follow
the instructions for submitting comments through the website.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail above.
Please submit your comments using only one method. To avoid
possible delays with mail or in-person deliveries, submissions through
the CFTC website are encouraged. ``Form PF'' must be in the subject
field of comments submitted via email, and clearly indicated on written
submissions. All comments must be submitted in English, or if not,
accompanied by an English translation. Comments will be posted as
received to www.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the CFTC to consider
information that may be exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in
17 CFR 145.9.
The CFTC reserves the right, but shall have no obligation, to
review, prescreen, filter, redact, refuse, or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, including, but not limited to, obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act, 5 U.S.C. 552, et seq. (``FOIA'').
SEC: Comments may be submitted to the SEC by any of the following
methods:
Electronic Comments
Use the SEC's internet comment forms (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
Send an email to [email protected]. Please include
File Number S7-22-22 on the subject line.
Paper Comments
Send paper comments to Secretary, U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-22-22. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The SEC will post all comments on the SEC's website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for
website viewing and printing in the SEC's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Operating conditions may limit access to
the SEC's Public Reference Room. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda, or other substantive items may be added by the
SEC or staff to the comment file during this rulemaking. A notification
of the inclusion in the comment file of any such materials will be made
available on the SEC's website. To ensure direct electronic receipt of
such notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: CFTC: Pamela Geraghty, Associate
Director; Michael Ehrstein, Special Counsel; Andrew Ruggiero, Attorney-
Advisor at (202) 418-6700, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW Washington, DC 20581. SEC: Alexis
Palascak, Lawrence Pace, Senior Counsels; Christine Schleppegrell,
Acting Branch Chief at (202) 551-6787 or [email protected], Investment
Adviser Regulation Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The CFTC and SEC are requesting public
comment on the following under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (``Advisers Act'').1 2
---------------------------------------------------------------------------
\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any section of the Advisers Act, we are referring
to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section of these
rules, we are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR 275], in which these rules are published.
\2\ Form PF is a joint form between the SEC and CFTC only with
respect to sections 1 and 2 of the Form.
[[Page 53833]]
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Agency Reference CFR citation
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CFTC & SEC...................... Form PF \2\....... 17 CFR 279.9.
SEC............................. Rule 204(b)-1..... 17 CFR 275.204(b)-
1.
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Table of Contents
I. Introduction
II. Discussion
A. Proposed Amendments to the General Instructions
1. Reporting Master-Feeder Arrangements and Parallel Fund
Structures
2. Reporting Private Funds that Invest in Other Funds
3. Reporting Timelines
B. Proposed Amendments Concerning Basic Information about the
Adviser and the Private Funds it Advises
1. Proposed Amendments to Section 1a of Form PF--Identifying
Information
2. Proposed Amendments to Section 1b of Form PF--Concerning All
Private Funds
3. Proposed Amendments to Section 1c of Form PF--Concerning All
Hedge Funds
C. Proposed Amendments Concerning Information about Hedge Funds
Advised by Large Private Fund Advisers
1. Proposed Amendments to Section 2a
2. Proposed Amendments to Section 2b
D. Proposed Amendments To Enhance Data Quality
E. Proposed Additional Amendments
III. Economic Analysis
A. Introduction
B. Economic Baseline and Affected Parties
1. Economic Baseline
2. Affected Parties
C. Benefits and Costs
1. Benefits
2. Costs
D. Reasonable Alternatives
1. Alternatives to Proposed Amendments to General Instructions,
Proposed Amendments to Enhance Data Quality, and Proposed Additional
Amendments
2. Alternatives to Proposed Amendments to Basic Information
about the Adviser and the Private Funds It Advises
3. Alternatives to Proposed Amendments to Information about
Hedge Funds Advised by Large Private Fund Advisers
4. Alternatives to the Definition of the Term ``Hedge Fund''
E. Request for Comment
IV. Paperwork Reduction Act
A. Form PF
1. Purpose and Use of the Information Collection
2. Confidentiality
3. Burden Estimates
B. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority
I. Introduction
The Commissions are proposing to amend sections of Form PF, the
form that certain SEC-registered investment advisers, including those
that also are registered with the CFTC as a CPO or CTA, use to report
confidential information about the private funds that they advise.\3\
The proposed amendments are designed to enhance FSOC's monitoring and
assessment of systemic risk and to provide additional information for
FSOC's use in determining whether and how to deploy its regulatory
tools. The proposed amendments also are designed to collect additional
data for use in the Commissions' regulatory programs, including
examinations, investigations and investor protection efforts relating
to private fund advisers.\4\ Finally, the proposed amendments also are
designed to improve the usefulness of this data.\5\
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\3\ Specifically, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), mandated that the SEC
and the CFTC, in consultation with the FSOC, jointly promulgate
rules governing the form and substance of reports required by
investment advisers to private funds to be filed with the SEC, and
with the CFTC for those that are dually-registered with both
Commissions. Public Law 111-203, 124 Stat. 1376 (2010). See, 15
U.S.C. 80b-11. See also, 17 CFR 4.27(d). The result was Sections 1
and 2 of Form PF, which were jointly promulgated. See Reporting by
Investment Advisers to Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on Form PF, Advisers Act
Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)]
(``2011 Form PF Adopting Release'') at section I. In 2014, the SEC
amended Form PF section 3 in connection with certain money market
fund reforms. See Money Market Fund Reform; Amendments to Form PF,
Advisers Act Release No. 3879 (July 23, 2014), [79 FR 47736 (Aug.
14, 2014)] (``2014 Form PF Amending Release'').
\4\ Any reference to the ``Commissions'', or ``we'', as it
relates to the collection and use of Form PF data are meant to refer
to the agencies in their separate or collective capacities, and such
data from filings made pursuant to 17 CFR 275.204(b)-1, by and
through Private Fund Reporting Depository, a subsystem of the
Investment Adviser Registration Depository (``IARD''), and reports,
analysis, and memoranda produced pursuant thereto. Further, as the
collection is being made pursuant to the Advisers Act and the IARD
is subject to the authority and control of the SEC, as of the date
of this proposal, it should not be assumed that the CFTC has direct,
or timely access to such data. The Commissions will continue to
engage in interagency discussions on the sharing of portions of Form
PF data relevant to the CFTC consistent with the terms of existing
interagency agreements or arrangements related to the sharing of
data.
\5\ Additionally, the Federal Reserve Board uses this data for
research and analysis.
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An adviser must file Form PF if (1) it is registered or required to
register with the SEC as an investment adviser, (2) it manages one or
more private funds, and (3) the adviser and its related persons
collectively had at least $150 million in private fund assets under
management as of the last day of its most recently completed fiscal
year.\6\ A CPO or CTA that also is registered or required to register
with the SEC as an investment adviser and satisfies the other
conditions described above must file Form PF with respect to any
commodity pool it manages that is a private fund. Most private fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors. Certain larger advisers provide more
information on a more frequent basis, including more detailed
information on particular hedge funds and liquidity funds.
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\6\ See 17 CFR 275.204(b)-1. Advisers Act section 202(a)(29)
defines the term ``private fund'' as an issuer that would be an
investment company, as defined in section 3 of the Investment
Company Act of 1940 (``Investment Company Act''), but for section
3(c)(1) or 3(c)(7) of that Act. Section 3(c)(1) of the Investment
Company Act provides an exclusion from the definition of
``investment company'' for any issuer whose outstanding securities
(other than short-term paper) are beneficially owned by not more
than one hundred persons (or, in the case of a qualifying venture
capital fund, 250 persons) and which is not making and does not
presently propose to make a public offering of its securities.
Section 3(c)(7) of the Investment Company Act provides an exclusion
from the definition of ``investment company'' for any issuer, the
outstanding securities of which are owned exclusively by persons
who, at the time of acquisition of such securities, are qualified
purchasers, and which is not making and does not at that time
propose to make a public offering of such securities. The term
``qualified purchaser'' is defined in section 2(a)(51) of the
Investment Company Act.
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Form PF provides the Commissions and FSOC with important
information about the basic operations and strategies of private funds
and has helped establish a baseline picture of the private fund
industry for use in assessing systemic risk. We now have almost a
decade of experience analyzing the information collected on Form PF. In
that time, the private fund industry has grown in size and evolved in
terms of business practices, complexity of fund structures, and
investment strategies and exposures.\7\ For example,
[[Page 53834]]
certain investment strategies, including credit, digital asset,\8\
litigation finance,\9\ and real estate strategies, have become more
common since the form was adopted.\10\ Similarly, we understand that
qualifying hedge fund exposures to repurchase agreements (``repos''),
reverse repurchase agreements (``reverse repos''), and U.S. treasury
securities have increased in recent years.\11\ Experience with Form PF
data also has identified potential ways to improve data quality,
including in instances where existing reporting may not identify fully
the potential risks, such as in the reporting of certain master-feeder
arrangements.
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\7\ The value of private fund net assets reported on Form PF has
more than doubled, growing from $5 trillion (net) in 2013 to $12
trillion (net) by the end of the third quarter of 2021, while the
number of private funds reported on the form has increased by nearly
55 percent in that time period. Unless otherwise noted, the private
funds statistics used in this Release are from the Private Funds
Statistics Third Quarter 2021. Division of Investment Management,
Private Fund Statistics Third Quarter 2021, (Mar. 30, 2022),
available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q3.pdf (``Private Fund
Statistics Q3 2021''). Any comparisons to earlier periods are from
the private funds statistics from that period, all of which are
available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. SEC staff began publishing the private fund
statistics in 2015, including data from 2013. Therefore, many
comparisons in this Release discuss the almost nine year span from
the beginning of 2013 through third quarter 2021. Some discussion in
this Release compares data from a shorter time span, because the SEC
staff published such data later than 2013. Staff reports,
statistics, and other staff documents (including those cited herein)
represent the views of SEC staff and are not a rule, regulation, or
statement of the SEC. The SEC has neither approved nor disapproved
the content of these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person.
\8\ See Zuckerman, Gregory, Mainstream Hedge Funds Pour Billions
of Dollars Into Crypto, The Wall Street Journal (March 2022)
available at https://www.wsj.com/articles/mainstream-hedge-funds-
pour-billions-of-dollars-into-crypto-
11646808223#:~:text=Brevan%20Howard%20launched%20a%20cryptocurrency,a
nd%20investing%20in%20blockchain%20technology.
\9\ See Burnett, David and Pierce, John, The Emerging Market for
Litigation Funding, The Hedge Fund Journal (June 2013) available at
https://thehedgefundjournal.com/the-emerging-market-for-litigation-funding/.
\10\ See Private Fund Statistics Q3 2021, supra footnote 7, at
p. 24.
\11\ A qualifying hedge fund is defined in Form PF as ``any
hedge fund that has a net asset value (individually or in
combination with any feeder funds, parallel funds and/or dependent
parallel managed accounts) of at least $500 million as of the last
day of any month in the fiscal quarter immediately preceding [the
adviser's] most recently completed fiscal quarter.'' See Form PF
Glossary of Terms. From 2015 through the end of 2020, qualifying
hedge fund exposure to repos doubled to $2 trillion, while from 2013
through the end of 2020, qualifying hedge fund borrowings
attributable to reverse repos more than doubled to $1.3 trillion.
For the same period, qualifying hedge fund exposure to U.S. treasury
securities increased by almost 70 percent to $1.7 trillion in
aggregate qualifying hedge fund gross notional exposure.
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Based on this experience and in light of these changes, the
Commissions and FSOC have identified information gaps and situations
where revised information would improve our understanding of the
private fund industry and the potential systemic risk within it. We
believe more detailed information, including with respect to strategies
and exposures, would provide better empirical data to FSOC with which
it may assess better the extent to which the activities of private
funds or their advisers pose systemic risks. We expect that FSOC would
use the new information collected on Form PF, together with market data
from other sources, to assist in determining whether and how to deploy
its regulatory tools.\12\ This may include, for instance, identifying
private fund advisers that merit further analysis or deciding whether
to recommend to a primary financial regulator, like the SEC or CFTC,
more stringent regulation of the financial activities that FSOC
determines may create or increase systemic risk. This revised
information also would improve our ability to protect investors.\13\
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\12\ Under the Dodd-Frank Act, FSOC must monitor emerging risks
to U.S. financial stability and employ its regulatory tools to
address those risks. S. REP. NO. 111-176, at 2-3 (2010).
\13\ The SEC also recently proposed amendments to the SEC-only
sections of Form PF (sections 3, 4, 5, and newly proposed section 6)
that would (1) require current reporting for large hedge fund
advisers and advisers to private equity funds, (2) decrease the
reporting threshold for large private equity advisers and amend
reporting requirements for large private equity advisers, and (3)
amend reporting requirements for large liquidity fund advisers.
Amendments to Form PF to Require Current Reporting and Amend
Reporting Requirements for Large Private Equity Advisers and Large
Liquidity Fund Advisers, Investment Advisers Act Release No. 5950
(Jan. 26, 2022), [87 FR 9106 (Feb. 17, 2022)] (``2022 SEC Form PF
Proposal'').
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The Commissions have consulted with FSOC to gain input on this
proposal, and to help ensure that Form PF continues to provide FSOC
with information it can use to carry out its monitoring obligations and
assess systemic risk in light of changes in the private fund industry
over the past decade. The Commissions are jointly proposing amendments
to the form's general instructions, as well as section 1 of Form PF,
which would apply to all Form PF filers. The Commissions also are
jointly proposing amendments to section 2 of Form PF, which would apply
to large hedge fund advisers who advise qualifying hedge funds (i.e.,
hedge funds that have a net asset value of at least $500 million).\14\
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\14\ Unless stated otherwise, terms in this release that are
defined in the Form PF Glossary of Terms are as defined therein.
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II. Discussion
A. Proposed Amendments to the General Instructions
We are proposing amendments to the Form PF general instructions
designed to improve data quality and comparability and to enhance
investor protection efforts and systemic risk assessment.\15\
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\15\ Additional proposed changes to the General Instructions
concerning amendments to enhance data quality concerning
methodologies and additional amendments are discussed in sections
II.D and II.E of this Release, as well as the proposal to amend
Instruction 3 to reflect our proposal to remove section 2a, which is
discussed in footnote 138, and accompanying text.
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1. Reporting Master-Feeder Arrangements and Parallel Fund Structures
Private funds often use complex structures to invest, including
master-feeder arrangements and parallel fund structures.\16\ We are
proposing amendments to Form PF that generally would require advisers
to report separately each component fund of a master-feeder arrangement
and parallel fund structure.\17\ However, an adviser would continue to
aggregate these structures for purposes of determining whether the
adviser meets a reporting threshold.\18\
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\16\ A ``master-feeder arrangement'' is an arrangement in which
one or more funds (``feeder funds'') invest all or substantially all
of their assets in a single private fund (``master fund''). A
``parallel fund structure'' is a structure in which one or more
private funds (each, a ``parallel fund'') pursues substantially the
same investment objective and strategy and invests side by side in
substantially the same positions as another private fund. See Form
PF Glossary of Terms.
\17\ Proposed Instruction 6. We also propose to amend
Instruction 3 to reflect the proposed approach for reporting master-
feeder arrangements and parallel fund structures. See infra footnote
18.
\18\ Proposed Instruction 5. For example, an adviser would
aggregate private funds that are part of the same master-feeder
arrangement in determining whether the adviser is a large hedge fund
adviser that must complete section 2 of Form PF. In connection with
these proposed changes, we propose to amend the term ``reporting
fund'' and Instruction 3 so they would no longer discuss reporting
aggregated information. Additionally, we propose to reorganize
current Instruction 5 and current Instruction 6 so they reflect the
proposed approach for when to aggregate certain funds. Current
Instruction 5 instructs advisers about when to aggregate information
about certain funds for purposes of reporting thresholds and
responding to questions. Current Instruction 6 instructs advisers
about how to aggregate information about certain funds. Proposed
Instruction 5 would instruct advisers on when to aggregate
information about certain funds for purposes of determining whether
they meet reporting thresholds. Proposed Instruction 6 would
instruct advisers about how to report information about certain
funds when responding to questions.
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Currently, Form PF provides advisers with flexibility to respond to
questions regarding master-feeder arrangements and parallel fund
structures either in the aggregate or separately, as long as they do so
consistently throughout Form PF.\19\ In adopting this approach in 2011,
the Commission stated that requiring advisers to aggregate or
disaggregate funds in a manner inconsistent with their internal
recordkeeping and
[[Page 53835]]
reporting may impose additional burdens and that, as long as the
structure of those arrangements is adequately disclosed, a prescriptive
approach to aggregation was not necessary.\20\ However, based on
experience reviewing Form PF data, we observed that when some advisers
report in aggregate and some advisers report separately, this can
result in obscured risk profiles (e.g., asset size, counterparty
exposure, investor liquidity) and made it difficult to compare complex
structures, undermining the utility of the data collected. We believe
prescribing the way advisers report a master-feeder arrangement and
parallel fund structure would provide better insight into the risks and
exposures of these arrangements.
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\19\ Current Instruction 5.
\20\ 2011 Form PF Adopting Release, supra footnote 3, at text
following n.332.
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Accordingly, we propose to require an adviser to report each
component fund of a master-feeder arrangement and parallel fund
structure, except where a feeder fund invests all its assets in a
single master fund and/or ``cash and cash equivalents'' (i.e., a
disregarded feeder fund).\21\ In the case of a disregarded feeder fund
in Question 6, advisers instead would identify the disregarded feeder
fund and look through to any disregarded feeder fund's investors in
responding to certain questions regarding fund investors on behalf of
the applicable master fund. The master fund effectively is a conduit
through which a disregarded feeder fund invests and we do not believe
separate reporting for such a feeder fund is necessary for data
analysis purposes.
---------------------------------------------------------------------------
\21\ See proposed Instruction 6. The proposal would revise the
term ``cash and cash equivalents,'' as described in section II.B.2
in this Release.
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In addition, we propose to no longer allow advisers to report any
``parallel managed accounts,'' (which is distinguished from ``parallel
fund structure''), except advisers would continue to be required to
report the total value of all parallel managed accounts related to each
reporting fund.\22\ We continue to believe that including parallel
managed accounts in the reporting may reduce the quality of data while
imposing additional burdens on advisers.\23\ Data regarding the total
value of parallel managed accounts, however, allow FSOC to take into
account the greater amount of assets an adviser may be managing using a
given strategy for purposes of analyzing the data reported on Form
PF.\24\
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\22\ Proposed Instruction 6. A ``parallel managed account'' is
any managed account or other pool of assets managed by the adviser
that pursues substantially the same investment objective and
strategy and invests side by side in substantially the same
positions as the identified private fund. See Form PF Glossary of
Terms. Currently, advisers may, but are not required to, report
information regarding parallel managed accounts in response to
certain questions, except they must report the total value of all
parallel managed accounts related to each reporting fund. See
current Instruction 5.
\23\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.334, and accompanying text (the Commission was persuaded that
aggregating parallel managed accounts for reporting purposes would
be difficult and ``result in inconsistent and misleading data''
because the characteristics of parallel managed accounts are often
somewhat different from the funds with which they are managed). For
example, in a separately managed account a client generally selects
an adviser's strategy but tailors it to the client's own investment
guidelines.
\24\ Id. at text following n.336.
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We request comment on the proposed amendments.
1. Should we amend Form PF to require advisers to report component
funds of master-feeder arrangements and parallel fund structures
separately except for disregarded feeder funds, as proposed? Would the
proposed amendments lead to more accurate data regarding the risk
profiles of reporting funds and improve comparability? Would the
proposed amendments enhance investor protection efforts and systemic
risk assessment? Are there better ways to meet these objectives? For
example, should Form PF require advisers to report only at the master
fund level or the feeder fund level?
2. Do you agree that the master fund is effectively a conduit
through which a disregarded feeder fund invests and that separate
reporting for such a feeder fund is not necessary for data analysis
purposes? Should we require advisers to report additional information
regarding disregarded feeder funds? For example, should we require
advisers to report the total cash holdings of such funds?
3. Are there other exceptions for reporting each component of a
master-feeder arrangement or parallel fund structures separately that
we should adopt?
4. Should we continue to require advisers to report only limited
information on parallel managed accounts? If we should require
additional reporting from parallel managed accounts, what additional
information should we require? Should reporting of any such additional
information be mandatory or voluntary?
5. Should we continue to require advisers to aggregate structures
when determining whether they meet reporting thresholds?
6. Form PF currently does not require an adviser to report
information regarding a private fund advised by any of the adviser's
related persons, unless the adviser identified that related person as
one for which the adviser is filing Form PF. Should we take a different
approach and require an adviser to include information regarding
private funds advised by any of the adviser's related persons if they
are part of a master-feeder arrangement or parallel fund structure
managed by the adviser? Or, would an adviser have difficulty gathering
the information necessary to report this information for private funds
managed by the adviser's related persons whose operations are genuinely
independent of the adviser's own operations?
7. Could ``parallel managed accounts,'' be interpreted as
overlapping with ``parallel fund structure?'' If so, should we remove
the phrase ``or other pool of assets'' in the definition of ``parallel
managed account'' to prevent that?
2. Reporting Private Funds That Invest in Other Funds
We are proposing amendments to Form PF regarding how advisers
report private fund investments in other private funds, trading
vehicles, and other funds that are not private funds.
Investments in other private funds. We propose to amend Instruction
7, which addresses how advisers treat private fund investments in other
private funds (e.g., a ``fund of funds''). Currently, advisers include
the value of private fund investments in other private funds in
determining whether the adviser meets the filing threshold to file Form
PF.\25\ We believe this requirement is implicit in the current form and
we propose to amend Instruction 7 to make it explicit. Current Form PF
permits an adviser to disregard the value of a private fund's equity
investments in other private funds for purposes of both the form's
reporting thresholds (e.g., whether it qualifies as a large hedge fund
adviser) and responding to questions on Form PF, as long as it does so
consistently throughout Form PF, subject to certain exceptions.\26\
Under the proposal, the form would continue to permit an adviser to
include or exclude the value of investments in other private funds
(including internal and external private funds) when determining
whether the
[[Page 53836]]
adviser meets the thresholds for reporting as a large hedge fund
adviser, large liquidity fund adviser, or large private equity adviser,
and whether a hedge fund is a qualifying hedge fund.\27\ The
Commissions continue to believe that allowing this flexibility for
these reporting thresholds avoids duplicative reporting, which reduces
the burden of reporting for advisers and improves the quality of the
data reported.\28\ For example, under these instructions an adviser may
exclude an investment in an external private fund that would already be
counted through another adviser's reporting obligations.
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\25\ Form PF Instruction 1 provides that certain advisers meet
the filing threshold if they and their related persons,
collectively, had at least $150 million in private fund assets under
management as of the last day of their most recently completed
fiscal year.
\26\ For example, under the current instructions, an adviser is
not permitted to disregard any liabilities of the private fund, even
if incurred in connection with an investment in other private funds.
See current Instruction 7.
\27\ See current Instruction 7 and proposed Instruction 7.
\28\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.128, and accompanying text.
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However, we believe the form's current flexibility on whether to
disregard underlying funds when responding to questions has undermined
the utility of the data collected, as it provides unclear, inconsistent
data on the scale of reporting funds' exposures. Therefore, we propose
to amend Instruction 7 to require an adviser to include the value of a
reporting fund's investments in other private funds when responding to
questions on Form PF, unless otherwise directed by the instructions to
a particular question.\29\ We believe that requiring advisers to report
fund of funds arrangements in a consistent manner would allow the
Commissions and FSOC to understand better these fund structures by
providing greater insight into the scale and exposures of reporting
funds.
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\29\ For example, an adviser would report the value of the
reporting fund's investments in other private funds when reporting
its gross asset value and net asset value in proposed Questions 11
and 12; however, Question 3 would specify that advisers must exclude
the value of the reporting fund's investment in other internal
private funds when providing a breakdown of their regulatory assets
under management and net assets under management.
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Currently, advisers are not required to, but nonetheless have the
option to, ``look through'' a reporting fund's investments in any other
entity (including other private funds), except in instances when the
form directs otherwise.\30\ As a result, some advisers may ``look
through'' a reporting fund's investments in other entities, while
others do not, leading to unclear data, inconsistent comparisons, and
less precise analysis across advisers. Therefore, we propose to amend
Instruction 7 to provide that, when responding to questions, advisers
must not ``look through'' a reporting fund's investments in internal
private funds or external private funds (other than a trading vehicle,
as described below), unless the question instructs the adviser to
report exposure obtained indirectly through positions in such funds or
other entities.\31\ We also propose to take the same approach with
regard to a reporting fund's investments in funds or other entities
that are not private funds or trading vehicles.\32\ These proposed
amendments are designed to improve data quality and comparisons, so the
Commissions and FSOC understand what Form PF data is from advisers
``looking through'' a reporting fund's investments, which we believe
would lead to more effective systemic risk assessments and investor
protection efforts.
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\30\ See current Instruction 8.
\31\ See proposed Instruction 7. For example, advisers would not
``look through'' to the creditors of or counterparties to other
private funds in responding to questions that ask about a reporting
fund's borrowings and counterparty exposures. See proposed Question
18 (concerning borrowings) and proposed Questions 27 and 28
(concerning counterparty exposures). However, selected questions in
section 2 of the form would require advisers to report indirect
exposure resulting from positions held through other entities
including private funds, and advisers would ``look through'' the
reporting fund's investments in internal private funds and external
private funds in responding to those questions. See e.g., proposed
Question 32 (concerning reporting fund exposures).
\32\ See proposed Instruction 8 and supra footnote 31 (which
provides examples that also apply to advisers to reporting funds
that invest in funds and other entities that are not private funds
or trading vehicles).
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Trading vehicles. Some private funds wholly own separate legal
entities that hold assets, incur leverage, or conduct trading or other
activities as part of the private fund's investment activities, but do
not operate a business (each, a ``trading vehicle'').\33\ We propose to
amend Form PF's general instructions to explain how advisers would
report information if the reporting fund uses a trading vehicle.\34\
Specifically, if the reporting fund uses a trading vehicle, and the
reporting fund is its only equity owner, the adviser would either (1)
identify the trading vehicle in section 1b, and report answers on an
aggregated basis for the reporting fund and such trading vehicle, or
(2) report the trading vehicle as a separate reporting fund. An adviser
would have to report the trading vehicle separately if the trading
vehicle holds assets, incurs leverage, or conducts trading or other
activities on behalf of more than one reporting fund. If reporting
separately, (1) advisers would report the trading vehicle as a hedge
fund if a hedge fund invests through the trading vehicle; (2) advisers
would report the trading vehicle as a qualifying hedge fund if a
qualifying hedge fund invests through the trading vehicle; (3)
otherwise, advisers would report the trading vehicle as a liquidity
fund, private equity fund, or other type of fund based on its
activities.\35\
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\33\ We propose to add ``trading vehicle'' to the Form PF
Glossary of Terms.
\34\ See proposed Instruction 7. We propose to make a conforming
change to Instruction 8 to reference this new instruction.
\35\ See proposed Instruction 7.
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Private funds may use trading vehicles for various purposes,
including (1) for jurisdictional, tax, or other regulatory purposes, or
(2) to ``ring-fence'' assets in light of liability or bankruptcy
concerns associated with a particular investment (i.e., structure
assets so counterparties would only have recourse against the trading
vehicle and not against the private fund). Currently, Form PF does not
require advisers to identify trading vehicles. As a result, Form PF
does not provide a clear window into the use of trading vehicles and
the risks they present. For example, if a trading vehicle is ring-
fenced, current Form PF does not provide a view into the assets or
collateral on which a counterparty to such trading vehicle relies or
the size and nature of the trading vehicle's exposure. In addition,
where more than one reporting fund invests through a particular trading
vehicle, the activities of multiple reporting funds are blended and
potentially obscured. The proposed amendments are designed to address
these concerns by providing more information on the extent private
funds use trading vehicles to conduct investment activities. The
proposed amendments also are designed to provide improved visibility
into position sizes and counterparty exposures through trading
vehicles. Having a clear, unobscured view into position sizes and
counterparty exposures through trading vehicles is designed to help
ensure accurate systemic risk assessment and analysis to further
investor protection efforts, by providing the Commissions and FSOC with
a view into the assets or collateral on which a counterparty to such
trading vehicle relies and the size and nature of the trading vehicle's
exposure.
Investments in funds that are not private funds. Under the
proposal, advisers would continue to include the value of the reporting
fund's investments in funds and other entities that are not private
funds, in determining reporting thresholds and responding to questions,
unless otherwise directed, as Form PF currently requires.\36\ For the
reasons discussed above, we are proposing that, when responding to
questions, however,
[[Page 53837]]
advisers must not ``look through'' a reporting fund's investments in
funds or other entities that are not private funds, or trading
vehicles, unless the question instructs the adviser to report exposure
obtained indirectly through positions in such funds or other
entities.\37\
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\36\ See Instruction 8.
\37\ See supra footnote 32, and accompanying text (discussing
proposed amendments to Instruction 8).
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We request comment on the proposed amendments.
8. Would the proposed amendments concerning reporting fund
investments in other private funds, trading vehicles, and other funds
that are not private funds provide a better understanding of the
structure of private funds, and improve data quality and comparability?
Is there a better way to meet these objectives? Should Form PF provide
more or less flexibility to advisers in how they treat these types of
private fund investments? For example, instead of allowing advisers the
flexibility to include or exclude a private fund's investments in other
private funds (including internal private funds and external private
funds) in determining whether they meet thresholds for filing as a
large hedge fund adviser, large liquidity adviser, or large private
equity adviser, and whether a reporting fund is a qualifying hedge
fund, should we require advisers to include or exclude such
investments? Should we require external qualifying hedge funds to be
excluded, to avoid receiving duplicate data? If Form PF should provide
more flexibility, how would we help ensure data is understandable and
comparable across advisers?
9. Would the proposed amendments regarding trading vehicles provide
a clearer picture of how private funds use trading vehicles and their
market risks? Would the proposed amendments provide improved visibility
into position sizes and counterparty exposures? Is there a better way
to meet these objectives? For example, should Form PF require advisers
to report whether a trading vehicle is ring-fenced for liability
purposes?
10. Under the proposal, if an adviser reports a trading vehicle as
a separate reporting fund, the adviser must report the trading vehicle
as a hedge fund, qualifying hedge fund, liquidity fund, private equity
fund, or other type of fund, if it meets certain requirements. Would
this proposed requirement help ensure advisers could not avoid
reporting the trading vehicle as a private fund that is subject to
additional reporting, such as a qualifying hedge fund? Is there a
better way to meet this objective? Should Form PF instead only require
advisers to report trading vehicles as investments in another fund?
11. Are the ``look through'' requirements concerning how to report
a reporting fund's investments in other entities clear? Should we
require advisers to not look through a reporting fund's investments in
other entities, unless the question instructs the adviser to report
exposure obtained indirectly through positions in such funds or other
entities, as proposed?
3. Reporting Timelines
We propose to amend Instruction 9 to require large hedge fund
advisers and large liquidity fund advisers to update Form PF within a
certain number of days after the end of each calendar quarter, rather
than after each fiscal quarter, as Form PF currently requires.\38\ All
other advisers would continue to file annual updates within 120
calendar days after the end of their fiscal year.\39\ Form PF would
continue to require all advisers to use fiscal quarters and years to
determine filing thresholds because advisers already make such
calculations under 17 CFR 279.1 (``Form ADV''), which requires annual
updates based on fiscal year.\40\
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\38\ Large hedge fund advisers generally would file within 60
calendar days after the end of each calendar quarter and large
liquidity fund advisers generally would file within 15 days after
the end of each calendar quarter. See proposed Instruction 9.
\39\ We also propose to amend the term ``data reporting date''
to reflect this proposed approach. See Form PF Glossary of Terms.
\40\ See Form PF Instructions 1 and 3; Form ADV and [17 CFR
275.204-1] Advisers Act rule 204-1 (amendments to Form ADV).
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Currently, fiscal quarter reporting significantly delays the time
at which the Commissions and FSOC receive a complete data set for a
calendar quarter. For example, large hedge fund advisers whose first
fiscal quarter ends on the calendar quarter end of March, would file
data covering January, February, and March by the end of May.\41\
However, large hedge fund advisers whose fiscal quarter ends in May
would not file their March data until the end of July, delaying
Commission and FSOC access to full calendar quarter data by all large
hedge fund advisers by four months. The proposed changes are designed
to provide a more complete data set sooner to improve the efficiency
and effectiveness of investor protection efforts and systemic risk
assessment. Based on Form ADV data as of December 2021, 99.2 percent of
private fund advisers already effectively file Form PF on a calendar
basis because their fiscal quarter or year ends on the calendar quarter
or year end, respectively.\42\ The 0.8 percent of private fund advisers
that have a non-calendar fiscal approach, which could cause a temporary
data gap, represents approximately 274 private funds, totaling $200
billion in gross asset value. Calendar quarter reporting also would
more closely align with reporting on [17 CFR pt. 4, app. A] Form CPO-
PQR, which requires calendar quarterly reporting, allowing easier
integration of these data sets.
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\41\ See current Instruction 9 (requiring large hedge fund
advisers to update Form PF within 60 calendar days after the end of
their first, second, and third fiscal quarters, among other things).
\42\ We are presenting data from all private fund advisers, not
just those who would file on a quarterly basis (i.e., large hedge
fund advisers and large liquidity fund advisers), to avoid
potentially disclosing proprietary information of individual Form PF
filers, and to be inclusive considering that the population of
quarterly filers versus annual filers may change over time.
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We request comment on the proposed amendments.
12. Should we revise the reporting timelines, as proposed?
13. Should Form PF continue to require advisers to determine filing
thresholds by fiscal year given corresponding Form ADV requirements?
Alternatively, should Form PF require all Form PF filers to use
calendar years and quarters for all Form PF purposes, including in
determining filing thresholds and when to update Form PF?
14. Should we reduce the number of days by which filers must update
Form PF to receive data sooner? How would this relieve or increase
burdens? For example, should Form PF require large hedge fund advisers
to update Form PF within 30 calendar days after the end of each
calendar or fiscal quarter, rather than 60 calendar days? Should Form
PF require large liquidity fund advisers to report within 10 calendar
days after the end of each calendar quarter, rather than 15 calendar
days? Should annual filers file within 30 calendar days after the end
of their fiscal year, rather than 120 calendar days?
15. Should Form PF reporting timelines be more or less consistent
with Form CPO-PQR?
B. Proposed Amendments Concerning Basic Information About the Adviser
and the Private Funds it Advises
Each adviser required to file Form PF must complete all or part of
section 1. The proposed amendments to section 1 are designed to provide
greater insight into private funds' operations and strategies, and
assist in identifying trends, including those that could create
systemic risk, which in turn is designed to enhance investor protection
efforts and systemic risk assessment. The
[[Page 53838]]
proposed changes are designed to improve comparability across advisers,
improve data quality, and reduce reporting errors, based on our
experience with Form PF filings.
1. Proposed Amendments to Section 1a of Form PF--Identifying
Information
Section 1a requires an adviser to report identifying information
about the adviser and the private funds it manages. We are proposing
several amendments to collect additional identifying information
regarding the adviser, its related persons, as well as their private
fund assets under management.
LEI for advisers and related persons. Legal entity identifiers, or
``LEIs,'' help identify entities and link data from different sources
that use LEIs.\43\ Currently, Form PF requires advisers to report the
LEI for certain entities, if they have one, such as for the reporting
fund and any parallel funds.\44\ Form PF's current definition of
``LEI'' provides that, in the case of a financial institution that has
not been assigned an LEI, advisers must provide the RSSD ID assigned by
the National Information Center of the Board of Governors of the
Federal Reserve System (``Federal Reserve Board''), if the financial
institution has an RSSD ID.\45\ We propose to remove this requirement
and, instead, provide that advisers must not substitute any other
identifier that does not meet the definition of an LEI.\46\ However,
advisers would use the RSSD ID, if the financial institution has one,
for questions that specifically request an RSSD ID, and for questions
that require advisers to report any other identifying information where
the type of information is not specified.\47\ These proposed amendments
are designed to improve data quality because, based on experience with
the current form, reporting RSSD IDs as LEIs makes it more difficult
for staff to link data efficiently and effectively.
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\43\ Form PF generally defines ``LEI'' as: the ``legal entity
identifier'' assigned by or on behalf of an internationally
recognized standards setting body and required for reporting
purposes by the U.S. Department of the Treasury's Office of
Financial Research or a financial regulator. See Form PF Glossary of
Terms.
\44\ See current Question 5(d) and current Question 7(e).
Current Form PF also requires large liquidity advisers to report the
LEI for each security and repo held by the reporting fund, if they
have one. See current Question 63(d) and current Question 63(g),
respectively. Current Form PF also requires large private equity
advisers to report the LEI for each of the reporting fund's
controlled portfolio companies that constitute a financial industry
portfolio company. See current Question 76.
\45\ See current Form PF Glossary of Terms. Currently, if an LEI
has not been assigned and there is no RSSD ID, then the adviser
would leave that line blank.
\46\ See proposed Form PF Glossary of Terms.
\47\ See e.g., proposed Question 9. We also would add ``RSSD
ID'' to the Form PF Glossary of Terms and define it as the
identifier assigned by the National Information Center of the
Federal Reserve Board, if any. See Form PF Glossary of Terms.
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While Form PF currently requires advisers to provide the LEI for
entities such as reporting funds and parallel funds, if the entities
have one, it does not require advisers to report the LEI for itself and
its related persons.\48\ We propose to require advisers to provide the
``LEI'' for themselves and their ``related persons,'' if they have an
LEI.\49\ This proposed amendment is designed to help identify advisers
and their related persons and link data from other data sources that
use this identifier.
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\48\ See e.g., current Question 5 and current Question 7.
\49\ See Proposed Question 1. We also propose to require
advisers to provide the LEI for other entities, if the other
entities have one, including internal private funds (see proposed
Question 7 and proposed Question 15), trading vehicles (see proposed
Question 9), and counterparties (see proposed Question 27 and
proposed Question 28). A ``related person'' has the meaning provided
in Form ADV. See Form PF Glossary of Terms. Form ADV defines a
``related person'' as any advisory affiliate and any person that is
under common control with the adviser. See Form ADV Glossary of
Terms.
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We request comment on the proposed amendments.
16. Should we require advisers to report ``LEI'' for financial
institutions that have one and only report ``RSSD ID'' as a secondary
identification where asked, as proposed? Would the proposed amendments
help us improve data quality and help link data more efficiently and
effectively from other sources that use LEIs and RSSD IDs? Is there a
better way to meet these objectives?
17. Should Form PF require advisers to report the LEI for certain
entities, if they have one, as proposed, such as the adviser and each
related person, as well as internal private funds, trading vehicles,
creditors, and counterparties, or others? Alternatively, should Form PF
require any entities to obtain LEIs if they do not have them? Would
those entities seek to obtain LEIs in the future absent any regulatory
requirement to do so?
18. Are there other data sources we also should use that would
allow us to link entities across forms?
19. Should we amend the term ``LEI'' in Form PF to match Form ADV
or any other forms that use the term or a similar term?
Assets under management. We are proposing to revise how advisers
report assets under management attributable to certain private funds.
Current Question 3 requires advisers to provide a breakdown of
regulatory assets under management and net assets under management.
These data are designed to show the size of the adviser and the nature
of the adviser's activities. We propose to amend the instructions to
direct advisers to exclude the value of private funds' investments in
other internal private funds to avoid double counting of fund of funds
assets.\50\ Advisers would include the value of trading vehicle assets
because, under the proposed definition, they would be wholly owned by
one or more reporting funds.\51\ These proposed amendments are designed
to provide a more accurate view of the assets managed by the adviser
and its related persons, as well as the general distribution of those
assets among various types of private funds, because accurately viewing
the scale of these managed assets is important to effectively assess
systemic risk and further investor protection efforts.
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\50\ See proposed Question 3.
\51\ See proposed Question 3. See proposed Form PF Glossary of
Terms.
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We request comment on the proposed amendments.
20. Would the proposed amendments prevent double counting fund of
funds assets? Is there a better way to meet this objective? Should we
include private funds managed by the adviser's related persons in the
definition of internal private fund for these purposes? Are there other
types of investments that should be disregarded in order to prevent
double counting? Are there other approaches to trading vehicles?
21. Form PF currently requires advisers to provide a breakdown of
assets under management and regulatory assets under management based on
certain categories of private funds. Should we require advisers to
provide a breakdown for more, fewer, or different categories of private
funds than Form PF currently provides? For example, should Question 3
include categories such as special purpose vehicles, private credit
funds, or types of fund of funds?
Explanation of assumptions. We are proposing to amend current
Question 4, which advisers use to explain assumptions that they make in
responding to questions on Form PF. Specifically, we propose to add an
instruction directing advisers to provide the question number when the
assumptions relate to a particular question.\52\ This amendment is
designed to help assess data more efficiently and
[[Page 53839]]
improve comparability, based on experience with the form.
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\52\ See proposed Question 4.
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We request comment on the proposed amendments.
22. Is there a better way to achieve our objectives of assessing
data more efficiently and improving comparability?
2. Proposed Amendments to Section 1b of Form PF--Concerning All Private
Funds
Section 1b requires advisers to report certain identifying and
other basic information about each private fund the adviser manages.
The proposal would amend section 1b to require advisers to report
additional identifying information about the private funds they manage
as well as the private funds' assets, financing, investor
concentration, and performance. The proposed changes are designed to
provide greater insight into private funds' operations and strategies
and assist in identifying trends that we believe would enhance investor
protection efforts and FSOC's systemic risk assessment. At the same
time, we believe the proposed amendments would help improve data
quality and comparability, based on experience with Form PF.
Type of private fund. We are proposing several amendments to
identify different types of reporting funds better, and help isolate
data according to fund type, to allow for more targeted analysis.
Currently, advisers indicate a reporting fund's type on the Private
Fund Reporting Depository (``PFRD'') filing system, and by filling out
particular sections of the form.\53\ We have found instances, however,
where advisers have identified a reporting fund differently on Form PF
than on Form ADV, even though the definitions of each fund type are the
same on both forms. This may be due to error, or may be due to the
fund's characteristics changing between deadlines for Form ADV and Form
PF. Accordingly, to help prevent reporting errors and help ensure
accuracy concerning the reporting fund's type, we propose to require
advisers to identify the reporting fund by selecting one type of fund
from a list: hedge fund that is not a qualifying hedge fund, qualifying
hedge fund, liquidity fund, private equity fund, real estate fund,
securitized asset fund, venture capital fund, or ``other.'' \54\ If an
adviser identifies the reporting fund as ``other,'' the adviser would
describe the reporting fund in Question 4, including why it would not
qualify for any of the other options.
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\53\ For advisers that are also CPOs or CTAs, filing Form PF
through PFRD is filing with both the SEC and CFTC. See Instruction 3
(instructing advisers to file particular sections of Form PF,
depending on their circumstances. For example, all Form PF filers
must file section 1 and large hedge fund advisers also must file
section 2).
