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Home , Commodity pool, Hedge fund

Vol. 76 Friday, No. 29 February 11, 2011

Part V

Commodity Futures Trading Commission

17 CFR Part 4

Securities and Exchange Commission

17 CFR Parts 275 and 279 Reporting by Advisers to Private Funds and Certain Pool Operators and Commodity Trading Advisors on Form PF; Proposed Rule

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COMMODITY FUTURES TRADING Commission, Three Lafayette Centre, Web site (http://www.sec.gov/rules/ COMMISSION 1155 21st Street, NW., Washington, DC proposed.shtml). Comments are also 20581. available for Web site viewing and 17 CFR Part 4 • Hand Delivery/Courier: Same as printing in the SEC’s Public Reference RIN 3038–AD03 mail above. Room, 100 F Street, NE., Washington, • Federal eRulemaking Portal: http:// DC 20549 on official days SECURITIES AND EXCHANGE www.regulations.gov. Follow the between the hours of 10 a.m. and 3 p.m. COMMISSION instructions for submitting comments. All comments received will be posted ‘‘Form PF’’ must be in the subject field without change; we do not edit personal 17 CFR Parts 275 and 279 of comments submitted via e-mail, and identifying information from clearly indicated on written submissions. You should submit only [Release No. IA–3145; File No. S7–05–11] submissions. All comments must be information that you wish to make RIN 3235–AK92 submitted in English, or if not, available publicly. accompanied by an English translation. FOR FURTHER INFORMATION CONTACT: Reporting by Investment Advisers to Comments will be posted as received to CFTC: Daniel S. Konar II, Attorney- Private Funds and Certain Commodity http://www.cftc.gov. You should submit Advisor, Telephone: (202) 418–5405, Pool Operators and Commodity only information that you wish to make E-mail: [email protected], Amanda L. Trading Advisors on Form PF available publicly. If you wish the CFTC Olear, Special Counsel, Telephone: to consider information that may be AGENCIES: Commodity Futures Trading (202) 418–5283, E-mail: [email protected], exempt from disclosure under the Commission and Securities and or Kevin P. Walek, Assistant Director, Freedom of Information Act, a petition Exchange Commission. Telephone: (202) 418–5405, E-mail: for confidential treatment of the exempt [email protected], Division of ACTION: Joint proposed rule. information may be submitted according and Intermediary Oversight, Commodity SUMMARY: The Commodity Futures to the established procedures in 17 CFR Futures Trading Commission, Three Trading Commission (‘‘CFTC’’) and the 145.9. Lafayette Centre, 1155 21st Street, NW., Securities and Exchange Commission The CFTC reserves the right, but shall Washington, DC 20581; SEC: David P. (‘‘SEC’’) (collectively, ‘‘we’’ or the have no obligation, to review, prescreen, Bartels, Attorney-Adviser, Sarah G. ten ‘‘Commissions’’) are proposing new rules filter, redact, refuse, or remove any or Siethoff, Senior Special Counsel, or under the Commodity Exchange Act and all of your submission from http:// David A. Vaughan, Attorney Fellow, at the Investment Advisers Act of 1940 to www.cftc.gov that it may deem to be (202) 551–6787 or [email protected], implement provisions of Title IV of the inappropriate for publication, including, Office of Investment Adviser Dodd-Frank Reform and but not limited to, obscene language. All Regulation, Division of Investment Consumer Protection Act. The proposed submissions that have been redacted or Management, U.S. Securities and SEC rule would require investment removed that contain comments on the Exchange Commission, 100 F Street, advisers registered with the SEC that merits of the rulemaking will be NE., Washington, DC 20549–8549. advise one or more private funds to file retained in the public comment file and SUPPLEMENTARY INFORMATION: The CFTC Form PF with the SEC. The proposed will be considered as required under the is requesting public comment on CFTC rule would require commodity Administrative Procedure Act and other proposed rule 4.27(d) [17 CFR 4.27(d)] pool operators (‘‘CPOs’’) and commodity applicable laws, and may be accessible under the Commodity Exchange Act trading advisors (‘‘CTAs’’) registered under the Freedom of Information Act, (‘‘CEA’’) 1 and proposed Form PF. The with the CFTC to satisfy certain 5 U.S.C. 552, et seq. (‘‘FOIA’’). SEC is requesting public comment on proposed CFTC filing requirements by SEC proposed rule 204(b)–1 [17 CFR filing Form PF with the SEC, but only 275.204(b)–1] and proposed Form PF if those CPOs and CTAs are also Electronic Comments [17 CFR 279.9] under the Investment registered with the SEC as investment • Use the SEC’s Internet comment Advisers Act of 1940 [15 U.S.C. 80b] advisers and advise one or more private form (http://www.sec.gov/rules/ (‘‘Advisers Act’’).2 funds. The information contained in proposed.shtml); or I. Background Form PF is designed, among other • Send an e-mail to rule- things, to assist the Financial Stability [email protected]. Please include File A. The Dodd-Frank Act Oversight Council in its assessment of Number S7–05–11 on the subject line; On July 21, 2010, President Obama systemic in the U.S. financial or signed into law the Dodd-Frank Wall • system. These advisers would file these Use the Federal eRulemaking Portal Street Reform and Consumer Protection reports electronically, on a confidential (http://www.regulations.gov). Follow the Act (‘‘Dodd-Frank Act’’).3 While the basis. instructions for submitting comments. Dodd-Frank Act provides for wide- DATES: Comments should be received on Paper Comments ranging reform of , or before April 12, 2011. • one stated focus of this legislation is to ADDRESSES: Comments may be Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, submitted by any of the following 1 7 U.S.C. 1a. methods: Securities and Exchange Commission, 2 15 U.S.C. 80b. Unless otherwise noted, when we 100 F Street, NE., Washington, DC refer to the Advisers Act, or any paragraph of the CFTC 20549–1090. Advisers Act, we are referring to 15 U.S.C. 80b of • the United States Code, at which the Advisers Act Agency Web site, via its Comments All submissions should refer to File is codified, and when we refer to Advisers Act rule Online process: http:// Number S7–05–11. This file number 204(b)–1, or any paragraph of this rule, we are comments.cftc.gov. Follow the should be included on the subject line referring to 17 CFR 275.204(b)–1 of the Code of instructions for submitting comments if e-mail is used. To help us process and Federal Regulations in which this rule would be published. In addition, in this Release, when we through the Web site. review your comments more efficiently, refer to the ‘‘Advisers Act,’’ we refer to the Advisers • Mail: David A. Stawick, Secretary, please use only one method. The SEC Act as in effect on July 21, 2011. Commodity Futures Trading will post all comments on the SEC’s 3 Public Law 111–203, 124 Stat. 1376 (2010).