\54\ Proposed Question 6(a).
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In addition, we propose to require an adviser to indicate whether
the reporting fund is a ``commodity pool,'' which is categorized as a
hedge fund on Form PF.\55\ Although the CFTC does not, as of the date
of this proposal, consider Form PF reporting on commodity pools as
constituting substituted compliance with CFTC reporting requirements,
some CPOs may continue to report such information on Form PF.\56\ This
proposed amendment would allow for analysis of hedge fund data both
with and without commodity pools reported on the form.
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\55\ Proposed Question 6(b). Form PF defines ``commodity pool''
as defined in section 1a(10) of the U.S. Commodity Exchange Act, as
amended. See Form PF Glossary of Terms.
\56\ Previously, the CFTC permitted dually registered CPO-
investment advisers to submit Form PF in lieu of certain CFTC
reporting requirements. See Compliance Requirements for Commodity
Pool Operators on Form CPO-PQR, (Oct. 9, 2020) [85 FR 71772 (Nov.
10, 2020)] (``Form CPO-PQR Release'').
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Finally, we propose to require advisers to report whether a
reporting fund operates as a UCITS or AIF, or markets itself as a money
market fund outside the United States, and in which countries (if
applicable).\57\ These proposed amendments are designed to allow the
Commissions and FSOC to filter data for more targeted analysis to
better understand the potential exposure to beneficial owners outside
the United States and to avoid double counting when Form PF data is
aggregated with other data sets that include UCITS, AIFs, and money
market funds that are marketed outside the United States.
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\57\ See proposed Question 6(c) through (h). We propose to
define the term ``UCITS'' as Undertakings for Collective Investment
in Transferable Securities, as defined in the UCITS Directive of the
European Parliament and of the Council (No. 2009/65/EC), as amended,
or as captured by the Collective Investment Schemes (Amendment etc.)
(EU Exit) Regulations 2019, as amended. We propose to define ``AIF''
as an alternative investment fund that is not regulated under the
UCITS Directive, as defined in the Directive of the European
Parliament and of the Council on alternative investment fund
managers (No. 2011/61/EU), as amended, or an alternative investment
fund that is captured by the Alternative Investment Fund Managers
(Amendment etc.) (EU Exit) Regulations 2019, as amended. See Form PF
Glossary of Terms.
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We request comment on the proposed amendments.
23. Should Form PF require advisers to report additional
identifying information about the private funds they advise, as
proposed? Would the proposed amendments help identify each type of
reporting fund, allow the Commissions and FSOC to filter data
concerning types of funds, and conduct more targeted analysis? Is there
a better way to meet these objectives?
24. Should proposed Question 6 include more, fewer, or different
categories of private funds? For example, should the form include a
category for funds that may be ``hybrid'' funds that may have
characteristics of different types of private funds? Should proposed
Question 6 include an ``other'' category, as proposed? Alternatively,
should proposed Question 6 not include an ``other'' category and
instead require that advisers select the best fit among the specific
categories? Are there other ways to limit the types of funds that may
report as ``other?''
25. Should Form PF require advisers to explain in Question 4 why
they choose ``other'' as a category, as proposed? Would this proposed
requirement clarify what type of fund the reporting fund is, if it does
not fit within the other categories? Is there a better way of
identifying what type of fund the reporting fund is? Should Form PF
require the adviser to include more, less, or different information in
the explanation?
26. Should Form PF require advisers to identify if the reporting
fund is a commodity pool, as proposed? Are any CPOs currently reporting
information regarding any commodity pools, even if they are not private
funds? If so, why? Alternatively, should we revise the definition of
``hedge fund'' so it would not include commodity pools? If we exclude
commodity pools from the definition of ``hedge fund,'' should we amend
Form PF to require advisers to report the same or different information
about commodity pools as they do for hedge funds?
27. Should Form PF require advisers to report whether and in which
countries the reporting company operates as a UCITS or AIF, or markets
itself as a money market fund outside the United States, as proposed?
Would the proposed amendment allow us and FSOC to filter data for more
targeted analysis to better understand the potential exposure to
beneficial owners outside the United States and to avoid double
counting when Form PF data is aggregated with other data sets that
include UCITS and AIFs? Is there a better way to meet these objectives?
28. Should Form PF define UCITS and AIF, as proposed? Would the
proposed definitions keep the terms evergreen if directives change or
new ones apply? If not, how should we define these terms? For example,
should we provide less detail in the definition
[[Page 53840]]
about the directives to keep the definitions evergreen?
Master-feeder arrangements, internal private funds, external
private funds, and parallel fund structures. To reflect that advisers
would report components of master-feeder arrangements and parallel fund
structures separately, we propose to amend Form PF to require advisers
to report identifying information about master-feeder arrangements and
other private funds (e.g., funds of funds), including internal private
funds, and external private funds.\58\ Form PF currently requires
advisers to report identifying information about parallel funds, and
would continue to do so under the proposal.\59\ The proposal also would
require advisers to report the value of the reporting fund's
investments in other private funds (e.g., funds of funds), as current
Question 10 requires, but with more detail.\60\ Specifically, the
proposal would require advisers to report the value of the reporting
fund's equity investments in external private funds and internal
private funds (including the master fund and each internal private
fund), which would comprise the total investments in other private
funds.\61\ These amendments are designed to help map complex fund
structures and cross reference private fund information across Form PF
filings, to provide more complete and accurate information about each
fund's risk profile.
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\58\ For master-feeder arrangements, advisers would report the
name of the feeder fund, its private fund identification number, and
whether the feeder fund is a separate reporting fund or a
disregarded feeder fund. For internal private funds that invest in
the reporting fund, advisers would report the name of the internal
private fund, its LEI, if it has one, and its private fund
identification number. See proposed Question 7. If the reporting
fund invests in external private funds, advisers would report the
name of the master fund, its private fund identification number, and
the master fund's LEI, if it has one. If the reporting fund invests
in internal private funds, advisers would report the internal
private fund's name, its private fund identification number, and its
LEI, if it has one. Proposed Question 15.
\59\ See current Question 7 and proposed Question 8.
\60\ This requirement would be part of proposed Question 15.
\61\ See proposed Question 15.
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In connection with these proposed amendments, in the Form PF
Glossary of Terms, we propose to remove the terms ``investments in
external private funds'' and ``investments in internal private funds,''
and replace them with ``external private funds'' (private funds that
neither the adviser nor the adviser's related persons advise) and
``internal private funds'' (private funds that the adviser or any of
the adviser's related persons advise), respectively. The proposed
definitions would not direct advisers to exclude ``cash management
funds,'' as is currently the case under the terms being removed,
because we observed that advisers determine whether a fund is a cash
management fund inconsistently. Therefore, this proposed amendment is
designed to improve data quality.
We request comments on the proposed amendments.
29. Would the proposed amendments help to map complex fund
structures and cross reference them to private fund information across
Form PF filings? Would the proposed amendments provide more complete
and accurate information about each fund's risk profile? Is there a
better way to meet these objectives?
30. Should the form require different or additional identifying
information to identify a master fund, feeder fund, internal private
fund, or external private fund?
31. Should Form PF require advisers to report the private fund
identification number for any feeder funds, as proposed, even though
advisers annually report the private fund identification number of any
feeder funds that invest in a private fund they advise on Form ADV?
\62\
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\62\ Form ADV, section 7.B.(1).A.6.
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32. Should Form PF define ``internal private funds,'' ``external
private funds,'' and ``trading vehicle,'' as proposed? Are there
alternative definitions we should adopt? For example, should we define
``internal private funds'' and ``external private funds'' to exclude
cash management funds as the current definitions of ``investments in
internal private funds'' and ``investments in external private funds''
do?
Withdrawal or redemption rights. The proposal would change how
advisers report withdrawal and redemption rights. Form PF currently
requires only large hedge fund advisers to report whether each
qualifying hedge fund provides investors with withdrawal or redemption
rights in the ordinary course.\63\ We propose to require all advisers
to provide this information for each reporting fund to inform the
Commissions and FSOC better of all reporting funds' susceptibility to
stress through investor redemptions, to help identify how widespread
the stress is.\64\ If the reporting fund provides investors with
withdrawal or redemption rights in the ordinary course, we propose to
require advisers to indicate how often withdrawals or redemptions are
permitted by selecting from a list of categories.\65\ Advisers would
report this information regardless of whether there are notice
requirements, gates, lock-ups, or other restrictions on withdrawals or
redemptions.\66\ We believe these proposed amendments would allow us
and FSOC to identify better reporting funds that may be affected by
investor withdrawals during certain market events, or vulnerable to
failure as a result of investor redemptions. We believe this
information also would provide insight into other data that all
reporting funds report. For example, we understand that private equity
funds that do not typically offer redemption rights in the ordinary
course likely have certain patterns of subscriptions and withdrawals,
and also report performance to investors and prospective investors as
an internal rate of return, rather than reporting based on changes in
the portfolio market value. We propose to define ``internal rate of
return'' in the proposed Form PF Glossary of Terms as the discount rate
that causes the net present value of all cash flows throughout the life
of the fund to be equal to zero. Analyzing reported information about
investor withdrawal or redemption rights together with reported
information about subscriptions and withdrawals or performance is
designed to help us identify developing trends relevant to identifying
systemic risk and would help us further investor protection efforts. We
request comment on the proposed amendments.
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\63\ Current Question 49(a).
\64\ To implement this, the proposal would move current Question
49(a) from section 2b, which requires large hedge fund advisers to
report information about qualifying hedge funds, to section 1b which
requires all advisers to report information about all the reporting
funds they advise, and redesignate it as Question 10. To accommodate
moving the question, the proposal would make corresponding
amendments to the instructions in current Question 49, which we
would redesignate as Question 52.
\65\ Proposed Question 10(b). The categories would be (1) any
business day, (2) at intervals of at least two business days and up
to a month, (3) at intervals longer than monthly up to quarterly,
(4) at intervals longer than quarterly up to annually, and (5) at
intervals of more than one year.
\66\ For example, if the reporting fund allows quarterly
redemptions that are subject to a gate, then the adviser would
select ``at intervals longer than monthly up to quarterly.''
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33. Should we require all advisers to report information about
withdrawal and redemption rights about all the reporting funds they
advise, as proposed? Alternatively, should only certain advisers report
this information for only certain reporting funds? If so, which ones
and why?
34. Should Form PF include more, fewer, or different categories for
the schedule of withdrawal or redemption
[[Page 53841]]
rights? As an alternative, should advisers be able to select ``other''
as a schedule category? Under what circumstances would an adviser
select ``other?''
35. Should we define ``internal rate of return'' as proposed? If
not, what alternative definitions should we use?
Trading vehicles. We are proposing to require advisers to provide
identifying information for any trading vehicle in which the reporting
fund holds investments or conducts activities.\67\ Advisers would
disclose the trading vehicle's legal name; LEI, if it has one; and any
other identifying information about the trading vehicle, such as the
RSSD ID, if it has one. This proposed amendment is designed to help the
Commissions and FSOC understand the reporting fund's activities,
including how it interacts with the market if the fund trades through a
trading vehicle and related counterparty exposures. The identifying
information also is designed to allow comparisons of Form PF data with
data from other sources that use such information to identify entities.
Enhancing the ability to compare Form PF data in this way is designed
to provide a more comprehensive view of the market, and therefore,
enhance investor protection efforts and systemic risk assessment.
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\67\ Proposed Question 9.
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We request comment on the proposed amendments.
36. Should all advisers provide identifying information for a
trading vehicle, including an LEI if it has one, as proposed?
Alternatively, should only certain advisers report it for certain
reporting funds?
37. Do any trading vehicles not have an LEI?
38. Should Form PF require more, less, or different identifying
information for the trading vehicle?
Gross asset value and net asset value. We propose several
amendments to the way advisers report gross asset value and net asset
value. We propose to require advisers who are filing quarterly updates
to report gross asset value and net asset value as of the end of each
month of the reporting period, rather than only reporting the
information as of the end of the reporting period, as Form PF currently
requires.\68\ This proposed amendment is designed to facilitate
analysis of other monthly Form PF data, including certain fund
performance and risk metrics.\69\
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\68\ See current Questions 8 and 9, and proposed Questions 11
and 12. We also propose to make amendments to the instructions in
current Question 8 (which we would redesignate as proposed Question
11) to correspond with the proposed instructions that would no
longer allow advisers to aggregate master-feeder arrangements, as
discussed above.
\69\ See e.g., proposed Question 23 (requiring all private fund
advisers to report monthly performance data, to the extent such
results are calculated for the reporting fund), supra footnote 98,
and accompanying text, and proposed Question 48 (requiring large
hedge funds to report monthly data concerning the reporting fund's
portfolio correlation), infra section II.C.2 of this Release.
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We also propose to add new Question 13 to require advisers to
separately report the value of unfunded commitments included in the
gross and net asset value reported in proposed Questions 11 and 12.\70\
Current Questions 8 and 9 require valuations based on the instruction
in Form ADV for calculating regulatory assets under management, which
requires advisers to include the amount of any unfunded
commitments.\71\ This approach reflects that, in the early years of a
private fund's life, its adviser typically earns fees based on the
total amount of capital commitments, which we presume reflects
compensation for efforts expended on behalf of the fund in preparation
for the investments.\72\ We continue to believe that net asset value
and gross asset value should include unfunded commitments so Form PF
data is comparable to Form ADV data. However, there are circumstances
where understanding the amount represented by unfunded commitments
would enhance our understanding of changes to a reporting fund's net
and gross asset value over time, inform us of trends, and improve data
comparability over the life of the fund. For example, knowing the value
of uncalled commitments would help the Commissions and FSOC more
accurately identify how much leverage a fund with uncalled commitments
has. Currently, the Commissions and FSOC only can infer this
information but it is unclear whether such inferences are correct.
Therefore, this proposed amendment is designed to improve data accuracy
and comparability, which is important for effective systemic risk
assessment and investor protection efforts.
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\70\ Form PF currently defines ``unfunded commitments'' as
``committed capital'' that has not yet been contributed to the
private equity fund by investors. We propose to amend the definition
so it refers to all reporting funds, not only private equity funds.
Form PF defines ``committed capital'' as any commitment pursuant to
which a person is obligated to acquire an interest in, or make
capital contributions to, the private fund. See Form PF Glossary of
Terms.
\71\ Form PF requires advisers to calculate gross asset value
and net asset value using regulatory assets under management, a
regulatory metric from Form ADV. See ``gross asset value'' and ``net
asset value'' as defined in Form PF Glossary of Terms; Form ADV:
Instructions for Part 1A, Instruction 5.b. An adviser must calculate
its regulatory assets under management on a gross basis, that is,
without deduction of any outstanding indebtedness or other accrued
but unpaid liabilities. In addition, an adviser must include the
amount of any uncalled capital commitments made to a private fund
managed by the adviser.
\72\ Rules Implementing Amendments to the Investment Advisers
Act of 1940, Advisers Act Release No. 3221 (June 22, 2011) [76 FR
42950, 42956 (July 19, 2011)], at text accompanying n.90.
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We request comment on the proposed amendments.
39. Should Form PF require advisers who are filing quarterly
updates to report information as of the end of each month of the
reporting period, as proposed? Would this requirement facilitate our
and FSOC's analysis of such advisers' other monthly Form PF data? Is
there a better way to meet this objective?
40. Should Form PF require advisers to report the value of unfunded
commitments included in the gross asset value and net asset value, as
proposed? Would the proposed amendment improve data accuracy and
comparability? Would the proposed amendment more accurately identify
how much leverage a fund with uncalled commitments has? Is there a
better way to meet this objective?
Inflows and outflows. We propose to add a question requiring
advisers to report information concerning the reporting fund's
activity, including contributions to the reporting fund, as well as
withdrawals and redemptions, which would include all withdrawals,
redemptions, or other distributions of any kind to investors.\73\ Form
PF would specify that, for purposes of the question, advisers must
include all new contributions from investors, but exclude contributions
of committed capital that they have already included in gross asset
value calculated in accordance with Form ADV instructions.\74\
Quarterly filers would provide this information for each month of the
reporting period. This proposed requirement is designed to facilitate
analysis of other monthly Form PF data, including certain fund
performance and risk metrics.\75\ Therefore, this amendment is designed
to improve data accuracy, and allow the Commissions and FSOC to analyze
data more efficiently. Inflows and outflows inform the Commissions and
FSOC of the relationship between flows and performance, changes to net
and gross asset value, as well as trends in the private fund industry.
Accordingly, this question is designed to provide a more accurate
baseline understanding of
[[Page 53842]]
inflows and outflows, so the Commissions and FSOC can, for example,
more accurately assess how much the private fund industry has grown
from flows versus performance. Inflows and outflows also can indicate
funding fragility, which can have systemic risk implications.
Therefore, this amendment also is designed to provide more accurate
data of inflows and outflows for systemic risk assessment and investor
protection efforts, including identifying activity that may not match
investor disclosures.
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\73\ See proposed Question 14.
\74\ Form PF would cite to Form ADV, Part 1A Instruction
6.e.(3).
\75\ See supra footnote 69.
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We request comment on the proposed amendments.
41. Should proposed Question 14 apply to advisers to all reporting
funds, as proposed, or only certain advisers to only certain reporting
funds?
42. Should proposed Question 14 instruct advisers to include or
exclude any other information? Would proposed Question 14 raise
operational challenges? For example, should the instructions specify
whether to include or exclude distributions that may be recallable by
the fund (i.e., ``recyclable capital commitments'' or capital that can
be recalled to invest during a portion of the investment period)?
43. Should Form PF require advisers to provide the amount of new
redemptions or subscriptions based on notices that would be payable or
expected after Form PF is due? If so, should all advisers submit such
data for all reporting funds, or should only certain advisers submit it
for only certain reporting funds?
Base currency. The proposal would require all advisers to identify
the base currency of all reporting funds, rather than only large hedge
fund advisers identifying this information for only qualifying hedge
funds.\76\ When a reporting fund uses a base currency other than U.S.
dollars in the current Form PF, the adviser must convert all monetary
values to U.S. dollars, unless otherwise specified, to complete Form
PF, which may cause inconsistencies in the data.\77\ Currently, the
Commissions and FSOC can identify such inconsistencies only for
qualifying hedge funds from current Question 31. Therefore, this
proposed change is designed to allow us and FSOC to interpret more
accurately responses to questions regarding foreign exchange exposures
and the effect of changes in currency rates on all reporting fund
portfolios to aid systemic risk assessment and investor protection
efforts across all reporting fund portfolios.
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\76\ To implement this, the proposal would move current Question
31 from current section 2b, which requires large hedge fund advisers
to report information about qualifying hedge funds, to section 1b
which requires all advisers to report information about all the
reporting funds they advise. See proposed Question 17.
\77\ See current Instruction 15. We also propose to revise
Instruction 15 to provide additional instructions concerning
currency conversions. See section II.D of this Release.
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We request comment on the proposed amendments.
44. Should we expand reporting of base currency information for all
reporting funds, as proposed? Would the proposed change allow us and
FSOC to interpret responses to questions regarding foreign exchange
exposures and the effect of changes in currency rates for these funds?
45. Would the proposed amendment improve efficiency?
Borrowings and types of creditors. The proposal would revise how
advisers report the reporting fund's ``borrowings.'' We propose to
revise the term ``borrowings'' to (1) specify that it includes
``synthetic long positions,'' which Form PF would define in the
Glossary of Terms, and (2) provide a non-exhaustive list of types of
borrowings.\78\ This proposed reporting approach is consistent with SEC
staff guidance from Form PF Frequently Asked Questions.\79\ This
proposed amendment is designed to improve data quality, based on
experience with the form. Current Question 12 requires advisers to
report the value of the reporting fund's borrowings and the types of
creditors. We propose to amend this question to require advisers to
indicate whether a creditor is based in the United States and whether
it is a ``U.S. depository institution,'' rather than a ``U.S. financial
institution'' as is currently required.\80\ This proposed amendment is
designed to make the categories more consistent with the categories the
Federal Reserve Board uses in its reports and analysis, to enhance
systemic risk assessment. The proposal would not require advisers to
distinguish between non-U.S. creditors that are depository institutions
and those that are not. We understand that it is difficult for advisers
to distinguish non-U.S. creditors by type, resulting in inconsistent
data that is less valuable for analysis.
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\78\ ``Borrowings'' would include, but would not be limited to
(1) cash and cash equivalents received with an obligation to repay;
(2) securities lending transactions (count cash and cash equivalents
and securities received by the reporting fund in the transaction,
including securities borrowed by the reporting fund for short
sales); (3) repo or reverse repo (count the cash and cash
equivalents and securities received by the reporting fund); (4)
negative mark-to-market of derivative transactions from the
reporting fund's point of view; and (5) the gross notional value of
``synthetic long positions.'' We propose to define a ``synthetic
long position'' in the Form PF Glossary of Terms (see the proposed
Form PF Glossary of Terms for the proposed definition.) We are
proposing this definition based on our understanding of the
instruments and to help ensure data quality to aid comparability.
\79\ See SEC staff Form PF Frequently Asked Questions, available
at https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml
(``Form PF Frequently Asked Questions''). See Form PF Frequently
Asked Question 12.1 (which provides a non-exhaustive list of types
of borrowings).
\80\ See proposed Question 18. Form PF would define ``U.S.
depository institution'' as any U.S. domiciled depository
institution, including any of the following: (1) a depository
institution chartered in the United States, including any federally-
chartered or state-chartered bank, savings bank, cooperative bank,
savings and loan association, or an international banking facility
established by a depositary institution chartered in the United
States; (2) banking offices established in the United States by a
financial institution that is not organized or chartered in the
United States, including a branch or agency located in the United
States and engaged in banking not incorporated separately from its
financial institution parent, United States subsidiaries established
to engage in international business, and international banking
facilities; (3) any bank chartered in any of the following United
States affiliated areas: U.S. territories of American Samoa, Guam,
and the U.S. Virgin Islands; the Commonwealth of the Northern
Mariana Islands; the Commonwealth of Puerto Rico; the Republic of
the Marshall Islands; the Federated States of Micronesia; and the
Trust Territory of the Pacific Islands (Palau); or (4) a credit
union (including a natural person or corporate credit union). Form
PF defines ``U.S. financial institution'' as any of the following:
(1) a financial institution chartered in the United States (whether
federally-chartered or state-chartered); (2) a financial institution
that is separately incorporated or otherwise organized in the United
States but has a parent that is a financial institution chartered
outside the United States; or (3) a branch or agency that resides
outside the United States but has a parent that is a financial
institution chartered in the United States. See proposed Form PF
Glossary of Terms.
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We request comment on the proposed amendments.
46. Should Form PF define or redefine any terms related to proposed
Question 18? For example, should Form PF define ``U.S. depository
institution,'' ``synthetic long positions,'' and revise the term
``borrowings,'' as proposed? Could the definitions be clearer? Should
Form PF define the terms differently? For example, should ``synthetic
long position'' provide a different list of assets to be included or
excluded? Does the reference to deep-in-the-money options in the
definition of ``synthetic long position'' need further clarification?
If so, what clarifications should we make?
47. Would advisers find it difficult to distinguish among different
types of non-U.S. creditors? Should Form PF require advisers to
distinguish between non-U.S. creditors that are depository institutions
and those that are not, or non-U.S. creditors that are financial
institutions and those that are not?
Fair value hierarchy. Current Question 14 requires advisers to
report the assets and liabilities of each
[[Page 53843]]
reporting fund broken down using categories that are based on the fair
value hierarchy established under U.S. generally accepted accounting
principles.\81\ Current Question 14 is designed to provide insight into
the illiquidity and complexity of a fund's portfolio and the extent to
which the fund's value is determined using metrics other than market
mechanisms.\82\ We are proposing to revise how advisers report fair
value hierarchy in current Question 14, which we would redesignate as
proposed Question 20, in the following ways to improve data quality and
better understand the reporting fund's complexity and valuation
challenges:
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\81\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying n.204.
\82\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.204.
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We propose to require advisers to indicate the date the
categorization was performed. This proposed amendment is designed to
show how old the data is. Some advisers report current fair value
hierarchy, while others report a prior year's fair value hierarchy if
the current data is not yet available.\83\ This can cause confusion
when analyzing the data, because the fair value hierarchy data concerns
a different time period than the other data advisers report on Form PF.
Therefore, we believe that adding a categorization date would help
ensure the data is not incorrectly categorized as applying to the wrong
time period, and in turn, would allow the Commissions and FSOC to
correlate data to other Form PF data and market events more accurately.
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\83\ Advisers are not required to update information that they
believe in good faith properly responded to Form PF on the date of
filing even if that information is subsequently revised for purposes
of their recordkeeping, risk management, or investor reporting (such
as estimates that are refined after completion of a subsequent
audit). See Instruction 16.
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We propose to direct advisers to report the absolute value
of all liabilities. Currently, advisers report liabilities
inconsistently, with some reporting absolute values and others
reporting negative values. This inconsistency causes errors when the
Commissions and FSOC aggregate this data and we believe the proposed
instruction would help reduce aggregation errors.
We propose to direct advisers to provide an explanation in
Question 4 if they report assets as a negative value. We have found
that some advisers have reported negative values for assets in
error.\84\ Therefore, this instruction is designed to reduce
inadvertent errors.
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\84\ We recognize that there may be cases when advisers
correctly report negative values, such as when subtracting fund of
fund investments.
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We propose to require advisers to separately report cash
and cash equivalents. Currently, Form PF does not explain where
advisers must report cash and cash equivalents in current Question 14.
While SEC staff have suggested that advisers generally should report
cash in the cost based column and cash equivalents in the applicable
column in the fair value hierarchy or the cost based column, depending
on the nature of the cash equivalents, we are proposing to add a
separate column for cash and cash equivalents.\85\ The proposed
categorization is designed to differentiate reported holdings of cash
and cash equivalents from harder to value assets that may be valued at
cost, and in turn, improve data quality and comparability.
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\85\ See Form PF Frequently Asked Question 14.3, Form PF
Frequently Asked Questions, supra footnote 79.
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We propose to amend the definition of ``cash and cash
equivalents.'' The current definition of ``cash and cash equivalents''
includes ``government securities.'' \86\ When reporting cash and cash
equivalents, some advisers may include government securities with
longer maturities, while others do not, which results in inconsistent
reporting and may obscure our and FSOC's understanding of fund
exposures. Therefore, to improve data quality, we propose to remove
government securities from the definition of ``cash and cash
equivalents,'' and present it as its own line item in the proposed Form
PF Glossary of Terms.\87\ We also propose to amend the term ``cash and
cash equivalents'' so it would direct advisers to not include any
digital assets when reporting cash and cash equivalents. As discussed
in section II.B.3 of this Release, we propose to define ``digital
assets'' and require advisers to report them separately than other
types of assets.\88\ Therefore, this proposed amendment is designed to
ensure that the categories of ``cash and cash equivalents'' and
``digital assets'' are clearly distinct to help ensure accurate
reporting.
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\86\ Current Form PF defines ``government securities'' in the
current term ``cash and cash equivalents'' as (1) U.S. treasury
securities, (2) agency securities, and (3) any certificate of
deposit for any of the foregoing.
\87\ We propose to make corresponding amendments to the
definition of ``unencumbered cash'' to reflect that ``government
securities'' would be a distinct term from ``cash and cash
equivalents.'' This proposed amendment is not intended to change the
meaning of the term ``unencumbered cash.'' See Form PF Glossary of
Terms.
\88\ See e.g., proposed Question 25, which would include digital
assets as a strategy category for advisers to hedge funds.
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We propose to add instructions directing advisers about
how to report data if their financial statement's audit is not yet
completed when Form PF is due. The instructions would state that
advisers should use the estimated values for the fiscal year and
explain that the information is an estimate in Question 4. The proposed
instructions also would provide that the adviser may, but is not
required to, amend Form PF when the audited financial statements are
complete.\89\ The instructions are consistent with responses to Form PF
Frequently Asked Questions and are designed to provide the Commissions
and FSOC with more recent information regarding the reporting fund than
may be possible if the reporting fund relied solely on audited
financial statement information (i.e., the reporting fund's previous
fiscal year's audited financial statements).\90\ Given that advisers
file Form PF sometimes months after their quarter and year ends,
depending on their size and the type of funds they advise, we believe
the proposed instruction would balance reporting burdens with more
timely information for assessing potential systemic risk and investor
protection concerns.
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\89\ Form PF Instruction 16 would continue to provide that an
adviser is not required to update information that it believes in
good faith properly responds to Form PF on the date of filing, even
if that information is subsequently revised, as Form PF currently
provides.
\90\ See Form PF Frequently Asked Question A.11, Form PF
Frequently Asked Questions, supra footnote 79.
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We request comment on the proposed amendments.
48. Should we require advisers to indicate the date the
categorization was performed, as proposed? Would this proposed
amendment help ensure the data is correctly categorized as applying to
the appropriate time period, and in turn, allow the Commissions and
FSOC to correlate data to other Form PF data and market events more
accurately? Is there a better way to meet this objective?
49. Should Form PF direct advisers to report the absolute value of
all liabilities, as proposed? Would this proposed amendment reduce
aggregation errors? Is there a better way to meet this objective?
50. Should Form PF direct advisers to provide an explanation in
Question 4 if they report assets as a negative value, as proposed?
Would this proposed instruction reduce inadvertent errors?
51. Should advisers report cash or cash equivalents separately from
other
[[Page 53844]]
assets, as proposed? Are there other alternatives we should implement?
For example, should Form PF require advisers to report cash in the cost
based column and cash equivalents in the applicable column in the fair
value hierarchy or the cost based column, depending on the nature of
the cash equivalents? \91\
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\91\ See supra footnote 85.
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52. Would the proposed amendments to the terms ``cash and cash
equivalents'' and ``unencumbered cash,'' and the addition of
``government securities'' allow for more precise reporting for these
types of assets? Alternatively, should the definition of ``cash and
cash equivalents'' provide that government securities would be included
in cash equivalents if they are eligible to be held by money market
funds under the risk-limiting condition set forth in [17 CFR 270.2a-
7(d)(1)(i)] Investment Company Act rule 2a-7(d)(1)(i), which generally
prohibits a money market fund from acquiring any instrument with a
remaining maturity of greater than 397 calendar days? Should this
language be more comparable with other requirements of Form PF, which
require large liquidity fund advisers to report the dollar amount of a
liquidity fund's assets that have a maturity greater than 397 days?
\92\ Should Form PF provide distinct line items for the term ``cash''
and ``cash equivalents,'' and revise questions to refer to each term,
as applicable? Should the term ``unencumbered cash'' continue to refer
to government securities, as proposed, or should we modify the term
differently? For example, should ``unencumbered cash'' refer to U.S.
treasury bills, rather than government securities?
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\92\ See e.g., Form PF, section 3, current Question 55(i). The
SEC recently proposed amendments to Form PF section 3, which would
redesignate current Question 55(i) to reflect new numbering. See
2022 SEC Form PF Proposal, supra footnote 13.
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53. Should Form PF direct advisers to report estimated values if
their financial statement's audit is not yet completed when Form PF is
due, as proposed? Alternatively, should we require advisers to update
Form PF with updated values when the audited financial statements are
complete?
Beneficial Ownership of the Reporting Fund. Current Question 16
requires advisers to specify the approximate percentage of the
reporting funds' equity that is beneficially owned by different groups
of investors. We propose to require advisers to provide more granular
information regarding the following groups of beneficial owners.\93\
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\93\ See proposed Question 22.
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Advisers would indicate whether beneficial owners that are
broker-dealers, insurance companies, non-profits, pension plans,
banking or thrift institutions are U.S. persons or non-U.S.
persons.\94\ This proposed amendment is designed to allow the
Commissions and FSOC to conduct more targeted analysis about risks
presented in the United States separate from risks presented abroad.
With regard to pension plans, in particular, it is currently unclear
how advisers must report assets in non-U.S. pension plans: as
governmental pension plans or foreign official institutions. Therefore,
this proposed amendment also is designed to improve data quality, based
on experience with the form.
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\94\ We understand that, in some cases, an adviser may not be
able to determine what type of non-U.S. entity the investor is.
Current Question 16 already provides a category that would address
that scenario in certain circumstances, and we would maintain that
approach. If investors that are not United States persons and about
which certain beneficial ownership information is not known and
cannot reasonably be obtained because the beneficial interest is
held through a chain involving one or more third-party
intermediaries, advisers currently report this in current Question
16(m), which we would redesignate as proposed Question 22(s).
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Advisers would indicate whether beneficial owners that are
private funds are either internal private funds (i.e., managed by the
adviser or its related persons) or external private funds. This
proposed amendment is designed to help the Commissions and FSOC
understand the interconnectedness of private funds to each other, which
would aid systemic risk assessment and investor protection efforts.
Furthermore, this information is designed to help the Commissions and
FSOC understand a reporting fund's risk from investor demands for
liquidity, because beneficial owners that are external private funds
may have less predictable withdrawals than internal private funds.
We would specify that ``state'' investors are U.S. state
investors to improve data quality and reduce potential confusion.\95\
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\95\ The proposal also would include instructions to proposed
Question 22, as well as current Question 15, which we would
redesignate as proposed Question 21 (concerning a certain percentage
of beneficial ownership), providing that if the reporting fund is
the master fund in a master-feeder arrangement, advisers must look
through any disregarded feeder fund (i.e., a feeder fund that is not
required to be separately reported). This proposed amendment is
designed to implement the proposed master-feeder reporting. See
section II.A.1 of this Release.
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The proposal would provide that if advisers report information in
the ``other'' category, they must describe in Question 4 the type of
investor, why it would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' This
proposed amendment is designed to improve data quality by providing
context to the adviser's selection of the ``other'' category, and help
ensure that advisers do not inadvertently report information in the
wrong category.
We request comment on the proposed amendments.
54. Should we revise the reporting categories as proposed? Should
we eliminate, add, or change any categories? For example, should we add
categories for security-based swap dealers that are U.S. persons and
those that are not? The instructions for current Question 16 require
advisers to include each investor in only one group. Therefore, if we
require advisers to report whether an investor is a security-based swap
dealer, how should they report the investor if the investor also
qualifies for another category, such as broker-dealers or ``banking or
thrift institutions?'' For example, should the list be non-exclusive?
Is there a better way to address cases when advisers may not be able to
determine what type of entity the investor is? \96\
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\96\ See supra footnote 94.
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55. Should Form PF require advisers to explain their response when
they select ``other'' as a category, as proposed? Should Form PF
require the adviser to include more, less, or different information in
the explanation? Would this proposed change provide context to the
adviser's selection of the ``other'' category and help prevent
misreporting?
56. Should we add instructions to current Question 15 (which we
propose to redesignate as proposed Question 21) to allow good faith
estimates in determining beneficial interests outstanding before March
31, 2012 (the effective date of Form PF), that have not been
transferred on or after that date, as current Question 16 does and Form
PF would continue to provide in proposed Question 22?
57. Current Question 16 includes a category concerning broker-
dealers. Under the proposal, advisers would distinguish between broker-
dealers that are U.S. persons and those that are not U.S. persons.
Should Form PF define ``broker-dealer'' or use different terms so the
categories would be more consistent with the Federal Reserve Board's
reports and analysis? Is there a way to achieve this objective while
ensuring the terms are consistent with the SEC's definition of the
terms? For example, should Form PF use and define the term ``broker''
or ``dealer'' as they are defined in the Securities Exchange Act of
1934 (``Exchange Act'')? \97\ Should Form PF
[[Page 53845]]
use and define the term ``foreign broker or dealer'' as it is defined
in [17 CFR 240.15a-6(b)(3)] (``Exchange Act rule 15a-6(b)(3)'')? Should
Form PF use the term ``securities brokers and dealers,'' and define it
the following way: Firms that buy and sell securities for a fee, hold
an inventory of securities for resale, or do both? Are the firms that
make up this sector those that submit information to the SEC on one of
two reporting forms, either [17 CFR 249.617] Form X-17A-5, Financial
and Operational Combined Uniform Single Report of Brokers and Dealers
(``FOCUS Report'') or [17 CFR 449.5] Form G-405, on Finances and
Operations of Government Securities Brokers and Dealers (``FOGS
Report'')?
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\97\ 15 U.S.C. 78c(a)(4) and 15 U.S.C. 78c(a)(5).
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Fund Performance. We are proposing several amendments regarding
fund performance reporting in current Question 17, which we would
redesignate as proposed Question 23.\98\ Currently, Form PF requires
all advisers to report gross and net fund performance for specified
fiscal periods using a table in current Question 17. The table in
current Question 17 requires advisers to provide monthly and quarterly
performance results in the table only if such results are calculated
for the reporting fund. This requirement would remain, but we propose
to add instructions specifying which lines to complete depending on
whether the adviser is submitting an initial filing, annual update, or
quarterly update.\99\ We also propose to amend the instructions to the
table to specify that if gross and net performance is reported to
current and prospective investors, counterparties, or otherwise in a
currency other than U.S. dollars, advisers must report the data using
that currency. We believe this instruction is implied in the current
form and we propose to amend this instruction to make it explicit. We
also propose to require advisers to identify the currency in Question
4.\100\ This proposed amendment is designed to inform the Commissions
and FSOC of the currency the adviser used to report the reporting
fund's gross and net performance, for more accurate and informed
analysis.
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\98\ In a separate release, the SEC is proposing a new rule
under the Advisers Act to require advisers to provide certain fund
performance information to its private funds' investors in quarterly
statements. See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Advisers Act Release No. IA-
5955 (Feb. 9, 2022) [87 FR 16886, (Mar. 24, 2022)].
\99\ We also propose to reorganize the table so monthly,
quarterly, and yearly data is presented in separate categories, but
this change would not affect reporting; advisers would report
information according to the same intervals, as they currently do.
We also propose to amend the table to refer to the end date of each
applicable month, quarter, and year, rather than last day of the
fiscal period, to reflect the proposed amendments to the reporting
period, as discussed above. See supra section II.A.3 of this
Release, and proposed Question 23(a).
\100\ See proposed Question 23(a).
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We also propose to create an exception to the tabular reporting. If
the reporting fund's performance is reported to current and prospective
investors, counterparties, or otherwise as an internal rate of return
since inception, the adviser would report its performance as an
internal rate of return.\101\ If such information is reported to
current and prospective investors, counterparties, or otherwise, in a
currency other than U.S. dollars, advisers would report the data using
that currency, and identify the currency in Question 4. This approach
is designed to acknowledge that advisers calculate performance data
differently for different types of private funds. For example, advisers
of private equity funds may use internal rate of return to calculate
performance data, while advisers to liquidity funds and hedge funds may
use a periodic rate of return. These calculations may differ in the way
they reflect realized and unrealized gains, among other things.
Therefore, the proposed change is designed to allow the Commissions and
FSOC to improve the usefulness and quality of performance data to
conduct more accurate analysis, including comparisons, and
aggregations.
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\101\ See proposed Question 23 instructions, and proposed
Question 23(b). Proposed Question 23(b) also would require that if
the fund reports different performance results to different groups,
advisers must provide the most representative results and explain
their selection in Question 4. The instructions to proposed Question
23(b) would specify that internal rates of return for periods longer
than one year must be annualized, while internal rates of return for
periods one year or less must not be annualized. This instruction is
designed to help ensure consistent reporting for accurate
comparisons.
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The proposal would require advisers to report additional
performance-related information if the adviser calculates a market
value on a daily basis for any position in the reporting fund's
portfolio. In such a case, the adviser would report the following:
The ``reporting fund aggregate calculated value'' at the
end of the reporting period.\102\ Advisers that file a quarterly update
also would report the reporting fund aggregate calculated value as of
the end of the first and second month of the reporting period.\103\
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\102\ We would define the term ``reporting fund aggregate
calculated value'' in the Form PF Glossary of Terms. See proposed
Form PF Glossary of Terms and proposed Question 23(c).
\103\ See proposed Question 23(c)(i).
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The reporting fund's volatility of the natural log of the
daily ``rate of return'' for each month of the reporting period,
following a prescribed methodology.\104\ Advisers would report whether
the reporting fund uses a different methodology than is prescribed in
Form PF to report to current and prospective investors, counterparties,
or otherwise, and if so, they would describe it in Question 4.\105\
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\104\ We would define ``rate of return'' for a reporting fund as
the percentage change in the reporting fund aggregate calculated
value in the reporting fund's base currency from one date to
another, and adjusted for subscriptions and redemptions. For a
portfolio position, the ``rate of return'' would be the percentage
change in the ``position calculated value,'' adjusted for income
earned. We would define ``position calculated value'' in the Form PF
Glossary of Terms. The prescribed methodology would be the standard
deviation of the natural log of one plus each of the daily rates of
return in the month, annualized by the square root of 252 trading
days. When calculating the natural log of a daily rate of return,
the rate of return, which is expressed as a percent, must first be
converted to a decimal value and then one must be added to the
decimal value. See proposed Form PF Glossary of Terms and Question
23(c)(ii).
\105\ See proposed Question 23(c)(iii).
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Whether the reporting fund had one or more days with a
negative daily rate of return during the reporting period. If so,
advisers would report (1) the most recent peak to trough drawdown, and
indicate whether the drawdown was continuing on the data reporting
date, (2) the largest peak to trough drawdown, (3) the largest single
day drawdown, and (4) the number of days with a negative daily rate of
return in the reporting period.\106\ These measures are designed to
help us and FSOC understand risk, particularly in reporting funds with
unique return patterns that are poorly measured using volatility alone.
We understand that advisers use drawdown metrics, therefore, this
question also is designed to be more reflective of industry practice,
and in turn improve data quality.
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\106\ See proposed Question 23(iv).
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Together, the proposed changes are designed to allow the
Commissions and FSOC to more accurately compare volatility across
different fund types to identify market trends (e.g., volatility of a
specific fund type), for systemic risk assessment and investor
protection efforts. For example, if several reporting funds that engage
in similar trading activity experience a surge in volatility, the
volatility itself or the reporting funds' response to the volatility
may impact others who also are engaging in similar trading activity,
which could pose systemic risk, and negatively affect investors.
We request comments on the proposed amendments.
[[Page 53846]]
58. Would the proposed changes improve data quality and provide the
Commissions and FSOC with a more robust picture of fund performance?
59. Should we amend the table in current Question 17, as proposed?
For example, should we specify that if a reporting fund's gross and net
performance is reported to current and prospective investors,
counterparties, or others in a currency other than U.S. dollars,
advisers must report the data using that currency, as proposed? Should
we require advisers to identify the currency in Question 4, as
proposed?
60. Do different types of private funds calculate performance data
differently based on industry conventions, or otherwise? Do the
proposed requirements and defined terms accurately capture the right
types of performance reporting for investor protection and systemic
risk assessment? Is there a better way to meet these objectives?
61. As an alternative, should Form PF require advisers to report
the reporting fund aggregate calculated value information only for
reporting funds that meet a certain asset threshold?
62. Should Form PF require advisers to follow the prescribed
methodology to compute the reporting fund's volatility of the daily
rate of return, as proposed, or should Form PF require advisers to
follow a different methodology? If so, what methodology should Form PF
prescribe and why? Should advisers have the flexibility to use their
own methodology to compute the reporting fund's volatility of the daily
rate of return? If advisers use their own methodology, how could the
Commissions and FSOC ensure data could be aggregated and compared?
63. Could the instructions on how to calculate the volatility of
the daily rate of return be clearer? For example, should the form
include a calculation worksheet for advisers to fill out to help
advisers calculate the volatility of rates of return?
64. Should we define ``position calculated value,'' ``reporting
fund aggregate calculated value,'' and ``rate of return,'' as proposed?
65. We are not defining the term ``drawdown.'' Should Form PF
define ``drawdown?'' For example, should Form PF define ``drawdown'' as
the maximum loss in the value over a specified time internal? Should
Form PF define or redefine any other terms?
66. Should Form PF specify what ``peak to trough'' means? For
example, should ``peak to trough'' mean the percentage decline from
portfolio's highest value (peak) to lowest value (trough) following the
establishment of the highest value (peak)? Are there industry standards
for determining peak to trough? For example, should Form PF provide
guidance on when the ``peak'' or ``trough'' should be reset? As an
alternative to requiring information about ``peak to trough,'' should
Form PF require advisers to report the maximum drawdown? If so, should
Form PF define ``maximum drawdown'' as the largest decline over any
time interval within the reporting period?
67. Should Form PF require advisers to report information about the
negative daily rates of return, as proposed? Alternatively, should Form
PF require the largest peak to trough drawdown over a rolling 10-day
period, or in each month?
68. Alternatively, should Form PF require advisers to report the
daily mark to market calculations, or both the daily rate of return and
the daily mark to market calculations?
69. Are the instructions clear for reporting funds that have base
currencies other than U.S. dollars? Should we revise the form further
to accommodate data concerning such funds?
3. Proposed Amendments to Section 1c of Form PF--Concerning All Hedge
Funds
Section 1c requires advisers to report information about the hedge
funds they advise. We propose 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. We also
propose to remove certain questions where other questions would provide
the same or more useful data to streamline reporting and reduce
reporting burdens without compromising investor protection efforts and
systemic risk analysis.
Investment Strategies. We propose to amend how advisers report
hedge fund investment strategies.\107\ We propose to require advisers
to indicate which investment strategies best describe the reporting
fund's strategies on the last day of the reporting period, rather than
allowing advisers flexibility to report information as of the data
reporting date or throughout the reporting period, as Form PF currently
provides.\108\ This amendment is designed to improve data quality by
specifying how to report information if the reporting fund changes
strategies over time.
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\107\ We would amend current Question 20, and redesignate it as
proposed Question 25.
\108\ See current Question 20.
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We also propose to update the strategy categories that advisers can
select to reflect our understanding of hedge fund strategies better,
and improve data quality and comparability, based on experience with
the form. For example, we propose to include more granular categories
for equity strategies, such as factor driven, statistical arbitrage,
and emerging markets. Similarly, we propose to include more granular
categories for credit strategies, such as litigation finance, emerging
markets, and asset-backed/structured products. These more granular
categories are designed to allow the Commissions and FSOC to conduct
more targeted analysis and improve comparability among advisers and
hedge funds, which the Commissions and FSOC can use to more accurately
identify and address systemic risk and investor protection issues in
times of stress. We also propose to add categories that have become
more commonly pursued by hedge funds since Form PF was adopted, such as
categories concerning real estate and digital assets.\109\ Today,
advisers may report information regarding these strategies in the
``other'' category, resulting in less robust Form PF data for analysis,
especially when such analysis filters results based on strategy.\110\
Therefore, the additional categories are designed to improve reporting
quality and data comparability across advisers, based on experience
with the form. If advisers select the ``other'' category, we propose to
require them to describe in Question 4 the investment strategy, why the
reporting fund would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' This
proposed change is designed to improve data quality by providing
context to the adviser's selection of the ``other'' category. It also
is designed to help us ensure that advisers are not misreporting
information in the ``other'' category when they should be reporting
information in a different category.
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\109\ Aggregate qualifying hedge fund gross notional exposure to
physical real estate has grown by 72 percent from the second quarter
2018 through the third quarter of 2021, to $146 billion. See Private
Funds Statistics, supra footnote 7, First Quarter 2020 (showing data
from the second quarter of 2018), and Third Quarter 2021.
\110\ The amount of hedge fund exposure that advisers attribute
to the ``other'' category has more than doubled to $57 billion, from
2013 through third quarter 2021. See Private Funds Statistics, supra
footnote 7.
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In connection with these proposed amendments, we propose to define
the term ``digital asset'' as an asset that is
[[Page 53847]]
issued and/or transferred using distributed ledger or blockchain
technology (``distributed ledger technology''), including, but not
limited to, so-called ``virtual currencies,'' ``coins,'' and
``tokens.'' These types of assets also are commonly referred to as
``crypto assets.'' \111\ We view these terms as synonymous. We are
proposing the term and definition to be consistent with the SEC's
recent statement on digital assets, and we believe that such term and
definition would provide a consistent understanding of the type of
assets we intend to address.\112\ The SEC proposed to add the same term
and definition to SEC's section of Form PF in the 2022 SEC Form PF
Proposal.\113\ The definition is designed to help ensure that advisers
report digital asset strategies accurately.
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\111\ See e.g., FSOC 2021 Annual Report, at 184-185, available
at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf (noting that another industry term for
``digital asset'' is ``crypto asset'').
\112\ See Custody of Digital Asset Securities by Special Purpose
Broker-Dealers, Exchange Act Release No. 90788 (Dec. 23, 2020) [86
FR 11627 (Feb. 26, 2021)], at n.1.
\113\ 2022 SEC Form PF Proposal, supra footnote 13.
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We request comment on the proposed amendments.
70. Should Form PF direct advisers to report information about the
reporting fund's strategies on the last day of the reporting period, as
proposed? Would this proposed amendment improve data quality, and
reduce ambiguity?
71. Should Form PF continue to provide that the strategies are
mutually exclusive and direct advisers to not report the same assets
under multiple strategies, as it currently does? Alternatively, should
Form PF allow advisers to report the same assets under multiple
strategies?
72. Should Form PF include more, fewer, or different categories?
Would the proposed categories improve reporting accuracy and data
comparability across advisers? Are there other strategies that are
important to track for assessing systemic risk or for the protection of
investors?
73. Are there categories that advisers report in the ``other''
category that Form PF should include as their own categories? Should we
remove the ``other'' category?
74. Should we require more specific disclosure of what each digital
asset represents? If so, what kinds of descriptions would be needed and
in what detail? For example, should the description include the rights
the digital asset provides to the holder? Should Form PF distinguish,
for example, between digital assets that represent an ability to
convert or exchange the digital asset for fiat currency or another
asset, including another digital asset, and those that do not represent
such a right to convert or exchange? For those digital assets that
represent a right to convert or exchange for fiat currency or another
digital asset, should we distinguish between those where the redemption
obligation is supported by an unconditional guarantee of payment, such
as some ``central bank digital currencies,'' and those digital assets
redeemable upon demand from the issuer, whether or not collateralized
by a pool of assets or a reserve? Should we identify digital assets
that do not represent any direct or indirect obligation of any party to
redeem or those that represent an equity, profit, or other interest in
an entity?
75. Should Form PF define or re-define any terms that are listed as
a proposed strategy?
Should Form PF define ``digital asset,'' as proposed? If not,
please identify alternative elements that would better identify the
digital assets held by private funds. Should Form PF use the term
``crypto asset'' instead of the term ``digital asset''?
76. Some reporting funds report as hedge funds, but may hold
commodities that are not securities or may hold commodity derivatives
such as bitcoin futures that would make them a commodity pool. Should
Form PF include categories for funds that hold digital assets
regardless of how the fund characterizes itself based on the assets it
is holding or would the proposed categories (other than the ``other''
category) apply?
77. If advisers select the ``other'' category, should Form PF
require them to explain the selection, as proposed? Should Form PF
require the adviser to include more, less, or different information in
the explanation?
78. Should Form PF require advisers to provide explanations for any
other categories besides the ``other'' category, as proposed? For
example, if advisers report digital assets, should Form PF require
advisers to provide the name of the digital asset, or describe the
characteristics of the digital asset?
Counterparty exposures. Counterparty exposure informs the
Commissions and FSOC of the interconnectedness of hedge funds with the
broader financial services industry, which is a critical part of
systemic risk assessment and investor protection efforts. Understanding
counterparty exposures allows the Commissions and FSOC to assess who
may be impacted by a reporting fund's failure, and which reporting
funds may be impacted by a counterparty's failure. Counterparty
exposure concerning central clearing counterparties (``CCPs'') is of
importance to FSOC's systemic risk assessment efforts as evidenced by
the fact that FSOC has designated many CCP institutions as
``systemically important,'' and recommended that regulators continue to
coordinate to evaluate threats from both default and non-default losses
associated with CCPs.\114\
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\114\ Form PF defines ``CCP'' as central clearing counterparties
(or central clearing houses) (for example, CME Clearing, The
Depository Trust & Clearing Corporation, Fedwire and LCH Clearnet
Limited). See Financial Stability Oversight Council, 2012 Annual
Report, Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf. (concerning the designations);
Financial Stability Oversight Council, 2021 Annual Report, p. 14,
available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf. (concerning the recommendation).
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The proposal would add proposed Question 26, and revise current
Questions 22 and 23, and redesignate them as proposed Questions 27 and
28, to provide better insight into hedge funds' borrowing and financing
arrangements with counterparties, including CCPs. Proposed Question 26
would require advisers to hedge funds (other than qualifying hedge
funds) to complete a new table (the ``consolidated counterparty
exposure table'') concerning exposures that (1) the reporting fund has
to creditors and counterparties, and (2) creditors and other
counterparties have to the reporting fund.\115\ Advisers would report
the U.S. dollar value of the reporting fund's ``borrowing and
collateral received (B/CR),'' as well as its ``lending and posted
collateral (L/PC),'' aggregated across all counterparties, including
CCPs, as of the
[[Page 53848]]
end of the reporting period.\116\ The form would explain what exposures
to net.\117\ Advisers would classify information according to type
(e.g., unsecured borrowing, secured borrowing, derivatives cleared by a
CCP, and uncleared derivatives) and the governing legal agreement
(e.g., a prime brokerage or other brokerage agreement for cash margin
and securities lending and borrowing, a global master repurchase
agreement for repo/reverse repo, and International Swaps and
Derivatives Association (``ISDA'') master agreement for synthetic long
positions, ``synthetic short positions,'' and derivatives).\118\
Advisers would report transactions under a master securities loan
agreement as secured borrowings. Advisers would check a box if one or
more prime brokerage agreements provide for cross-margining of
derivatives and secured financing transactions. If advisers check the
box, we propose to include instructions about how to report secured
financing and derivatives in the consolidated counterparty exposure
table.
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\115\ Qualifying hedge funds would not complete this table
because section 2 would be revised to include similar questions that
require additional detail. See discussion at Section II.C of this
Release. Together the proposed questions in section 1c and similar
questions at section 2 would allow the Commissions and FSOC to
consolidate information relating to hedge funds' and qualifying
hedge funds' arrangements with creditors and other counterparties,
to support systemic risk assessment and investor protection efforts.
We propose to define the term ``consolidated counterparty exposure
table'' in the Form PF Glossary of Terms. For hedge funds, other
than qualifying hedge funds, it would mean the section 1c table (at
proposed Question 26) that collects the reporting fund's borrowing
and collateral received and lending and posted collateral aggregated
across all creditors and counterparties as of the end of the
reporting period. For qualifying hedge funds, it would mean the
section 2 table (at proposed Question 41) that collects the
reporting fund's borrowing and collateral received and lending and
posted collateral aggregated across all creditors and counterparties
as of the end of the reporting period.
\116\ We would define ``borrowing and collateral received (B/
CR)'' and ``lending and posted collateral (L/PC)'' in the Form PF
Glossary of Terms. We are proposing these definitions based on our
understanding of borrowing and lending and to help ensure data
quality and comparability. We also propose to amend the term ``gross
notional value'' to provide more detail on how to report it to aid
advisers completing the consolidated counterparty exposure table.
See proposed Form PF Glossary of Terms.
\117\ Advisers would net the reporting fund's exposure with each
counterparty and among affiliated entities of a counterparty to the
extent such exposures may be contractually or legally set-off or
netted across those entities or one affiliate guarantees or may
otherwise be obligated to satisfy the obligations of another under
the agreements governing the transactions. We would include
instructions providing that netting must be used to reflect net cash
borrowed from or lent to a counterparty, but must not be used to
offset securities borrowed and lent against one another, when
reporting prime brokerage and repo/reverse repo transactions. These
instructions are designed to help ensure data quality and
comparability. See proposed Question 26.
\118\ We propose to define ``ISDA'' as the International Swaps
and Derivatives Association. We also propose to define ``synthetic
short positions'' in the Form PF Glossary of Terms (see the proposed
Form PF Glossary of Terms for the proposed definition). We are
proposing this definition based on our understanding of the
instruments and to help ensure data quality to aid comparability.
See also supra footnote 78 (discussing the proposed definition of
``synthetic long position'').
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Form PF would continue to require advisers to report information
about individual counterparties that present the greatest exposure to
and from hedge funds.\119\ Under the proposal, however, advisers to
qualifying hedge funds would not complete proposed Questions 27 and 28,
if they complete certain similar questions in Form PF section 2, to
avoid duplication.\120\ We also propose to revise current Questions 22
and 23 to improve data quality.
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\119\ See current Questions 22 and 23, and proposed Questions 27
and 28.
\120\ See proposed Questions 42 and 43 in Form PF section 2, and
supra footnote 115.
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Although current Questions 22 and 23 provide instructions
on how to identify the counterparties, we understand that advisers have
been using different methodologies to identify them, and have
misidentified lending relationships, which has limited the utility and
comparability of the reported information. Therefore, we propose to
provide more detailed instructions for advisers to use to identify the
individual counterparties. For both proposed Questions 27 and 28,
advisers would use the calculations from the consolidated counterparty
exposure table to identify the counterparties.\121\ This proposed
amendment is designed to help ensure that the Commissions' and FSOC's
analysis can identify true data differences, without the distraction of
methodology differences, which can suggest differences where there are
none, and reduce circumstances where advisers would misidentify lending
relationships.
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\121\ See proposed Question 26 for the consolidated counterparty
exposure table. The proposal would define new terms related to the
consolidated counterparty exposure table: ``cash borrowing
entries,'' ``cash lending entries,'' ``collateral posted entries,''
and ``collateral received entries.'' See proposed Form PF Glossary
of Terms.
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Proposed Question 27 would require advisers to identify
each creditor or other counterparty (including CCPs) to which the
reporting fund owes a certain amount (before posted collateral) equal
to or greater than either (1) five percent of net asset value as of the
data reporting date or (2) $1 billion. If there are more than five such
counterparties, the adviser only would report the five counterparties
to which the reporting fund owes the largest dollar amount, before
taking into account collateral that the reporting fund posted. If there
are fewer than five such counterparties, the adviser only would report
the counterparties that meet the threshold. For example, if only three
counterparties meet the threshold, the adviser would report only three
counterparties. This would be a change from current Question 22, which
requires advisers to identify five counterparties to which the
reporting fund has the greatest mark-to-market net counterparty credit
exposure, regardless of the actual size of the exposure. The proposed
threshold is designed to highlight two different, significant,
potentially systemic, risks: five percent of net asset value represents
an amount of borrowing by a reporting fund that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Additionally, the $1 billion represents an amount that, in the case of
a very large fund, may not represent five percent of its net assets,
but may be large enough to create stress for certain of its
counterparties.
Proposed Question 28 would require advisers to provide
information for counterparties to which the reporting fund has net
mark-to-market counterparty credit exposure which is equal to or
greater than either (1) five percent of the reporting fund's net asset
value as of the data reporting date or (2) $1 billion, after taking
into account collateral received or posted by the reporting fund. If
there are more than five such counterparties, the adviser would only
report the five to which the reporting fund has the greatest mark-to-
market exposure after taking into account collateral received. If there
are fewer than five such counterparties, the adviser only would report
the counterparties that meet the threshold. This would be a change from
current Question 23, which requires advisers to identify five
counterparties to which the reporting fund has the greatest mark-to-
market net counterparty credit exposure, regardless of the actual size
of the exposure. The proposed threshold is designed to represent an
amount of lending from a reporting fund that, if a default occurred,
could cause a significant loss that could result in a forced unwind and
forced sales from the reporting fund's portfolio. Furthermore, we
believe that the five percent threshold level would be large enough to
constitute a shock to a reporting fund's net asset value and is an
often-used industry metric. The $1 billion threshold represents an
amount that, in the case of a very large counterparty, may not
represent five percent of its net assets, but may be large enough to
create stress for the reporting fund.
Currently, advisers report exposures that the reporting
fund has to counterparties as a percentage of the reporting fund's net
asset value, and advisers report exposures that counterparties have to
the reporting fund in U.S. dollars.\122\ We propose to require advisers
to report both data sets in U.S. dollars for consistency and
comparability.\123\
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\122\ See current Questions 22 and 23.
\123\ See proposed Questions 27 and 28.
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[[Page 53849]]
We propose to require advisers to report the amount of
collateral posted, to help inform the Commissions and FSOC of the
potential impact of a reporting fund or counterparty default.
We also propose to require advisers to report the
counterparty's LEI, if it has one, to help identify counterparties and
more efficiently link data from other data sources that use this
identifier.
Advisers would continue to indicate if a counterparty is
affiliated with a major financial institution, as Form PF currently
provides.\124\ If the financial institution is not listed on Form PF,
advisers would continue to have the option of selecting ``other'' and
naming the entity in the chart, as Form PF currently provides.
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\124\ See current Question 22 and current Question 23.
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However, we propose to require the adviser to also describe the
financial institution in Question 4. This proposed amendment is
designed to help the Commissions and FSOC efficiently and accurately
identify the entity, without having to contact advisers individually.
Together, the proposed amendments are designed to allow the
Commissions and FSOC to identify and align sources of borrowing and
lending to identify significant counterparty exposures, so that
different styles of borrowing would not be not obscured by methodology
differences or misidentified lending relationships, based on our
experience with the form. We request comment on the proposed
amendments.
79. Would the proposed amendments help us and FSOC identify which
advisers and reporting funds may have counterparty credit risk in the
event of a counterparty failure (including CCP failure) or other market
event that affects performance by prime brokers or other counterparties
(including CCPs)? Is there a better way to meet these objectives?
80. Are the proposed consolidated counterparty exposure table, its
instructions, and defined terms clear? Could they be clearer? Are there
circumstances not contemplated by the instructions that need to be
addressed? Is there an easier way for advisers to report counterparty
exposures that would provide comparable data? Should Form PF define the
terms ``counterparty exposure table,'' ``borrowing and collateral
received (B/CR),'' ``lending and posted collateral (L/PC),''
``synthetic short position,'' ``cash borrowing entries,'' ``cash
lending entries,'' ``collateral posted entries,'' ``collateral received
entries,'' and redefine ``gross notional value,'' as proposed? For
example, should ``synthetic short position'' provide a different list
of assets to be included or excluded? Should Form PF define or redefine
more, fewer, or different terms?
81. Should Form PF require advisers to identify more or less than
only significant counterparty exposures? Is the proposed threshold for
identifying the counterparties with the most significant exposure to
and from the reporting fund the right threshold? Does it represent an
amount of borrowing from a reporting fund that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio?
Is there a different threshold that would meet this objective? Should
advisers report all counterparties that meet the threshold, even if
there are more than five such counterparties? Should advisers report
the five counterparties that the reporting fund has the greatest
exposure to and from, even if they don't meet the proposed threshold?
82. Should Form PF provide more detailed instructions for advisers
to use to identify the individual counterparties, as proposed? Could
the instructions be clearer? If Form PF should have less detailed
instructions on how to identify the counterparties, how could the
Commissions and FSOC help ensure that the data would be comparable?
83. Should we require advisers to report values in U.S. dollars, as
proposed? Alternatively, should Form PF require advisers to report
values as a percentage of the reporting fund's net asset value? Should
Form PF require advisers to report amounts as both U.S. dollars and as
a percentage of the reporting fund's net asset value, or another way?
84. Should Form PF require advisers to report collateral posted, as
proposed? Would the proposed amendment help inform the Commissions and
FSOC of the potential impact of a reporting fund or counterparty
default? Is there a better way to meet this objective?
85. Should Form PF require advisers to report the counterparty's
LEI, if it has one?
86. If an adviser selects ``other,'' should we require the adviser
to describe the entity in Question 4? Alternatively, should we
eliminate the ``other'' category?
Trading and clearing mechanisms. We propose to revise how advisers
report information about trading and clearing mechanisms.\125\ These
types of data inform the Commissions and FSOC of the extent of private
fund activities that are conducted on and away from regulated exchanges
and clearing systems, which is important to understanding systemic risk
that could be transmitted through counterparty exposures.\126\ We
propose to require advisers to report (1) the value traded and (2) the
value of positions at the end of the reporting period, rather than
requiring advisers to report information as a percentage in terms of
value and trade volumes, as Form PF currently requires.\127\ This
proposed change is designed to simplify reporting because advisers
would compute the value before they convert it into a percentage;
therefore, this proposed change would eliminate an extra calculation
for advisers. It also is designed to provide the Commissions and FSOC
with data that can be more efficiently compared and aggregated among
advisers and other data sources. With data in dollar values, the
Commissions and FSOC could more effectively estimate the size, extent,
and pace of each hedge fund's participation in activity on or away from
regulated exchanges and clearing systems in relation to total values.
Understanding the size of hedge fund participation in activity on and
away from regulated exchanges and clearing systems is important to
assessing systemic risk, because activity that takes place on regulated
exchanges and clearing systems presents different risks than activity
that takes places away from regulated exchange and clearing systems.
For example, activity that takes place away from a regulated exchange
or clearing system may be less transparent, and may present more credit
risk than activity that takes place on a regulated exchange and a
clearing system that acts as a central counterparty that guarantees
trades.
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\125\ See current Questions 24, and 25, which we would
redesignate as proposed Questions 29 and 30.
\126\ See supra footnote 114 and accompanying text (discussing
the role of CCPs); 2011 Form PF Adopting Release, supra footnote 3,
at n.228, and accompanying text.
\127\ Proposed Question 29 would specify that ``value traded''
is the total value in U.S. dollars of the reporting fund's
transactions in the instrument category and trading mode during the
reporting period. Proposed Question 29 also would specify that, for
derivatives, value traded would be the weighted average of the
notional amount of aggregate derivatives transactions entered into
by the reporting fund during the reporting period, except for the
following: (1) for options, advisers would use the delta adjusted
notional value, and (2) for interest rate derivatives, advisers
would use the ``10-year bond equivalent.'' This measurement is
designed to track standard industry convention. We propose to add
the term ``10-year bond equivalent'' to the Form PF Glossary of
Terms, as discussed in section II.C.2 of this Release. See infra
footnote 159.
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We also propose to require advisers to report information about
trading and clearing mechanisms for transactions in
[[Page 53850]]
interest rate derivatives separately from other types of derivatives.
Form PF data show that interest rate derivatives represent the largest
gross investment exposure of qualifying hedge funds.\128\ Therefore,
this amendment is designed to help ensure that the Commissions and FSOC
can identify risks of such a significant volume of activity on and away
from regulated exchanges and clearing systems, without the data being
obscured by other types of derivatives. The proposal would require
advisers to report interest rate derivatives and other types of
derivatives, by indicating the estimated amounts that were (1) traded
on a regulated exchange or swap execution facility, (2) traded over-
the-counter and cleared by a CCP, and (3) traded over the counter or
bilaterally transacted (and not cleared by a CCP). These proposed
categories reflect our understanding of how derivatives may be traded.
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\128\ See Private Funds Statistics, supra footnote 7.
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The proposal would continue to require advisers to report clearing
information concerning repos, but would specify how to report sponsored
repos, and would specify that advisers must report reverse repos with
repos.\129\ According to the Fixed Income Clearing Corporation
(``FICC''), FICC's sponsored repo service has expanded in 2017 and
2019, ultimately resulting in daily volume up to $300 million per day
as of 2021, with a peak in March 2020 of $564 billion.\130\ Sponsored
repos incorporate a different structure than other repos, in that FICC
serves as a counterparty to any sponsored trade and the sponsored
member bears responsibility for meeting the obligations of the
sponsored member on all transactions that it submits for clearing.
Adding a particular reference to sponsored repos would ensure that
advisers understand how sponsored repos cleared by a CCP should be
reported, i.e., as trades cleared at a CCP.\131\ Therefore, we propose
to provide a separate line item for sponsored repos. The proposed
amendment is designed to improve data quality concerning repos and
sponsored repos, to allow the Commissions and FSOC to conduct more
accurate and targeted systemic risk assessments and analysis concerning
investor protection efforts. We also propose to specify that advisers
must report reverse repos with repos. Current Question 24 requires
advisers to report ``repos,'' which some advisers could interpret to
include reverse repos, while others could interpret as excluding
reverse repos. Therefore, this proposed amendment is designed to
improve data quality.\132\
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\129\ The proposal also would explain that ``repo'' means
``securities in'' transactions and ``reverse repo'' means
``securities out'' transactions. Sponsored repos and sponsored
reverse repos would apply to transactions in which the reporting
fund has been sponsored by a sponsoring member of the Fixed Income
Clearing Corporation. We would revise how Form PF explains tri-party
repos to help ensure they do not exclude sponsored tri-party repos.
Currently, Form PF explains that a tri-party repo applies where repo
collateral is held at a custodian (not including a CCP) that acts as
a third party agent to both the repo buyer and the repo seller. We
propose to amend Form PF so it would explain that tri-party repo
would apply where the repo or reverse repo collateral is executed
using collateral management and settlement services of a third party
that does not act as a CCP. See Form PF Glossary of Terms (modifying
the terms ``repo'' and ``reverse repo'') and Question 29
instructions (discussing sponsored repos, sponsored reverse repos,
and tri-party repos).
\130\ See FICC Sponsored Repo in 2021, by DTCC Connection Staff
(Feb. 9, 2021), available at https://www.dtcc.com/dtcc-connection/articles/2021/february/09/ficc-sponsored-repo-in-2021.
\131\ Current Question 24.
\132\ See proposed Question 29.
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The proposal also would revise current Question 25, which requires
advisers to report the percentage of the reporting fund's net asset
value related to transactions not described in current Question 24,
which we would redesignate as proposed Question 29. The proposal would,
instead, require advisers to report both the value traded and the
position value as of the end of the reporting period for transactions
not described in proposed Question 29. These amendments are designed to
make proposed Question 30 data comparable with data from proposed
Question 29, so that together, Questions 29 and 30 would provide the
Commissions and FSOC with a complete data set of the adviser's trading
and clearing mechanisms during the reporting period.
We request comment on the proposed amendments.
87. Would the proposed amendments enhance analysis of clearance and
settlement, interest rate derivatives, as well as repos, reverse repos,
and sponsored repos?
88. Should Form PF require advisers to add repos and reverse repos
together when reporting information about trading and clearing
mechanisms, as proposed? Alternatively, should Form PF require advisers
to report information about repos separately from reverse repos?
89. Do the proposed reporting categories cover the types of trading
and clearing mechanisms used to trade derivatives? Should Form PF
include more or fewer trading and clearing categories?
90. Would the proposed amendments make data from proposed Questions
29 and 30 comparable, so that together, the questions would provide the
Commissions and FSOC with a complete data set of the adviser's trading
and clearing mechanisms during the reporting period? Is there a better
way to meet this objective?
91. Would the proposal to require advisers to report the value
traded and the value of positions as of the end of the reporting period
improve our ability to aggregate data and compare data among advisers?
Would requiring the values, instead of the percentages, provide the
Commissions and FSOC with a view into the extent of exposures across
reporting funds, which would inform the Commissions and FSOC as to how
much value would be at stake, given a market event? Are there better
ways to meet these objectives?
92. Should we amend the terms ``repo'' and ``reverse repo,'' as
proposed? Are the proposed definitions more consistent with how the
private fund industry understands repos and reverse repos? If not, how
should we define the terms, and would such definitions be consistent
with how the Commissions use the terms in other contexts? Should Form
PF refer to sponsored repos, as proposed?
Removing Certain Questions Concerning Hedge Funds. We propose to
remove current Questions 19 and 21 from the form. Current Question 19
requires advisers to hedge funds to report whether the hedge fund has a
single primary investment strategy or multiple strategies. Proposed
Question 25, which requires hedge fund advisers to disclose certain
information about each investment strategy, would provide this
information, as discussed above in this section II.B.3 of the Release.
We also propose to remove current Question 21, which requires hedge
fund advisers to approximate what percentage of the hedge fund's net
asset value was managed using high frequency trading strategies. We
believe the form's question on portfolio turnover, with proposed
revisions, would better inform our and FSOC's understanding of the
extent of trading by large hedge fund advisers and would better show
how larger hedge funds interact with the markets and provide trading
liquidity.\133\
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\133\ See proposed revisions to current Question 27, as
discussed in section II.C of this Release.
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We request comments on the proposed amendments.
93. Should we remove current Questions 19 and 21, as proposed?
Alternatively, should Form PF keep current Question 21, but revise it
to improve data quality? For example,
[[Page 53851]]
should Form PF define ``high frequency trading?''
94. Does the turnover data Form PF would collect provide more
informative data than current Question 21, which we propose to remove?
95. Should Form PF require advisers to report more or less turnover
data? For example, should Form PF require only large hedge fund
advisers to report the value of turnover during the month for the
qualifying hedge funds that they advise, as proposed, or should Form PF
require such information for all advisers who advise hedge funds of any
size?
96. Should Form PF remove any other questions that would be
answered by other questions that would provide the same or more useful
data?
C. Proposed Amendments Concerning Information About Hedge Funds Advised
by Large Private Fund Advisers
A private fund adviser must complete section 2 of Form PF if it had
at least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding the
adviser's most recently completed fiscal quarter.\134\ This section
requires additional information regarding the hedge funds these
advisers manage, which is tailored to focus on relevant areas of
financial activity that have the potential to raise systemic concerns.
We are proposing several amendments to this section, including
amendments that would remove aggregate reporting in section 2a, which
we have found to be less meaningful for analysis and more burdensome
for advisers to report, while preserving and enhancing reporting on a
per fund basis in section 2b. We also propose to retain certain
questions previously reported by advisers on an aggregate basis that we
believe are important for data analysis and systemic risk assessment,
but require reporting on a per fund basis. Collectively, the proposed
changes to section 2 are designed to provide better insight into the
operations and strategies employed by qualifying hedge funds and their
advisers, and improve data quality and comparability to enable FSOC to
monitor systemic risk better and enhance the Commissions' regulatory
programs and investor protection efforts. Furthermore, the proposal
would remove certain other reporting requirements that we have found to
be less useful based on our experience with Form PF since adoption,
which would help reduce reporting burdens for advisers while preserving
the Commissions' and FSOC's regulatory oversight.
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\134\ Section 2a requires a large hedge fund adviser to report
certain aggregate information about any hedge fund it advises and
section 2b requires a large hedge fund adviser to report certain
additional information about any hedge fund it advises that has a
net asset value of at least $500 million as of the last day of any
month in the fiscal quarter immediately preceding the adviser's most
recently completed fiscal quarter (a ``qualifying hedge fund'').
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Currently, the Form PF Glossary of Terms defines a ``hedge fund''
generally as any private fund (other than a securitized asset fund):
(a) with respect to which one or more investment advisers (or
related persons of investment advisers) may be paid a performance fee
or allocation calculated by taking into account unrealized gains (other
than a fee or allocation the calculation of which may take into account
unrealized gains solely for the purpose of reducing such fee or
allocation to reflect net unrealized losses);
(b) that may borrow an amount in excess of one-half of its net
asset value (including any committed capital) or may have gross
notional exposure in excess of twice its net asset value (including any
committed capital); or
(c) that may sell securities or other assets short or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration).\135\
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\135\ See current Form PF Glossary of Terms for the complete
definition.
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The definition is designed to include any private fund having any
one of three common characteristics of a hedge fund: (1) a performance
fee that takes into account market value (instead of only realized
gains); (2) leverage; or (3) short selling. We request comment on
whether we should amend the definition of ``hedge fund'' as such term
is defined in the Form PF Glossary of Terms in order to address
potential data mismatches and improve data quality. Specifically, we
request comment on the following:
97. We understand that some reporting funds may consider themselves
``private equity funds,'' but advisers report them as hedge funds as
Form PF directs because the reporting fund's governing documents permit
the fund to engage in certain borrowing and short selling (even though
it did not do so at any time in the past, for example, 12 months) (a
``deemed hedge fund'' for purposes of this Release). Should we amend
the definition of ``hedge fund'' in the Form PF Glossary of Terms so
that such deemed hedge funds report as private equity funds and not
hedge funds? If so, how? Would such changes improve data quality by
excluding private equity strategies from reporting as hedge funds and
instead requiring such funds to report as private equity funds? If so,
and if we were to amend the definition of ``hedge fund'' in Form PF,
should we amend it for all purposes under Form PF or only certain
sections such as sections 1 and 2? Should we concurrently make
conforming definitional changes to any other forms, such as Form ADV
(or alternatively amend Form ADV so it would reference any revised
definition of ``hedge fund'' in Form PF)?
98. As an example, should we amend the definition of ``hedge fund''
so that, to qualify as a hedge fund under the leverage prong of the
definition, a fund would have to continue to satisfy subsection (b) of
the definition, but also must have actually borrowed or used any
leverage during the past 12 months, excluding any borrowings secured by
unfunded commitments (i.e., subscription lines of credit); \136\ and to
qualify as a hedge fund under the short selling prong of the
definition, the fund must have actually engaged in the short selling
activities described in subsection c of the definition during the past
12 months? \137\ If we were to amend the definition, would excluding
actual borrowings secured by unfunded commitments (i.e., subscription
lines of credit) appropriately exclude private equity funds, which
typically engage in such borrowings? Should any amended definition
require actual borrowing or short selling in the last 12 months?
Alternatively, should any amended definition require a longer or
shorter time period, such as 18 months or nine months, or different
time periods for borrowing versus short selling?
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\136\ Subsection (b) of the current definition of ``hedge fund''
states that a hedge fund is any private fund (other than a
securitized asset fund) that may borrow an amount in excess of one-
half of its net asset value (including any committed capital) or may
have gross notional exposure in excess of twice its net asset value
(including any committed capital). See current Form PF Glossary of
Terms.
\137\ Subsection (c) of the current definition of ``hedge fund''
states that a hedge fund is any private fund (other than a
securitized asset fund) that may sell securities or other assets
short or enter into similar transactions (other than for the purpose
of hedging currency exposure or managing duration). See current Form
PF Glossary of Terms.
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99. Should any amended definition include a requirement for the
reporting fund to provide redemption rights in the ordinary course or
exclude actual portfolio company guarantees in the past 12 months (or
some other time period)? What other alternative changes to any amended
definition of ``hedge fund'' do you suggest?
100. Should any revised definition specify that subscription lines
of credit encompass both short term and long term subscription lines of
credit? If so,
[[Page 53852]]
should we specify what constitutes ``short term'' and ``long term''?
For example, should ``short term'' mean three to six months, or less
than the life of the fund, and should ``long term'' mean longer than
six months, or the life of the fund?
101. Would it be appropriate for any amended definition of ``hedge
fund'' to continue to include commodity pools or should commodity pools
be excluded?
1. Proposed Amendments to Section 2a
Removal of aggregate reporting. We propose to eliminate the
requirement for large hedge fund advisers to report certain aggregated
information about the hedge funds they manage.\138\ Based on our
experience using data obtained from Form PF since its adoption, we have
found that aggregated adviser level information combines funds with
different strategies and activities, thus making analyses less
meaningful. Aggregation can mask the directional exposures of
individual funds (e.g., positions held by one reporting fund may appear
to be offset by positions held in a different fund). Additionally,
there can be inconsistencies between data reported in the aggregate in
section 2a and on a per fund basis in section 2b (e.g., we have
observed in some instances that the sum of fund exposures advisers
report in current Question 30 on a per fund basis exceed the aggregate
figure reported in current Question 26). We believe that aggregating
information across funds may be burdensome for some advisers because
certain advisers may keep fund records on different systems, and
``rolling-up'' the data from different sources to report on the form
may be complex and time consuming. While advisers may be required to
aggregate certain types of investment holdings across their funds for
other regulatory purposes (e.g., certain U.S. registered equities for
Form 13F reporting), advisers generally do not aggregate all portfolio
investment exposure information across their funds other than for Form
PF reporting purposes, given that counterparties, markets, and
investors tend to interact with funds on an individual basis and not in
the aggregate at the adviser level.
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\138\ We propose to remove section 2a and redesignate section 2b
as section 2. In connection with the proposed removal of section 2a,
we propose to revise the general instructions to make corresponding
changes (including amending Instruction 3 to reflect the proposed
removal of section 2a), and propose to revise current Question 27
(reporting on the value of turnover in certain asset classes in
advisers' hedge funds' portfolios) and current Question 28
(reporting on the geographical breakdown of investments held by
advisers' hedge funds), move each of these questions to new section
2, and redesignate them as Question 34 and Question 35,
respectively. Furthermore, in connection with the proposed changes,
we would revise the term ``sub-asset class'' so it no longer refers
to Question 26, which the proposal would remove.
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We do not believe that removing section 2a would result in a
meaningful deterioration in the information collected because the vast
majority of gross hedge fund assets on which advisers report in the
aggregate in section 2a constitute the gross assets of qualifying hedge
funds that are reported in section 2b. For example, large hedge fund
advisers reported total gross notional exposure for qualifying hedge
funds in section 2b that constituted approximately 91 percent of the
total gross notional exposure reported on an aggregate basis by large
hedge fund advisers in section 2a as of the same date.\139\
Furthermore, as discussed in section II.B.3. above, we are also
proposing to enhance reporting for all hedge funds in section 1
(particularly section 1c), which we believe would mitigate against
potential data gaps that could result from the removal of section 2a,
given that advisers currently report information on all their hedge
funds in section 2a but only report on qualifying hedge funds in
section 2b. Additionally, certain information collected in section 2a
is duplicative of information already collected on a per fund basis in
section 2b.\140\ By continuing to require reporting on a per fund
basis, information reported in section 2b would allow the Commissions
and FSOC to compile aggregate figures.\141\
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\139\ As noted above, based on experience with Form PF since
adoption, we have found information gathered in section 2a for the
remaining 9 percent of funds to not be very useful given that it is
aggregated data across different funds.
\140\ For example, Question 26 of section 2a requires large
hedge fund advisers to report aggregated information on exposure to
different types of assets, which is effectively the same exposure
information reported on a per fund basis for each qualifying hedge
fund in current Question 30 of section 2b.
\141\ Additionally, we are proposing to move current Question 31
(base currency) currently required only for qualifying hedge funds
to section 1b. We are also proposing to enhance section 1c to
require more detailed information about hedge funds' borrowing and
financing arrangements (including posted collateral) and also
proposing to revise current Question 25 and current Question 26 to
require end of period reporting of the value of certain instrument
categories (including listed equities, interest rate derivatives and
other derivatives, and repo/reverse repos).
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We request comments on the proposed amendments.
102. Should we remove aggregate reporting by eliminating section 2a
as proposed? Alternatively, should we retain a subset of the questions
in section 2a to be reported on an aggregate basis? If so, which
questions and why?
103. Do you agree that counterparties, markets, and investors tend
to look at funds on an individual basis and not in the aggregate at the
adviser level and as such the proposed removal of section 2a would
reduce the burden on advisers having to report fund level data on an
aggregated basis?
104. Do you agree that aggregating information across funds may be
burdensome for some advisers? Do some advisers maintain fund records on
different systems such that ``rolling-up'' the data from different
sources to report on the form would be complex and time consuming?
2. Proposed Amendments to Section 2b
Current section 2b requires a large hedge fund adviser to report
certain additional information about any hedge fund it advises that is
a qualifying hedge fund.\142\ As noted in the 2011 Form PF Adopting
Release, information reported in section 2b is designed to assist FSOC
in monitoring the composition of hedge fund exposures over time as well
as the liquidity of those exposures. The information also aids FSOC in
its monitoring of credit counterparties' unsecured exposure to hedge
funds as well as hedge funds' exposure and ability to respond to market
stresses and interconnectedness with CCPs. Based on our experience with
the data since Form PF was first adopted and our consultations with
FSOC, we are proposing to amend section 2b to do the following:
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\142\ In connection with the proposed amendments, we propose to
redesignate section 2b as section 2.
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(1) Enhance, expand, and simplify investment exposure reporting;
(2) Revise open and large position reporting;
(3) Revise borrowing and counterparty exposure reporting;
(4) Revise market factor effects reporting; and
(5) Make certain other changes designed to streamline and enhance
the value of data collected on qualifying hedge funds by: (a) adding
reporting on currency exposure, turnover, country and industry
exposure; (b) adding new reporting on CCPs; (c) streamlining risk
metric reporting and collecting new information on investment
performance by strategy and portfolio correlation; and (d) enhancing
portfolio and financing liquidity reporting.
a. Investment Exposure Reporting.
Reporting on qualifying hedge fund exposures to different types of
assets has been critical in helping to monitor the composition of hedge
fund exposures over time, particularly as it relates to
[[Page 53853]]
systemic risk monitoring. The proposal would (1) replace the table
format of current Question 30, which we would redesignate as Question
32, with narrative instructions and a ``drop-down'' menu while also
revising the instructions to specify how to report certain positions,
(2) require reporting based on ``instrument type'' within sub-asset
classes to identify whether the fund's investment exposure is achieved
through cash or physical investment exposure, through derivatives or
other synthetic positions, or indirectly (e.g., through a pooled
investment such as an ETF, an investment company, or a private fund),
(3) require the calculation of ``adjusted exposure'' for each sub-asset
class (i.e., require (in addition to value as currently reported) the
calculation of ``adjusted exposure'' for each sub-asset class that
allows netting across instrument types representing the same reference
asset within each sub-asset class, and, for fixed income, within a
prescribed set of maturity buckets), (4) require uniform interest rate
risk measure reporting for sub-asset classes that have interest rate
risk (while eliminating the current option to report one of duration,
weighted average tenor (WAT) or 10-year equivalents), and (5) amend the
list of reportable sub-asset classes consistent with these other
changes and collect enhanced information for some asset types.\143\
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\143\ In connection with the proposed amendments, we also
propose to remove Question 44, which under the proposal would be
duplicative of the new reporting requirements in proposed Question
32.