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‘‘promote the financial stability of the SEC.9 Congress required this registration and reports must include a description United States’’ by, among other in part because it believed that of certain information about private measures, establishing better monitoring ‘‘information regarding [the] size, funds, such as the amount of of emerging using a system-wide strategies and positions [of large private under management, use of , perspective.4 To further this goal, Title funds] could be crucial to regulatory counterparty credit risk exposure, and I of the Dodd-Frank Act establishes the attempts to deal with a future crisis.’’ 10 trading and investment positions for Financial Stability Oversight Council To that end, Section 404 of the Dodd- each private fund advised by the (‘‘FSOC’’), which is comprised of the Frank Act, which amends section 204(b) adviser.13 The SEC must issue jointly leaders of various financial regulators of the Advisers Act, directs the SEC to with the CFTC, after consultation with (including the Commissions’ Chairmen) require private fund advisers 11 to FSOC, rules establishing the form and and other participants.5 The Dodd- maintain records and file reports content of any such reports required to Frank Act directs FSOC to monitor containing such information as the SEC be filed with respect to private fund emerging risks to U.S. financial stability deems necessary and appropriate in the advisers also registered with the and to require that the Board of public interest and for CFTC.14 Governors of the protection or for the assessment of This joint proposal is designed to System (‘‘FRB’’) supervise designated by FSOC.12 The records fulfill this statutory mandate. Under nonbank financial companies that may proposed Advisers Act rule 204(b)–1, pose risks to U.S. financial stability in acquisition of such securities, are qualified private fund advisers would be required the event of their material financial purchasers, and which is not making and does not to file Form PF with the SEC. Private at that time propose to make a of distress or failure or because of their such securities.’’ The term ‘‘qualified purchaser’’ is fund advisers that also are registered as 6 activities. In addition, the Dodd-Frank defined in section 2(a)(51) of the Investment CPOs or CTAs with the CFTC would file Act directs FSOC to recommend to the Company Act. Form PF to satisfy certain CFTC FRB heightened prudential standards 9 The Dodd-Frank Act requires such private fund systemic risk reporting requirements.15 for designated nonbank registration by amending section 203(b)(3) Information collected about private 7 of the Advisers Act to repeal the exemption from companies. registration for any adviser that during the course funds on Form PF, together with The Dodd-Frank Act anticipates that of the preceding 12 months had fewer than 15 information the SEC collects on Form FSOC will be supported in these clients and neither held itself out to the public as ADV and the information the CFTC responsibilities by various regulatory an investment adviser nor advised any registered or business development separately has proposed CPOs file on agencies, including the Commissions. company. See section 403 of the Dodd-Frank Act. Form CPO–PQR and CTAs file on Form To that end, the Dodd-Frank Act See also infra note 11 for the definition of ‘‘private CTA–PR, will provide FSOC and the amends certain statutes, including the fund adviser.’’ There are exemptions from the Commissions with important Advisers Act, to authorize or direct registration requirement, including exemptions for advisers to funds and advisers to information about the basic operations certain Federal agencies to support private funds with less than $150 million in assets and strategies of private funds and will FSOC. Title IV of the Dodd-Frank Act under management in the United States. There also be important in FSOC obtaining a amends the Advisers Act to generally is an exemption for ‘‘foreign private advisers,’’ which are investment advisers with no place of baseline picture of potential systemic require that advisers to funds and risk across both the entire private fund 8 business in the United States, fewer than 15 clients other private funds register with the in the United States and in the United industry and in particular kinds of States in private funds advised by the adviser, and private funds, such as hedge funds.16 4 See S. Conf. Rep. No. 111–176, at 2–3 (2010) less than $25 million in (‘‘Senate Committee Report’’). from such clients and investors. See sections 402, mandatory. See also Senate Committee Report, 5 Section 111 of the Dodd-Frank Act provides that 407 and 408 of the Dodd-Frank Act. See also supra note 4, at 39 (‘‘this title requires private fund the voting members of FSOC will be the Secretary Exemptions for Advisers to Venture Capital Funds, advisers * * * to disclose information regarding of the Treasury, the Chairman of the FRB, the Private Fund Advisers With Less Than $150 Million their investment positions and strategies.’’). Comptroller of the , the Director of the in Assets Under Management, and Foreign Private 13 Bureau of Consumer Financial Protection, the Advisers, Investment Advisers Act Release No. IA– See section 404 of the Dodd-Frank Act. Chairman of the SEC, the Chairperson of the 3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10, 2010) 14 See section 406 of the Dodd-Frank Act. Federal Deposit Corporation, the (‘‘Private Fund Exemption Release’’); Rules 15 For these private fund advisers, filing Form PF Chairperson of the CFTC, the Director of the Federal Implementing Amendments to the Investment through the Form PF filing system would be a filing Housing Agency, the Chairman of the Advisers Act of 1940, Investment Advisers Act with both the SEC and CFTC. Irrespective of their National Credit Union Administration Board and an Release No. IA–3110 (Nov. 19, 2010), 75 FR 77,052 filing a Form PF with the SEC, all private fund independent member appointed by the President (Dec. 10, 2010) (‘‘Implementing Release’’). advisers that are also registered as CPOs and CTAs having insurance expertise. FSOC will also have References in this Release to Form ADV or terms with the CFTC would be required to file Schedule five nonvoting members, which are the Director of defined in Form ADV or its glossary are to the form A of proposed Form CPO–PQR (for CPOs) or the Office of Financial Research, the Director of the and glossary as they are proposed to be amended Schedule A of proposed Form CTA–PR (for CTAs). Federal Insurance Office, a state insurance in the Implementing Release. Additionally, to the extent that they operate or commissioner, a state banking supervisor and a 10 See Senate Committee Report, supra note 4, at advise commodity pools that do not satisfy the state securities commissioner. 38. definition of ‘‘private fund’’ under the Dodd-Frank 6 Section 112 of the Dodd-Frank Act. 11 Throughout this Release, we use the term Act, private fund advisers that are also registered 7 Id. ‘‘private fund adviser’’ to mean any investment as CPOs or CTAs would still be required to file 8 Section 202(a)(29) of the Advisers Act defines adviser that (i) is registered or required to register proposed Form CPO–PQR (for CPOs) and proposed the term ‘‘private fund’’ as ‘‘an issuer that would be with the SEC (including any investment adviser Form CTA–PR (for CTAs), as applicable. an investment company, as defined in section 3 of that is also registered or required to register with 16 The information reported through the various the Investment Company Act of 1940 (15 U.S.C. the CFTC as a CPO or CTA) and (ii) advises one or reporting forms is designed to be complementary, 80a–3) (‘‘Investment Company Act’’), but for section more private funds. We are not proposing that and not duplicative. Information reported on Form 3(c)(1) or 3(c)(7) of that Act.’’ Section 3(c)(1) of the advisers solely to venture capital funds or advisers ADV would be publicly available, while Investment Company Act provides an exclusion to private funds that in the aggregate have less than information reported on Form PF and proposed from the definition of ‘‘investment company’’ for $150 million in assets under management in the Forms CPO–PQR and CTA–PR would be any ‘‘issuer whose outstanding securities (other than United States (‘‘exempt reporting advisers’’) be confidential to the extent permitted under -term paper) are beneficially owned by not required to file Form PF. applicable law. Form ADV and Form PF also have more than one hundred persons and which is not 12 While Advisers Act section 204(b)(1) could be different principal purposes. Form ADV primarily making and does not presently propose to make a read in isolation to imply that the SEC requiring aims at providing the SEC and investors with basic public offering of its securities.’’ Section 3(c)(7) of private fund systemic risk reporting is information about advisers (including private fund the Investment Company Act provides an exclusion discretionary, other amendments to the Advisers advisers) and the funds they manage for investor from the definition of ‘‘investment company’’ for Act made by the Dodd-Frank Act (such as Advisers protection purposes, although Form ADV any ‘‘issuer, the outstanding securities of which are Act section 204(b)(5) and 211(e) suggest that information also will be available to FSOC. owned exclusively by persons who, at the time of Congress intended such rulemaking to be Continued

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Information the SEC obtains through future financial crises.22 Collecting In addition, our staffs have consulted reporting under section 404 of the consistent and comparable information with the United Kingdom’s Financial Dodd-Frank Act is to be shared with is of added value in private fund Services Authority (the ‘‘FSA’’), which FSOC as FSOC considers necessary for systemic risk reporting because it would has conducted a voluntary semi-annual purposes of assessing the systemic risk aid in the assessment of systemic risk on survey since October 2009 by sampling posed by private funds and generally is a global basis and thus enhance the the largest groups based in to remain confidential.17 Our staffs have utility of information sharing among the United Kingdom.27 Because many consulted with staff representing U.S. and foreign financial regulators.23 hedge fund advisers are located in the FSOC’s members in developing this Recognizing this benefit, our staffs United Kingdom and subject to the proposal. We note that simultaneous participated in the International jurisdiction of the FSA, this with our staffs’ FSOC consultations Organization of Securities Commissions’ coordination has been particularly relating to this rulemaking, FSOC has (‘‘IOSCO’’) preparation of a report important.28 UK hedge fund advisers been building out its standards for regarding hedge fund oversight.24 complete this survey on a voluntary assessing systemic risk across different Among other matters, this report basis, and the survey collects kinds of financial firms and has recently recommended that hedge fund advisers information regarding all funds proposed standards for determining provide to their national regulators managed by the particular hedge fund which nonbank financial companies information for the identification, adviser as well as for individual funds should be designated as subject to FRB analysis, and mitigation of systemic with at least $500 million in assets. The supervision.18 risk. It also recommended that information the survey collects is regulators cooperate and designed to help the FSA better B. International Coordination information where appropriate in order understand hedge funds’ use of In assessing systemic risk, the Dodd- to facilitate efficient and effective leverage, ‘‘footprints’’ in various Frank Act requires that FSOC oversight of globally active hedge funds classes (including concentration and coordinate with foreign financial and to help identify systemic risks, risks liquidity issues), the scale of asset/ regulators.19 This coordination may be to market integrity, and other risks liability mismatches, and counterparty particularly important in assessing arising from the activities or exposures credit risks.29 In addition, for more than systemic risk associated with hedge of hedge funds.25 The types of five years the FSA has been conducting funds and other private funds because information that IOSCO recommended a semi-annual survey of hedge fund they often operate globally and make regulators gather from hedge fund counterparties to assist it in assessing significant in firms and advisers is consistent with and trends in counterparty credit risk, markets around the world.20 As others comparable to the types of information requirements, and other have recognized, ‘‘[g]iven the global we propose to collect from hedge funds matters.30 Our staffs’ consultation with nature of the markets in which [private through Form PF, as described in the FSA as they designed and fund] managers and funds operate, it is further detail below.26 conducted their hedge fund surveys has imperative that a regulatory framework been very informative, and we have be applied on an internationally 22 See U.S. Department of the Treasury, Financial incorporated into proposed Form PF consistent basis.’’ 21 International Regulatory Reform: A New Foundation (2009), at 8; many of the types of information and Equipping Financial Regulators with the Tools regulatory coordination also has been Necessary to Monitor Systemic Risk, Senate collected through the FSA surveys. cited as a critical element in facilitating Banking Subcommittee on and SEC staff also has consulted with financial regulators’ formulation of a International and Finance, Feb. 12, 2010 Hong Kong’s Securities and Futures comprehensive and effective response to (testimony of Daniel K. Tarullo, member of the Commission regarding hedge fund FRB). See also Group of 20 and the International oversight and data collection because Monetary Fund, The Global P Crisis for Fure Information on Form ADV is designed to provide Regulation of Financial Institutions and M arkets Hong Kong is an important jurisdiction the SEC with information necessary to its and for Liquidity Management (Feb. 4, 2009). for hedge funds in Asia.31 This administration of the Advisers Act and to efficiently 23 The Commissions expect that they may share consultation also has proven helpful in allocate its examination resources based on the information reported on Form PF with various designing proposed Form PF. risks the SEC discerns or the identification of foreign financial regulators under information common business activities from information sharing agreements in which the foreign regulator provided by advisers. See Implementing Release, agrees to keep the information confidential. represent a significant proportion of such activity supra note 9. In contrast, the Commissions intend 24 Technical Committee of the International in important markets or products. Some of this to use Form PF primarily as a confidential systemic Organization of Securities Commissions, Hedge information would be collected through the revised risk disclosure tool to assist FSOC in monitoring Funds O (June 2009), available at https:// Form ADV, as proposed by the SEC in the and assessing systemic risk, although it also would www.iosco.org/library/pubdocs/pdf/ Implementing Release, rather than Form PF. be available to assist the Commissions in their IOSCOPD293.pdf (‘‘IOSCO Report’’). 27 The survey canvasses approximately 50 FSA- regulatory programs, including examinations and 25 Id. at 3. authorized investment managers. See, e.g., investigations and investor protection efforts Authority, Assessing Possible 26 See IOSCO Report, supra note 24, at 14; Press relating to private fund advisers. Sources of Systemic Risk from Hedge Funds: A Release, International Regulators Publish Systemic 17 See section 404 of the Dodd-Frank Act; infra Report on the Findings of the Hedge Fund as Risk Data Requirements for Hedge Funds (Feb. 25, note 39 and accompanying text. Counterparty Survey and the Hedge Fund Survey 2010), available at https://www.iosco.org/news/pdf/ 18 (Jul. 2010), available at http://www.fsa.gov.uk/ See, e.g., Authority to Require Supervision and IOSCONEWS179.pdf. The IOSCO Report states that pubs/other/hf_report.pdf (‘‘FSA Survey’’). Regulation of Certain Nonbank Financial systemic risk information that hedge fund advisers 28 Companies, Financial Stability Oversight Council should provide to regulators should include, for According to Hedge Fund Intelligence, U.K.