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Narrative reporting instructions and additional information on how
to report. The proposal would replace the existing complex table in
current Question 30 with reporting instructions that would use a series
of ``drop-down'' menu selections for each sub-asset class and the
applicable information required for each sub-asset class. This approach
is similar to the narrative instructions (and drop-down menus) already
in effect for current section 3 with respect to liquidity fund position
reporting.\144\ We believe that these changes and new format would
simplify and specify how to report the required information in proposed
Question 32. Additionally, the proposed changes may reduce filer
burdens compared to the current form because advisers are currently
required to enter ``N/A'' in each field for which there is not a
relevant position, while the proposal would only require advisers to
provide information for sub-asset classes in which their qualifying
hedge funds hold relevant positions. Furthermore, the proposal would
require advisers to report the absolute value of short positions,
include positions held in side-pockets as positions of the reporting
fund, and include any closed out and OTC forward positions that have
not yet expired or matured.
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\144\ See Form PF, Section 3, Question 63(f) and (g).
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We propose to amend the instructions to current Question 30 to
specify how advisers should classify certain positions. Specifically,
the proposed instructions would require advisers to choose the sub-
asset class that describes the position with the highest degree of
precision, which we believe would result in more accurate
classification of positions and therefore better data, rather than
simply noting that any particular position should only be included in a
single sub-asset class. This proposed change is designed to instruct
advisers on how to classify positions that could be accurately
classified in multiple sub-asset classes, and is consistent with SEC
staff Form PF Frequently Asked Questions.\145\ The proposal also would
add a new instruction that directs advisers to report cash borrowed via
reverse repo as the short value of repos, and refer advisers to the
proposed revised definitions of ``repo'' and ``reverse repo'' in the
Glossary of Terms, also consistent with SEC staff Form PF Frequently
Asked Questions.\146\ We believe this proposed change would reduce
confusion on how to report repo information and help reduce filer
errors. Finally, the amended instructions also would include a revised
list of sub-asset classes.\147\
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\145\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 26.2.
\146\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 26.5. See also supra footnote 129.
\147\ The proposed amendments to this list, as well as other
changes to instructions in specific parts of proposed Question 32,
are discussed below.
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We also propose to require advisers to provide additional
explanatory information in situations where a qualifying hedge fund
reports long or short dollar value exposure to ``catch-all'' sub-asset
class categories \148\ equal to or exceeding either (1) five percent of
a fund's net asset value or (2) $1 billion.\149\ We have observed that
some funds report significant amounts of assets in these ``catch-all''
categories. We chose the five percent threshold level because we
believe it represents a level that would identify exposure that could
be material to a fund's investment performance. The $1 billion
threshold represents a level for large funds (e.g., those with net
asset values in excess of $20 billion) that is large enough so as to
have potential systemic risk implications even if the position is less
than five percent of the fund. We propose to add this explanatory
requirement to inform our understanding of significant exposure
reported in these ``other'' sub-asset classes better, which we believe
is important for assessing systemic risk.
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\148\ These sub-asset classes include: loans (excluding
leveraged loans and repos), other structured products, other
derivatives, other commodities, digital assets, and investments in
other sub-asset classes.
\149\ Some filers report significant exposure to these ``other''
categories. For example, the public Private Fund Statistics Second
Quarter 2020 (``Private Fund Statistics Q2 2020'') (Table 46) shows
about $100 billion in aggregate QHF GNE reported as ``other loans,''
more than other asset categories of interest, such as ABS/structured
products (ex. MBS but including CLO/CDOs) (about $53 billion) and
convertible bonds ($95 billion) as of 2020 Q1. See Private Fund
Statistics Q2 2020 available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2020-q2.pdf.
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We request comment on the proposed amendments.
105. Should we amend the format of current Question 30 as proposed?
Do the proposed narrative instructions clarify and simplify reporting
for advisers? Alternatively, if the proposed format creates additional
complexity for filers, should only a subset of qualifying hedge funds
be required to complete proposed Question 32? If so, what should the
threshold be and why?
106. Do you agree that the proposed changes requiring advisers to
choose the sub-asset class that describes positions with the highest
degree of precision would result in more accurate classification of
positions and therefore better data for analysis? If not, what
alternatives do you suggest?
107. Currently, most sub-asset classes (e.g., equities, corporate
bonds) are not further divided to account for exposure by the sub-asset
class to a particular country or region. Instead, other questions on
Form PF collect this information (e.g., current Question 28). Should we
further divide sub-asset classes by geographic exposure? If so, would
the separation of sub-asset classes by U.S. and non-U.S. be helpful or
would even more granularity be appropriate?
108. As an alternative to the proposed requirement that advisers
provide additional explanatory information in situations where a
qualifying hedge fund has significant exposure to ``catch-all'' sub-
asset class categories (i.e., if the long or short dollar value is
equal to or exceeds either (1) five percent of a fund's net asset value
or (2) $1 billion), should we add additional sub-asset classes to
further break out the types of instruments that are being classified in
[[Page 53854]]
these ``catch-all'' buckets? If we should add more sub-asset classes,
what should they be? Is the proposed threshold for requiring that
advisers provide additional explanatory information set at the
appropriate level? Should it be higher or lower?
109. With respect to sub-asset classes pertaining to loans, should
we add additional sub-asset classes to capture loans originated by
banks versus other entities for purposes of monitoring systemic risk?
Should we require reporting on private funds' origination activities in
a separate question that would ask whether the private fund originate
loans and if so much has it originated?
110. Should any other sub-asset classes reflected in the proposal
be broken out separately in proposed Question 32? If so, what sub-asset
classes and why?
111. Should the short dollar value of repo match borrowings by
reverse repo reported in the counterparty exposure table in Question
41, and if they do not match, should we require explanation?
112. The current instructions to Question 30 require advisers to
include closed out and OTC forward positions that have not yet expired/
matured. However, SEC staff Form PF Frequently Asked Question 44.1
states that reporting is not required for closed out positions if
closed out with the same counterparty if there is no remaining legally
enforceable obligation. Further, we understand that advisers use
different internal methods to account for closed out and OTC forward
positions not yet expired/matured, which introduces inconsistencies in
data reported on Form PF. Should we require advisers to report closed
out and OTC forward positions that have not yet expired/matured even if
closed out as suggested by the current instructions? Alternatively,
should we only require reporting unless the OTC forward positions are
closed out with the same counterparty and there is no remaining legally
enforceable obligation (consistent with our proposed revision to
Instruction 15)?
113. Is it clear in proposed Question 32 how to classify positions
in certain sub-asset classes as ``long'' or ``short'' in light of the
proposed changes to Instruction 15 \150\ with respect to classifying
positions? Should we provide additional guidance specific to proposed
Question 32? If so, what additional instructions or guidance would be
helpful?
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\150\ See discussion at Section II.D of this Release.
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114. Current Question 30 and several other current and/or proposed
questions in Section 2 of Form PF would not be necessary if large hedge
fund advisers instead filed information about each qualifying hedge
fund's portfolio positions similar to what is required by Section 3 for
large liquidity fund advisers or on Form N-PORT for registered
investment companies. Should we require, or permit, large hedge fund
advisers to file this kind of position level information for qualifying
hedge private funds instead of, or as an optional alternative to,
responding to current Question 30 and certain other questions
concerning portfolio holdings, such as position concentrations,
currency, geographic and industry exposure, and market factor testing?
For example, if in lieu of completing current Question 30 (exposure
reporting), current Question 28 (country exposure), current Question 34
(position concentration), current Question 35 (large positions), and
current Question 44 (aggregate value of derivatives positions), and
potentially additional questions including those concerning
counterparty exposures, advisers could instead choose to file position
level information, would this help alleviate the reporting burden?
Separate reporting for positions held physically, synthetically or
through derivatives and indirect exposure. The proposal would require
advisers to report the dollar value of a qualifying hedge fund's long
positions and the dollar value of the fund's short positions in certain
sub-asset classes by ``instrument type'' (i.e., cash/physical
instruments, futures, forwards, swaps, listed options, unlisted
options, and other derivative products, ETFs, exchange traded product,
U.S. registered investment companies (excluding ETFs and money market
funds), non-U.S. registered investment companies, internal private fund
or external private fund, commodity pool, or other company, fund or
entity).\151\ For each month of the reporting period, advisers would be
required to report long and short positions in these sub-asset classes
held physically, synthetically or through derivatives, and indirectly
through certain entities,\152\ separately in order to provide the
Commissions and FSOC sufficient information to understand, monitor, and
assess qualifying hedge funds' exposures to certain types of assets and
investment products. The current instructions (and the associated
definitions) require advisers to combine exposure held physically,
synthetically, or through
[[Page 53855]]
derivatives when reporting certain fixed income and other sub-asset
classes.\153\ Even when certain sub-asset classes currently separate
physical and derivative exposure (e.g., listed equities), all
derivative instrument types are combined regardless of each derivative
instrument type's risk characteristics. Furthermore, the form's current
instructions for reporting investment exposure obtained through funds
or other entities are different. For example, instructions require
advisers to categorize ETFs based on the assets the ETF holds, while
other registered investment companies are reported as a separate sub-
asset class, and may obscure the extent of a reporting fund's exposure
to particular sub-asset classes. This difference and lack of
granularity in reporting makes it difficult to understand the
activities of qualifying hedge funds and limits the utility of data
collected for purposes of understanding the role qualifying hedge funds
play in certain market events. For example, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S treasury market.
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\151\ See Form PF Glossary of Terms (proposed definition of
``instrument type''). See also proposed Question 32(a). Sub-asset
classes that would require reporting by instrument type (see
proposed Question 32(a)(1)) include: listed equity issued by
financial institutions; American Depositary Receipts; other single
name listed equity; indices on listed equity; other listed equity;
unlisted equity issued by financial institutions; other unlisted
equity, investment grade corporate bonds issued by financial
institutions (other than convertible bonds); investment grade
corporate bonds not issued by financial institutions (other than
convertible bonds); non-investment grade corporate bonds issued by
financial institutions (other than convertible bonds); non-
investment grade corporate bonds not issued by financial
institutions (other than convertible bonds); investment grade
convertible bonds issued by financial institutions; investment grade
convertible bonds not issued by financial institutions; non-
investment grade convertible bonds issued by financial institutions;
non-investment grade convertible bonds not issued by financial
institutions; U.S. treasury bills; U.S. treasury notes and bonds;
agency securities; GSE bonds; sovereign bonds issued by G10
countries other than the U.S, other sovereign bonds (including
supranational bonds); U.S. state and local bonds; MBS; ABCP; CDO
(senior or higher); CDO (mezzanine); CDO (junior equity); CLO
(senior or higher); CLO (mezzanine); CLO (junior equity); other ABS,
other structured products; U.S. dollar interest rate derivatives;
non-U.S. currency interest rate derivatives; foreign exchange
derivatives; correlation derivatives; inflation derivatives;
volatility derivatives; variance derivatives; other derivatives,
agricultural commodities; crude oil commodities; natural gas
commodities; power and other energy commodities; gold commodities;
other (non-gold) precious metal commodities; base metal commodities;
other commodities; real estate; digital assets; investments in other
sub-asset classes. These sub-asset classes are reported at the sub-
asset class level and not by instrument type (see proposed Question
30(a)(2)): leveraged loans, loans (excluding leveraged loans and
repo); overnight repo, term repo (other than overnight), open repo;
sovereign single name CDS; financial institution single name CDS;
other single name CDS, index CDS; exotic CDS; U.S. currency
holdings, non-U.S. currency holdings, certificates of deposit, other
deposits, money market funds, other cash and cash equivalents
(excluding bank deposits, certificates of deposit and money market
funds). In connection with the proposal we also propose to amend the
Glossary of Terms to (i) amend the definitions of agency securities,
convertible bonds, corporate bonds, GSE bonds, leveraged loans,
sovereign bonds, and U.S. treasury securities, in each case to
include positions held indirectly through another entity, (ii)
remove the definitions of crude oil, derivative exposures to
unlisted equities, gold, natural gas, and power, and (iii) amend the
definitions of commodities and other commodities. See Form PF
Glossary of Terms. Additionally, for foreign exchange derivatives,
advisers would report forex swaps and currency swaps separately, and
in determining dollar value, would not net long and short positions
within sub-asset classes or instrument types (with the exception of
spot foreign exchange longs and shorts).
\152\ In determining the reporting fund's exposure to sub-asset
classes for positions held indirectly through entities, the proposal
would permit advisers to allocate the position among sub-asset
classes and instrument types using reasonable estimates consistent
with its internal methodologies and conventions of service
providers. Furthermore, if a reporting fund's position in any such
entity represents less than (1) 5% of the reporting fund's net asset
value and (2) $1 billion, the proposal would permit advisers to
report an entire entity position in one sub-asset class and
instrument type that best represents the sub-asset class exposure of
the entity, unless the adviser would allocate the exposure more
granularly under its own internal methodologies and conventions of
its service providers.
\153\ We propose to require advisers to report the dollar value
of long and short positions for the sub-asset class (and not
instrument type) for following sub-asset classes: leveraged loans,
loans (excluding leveraged loans and repo); overnight repo, term
repo (other than overnight), open repo; sovereign single name CDS;
financial institution single name CDS; other single name CDS, index
CDS; exotic CDS; U.S. currency holdings, non-U.S. currency holdings,
certificates of deposit, other deposits, money market funds, other
cash and cash equivalents (excluding bank deposits, certificates of
deposit and money market funds). See proposed Question 32(a).
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We request comment on the proposed amendments.
115. Do advisers' internal risk reporting systems track long and
short positions by instrument type? Does the proposed definition of
``instrument type'' present different types of risk such that it would
be valuable to collect information separately for each instrument? Are
the proposed instrument types appropriate? Alternatively, should we
aggregate instrument types so that there are fewer options or should
there be a different set of instrument types for different sub-asset
classes? If so, what should they be?
116. Should we require reporting of dollar value by instrument type
as proposed or for fewer sub-asset classes?
117. In proposed Question 32 we would not require advisers to
report positions in certain sub-asset classes by instrument type \154\
because we understand that exposure to these sub-asset classes would
generally be held physically (e.g., currency holdings) or through a
single instrument type (e.g., repo and credit-default swaps). Should we
also require reporting by instrument type for any of these sub-asset
classes?
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\154\ See supra footnote 151.
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118. Do the proposed amendments better capture exposures to sub-
asset classes held physically, synthetically or through derivatives,
and indirectly through certain entities? If not, how should we modify
the proposal to better capture these types of exposures?
Adjusted exposure reporting. While we would continue to require
advisers to report ``gross'' long and short exposure, i.e., the dollar
value of a qualifying hedge fund's long positions and dollar value of
the fund's short positions for various sub-asset classes (and by
instrument type for certain sub-asset classes as explained above), we
propose to require advisers to also report the ``adjusted'' exposure of
long and short positions for each sub-asset class in which a fund has a
reportable position.\155\ Based on our experience, we have found that
gross exposure reporting, while useful because the information
indicates fund size on a comparable basis among funds, may inflate some
qualifying hedge funds' reported long and short exposures in a way that
does not properly represent the economic exposure and market risk of a
reporting fund's portfolio. For example, when only looking at gross
exposure, certain relative value strategies that are designed to match
long and short exposures in the same or similar (highly correlated)
assets may reflect very high leverage, but not have the same level of
risk as portfolios with less leverage but that are more exposed
directionally. Furthermore, some advisers, for purposes of managing
risk, do not view their portfolio on a ``gross'' basis because they do
not believe it provides a meaningful measure of risk. We believe that
``gross'' exposure reporting by itself presents an incomplete picture
that represents a significant data gap for purposes of systemic risk
analysis.
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\155\ Proposed Question 32(b). See also Form PF Glossary of
Terms (proposed definition of ``adjusted exposure'').
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We propose to require advisers to determine adjusted exposure for
each ``sub-asset'' using a specified methodology that is designed to
facilitate comparisons of the reported data. Specifically, the proposal
would require advisers to calculate and report ``adjusted exposure'' of
long and short positions for each sub-asset class by netting (1)
positions that have the same underlying ``reference asset'' across
``instrument type'' (i.e., cash/physical instruments, futures,
forwards, swaps, listed options, unlisted options, other derivative
products, and positions held indirectly through another entity such as
ETFs, other exchange traded products,\156\ U.S. registered investment
companies (excluding ETFs and money market funds), investments in non-
U.S. registered investment companies,\157\ other private funds,
commodity pools, or other companies, funds or entities) and (2) fixed
income positions that fall within certain predefined maturity buckets
(i.e., 0 to 1 year, 1 to 2 year, 2 to 5 year, 5 to 10 year, 10 year, 10
to 15 year, 15 year, 15 to 20 year, and 20+ year).\158\
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\156\ In connection with this proposed amendment, we also
propose to define ``exchange traded product'' as ``an investment
traded on a stock exchange that invests in underlying securities or
assets, such as an ETF or exchange traded note.'' See Form PF
Glossary of Terms. Given that the exchange traded product market has
grown significantly since Form PF was first adopted, we believe that
activity in exchange traded products may present different systemic
risks than traditional listed equities and other instruments that
might be used to obtain exposure to underlying assets owned within
an ETF. Furthermore, we believe added insight into whether the
underlying sub-asset class exposure is held through an ETF would
enhance FSOC's analysis of systemic risk associated with this asset
class.
\157\ See Form PF Glossary of Terms (proposed definition of
``investments in non-U.S. registered investment companies'').
Furthermore, we also propose to remove the term ``U.S. registered
investment companies'' from the Form PF Glossary of Terms.
\158\ See Form PF Glossary of Terms. We propose to define
``reference asset'' as a security or other investment asset to which
a fund is exposed through direct ownership (i.e., a physical or cash
position), synthetically (i.e. the subject of a derivative or
similar instrument held by the fund), or indirect ownership (e.g.,
through ETFs, other exchange traded products, U.S. registered
investment companies, non-U.S. registered investment companies,
internal private funds, external private funds, commodity pools, or
other companies, funds, or entities). An adviser may identify a
reporting fund's reference assets according to its internal
methodologies and the conventions of service providers, provided
that these methodologies and conventions are consistently applied,
do not conflict with any instructions or guidance relating to Form
PF and reported information is consistent with information it
reports internally and to investors and counterparties.
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For purposes of determining ``adjusted exposure,'' we propose to
permit cross counterparty netting consistent with information reported
by a fund internally and to current and prospective investors, because
we believe it would better reflect the fund's economic exposure. For
example, a fund with market-neutral trades may lose substantial amounts
of capital in a period of market stress if prices diverge, regardless
of the identities of the counterparties. Additionally, counterparty
identification may be
[[Page 53856]]
ambiguous for some positions, such as when a fund simply has a long
position in an equity security traded over an exchange or purchased
from a broker without the use of any financing.
Finally, if a fund does not net across all instrument types in
monitoring the economic exposure of the fund's investment positions for
purposes of internal reporting and reporting to investors, we would (in
addition to adjusted exposure determined as specified above) also
require the adviser to report adjusted exposure based on an adviser's
internal methodologies and describe in Question 4 how the adviser's
internal methodology differs from the standard approach in proposed
Question 32. This additional information would provide better insight
into how these advisers assess the economic exposure of their reporting
fund's portfolio, while still ensuring an adviser provides information
that supports our and FSOC's ability to aggregate and compare the data
across funds.
We request comment on the proposed amendments.
119. The proposal would permit advisers to net across
counterparties without limit if consistent with methodologies used for
internal reporting and reporting to investors. Is this appropriate?
Alternatively, should we only allow cross-counterparty netting to the
extent that it is permitted by legal agreement?
120. Is the proposed definition of ``reference asset'' sufficiently
clear? Should we instead propose a definition that tailors the
definition to different asset classes (e.g., repo exposures could be
netted in accordance with GAAP rules for balance sheet netting,
treasury exposures could be netted within maturity buckets)?
121. The proposed definition of ``reference asset'' specifies using
the cheapest-to-deliver security for bond futures. Should additional or
alternative approaches for bond futures be included in the proposed
definition? Are there other potentially ambiguous cases that should be
clarified? If so, what are they?
122. Is the proposed method for determining adjusted exposure
appropriate? For example, is the proposed netting of fixed income
positions that fall within certain predefined maturity buckets
appropriate? Should we identify additional or different maturity
buckets? If so, which maturity buckets?
123. As an alternative, should we instead require ETFs, exchange
traded products, U.S. and non-U.S. registered investment companies,
other private funds, commodity pools, or other companies, funds or
entities to be reported as stand-alone sub-asset classes?
Require advisers to report a uniform interest rate risk measure. We
propose to require advisers to report the 10-year zero coupon bond
equivalent \159\ for all sub-asset classes with interest rate risk (by
instrument type if applicable) \160\ rather than providing advisers
with a choice to report duration, weighted average tenor (``WAT''), or
an unspecified 10-year bond equivalent.\161\ The proposal would require
advisers to report the 10-year zero coupon bond equivalent of the
dollar value of long and short positions in each sub-asset class (and
by instrument type, if applicable) as well as for the adjusted exposure
of long and short exposures for each sub-asset class for each monthly
period.
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\159\ We are proposing a new glossary definition of 10-year bond
equivalent to explain that the term 10-year bond equivalent means
``the equivalent position in a 10-year zero coupon bond, expressed
in the base currency of the reporting fund.'' See Form PF Glossary
of Terms (proposed definition of ``10-year bond equivalent''). We
also would make a conforming change to the definition of interest
rate derivative to use this new definition.
\160\ We propose to require advisers to report the 10-year zero
coupon bond equivalent for the following sub-asset classes:
investment grade corporate bonds issued by financial institutions
(other than convertible bonds); investment grade corporate bonds not
issued by financial institutions (other than convertible bonds);
non-investment grade corporate bonds issued by financial
institutions (other than convertible bonds); non-investment grade
corporate bonds not issued by financial institutions (other than
convertible bonds); investment grade convertible bonds issued by
financial institutions; investment grade convertible bonds not
issued by financial institutions; non-investment grade convertible
bonds issued by financial institutions; non-investment grade
convertible bonds not issued by financial institutions; U.S.
treasury bills; U.S. treasury notes and bonds; U.S. agency
securities; GSE bonds; sovereign bonds issued by G10 countries other
than the U.S; other sovereign bonds (including supranational bonds);
U.S. state and local bonds; leveraged loans; loans (excluding
leveraged loans and repo); overnight repo; term repo (other than
overnight); open repo; MBS; ABCP; Senior or higher CDO; Mezzanine
CDO; Junior equity CDO; Senior or higher CLO; Mezzanine CLO; Junior
equity CLO; other ABS; other structured product; U.S. dollar
interest rate derivatives; non-U.S. currency interest rate
derivatives; and certificates of deposit. See proposed Question
32(c).
\161\ See proposed Question 32(c).
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The proposed change is designed to improve reporting and obtain
better data, because the current approach, while providing optionality,
makes it difficult to compare and aggregate data reported by different
funds effectively. Furthermore, we believe that the 10-year zero coupon
bond equivalent is commonly used by hedge fund advisers and would be a
better and more consistent measure of interest rate risk than duration,
WAT, or the current unspecified 10-year equivalent. WAT may be an
incomplete measure because it does not always reflect the presence of
options embedded in bonds or differing sensitivity to interest rate
changes in circumstances where base currencies are subject to a higher
or lower risk-free rate, and it also may not be meaningful for interest
rate derivative products. Duration can tend toward infinity for certain
derivatives, which can provide little meaning or utility. In addition,
methodologies for calculations of duration and a 10-year equivalent (if
not standardized to a zero coupon bond) may vary, which can result in
variability among calculations. Therefore, we believe that by
eliminating additional reporting options, requiring the 10-year zero
coupon bond equivalent would provide a common denominator across funds
that advisers would be able to easily calculate and that would provide
a consistent and comparable metric. In this regard, we do not believe
the proposed requirement would create an additional burden for advisers
that currently report based on a 10-year equivalent for these types of
assets, which we estimate represents roughly 40 percent of the total
number of advisers responding to Question 30.\162\
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\162\ Based on analysis of Form PF data 2021Q4 and 2020Q4.
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We request comment on the proposed amendments.
124. Are the proposed changes with respect to reporting of the 10-
year zero coupon bond appropriate? If not, what alternative do you
suggest?
125. What would be the burden on advisers of standardizing
reporting to the 10-year zero coupon bond equivalent for sub-asset
classes with interest rate risk, by instrument type?
126. Alternatively, should we use a measure other than the 10-year
zero coupon bond equivalent and if so, what measure should be used
(e.g., duration, WAT or another measure?).
127. As an alternative to the 10-year zero coupon bond equivalent,
we considered whether to standardize the interest rate risk measure to
DV01, which we would define as the gain or loss for a 1 basis point
decline in the risk-free interest rate, expressed in U.S. dollars. In
this regard, we understand that both duration and a 10-year bond
equivalent rely on an initial calculation of DV01. Would DV01 be a
better alternative for standardization to provide consistent reporting
across all funds compared to the 10-year zero coupon bond equivalent?
If DV01 is preferred, should we use a different formula (e.g., a 1
basis point increase)? If we should use a different formula,
[[Page 53857]]
what should it be and why? Would the burden on advisers of
standardizing reporting to DV01 be different than standardizing to the
10-year zero coupon bond equivalent?
128. Should we define 10-year bond equivalent in the Glossary of
Terms as ``the equivalent position in a 10-year zero coupon bond,
expressed in the base currency of the reporting fund,'' as proposed?
The glossary definition of ``interest rate derivative'' requires
reporting relating to interest rate derivatives to be presented as ``in
terms of 10-year bond-equivalents.''
129. Do you agree that the 10-year zero coupon bond equivalent is
commonly used by hedge fund advisers and would be a better and more
consistent measure of interest rate risk than duration, WAT, or the
current unspecified 10-year equivalent?
Amended list of sub-asset classes. In proposed Question 32, we
would revise the list of reportable sub-asset classes in two ways.
First, some sub-asset classes are consolidated and tailored to reflect
our proposed reporting of the dollar value of long and short positions
by instrument type. For example, sub-asset classes for listed and
unlisted equity derivatives are combined with sub-asset classes for
listed and unlisted equities, and similarly, sub-asset classes for
physical commodities and commodity derivatives are combined.\163\
Likewise, some current sub-asset classes would now be reflected as
instrument types, such as internal private funds, external private
funds and registered investment companies (now separated in to ETFs,
U.S. registered investment companies and non-U.S. registered investment
companies). Second, the proposal would add new sub-asset classes to
provide additional information to help the Commissions and FSOC better
understand qualifying hedge funds' investment exposures to certain
asset types, and reduce reporting in certain ``catch-all'' sub-asset
classes, such as ``other listed equity.''
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\163\ In connection with the proposed amendments, we would amend
the definitions of ``listed equity'' and ``unlisted equity'' to
reflect that filers should include synthetic or derivative exposure
as well as positions held indirectly through another entity (e.g.,
through an ETF, exchange traded product, U.S.-registered investment
companies, non-U.S. registered investment companies, internal
private fund or external private fund, commodity pool, or other
company, fund or entity). Additionally, we would amend the
definition of ``listed equity derivatives'' to include derivatives
relating to ADRs, and other derivatives relating to indices on
listed equities. See Form PF Glossary of Terms (proposed definition
of ``listed equity,'' ``unlisted equity,'' and ``listed equity
derivatives'').
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Specifically, the proposal would: (1) expand equity exposure
reporting to add sub-asset classes for (a) listed equity securities
(including new sub-asset classes for other single name listed equities
and indices on listed equities), and (b) American depository receipts
(``ADRs''); (2) add additional sub-asset classes for reporting ``repo''
and ``reverse repo'' positions, based on term; (3) add additional sub-
asset classes for asset backed securities (``ABS'') and other
structured products; (4) add new sub-asset classes and revise existing
sub-asset classes that capture certain derivatives, including certain
credit derivatives and volatility and variance derivatives; (5) specify
sub-asset classes pertaining to investments in cash and cash
equivalents and commodities; and (6) add a new sub-asset class for
digital assets.
Listed Equity Securities
We propose to add new sub-asset classes for certain categories of
listed equity securities, specifically, for other single name listed
equities and indices on listed equities. This change is designed to
provide added granularity to reporting on listed equities \164\ given
the potential impact of these new sub-asset classes from an overall
systemic risk perspective, as the form currently only requires advisers
to single out and report for listed equities issued by financial
institutions with all other listed equities reported in a catch-all
category ``other listed equity.'' Identifying single equities
separately from equity index exposure can help distinguish broadly
diversified portfolios from those that could be more concentrated, and
also help to identify what strategies are being pursued by multi-
strategy funds. Additionally, single equity positions may be more
vulnerable to short squeezes \165\ (i.e., a type of manipulation in
which prices are manipulated upward to force short sellers out of their
positions, as short sellers are required by brokers to maintain margin
above a certain level, and as prices rise short sellers must add cash
to their margin accounts or close out their short positions) than index
positions, so the level of granularity the proposal would obtain with
respect to this information would help to identify better entities that
may be affected during a short squeeze event.
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\164\ See current Question 26 and current Question 30, which
require reporting on listed equities but do not separate out single
names from indices. Investments in single name equities involve
materially more idiosyncratic risks, such as the potential for more
extreme price movements that are not correlated to other market
movements, than investments in indices, and therefore we propose to
require separate reporting.
\165\ Single stock shorts often account for a higher portion of
the available float and/or often have a larger days to cover (i.e.,
the number of trading days to cover a short) than do shorts on ETFs.
As a result, a potential need to cover a short could generally have
a more pronounced effect on single stocks.
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We request comments on the proposed amendments.
130. Should we add new sub-asset classes for other single name
listed equities and indices on listed equities as proposed? Are the
proposed categories appropriate? If not, is there another alternative
that we should use?
ADRs
We propose to add a new sub-asset class for ADRs in line with how
ADRs are reported on the CFTC's Form CPO-PQR.\166\ While ADRs are
purchased in U.S. dollars, these instruments have currency risk because
the underlying security is priced in its home country currency, and the
ADR's U.S. dollar price fluctuates one-for-one with each movement in
the home currency. Accordingly, the proposal would require ADRs to be
reported separately from other listed equity instruments. This
requirement also would help increase the utility of the information
reported under the ``other listed equity'' sub-asset class on Form PF,
which requires reporting of multiple other sub-asset classes.
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\166\ As noted above, where applicable, we have proposed to
align Form PF with Form CPO-PQR to (1) enable filers that currently
are required to file both Form PF and Form CPO-PQR independently to
compile and use similar data in completing both forms and (2) enable
users of the reported data (e.g., FSOC and other regulatory
agencies) to (i) link data for funds that file both forms and (ii)
aggregate and compare data across data sets more easily.
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We request comment on the proposed amendments.
131. Should we break out ADRs separately from the ``other listed
equity'' category on Form PF as proposed?
Repurchase Agreements (``Repos'')
We propose to add additional sub-asset classes to the ``repos''
section of proposed Question 32 to capture a breakdown of repos by term
(e.g., overnight, other than overnight, and open term). Hedge funds
often borrow cash overnight and pledge securities such as government
bonds as collateral. We believe that collecting more information on the
different types of repos held by qualifying hedge funds would allow the
Commissions and FSOC to understand better the role of these funds in
potentially amplifying funding stresses and the risks associated with
short-term funding for certain trading strategies, particularly in
light of the issues the repo market experienced during the fall of 2019
and in March 2020.\167\
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\167\ See. e.g., 2021 Financial Stability Oversight Council
Annual Report at 12 and 159 available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
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[[Page 53858]]
We request comment on the proposed amendments.
132. Should we add additional sub-asset classes to the ``repos''
section of proposed Question 32 as proposed? Are the proposed
additional sub-asset classes appropriate? If not, is there another
alternative that we should use?
133. How often do hedge funds use ``open'' repo transactions (i.e.,
a repo with no defined term and which rolls over each day) and should
we combine the open and overnight repo categories? Alternatively,
should we require a breakdown of repo exposure by term in a separate
question in Item C ``financing information'' of section 2 instead of in
proposed Question 32?
Asset Backed Securities (``ABS'')/Structured Products
We propose to separate the collateralized debt obligation (``CDO'')
and collateralized loan obligation (``CLO'') sub-asset class in
proposed Question 32 into two separate sub-asset classes (one for CDOs
and one for CLOs), and further break out each of these new sub-asset
classes based on the seniority of the instrument (e.g., senior,
mezzanine, and junior tranches) similar to the reporting approach on
the CFTC's Form CPO-PQR.\168\ The proposed changes are designed to
provide separate reporting for CDOs and CLOs, which we believe is
important because CDOs and CLOs are fundamentally different financial
products and the current combined reporting obscures the specific
attributes of each product. Furthermore, given the recent focus on CLOs
by FSOC \169\ in monitoring systemic risk, we believe that having
detailed product specific data for CDOs and CLOs is justified due to
the potential value this information would provide for systemic risk
monitoring.
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\168\ See Form PF Glossary of Terms (proposed definitions of
``CDO'' and ``CLO''). The proposal would separate the current
definition of ``CDO/CLO'' into a separate definition for each
financial product. The definition of CDO would only include
collateralized debt obligations (including cash flow and synthetic)
and the definition of CLO would include collateralized loan
obligations (including cash flow and synthetic) other than MBS, and
would not include any positions held via CDS. See also supra
footnote 166 (regarding the proposed alignment of Form PF with Form
CPO-PQR).
\169\ See United States Government Accountability Office, Report
to Agency Officials, ``FINANCIAL STABILITY Agencies Have Not Found
Leveraged Lending to Significantly Threaten Stability but Remain
Cautious Amid Pandemic,'' December 2020, available at: https://www.gao.gov/assets/gao-21-167.pdf.
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We request comment on the proposed amendments.
134. Should we break out the CDO and CLO sub-asset class in
proposed Question 32 into two separate sub-asset classes (one for CDOs
and one for CLOs) as proposed? If not, what alternatives do you
suggest?
135. In proposed Question 32, we do not break out sub-asset classes
for derivatives exposures to ABS and structured products (e.g.,
forwards on MBS). Should these types of financial instruments be
reported as ``other derivatives'' in proposed Question 32 or should we
add additional sub-asset classes for reporting derivative exposures to
these instruments?
136. Would more granular reporting for CLOs and CDOs inform
monitoring and assessment of systemic risk? Instead of senior,
mezzanine, and junior categories, would investment grade and non-
investment grade categories be simpler and less burdensome for advisers
to report? Should other categories be added? If so, what categories?
Should advisers separately report securitizations and re-
securitizations, as required on the CFTC's Form CPO-PQR?
137. Should we collect separate information about MBS
securitizations and re-securitizations in proposed Question 32?
138. Does the real estate sub-asset class capture real estate
exposure through vehicles that are not MBS or other structured products
(e.g., commercial leases)? If not, how should we modify the proposal to
do so?
Credit, Foreign Exchange, Interest Rate, and Other Derivatives
We propose to revise the credit, foreign exchange (``forex''), and
interest rate and other derivative sub-asset classes to provide more
detailed reporting. For example, with respect to credit derivatives,
the proposal would collect more detail on single name CDS exposure to
capture better information on risk signals from these instruments by
adding separate sub-asset classes for sovereign single name CDS,
financial institution single name CDS, and other single name CDS (to
capture any credit derivatives that do not fall into the other
enumerated CDS categories).\170\ We believe that an increase in single
name CDS exposure may signify a bet against an entity or the market
more generally, which may have significant systemic risk implications,
particularly with respect to concentrated single-issuer positions that
can drive more extreme price movements and face difficulties in the
unwinding process, and for counterparties on the other side of highly
leveraged trades when the market moves against these positions.\171\
Furthermore, single name CDS exposure can represent important,
concentrated risk positions for a fund, similar to large single equity
positions, which can be connected to market contagion events, and have
systemic risk and market liquidity implications.
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\170\ See also Form PF Glossary of Terms (proposed revised
definition of ``single name CDS'').
\171\ The CFTC's Form CPO-PQR also requests information on
single name financial CDS, and the revised IOSCO Global Fund
Investment Survey also collects this information.
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Similarly, we propose to add more detailed reporting for foreign
exchange derivatives by adding separate sub-asset classes for forex
swaps and currency swaps consistent with reporting to the Bank for
International Settlements (``BIS''), while removing the less useful
requirement of separate reporting for foreign exchange derivatives used
for investment and hedging, as we have found the data of limited value
because we do not believe that information is reported consistently
across filers.\172\ We believe that adding separate reporting for
different types of foreign exchange instruments (e.g., forex swaps and
currency swaps) is appropriate because they have materially different
risk characteristics, including different maturity profiles, and may be
executed under different documentation which could affect their ability
to be netted against one another. We refer to the BIS framework because
we understand that it reflects a commonly accepted industry approach
for classifying these instruments. Furthermore, given the significance
of hedge funds' exposure to these instruments, we believe that more
granular information would better inform our understanding of systemic
risk issues that may arise from holdings in these different types of
instruments. We also propose to divide the current ``interest rate
derivatives'' sub-asset class into ``U.S. dollar interest rate
derivatives'' and ``non-U.S. currency interest rate derivatives.'' We
believe that added granularity would be important because we have found
that Form PF data consistently shows interest rate derivatives as the
sub-asset class to which qualifying hedge funds have the greatest
exposure over time. A
[[Page 53859]]
better understanding of whether these exposures are related to the U.S.
dollar yield curve or other countries' yield curves is important from a
systemic risk analysis perspective. Finally, we propose to add new sub-
asset classes for various types of derivatives that are regularly used
by hedge funds including correlation derivatives, inflation
derivatives, volatility derivatives, and variance derivatives, which
would both provide additional insight into how qualifying hedge funds
use these types of financial instruments and further limit the number
and type of derivatives that advisers report in the ``catch-all''
``other derivatives'' category.\173\
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\172\ In connection with these proposed changes, we also propose
to make changes to the definition of ``foreign exchange derivative''
to improve data quality with respect to how advisers report foreign
exchange derivative exposure. We propose to revise the definition to
(1) now include any derivative whose underlying asset is a currency
other than the base currency of the reporting fund, (2) provide
additional information on the treatment of cross- foreign exchange
versus regular foreign exchange, and (3) require reporting of both
legs of cross currency foreign exchange derivatives to reflect
exposures from such transactions. See Form PF Glossary of Terms
(proposed revised definition of ``foreign exchange derivative'').
\173\ In connection with these proposed amendments, we also
propose to add new definitions to the Glossary of Terms for
``correlation derivative,'' ``inflation derivative,'' ``volatility
derivative,'' and ``variance derivative.'' See Form PF Glossary of
Terms (proposed definitions of ``correlation derivatives,''
``inflation derivative,'' ``volatility derivative,'' and ``variance
derivative'').
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We request comment on the proposed amendments.
139. As proposed, are the sub-asset classes for reporting on types
of derivatives appropriate? For example, for forex derivatives, should
we clarify, for cross-currency pairs (where U.S. dollars are not
involved), that each leg of the transaction should be reported as long
and/or short? What other types of derivatives sub-asset classes should
be included or excluded, if any? Would the proposed sub-asset classes
for reporting on derivatives be overly burdensome for advisers?
140. Form CPO-PQR requires separate reporting for futures,
forwards, swaps and options. The proposed revisions captured in
proposed Question 32 would collect similar detail for the interest rate
derivative and foreign exchange categories, but not for other asset
categories. Would it be helpful to collect this level of detail for
other derivatives positions beyond interest rate and foreign exchange?
Additionally, should we add additional and/or standardization of
derivative reporting that would align with Financial Conduct Authority/
European Securities and Markets Authority data collection by capturing,
for each sub-asset class, the total gross notional value of contracts
including the total notional of futures and delta-adjusted notional of
options? Finally, should we amend the instructions to Question 30 to
require reporting of closed out and OTC forward positions which have
not yet expired/matured?
141. Should we give guidance on reporting total return swaps (e.g.,
as ``other credit derivatives'' or ``interest rate swaps'')?
142. With respect to the proposed addition of a new sub-asset class
for volatility derivatives, do hedge funds use volatility derivatives?
Additionally, are the sub-asset class categories in the proposed
volatility derivative section appropriate? If not, should we add other
sub-asset class categories or combine some of these categories?
143. Should we require a more granular break out of interest rate
derivative exposures? If so, what categories should we include? The
definition of ``interest rate derivative'' instructs advisers to
present interest rate derivatives as 10-year bond equivalents. As
noted, the proposal would specify that the 10-year zero coupon bond
equivalent would be required. Should we change how interest rate
derivatives should be reported (e.g., the total gross notional value of
outstanding contracts including the total notional value of futures and
delta-adjusted value of options)?
144. We propose to add new definitions for ``correlation
derivative,'' ``inflation derivative,'' ``volatility derivative,'' and
``variance derivative.'' Are these definitions appropriate? If not, how
would you modify one or more definitions?
145. As noted above, we believe adding separate reporting for
different types of foreign exchange instruments (e.g., forex swaps and
currency swaps) is appropriate because they have materially different
risk characteristics and may be executed under different documentation
and we refer to the BIS framework because we understand that it
reflects a commonly accepted industry approach for classifying these
instruments. Do you agree with our view, and is the proposed approach
appropriate? If not, what alternative approach do you suggest?
Cash and Commodities
We propose to make revisions to the sub-asset class categories for
cash and commodities.
We would require advisers to break out cash and cash equivalents
\174\ between U.S. currency holdings and non-U.S. currency holdings,
while also removing the current requirement to report on investments in
funds for cash management purposes (other than money market funds)
because in our experience advisers use inconsistent methods for
determining whether a private fund investment is being used for cash
management purposes and we believe that other information reported in
current section 2b is more useful for assessing liquidity management
(e.g., current Question 33 with respect to unencumbered cash).\175\
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\174\ Some advisers include treasuries in their reporting of
``cash'' because it was part of the definition of ``cash and cash
equivalents.'' We propose to revise the definition of ``cash and
cash equivalents'' to reflect that treasuries should not be included
in ``cash and cash equivalents'' sub-asset class. In connection with
this proposed change we also propose to add a new separate
definition for ``government securities.'' See Form PF Glossary of
Terms (proposed revised definition of ``cash and cash equivalents''
and proposed definition of ``government securities''). See also
discussion at Section II.B.2 of this Release regarding the revised
definitions of cash and cash equivalents and government securities.
\175\ Additionally, in many cases we would be able obtain more
information about all internal fund investments (including whether a
fund looks like a cash management vehicle) through the new
information the proposal would require to be reported in section 1b.
See discussion at Section II.B.2 of this Release.
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Additionally, we propose to broaden the current power commodity
sub-asset classes to also capture other energy commodities, and add
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities) to
provide added granularity with respect to these financial products
given their potential systemic risk implications and to better inform
our and FSOC's understanding of the activities of hedge funds in these
important commodities markets. We have found that a limitation of the
current form is that very different commodities (e.g., wheat and
nickel) are reported together in the same sub-asset class (i.e.,
``other commodities'') making the reported data less meaningful for
analysis. We believe that, with added granularity, we would be in a
better position to identify concentrated exposures to particular
commodities, data that could be valuable in the event of a dislocation
in a particular commodity market.\176\ The additional
[[Page 53860]]
commodity sub-asset classes that we propose to add, i.e., other (non-
gold) precious metals, agricultural commodities and base metal
commodities, were chosen because we believe they are most relevant from
a systemic risk perspective given the size of these markets and what we
currently know of hedge fund exposures to these markets.\177\
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\176\ For example, we believe the addition of a base metal
commodities sub-asset class would allow for identification of large
players in the base metals market (such as those impacted by the
March 2022 ``nickel squeeze''). During the March 2022 ``nickel
squeeze,'' the price of nickel rose unusually steeply and rapidly in
response to commodity price increases caused by Russia's invasion of
Ukraine, and this event, coupled with one or more market
participants holding large short positions, caused prices to
increase in an extreme manner (e.g., a one-day increase of 63% for
the generic first futures contract on March 7, 2022). See e.g.,
Shabalala, Zandi, Nickel booms on short squeeze while other metals
retreat, Reuters (March 2022) available at https://www.reuters.com/markets/europe/lme-nickel-jumps-another-10-after-record-rally-supply-fears-2022-03-08/; Nagarajan, Shalini, Nickel Trading Halted
at LME Until Friday After Wild Price Spike (businessinsider.com)
(March 2022) available at https://markets.businessinsider.com/news/
commodities/nickel-price-london-metal-exchange-suspends-trading-
shanghai-short-squeeze-2022-
3#:~:text=The%20London%20Metal%20Exchange%20has,17%25%20to%20their%20
daily%20limit.
\177\ These proposed change with respect to commodities sub-
asset classes would also better align Form PF with Form CPO-PQR.
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We request comment on the proposed amendments.
146. With respect to reporting on cash and cash equivalents, should
we request separate reporting for US and non-US deposits? Would
additional detail be burdensome for advisers? With respect to the
proposed category ``other cash and cash equivalents (excluding bank
deposits, certificates of deposit, money market funds and U.S. treasury
bills, notes and bonds),'' should we require advisers to provide a
description in Question 4 of what is reported in this sub-asset class?
147. We propose to add additional sub-asset classes for
commodities. Are the proposed additional commodities sub-asset classes
appropriate? If not, what alternatives do you suggest? Should we add
more or fewer sub-asset classes for commodities? If we should add more,
what additional sub-asset classes do you recommend? Should we add a
sub-asset class for other physical assets?
Digital Assets
The proposal would add a new sub-asset class for digital assets and
define the term ``digital asset.'' \178\ We have observed the growth as
well as the volatility of this asset class in recent years.\179\ We
understand that many hedge funds have been formed recently to invest in
digital assets, while many existing hedge funds are also allocating a
portion of their portfolios to digital assets.\180\ Accordingly, we
believe it is important to collect information on funds' exposures to
digital assets in order to understand better their overall market
exposures.
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\178\ See discussion at Section II.B.3 of this Release. See also
Form PF Glossary of Terms (proposed definitions of ``digital
asset'').
\179\ In early 2021 the digital asset market surpassed $1
trillion, mostly driven by the rise in Bitcoin's price, which some
speculate may be driven in part by hedge fund investments. See
Brettell, Karen and Chavez-Dreyfuss, Crypto market cap surges above
$1 trillion for first time, Reuters (January 2021) available at
https://www.reuters.com/world/china/crypto-market-cap-surges-above-1-trillion-first-time-2021-01-07/.
\180\ See C. Williamson, Managers Taking Bigger Steps Into
Crypto, Pensions&Investments (March 2022) available at https://www.pionline.com/cryptocurrency/hedge-fund-managers-taking-bigger-steps-cryptocurrency.
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We request comment on the proposed amendments.
148. Should the sub-asset class for ``digital assets'' provide more
granularity? For example, should we have separate sub-asset classes for
digital assets that represent an ability to convert or exchange the
digital asset for fiat currency or another asset, including another
digital asset, and those that do not represent such a right to convert
or exchange; for digital assets that represent a right to convert or
exchange for fiat currency or another digital asset, those where the
redemption obligation is supported by an unconditional guarantee of
payment, such as some ``central bank digital currencies,'' and those
redeemable upon demand from the issuer, whether or not collateralized
by a pool of assets or a reserve; for digital assets that do not
represent any direct or indirect obligation of any party to redeem; and
for digital assets that represent an equity, profit, or other interest
in an entity? Should we require advisers to report the digital asset by
name (e.g., Bitcoin and Ether) or describe its characteristics?
Open and Large Position Reporting
Advisers to qualifying hedge funds currently report (1) a fund's
total number of ``open positions'' determined on the basis of each
position and not with reference to a particular issuer or
counterparty,\181\ and (2) the percentage of a fund's net asset value
and sub-asset class for each open position that represents five percent
or more of a fund's net asset value.\182\ We have found that advisers
use different methods for identifying and counting their ``open
positions,'' which has made making meaningful comparisons among funds
difficult. This has also potentially obscured certain large exposures,
which may make concentration assessments less exact. For example, an
``open position'' might indicate a position held physically, or
synthetically through derivatives, or both. As such, we propose to
require that advisers provide information about a fund's investment
exposures based on ``reference assets,'' which would capture securities
or other assets to which a fund has exposure, be it direct or indirect
ownership, synthetic exposure, or exposure through derivatives.\183\
The proposal is designed to provide insight into the extent of a fund's
portfolio concentration and large exposures to any reference assets.
The proposal would require advisers to report (1) the total number of
reference assets to which a fund holds long and short netted exposure,
(2) the percentage of net asset value represented by the aggregated
netted exposures of reference assets with the top five long and short
netted exposures, and (3) the percentage of net asset value represented
by the aggregate netted exposures of reference assets representing the
top ten long and short netted exposures. We are proposing to require
reporting for the top five long and short netted positions and the top
ten netted long and short positions because combined these two metrics
provide a holistic view of a reporting fund's portfolio concentration.
We also understand that these are commonly used industry metrics for
assessing portfolio concentration levels. We propose to define ``netted
exposure'' as the sum of all positions with legal and contractual
rights that provide exposure to the same reference asset, taking into
account all positions, including offsetting and partially offsetting
positions, relating to the same reference asset (without regard to
counterparties or issuers of a derivative or other instrument that
reflects the price of the reference asset).\184\
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\181\ Current Question 34.
\182\ Current Question 35.
\183\ See proposed Question 39.
\184\ Netted exposure to a reference asset would either be long
or short, and advisers would determine the value of each netted
exposure to each reference asset in U.S. dollars, expressed as the
delta adjusted notional value, or as the 10-year bond equivalent for
reference assets that are fixed income assets. Advisers would not
report exposure to cash and cash equivalents. See proposed Question
39. See also Form PF Glossary of Terms (proposed definition of
``netted exposure'').
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The proposal also would require advisers to provide certain
information on a fund's reference asset to which the fund has gross
exposure (as of the end of each month of the reporting period) equal to
or exceeding (1) one percent of net asset value, if the reference asset
is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the debt security
issuance, (2) one percent of net asset value, if the reference asset is
a listed equity security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding the reporting date, or (3) (a) five
percent of the reporting fund's net asset value or (b) $1 billion.
Advisers would be required to report: (1) the dollar value (in U.S.
dollars) of all long and the dollar value (in U.S. dollars) of all
short positions with legal and contractual rights that provide exposure
to the reference asset; (2) netted exposure to the reference asset; (3)
sub-asset class and instrument
[[Page 53861]]
type; (4) the title or description of the reference asset; (5) the
reference asset issuer (if any) name and LEI; (6) CUSIP (if any); \185\
and (7) if the reference asset is a debt security, the size of issue,
and if the reference asset is a listed equity, the average daily
trading volume, measured over 90 days preceding the reporting date.
Additionally, advisers may at their option choose to provide the FIGI
for the reference asset, but they are not required to do so.\186\ We
propose to define ``gross exposure'' to a ``reference asset'' as the
sum of the absolute value of all long and short positions with legal
and contractual rights that provide exposure to the reference
asset.\187\ We considered varying levels of thresholds and believe that
the proposed thresholds described above are appropriate based on the
following reasoning. First, the five percent threshold has been carried
over from the current version of Form PF and is also a commonly used
metric for identifying significant positions in a portfolio.\188\ In
addition, while a portfolio is generally viewed as diversified when it
holds at least 20 different positions, when a position goes above five
percent it reduces portfolio diversification. Second, the $1 billion
threshold represents a level for large funds (e.g., those with net
asset values in excess of $20 billion) that is large enough so as to
have potential systemic risk implications even if the position is less
than five percent of the fund. Finally, the proposed one percent
threshold is aimed at limiting filer burdens while still providing
insight into the risks associated with a position that may be small
relative to a fund's overall portfolio but which constitutes a large
fraction of the market for a particular holding, given that a
liquidation by one fund can trigger a disorderly liquidation. A
disorderly liquidation of this kind may raise systemic risk concerns as
it may lead to liquidation losses at other funds for which the position
is more impactful and possibly lead to a cascade of additional unwinds.
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\185\ Advisers would also be required to provide at least one of
the following other identifiers: (1) ISIN; (2) ticker if ISIN is not
available); (3) other unique identifier (if ticker and ISIN are not
available). For reference assets with no CUSIP, or other identifier,
advisers would be required to describe the reference asset. See
proposed Question 40(a).
\186\ See proposed Question 40(a)(xi).
\187\ See proposed Question 40 and Form PF Glossary of Terms
(proposed revised definition of ``gross exposure'').
\188\ E.g., Schedule 13G/13D uses a five percent threshold.
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The purpose of these amendments is to improve our ability to assess
the magnitude of hedge fund portfolio concentration, as well as to
identify directional exposure. From a systemic risk and an investor
protection perspective, high portfolio concentration carries the risk
of amplified losses that can occur when a fund's investment represents
a large portion of a particular investment, asset class, or market
segment. Leveraged portfolios further amplify this risk. The proposed
amendments are designed to better capture a fund's concentration risk
(e.g., where gross exposure to a reference asset is large compared to
the fund's NAV and/or compared to the market for a reference security).
Reporting positions that are large compared to market size also may
provide some insight about whether multiple firms are ``crowding'' into
trades in certain types of securities or other financial assets. We
believe that such ``crowding'' may increase the risk that one fund's
forced selling may trigger systemic effects across a particular market.
We also believe that collecting information about the composition of
exposure to a reference asset would allow us and FSOC to link the
information reported in proposed Question 40 to exposure reporting in
proposed Question 32, which would give the reported data added context
and facilitate understanding of a fund's investment portfolio and
assessment of any implications for systemic risk and investor
protection purposes. For example, in a convertible arbitrage trade
involving a position in a convertible bond and an offsetting position
in the equity securities of the same issuer, reference asset exposure
might be obtained by positions in two different sub-asset classes
(i.e., investment grade convertible bonds and equities) and using a
combination of instrument types (e.g., physical ownership and futures
or a swap). The combination of information reported in proposed
Question 32 and proposed Question 40 would facilitate our ability to
identify this type of situation, better understand a qualifying hedge
fund's investment approach and whether it is taking on concentrated
positions (potentially with leverage), and assess whether or not a
qualifying hedge fund's activities may have systemic risk or investor
protection implications.
We request comment on these proposed amendments.
149. The proposal would require advisers to report (1) the total
number of reference assets to which a fund holds long and short netted
exposure, (2) the percent of net asset value represented by the
aggregated netted exposures of reference assets with the top five long
and short netted exposures, and (3) the percent of net asset value
represented by the aggregate netted exposures of reference assets
representing the top ten long and short netted exposures. Are these
requirements appropriate? If not, how should we modify them? For
example, should we require reporting on more or fewer long and short
netted exposures rather than just the top five and the top ten? Instead
of requiring disclosure on specific exposures described above, should
we require a full position disclosure filing similar to Form N-PORT?
150. Does our proposed ``reference asset'' definition work in the
context of these questions? For example, does the definition capture
interest rate derivatives? If not, how should we modify the definition
or these questions to capture interest rate derivatives? If we should
collect information about interest rate derivatives, should we specify
reporting by maturity bucket and currency? If so, should we use the
same maturity buckets that we have proposed for purposes of calculating
``adjusted'' exposure in proposed Question 32?
151. Should the ``reference asset'' definition be more specific or
provide more guidance on how to ``look through'' certain instruments
(e.g., a correlation basket or an index (such as the NASDAQ) or ETFs or
other pooled vehicles and private funds)?
152. Should we provide additional guidance in the definition of
``reference asset'' such as instructing advisers to refer to the
``issuer''? Should we provide instructions or guidance on how advisers
should address ``reference assets'' that have varying term structures
(e.g., use maturity buckets)?
153. The proposal would require advisers to provide certain
information on a fund's reference asset to which the fund has gross
exposure (as of the end of each month of the reporting period) equal to
or exceeding (1) one percent of net asset value, if the reference asset
is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the debt security
issuance, (2) one percent of net asset value, if the reference asset is
a listed equity security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding, or (3) either (a) five percent of the
reporting fund's net asset value or (b) $1 billion. Are these
thresholds appropriate? If not, how should they be modified? Should
separate thresholds be used to compare netted exposures, and gross
exposures, to equity volume and debt issue size?
[[Page 53862]]
For fixed income, is the reference to ``debt security issuance'' clear?
While this reference is designed to capture a full issue size, should
it instead reference individual tranches of an issue?
154. For position reporting in Question 40, should we also require
advisers to report the number of shares, principal amount or other
unit, currency value and percent of value compared to NAV? Would this
be burdensome to report?
155. In Question 40, are there other unique identifiers, in
addition to or in lieu of LEI or CUSIP that we should add in addition
to those proposed (e.g., for commodities or indices)? Alternatively,
should we permit advisers to report FIGI in lieu of CUSIP in Question
40 rather the requiring advisers to report CUSIP?
b. Borrowing and Counterparty Exposure
Counterparty exposure. As noted above, we propose to revise and
enhance how advisers report information about their relationships with
creditors and other counterparties (including CCPs) and the associated
collateral arrangements for their hedge funds.\189\ For qualifying
hedge funds, we propose to include a new consolidated counterparty
exposure table, similar to the new consolidated counterparty exposure
table proposed for hedge funds in section 1c of the form,\190\ which
would capture all cash, securities, and synthetic long and short
positions by a reporting fund, a fund's credit exposure to
counterparties, and amounts of collateral posted and received. This
table would replace the information currently required by Questions 43,
44, 45, and 47, each of which would be deleted under the proposal.\191\
Under the proposal, proposed Questions 42 and 43 would continue to
collect information about a reporting fund's key individual
counterparties, but in more detail. These revisions are designed to
improve data quality and comparability, close data gaps and provide
better insight into qualifying hedge funds' borrowing and financing
relationships, their credit exposure to counterparties and collateral
practices, and also would enhance the Commissions' and FSOC's ability
to assess the activities of qualifying hedge funds and their
counterparties for investor protection purposes and in monitoring
systemic risk.
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\189\ See discussion at Section II.B.3 of this Release.
\190\ See discussion at Section II.B.3 of this Release.
\191\ In connection with the proposed removal of current
Question 44, we propose to make a corresponding amendment to current
Question 13, which would be redesignated as Question 19, to remove
an instruction that would no longer be relevant.
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The proposed new consolidated counterparty exposure table would be
designed to capture information on all non-portfolio credit exposure
that a qualifying hedge fund has to its counterparties (including CCPs)
and the exposure that creditors and other counterparties have to the
fund, taking into account netting. The new table would require advisers
to report in U.S. dollars, as of the end of each month of the reporting
period, a qualifying hedge fund's borrowings and other transactions
with creditors and other counterparties by type of borrowing or
transaction (e.g., unsecured, secured borrowing and lending under a
prime brokerage agreement, secured borrowing and lending via repo or
reverse repo, other secured borrowing and lending, derivatives cleared
by a CCP, and uncleared derivatives) and the collateral posted or
received by a reporting fund in connection with each type of borrowing
or other transaction.\192\ The proposed table also would require
advisers to qualifying hedge funds to (1) classify each type of
borrowing by creditor type (i.e., U.S. depository institution, U.S.
creditors that are not depository institutions, and non-U.S.
creditors); (2) classify posted collateral by type (e.g., cash and cash
equivalents, government securities, securities other than cash and cash
equivalents and government securities and other types of collateral or
credit support (including the face amount of letters of credit and
similar third party credit support) received and posted by a reporting
fund, and secured borrowing and lending (prime brokerage or other
brokerage agreement), and (3) report, at the end of each month of the
reporting period, the expected increase in collateral required to be
posted by the reporting fund if the margin increases by one percent of
position size for each type of borrowing or other transaction. We
believe that measuring the impact of a one percent margin change will
allow for a meaningful assessment of qualifying hedge funds'
vulnerability to changes in financing costs and identification of funds
that are most sensitive to potential margin changes. We also believe
that measuring this impact would provide a conventional way to obtain
data on funds' vulnerability to margin increases that is easy to scale
up for analysis purposes and allows for uniform comparisons across
hedge funds to see which funds have lockup agreements and which funds
do not. Furthermore, the proposed table is designed to consolidate
existing questions and provide more specific instructions in an effort
to eliminate information gaps and improve the reliability of data
collected. We believe that this new approach would collect better
information about a qualifying hedge fund's borrowing and financing,
cleared and uncleared derivatives positions, and collateral practices
as well as a fund's credit exposure to counterparties resulting from
excess margin, haircuts and positive mark-to-market derivatives
transactions, which we believe would enhance FSOC's systemic risk
assessments.
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\192\ The instructions would direct advisers to classify
borrowings and other transactions and associated collateral based on
the governing legal agreement (e.g., a prime brokerage or other
brokerage agreement for cash margin and securities lending and
borrowing, a global master repurchase agreement for repo/reverse
repo, and ISDA master agreement for synthetic long positions,
synthetic short positions and other derivatives), and instruct
advisers how to report when there is cross-margining under a fund's
prime brokerage agreement. We are also proposing to add new
definitions of ``synthetic long position'' and ``synthetic short
position'' to the Glossary of Terms. See Form PF Glossary of Terms
(proposed definitions of ``synthetic long position'' and ``synthetic
short position''). Additionally, the instructions would permit
advisers to net a reporting fund's exposure with each counterparty
and among affiliated entities of a counterparty to the extent such
exposures may be contractually or legally set-off or netted across
those entities and/or one affiliate guarantees or may otherwise be
obligated to satisfy the obligations of another under the agreements
governing the transactions. The instructions would also direct
advisers to classify borrowing by creditor type (e.g., percentage
borrowed from U.S. depository institutions, U.S. creditors that are
not U.S. depository institutions, non-U.S. creditors) based on the
legal entity that is the contractual counterparty for such borrowing
and not based on parent company or other affiliated group.
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We request comment on the proposed addition of this new table.
156. Is the information to be collected in the proposed new table
appropriate? If not, how should we modify the proposed reporting
requirements? Would reporting in the proposed new table be overly
burdensome for advisers? If so, how should we modify the proposed table
to reduce burdens on advisers?
157. Would the proposed table capture an accurate overall view of
the non-portfolio credit exposure that a qualifying hedge fund has in
aggregate to its counterparties (including CCPs) and the exposure that
creditors and other counterparties have to the fund? Are the table
instructions clear? Would the instructions properly capture a reporting
fund's borrowing and other transactions with creditors? Do we need to
modify the proposed instructions for calculating and reporting
associated collateral to clarify any matters? Do we need to modify the
instructions with
[[Page 53863]]
respect to netting to increase clarity or avoid undue burden?
158. We propose to specify how to classify certain types of
transactions based on legal agreement. We are proposing to classify all
transactions under a master securities loan agreement (``MSLA'') as
other secured borrowing. Is another classification more appropriate? If
so, what classification do you suggest? For example, should borrowing
and collateral received and lending and posted collateral under an MSLA
be reported in a separate category of borrowing or consolidated with
prime broker borrowing? Are the instructions provided for cross
margining reasonable and practicable, or should they be changed in any
way?
159. In connection with the proposal, we propose to add a new
definition for ``synthetic short position.'' Is the list of assets to
be included or excluded from the definition appropriate or should we
provide a different list of assets? If we should provide a different
list, what assets should be included and excluded?
160. Is it clear that advisers should calculate the expected
increase or decrease based on a margin increase of one percent of
position size in proposed Question 41 or should we provide further
guidance or clarify the question? Should the metric be something other
than the expected increase or decrease based on a margin increase of
one percent of position size? If so, what metric should be used?
161. As an alternative, should we include a drop-down box with
possible types of other secured borrowings (e.g., letters of credit,
loans secured by other collateral such as real estate, equipment,
receivables, etc.) and also include an ``other'' ``catch-all'' category
that would need to be explained in Question 4?
Significant counterparty reporting. The proposal would require
advisers, for each of their qualifying hedge funds, to identify all
creditors and counterparties (including CCPs) where the amount a fund
has borrowed (including any synthetic long positions) before posted
collateral equals or is greater than either (1) five percent of the
fund's net asset value or (2) $1 billion.\193\ We believe this
threshold is appropriate because it highlights two different but
potentially significant risks. First, five percent of a fund's net
asset value represents an amount of borrowing that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Second, $1 billion represents an amount that, in the case of a very
large fund, may not represent five percent of the fund's net asset
value, but may be large enough to create stress for certain of its
counterparties. This change is designed to specify how securities held
should be treated, avoiding a common source of error in how advisers
have completed the current form, and allowing both counterparty risks
related to collateralized transactions to be viewed in one place, i.e.,
the risk that collateral will not be returned, and the risk that the
borrower of cash will fail to repay the amount borrowed, risks that we
have found cannot be fully observed based on information collected on
the current form. For the top five creditors and other counterparties
from which a fund has borrowed the most (including any synthetic long
positions) before posted collateral, advisers would be required to
identify the counterparty (by name, LEI, and financial institutional
affiliation) and to provide information detailing a fund's transactions
and the associated collateral. We have proposed a ``top five''
reporting threshold as this level is consistent with the current
threshold for reporting on collateral practices on Form PF.\194\
Advisers would be required to present this information using a proposed
individual counterparty exposure \195\ table that follows the same
format as the new consolidated counterparty exposure table described
above for Question 41, including borrowings and other transactions by
type and collateral posted and received by type. For all other
creditors and counterparties from which the amount a fund has borrowed
(including any synthetic long positions) before posted collateral that
equals or is greater than either (1) five percent of the fund's net
asset value or (2) $1 billion, advisers would be required to identify
each counterparty (by name, LEI, and financial institution affiliation)
and report the amount of such borrowings and the collateral posted by
the fund in U.S. dollars.
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\193\ See proposed Question 42. Advisers would use calculations
performed to complete the new table in proposed Question 41 for
purposes of identifying the counterparties to be reported in
proposed Question 42 and Question 43, and the calculation method
would be designed to be similar to the calculations used to identify
counterparties in proposed Question 27 and proposed Question 28 in
order to facilitate aggregation and analysis of data across hedge
funds and qualifying hedge funds. Furthermore, if more than five
counterparties meet the threshold, advisers would complete an
individual counterparty exposure table for the top five creditors or
other counterparties to which a reporting fund owed the greatest
amount in respect of cash borrowing entries (before posted
collateral), and also identify all other creditors and
counterparties (including CCPs) to which the reporting fund owed an
amount in respect of cash borrowing entries (before posted
collateral) equal to or greater than either (1) five percent of the
reporting fund's net asset value as of the data reporting date or
(2) $1 billion. See also Form PF Glossary of Terms (proposed
definitions of ``cash borrowing entries'' and ``collateral posted
entries'').
\194\ See current Question 36.
\195\ In connection with the proposal, we propose to add a new
definition for ``individual counterparty exposure table'' to the
Form PF Glossary of Terms.
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Similarly, the proposal would require advisers, for each of their
qualifying hedge funds, to identify all counterparties (including CCPs)
to which a fund has net mark-to-market counterparty credit exposure
after collateral that equals or is greater than either (1) five percent
of the fund's net asset value or (2) $1 billion.\196\ We believe this
threshold is appropriate because both portions of the threshold
highlight potential systemic risk: five percent of net asset value is a
level that we believe represents significant exposure (based on the
impact on performance) in the event of counterparty default, and $1
billion, while it may not equal five percent of a large hedge fund's
assets, may indicate a larger systemic stress involving a fund's
counterparties. For the top five of these counterparties, advisers
would identify the counterparty (by name, LEI and financial institution
affiliation) and provide information detailing a fund's relationship
with these counterparties including associated collateral using the
same table required for individual counterparty reporting.\197\ The
proposal also would require qualifying hedge funds to identify all
other counterparties (by name, LEI, and financial institution
affiliation) to which a fund has net mark-to-market exposure after
collateral that equals or is greater than either (1) five percent of a
fund's net asset value or (2) $1 billion and would require these
advisers to report the amount of the exposure before and after
collateral posted by either the counterparty or the reporting fund as
applicable. The purpose of this new requirement is to enhance our
ability to understand the impact a particular counterparty failure like
those that occurred during the 2008 financial crisis and in the period
since (e.g., the failure of MF Global in 2011),\198\ which we believe
is important
[[Page 53864]]
for systemic risk assessments and from an investor protection
perspective. In assessing the risk to a fund of a counterparty default,
the proposal would look at whether a fund has net borrowing exposure or
net lending exposure to a counterparty. If the fund is a net borrower
with respect to a counterparty, we would measure cash borrowed by the
fund against collateral posted by fund. Alternatively, when the fund is
a net lender with respect to a counterparty, we would measure cash
loaned to the counterparty against collateral posted by the
counterparty to assess whether the counterparty has posted insufficient
collateral (relative to the amount borrowed).\199\
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\196\ See proposed Question 43.
\197\ Under the proposal, however, if an adviser completes the
table in Question 42 for a particular counterparty, the adviser
would not be required to complete the table twice.
\198\ See e.g., Gapper, John and Kaminska, Izabella, Downfall of
MF Global--US broker-dealer bankruptcy highlights global reach of
eurozone crisis, Financial Times (November 2011) available at
https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.
\199\ See Form PF Glossary of Terms (proposed definitions of
``cash borrowing entries,'' ``collateral posted entries,'' ``cash
lending entries,'' and ``collateral received entries'') for a
detailed description of these calculations.
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These proposed amendments are designed to streamline the form by
consolidating information currently collected in Question 47 into
proposed Question 42, and to improve the quality and comparability of
reported information and our ability to integrate the data obtained for
analysis with other regulatory data sets by specifying how advisers
determine borrowing and counterparty credit exposure.\200\ The proposed
changes, in conjunction with the proposed new consolidated counterparty
exposure table, would also provide a better overall view of hedge
funds' borrowing and other financing arrangements and counterparty
credit exposure and associated collateral, which we believe would
provide critical insight into (1) creditor and counterparty exposure to
qualifying hedge funds through synthetic long positions through
derivatives, (2) potential gaps in margin received by and posted by
qualifying hedge funds and the size of any such gaps, (3) qualifying
hedge funds' exposure to a large counterparty failure, and (4) the
expected impact on a fund's financing arrangements of a change in
margin requirements.
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\200\ The proposal would require creditor legal name and LEI,
which would aid in the identification of counterparties and
facilitate analysis of the interconnectedness of market participants
(e.g., Form N-PORT and Form N-CEN already collect LEI for registered
investment company counterparties, and including LEIs here would
facilitate analysis across data sets).
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Finally, the proposal would remove the requirement from current
Question 38 for advisers to report the percentage of the total amount
of collateral and other credit support that a fund has posted to
counterparties that may be re-hypothecated.\201\ We are proposing this
change because we believe that this reporting is burdensome for
advisers, and we have found that the data obtained is generally not
reliable because advisers cannot easily collect and report the required
information as re-hypothecation commonly occurs from omnibus accounts
into which advisers generally do not have visibility.\202\ We request
comment on the proposed amendments.
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\201\ We would redesignate Question 38 as Question 45.
\202\ See MFA Letter to Chairman Clayton, Sept. 17, 2018,
available at https://www.managedfunds.org/wp-content/uploads/2020/04/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf (noting
the rehypothecated securities are taken out of an omnibus account,
which makes reporting for advisers with any certainty difficult).
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162. Should we amend counterparty reporting as proposed, including
the proposed counterparty identifying information? Is the proposed
identifying information appropriate? If not, what alternatives do you
suggest? Would the proposed amendments lead to more accurate data
regarding counterparties?
163. We have proposed to limit more detailed reporting in proposed
Question 42 to the top five creditor and counterparties from which a
fund has borrowed the most (including any synthetic long positions)
before posted collateral, and in proposed Question 43 to the top five
counterparties to which a fund has the greatest net mark to market
counterparty credit exposure after collateral. Should we expand this
question to require more detailed reporting for the top, for example,
ten creditors and/or counterparties, as applicable? Alternatively,
should we further limit the scope of creditor and/or counterparty
reporting? Should we require that all creditor and/or counterparties be
listed?
164. Do advisers find the re-hypothecation reporting burdensome?
Are advisers able to collect and report information currently required
by Question 38 given omnibus accounts?
165. Are securities lending and borrowing different from other
types of trading and financing activities (e.g., repo/reverse repo,
prime broker borrowing) for purposes of counterparty monitoring and
risk assessment? If so, should we treat them differently?
166. As proposed, calculations in these questions would exclude
collateral that is not cash and cash equivalents or other securities to
avoid including letters of credit and other illiquid assets (e.g., real
estate) posted as collateral. What other types of collateral would be
omitted under this instruction? Would it omit types of collateral
commonly accepted by creditors and other counterparties? If so, how
should we modify the question?
167. This proposal would collect information about top
counterparties based on a fund's borrowing from each counterparty legal
entity, rather than borrowing from all entities affiliated with a major
financial institution. Could this approach result in data gaps where a
fund borrows from different counterparties with one affiliated group
below the reporting threshold? Alternatively, should we require funds
to aggregate borrowings from all affiliates of major counterparties,
and report on each affiliate in this counterparty reporting? What data
gaps might occur using this alternative approach? Is the proposed
threshold (i.e., equal to or greater than either (1) five percent of
the fund's net asset value or (2) $1 billion) for identifying
counterparties to which the fund is exposed appropriate? Will it
capture those counterparties to which the fund may have material
counterparty credit exposure? Should we adopt a combination of
thresholds (e.g., greater than five percent or $1 billion for
individual counterparties and greater than 10 percent or $1 billion for
any affiliated group of counterparties)?
c. Market Factor Effects
The proposal would require advisers to qualifying hedge funds to
respond to all market factors to which their portfolio is directly
exposed, rather than allowing advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with the reporting fund's risk management, as Form PF
currently provides.\203\ These proposed changes are designed to enhance
investor protection efforts and systemic risk assessment by allowing
the Commissions and FSOC to track better common market factor
sensitivities, as well as correlations and trends in those market
factor sensitivities.
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\203\ See current Question 42 and proposed Question 47. For
market factors that have no direct effect on a reporting fund's
portfolio, we propose to instruct filers to enter zero.
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We also propose to change the stress thresholds to (1) require
advisers to report one threshold for each market factor, rather than
two as is currently required, and (2) propose different thresholds for
certain market factors to capture stress scenarios that are plausible
but still infrequent market moves.\204\ Information resulting from
[[Page 53865]]
stress testing at thresholds in the current form (one low and one high)
is not useful because the thresholds are either too frequent (for the
lower threshold) or too extreme and may not result in accurate
estimates (for the higher threshold). Based on our experience with this
information, we do not believe that collecting data at multiple
thresholds \205\ for each market factor is significantly more
meaningful than collecting market factor sensitivity at a single
plausible but still infrequent threshold.
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\204\ For example, on the current form, advisers must report the
effect of an increase or decrease in equity prices by five percent
and by 20 percent, while under the proposal advisers would only
report the effect of a 10 percent increase or decrease, which is a
more plausible but still infrequent scenario.
\205\ See current Question 42.
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The proposal also would add a market factor test concerning non-
parallel risk free interest rate movements. It would test hedge fund
exposure to changes in the slope of the yield curve, which is currently
untested and can be a source of systemic risk when there are sudden
interest rate changes. For example, this market factor could provide
meaningful information on hedge funds that take complex positions, such
as market neutral strategies (e.g., basis trading in particular) and
other strategies that employ trades that take advantage of spreads in
yield curves coupled with high use of leverage.
The proposal also would revise the instructions so advisers would
report the long component and short component consistently with market
convention, rather than opposite from market convention, as Form PF
currently provides in order to reduce inadvertent mistakes in
completing the form.\206\ We request comment on the proposed
amendments.
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\206\ The proposal would amend the instructions to provide that
``risk free interest rates'' would include interest rate swap rates
in which a fixed rate is exchanged for a risk-free floating rate
such as the secured overnight financing rate (``SOFR'') or the
sterling overnight index average (``SONIA''). Additionally, the
proposal would amend the instructions to specify that (1) for market
factors involving interest rates and credit spreads, advisers should
separate the effect on its portfolio into long and short components
where (i) the long component represents the aggregate result of all
positions whose valuation changes in the opposite direction from the
market factor under a given stress scenario, and (ii) the short
component represents the aggregate result of all positions whose
valuation changes in the same direction as the market factor under a
given stress scenario, and (2) for market factors other than
interest rates and credit spreads, advisers should separate the
effect on its portfolio into long and short components where (i) the
long component represents the aggregate result of all positions
whose valuation changes in the same direction as the market factor
under a given stress scenario and (ii) the short component
represents the aggregate result of all positions whose valuation
changes in the opposite direction from the market factor under a
given stress scenario. See proposed Question 47.
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168. Should Form PF require advisers to qualifying hedge funds to
respond to all market factors, as proposed? Alternatively, should Form
PF allow advisers to omit a response to any market factor that it does
not regularly consider in formal testing in connection with the
reporting fund's risk management? Do advisers or their reporting funds
regularly consider all, some, or other market factors we are proposing?
If so which ones and why? Are adjustments needed for advisers that use
a different stress test methodology than that required by the question
as proposed?
169. Should we revise the stress thresholds, as proposed? Would the
proposed thresholds capture stress scenarios that are plausible but
still infrequent market moves? Is there a better way to meet this
objective? Are adjustments needed for advisers that test thresholds
similar, but not identical to, those proposed?
170. Should Form PF include a market factor concerning non-parallel
risk free interest rate movements, as proposed? Would this proposed
amendment provide meaningful exposure information for hedge funds that
take complex positions, such as market neutral strategies (e.g., basis
trading in particular) and other strategies that employ trades that
take advantage of spreads in yield curves coupled with a high use of
leverage? Would any of the other market factors better describe the
risks such strategies are exposed to?
171. Are the proposed amendments to how advisers would report long
and short components consistent with market convention? Do market
conventions vary by asset type? Would the proposed change relieve or
increase burdens? Please provide supportive data. Is there a more
effective way to require advisers to report long and short components
that would be consistent with market conventions and allow for data
comparability?
172. Are there any definitions or instructions that we should
clarify or change in this question?
173. As an alternative, should Form PF require all advisers to all
types of reporting funds to report market factor data? Which ones and
why?
d. Additional Amendments to Section 2b
Currency exposure reporting. The proposal would require qualifying
hedge funds to report for each month of the reporting period, in U.S.
dollars, (1) the net long value and short value of a fund's currency
exposure arising from foreign exchange derivatives and all other assets
and liabilities denominated in currencies other than a fund's base
currency, and (2) each currency to which the fund has long dollar value
or short dollar value exposure equal to or exceeding either (a) five
percent of a fund's net asset value or (b) $1 billion.\207\ In
responding, advisers would be required to include currency exposure
obtained indirectly though positions held in other entities (e.g.,
investment companies, other private funds, commodity pools or other
companies, funds or entities) and could report reasonable estimates if
consistent with internal methodologies and conventions of service
providers.\208\ This proposed requirement is designed to provide
insight into whether notional currency exposures reported by qualifying
hedge funds in Question 30 represent directional exposure or are hedges
of equity and/or fixed income positions. This new question would allow
us to understand whether a qualifying hedge fund's portfolio is exposed
to a given currency, and it would also provide a view into the fund's
currency exposure resulting from holdings in foreign securities (e.g.,
Eurobonds). While current Question 30 requires advisers to separate
currency exposure relating to hedging from other currency, we have
found that this data has not been very useful for determining whether a
currency position is speculative or a hedge. Additionally, we believe
that it is important to consider a qualifying hedge fund's currency
exposure to identify vulnerabilities to currency fluctuations and
market events that affect different countries and regions. Finally, we
believe the proposed threshold of either (1) five percent of a fund's
net asset value or (2) $1 billion for reporting individual currency
exposure is appropriate because it represents, in each prong of the
threshold, a material level of portfolio exposure to currency risk at
which we believe a deterioration in the value of a particular currency
could have a significant negative impact on a fund's investors. We also
believe that if multiple large funds have significant exposure to a
currency that is rapidly devaluing, this circumstance could raise
financial stability concerns, and this proposed reporting would better
enable review of this type of situation. More broadly, we also would be
able to use
[[Page 53866]]
the information obtained to identify concentrations in particular
currencies and assess the potential impact of market events that affect
particular currencies. We request comment on the proposed amendments.
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\207\ Proposed Question 33.
\208\ This instruction is designed to simplify and reduce the
burdens of reporting sub-asset class exposures. Furthermore, the
proposal would permit advisers to provide good faith estimates and
take currency hedges into account, if consistent with their internal
methodologies and information reported internally and to investors.
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174. Should we add new Question 33, as proposed?
175. Would this new question enhance systemic risk analysis,
including the impact of currency risk? Is there a better way to meet
this objective? How could we modify the proposed question to better
meet its objective?
176. Is the proposed threshold of either (1) five percent of a
fund's net asset value or (2) $1 billion for reporting individual
currency exposure appropriate? If not, what threshold is appropriate?
Turnover. The proposal would require reporting on a per fund basis
on the value of turnover in certain asset classes rather than on an
aggregate basis as currently required.\209\ We believe that requiring
this reporting on a per fund basis would provide more detailed
information to us and FSOC while at the same time simplifying reporting
for advisers. We understand that advisers do not currently aggregate
turnover related information among funds. Aggregating solely for Form
PF reporting is particularly burdensome as the required data is
typically on separate reporting systems and advisers must ``roll-up''
data from these sources to report on the form.
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\209\ Proposed Question 34. In connection with the proposed
amendments, the proposal would move reporting on the value of
turnover in certain asset classes and the geographical breakdown of
investments from section 2a to section 2b.
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We also propose to add new categories for turnover reporting that
would disaggregate combined categories and better capture turnover of
potentially relevant securities, such as various types of derivatives
(e.g., listed equity, interest rate, foreign exchange), which we
believe would help support analysis of hedge fund market activity.\210\
Furthermore, we propose to add a new consolidated foreign exchange and
currency swaps category and make other changes.\211\ During the March
2020 COVID-19-related market turmoil, FSOC sought to evaluate the role
hedge funds played in disruptions in the U.S. treasury market by
unwinding cash-futures basis trade positions and taking advantage of
the near-arbitrage between cash and futures prices of U.S. treasury
securities.\212\ Because the existing requirement regarding turnover
reporting on U.S. treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March 2020 market events,
was unable to obtain a complete picture of activity relating to long
treasuries and treasury futures. Given the significant size of hedge
funds' exposures to certain derivative products, we believe it is
important to gain more insight into trading activities with respect to
these financial instruments to better enable the Commissions and FSOC
to assess and monitor the activity of qualifying hedge funds for
systemic risk implications.\213\ Expanded reporting on turnover also
would provide better information for assessing trading frequency in
lieu of requiring advisers to report what percentage of their hedge
funds' net asset value is managed using high-frequency trading
strategies.\214\
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\210\ We also propose to break out some categories by futures,
swaps, and options as different types of derivatives have different
risk profiles and implications for systemic risk, and to add a
category for ``other derivative instrument types'' so that all
derivatives are reported.
\211\ We propose to add instructions requiring advisers to
report turnover in derivatives separately from turnover in physical
holdings for asset classes in proposed Question 32 and to make other
conforming changes to reflect changes to defined terms in the Form
PF Glossary of Terms.
\212\ See U.S. Credit Markets Interconnectedness and the Effects
of the COVID-19 Economic Shock, U.S. Securities Exchange Commission,
October 2020 available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. See Financial Stability Oversight
Council 2021 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
\213\ As of the end of the third quarter of 2021, interest rate
derivatives currently make up approximately 25 percent of gross
notional exposure (GNE) reported on Form PF, while foreign exchange
derivatives make up 15 percent of GNE. Additionally, commodity,
credit, and other derivatives when combined make up five percent, or
nearly $1.5 trillion. See Private Fund Statistics Q3 2021, supra
footnote 7.
\214\ See current Question 21. We propose to remove Question 21
as it would be redundant in light of the proposed expanded turnover
reporting.
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We request comment on the proposed Question 34.
177. Would the proposed detailed turnover reporting provide
additional insight into a fund's activities in key markets? Should
additional categories be added to provide a clearer view of turnover
and its potential to help us and FSOC identify and monitor activities
that could indicate systemic risk in the market? If so, what categories
do you suggest and why? Should we exclude any of the proposed
categories? If so, why?
178. The current instructions state that turnover value should be
reported as the sum of the absolute value of transactions, and as such
the reported value of turnover for certain derivatives may be very
large (reflecting notional value). Should we use a different measure
for valuing turnover (e.g., market value)? Recognizing that the current
instructions result in consistency in reported value among questions on
Form PF, would a different measure be more or less useful?
179. Do you agree that aggregating information may be burdensome
for some advisers? Do some advisers maintain the required data on
different systems such that ``rolling-up'' the data from different
sources to report on the form would be complex and time consuming?
Country and industry exposure. We are proposing to require advisers
to report all countries (by ISO country code) \215\ to which a
reporting fund has exposure equal to or exceeding either (1) five
percent of its net asset value or (2) $1 billion, and to report the
dollar value of long exposure and the dollar value of short exposure in
U.S. dollars, for each monthly period to improve data comparability
across funds.\216\ Under the current approach, only certain regions are
identified and these regions are not uniformly defined, which results
in data that is not consistent.\217\ In addition, at times we have
needed to identify countries of interest not on this list. As such, we
propose to replace the country of interest and regional reporting with
this new country level information. Finally, we believe that the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual countries and
geographic regions, and is a level that could significantly impact a
fund and its investors if, for example, there are currency fluctuations
or geopolitical instability. Furthermore, the data obtained would allow
for identification of industry concentrations in particular countries
and/or regions and help assess the potential impact of market events on
these geographic segments. We believe that the five percent threshold
level constitutes a reasonable shock to a fund's net asset value. For
example, to the extent there is a market-wide event, a worst-case
scenario would be for long positions to lose their full value, in this
shock case
[[Page 53867]]
at least five percent. Furthermore, and particularly for funds without
a benchmark, five percent is often evaluated for industry, individual
position, and country risk, and is a common and easy to measure
threshold. With respect to the $1 billion threshold, we believe it
constitutes sufficiently large nominal value exposure from a risk
perspective.