- Release (Jan. 18, 2011); Advance Notice of Proposed example: (1) Information on their prime , based advisers manage approximately 16% of global Rulemaking Regarding Authority to Require custodian, and background information on the hedge fund assets. This concentration of hedge fund Supervision and Regulation of Certain Nonbank persons managing the assets; (2) information on the advisers is second only to the United States Financial Companies, Financial Stability Oversight manager’s larger funds including the net asset (managing approximately 76% of global hedge fund Council Release (Oct. 1, 2010), 75 FR 61653 (Oct. value, predominant strategy/regional focus and assets). See HFI, supra note 20. 6, 2010) (‘‘FSOC Designation ANPR’’). performance; (3) leverage and risk information, 29 FSA Survey, supra note 27. 19 See section 175 of the Dodd-Frank Act. including of the hedge fund 30 Id. 20 See Damian Alexander, Global Hedge Fund adviser’s larger funds; (4) asset and liability 31 According to Hedge Fund Intelligence, Hong Assets Rebound to Just Over $1.8 Trillion, Hedge information for the manager’s larger funds; (5) Kong-based advisers manage approximately 0.54% Fund Intelligence (Apr. 7, 2010) (‘‘HFI’’). counterparty risk, including the biggest sources of of global hedge fund assets, which is the largest 21 Group of Thirty, Financial Reform: A credit; (6) product exposure for all of the manager’s concentration of hedge fund advisers in Asia. See Framework for Financial Stability (Jan. 15, 2009). assets; and (7) investment activity known to HFI, supra note 20.

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Collectively, hedge fund advisers based have taken these international efforts form only with respect to those in the United States, the United relating to systemic risk monitoring in sections.38 Kingdom, and Hong Kong represent funds into account in the Form PF would elicit non-public over 92 percent of global hedge fund proposed reporting discussed below. information about private funds and assets, and thus a broad consistency their trading strategies the public among these jurisdictions’ hedge fund II. Discussion disclosure of which, in many cases, could adversely affect the funds and information collections, including our The SEC is proposing a new rule own, will facilitate the sharing of their investors. The SEC does not intend 204(b)–1 under the Advisers Act to consistent and comparable information to make public Form PF information require that SEC-registered investment for systemic risk assessment purposes identifiable to any particular adviser or advisers report systemic risk for most global hedge fund assets under private fund, although the SEC may use management.32 Finally, in connection information to the SEC on Form PF if Form PF information in an enforcement 36 with the IOSCO report, IOSCO members they advise one or more private funds. action. Amendments to the Advisers Act (including the SEC and CFTC) agreed, For registered CPOs and CTAs that are added by the Dodd-Frank Act preclude on a ‘‘best efforts’’ basis, to conduct a also registered as investment advisers the SEC from being compelled to reveal survey of hedge fund reporting data as with the SEC and advise a private fund, the information except in very limited of the end of September 2010 based on this report also would serve as circumstances.39 Similarly, the Dodd- the guidelines established in the IOSCO substitute compliance for a portion of Frank Act exempts the CFTC from being report and the FSA survey. This the CFTC’s proposed systemic risk compelled under FOIA to disclose to the internationally coordinated survey effort reporting requirements under proposed public any information collected has also informed our proposed Commodity Exchange Act rule through Form PF and requires that the reporting. 4.27(d).37 Because commodity pools CFTC maintain the confidentiality of International efforts also have focused that meet the definition of a private that information consistent with the on potential systemic considerations fund are categorized as hedge funds for level of confidentiality established for arising out of other types of private purposes of Form PF as discussed the SEC in section 404 of the Dodd- funds, such as private equity funds. For below, CPOs and CTAs filing Form PF Frank Act. The Commissions would example, an International Monetary would need to complete only the make information collected through Fund (‘‘IMF’’) staff paper has focused on sections applicable to hedge fund Form PF available to FSOC, as is ‘‘extending the perimeter’’ of effective advisers, and the form would be a joint required by the Dodd-Frank Act, subject regulatory oversight to capture all to the confidentiality provisions of the 40 financial activities that may pose Dodd-Frank Act. financial markets, are not subject to micro- We propose that each private fund systemic risks, regardless of the type of prudential supervision. But they need to be part of adviser report basic information about institution in which they occur.33 The macro-prudential analysis and risk assessments, as the operations of its private funds on IMF paper proposed that these financial they influence the overall behaviour of the . To gain a truly ‘‘systemic’’ perspective on Form PF once each year. We propose activities be subject to reporting the financial system, no material element should be that a relatively small number of Large obligations so that regulators may assess left out.’’); Private Equity and Leveraged Finance Private Fund Advisers (described in potential systemic risk and emphasized Markets, for International Settlements section II.B below) instead be required the need to capture all financial Committee on the Global Financial System Working Paper No. 30 (Jul. 2008), available at http:// to submit this basic information each activities conducted on a leveraged www.bis.org/publ/cgfs30.pdf (‘‘BIS Private Equity quarter along with additional systemic basis, including activities of leveraged Paper’’) (‘‘Going forward, the Working Group risk related information required by private equity vehicles.34 Others also believes that enhancing transparency and strengthening practices [relating Form PF concerning certain of their have recognized a need for monitoring to private equity and leveraged finance markets] the private equity sector because having require special attention. * * * The recent market 38 Thus, private fund advisers that also are CPOs information on its potentially turmoil has demonstrated that a number of the risks or CTAs would be obligated to complete only systemically important interactions with in the leveraged finance market are likely to section 1 and, if they met the applicable threshold, the financial system are an important materialise in combination with other financial section 2 of Form PF. Accordingly, Form PF is a market risks in stressed market conditions. * * * joint form between the SEC and the CFTC only with part of regulators’ obtaining the In the public sector, there is a stronger case for respect to sections 1 and 2 of the form. complete picture of the broader developing early warning indicators and devoting 39 See section 404 of the Dodd-Frank Act stating financial system that is so vital to more research efforts to modelling the dynamic that ‘‘[n]otwithstanding any other provision of law, effective systemic risk monitoring.35 We relationships between risk factors with a view to the Commission [SEC] may not be compelled to understanding the interrelationships across markets disclose any report or information contained and their impact on the financial sector.’’). See also therein required to be filed with the Commission 32 See HFI, supra note 20. Macroeconomic Assessment Group established by [SEC] under this subsection’’ except to Congress 33 See Ana Carvajal et al., The Perimeter of the Financial Stability Board and the Basel upon agreement of confidentiality. Section 404 also Financial Regulation, IMF Staff Note SPN/ Committee on Banking Supervision, Interim Report: provides that nothing prevents the SEC from 09/07 (Mar. 26, 2009), available at http:// Assessing the Macroeconomic Impact of the complying with a request for information from any www.imf.org/external/pubs/ft/spn/2009/ Transition to Stronger Capital and Liquidity other federal department or agency or any self- spn0907.pdf. Requirements (Aug. 2010), at section 5.2, available regulatory organization requesting the report or 34 Id., at 8. at http://www.financialstabilityboard.org/ information for purposes within the scope of its _ 35 See, e.g., Lorenzo Bini Smaghi, Member of the publications/r 100818b.pdf. jurisdiction or an order of a court of the U.S. in an Executive Board of the European , 36 See proposed Advisers Act rule 204(b)–1. action brought by the U.S. or the SEC. Section 404 Going Forward—Regulation and Supervision after 37 See proposed Commodity Exchange Act rule of the Dodd-Frank Act also states that the SEC shall the Financial Turmoil, Speech by at the 4th 4.27(d), which provides that these CPOs and CTAs make available to FSOC copies of all reports, International Conference of Financial Regulation would need to file other reports as required under documents, records, and information filed with or and Supervision (Jun. 19, 2009), available at rule 4.27 with respect to pools that are not private provided to the SEC by an investment adviser under http://www.bis.org/review/r090623e.pdf (stating funds. For purposes of this proposed rule, it is the section 404 of the Dodd-Frank Act as FSOC may ‘‘macro-prudential analysis needs to capture all CFTC’s position that any false or misleading consider necessary for the purpose of assessing the components of financial systems and how they statement of a material fact or material omission in systemic risk posed by a private fund and that interact. This includes all intermediaries, markets the jointly proposed sections (sections 1 and 2) of FSOC shall maintain the confidentiality of that and infrastructures underpinning them. In this proposed Form PF that is filed by these CPOs and information consistent with the level of respect, it is important to consider that at present CTAs shall constitute a violation of section 6(c)(2) confidentiality established for the SEC in section some of these components, such as hedge funds, of the Commodity Exchange Act. Proposed Form PF 404 of the Dodd-Frank Act. private equity firms or over-the-counter (OTC) contains an oath consistent with this position. 40 See section 404 of the Dodd-Frank Act.

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private funds.41 In the sections below, market positions. The SEC also does not the FRB.50 Such a form, if feasible, we describe the principal reasons we currently collect data to assess the risk likely would require substantial believe that FSOC needs this of a run on a private liquidity fund, a additional and more detailed data information in order to monitor the risk that could transfer into registered addressing a wider range of possible systemic risk that may be associated funds and into the fund profiles, since it could not be with the operation of private funds. broader short term markets and tailored to a particular adviser, and those that rely on those markets.47 would impose correspondingly greater A. Purposes of Form PF While we are proposing to collect burdens on private fund advisers. This The Dodd-Frank Act tasks FSOC with information on Form PF to assist FSOC type of information gathering may be monitoring the financial services in its monitoring obligations under the better accomplished by OFR through marketplace in order to identify Dodd-Frank Act, the information targeted information requests to specific potential threats to the financial collected on Form PF would be private fund advisers identified through stability of the United States.42 It also available to assist the Commissions in Form PF, rather than through a general requires FSOC to collect information their regulatory programs, including reporting form.51 from member agencies to support its examinations and investigations and The amount of information a private functions.43 Section 404 of the Dodd- investor protection efforts relating to fund adviser would be required to Frank Act directs the SEC to support private fund advisers.48 report on the proposed form would vary this effort by collecting from investment We have designed Form PF, in based on both the size of the adviser and advisers to private funds such consultation with staff representing the type of funds it advises. This information as the SEC deems necessary FSOC’s members, to provide FSOC with approach reflects our initial view after and appropriate in the public interest such information so that it may carry consulting with staff representing and for the protection of investors or for out its monitoring obligations.49 Based FSOC’s members that a smaller private the assessment of systemic risk.44 FSOC upon the information we propose to fund adviser may present less risk to the may, if it deems necessary, direct the obtain from advisers about the private stability of the U.S. financial system and Office of Financial Research (‘‘OFR’’) to funds they advise, together with market thus merit reporting of less collect additional information from data it collects from other sources, information.52 It also reflects our nonbank financial companies.45 FSOC should be able to identify understanding that different types of The Commissions are jointly whether any private funds merit further private funds could present different proposing sections 1 and 2 of Form PF, analysis or whether OFR should collect implications for systemic risk and that and the SEC is proposing sections 3 and additional information. We have not reporting requirements should be 4 of Form PF, to collect information sought to design a form that would appropriately calibrated.53 As discussed necessary to permit FSOC to monitor provide FSOC in all cases with all the in more detail below, Form PF would private funds in order to identify any information it may need to make a require more detailed information from potential systemic threats arising from determination that a particular entity advisers managing a large amount of their activities. The information we should be designated for supervision by hedge fund or liquidity fund assets. Less currently collect about private funds information would be required and their activities is very limited and 47 See section II.A.3 of this Release for a regarding advisers managing a large is not designed for the purpose of discussion of liquidity funds and their potential amount of private equity fund assets monitoring systemic risk.46 We do not risks. because, after a review of available 48 See SEC section VI.A of this Release for a literature and consultation with staff currently collect information, for discussion of how the SEC could use proposed example, about hedge funds’ primary Form PF data for its regulatory activities and representing FSOC’s members, it trading counterparties or significant investor protection efforts. appears that private equity funds may 49 Industry participants (in response to FSOC present less potential risk to U.S. 41 See proposed Instructions to Form PF. Our Designation ANPR, supra note 18) acknowledged financial stability. The principal reasons proposed reporting thus complies with the Dodd- the potentially important function that such for Form PF’s proposed reporting Frank Act directive that, in formulating systemic reporting may play in allowing FSOC to monitor the private fund industry more generally and to assess specific to hedge funds, liquidity funds, risk reporting and recordkeeping