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\215\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
\216\ Proposed Question 35. In connection with the proposed
amendments, the proposal would move reporting on geographical
breakdown of investments from section 2a to section 2b.
\217\ Currently, consistent with staff guidance in Form PF
Frequently Asked Questions 28.1 and 28.2 advisers may report
geographical exposure based on internal methods and indicate in
Question 4 if methods do not reflect risk and economic exposure. See
Form PF Frequently Asked Questions, supra footnote 79.
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We also propose to add a new question that would require advisers
to provide information about each industry to which a reporting fund
has exposure equal to or exceeding either (1) five percent of its net
asset value or (2) $1 billion.\218\ Advisers would be required to
report, for each monthly period, the long dollar value and short dollar
value of a reporting fund's exposure by industry based on the NAICS
\219\ code of the underlying exposure. The purpose of this new question
would be to collect information that would provide insight into hedge
funds' industry exposures in a standardized way to allow for
comparability among funds and meaningful aggregation of data to assess
overall industry-specific concentrations. Further, we believe the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual industries, and is a
level that could significantly impact a fund and its investors if, for
example, there are market or geopolitical events that affect
performance by a particular industry, such as the burst of the ``tech
bubble'' in the early 2000s or COVID-19's impact on airline,
accommodation and food service industries. Furthermore, the data
obtained would allow for identification of industry concentrations and
help assess the potential impact of market events on industries. While
we considered a lower threshold, we believe that the proposed threshold
strikes an appropriate balance between identifying significant industry
exposure and the burdens of reporting this information on Form PF. We
believe this information would be useful to the Commissions and FSOC in
monitoring systemic risk, particularly if multiple funds have
significant concentrations in industries that are experiencing periods
of stress or disruption.
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\218\ Proposed Questions 36.
\219\ North American Industry Classification System.
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When responding to these questions about country and industry
exposure, advisers would be required to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other company, funds
or entities). Without this requirement, a fund's exposure to geographic
regions and industries could be obscured and hinder the Commissions'
and FSOC's ability to assess risks and the potential impact of events
and trends that affect a particular industry or geographic region, both
of which could have implications for investors. While we believe that
advisers typically maintain this information, the proposed instructions
to these questions seek to minimize filer burdens by permitting
advisers to report reasonable estimates if such reporting is consistent
with internal methodologies and information reported internally and to
investors.
We request comment on the proposed Question 35 and proposed
Question 36.
180. Should we require advisers to report all countries (by ISO
country code) \220\ to which a reporting fund has exposure of equal to
or exceeding (1) five percent or more of its net asset value or (2) $1
billion, and to report exposure in U.S. dollars? Is this threshold
appropriate? If not, should the threshold be higher or lower? Do you
agree that removing regional level reporting is appropriate? Are there
any other alternatives? If so, what alternatives?
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\220\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
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181. Should we require advisers to provide information about each
industry to which a reporting fund has exposure equal to or exceeding
(1) five percent or more of its net asset value or (2) $1 billion? Is
this threshold appropriate? If not, should the threshold be higher or
lower?
182. With respect to requiring advisers to provide information
about portfolio industry exposure, what level of industry detail should
be gathered (for example, 2-digit NAICS codes represent 20 unique
industries)? Is it more burdensome to provide more detail, or does
aggregation to broader industry categories create additional burden?
183. We propose to modify the instructions to require that
investments be categorized based on concentration of risk and economic
exposure. Should we add instructions or guidance for currency crosses
or dollar denominated non-U.S. sovereign debt? Furthermore, current
Question 77 (for private equity funds) also uses NAICS codes for
reporting industry exposure. Should we use Global Industry
Classification Standard (GICS) codes or another classification
standard? Finally, how should ETFs and other exchange traded products
be reported in this question? Are these financial instruments typically
coded to industry sector? If not, what alternatives do you suggest and
why?
184. We propose to require advisers, when responding to proposed
Question 35 and proposed Question 36 to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other funds or
entities). Is this appropriate? If not, why? Would this be overly
burdensome for advisers?
Central clearing counterparty (CCP) reporting. We propose to
require advisers to identify each CCP or other third party holding
collateral posted by a qualifying hedge fund in respect of cleared
exposures (including tri-party repo) equal to or exceeding either (1)
five percent of a reporting fund's net asset value or (2) $1
billion.\221\ The proposed new question would exclude counterparties
already reported in proposed Question 42 and proposed Question 43,\222\
and require advisers to provide information on: (1) the legal name of
the CCP or third party; (2) LEI (if available); (3) whether the CCP or
third party is affiliated with a major financial institution; (4) the
reporting fund's posted margin (in U.S. dollars); and (5) the reporting
fund's net exposure (in U.S. dollars). We are proposing this new
question based on our experience with Form PF since adoption as we have
found data gaps with respect to identifying qualifying hedge fund
exposures to CCPs and other third parties that hold collateral in
connection with cleared exposures. Furthermore, we understand that (1)
many large hedge fund advisers already track margin posted for cleared
exposures because margin requirements at any given time may well exceed
the clearinghouse's exposure to a fund and therefore are an important
credit risk exposure metric for a fund, and (2) that CCP recovery,
resiliency and resolution also are current concerns for some
advisers.\223\ Given these factors, we
[[Page 53868]]
believe that the burden of this proposed new question would be
justified by valuable insight the data obtained would provide into an
area that could have significant implications from a systemic risk
perspective. Additionally, we have chosen a reporting threshold of
equal to or exceeding either (1) five percent of net asset value or (2)
$1 billion to be consistent with the thresholds for other counterparty
exposure questions,\224\ as we believe that a qualifying hedge fund is
similarly exposed where a third party holds collateral irrespective of
whether the third party is a CCP or other counterparty. The proposal
would also remove current Question 39, which requires information about
transactions cleared directly through a CCP, as the information
collected is duplicative of information already collected in current
Question 24. We request comment on the proposed addition of new
Question 44.
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\221\ Proposed Question 44.
\222\ See discussion at Section II.C.2.b of this Release.
\223\ See ``A Path Forward For CCP Resilience, Recovery, And
Resolution,'' March 10, 2020 available at https://www.blackrock.com/corporate/literature/whitepaper/path-forward-for-ccp-resilience-recovery-and-resolution.pdf. See also J.P. Morgan Press Release,
March 10, 2020, available at https://www.jpmorgan.com/solutions/cib/markets/a-path-forward-for-ccp-resilience-recovery-and-resolution.
\224\ See discussion at Section II.C.2.b of this Release.
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185. Should we collect information about the exposure of qualifying
hedge funds to CCPs and other third parties holding collateral in
respect of cleared exposures? If so, what information should be
collected on these exposures? Does the proposed question collect
helpful information? Should we collect different information, more
information or less information? Is the proposed reported threshold of
equal to or exceeding either (1) five percent of a reporting fund's net
asset value or (2) $1 billion appropriate? If not, how should the
threshold be modified?
186. Do you agree that many large hedge fund advisers already track
margin posted for cleared exposures because margin requirements at any
given time may well exceed the clearinghouse's exposure to a fund and
therefore are an important credit risk exposure metric for a fund?
Additionally, do you agree that CCP recovery, resiliency, and
resolution also are current concerns for some advisers?
Risk metrics. We propose to eliminate the requirement that an
adviser indicate whether there are risk metrics other than, or in
addition to, Value at Risk (``VaR'') that the adviser considers
important to managing a reporting fund's risks.\225\ Advisers generally
do not report detailed information in response to this requirement.
Currently, about 60 percent of advisers to qualifying hedge funds
(representing about 75 percent of the aggregate gross asset value of
qualifying hedge funds) report using VaR or market factor changes in
managing their hedge funds.\226\ Instead, we propose to require
advisers to provide additional information about a reporting fund's
portfolio risk profile, including reporting on portfolio correlation,
investment performance by strategy and volatility of returns and
drawdowns.\227\ The proposal would expand the amount of data collected
by collecting risk data in circumstances where advisers do not use VaR
or market factor changes, and thus provide insight across all (rather
than only some) qualifying hedge funds. This new information would
provide uniform and consistently reported risk information that will
enhance our ability to monitor and assess investment risks of
qualifying hedge funds to gauge systemic risk. In particular,
volatility of returns and drawdown data is a simple measure of risk
that enables us to monitor risk-adjusted returns, changes in volatility
and thereby risk profiles.
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\225\ See current Question 41.
\226\ See Private Funds Statistics Q2 2020 (Table 58/59).
Current Question 40 requires advisers to report certain risk data if
the adviser regularly calculates VaR of the reporting fund. Current
Question 42 requires advisers, for specific market factors, to
determine the effect of specified changes on a reporting fund's
portfolio, but permits advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with a reporting fund's risk management.
\227\ See Proposed Question 48 (portfolio correlation), proposed
Question 49 (investment performance breakdown by strategy), and
proposed Question 23(c) (volatility of returns and drawdown
reporting). See discussion at Section II.B.2 of this Release. We
propose to also revise the title of Item C. of current section 2b to
``Reporting fund risk metrics and performance'' to reflect that the
proposal would add new questions on performance to this section of
the form.
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We request comment on the proposed removal of Question 41.
187. Do you agree with the proposed removal of Question 41?
Instead, should we change this question to make it easier for advisers
to report more detailed information? Do you believe that new Questions
48, 49 and 23(c) will provide better information about the risk
profiles of qualifying hedge funds?
Investment performance by strategy. The proposal would require
advisers to qualifying hedge funds that indicate more than one
investment strategy for a fund in proposed Question 25 to report
monthly gross investment performance by strategy if the adviser
calculates and reports this data for such fund, whether to current and
prospective investors, counterparties, or otherwise.\228\ An adviser
would be required to provide monthly performance results only if such
results are calculated for a reporting fund (whether for purposes of
reporting to current and prospective investors, counterparties, or
otherwise), but would not be required to respond to this question if
the adviser reports performance for the fund as an internal rate of
return. This question is designed to integrate Form PF hedge fund data
with the Federal Reserve Board's reporting on Financial Accounts of the
United States, which the Federal Reserve uses to track the sources and
uses of funds by sector, and which are a component of a system of
macroeconomic accounts including the National Income and Product
accounts and balance of payments accounts, all of which serve as a
comprehensive set of information on the economy's performance. We also
believe that this information could be helpful to the Commissions' and
FSOC's monitoring and analysis of strategy-specific systemic risk in
the hedge fund industry. We request comment on the proposed addition of
new Question 49.
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\228\ Proposed Question 49. The strategies in proposed Question
49 would be based on the strategies set forth in proposed Question
25 (the proposal would also revise the strategy categories in
current Question 20, which we would redesignate as Question 25, to
better reflect our understanding of hedge fund strategies and to
improve data quality and comparability). See discussion at Section
II.B.3 of this Release.
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188. Do you agree with the addition of new Question 49 as proposed?
If not, what alternatives would you suggest and why? Would responding
to this question be burdensome? If it would be overly burdensome, how
would you suggest we modify the proposal?
Portfolio correlation. The proposal would add a new question on
portfolio correlation to collect data on the effects of a breakdown in
correlation.\229\ Based on feedback from advisers filing Form PF and
data reported on Form PF, it appears that hedge funds using the most
leverage tend to engage in long/short, relative value, and similar
strategies that seek to pair trades in highly correlated instruments,
possibly with a focus on factor models. For these hedge funds, VaR
calculations that rely on static correlation matrices may not factor in
periods of market turmoil when assumed correlations break down.
Therefore, a breakdown in assumed correlations could cause these funds
to de-lever and could have a significant impact on financial stability,
particularly if there are ``crowded'' or overlapping positions across
funds, which could lead to cascade effects. We recommend a new question
that gathers data on the effects of a breakdown in assumed correlations
rather than just historical correlations. The proposed new question
would focus on assessing the risks associated with a correlation
breakdown, and would require qualifying hedge funds to report for
[[Page 53869]]
their portfolios (as of the end of each month of the reporting period)
(1) the average pairwise 3-month realized prior Pearson correlation of
each portfolio position's periodic (e.g., daily or weekly) total rates
of return using the greatest available frequency of data over the
measurement window (e.g., daily or weekly), (2) the frequency of the
data used over the prior 3-month window (e.g., daily or weekly) (3) the
expected annualized volatility utilizing 3-month realized prior Pearson
correlations of each portfolio position's periodic (e.g., daily or
weekly) total rates of return and assuming realized prior volatilities
of portfolio positions with the same frequency window as that chosen
when computing 3-month realized correlations, and (4) what the
resulting annualized volatility would be if a reporting fund uniformly
reduced or increased pairwise correlations by 20 percentage points
utilizing 3-month realized prior Pearson correlations of portfolio
positions' periodic rates of return and assuming 3-month realized prior
volatilities of portfolio positions' periodic rates of return with the
same frequency window as that chosen when computing 3-month realized
correlations. This question is designed to (1) isolate the impact of a
breakdown in correlation on the volatility of long/short funds that may
de-lever if there is an increase in their volatility, (2) avoid some of
the pitfalls of VaR models such as relying on backwards looking
assumptions on the relationship between securities, and (3) provide a
measure of volatility sensitivity in addition to one-day VaR. We
believe that this new question would not create a significant burden
for advisers because portfolio positions' periodic total rates of
return and corresponding correlation matrices are likely available for
most qualifying hedge funds. We request comment on the proposed
addition of new Question 48.
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\229\ Proposed Question 48.
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189. Are the effects of a breakdown in correlations useful for
monitoring systemic risk? Would this question provide helpful
information for purposes of comparing fund activities and assessing
risk? Does it offer insight into funds with a range of strategies or is
it useful for only some strategies? What other questions could isolate
the effects of a breakdown in correlations? Will it be burdensome for
advisers to qualifying hedge funds to respond to this question and, if
so, what burdens will be imposed? Are total rates of return and
corresponding correlation matrices readily available for most
qualifying hedge funds? If not, what strategies would have the most
difficulty completing this question? Are there less burdensome
questions that could help isolate the effects of a breakdown in
correlations?
190. As an alternative or in addition to measuring sensitivity to
correlation, would any of the following approaches be preferable to our
proposal: (1) subtract aggregate portfolio VaR from the sum of VaR
computed at the asset class level, or some other sub-portfolio level,
to measure the impact of diversification and the sensitivity to
correlation, or (2) combine single factor stress tests for the
portfolio assuming zero correlation?
191. As proposed, would responding to new Question 48 create an
undue burden for advisers? If so, how should we modify the question to
make it less burdensome for respondents? Does the flexibility embedded
in the proposed question (i.e., the flexibility for a fund to choose
its own frequency of position marks (be it daily, weekly, monthly))
make it easier for funds to respond?
192. Is the proposed 20 percentage point sensitivity metric
appropriate? If not, what alternative do you suggest?
Portfolio Liquidity. We propose to require advisers to include cash
and cash equivalents when reporting portfolio liquidity, rather than
excluding them, as the question currently provides.\230\ We understand
that reporting funds typically include cash and cash equivalents when
analyzing their portfolio liquidity. We believe the proposed change
would improve data quality by reducing inadvertent errors that result
from requiring advisers to report in a way that is different from how
they may report internally. We believe this proposed change is more
reflective of industry practice, and it is preferable to receive
reported data in a format that reflects how advisers typically analyze
portfolio liquidity.
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\230\ See current Question 32 and proposed Question 37.
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We also propose to amend the form's instructions to allow advisers
to assign each investment to more than one period, rather than
directing advisers to assign each investment to only one period, as
Question 32 currently provides. We understand that directing advisers
to assign an investment to only one period may make a reporting fund's
portfolio appear less liquid than it is because it would not reflect
that reporting funds may divide up sales in different periods (e.g., a
reporting fund could sell off a portion in the first time period, and
sell of the remainder in subsequent time periods). Therefore, this
proposed change is designed to reflect the liquidity of a reporting
fund's portfolio more accurately.
While advisers would continue to be able to rely on their own
methodologies to report portfolio liquidity, we propose to add an
instruction explaining that estimates must be based on a methodology
that takes into account changes in portfolio composition, position
size, and market conditions over time. Based on experience with the
form, we have found that some advisers have used static methodologies
that do not consider portfolio composition and position size relative
to the market, and therefore do not reflect a reasoned view about when
positions could be liquidated at or near carrying value. Therefore,
this proposed change is designed to continue to allow advisers to use
their own methodologies, but improve data quality to ensure that the
methodologies generate reporting that reflects a reasonable view of
portfolio liquidity in light of changes in portfolio composition and
size, and market conditions, over time.
Finally, to facilitate more accurate reporting, collect better
data, and reduce filer errors, we propose to amend the table to be
included in proposed Question 37 to reflect that information should be
reported as a percentage of NAV consistent with SEC staff Form PF
Frequently Asked Questions.\231\
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\231\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 32.3.
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We request comment on the proposed amendments.
193. Should proposed Question 37's portfolio liquidity requirements
include cash and cash equivalents, as proposed, regardless of what
types of advisers would complete it? Would this proposed amendment help
the Commissions and FSOC better analyze portfolio liquidity? Would this
proposed change make Form PF more consistent with how the industry
analyzes portfolio liquidity? Is there a better way to meet these
objectives? For example, should Form PF instead require advisers to
report cash and cash equivalents for all reporting funds separately
than other positions when reporting portfolio liquidity?
194. Do you agree that reporting funds typically include cash and
cash equivalents when analyzing their portfolio's liquidity?
195. Should Form PF allow advisers to assign investments to more
than one period, as proposed? Would this proposed change more
accurately reflect the liquidity of a reporting fund's portfolio?
196. Should Form PF continue to allow advisers to rely on their own
[[Page 53870]]
methodologies in reporting on portfolio liquidity?
197. Should Form PF include an instruction that provides that
estimates must be based on a methodology that takes into account
changes in portfolio composition, position size, and market conditions
over time, as proposed? Would this proposed change improve data
quality? Is there a better way to achieve this objective? If we add the
instruction to this question, in particular, would it suggest that the
instruction would not apply to other liquidity analysis, or other
portfolio metrics?
198. As an alternative, should Form PF require all advisers to
report portfolio liquidity for all reporting funds?
199. Should Form PF change how advisers report portfolio liquidity
in any other ways? For example, should we require advisers to report
information in dollars, in addition to or instead of reporting as a
percentage of the portfolio, as Form PF currently requires? Would such
a requirement help the Commissions and FSOC to compare portfolio
liquidity with other data on Form PF that advisers report in dollars?
Financing Liquidity. Question 46 is designed to show the extent to
which financing may become rapidly unavailable for qualifying hedge
funds.\232\ We propose to amend current Question 46 to improve data
quality thereby supporting more effective systemic risk analysis.\233\
Advisers would provide the dollar amount of financing that is available
to the reporting fund, including financing that is available but not
used, by the following types: (1) ``unsecured borrowing,'' (2)
``secured borrowing'' via prime brokerage, (3) secured borrowing via
reverse repo, and (4) other secured borrowings.\234\ Currently, the
Commissions and FSOC infer this data from this question and current
Question 43 (concerning the reporting fund's borrowings).\235\ However,
these inferences may not be accurate given the number of assumptions
that currently go into making such inferences. This proposed
information would help us understand the extent to which a fund's
financing could be rapidly withdrawn and not replaced.
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\232\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying n.281.
\233\ We would redesignate Question 46 as Question 50.
\234\ Form PF defines ``unsecured borrowing'' as obligations for
borrowed money in respect of which the borrower has not posted
collateral or other credit support. Form PF defines ``secured
borrowing'' as obligations for borrowed money in respect of which
the borrower has posted collateral or other credit support. For
purposes of this definition, reverse repos are secured borrowings.
See Form PF Glossary of Terms. These categories are designed to be
consistent with borrowing categories that qualifying hedge funds
would report on the new counterparty exposure table.
\235\ Current Question 43 collects data on the reporting fund's
borrowing by type (e.g., unsecured, and secured by type, i.e., prime
broker, reverse repo or other), while current Question 46 only
collects a total amount of financing available, both used and
unused, with no breakdown by type of financing.
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We request comment on the proposed amendments.
200. Should Form PF require advisers to report the amount of
financing that is available to the reporting fund but not used, as a
dollar amount, as proposed? Alternatively, should Form PF require
advisers to report this information in a different way? For example,
should Form PF require advisers to report the amount of financing that
is available to the reporting fund but not used, as a percentage of
total financing? Would it be more or less burdensome for advisers to
report this information as a dollar amount than as a percentage of
total financing? Please provide supportive data.
201. As an alternative, should Form PF require all advisers to
report financing liquidity for any size hedge funds they advise? If so,
why?
D. Proposed Amendments To Enhance Data Quality
We are also proposing several amendments to the instructions to
Form PF to enhance data quality.\236\ Specifically, we are proposing
the following changes:
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\236\ Proposed Instruction 15 (provides guidelines for advisers
in responding to questions on Form PF relying on their own
methodology).
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Reporting of percentages. For questions that require information to
be expressed as a percentage, we propose to require that percentages be
rounded to the nearest one hundredth of one percent rather than rounded
to the nearest whole percent. We believe that this additional level of
precision is important, especially for questions where it is common for
filers to report low percentage values (e.g., risk metric questions
such as current Question 40 and current Question 42) to avoid
situations where advisers round to zero and no data is reported,
potentially obscuring small changes that may be meaningful from a risk
analysis or stress testing perspective.
Value of investment positions and counterparty exposures. We
propose to specify how private fund advisers determine the value of
investment positions (including derivatives) and counterparty
exposures. The proposed changes are designed to provide a more
consistent presentation of reported information on investment and
counterparty exposures to support more accurate aggregation and
comparisons among private funds by us and FSOC in assessing systemic
risk. Under the form's current instructions, advisers may report
portfolios with similar exposures differently.\237\ We understand that
some advisers net legs of partially offsetting trades when calculating
the value of derivatives positions in accordance with internal
methodologies, but others do not, resulting in inconsistent reporting
that may obscure a fund's risk profile. We propose to require these
trades to be reported independently on a gross basis, consistent with
derivatives reporting on Form N-PORT.\238\ We also propose to instruct
advisers that for all positions reported on Form PF, advisers should
not include as ``closed-out'' a position if the position is closed out
with the same counterparty and results in no credit or market exposure
to the fund, making the approach on Form PF with respect to closed out
positions consistent with rule 18f-4 of the Investment Company Act and
our understanding of filers' current practices.\239\
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\237\ See Form PF: General Instruction 15.
\238\ Specifically, proposed Instruction 15 requires that if a
question in Form PF requests information regarding a ``position'' or
``positions,'' advisers must treat legs of a transaction even if
offsetting or partially offsetting, or even if entered into with the
same counterparty under the same master agreement as two separate
positions, even if reported internally as part of a larger
transaction. See also instructions to N-PORT, General Instruction G.
\239\ See Use of Derivatives by Registered Investment Companies
and Business Development Companies, IC Release No. 34084 (Nov. 2,
2020), Section II.E.2.c. [85 FR 83162, 83210] Dec. 21, 2020. See
also Form PF Frequently Asked Questions, supra footnote 79, Question
44.1.
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Reporting of long and short positions. We propose to amend the
instructions regarding the reporting of long and short positions on
Form PF to improve the accuracy and consistency of reported data used
for systemic risk analysis. We propose to specify that if a question
requires the adviser to distinguish long positions from short
positions, the adviser should classify positions based on the
following: (1) a long position experiences a gain when the value of the
market factor to which it relates increases (and/or the yield of that
factor decreases), and (2) a short position experiences a loss when the
value of the market factor to which it relates increases (and/or the
yield of that factor decreases).
Calculating certain derivative values. We propose to amend the
instruction to provide that, (1) for calculating the value of interest
rate derivatives, ``value'' means the 10-year bond
[[Page 53871]]
equivalent, and (2) for calculating the value of options, ``value''
means the delta adjusted notional value (expressed as a 10-year bond
equivalent for options that are interest rate derivatives).\240\ The
amended instruction would also provide that in determining the value of
these derivatives, advisers should not net long and short positions or
offset trades, but should exclude closed-out positions that are closed
out with the same counterparty provided that there is no credit or
market exposure to the fund. The proposed amendments are designed to
provide more consistent reporting by advisers, which we believe would
help support more accurate aggregation of data, better comparisons
among funds, and a more accurate picture for purposes of assessing
systemic risk.\241\
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\240\ See Form PF Glossary of Terms (proposed definition of
``10-year bond equivalent'' specifies the zero coupon bond
equivalent).
\241\ This is consistent with prior staff positions. See Form PF
Frequently Asked Questions, supra footnote 79, Questions 24.3 and
26.1.
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Currency Conversions for Reporting in U.S. Dollars. We propose to
amend Instruction 15 to clarify that if a question requests a monetary
value, advisers should provide the information in U.S. dollars as of
the data reporting date or other requested date (as applicable) and use
a foreign exchange rate for the applicable date. We also propose to
amend Instruction 15 to provide that if a question requests a monetary
value for transactional data that covers a reporting period, advisers
should provide the information in U.S. dollars, rounded to the nearest
thousand, using foreign exchange rates as of the dates of any
transactions to convert local currency values to U.S. dollars.\242\
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\242\ See proposed Instruction 15.
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We request comment on the proposed amendments to Instruction 15.
202. Should we require reporting of ``gross'' positions and
exposure as proposed? Would the proposed approach cause advisers to
report misleading data? Would the proposed approach cause compliance or
operational issues? What other approach could we take to obtain
consistent data that would better reveal risks associated with a
particular fund? We understand that most advisers' risk management
systems incorporate offsetting or netting methods, but they may take
different approaches. Should we permit advisers to report using the
offsetting or netting methods they use internally? Would that provide
useful data? Should we instead require advisers to offset and net based
on a consistent, prescribed method?
203. The proposal would instruct advisers to not include as
``closed-out'' a position if the position is closed out with the same
counterparty and results in no credit or market exposure to the fund.
Do you agree that the proposed changes would make the approach on Form
PF with respect to closed out positions consistent with rule 18f-4 of
the Investment Company Act and filers' current practices? If not, what
alternative approach do you suggest?
204. Should we capture derivative exposure differently or request
additional measures of derivatives? For example, the CFTC's Form CPO-
PQR requires reporting of positive/negative open trade equity (OTE),
which refers to the amount of unrealized gain/loss on open derivative
positions. Would this measure improve our ability to assess and compare
private fund activities and assess systemic risk?
205. Does reporting to the nearest one hundredth of one percent
involve additional burdens compared to the current requirement to round
to the nearest one percent? Would it meaningfully increase the accuracy
of the reporting? Would permitting rounding to the nearest one percent
on any of the questions on Form PF that request information expressed
as a percentage reduce burdens on filers?
206. Are the proposed instructions with respect to classifying long
and short positions consistent with industry conventions? Are these
instructions clear for different types of products? If not, how should
they be modified? For example, are there any elements of the
Alternative Investment Fund Managers Directive or Open Protocol
Enabling Risk Aggregation that would be helpful to incorporate?
207. The proposal would require that advisers report two or more
legs of a transaction--even if offsetting--as separate positions. This
proposed amendment is designed to elicit a more consistent presentation
of investment and counterparty exposures. We understand, however, that
this approach may inflate the value of a reporting fund's long and
short investment exposures in a way that does not represent the
adviser's view of a reporting fund's investment exposures and the
associated risks. Is this a valid concern? Are there other approaches
we should use for investment exposure reporting? For example, should we
require netting of long and short positions under certain conditions
(e.g., identical underlying securities and same counterparty) when
consistent with the adviser's internal recordkeeping and risk
management? Should we require advisers to report exposures on both a
``gross'' basis as well as after all netting consistent with the
adviser's internal recordkeeping and risk management?
208. The proposal would amend the instruction to provide that, (1)
for calculating the value of interest rate derivatives, ``value'' means
the 10-year bond equivalent, and (2) for calculating the value of
options, ``value'' means the delta adjusted notional value (expressed
as a 10-year bond equivalent for options that are interest rate
derivatives). Is this approach appropriate? If not, what alternatives
do you suggest?
209. Are the proposed instructions with respect to reporting in
U.S. dollars when a question requests a monetary value appropriate? If
not, how should they be modified? If a reporting fund's base currency
is not U.S. dollars, how and when do advisers convert the base currency
to U.S. dollars? Should Form PF include additional instructions on how
or when to convert base currency to U.S. dollars? For example, should
Form PF require advisers to report the conversion rate? Is further
specificity needed regarding return series, volatility and other
percentage measures for funds that have base currencies other than the
U.S. dollar?
E. Proposed Additional Amendments
The proposal would make several additional amendments to the
general instructions to Form PF. Specifically, we propose to amend
Instruction 14 to allow advisers to request a hardship exemption
electronically to make it easier to submit a temporary hardship
exemption,\243\ and provide, by way of an amendment to rule 204(b)-1(f)
under the Advisers Act, that for purposes of determining the date on
which a temporary hardship exemption is filed, ``filed'' means the
earlier of the date the request is postmarked or the date it is
received by the Commission.\244\ We are
[[Page 53872]]
proposing the latter change to assist advisers with determining what
constitutes a ``filed'' temporary hardship exemption in the context of
the requirement that the request be filed no later than one business
day after a filer's electronic Form PF filing was due as required under
Instruction 14. Additionally, the proposal would amend Instruction 18
based on recent rule changes made by the CFTC with respect to Form CPO-
PQR.\245\ While the CFTC no longer considers Form PF reporting on
commodity pools as constituting substituted compliance with CFTC
reporting requirements, some CPOs may continue to report such
information on Form PF.
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\243\ The proposal would also update the mailing address to
which advisers requesting a temporary hardship exemption should mail
their exemption filing, include the email address for submitting
electronically the adviser's signed exemption filing in PDF format,
add an instruction noting that filers should not complete or file
any other sections of Form PF if they are filing a temporary
hardship exemption. See Proposed Instruction 14. The proposal would
indicate that the reference regarding the instruction pertaining to
temporary hardship exemptions should refer to Instruction 14 instead
of Instruction 13. See Form PF General Instruction 3, Section 5--
Advisers requesting a temporary hardship exemption.
\244\ We are also amending rule 204(b)-1(f) under the Advisers
Act to remove certain filing instructions in the rule for temporary
hardship exemptions and instead direct filers to the instructions in
the form. See 204(b)-1(f)(2)(i) (indicating that advisers should
complete and file Form PF in accordance with the instructions to
Form PF, no later than one business day after the electronic Form PF
filing was due).
\245\ See Form CPO-PQR Release, supra footnote 56.
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The proposal would revise the terms ``EEA,'' which Form PF defines
as the European Economic Area and ``G10,'' which Form PF defines as The
Group of Ten, to (1) remove outdated country compositions and (2)
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF if adopted, advisers would use the current composition as of the
data reporting date. This proposed amendment is designed to address
questions from advisers about whether to report data based on the
composition of the EEA and G10 as of the effective date of these
proposed amendments to Form PF if adopted, or the current composition
of the EEA and G10, if it changes.
We request comment on the proposed amendments.
210. Would the proposed amendments to Instruction 14 and to rule
204(b)-1(f) under the Advisers Act make it easier to submit a temporary
hardship exemption and assist advisers in determining the date on which
a temporary hardship exemption is filed? If not, are there
alternatives?
211. Would the proposed amendments to the Glossary of Terms
appropriately update the terms and provide clarification? Is there a
better way to meet these objectives? If so, please provide examples.
212. The proposal would amend Instruction 18 based on recent rule
changes made by the CFTC with respect to Form CPO-PQR. Is this proposed
change appropriate?
213. The proposal would remove the list of country compositions and
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF (if adopted), advisers would use the current composition as of the
data reporting date. Is this approach appropriate? If not, what
alternative approach do you suggest?
III. Economic Analysis
A. Introduction
The SEC is mindful of the economic effects, including the costs and
benefits, of the proposed amendments. Section 202(c) of the Advisers
Act provides that when the SEC is engaging in rulemaking under the
Advisers Act and is required to consider or determine whether an action
is necessary or appropriate in the public interest, the SEC shall also
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors.\246\ The
analysis below addresses the likely economic effects of the proposed
amendments, including the anticipated and estimated benefits and costs
of the amendments and their likely effects on efficiency, competition,
and capital formation. The SEC also discusses the potential economic
effects of certain alternatives to the approaches taken in this
proposal.
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\246\ 15 U.S.C. 80b-2(c).
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Many of the benefits and costs discussed below are difficult to
quantify. For example, the SEC cannot quantify the effects of how
regulators may adjust their policies and oversight of the private fund
industry in response to the additional data collected under the
proposed rule. Also, in some cases, data needed to quantify these
economic effects are not currently available and the SEC does not have
information or data that would allow such quantification. For example,
costs associated with the proposal may depend on existing systems and
levels of technological expertise within the private fund advisers,
which could differ across reporting persons. While the SEC has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The SEC seeks
comment on all aspects of the economic analysis, especially any data or
information that would enable a quantification of the proposal's
economic effects.
B. Economic Baseline and Affected Parties
1. Economic Baseline
As discussed above, the Commissions adopted Form PF in 2011, with
additional amendments made to section 3 along with certain money market
reforms in 2014.\247\ Form PF complements the basic information about
private fund advisers and funds reported on Form ADV.\248\ Unlike Form
ADV, Form PF is not an investor-facing disclosure form. Information
that private fund advisers report on Form PF is provided to regulators
on a confidential basis and is nonpublic.\249\ The purpose of Form PF
is to provide the Commissions and FSOC with data that regulators can
deploy in their regulatory and oversight programs directed at assessing
and managing systemic risk and protecting investors.\250\
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\247\ See supra footnote 3. When the SEC adopted the amendments
to section 3 in 2014 in connection with certain money market
reforms, it noted that under the proposal it was concerned that some
of the proposed money market reforms could result in assets shifting
from registered money market funds to unregistered products such as
liquidity funds, and that the proposed amendments were designed to
help the SEC and FSOC track any potential shift in assets and better
understand the risks associated with the proposed money market
reforms. See, e.g., D. Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators (DERA White Paper Jan. 2017)
(``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf; 2011 Form PF Adopting Release; 2014
Form PF Amending Release at 466; Commissioner Aguilar Statement,
July 23, 2014, available at https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statment-laa.
\248\ Investment advisers to private funds report on Form ADV,
on a public basis, general information about private funds that they
advise, including basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://adviserinfo.sec.gov/.
\249\ As discussed above, SEC staff publish quarterly reports of
aggregated and anonymized data regarding private funds on the SEC's
website. See supra footnote 7; see also Private Fund Statistics Q3
2021
\250\ See supra section I.
---------------------------------------------------------------------------
Private funds and their advisers play an important role in both
private and public capital markets. These funds, including hedge funds,
currently have more than $18.0 trillion in gross private fund
assets.\251\ Hedge funds in particular have more than $9.7 trillion in
gross private fund assets.\252\ Private funds invest in large and small
businesses and use strategies that range from long-term investments in
equity
[[Page 53873]]
securities to frequent trading and investments in complex instruments.
Their investors include individuals, institutions, governmental and
private pension funds, and non-profit organizations.
---------------------------------------------------------------------------
\251\ These estimates are based on staff review of data from the
Private Fund Statistics report for the third quarter of 2021, issued
in March 2022. Private fund advisers who file Form PF currently have
$18.1 trillion in gross assets. See Private Fund Statistics Q3 2021.
\252\ See Division of Investment Management, Private Fund
Statistics, (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
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Before Form PF was adopted, the SEC and other regulators, including
the CFTC, had limited visibility into the economic activity of private
fund advisers and relied largely on private vendor databases about
private funds that covered only voluntarily provided private fund data
and did not represent the total population.\253\ Form PF represented an
improvement in available data about private funds, both in terms of its
reliability and completeness.\254\ Generally, investment advisers
registered (or required to be registered) with the Commission with at
least $150 million in private fund assets under management must file
Form PF. Smaller private fund advisers and all private equity fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors.\255\ In addition, large private
equity advisers provide data about each private equity fund they
manage. Large hedge fund and liquidity fund advisers also provide data
about each reporting fund they manage, and are required to file
quarterly.\256\
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\253\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\254\ Id.
\255\ Id.
\256\ Id.
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The SEC and other regulators now have almost a decade of experience
with analyzing the data collected on Form PF. The collected data has
helped FSOC establish a baseline picture of the private fund industry
for the use in assessing systemic risk \257\ and improved the SEC's
oversight of private fund advisers.\258\ Form PF data also has enhanced
the SEC's and FSOC's ability to frame regulatory policies regarding the
private fund industry, its advisers, and the markets in which they
participate, as well as more effectively evaluate the outcomes of
regulatory policies and programs directed at this sector, including the
management of systemic risk and the protection of investors.\259\
Additionally, based on the data collected through Form PF filings,
regulators have been able to regularly inform the public about ongoing
private fund industry statistics and trends by generating quarterly
Private Fund Statistics reports \260\ and by making publicly available
certain results of staff research regarding the characteristics,
activities, and risks of private funds.\261\ As discussed above, these
data may also be used by the CFTC for the purposes of its regulatory
programs, including examinations, investigations and investor
protection efforts.\262\
---------------------------------------------------------------------------
\257\ See, e.g., OFR, 2021 Annual Report to Congress (Nov.
2021), available at https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf; Financial Stability
Oversight Council, 2020 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
\258\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\259\ See supra footnotes 257, 258.
\260\ See supra footnote 249.
\261\ See, e.g., David C. Johnson and Francis A. Martinez, Form
PF Insights on Private Equity Funds and Their Portfolio Companies
(OFR Brief Series No. 18-01, June 14, 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; Hiltgen Paper; G. Aragon, T. Ergun, M.
Getmansky, and G. Girardi, Hedge Funds: Portfolio, Investor, and
Financing Liquidity, (DERA White Paper, May 2017), available at
https://www.sec.gov/files/dera_hf-liquidity.pdf; George Aragon,
Tolga Ergun, and Giulio Girardi, Hedge Fund Liquidity Management:
Insights for Fund Performance and Systemic Risk Oversight (DERA
White Paper, Apr. 2021), available at https://www.sec.gov/files/dera_hf-liquidity-management.pdf; Mathis S. Kruttli, Phillip J.
Monin, and Sumudu W. Watugala, The Life of the Counterparty: Shock
Propagation in Hedge Fund-Prime Broker Credit Networks (OFR Working
Paper No. 19-03, Oct., 2019), available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-03_the-life-of-the-counterparty.pdf; Mathias S. Kruttli, Phillip J. Monin,
Lubomir Petrasek, and Sumudu W. Watugala, Hedge Fund Treasury
Trading and Funding Fragility: Evidence from the COVID-19 Crisis
(Federal Reserve Board, Finance and Economics Discussion Series No.
2021-038, Apr. 2021), available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; Mathias S. Kruttli, Phillip
J. Monin, and Sumudu W. Watugala, Investor Concentration, Flows, and
Cash Holdings: Evidence from Hedge Funds (Federal Reserve Board,
Finance and Economics Discussion Series No. 2017-121 Dec. 15, 2017),
available at https://www.federalreserve.gov/econres/feds/investor-concentration-flows-and-cash-holdings-evidence-from-hedge-funds.htm.
\262\ See supra section I.
---------------------------------------------------------------------------
However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where more granular and
timely information would improve the SEC's and FSOC's understanding of
the private fund industry and the potential systemic risk relating to
its activities, and improve regulators' ability to protect
investors.\263\ For example, as discussed above, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S treasury market.\264\ Also during the COVID-19 market turmoil, FSOC
sought to evaluate the role hedge funds played in disruptions in the
U.S. treasury market by unwinding cash-futures basis trade positions
and taking advantage of the near-arbitrage between cash and futures
prices of U.S. treasury securities. Because the existing requirement
regarding turnover reporting on U.S. treasury securities is highly
aggregated, the SEC staff, during retrospective analyses on the March
2020 market events, was unable to obtain a complete picture of activity
relating to long treasuries and treasury futures.\265\ The need for
more granular and timely information collected on Form PF is further
heightened by the increasing significance of the private fund industry
to financial markets, and resulting regulatory concerns regarding
potential risks to U.S. financial stability from this sector.\266\ The
SEC's and FSOC's experiences analyzing Form PF data has also identified
certain areas of Form PF where questions result in data received that
is redundant to other questions, or instructions that result in
unnecessary reporting burden for some advisers.\267\
---------------------------------------------------------------------------
\263\ See supra section I.
\264\ See supra section II.C.2.a.
\265\ See supra section II.C.2.d. This also includes the SEC's
and FSOC's experience analyzing data from multiple regulatory
filings. For example, one SEC staff paper has used Form PF data and
Form N-MPF data to study rule 2a-7 risk limits and implications of
money market reforms. See, e.g., Hiltgen Paper.
\266\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. See supra footnote 7. See also
Financial Stability Oversight Council Update on Review of Asset
Management Product and Activities (2014), available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
\267\ Based on the PRA analysis in section IV.A.3, the current
costs associated with filing Form PF report are estimated to be
$4,173.75 per quarterly filing or $16,695 annually for smaller
private fund advisers, $41,737.50 per quarterly filing or $166,950
annually for large hedge fund advisers, $19,477.50 per quarterly
filing or $77,910 annually for large liquidity fund advisers, and
$27,825 per quarterly filing or $111,300 annually for large private
equity advisers. The calculation for large liquidity fund advisers
incorporates the adjustment explained in footnote 9 to Table 6
(yielding an estimate of costs prior to the proposal of $29,216.25/
105*70 = $19477.50). See Table 6. A 2018 industry survey of large
hedge fund advisers observed filing costs that ranged from 35% to
72% higher than SEC cost estimates. See Managed Funds Association,
``A Streamlined Form PF: Reducing Regulatory Burden,'' September 17,
2018, p. 3, available at https://www.managedfunds.org/wp-content/uploads/2018/09/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf. However, a 2015
academic survey of SEC-registered investment advisers to private
funds affirmed the SEC's cost estimates for smaller private fund
advisers' Form PF compliance costs, and observed that the SEC
overestimated Form PF compliance costs for larger private fund
advisers. See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9 Brooklyn Journal of Corporate, Financial, and
Commercial Law 428 (2015).
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[[Page 53874]]
2. Affected Parties
The proposal amends the general instructions and basic information
reporting requirements facing all categories of private fund advisers.
As discussed above, these include, but are not limited to, advisers to
hedge funds, private equity funds, real estate funds, securitized asset
funds, liquidity funds, and venture capital funds.\268\ The proposal
further amends reporting requirements for large hedge fund advisers,
including specific revisions for large hedge fund advisers to
qualifying hedge funds.\269\
---------------------------------------------------------------------------
\268\ See supra section I.
\269\ Form PF currently defines ``hedge fund'' broadly to
include any private fund (other than a securitized asset fund) that
has any of the following three characteristics: (1) a performance
fee or allocation that takes into account unrealized gains, or (2) a
high leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notional
exposure in excess of twice its net asset value (including committed
capital)) or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary of Terms. ``Large'' hedge fund
advisers are those, collectively with their related persons, with at
least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter. Qualifying
hedge funds are hedge funds that have a net asset value
(individually or in combination with any feeder funds, parallel
funds and/or dependent parallel managed accounts) of at least $500
million as of the last day of any month in the fiscal quarter
immediately preceding the adviser's most recently completed fiscal
quarter. See supra section II.C.
---------------------------------------------------------------------------
Hedge funds, the focus of part of the proposal, are one of the
largest categories of private funds,\270\ and as such play an important
role in the U.S. financial system due to their ability to mobilize
large pools of capital, take economically important positions in a
market, and their extensive use of leverage, derivatives, complex
structured products, and short selling.\271\ While these features may
enable hedge funds to generate higher returns as compared to other
investment alternatives, the same features may also create spillover
effects in the event of losses (whether caused by their investment and
derivatives positions or use of leverage or both) that could lead to
significant stress or failure not just at the affected fund but also
across financial markets.\272\
---------------------------------------------------------------------------
\270\ See infra footnote 273.
\271\ See, e.g., Lloyd Dixon, Noreen Clancy, and Krishna B.
Kumar, Hedge Fund and Systemic Risk, RAND Corporation (2012); John
Kambhu, Til Schuermann, and Kevin Stiroh, Hedge Funds, Financial
Intermediation, and Systemic Risk, Federal Reserve Bank of New
York's Economic Policy Review (2007).
\272\ See supra footnotes 257, 266.
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In the third quarter of 2021, there were 9,484 hedge funds reported
on Form PF, managed by 1,758 advisers, with nearly $9.8 trillion in
gross assets under management, which represented approximately 54% of
assets reported by private fund advisers.\273\ Currently, hedge fund
advisers with between $150 million and $2 billion in regulatory assets
(that do not qualify as large hedge fund advisers) file Form PF
annually, in which they provide general information about funds they
advise such as the types of private funds advised, fund size, their use
of borrowings and derivatives, strategy, and types of investors. Large
hedge fund advisers (those with at least $1.5 billion in regulatory
assets under management attributable to hedge funds) \274\ file Form PF
quarterly, in which they provide data about each hedge fund they
managed during the reporting period (irrespective of the size of the
fund). Large hedge fund advisers must report more information on Form
PF about qualifying hedge funds (those with at least $500 million as of
the last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter) \275\ than other
hedge funds they manage during the reporting period. In the third
quarter of 2021, there were 2,013 qualifying hedge funds reported on
Form PF, managed by 592 advisers, with $8.3 trillion in gross assets
under management, which represented approximately 85 percent of the
reported hedge fund assets.\276\
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\273\ In the third quarter of 2021, hedge fund assets accounted
for 54 percent of the gross asset value (``GAV'') ($9.8/$18.1
trillion) and 42.5 percent of the net asset value (``NAV'') ($5.1/
$12.0 trillion) of all private funds reported on Form PF. Private
Fund Statistics Q3 2021 at p. 5.
\274\ See supra footnote 269.
\275\ Id.
\276\ In the third quarter of 2021, qualifying hedge fund assets
accounted for 85 percent of the GAV ($8.3/$9.8 trillion) and 82
percent of the NAV ($4.2/$5.1 trillion) of all hedge funds reported
on Form PF. Private Fund Statistics Q3 2021 at pp. 4-5.
---------------------------------------------------------------------------
Private equity funds are another large category of funds in the
private fund industry. In the third quarter of 2021, there were 15,835
private equity funds reported on Form PF, managed by 1,455 advisers,
with $4.8 trillion in gross assets under management, which represented
over one quarter of the reported gross assets in the private fund
industry.\277\ Many private equity funds focus on long-term returns by
investing in a private, non-publicly traded company or business--the
portfolio company--and engage actively in the management and direction
of that company or business in order to increase its value.\278\ Other
private equity funds may specialize in making minority investments in
fast-growing companies or startups.\279\
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\277\ In the third quarter of 2021, private equity assets
accounted for 26 percent of the GAV ($4.8/$18.1 trillion) and 35
percent of the NAV ($4.1/$12.0 trillion) of all private funds
reported on Form PF. Private Fund Statistics Q3 2021 at p. 5.
\278\ After purchasing controlling interests in portfolio
companies, private equity advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., Private Equity Funds, Securities and Exchange
Commission, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
\279\ Id.
---------------------------------------------------------------------------
For the remaining categories of funds (real estate funds,
securitized asset funds, liquidity funds, venture capital funds, and
other private funds), advisers required to file Form PF had, in the
third quarter of 2021, investment discretion over $3.5 trillion in
gross assets under management.\280\ These assets were managed by 1,442
fund advisers managing 12,019 funds.\281\
---------------------------------------------------------------------------
\280\ Private Fund Statistics Q3 2021 at p. 5.
\281\ Private Fund Statistics Q3 2021 at p. 4.
---------------------------------------------------------------------------
Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\282\ Private funds that rely on the exclusion from the
definition of ``investment company'' provided in Section 3(c)(7) of the
Investment Company Act are limited to investors that are also qualified
purchasers (as defined in section 2(a)(51) of the Investment Company
Act). Retail U.S. investors with exposure to private funds are
typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\283\ In the
third quarter of 2021, public pension plans had $1,586
[[Page 53875]]
billion invested in reporting private funds while private pension plans
had $1,263 billion invested in reporting private funds, making up 13.2
percent and 10.5 percent of the overall beneficial ownership in the
private equity industry, respectively.\284\ Private fund advisers have
also sought to be included in individual investors' retirement plans,
including their 401(k)s.\285\
---------------------------------------------------------------------------
\282\ See, e.g., Private Equity Funds, Securities and Exchange
Commission, (Investor.gov: Private Equity Funds), available at
https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity; Hedge
Funds, Securities and Exchange Commission (Investor.gov: Hedge
Funds), available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
\283\ See supra footnotes 251, 282.
\284\ Private Fund Statistics Q3 2021 at p. 15.
\285\ See, e.g., Dep't of Labor, Information Letter (June 3,
2020), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.
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C. Benefits and Costs
1. Benefits
The proposal is designed to facilitate two primary goals the SEC
sought to achieve with reporting on Form PF as articulated in the
original adopting release, namely: (1) facilitating FSOC's
understanding and monitoring of potential systemic risk relating to
activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the SEC's abilities
to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the SEC's efforts to protect investors
and maintain fair, orderly, and efficient markets.\286\
---------------------------------------------------------------------------
\286\ See supra section I. While the proposed amendments are
also designed to improve the usefulness of this data for the CFTC,
this economic analysis does not include the benefits associated with
enhancements to the CFTC's use of reporting on Form PF.
---------------------------------------------------------------------------
The SEC believes the proposal would accomplish these goals in three
key ways, each discussed in detail in the following sections. First,
the proposal would provide for solutions to potential reporting errors
and issues of data quality when analyzing Form PF filings across
advisers and when analyzing multiple different regulatory filings.
Higher quality data across different funds and across different
regulatory filings can allow the SEC and FSOC to develop an
understanding of one set of advisers and apply it to other advisers
more rapidly, or apply lessons from one financial market to other
financial markets. This can help the SEC and FSOC develop more
effective regulatory responses, and help the SEC protect investors by
identifying areas in need of outreach, examinations, and investigations
in response to potential systemic risks, conflicting arrangements
between advisers and investors, and other sources of investor harm.
Second, the proposal would help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry in terms of ownership, size, investment
strategies, and exposures. This can improve the SEC's and FSOC's
understanding of new developing systemic risks and potential
conflicting arrangements, thereby further aiding in the development of
regulatory responses, and also aiding the SEC in efforts to protect
investors by identifying areas in need of outreach, examinations, and
investigations.
Third, the proposal would streamline reporting and reduce reporting
burdens without compromising investor protection efforts and systemic
risk analysis. This would improve the efficiency and effectiveness of
the SEC's efforts to protect investors and maintain fair, orderly and
efficient markets.
The SEC anticipates that the increased ability for the SEC's and
FSOC's oversight, resulting from the proposed amendments, could promote
better functioning and more stable financial markets, which may lead to
efficiency improvements. The SEC does not anticipate significant
effects of the proposed amendments on competition in the private fund
industry because the reported information generally would be nonpublic
and similar types of advisers would have comparable burdens under the
amended Form. For similar reasons, the SEC does not anticipate
significant effects of the proposed amendments on capital formation.
The proposal would amend the general instructions (as well as
implement additional amendments), section 1 (requiring basic
information about advisers and the private funds they advise), and
section 2 (requiring information about hedge funds advised by large
private fund advisers) of Form PF. The benefits associated with each of
these specific elements are discussed in greater detail below.
a. Proposed Amendments to General Instructions, Proposed Amendments To
Enhance Data Quality, and Proposed Additional Amendments
The proposal would update the Form PF general instructions to
revise how all private fund advisers satisfy certain requirements on
Form PF, it would issue a series of amendments to enhance data quality,
and it would lastly issue a series of additional amendments.\287\ There
are five categories of such proposals.
---------------------------------------------------------------------------
\287\ See supra section II.A, II.D, II.E.
---------------------------------------------------------------------------
First, the proposal would amend the general instructions for
reporting of master-feeder arrangements and parallel fund
structures.\288\ These revisions to the general instructions would
improve consistency of reporting associated with measuring private fund
interconnectedness and investment in other private funds by revising
instructions for reporting of ownership structures and revising
instructions that were previously ambiguous and resulted in reporting
errors and issues of data quality across advisers. For example, as
discussed above, Form PF currently provides advisers with flexibility
to respond to questions regarding master-feeder arrangements, parallel
fund structures, and use of funds of funds either in the aggregate or
separately, as long as they do so consistently throughout Form PF. The
revised instructions would specify how to respond to these questions to
prevent some advisers from responding in the aggregate and some
advisers from responding separately.\289\ The proposal would also
require reporting on the total value of parallel managed accounts.\290\
The SEC anticipates these improved data would assist the SEC and FSOC
in assessing potential risks to financial stability resulting from
increasingly complex ownership and investment structures of private
funds. While master-feeder arrangements, parallel fund structures, and
use of funds of funds all allow private funds to benefit from larger
pools of capital, diversify risk, and enjoy shared returns,\291\ these
same features have inherent risks of
[[Page 53876]]
spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well.
Complex ownership structures may also create conflicts of interest when
the same individuals serve as directors on boards of both master and
feeder funds under a single owner,\292\ and may also mask instances of
fraud and a private fund's methods for committing fraud.\293\ Investor
protection efforts would therefore benefit from more consistent data
providing connections from master funds to feeder funds and other
ownership information.
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\288\ See supra section II.A.1. However, an adviser would
continue to aggregate these structures for purposes of determining
whether the adviser meets a reporting threshold.
\289\ Similar benefits would be obtained from proposed revisions
to Instruction 7, which address that advisers to funds of funds
currently have flexibility to choose whether to disregard a private
fund's equity investments in other private funds for all Form PF
purposes so long as they do so consistently throughout Form PF.
Other proposed revisions could also provide benefits associated with
consistency of reporting by revising instructions to avoid error
across filers, such as the revisions to Instruction 8 that the
instruction on which investments to include in determining reporting
thresholds and responding to questions applies only to investments
in funds that are not private funds, and to provide that advisers
would not be required to look through a reporting fund's investments
in any other fund that is not a private fund, other than a trading
vehicle. See supra section II.A.2. Similar benefits would also be
obtained from the proposed amendments updating instructions to
provide conformity with CFTC's amendments to Form CPO-PQR, including
those that specify when advisers that are also CPOs should complete
particular sections of Form PF. See supra section II.E, see also
Proposed Instruction 18.
\290\ See supra section II.A.1.
\291\ See, e.g., Robert Harris, Tim Jenkinson, Steven Kaplan,
Ruediger Stucke, Financial Intermediation in Private Equity: How
Well Do Funds of Funds Perform?, 129 Journal of Financial Economics
2, 287-305 (Aug. 2018).
\292\ See, e.g., Todd Ehret, Platinum Fraud Charges Shine Light
On Cayman Director Responsibilities, Reuters Financial Regulatory
Forum, March 30, 2017, available at https://www.reuters.com/article/bc-finreg-cayman-private-structure/platinum-fraud-charges-shine-light-on-cayman-director-responsibilities-idUSKBN17030J.
\293\ See, e.g., Melvyn Teo, Lessons Learned from Hedge Fund
Fraud, Eureka Hedge, Oct. 2009, available at https://www.eurekahedge.com/Research/News/506/Lessons-Learned-From-Hedge-Fund-Fraud.
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Second, the proposal would amend the general instructions for
reporting for private funds that invest in other funds or trading
vehicles.\294\ Specifically, the proposal would revise Instructions 7
and 8 to require advisers to include information pertaining to their
trading vehicles when completing Form PF.\295\ Because private funds
may use trading vehicles for a wide variety of purposes, more complete
and accurate visibility into asset class exposures, position sizes, and
counterparty exposures relied on by trading vehicles can enhance the
SEC's and FSOC's systemic risk and financial stability assessment
efforts and the SEC's efforts to protect investors by identifying areas
in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\294\ These proposed amendments would include requiring advisers
to include the value of a private fund's investments in other
private funds when determining whether the adviser must file Form
PF; requiring an adviser to include the value of a reporting fund's
investments in other private funds when responding to questions on
the fund, but to not look through its investments in other private
funds when responding to questions about the reporting fund's
investment and other activities; amending the general instructions
to explain how advisers would report information if the reporting
fund holds investments or conducts activities through a trading
vehicle; amending Instruction 8 to indicate that the instruction on
which investments to include in determining reporting thresholds and
responding to questions applies only to investments in funds that
are not private funds; and providing that advisers would not be
required to look through a reporting fund's investments in any other
fund that is not a private fund, other than a trading vehicle. See
supra section II.A.2.
\295\ See supra section II.A.2.
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Third, the proposal would amend the general instructions for
reporting timelines by revising Instruction 9 to require large hedge
fund advisers and large liquidity fund advisers to update Form PF
within a certain number of days after the end of each calendar quarter,
rather than each fiscal quarter, as Form PF currently requires.\296\
The SEC anticipates that these amendments would improve the consistency
of reporting across different private fund advisers, across quarterly
and annual filings, and across different regulatory forms,\297\ which
may improve the ability of regulators to analyze filing data across
fund advisers and across different regulatory forms by resolving
reporting errors and issues of data quality. These data analyses are
important contributors to the SEC's and FSOC's efforts to assess
systemic risk and develop a complete picture of private fund markets.
The SEC anticipates that these improved reporting alignments may
enhance the SEC's and FSOC's abilities to assess potential risks
presented by private funds.\298\ For example, as discussed above,
academic research has used Form PF data and Form N-MPF data to study
rule 2a-7 risk limits and implications of money market reforms.\299\
Standardizing data across regulatory filings can lead to further
industry insights from combined regulatory filing data, and these
industry insights may improve systemic risk assessment and regulator
investor protection efforts. However, as discussed above, because
almost all large hedge fund advisers and large liquidity fund advisers
already effectively file on a calendar quarter basis because their
fiscal quarter ends on the calendar quarter, the SEC anticipates that
these benefits may be marginal.\300\
---------------------------------------------------------------------------
\296\ See supra section II.A.3.
\297\ See supra section II.A.3.
\298\ While the amendments to general instructions associated
with reporting timelines would primarily offer economic benefits
associated with improvement in data quality and resolutions to data
gaps, the proposed amendments to reporting timelines would also
provide a potential improvement to regulators' ability to evaluate
markets for investor protection efforts and systemic risk
assessment, in that they accelerate the provision of data from
quarterly reporting. See supra section II.A.3. Moreover, as the
proposal would make reporting timelines more consistent, there could
be reduced costs associated with regulatory filings, as private fund
advisers reduce their need to track differentiated calendar quarter
and fiscal quarter data.
\299\ See supra section III.B.1.
\300\ See supra section II.A.3. Specifically, and as discussed
above, based on staff analysis of Form ADV data as of December 2021,
99.2 percent of private fund advisers already effectively file on a
calendar basis because their fiscal quarter or year ends on the
calendar quarter or year end, respectively. The 0.8 percent of
private fund advisers that have a non-calendar fiscal approach
represents approximately 274 private funds, totaling $200 billion in
gross asset value. See supra section II.A.3.
---------------------------------------------------------------------------
Fourth, the proposal would issue a series of amendments that impact
several sections of Form PF and which would broadly enhance data
quality by potentially resolving reporting errors and issues of data
quality. These amendments would specify that reported percentages be
rounded to the nearest one hundredth of one percent, provide consistent
instruction for reporting of investment and counterparty exposures,
provide consistent instruction on the reporting of long and short
positions, and provide consistent instruction for reporting of
derivative values.\301\ We believe the resulting improved data quality
would improve the ability of the SEC and FSOC to evaluate market risk
and measure industry trends, thereby increasing the efficiency with
which regulatory responses are developed, improving systemic risk
assessment and regulator programs to protect investors.
---------------------------------------------------------------------------
\301\ See supra section II.D.
---------------------------------------------------------------------------
Lastly, the proposal would issue a series of additional amendments
that would amend instructions related to temporary hardship exemptions,
provide conformity with the CFTC's amendments to Form CPO-PQR
(including those that specify when advisers that are also CPOs should
complete particular sections of Form PF), and revise definitions of the
terms EEA and G10 within Form PF.\302\ The additional amendments
updating instructions to the temporary hardship exemption to Form PF,
by way of an amendment to rule 204(b)-1(f) under the Advisers Act,
would make it easier to submit a temporary hardship exemption and would
assist advisers in determining what constitutes a ``filed'' temporary
hardship exemption.\303\ These amendments may facilitate more
successful submissions of temporary hardship exemptions by private fund
advisers who require one, and may thereby reduce costs to those private
fund advisers. Similarly, by providing conformity with the CFTC's
amendments to Form CPO-PQR, including those that specify when advisers
that are also CPOs should complete particular sections of Form PF, and
revising definitions associated with the terms EEA and G10, the
proposal may reduce confusion for advisers filing Form PF, thereby
reducing the burden of filing.\304\
---------------------------------------------------------------------------
\302\ See supra section II.E, Proposed Instruction 18.
\303\ See supra section II.E.
\304\ See supra section II.E, Proposed Instruction 18.
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[[Page 53877]]
b. Proposed Amendments to Basic Information About the Adviser and the
Private Funds it Advises
The proposed amendments to section 1, which requires all private
fund advisers to report information about the adviser and the private
funds they manage, include revisions to section 1a (concerning basic
identifying information),\305\ revisions to section 1b (concerning all
of a private fund adviser's private funds),\306\ and revisions to
section 1c (more specifically concerning all of a private fund
adviser's hedge funds).\307\ The proposed changes would provide greater
insight into all private funds' operations and strategies, and would
further assist in assessing industry trends. This section discusses how
the SEC believes the proposed changes would thereby enhance the SEC's
and FSOC's systemic risk assessment efforts and the SEC's efforts to
protect investors by identifying areas in need of outreach,
examination, or investigation. This would be accomplished in four key
ways.
---------------------------------------------------------------------------
\305\ See supra section II.B.1.
\306\ See supra section II.B.2.
\307\ See supra section II.B.3.
---------------------------------------------------------------------------
First, the proposed changes would provide more prescriptive
requirements to improve comparability across advisers and reduce
reporting errors and issues of data quality by aligning data across
filers and across regulatory filings, based on experience with the
form. This greater alignment could improve the efficiency with which
the SEC and FSOC evaluate market risk and measure industry trends,
thereby increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulator programs to
protect investors. For example, revisions to section 1a (relating to
adviser reporting of identifying information for all private funds they
advise) would revise instructions on the use of LEIs and RSSD IDs for
advisers and related persons, and could help link data more efficiently
between Form PF and other regulatory filings that use these universal
identifiers.\308\ Several revisions to section 1b (relating to adviser
reporting of basic information for all private funds they advise) would
modify instructions and could prevent advisers from inadvertently
reporting different fund types on different regulatory filings (or,
when different reporting on two different forms is appropriate, the
revised instructions are designed to solicit the reason for
differentiated reporting), facilitating more robust data analyses that
use combined data from multiple regulatory forms.\309\ Revisions to
section 1c would require advisers to indicate which investment
strategies best describe the reporting fund's strategies on the last
day of the reporting period, addressing any ambiguity about how to
report information if the reporting fund changes strategies over
time.\310\ The SEC believes these revisions to section 1, and
others,\311\ would improve the accuracy and reliability of Form PF
data, thereby potentially improving the SEC's and FSOC's efforts to
assess developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improving the SEC's
efforts to protect investors by identifying areas in need of outreach,
examination, or investigation.
---------------------------------------------------------------------------
\308\ See supra section II.B.1. For example, the proposed
reporting of a fund's and its adviser's LEI is consistent with the
way fund relationships are reported in the Global LEI system. See,
e.g., LEI ROC, Policy on Fund Relationships and Guidelines for the
Registration of Investment Funds in the Global LEI System (May 20,
2019), available at https://www.leiroc.org/publications/gls/roc_20190520-1.pdf.
\309\ See supra section II.B.2. For example, the Division of
Investment Management relies on Form PF and Form ADV filings in
providing quarterly summaries of private fund industry statistics
and trends. See, e.g., Division of Investment Management, Private
Fund Statistics, (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\310\ See supra section II.B.3.
\311\ Other proposed revisions that would provide this benefit
include the proposal revising reporting of regulatory versus net
assets under management; reporting of assumptions the adviser makes
in responding to questions on Form PF; reporting of types of fund;
reporting of master-feeder arrangements, internal/external private
funds, and parallel fund structures; reporting of monthly gross and
net asset values; reporting of the value of unfunded commitments;
reporting on the value of borrowing activity; reporting of fair
value hierarchy; reporting of beneficial ownership; reporting of
fund performance; more granular reporting of hedge fund strategies;
more granular reporting of hedge fund counterparty exposures
including identification of counterparties representing a fund's
greatest exposure; and more granular reporting of hedge fund trading
and clearing mechanisms. See supra section II.B.
---------------------------------------------------------------------------
Second, the proposal would expand the data collected by the forms
into newly emerging areas of risk. These expanded areas of reporting
broadly capture key trends in (i) private fund advisers' ownership
structures, and (ii) private fund advisers' investment and trading
strategies, including increasing exposures to new asset classes,
changing exposures across different categories of counterparties, and
increasing use of financial tools for increasing fund performance.
With respect to updated reporting on ownership structures, as
discussed above, interconnected ownership structures have inherent
risks of spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well,
and so enhanced data on detailed ownership structures could improve
systemic risk assessment efforts.\312\ These improved data could also
contribute to efforts to protect investors from conflicts of interest
and other sources of potential harm.\313\ The types of enhancements to
Form PF's data on interconnected ownership structures include, for
example, requiring advisers to provide LEIs for themselves and any of
their related persons, such as reporting funds and parallel funds,\314\
and expanding the required reporting detail on the value of the
reporting fund's investments in funds of funds.\315\ Similar to the
amendments to general instructions, the SEC believes that these
revisions would improve measurement of these complex ownership
structures, thereby potentially improving the SEC's and FSOC's efforts
to assess developing systemic risks and FSOC's efforts to assess
broader financial instability, as well as potentially improving the
SEC's efforts to protect investors from conflicting arrangements and
identify other areas in need of outreach, examination, or
investigation.\316\
---------------------------------------------------------------------------
\312\ See supra section III.C.1.a.
\313\ Id.
\314\ See supra section II.B.1.
\315\ See supra section II.B.2.
\316\ See supra section III.C.1.a.
---------------------------------------------------------------------------
Many revisions would also keep Form PF filings up to date with key
developing trends among private fund advisers' investing and trading
practices. These revisions would improve consistency of reporting of
modern private fund issues across fund advisers, provide more complete
and accurate information on developing trends, and improve the SEC's
and FSOC's abilities to effectively and efficiently assess new systemic
risks and other potential sources of investor harm, as well as inform
the SEC's and FSOC's broader views on the private fund landscape.
For example, in Form PF section 1c, the proposal would require
hedge funds to report whether their investment strategy includes
digital assets,\317\ which are a growing and increasingly important
area of hedge fund strategy.\318\ The proposal would
[[Page 53878]]
therefore help the SEC and FSOC to assess new sources of potential
systemic risk and develop regulatory responses, and would further allow
the SEC to analyze new areas of potential investor harm to determine
any necessary outreach, examination, or investigation.
---------------------------------------------------------------------------
\317\ See supra section II.B.3.
\318\ See, e.g., AIMA, PwC, and Elwood Asset Management, 3rd
Annual Global Crypto Hedge Fund Report 2021, available at https://www.aima.org/educate/aima-research/third-annual-global-crypto-hedge-fund-report-2021.html (concluding that approximately a fifth of
hedge funds were investing in such assets in 2021, with on average
three percent of their total hedge fund assets under management
invested, and 86 percent of those hedge funds intended to deploy
more capital into this asset class by the end of 2021); see also
supra footnote 111 and accompanying text.
---------------------------------------------------------------------------
As another example, the proposal would introduce several questions
on counterparty exposures, corresponding to both CCP exposures and
bilateral counterparty (i.e., non-CCP) exposures. These additions to
Form PF include requiring advisers to report hedge fund borrowing,
lending, and collateral with respect to transactions involving both
their bilateral counterparties and CCPs, requiring reporting of hedge
fund derivative and repo activity that was cleared by a CCP (as well as
activity not cleared by a CCP), and instructing advisers on what
exposures to net.\319\ There are two economic considerations associated
with counterparty exposure reporting on Form PF. First and foremost,
bilateral exposures and CCP exposures have different risk profiles,
with CCPs offering risk reduction mechanisms and other economic
benefits by netting trading across counterparties and across different
assets within an asset class or by centralizing clearance and
settlement activities.\320\ The SEC therefore believes the proposal
could help Form PF provide insight into relative trends in bilateral
trading versus central counterparty trading and resulting systemic
risks from counterparty exposures. Second, while CCPs reduce the
systemic risk associated with the failure of any single hedge fund or
other private fund, the failure of a large CCP itself could potentially
represent a substantial systemic risk event in the future.\321\ While a
systemic risk event such as the failure of a CCP has never occurred in
the United States, CCPs in other countries have failed,\322\ and the
SEC believes the proposal could help Form PF provide new insights into
the potential for such systemic risk events in the future. FSOC has
also designated many CCP institutions as ``systemically important,''
\323\ and recommends that regulators continue to coordinate to evaluate
threats from both default and non-default losses associated with
CCPs.\324\
---------------------------------------------------------------------------
\319\ See supra section II.B.3.
\320\ Siro Aramonte and Wenqian Huang, Costs and Benefits of
Switching to Central Clearing, BIS Quarterly Review (Dec. 2019),
available at https://www.bis.org/publ/qtrpdf/r_qt1912z.htm; Albert
J. Menkveld & Guillaume Vuillemey, The Economics of Central
Clearing, 13 Ann. Rev. Fin. Econ. 153 (2021).
\321\ Id.
\322\ For example, the Hong Kong Futures Guarantee Corporation
failed during the stock market crash of 1987. See Menkveld &
Vuillemey, supra footnote 320.
\323\ Financial Stability Oversight Council, 2012 Annual Report,
Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.
\324\ Financial Stability Oversight Council, 2021 Annual Report,
p. 14, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
---------------------------------------------------------------------------
The SEC therefore believes these revisions, and others like
them,\325\ would help the SEC and FSOC better understand the modern
landscape of the private fund industry, thereby potentially improving
the SEC's and FSOC's efforts to assess developing systemic risks and
FSOC's efforts to assess broader financial instability, as well as
potentially improving the SEC's efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\325\ Other proposed revisions that would provide this benefit
include the proposal reporting of withdrawal and redemption rights;
reporting of other inflows and outflows; more granular reporting of
hedge fund strategies; more granular reporting of hedge fund
counterparty exposures including identification of counterparties
representing a fund's greatest exposure; and more granular reporting
of hedge fund trading and clearing mechanisms. See supra section
II.B.
---------------------------------------------------------------------------
Third, there are revisions that would expand the scope of certain
questions from only covering qualifying hedge funds advised by large
hedge fund advisers to covering all hedge funds advised by any private
fund adviser. By expanding the universe of private funds that are
covered by several questions, the proposal would enhance the SEC's and
FSOC's ability to conduct broad, representative measurements regarding
the private fund industry. For example, the proposal would require all
advisers to report whether each reporting fund they advise provides
investors with withdrawal or redemption rights in the ordinary course,
rather than only requiring large hedge fund advisers to report it for
the qualifying hedge funds they advise, as Form PF currently
requires.\326\ Because the activities of private fund advisers may
differ significantly depending on their size, this enhanced coverage
would potentially enhance regulators' abilities to obtain a
representative picture of the private fund industry and lead to more
robust conclusions regarding emerging industry trends and
characteristics. The SEC believes these proposed amendments, and
others,\327\ would enhance regulator's picture of the private fund
industry, thereby potentially improving the SEC's and FSOC's efforts to
assess developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improving the SEC's
efforts to protect investors by identifying areas in need of outreach,
examination, or investigation.
---------------------------------------------------------------------------
\326\ See supra section II.B.2.
\327\ The proposed revisions to reporting of base currency would
provide similar benefits. See supra section II.B.
---------------------------------------------------------------------------
Lastly, certain proposed changes would streamline reporting and
reduce reporting burden by removing certain questions where other
questions provide the same or superseding information. For example, the
proposal would remove current Question 19, which requires advisers to
hedge funds to report whether the hedge fund has a single primary
investment strategy or multiple strategies, and would also remove
current Question 21, which requires advisers to hedge funds to
approximate what percentage of the hedge fund's net asset value was
managed using high frequency trading strategies.\328\ The SEC believes
that these revisions would directly lower the costs and help reduce
part of the burden on advisers of completing Form PF filings.\329\
---------------------------------------------------------------------------
\328\ See supra section II.B.3.
\329\ These benefits from streamlined reporting and reduced
reporting burden would be offset by increased costs associated with
the additional and more granular detail that would be required on
Form PF under the proposal. See infra section III.C.2, IV.A.3.
---------------------------------------------------------------------------
c. Proposed Amendments to Information About Hedge Funds Advised by
Large Private Fund Advisers
The proposed changes to section 2 would provide greater insight
into operations and strategies into hedge funds advised by large
private fund advisers specifically, and would also assist in assessing
broader hedge fund industry trends. This section discusses how the SEC
believes the proposed changes would thereby enhance the SEC's and
FSOC's investor protection and systemic risk assessment efforts. This
would be accomplished in three key ways.
As with section 1, first, the proposed changes would provide more
prescriptive requirements to improve comparability across advisers and
reduce reporting errors and issues of data quality, based on experience
with the form. This would be accomplished by standardizing reporting of
information across different advisers and across different regulatory
filings. For example, the proposed amendments to Question 30 (on
qualifying hedge fund exposures to different types of assets) would
replace the existing
[[Page 53879]]
complex table in Question 30 with reporting instructions that would use
a series of drop-down menu selections and provide additional narrative
reporting instructions and additional information on how to report
exposures.\330\ Similarly, advisers to qualifying hedge funds would now
be required to report the 10-year zero coupon bond equivalent for all
sub-asset classes with interest rate risk, rather than providing
advisers with a choice to report duration, WAT, or an unspecified 10-
year equivalent.\331\ Several revisions (relating to adviser reporting
of basic information for all hedge funds that it advises) would revise
instructions relating to reporting of adjusted long and short exposures
and market factor effects on a hedge fund's portfolio.\332\ These
revisions could potentially prevent, for example, data errors
associated with reporting of long and short components of a portfolio
or discrepancies across advisers in their choices of which market
factors to report (as Form PF currently allows advisers to omit a
response to any market factor that they do not regularly consider in
formal risk management testing).\333\ As another example, the proposal
would provide for a new sub-asset class in investment exposure
reporting for ADRs, in line with how ADRs are reported on the CFTC's
Form CPO-PQR, potentially improving assessment of currency risk across
regulatory filings.\334\ As a final example, the proposal would revise
reporting for positions held physically, synthetically, or through
derivatives and indirect exposure, and would require reporting turnover
on a per fund basis instead of in the aggregate as well as providing
for more granular reporting of turnover.\335\ The SEC believes these
revisions, and others,\336\ would align Form PF data across filers,
thereby potentially improving the efficiency with which the SEC and
FSOC evaluate market risk and measure industry trends, thereby
increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulatory programs
to protect investors.
---------------------------------------------------------------------------
\330\ See supra section II.C.2.
\331\ Id.
\332\ See supra section II.C.2.a; II.C.2.c.
\333\ Id. For example, higher quality data on short positions
could facilitate more accurate and timely identification of
significant market participants during periods of volatility related
to shorting activity, such as the January 2021 ``meme stock''
episodes. See, e.g., Staff Report on Equity and Options Market
Structure Conditions in Early 2021 (Oct. 14, 2021), available at
https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
\334\ See supra section II.C.2.a.
\335\ As discussed above, when monitoring funds' activities
during recent market events like the March 2020 COVID-19 turmoil,
the existing aggregation of U.S. treasury securities with related
derivatives did not reflect the role hedge funds played in the U.S.
treasury market. See supra section II.C.2.a, III.B.1. Also during
the COVID-19 market turmoil, FSOC sought to evaluate the role hedge
funds played in disruptions in the U.S. treasury market by unwinding
cash-futures basis trade positions and taking advantage of the near-
arbitrage between cash and futures prices of U.S. treasury
securities. Because the existing requirement regarding turnover
reporting on U.S. treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March 2020 market
events, was unable to obtain a complete picture of activity relating
to long treasuries and treasury futures. See supra section II.C.2.d,
III.B.1.
\336\ Other proposed revisions that would provide this benefit
include the proposal revising reporting of reportable sub-asset
classes, including those for certain categories of listed equity
securities, repos, asset-backed securities and other structured
products, derivatives, and cash and commodities; revising reporting
of open and large position reporting; revising reporting of
counterparty exposures including reporting of significant
counterparties; revising currency reporting; requiring significant
country and industry exposure; requiring additional reporting on
fund portfolio risk profiles; requiring more granular reporting of
investment performance by strategy; amending reporting of portfolio
liquidity; and amending reporting of financing liquidity. See supra
section II.C.
---------------------------------------------------------------------------
Second, the proposed changes would help Form PF provide greater
insight into newly emerging areas of risk, including increasing
exposures to new asset classes, changing exposures across different
categories of counterparties, and changing risk management practices
(such as changing practices around posting of collateral). The SEC
believes these proposed changes would help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry. For example, in addition to the more general
investment strategy questions in section 1c described above,\337\
section 2b would define the term ``digital asset'' and would require
large advisers to qualifying hedge funds to report their total
exposures to digital assets.\338\ As another example, large advisers to
qualifying hedge funds would be required to report exposures to
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities).\339\
They would also be required to report all other counterparties (by
name, LEI, and financial institution affiliation) to which a fund has
net mark-to-market exposure after collateral that equals or is greater
than either (1) five percent of a fund's net asset value or (2) $1
billion, facilitating regulators' abilities to understand the impact a
particular counterparty failure like those that occurred during the
2008 financial crisis and in the period since (e.g., the failure of MF
Global in 2011).\340\ Advisers would also be required to report certain
of their exposures to CCPs,\341\ and would be required to report each
CCP (or other third party) holding collateral in respect of cleared
exposures in excess of 5 percent of the fund's net asset value, or $1
billion.\342\ As discussed above, these (and other) new granular
reporting requirements would represent new possible sources of systemic
risk for the SEC and FSOC to evaluate, and also new areas of focus for
the SEC's regulatory outreach, examination, and investigation.\343\ The
SEC believes these revisions, and others,\344\ would improve the SEC's
and FSOC's efforts to assess developing systemic risks and FSOC's
efforts to assess broader financial stability, as well as potentially
improve the SEC's efforts to protect investors by identifying areas in
need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\337\ See supra section III.C.1.b.
\338\ See supra section II.C.2.a.
\339\ See supra section II.C.2.a.
\340\ See supra section II.C.2.a, footnote 198 and accompanying
text.
\341\ See supra section II.C.2.b.
\342\ See supra section II.C.2.d.
\343\ See supra section III.C.1.b. For example, the SEC believes
the addition of a base metal commodities sub-asset class would allow
for identification of large players in the base metals market (such
as those impacted by the March 2022 ``nickel squeeze,'' during which
the price of nickel rose unusually steeply and rapidly in response
to commodity price increases caused by Russia's invasion of
Ukraine). See supra footnote 176.
\344\ Other proposed revisions that would provide this benefit
include revising reporting for positions held physically,
synthetically, or through derivatives and indirect exposure;
revising reportable sub-asset classes, including those for certain
categories of listed equity securities, repos, asset-backed
securities and other structured products, derivatives, and other
cash and commodities; further revising reporting of counterparty
exposures including reporting of significant counterparties (in
addition to the revisions to CCP exposures); revising currency
reporting; requiring more granular reporting of turnover; requiring
significant country and industry exposure; requiring additional
reporting on fund portfolio risk profiles; requiring more granular
reporting of investment performance by strategy; requiring new
reporting on portfolio correlation; amending reporting of portfolio
liquidity; and amending reporting of financing liquidity. See supra
section II.C.
---------------------------------------------------------------------------
Lastly, the proposal would remove certain questions where other
questions provide the same or superseding information, which the SEC
believes would streamline reporting and reduce reporting burden. For
example, the proposal would remove section 2a entirely, proposing that
the aggregated information in section 2a is redundant to information
required to be reported in other sections,\345\ and would remove the
requirement from Question 38 for advisers to report the percentage of
the
[[Page 53880]]
total amount of collateral and other credit support that a fund has
posted to counterparties that may be re-hypothecated.\346\ The SEC
believes that these revisions, and others,\347\ would directly lower
the costs and reduce the burden to advisers of completing Form PF
filings.
---------------------------------------------------------------------------
\345\ See supra section II.C.1.
\346\ See supra section II.C.1.
\347\ Other proposed revisions that would provide this benefit
include the proposal consolidating Question 47 into Question 36;
removing the requirement from Question 38 for advisers to report the
percentage of the total amount of collateral and other credit
support that a fund has posted to counterparties that may be re-
hypothecated; and requiring reporting turnover on a per fund basis
instead of in the aggregate. See supra section II.C.
---------------------------------------------------------------------------
2. Costs
The proposed amendments to Form PF would lead to certain additional
costs for private fund advisers. Any portion of these costs that is not
borne by advisers would ultimately be passed on to private funds'
investors. These costs would vary depending on the scope of the
required information, which is determined based on the size and types
of funds managed by the adviser as well as each fund's investment
strategies, including choices of asset classes and counterparties.
These costs are quantified, to the extent possible, by examination of
the analysis in section IV.A.3.
The SEC anticipates that the costs to advisers associated with Form
PF would be composed of both direct compliance costs and indirect
costs. Direct costs for advisers would consist of internal costs (for
compliance attorneys and other non-legal staff of an adviser, such as
computer programmers, to prepare and review the required disclosure)
and external costs (including filing fees as well as any costs
associated with outsourcing all or a portion of the Form PF reporting
responsibilities to a filing agent, software consultant, or other
third-party service provider).\348\
---------------------------------------------------------------------------
\348\ See section IV.A.3 (for an analysis of the direct costs
associated with the new Form PF requirements for quarterly and
annual filings).
---------------------------------------------------------------------------
The SEC believes that the direct costs associated with the proposed
amendments would be most significant for the first updated Form PF
report that a private fund adviser would be required to file because
the adviser would need to familiarize itself with the new reporting
form and may need to configure its systems to gather the required
information efficiently. In subsequent reporting periods, the SEC
anticipates that filers would incur significantly lower costs because
much of the work involved in the initial report is non-recurring and
because of efficiencies realized from system configuration and
reporting automation efforts accounted for in the initial reporting
period. This is consistent with the results of a survey of private fund
advisers, finding that the majority of respondents identified the cost
of subsequent annual Form PF filings at about half of the initial
filing cost.\349\
---------------------------------------------------------------------------
\349\ See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9 Brooklyn Journal of Corporate, Financial, and
Commercial Law 428 (2015).
---------------------------------------------------------------------------
The SEC anticipates that the proposed amendments aimed at improving
data quality and comparability would impose limited direct costs on
advisers given that advisers already accommodate similar requirements
in their current Form PF reporting and can utilize their existing
capabilities for preparing and submitting an updated Form PF. The SEC
expects that most of the costs would arise from the proposed
requirements to report additional and more granular information on Form
PF. These direct costs would mainly include an initial cost to setup a
system for collecting, verifying additional more granular information,
and limited ongoing costs associated with periodic reporting of this
additional information.\350\ We believe that the proposed amendment to
rule 204(b)-1(f) under the Advisers Act would have minimal costs
associated with it, as the proposed amendment only makes it easier to
submit a temporary hardship exemption and assists advisers in
determining what constitutes a ``filed'' temporary hardship
exemption.\351\ As discussed in the benefits section, the SEC believes
that part of the costs to advisers arising from the proposed amendments
would be mitigated by the cost savings resulting from reduced
ambiguities and inefficiencies that currently exist in the reporting
requirements, as this may reduce the amount of time and effort required
for some advisers to prepare and submit Form PF information.\352\
---------------------------------------------------------------------------
\350\ Based on the PRA analysis in section IV.A.3, initial costs
associated with filing the first updated Form PF report are
estimated to increase by $4,790 for smaller private fund advisers,
$15,557 for large hedge fund advisers, $8,780 for large liquidity
fund advisers, and $8,780 for large private equity advisers. These
figures are calculated as the cost of filing under the proposal
minus the cost of filing prior to the proposal for each category of
adviser. See Table 5. Direct internal compliance costs associated
with the proposal are estimated at $1,866.25 per quarterly filing or
$7,465 annually for smaller private fund advisers. Direct internal
compliance costs associated with the proposal are estimated at
$6,582.5 per quarterly filing or $26,330 annually for large hedge
fund advisers. Direct internal compliance costs associated with the
proposal are estimated at $3,172.5 per quarterly filing or $12,690
annually for large liquidity fund advisers. Direct internal
compliance costs associated with the proposal are estimated at
$3,885 per quarterly filing or $15,540 annually for large private
equity advisers. These figures are calculated as the cost of filing
under the proposal minus the cost of filing prior to the proposal
for each category of adviser, with an additional correction for
large liquidity fund advisers to incorporate the adjustment
explained in footnote 9 to Table 6 (yielding an estimate of costs
prior to the proposal of $29,216.25/105*70 = $19477.50). See Table
6. It is estimated that there will be no additional direct external
costs and no changes to filing fees associated with the proposed
amendments. See Table 8. The SEC anticipates that there may be
additional first-time filing costs for filers who do not currently
file on a calendar quarter basis, but that these costs are likely to
be small and not likely to impact subsequent filings beyond the
first. As discussed above, a 2018 industry survey of large hedge
fund advisers found filing costs that ranged from 35% to 72% higher
than SEC cost estimates. These industry cost estimates would
therefore suggest costs associated with the proposed changes to Form
PF that are potentially 35% to 72% higher than those estimated here.