for investment and private equity funds are discussed advisers to mid-sized private funds, the the extent to which any private funds may pose Commission take into account the size, governance, systemic risk more specifically. See, e.g., Comment below. and of such funds to determine Letter of the Managed Funds Association (Nov. 5, whether they pose systemic risk. See section 408 of 2010) (‘‘the enhanced regulation of hedge fund 1. Hedge Funds the Dodd-Frank Act. The Dodd-Frank Act also managers and the markets in which they participate following the passage of the Dodd-Frank Act We believe that Congress expected states that the SEC may establish different reporting hedge fund advisers would be required requirements for different classes of fund advisers, ensures that regulators will have a timely and based on the type or size of private fund being complete picture of hedge funds and their to report information to the advised. See section 404 of the Dodd-Frank Act. activities’’), Comment Letter of the Coalition of Commissions under Title IV of the Private Investment Companies (Nov. 5, 2010) (‘‘the 42 See section 112(a)(2)(C) of the Dodd-Frank Act. 54 registration and reporting structure for private Dodd-Frank Act. After consulting with 43 See section 112(d)(1) of the Dodd-Frank Act. funds subject to SEC oversight will result in an 44 Section 404 of the Dodd-Frank Act requires that unprecedented range and depth of data to the 50 See section 113 of the Dodd-Frank Act for a reports and records that the SEC mandates be Council, its constituent members and the newly discussion of the matters that FSOC must consider maintained for these purposes include a description created Office of Financial Research. From this when determining whether a U.S. nonbank of certain categories of information, such as assets information, in addition to the information gathered financial company shall be supervised by the FRB under management, use of leverage, counterparty by the Council, the Council should be able to and subject to prudential standards. credit risk exposure, and trading and investment assemble a clear picture of the overall U.S. financial 51 Recordkeeping requirements specific to private positions for each private fund advised by the network and how private investment funds fit into fund advisers for systemic risk assessment purposes adviser. it, both on an individual and overall basis’’), will be addressed in a future release pursuant to our 45 See sections 153 and 154 of the Dodd-Frank Comment Letter of the Private Equity Growth authority under section 404 of the Dodd-Frank Act. Act. Council (Nov. 5, 2010) (‘‘regulators also now have 52 We discuss the information we propose 46 We note that the SEC has proposed the authority to require all private equity firms and requiring smaller private fund advisers report in amendments to Form ADV that also would require private equity funds to provide any additional data section II.D.1 of this Release. private funds to report certain basic information, needed to assess systemic risk’’) (‘‘PE Council 53 Congress recognized this need as well. See such as the fund’s prime and its gross and Letter’’). Comment letters in response to the FSOC supra note 41. net asset values. See Implementing Release, supra Designation ANPR are available at http:// 54 See Senate Committee Report, supra note 4, at note 9. www.regulations.gov. 38 (‘‘While hedge funds are generally not thought

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staff representing FSOC’s members, our or both) could result in material losses and discuss their implications for the initial view is that the investment at the financial institutions that lend to reporting we propose on Form PF. activities of hedge funds 55 may have the them if collateral securing this lending potential to pose systemic risk for is inadequate.58 These losses could have 2. Liquidity Funds several reasons and, accordingly, that systemic implications if they require ‘‘Liquidity funds’’ also may be advisers to these hedge funds should these financial institutions to scale back important to FSOC’s monitoring and provide targeted information on Form their lending efforts or other financing 59 assessment of potential systemic risks, PF to allow FSOC to gain a better activities generally. The simultaneous and the SEC believes information picture of the potential systemic risks failure of several similarly positioned concerning them, therefore, should be posed by the hedge fund industry. hedge funds could create contagion included on Form PF.63 The proposed Hedge funds may be important sources, through the financial markets if the Form PF would define a liquidity fund and users, of liquidity in certain failing funds liquidate their investment markets. Hedge funds often use positions in parallel at firesale prices, as a private fund that seeks to generate financial institutions that may have thereby depressing the mark-to-market income by investing in a of systemic importance to obtain leverage valuations of securities that may be short-term obligations in order to and enter into other types of widely held by other financial maintain a stable per transactions. Hedge funds employ institutions and investors.60 Many of unit or minimize principal for investment strategies that may use these concerns were raised in investors.64 Liquidity funds thus can leverage, derivatives, complex September 1998 by the near collapse of resemble money market funds, which structured products, and short selling in Term Capital Management, a are registered under the Investment an effort to generate returns. Hedge highly leveraged hedge fund that Company Act of 1940 and seek to funds also may employ strategies experienced significant losses stemming maintain a ‘‘stable’’ net asset value per involving high volumes of trading and from the 1997 Russian financial crisis.61 share, typically $1, through the use of ‘‘ ’’ concentrated investments. These Accordingly, proposed Form PF the amortized cost method of 65 strategies, and in particular high levels would include questions about large . of leverage, can increase the likelihood hedge funds’ investments, use of A report recently released by the that the fund will experience stress or leverage and collateral practices, President’s Working Group on Financial fail, and amplify the effects on financial counterparty exposures, and market Markets (the ‘‘PWG MMF Report’’) 56 markets. While many hedge funds are positions that are designed to assist discussed in detail how certain features not highly leveraged, certain hedge fund FSOC in monitoring and assessing the of registered money market funds, many strategies employ substantial amounts of extent to which stresses at those hedge of which are shared by liquidity funds, 57 leverage. Significant hedge fund funds could have systemic implications may make them susceptible to runs and failures (whether caused by their by spreading to prime brokers, credit or thus create the potential for systemic investment positions or use of leverage trading counterparties, or .66 The PWG MMF Report describes markets.62 This information also is to have caused the current financial crisis, how some investors may consider information regarding their size, strategies, and designed to help FSOC observe how liquidity funds to function as substitutes positions could be crucial to regulatory attempts to hedge funds behave in response to for registered money market funds and deal with a future crisis. The case of Long-Term certain stresses in the markets or the potential for systemic risk that Capital Management, a hedge fund that was rescued economy. We request comment on this through Federal Reserve intervention in 1998 because of concerns that it was ‘‘too-interconnected- analysis of the potential systemic risk 63 Form PF is a joint form between the SEC and to-fail,’’ shows that the activities of even a single posed by hedge funds. Does it the CFTC only with respect to sections 1 and 2 of hedge fund may have systemic consequences.’’). adequately identify the ways in which the form. Section 3 of the form, which would 55 See section II.B of this Release for a discussion hedge funds might generate systemic require more specific reporting regarding liquidity of the definition of ‘‘hedge fund’’ in proposed Form risk? Are there other ways that hedge funds, would only be required by the SEC. PF. To prevent duplicative reporting, commodity 64 See section II.B of this Release for a discussion pools that meet the definition of a private fund funds could create systemic risk? Are of the definition of ‘‘liquidity fund’’ in proposed would be treated as hedge funds for purposes of hedge funds not a potential source of Form PF. Form PF. CPOs and CTAs that are not also systemic risk? Please explain your views 65 Under the amortized cost method, securities are registered as an investment adviser with the SEC valued at acquisition cost, with adjustments for would be required to file proposed Form CPO–PQR amortization of premium or accretion of discount, 58 (for CPOs) and proposed Form CTA–PR (for CTAs) See, e.g., Id.; Ben S. Bernanke, Hedge Funds instead of at fair market value. To prevent reporting similar information as Form PF requires and Systemic Risk, Speech at the Federal Reserve substantial deviations between the amortized cost for private fund advisers that advise one or more Bank of Atlanta’s 2006 ’s share price and the mark-to-market per-share value hedge funds. See Operators and Conference (May 16, 2006), available at http:// of the fund’s assets (its ‘‘shadow NAV’’), a money Commodity Trading Advisors: Amendments to www.federalreserve.gov/newsevents/speech/ market fund must periodically compare the two. If Compliance Obligations, CFTC Release (Jan. l, bernanke20060516a.htm (‘‘Bernanke’’); Nicholas there is a difference of more than one-half of 1 2011). Deeming commodity pools that meet the Chan et al., Systemic Risk and Hedge Funds, percent (typically, $0.005 per share), the fund must definition of a private fund to be hedge funds for National Bureau of Economic Research Working re-price its shares, an event colloquially known as purposes of Form PF, therefore, is designed to Paper 11200 (Mar. 2005), available at http:// ‘‘breaking the buck.’’ See ensure that the CFTC obtains similar reporting www.nber.org/papers/w11200.pdf; Andrew Lo, Reform, Investment Company Act Release No. regarding commodity pools that satisfy CFTC Regulatory Reform in the Wake of the Financial 28807 (June 30, 2009), 74 FR 32688 (July 8, 2009), reporting obligations by the CPO or CTA filing Crisis of 2007–2008, 1 J. Fin. Econ. P. 4 (2009); and at section III (‘‘MMF Reform Proposing Release’’). John Kambhu et al., Hedge Funds, Financial proposed Form PF. 66 Report of the President’s Working Group on Intermediation, and Systemic Risk, FRBNY Econ. P. 56 See President’s Working Group on Financial Financial Markets: Money Market Fund Reform Rev. (Dec. 2007) (‘‘Kambhu’’). Markets, Hedge Funds, Leverage, and the Lessons Options (Oct. 2010), available at http://treas.gov/ 59 of Long Term Capital Management (Apr. 1999), at Kambhu, supra note 58; Financial Stability press/releases/docs/ 23, available at http://www.ustreas.gov/press/ Forum, Update of the FSF Report on Highly 10.21%20PWG%20Report%20Final.pdf. The PWG releases/reports/hedgfund.pdf (‘‘PWG LTCM Leveraged Institutions (May 19, 2007). MMF Report states that the work of the President’s Report’’). 60 See Bernanke, supra note 58; David Stowell, Working Group on Financial Reform relating to 57 See FSA Survey, supra note 27, at 5 (showing An Introduction to Investment , Hedge Funds money market funds is now being taken over by borrowings as a multiple of net equity ranging from & Private Equity: The New Paradigm 259–261 FSOC. The SEC has discussed previously registered 100% in strategies such as managed futures to (2010). money market funds’ susceptibility to runs. See 1400% in the hedge fund 61 See PWG LTCM Report, supra note 56. MMF Reform Proposing Release, supra note 65, at strategy). 62 See section II.D.2 of this Release. section III.

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results.67 During the financial crisis, private equity funds, certain of their recent financial crisis, a trend in private several sponsors of ‘‘enhanced cash portfolio companies, or creditors equity transactions was for private funds,’’ a type of liquidity fund, involved in financing private equity equity firms to enter into buyout committed capital to those funds to transactions also may be important to transactions with seller-favorable prevent investors from realizing losses the assessment of systemic risk and, financing conditions and terms that in the funds.68 The fact that sponsors of therefore, that large advisers to these placed much of the risk of market certain liquidity funds felt the need to funds should provide targeted deterioration after the transaction support the stable value of those funds information on Form PF to allow FSOC agreement was signed on the financing suggests that they may be susceptible to to conduct basic systemic risk institutions and the private equity runs like registered money market monitoring.70 adviser.73 funds. One aspect of the private equity In addition, some industry observers Registered money market funds are business model that some have have noted that the leveraged buyout subject to extensive regulation under identified as potentially having systemic investment model of imposing Investment Company Act rule 2a–7, implications is its method of financing significant amounts of leverage on their which imposes credit-quality, maturity, buyouts of companies. Leveraged portfolio companies in an effort to meet and diversification requirements on private equity transactions often rely on investment return objectives subjects money market fund portfolios designed banks to provide bridge financing until those portfolio companies to greater risk to ensure that the funds’ investing the permanent financing for the in the event of economic stress.74 If remains consistent with the objective of transaction is completed, whether private equity funds conduct a maintaining a stable net asset value.69 through a syndicated bank or While liquidity funds are not required issuance of high yield bonds by the risks has resulted in significant mark to market to comply with rule 2a–7, we portfolio company or both.71 When losses to banks’’); Bank of England, Financial Stability Report, at 19 (Oct. 2007), available at understand that many liquidity funds market conditions suddenly turn, these http://www.bankofengland.co.uk/publications/fsr/ can suspend redemptions or impose institutions can be left holding this 2007/fsrfull0710.pdf (‘‘Bank of England’’) (‘‘The near gates on shareholder redemptions upon potentially risky bridge financing (or closure of primary issuance markets for indications of stress at the fund. As a committed to provide the final bank collateralised loan obligations, and an increase in among investors, left banks unable to result, the risk of runs at liquidity funds financing, but no longer able to distribute leveraged that they had originated may be mitigated. The information that syndicate or securitize it and thus earlier in the year. This exacerbated a problem the SEC is proposing to require advisers forced to hold it) at precisely the time banks already faced, as debt used to finance a to liquidity funds report is designed to when credit market conditions, and number of high-profile private-equity sponsored leveraged buyouts (LBOs) had remained on their allow FSOC to assess liquidity funds’ therefore the institutions’ own general balance sheets.’’). susceptibility to runs and ability to exposure to private equity transactions 73 See Davidoff, supra note 71, at 495–496 (noting otherwise pose systemic risk. and other committed financings, have the trend in private equity transaction agreements The SEC requests comment on this worsened.72 For example, prior to the signed prior to the financial crisis to have no financing condition and to have limited ‘‘market analysis of the potential systemic risk outs’’ and ‘‘lender outs’’ in the debt commitment posed by liquidity funds. Does it 70 See