See MFA Letter to Chairman Clayton, supra note 202, at 3. However, a
2015 survey of SEC-registered investment advisers to private funds
affirmed the SEC's cost estimates for smaller private fund advisers'
Form PF compliance costs, and found that the SEC overestimated Form
PF compliance costs for larger private fund advisers. These academic
literature cost estimates would therefore suggest that the costs
associated with the proposed changes to Form PF estimated here are
potentially conservatively large. See Wulf Kaal, Private Fund
Disclosures Under the Dodd-Frank Act, 9 Brooklyn Journal of
Corporate, Financial, and Commercial Law 428 (2015). See also supra
footnote 267.
\351\ See supra section II.E.
\352\ The proposal also seeks to limit unnecessary costs by
avoiding redundancies between new questions and existing questions.
For example, if the proposal is adopted, the SEC would remove
current Question 22, as it would be redundant in light of the
proposed expanded turnover reporting. See supra footnote 214.
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Indirect costs for advisers would include the costs associated with
additional actions that advisers may decide to undertake in light of
the additional reporting requirements on Form PF. Specifically, to the
extent that the proposed amendments provide an incentive for advisers
to improve internal controls and devote additional time and resources
to managing their risk exposures and enhancing investor protection,
this may result in additional expenses for advisers, some of which may
be passed on to the funds and their investors.
Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. However, the SEC anticipates that
these adverse effects would be mitigated by certain aspects of the Form
PF reporting requirements and controls and systems designed by the SEC
for handling the data. For example, because data on Form PF generally
could not, on its own, be used to identify individual investment
positions, the ability of a
[[Page 53881]]
competitor to use Form PF data to replicate a trading strategy or trade
against an adviser is limited. The SEC has controls and systems for the
use and handling of the proposed modified and new Form PF data in a
manner that reflects the sensitivity of the data and is consistent with
the maintenance of its confidentiality. The SEC has substantial
experience with the storage and use of nonpublic information reported
on Form PF as well as other nonpublic information that the SEC handles
in the course of business.
D. Reasonable Alternatives
1. Alternatives to Proposed Amendments to General Instructions,
Proposed Amendments To Enhance Data Quality, and Proposed Additional
Amendments
The SEC has considered alternatives to the proposed amendments to
general instructions, proposed amendments to enhance data quality, and
the proposed additional amendments considered in this proposal
(including the amendments to the process for requesting temporary
hardship exemptions, by way of an amendment to rule 204(b)-1(f) under
the Advisers Act). The alternatives considered have been in the form of
different choices of framing, level of additional detail requested by
Form PF, level of detail removed from Form PF, and precise information
targeted.
For example, in the general instructions, the SEC considered an
alternative that would require advisers to report only at the master
fund level or only at the feeder fund level. As another example, with
respect to trading vehicles, the proposal currently would require
advisers to report a trading vehicle as a separate reporting fund, the
adviser must report the trading vehicle as a hedge fund, qualifying
hedge fund, liquidity fund, private equity fund, or other type of fund,
if it meets certain requirements, but the SEC considered an alternative
that would only require advisers to report trading vehicles as
investments in another fund. As a final example, the SEC considered
requiring annual filers to file within 30 calendar days after the end
of their fiscal year, rather than 120 calendar days.
While many alternatives may be able to capture more detailed
information, or may be able to capture relevant information with a
smaller reporting burden for advisers, the SEC believes that each of
the amendments to general instructions, amendments to enhance data
quality, and additional amendments as proposed improve data quality and
enhance the usefulness of reported data without imposing undue
reporting burden. As discussed above we request suggestions and
comments on each proposed revision and addition.\353\
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\353\ See supra section II.A, II.D, II.E.
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2. Alternatives to Proposed Amendments to Basic Information About the
Adviser and the Private Funds It Advises
The SEC has also considered alternatives to the proposed amendments
to basic information about advisers and the private funds they advise.
As above, these alternatives are in the form of different choices of
framing, level of additional detail requested by Form PF, level of
detail removed from Form PF, and precise information targeted.
For example, with respect to identifying information for private
funds in section 1a, the SEC considered an alternative that would
provide more granularity for advisers to list categories of funds, such
as differentiating between different types of funds of funds (for
example, differentiating between multi-manager funds of funds and
multi-asset funds of funds). As another example, with respect to basic
information reported for all private funds in section 1b, the SEC
considered alternatives that would limit reporting information about
withdrawal rights, redemption rights, and contributions to only funds
and advisers of a certain size. The SEC also considered various
alternatives with respect to reporting of digital assets, such as
distinguishing between digital assets that represent an ability to
convert or exchange the digital asset for fiat currency or another
asset, including another digital asset, and those that do not represent
such a right to convert or exchange; for digital assets that represent
a right to convert or exchange for fiat currency or another digital
asset, those where the redemption obligation is supported by an
unconditional guarantee of payment, such as some ``central bank digital
currencies,'' and those redeemable upon demand from the issuer, whether
or not collateralized by a pool of assets or a reserve; for digital
assets that do not represent any direct or indirect obligation of any
party to redeem; and for digital assets that represent an equity,
profit, or other interest in an entity. As a final example, with
respect to basic information reported for all hedge funds, the proposal
would currently require advisers to identify each creditor or other
counterparty (including CCPs) to which the reporting fund owes cash and
synthetic financing borrowing (before posted collateral) equal to or
greater than either (1) five percent of net asset value of the
reporting fund as of the data reporting date or (2) $1 billion, but the
SEC considered alternatives that would change the proposed thresholds,
either increasing or decreasing Form PF's definition of what
constitutes a significant counterparty.
The SEC believes that each of the amendments as proposed improve
data quality and enhance the usefulness of reported data without
imposing undue reporting burden, but as discussed above we request
suggestions and comments on each proposed revision and addition.\354\
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\354\ See supra section II.B.
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3. Alternatives to Proposed Amendments to Information About Hedge Funds
Advised by Large Private Fund Advisers
The SEC has considered alternatives to the proposed amendments to
information about hedge funds advised by large private fund advisers.
As above, these alternatives are in the form of different choices of
framing, level of additional detail requested by Form PF, level of
detail removed from Form PF, and precise information targeted.
For example, with respect to investment exposure reporting, the
proposal would continue to require reporting on qualifying hedge fund
exposures to different types of assets, but would revise the
instructions and format of this reporting. As an alternative, the SEC
considered a proposal that would require or permit large hedge fund
advisers to file portfolio position-level information for qualifying
hedge funds similar to what is required for large liquidity fund
advisers, and large hedge fund advisers who do so would be allowed to
forgo responding to certain specific investment exposure questions in
section 2, including Question 30. We believe that the questions as
currently proposed improve data quality and enhance the usefulness of
reported data without imposing undue reporting burden, but we request
comment on each proposed revision and addition.\355\
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\355\ See supra section II.C.
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As another example, the SEC considered alternative approaches for
instructing reporting advisers on how to net long and short positions
for each sub-asset class. One prong of the proposed instructions for
netting long and short positions relies on a newly defined term
``reference asset,'' with which we propose to define as ``a security or
other investment asset to which the reporting fund is exposed
[[Page 53882]]
through direct ownership, synthetically, or indirect ownership,'' \356\
and instructs advisers to net positions that have the same underlying
reference asset across instrument types. The SEC has considered instead
tailoring these instructions to different asset classes. For example,
the SEC considered instructing advisers to net repo exposures in
accordance with GAAP rules for balance sheet netting, or instructing
advisers with exposures whose underlying reference assets are treasury
securities to net within predefined maturity buckets. However, the SEC
believes that providing netting instructions through the proposed
single definition of ``reference asset'' improves data quality and
enhances the usefulness of report data without imposing undue
burden.\357\
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\356\ See Proposed Form PF Glossary of Terms. The proposal would
also instruct advisers to net fixed income positions that fall
within certain predefined maturity buckets. See supra section II.C.
\357\ See supra section II.C.
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As final example, the SEC also considered requiring advisers to
report DV01 instead of the 10-year zero coupon bond equivalent. We
understand that the 10-year zero coupon bond equivalent is the most
widely used duration measure currently applied in the industry, and
would require the fewest number of private funds to update their
calculations of duration to comply with the reporting requirement, but
as discussed above the SEC requests comment on whether DV01 would be a
more appropriate reporting requirement.\358\
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\358\ See supra section II.C.
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Broadly, the SEC believes that each of the amendments as proposed
improve data quality and enhance the usefulness of reported data
without imposing undue reporting burden, but as discussed above we
request suggestions and comments on each proposed revision and
addition.\359\
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\359\ See supra section II.C.
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4. Alternatives to the Definition of the Term ``Hedge Fund''
The SEC has also considered amending the definition of ``hedge
fund'' which is defined in the Glossary of Terms as any private fund
(other than a securitized asset fund) (a) with respect to which one or
more investment advisers (or related persons of investment advisers)
may be paid a performance fee or allocation calculated by taking into
account unrealized gains (other than a fee or allocation the
calculation of which may take into account unrealized gains solely for
the purpose of reducing such fee or allocation to reflect net
unrealized losses); (b) that may borrow an amount in excess of one-half
of its net asset value (including any committed capital) or may have
gross notional exposure in excess of twice its net asset value
(including any committed capital); or (c) that may sell securities or
other assets short or enter into similar transactions (other than for
the purpose of hedging currency exposure or managing duration).\360\ As
noted above, the current definition of ``hedge fund'' is designed to
include any private fund having any one of three common characteristics
of a hedge fund: (1) a performance fee, (2) leverage, or (3) short
selling. In particular, this existing definition in Form PF of ``hedge
fund'' focuses on a reporting fund's ability to engage in certain
borrowing and short selling, rather than actual or intended borrowing
and short selling. Some reporting funds may consider themselves
``private equity funds,'' but advisers report them as hedge funds,
because the reporting fund's governing documents permit the fund to
engage in certain borrowing and short selling (even though it did not
do so at any time in the past 12 months).
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\360\ See supra section II.C.
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As discussed above, hedge funds and private equity funds are two
separate categories of private funds, and typically differ in their
characteristics, such as a hedge fund being more likely to engage in
extensive use of (non-subscription lines of credit) leverage,
derivatives, complex structured products, and short selling, and a
private equity fund being more likely to focus on long-term returns and
engage actively in the management and direction of the companies it
invests in.\361\ Under the existing definition, an adviser to a fund
that holds itself out as a private equity fund and is permitted in its
fund governing documents to engage in certain short-selling, but has
not done so in the past 12 months, would be reported in Form PF data as
a hedge fund with zero short exposure. Depending on how widespread this
definitional mismatch is, it could have an impact on data quality.\362\
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\361\ See supra section III.B.2.
\362\ The SEC does not have data on how many reporting funds
would be considered deemed hedge funds, but the SEC estimates that
up to 30 percent of qualifying hedge funds could be deemed hedge
funds that advisers should report as private equity funds. See Form
PF data from current Question 49(a), as of the third quarter of
2021.
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Accordingly, the SEC is requesting additional information on the
issue.\363\ In doing so, the SEC is requesting comment on a potential
alternative definition of ``hedge fund,'' under which, to qualify as a
hedge fund under the leverage prong of the potential alternative
definition, a fund would have to satisfy subsection (b) of the
definition (the leverage prong), as it does today, but also must have
actually borrowed or used any leverage during the past 12 months,
excluding any borrowings secured by unfunded commitments (i.e.,
subscription lines of credit). Additionally, to qualify as a hedge fund
under the short selling prong of the potential alternative definition
(the short selling prong), the fund must have actually engaged in
certain short selling during the past 12 months. The SEC also
considered alternative definitions requiring, for example, longer or
shorter time periods, different time periods for borrowing versus short
selling, or requirements for the reporting fund to provide redemption
rights in the ordinary course.
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\363\ See supra section II.C.
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A revised definition could better ensure advisers report
information in closer accordance with their characteristics.\364\ For
example, an adviser to a private fund that has actually engaged in
short selling in the preceding 12 months would meet this alternative
definition of hedge fund and thus report the value of its short
positions as part of section 2, Item B.\365\ Meanwhile, for example, an
adviser to a private fund that holds itself out as a private equity
fund, has not borrowed or used any leverage during the preceding 12
months (excluding subscription lines of credit), and has not sold
securities or other assets short (or entered into similar transactions)
would not meet this alternative definition of a hedge fund, and would
report information more relevant for a private equity fund such as,
among other items, the average debt-to-equity ratio of its portfolio
investments.\366\ The SEC also believes an alternative definition would
reduce the unnecessary reporting burden faced by advisers to deemed
hedge funds that
[[Page 53883]]
hold themselves out as private equity funds but currently comply with
instructions to report information on Form PF section 2; however, this
benefit would be partially mitigated by the impacted private fund
advisers who would now need to report on necessary Form PF sections for
private equity fund advisers.\367\
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\364\ This benefit may be mitigated to the extent that any
private fund advisers deliberately seek to fill hedge fund reporting
requirements because they believe their burden of reporting the
hedge fund sections of Form PF is lower than the burden they would
face from reporting the private equity sections of Form PF. Any such
private fund advisers could, under the proposed definition, have
their funds take on de minimis leverage or short selling, and
therefore still be instructed to report as a hedge fund. However, we
estimate that Form PF filing is on average more burdensome for large
hedge fund advisers than for large private equity advisers, and so
there may be very few, if any, private fund advisers deliberately
filing as a hedge fund adviser instead of as a private equity
adviser. See infra section IV.A.3
\365\ See supra section II.C.2.
\366\ See supra section II.C.2; see also Form PF, section 4.
\367\ See supra section II.C.2; III.C.2; see also infra section
IV.A.3. We estimate that for advisers who would be required to file
an initial filing as a large private equity adviser instead of a
large hedge fund adviser because of the potential alternative
definition of ``hedge fund,'' the impact on their filing costs would
be the difference in the proposed new cost of filing for large
private equity advisers minus the current cost of filing for large
hedge fund advisers. We estimate this figure would be negative,
reflecting a cost savings. Thus, the potential alternative
definition would reduce the costs for initial filers who would be
impacted by the definition of ``hedge fund'' by approximately
$30,883. See infra section IV.A.3, Table 5. We estimate that for the
advisers who would be impacted by the potential alternative
definition of ``hedge fund'' and would have to make ongoing annual
filings as a large private equity adviser instead of ongoing
quarterly filings as a large hedge fund adviser, the impact of the
alternative definition on their filing costs would be the difference
in the proposed new cost of filing for large private equity advisers
minus four times the cost of filing prior to the proposal for large
hedge fund advisers. We again estimate this figure to be negative,
and estimate an ongoing annual cost savings to these advisers of
$135,240. See infra section IV.A.3, Table 6. Because Form PF defines
large hedge fund advisers by considering a threshold of $1.5 billion
in assets under management but defines large private equity advisers
by considering a threshold of $2 billion in assets under management,
there may be private fund advisers who, under the potential
alternative definition, would no longer be required to file as a
large hedge fund adviser, and would also not be required to instead
report as a large private equity adviser.
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A potential unintended consequence of the existing reporting
approach for hedge funds could be incomplete data sets for private
equity funds, as well as less accurate reporting about hedge funds.
However, a revised definition that focuses on actual or contemplated
use may also result in incomplete data sets for hedge funds, which are
a class of funds that may be systemically significant. In particular,
when first adopting the definition, the Commissions reasoned that even
a reporting fund for which leverage or short selling is an important
part of its strategy may not engage in that practice during every
reporting period.\368\ Because a reporting fund may vary from year to
year in its use of leverage or short selling, a revised definition that
focuses on actual or contemplated use would also cause fluctuations in
the data from year to year, depending on which funds use leverage or
short selling in a particular year, potentially impacting the quality
or usefulness of resulting data. The potential costs of this
alternative definition also include transition filing costs for
advisers impacted by the definition, who would be required to update
their reporting methods to capture information from their funds
relevant for reporting on Form PF as a private equity fund instead of
as a hedge fund, and completing corresponding sections of the form
targeted at each category.\369\
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\368\ See supra footnote 3; see also 2011 Form PF Adopting
Release, at text accompanying footnote 78.
\369\ We estimate that the average cost of a transition filing
is $19.25. See Table 7.
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The SEC has also considered conforming changes to the definition of
``hedge fund'' for the purposes of Form ADV.\370\ Form ADV relies on a
definition of ``hedge fund'' for the purposes of only one question,
which requires advisers to identify the type of private fund they
advise by selecting from a list of funds, including hedge funds.\371\
As a result, we do not believe there would be any substantial
additional economic effects of making conforming changes to Form ADV.
By amending the definition in Form ADV so that it would be consistent
with how the proposal would define it in Form PF, this alternative
would maintain the baseline consistency of information between Form PF
and Form ADV. The SEC anticipates that the costs associated with a
potential alternative definition of ``hedge fund'' on Form ADV would be
de minimis, as private fund advisers would not be required to complete
any more or fewer questions on Form ADV, at any more or fewer
intervals.
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\370\ See supra section II.C. Form ADV filers include advisers
registered with the SEC and those applying for registration with the
SEC, as well as exempt reporting advisers. Some private fund
advisers that are required to report on Form ADV are not required to
file Form PF (for example, exempt reporting advisers and advisers
with less than $150 million in private fund assets under
management). Other advisers are required to file Form PF and are not
required to file Form ADV (for example, advisers to commodity pools
that are not private funds). Based on the staff review of Form ADV
filings and the Private Fund Statistics, less than 10 percent of
funds reported on Form ADV but not on Form PF in 2020.
\371\ See Form ADV: Instructions for Part 1A, Instruction 6 and
Form ADV Part 1A, Schedule D, section 7.B.(1), Question 10
(``Question 10'') (defining the term ``hedge fund,'' and specifying
that the definition applies for purposes of Question 10). Form ADV
also uses the term ``hedge fund'' in Part 2A, but does not refer to
the definition provided for Question 10.
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E. Request for Comment
The SEC requests comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the amendments, if the SEC were
to adopt them, would promote efficiency, competition, and capital
formation. In addition, the SEC requests comments on our selection of
data sources, empirical methodology, and the assumptions the SEC has
made throughout the analysis. Commenters are requested to provide
empirical data, estimation methodologies, and other factual support for
their views, in particular, on costs and benefits estimates. In
addition, the SEC requests comment on:
214. Whether there are any additional costs and benefits associated
with the proposed amendments to Form PF that we should include in our
analysis? What additional materials and data should the SEC consider
for estimating these costs and benefits?
215. Whether our assumptions about costs associated with the
proposal are accurate? For example, is it accurate to assume that
certain costs may be mitigated given that advisers already accommodate
similar requirements in their current Form PF and Form ADV reporting
and can utilize their existing capabilities for preparing and
submitting an updated Form PF?
216. Whether there are any additional benefits or costs that should
be included associated with the reasonable alternatives considered?
IV. Paperwork Reduction Act
CFTC:
The information collection titled ``Form PF and Rule 204(b)-1''
(OMB Control No. 3235-0679) was issued to the SEC and implements
sections 404 and 406 of the Dodd-Frank Act by requiring private fund
advisers that have at least $150 million in private fund assets under
management to report certain information regarding the private funds
they advise on Form PF. The SEC makes information on Form PF available
to the CFTC, subject to the confidentiality provisions of the Dodd-
Frank Act, and the CFTC may use information collected on Form PF in its
regulatory programs, including examinations, investigations and
investor protection efforts relating to private fund advisers.
CFTC rule 4.27 \372\ does not impose any additional burden upon
registered CPOs and CTAs that are dually registered as investment
advisers with the SEC (``dual registrants''). There is no requirement
to file Form PF with the CFTC, and any filings made by dual registrants
with the SEC are made pursuant to the Advisers Act. While
[[Page 53884]]
CFTC rule 4.27(d) states that dually registered CPOs and CTAs that file
Form PF with the SEC will be deemed to have filed Form PF with the CFTC
for purposes of any enforcement action regarding any false or
misleading statement of material fact in Form PF, the CFTC is not
imposing any additional burdens herein. Therefore, any burden imposed
by Form PF on entities registered with both the CFTC and the SEC has
been fully accounted for within the SEC's calculations regarding the
impact of this collection of information under the PRA, as set forth
below.\373\
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\372\ CFTC rule 4.27, 17 CFR 4.27, was adopted pursuant to the
CFTC's authority set forth in section 4n of the Commodity Exchange
Act (``CEA''), 7 U.S.C. 6n. CFTC regulations are found at Title 17
Chapter I of the Code of Federal Regulations (``CFR'').
\373\ 44 U.S.C. 3501-3521.
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SEC:
The proposal would revise an existing ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\374\ The SEC is submitting the collection of information to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\375\ The title for the collection of information is
``Form PF and Rule 204(b)-1'' (OMB Control Number 3235-0679), and
includes both Form PF and rule 204(b)-1 (``the rules'').\376\ An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid OMB
control number.
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\374\ 44 U.S.C. 3501 through 3521.
\375\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
\376\ The SEC also submitted the collection of information to
OMB in connection with the 2022 SEC Form PF Proposal (ICR Reference
No. 202202-3235-026) (conclusion date May 17, 2022) available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202202-3235-026; 2022 SEC Form PF Proposal, supra footnote 3.
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A. Form PF
Compliance with the information collection titled ``Form PF and
Rule 204(b)-1'' is mandatory. The respondents are investment advisers
that (1) are registered or required to be registered under Advisers Act
section 203, (2) advise one or more private funds, and (3) managed
private fund assets of at least $150 million at the end of their most
recently completed fiscal year (collectively, with their related
persons).\377\ Form PF divides respondents into groups based on their
size and types of private funds they manage, requiring some groups to
file more information more frequently than others. The types of
respondents are (1) smaller private fund advisers, that report annually
(i.e., private fund advisers that do not qualify as large private fund
advisers), (2) large hedge fund advisers, that report more information
quarterly (i.e., advisers with at least $1.5 billion in hedge fund
assets under management), (3) large liquidity fund advisers, that
report more information quarterly (i.e., advisers that manage liquidity
funds and have at least $1 billion in combined money market and
liquidity fund assets under management), and (4) large private equity
advisers, that report more information annually (i.e., advisers with at
least $2 billion in private equity fund assets under management). As
discussed more fully in section II above and as summarized in sections
IV.A.1 and IV.A.3.a below, the proposal would revise how all types of
respondents report certain information on Form PF.
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\377\ See 17 CFR 275.204(b)-1.
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1. Purpose and Use of the Information Collection
The rules implement provisions of Title IV of the Dodd-Frank Act,
which amended the Advisers Act to require the SEC to, among other
things, establish reporting requirements for advisers to private
funds.\378\ The information collected on Form PF is designed to
facilitate FSOC's monitoring of systemic risk in the private fund
industry and assist FSOC in determining whether and how to deploy its
regulatory tools with respect to nonbank financial companies.\379\ The
SEC also may use information collected on Form PF in its regulatory
programs, including examinations, investigations, and investor
protection efforts relating to private fund advisers.\380\
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\378\ See 15 U.S.C. 80b-4(b) and 15 U.S.C. 80b-11(e).
\379\ See Form PF.
\380\ Id.
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The proposed amendments are designed to enhance FSOC's ability to
monitor systemic risk as well as bolster the SEC's regulatory oversight
of private fund advisers and investor protection efforts. The proposal
would amend the form's general instructions, as well as section 1 of
Form PF, which would apply to all Form PF filers. The proposal also
would amend section 2 of Form PF, which would apply to large hedge fund
advisers that advise qualifying hedge funds (i.e., hedge funds with a
net asset value of at least $500 million).
2. Confidentiality
Responses to the information collection will be kept confidential
to the extent permitted by law.\381\ Form PF elicits non-public
information about private funds and their trading strategies, the
public disclosure of which could adversely affect the funds and their
investors. The SEC does not intend to make public Form PF information
that is identifiable to any particular adviser or private fund,
although the SEC may use Form PF information in an enforcement action
and FSOC may use it to assess potential systemic risk.\382\ SEC staff
issues certain publications designed to inform the public of the
private funds industry, all of which use only aggregated or masked
information to avoid potentially disclosing any proprietary
information.\383\ The Advisers Act precludes the SEC from being
compelled to reveal Form PF information except (1) to Congress, upon an
agreement of confidentiality, (2) to comply with a request for
information from any other Federal department or agency or self-
regulatory organization for purposes within the scope of its
jurisdiction, or (3) to comply with an order of a court of the United
States in an action brought by the United States or the SEC.\384\ Any
department, agency, or self-regulatory organization that receives Form
PF information must maintain its confidentiality consistent with the
level of confidentiality established for the SEC.\385\ The Advisers Act
requires the SEC to make Form PF information available to FSOC.\386\
For advisers that are also commodity pool operators or commodity
trading advisers, filing Form PF through the Form PF filing system is
filing with both the SEC and CFTC.\387\ Therefore, the SEC makes Form
PF information available to FSOC and the CFTC, pursuant to Advisers Act
section 204(b), making the information subject to the confidentiality
protections applicable to information required to be filed under that
section. Before sharing any Form PF information, the SEC requires that
any such department, agency, or self-regulatory organization represent
to the SEC that it has in place controls designed to ensure the use and
handling of Form PF information in a manner consistent with the
protections required by the Advisers Act. The SEC has instituted
procedures to protect the confidentiality of Form PF information in a
manner consistent with the protections required in the Advisers
Act.\388\
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\381\ See 5 CFR 1320.5(d)(2)(vii) and (viii).
\382\ See 15 U.S.C. 80b-10(c) and 15 U.S.C. 80b-4(b).
\383\ See e.g., Private Funds Statistics, issued by staff of the
SEC Division of Investment Management's Analytics Office, which we
have used in this PRA as a data source, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\384\ See 15 U.S.C. 80b-4(b)(8).
\385\ See 15 U.S.C. 80b-4(b)(9).
\386\ See 15 U.S.C. 80b-4(b)(7).
\387\ See 2011 Form PF Adopting Release, supra footnote 3 at
n.17.
\388\ See 5 CFR 1320.5(d)(2)(viii).
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[[Page 53885]]
3. Burden Estimates
We are revising our total burden estimates to reflect the proposed
amendments, updated data, and new methodology for certain
estimates.\389\ The tables below map out the Form PF requirements as
they apply to each group of respondents and detail our burden
estimates.
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\389\ For the previously approved estimates, see ICR Reference
No. 202011-3235-019 (conclusion date Apr. 1, 2021), available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202011-3235-019.
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a. Proposed Form PF Requirements by Respondent
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP01SE22.000
[[Page 53886]]
b. Annual Hour Burden Estimates
Below are tables with annual hour burden estimates for (1) initial
filings, (2) ongoing annual and quarterly filings, and (3) transition
filings, final filings, and temporary hardship requests.
[GRAPHIC] [TIFF OMITTED] TP01SE22.001
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c. Annual Monetized Time Burden Estimates
Below are tables with annual monetized time burden estimates for
(1) initial filings, (2) ongoing annual and quarterly filings, and (3)
transition filings, final filings, and temporary hardship
requests.\390\
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\390\ The hourly wage rates are based on (1) SIFMA's Management
& Professional Earnings in the Securities Industry 2013, modified by
SEC staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead; and (2) SIFMA's Office Salaries in the
Securities Industry 2013, modified by SEC staff to account for an
1,800-hour work-year and inflation, and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead.
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d. Annual External Cost Burden Estimates
Below is a table with annual external cost burden estimates for
initial filings as well as ongoing annual and quarterly filings. There
are no filing fees for transition filings, final filings, or temporary
hardship requests and we continue to estimate there would be no
external costs for those filings, as previously approved.
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e. Summary of Estimates and Change in Burden
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BILLING CODE 8011-01-C
B. Request for Comments
We request comment on whether our estimates for burden hours and
external costs as described above are reasonable. Pursuant to 44 U.S.C.
3506(c)(2)(B), the SEC solicits comments in order to (1) evaluate
whether the proposed collection of information is necessary for the
proper performance of the functions of the SEC, including whether the
information will have practical utility; (2) evaluate the accuracy of
the SEC's estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) determine whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
[email protected], and should send a copy to
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-22-22. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this release; therefore a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this release. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
22-22, and be submitted to the Securities and Exchange Commission,
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736.
V. Regulatory Flexibility Act Certification
CFTC:
The Regulatory Flexibility Act (the ``RFA'') \391\ requires that
Federal agencies consider whether the rules they propose will have a
significant economic impact on a substantial
[[Page 53899]]
number of ``small entities'' \392\ whenever an agency publishes a
general notice of proposed rulemaking for any rule, pursuant to the
notice-and-comment provisions of the Administrative Procedure Act.\393\
---------------------------------------------------------------------------
\391\ 5 U.S.C. 601, et. seq.
\392\ See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
\393\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 551 et seq.
---------------------------------------------------------------------------
Registered CPOs and CTAs that are dually registered as investment
advisers with the SEC are only required to file Form PF with the SEC
pursuant to the Advisers Act. CFTC rule 4.27(d) provides that dually
registered CPOs and CTAs that file Form PF with the SEC will be deemed
to have filed Form PF with the CFTC, for purposes of any enforcement
action regarding any false or misleading statement of material fact in
Form PF. The CFTC is not imposing any additional obligation herein
beyond what is already required of these entities when filing Form PF
with the SEC.
Entities impacted by the Form PF are the SEC's regulated entities
and no small entity on its own would meet the Form PF's minimum
reporting threshold of $150 million in regulatory assets under
management attributable to private funds. Also, any economic impact
imposed by Form PF on small entities registered with both the CFTC and
the SEC has been accounted for within the SEC's initial regulatory
flexibility analysis regarding the impact of this collection of
information under the RFA. Accordingly, the Chairman, on behalf of the
CFTC, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed
rules will not have a significant economic impact on a substantial
number of small entities.
SEC:
The Regulatory Flexibility Act of 1980 (``Regulatory Flexibility
Act'') \394\ requires the SEC to prepare and make available for public
comment an initial regulatory flexibility analysis of the impact of the
proposed rule amendments on small entities, unless the SEC certifies
that the rules, if adopted would not have a significant economic impact
on a substantial number of small entities.\395\ For the purposes of the
Advisers Act and the Regulatory Flexibility Act, an investment adviser
generally is a small entity if it (1) has assets under management
having a total value of less than $25 million, (2) did not have total
assets of $5 million or more on the last day of the most recent fiscal
year, and (3) does not control, is not controlled by, and is not under
common control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had total assets of $5 million or more on the last day of
its most recent fiscal year.\396\
---------------------------------------------------------------------------
\394\ 5 U.S.C. 601, et. seq.
\395\ See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
\396\ 17 CFR 275.0-7.
---------------------------------------------------------------------------
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
SEC hereby certifies that the proposed amendments to Advisers Act rule
204(b)-1 and Form PF would not, if adopted, have a significant economic
impact on a substantial number of small entities. By definition, no
small entity on its own would meet rule 204(b)-1 and Form PF's minimum
reporting threshold of $150 million in regulatory assets under
management attributable to private funds. Based on Form PF and Form ADV
data as of December 2021, the SEC estimates that no small entity
advisers are required to file Form PF. The SEC does not have evidence
to suggest that any small entities are required to file Form PF but are
not filing Form PF. Therefore, there would be no significant economic
impact on a substantial number of small entities. The SEC encourages
written comments on the certifications. Commentators are asked to
describe the nature of any impact on small entities and provide
empirical data to support the extent of the impact.
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\397\ the SEC must advise OMB whether a
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results in or is likely
to result in the following:
---------------------------------------------------------------------------
\397\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
The SEC requests comment on whether the proposal would be a ``major
rule'' for purposes of SBREFA. The SEC solicits comment and empirical
data on the following:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
VII. Statutory Authority
CFTC:
The CFTC is not proposing any amendments to its rules in this
rulemaking.
SEC:
The SEC is proposing amendment to rule 204(b)-1 [17 CFR 275.204(b)-
1] pursuant to its authority set forth in sections 204(b) and 211(e) of
the Advisers Act [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
The SEC is proposing amendments to rule 279.9 pursuant to its
authority set forth in sections 204(b) and 211(e) of the Advisers Act
[15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for part 275 continues to read as
follows.
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
0
2. Amend Sec. 275.204(b)-1 by:
0
a. Revising paragraph (f)(2)(i) to remove the phrases ``in paper
format,'' and ``, Item A of Section 1a and Section 5 of Form PF,
checking the box in Section 1a indicating that you are requesting a
temporary hardship exemption'';
0
b. Redesignating paragraph (f)(4) as paragraph (f)(5); and
0
c. Adding new paragraph (f)(4).
The addition reads as follows:
Sec. 275.204(b)-1 Reporting by investment advisers to private funds.
* * * * *
(f) * * *
(4) A request for a temporary hardship exemption is considered
filed upon the earlier of the date the request is postmarked or the
date it is received by the Commission.
* * * * *
[[Page 53900]]
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
3. The authority citation for part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq., Pub. L. 111-203, 124 Stat. 1376.
0
4. Sec. 279.9 Form, PF, reporting by investment bankers to private
funds. Form PF [referenced in Sec. 279.9] is revised to read as
follows. The revised version of Form PF is attached as Appendix A.
Note: The text of Form PF does not, and the amendments will not,
appear in the Code of Federal Regulations.
By the Commissions.
Dated: August 10, 2022.
Christopher Kirkpatrick,
Secretary, Commodity Futures Trading Commission.
Vanessa A. Countryman,
Secretary, Securities and Exchange Commission.
BILLING CODE 8011-01-P
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BILLING CODE 8011-01-C
Note: The following Commodity Futures Trading Commission (CFTC)
appendices will not appear in the Code of Federal Regulations.
CFTC Appendices to Amendments to Form PF To Amend Reporting
Requirements for All Filers and Large Hedge Fund Advisers--CFTC Voting
Summary and Commissioners' Statements
CFTC Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson and
Goldsmith Romero voted in the affirmative. Commissioners Mersinger
and Pham voted in the negative.
CFTC Appendix 2--Statement of Chairman Rostin Behnam
I appreciate all of the hard work of the staff in the Commodity
Futures Trading Commission's Market Participants Division as well as
the staff at the Securities and Exchange Commission, the Department
of the Treasury, the Federal Reserve Board, and the Financial
Stability Oversight Council for their work on this proposal. I look
forward to the public's thoughtful comments on the proposal to
improve the usefulness of Form PF.
CFTC Appendix 3--Statement of Commissioner Kristin N. Johnson
Transparency is an integral component of the regulatory
framework that ensures the safety and soundness and enduring
preeminence our financial markets.
Working in collaboration with our colleagues at the Securities
and Exchange Commission (SEC) to enhance oversight and improve
visibility through thoughtfully designed and well-calibrated
collection approaches is consistent with our mission and statutory
mandate--to ``insure the financial integrity of all transactions
subject to this Act and the avoidance of systemic risk.'' \398\
---------------------------------------------------------------------------
\398\ Section 3(b) of the Commodity Exchange Act, 7 U.S.C. 5(b).
---------------------------------------------------------------------------
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) \399\ incorporated innovative regulatory features
for promoting the stability of the US financial system, including
establishing the Financial Stability Oversight Council (FSOC) to
monitor for emerging systemic risks that could significantly impact
our financial markets and American consumers.\400\
---------------------------------------------------------------------------
\399\ Public Law 111-203, 124 Stat. 1376 (2010).
\400\ See Sections 111 and 120 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Today's proposal seeks to further our commitment to achieving
these values. Consequently, I support issuing for comment the
proposal to amend Form PF, and look forward to the thoughtful,
substantive contributions that the proposed amendments will
engender.
Congress in drafting the Dodd-Frank Act recognized that risks
with systemic import are best monitored through collaboration
amongst the US financial regulators, each with distinct regulatory
mandates, and leveraging their resources and expertise to support
FSOC's overarching responsibilities. Form PF reflects these
statutory qualities. As directed by the Dodd-Frank Act, the
Commission and SEC in 2011 jointly issued rules to provide FSOC with
important information about private fund operations and strategies
through Form PF.\401\
---------------------------------------------------------------------------
\401\ Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128, 71129 (Nov. 16, 2011).
---------------------------------------------------------------------------
The private fund industry has only grown in size and importance
since 2011. In the third quarter of 2021, private funds reported a
staggering $12 trillion of assets on Form PF.\402\ The sheer
aggregate size of private funds signifies the potential for events
in this industry to produce reverberating effects on the integrity
of our financial markets and, in turn, remarkably influence the
welfare of American consumers. Form PF over the last decade has
provided financial regulators with needed transparency into this
potentially systemically significant sector of the financial
system.\403\
---------------------------------------------------------------------------
\402\ Amendments to Form PF to Amend Reporting Requirements for
All Filers and Large Hedge Fund Advisers (Voting Copy--As approved
by the Commodity Futures Trading Commission on 8/10/2022) (Proposed
Rules) at 8 n.7, https://www.cftc.gov/media/7536/votingdraft081022Parts275and279/download.
\403\ See Proposed Rules at 150.
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I support the Commissions' endeavor to build on data collection
points that need clarity and to propose revisions in response to
changes in financial markets as well as market participants and
regulators' experience with Form PF as a tool for gathering
information. Over the last decade, private funds have adopted new
practices, investment strategies and an appetite for investing in
non-traditional assets.\404\ The proposed revisions to Form PF aim
to adapt to these developments as informed by experience in
administering Form PF.
---------------------------------------------------------------------------
\404\ Proposed Rules at 7-8.
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Notwithstanding these important gains, I note that it will be
important to hear from and consider the concerns raised by all
stakeholders, including for example, concerns regarding the costs
and challenges of reporting, particularly for smaller entities. I
anticipate the proposal to amend Form PF will engender important
substantive contributions that will refine our understanding of the
benefits of data collection, enhance transparency, and improve our
ability to preserve the integrity of our markets.
CFTC Appendix 4--Statement of Commissioner Christy Goldsmith Romero
As a U.S. financial markets regulator and a member of the
Financial Stability Oversight Council (``FSOC''), the Commission has
a
[[Page 53985]]
critical responsibility to monitor, identify, and respond to
systemic risks and emerging threats to U.S. financial stability. I
support the proposed amendments to Form PF because they will enhance
one of the Commission's tools to fulfill that critical
responsibility and facilitate our regulatory oversight of private
funds.\1\
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\1\ The data collected also supports the CFTC's supervision,
examinations, enforcement investigations, and customer protections.
---------------------------------------------------------------------------
One lesson from the financial crisis was the risk of contagion
to U.S. financial markets from private-fund activities, strategies,
and exposures, including those related to novel or complex
derivatives. This was evident with the failure of Bear Stearns'
structured credit funds in the lead-up to the financial crisis, and
more recently, with the failure of Archegos Capital Management.
These examples, and others, highlight the necessity for U.S.
financial regulators to have visibility into funds' activities and
exposures to fulfill their regulatory responsibilities and
ultimately, to prevent or mitigate the buildup of systemic risk in
the U.S. financial system.
This proposal marks important coordination with the Securities
and Exchange Commission (``SEC'') to enhance joint reporting
requirements and guard against hidden risks in the U.S. financial
system.
The CFTC and SEC embark on this proposed rulemaking after nearly
a decade of experience of private fund reporting.\2\ It is
particularly appropriate to revisit our reporting framework given
that, as U.S. financial markets have evolved over the past decade,
the private fund space has grown and evolved in tandem. This is why
we seek public comment on new or revised areas of data--including
those intended to provide further insight into complex structures,
new types of instruments, identification data, redemption and
withdrawal rights, ownership, and counterparty exposures, among
other subjects. It is also important that we collect information on
fund exposure to digital assets in order to understand evolving
market risk.
---------------------------------------------------------------------------
\2\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, section 112, Public Law 111-203, 124 Stat. 1376 (2010) (the
``Dodd-Frank Act''), required the SEC and CFTC to establish joint
rules in furtherance of the FSOC's critical mission to monitor
systemic risk through the creation of Form PF. See Section 406 of
the Dodd-Frank Act. Since 2012, private fund advisers, including
certain commodity pool operators and commodity trading advisors that
are dually-registered with both the CFTC and SEC, have been required
to file reports regarding their operations and holdings through Form
PF. See also Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128 (Nov. 16, 2011).
---------------------------------------------------------------------------
Our objective is to increase the usefulness of the data
collected; to ensure that it is actually used as Congress intended
to bring transparency to risk previously hidden. I look forward to
reviewing public comment on whether the proposal would meet our
objective.
Thank you to Commission staff for working with my office to
improve the proposal to facilitate effective oversight by the CFTC.
I commend staff from both agencies on this proposal, and on future
information sharing, that will promote the financial stability of
U.S. financial markets.
CFTC Appendix 5--Dissenting Statement of Commissioner Summer K.
Mersinger
I am respectfully voting to dissent on the joint SEC/CFTC
proposed rulemaking to amend Form PF, the confidential reporting
form for certain SEC-registered investment advisers to private
funds. The class of registered investment advisers required to
submit Form PF includes those that also are registered with the CFTC
as commodity pool operators or commodity trading advisors.
As I previously stated in my concurrence to the CFTC's recent
Request for Information on Climate-Related Financial Risk (``Climate
RFI''),\1\ I support efforts to engage market participants,
industry, and the general public in our policy-making process. And I
agree that after a decade of experience with Form PF, it is
appropriate to evaluate possible amendments. If improvements can be
made that would enable us to collect more efficiently data that we
truly need to fulfill our responsibilities, while reducing
unnecessary burdens on those required to supply that data, we should
consider them.
---------------------------------------------------------------------------
\1\ See Concurring Statement of Commissioner Summer K. Mersinger
Regarding Request for Information on Climate-Related Financial Risk
(June 2, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement060222.
---------------------------------------------------------------------------
However, I do not support this particular proposal. Data and
information that federal regulators request from market participants
should be narrowly tailored to the purpose intended under our
governing statutes, and unfortunately, that does not appear to be
the overall approach in this proposal. I am even more concerned that
constructive input the agencies already have received over the years
from market participants that actually complete Form PF receives
little attention in the proposal.
I look forward to receiving the public's comments, which I hope
will inform the Commissions' consideration of final amendments to
Form PF that provide for the collection of necessary data as
efficiently as possible.
CFTC Appendix 6--Dissenting Statement of Commissioner Caroline D. Pham
I respectfully dissent from the proposed amendments to the
Reporting Form for Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors (Form PF).
The proposed joint amendments, an action of the CFTC as well as the
SEC, seem to impose overly broad obligations that would be
unnecessarily burdensome and would present potentially significant
operational challenges and costs without a persuasive cost-benefit
analysis under the Commodity Exchange Act (CEA).\1\ In a time of
economic challenges, including rising inflation, we must be careful
when considering proposals that could inhibit positive economic
activity that supports American businesses and jobs. I look forward
to hearing from commenters as to the proposed amendments, including
practical implementation issues and the relative costs and benefits
of the proposal.
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\1\ 7 U.S.C. 19.
[FR Doc. 2022-17724 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P 6351-01-P