section II.B of this Release for a discussion letters and further noting that ‘‘by agreeing to a more adequately identify the ways in which of the definition of ‘‘private equity fund’’ in Form certain debt commitment letter and providing liquidity funds might generate systemic PF. Form PF is a joint form between the SEC and bridge financing, the banks now took on the risk of the CFTC only with respect to sections 1 and 2 of market deterioration between the time of signing risk? Are there other ways that liquidity the form. Section 4 of the form, which would and closing.’’). Bank regulators and industry funds could create systemic risk? Do require more specific reporting regarding private observers also noted the trend in private equity liquidity funds lack any potential to equity funds, would only be required by the SEC. financing prior to the financial crisis for banks to create systemic risk? Please explain 71 See Steven M. Davidoff, The Failure of Private enter into ‘‘covenant lite’’ loans, which did not Equity, 82 S. Cal. L. Rev. 481, 494 (2009) require borrowers to meet certain performance your views and discuss their (‘‘Davidoff’’). metrics for cash flow or profits. See The Economics implications for the reporting proposed 72 See Senior Supervisors Group, Observations on of Private Equity Investments: Symposium on Form PF. Risk Management Practices during the Recent Summary, FRBSF Economic Letter (Feb. 29, 2008), Market Turbulence, at 2 (Mar. 6, 2008), available at available at http://www.frbsf.org/publications/ 3. Private Equity Funds http://www.occ.gov/publications/publications-by- economics/letter/2008/el2008-08.html (noting type/other-publications/pub-other-risk-mgt- growth in the first half of 2007 in such ‘‘covenant It is the SEC’s initial view, after practices-2008.pdf (‘‘Firms likewise found that they lite’’ loans); Financial Stability Forum, Report of the consultation with staff representing could neither syndicate to external investors their Financial Stability Forum on Enhancing Market and FSOC’s members, that the activities of leveraged loan commitments to corporate borrowers Institutional Resilience, at 7 (Apr. 7, 2008), nor cancel their commitments to fund those loans available at http://www.financialstabilityboard.org/ despite material and adverse changes in the publications/r_0804.pdf (‘‘Another segment that saw 67 PWG MMF Report, supra note 66, at section 3.h availability of funding from other investors in the rapid growth in volume accompanied by a decline ‘‘ ( These vehicles typically invest in the same types market’’); BIS Private Equity Paper, supra note 35, in standards was the corporate leveraged loan of short-term instruments that MMFs hold and at 1–2 (‘‘Conditions in the leveraged loan market market, where lenders agreed to weakened loan share many of the features that make MMFs deteriorated in the second half of 2007, and demand covenants to obtain the business of private equity vulnerable to runs, so growth of unregulated MMF for leveraged finance declined sharply. An initial funds.’’); Bank of England, supra note 73, at 27 substitutes would likely increase systemic risks. temporary adverse investor reaction to loose (‘‘Market intelligence suggested that private equity However, such funds need not comply with rule lending terms and low credit spreads prevailing in sponsors had considerable market power to impose 2a–7 or other [Investment Company Act] early 2007 became more protracted over the course aggressive capital structures, tight spreads and weak protections and in general are subject to little or no of the second half of the year as the turbulence in covenants because investor demand was so strong. regulatory oversight. In addition, the risks posed by financial markets deepened and contraction in But in August, the flow of new LBOs came to a MMF substitutes are difficult to monitor, since they demand for leveraged loans became more severe. virtual standstill and the debt of a sequence of high- provide far less market transparency than MMFs.’’). Global primary market leveraged loan volumes profile companies could not be sold [by banks].’’). 68 See, e.g., Sree Vidya Bhaktavatsalam, shrank by more than 50% in the second half of 74 See, e.g., Paying the Price, The Economist (Jul. BlackRock Earnings Beat Estimates on Hedge-Fund 2007. The contraction in demand for leveraged 31, 2010) (‘‘ funds could decide to make a Fees, Bloomberg (Jan. 17, 2008) (‘‘During the fourth loans revealed substantial exposure of arranger geared bet on equities by borrowing money and quarter, BlackRock spent $18 million to support the banks to warehouse risk. Undistributed loans will investing in the S&P 500 . But they would net asset value of two enhanced cash funds whose contribute to increased funding costs and capital understandably regard such a strategy as highly values fell as the credit markets got squeezed’’); Sree requirements for banks in 2008, on top of other risky. Giving money to private-equity managers, Vidya Bhaktavatsalam & Christopher Condon, offbalance sheet products that they have been who then use debt to acquire quoted companies, is Federated Investors Bails Out Cash Fund After forced to bring on-balance sheet. Moreover, with viewed in an entirely different light but amounts to Losses, Bloomberg (Nov. 20, 2007). leveraged loan indices trading close to 90 cents on the same gamble’’). See also BIS Private Equity 69 See 17 CFR 270.2a–7. a dollar in March 2008, realisation of warehouse Paper, supra note 35, at 24–25.

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leveraged buyout of an entity that could B. Who Must File Form PF asset value (including any committed be systemically important, information We propose that any investment capital) or may have gross notional about that investment could be adviser registered or required to register exposure in excess of twice its net asset important in FSOC monitoring and with the SEC that advises one or more value (including any committed assessing potential systemic risk.75 private funds must file a Form PF with capital); or (3) may sell securities or 81 For these reasons, the SEC believes the SEC.78 A CPO or CTA that also is other assets short. As noted above, certain information on the activities of a registered investment adviser that ‘‘liquidity fund’’ would be defined as private equity funds and their portfolio advises one or more private funds any private fund that seeks to generate companies is relevant for purposes of would be required to file Form PF with income by investing in a portfolio of monitoring potential systemic risk.76 In respect to any advised commodity pool short term obligations in order to addition, based on the SEC’s that is a ‘‘private fund.’’ By filing Form maintain a stable net asset value per consultations with staff representing PF with respect to these private funds, unit or minimize principal volatility for 82 FSOC’s members, private equity a CPO will be deemed to have satisfied investors. ‘‘Private equity fund’’ would transaction financings, and their certain of its filing requirements for be defined as any private fund that is interconnected impact on the lending these funds.79 Under these rules, most not a hedge fund, liquidity fund, real institutions, could be a useful area for private fund advisers would be required estate fund, securitized asset fund or FSOC to monitor in fulfilling its duty to to complete only section 1 of Form PF, venture capital fund and does not gain a comprehensive picture of the providing certain basic information provide investors with redemption 83 financial services marketplace in order regarding any hedge funds they advise rights in the ordinary course. to identify potential threats to the in addition to information about their Our proposed definition of hedge stability of the U.S. financial system. private fund assets under management fund would cover any private fund that and more generally about their funds’ has any one of three common The SEC requests comment on this performance and use of leverage. The analysis of the potential systemic risk characteristics of a hedge fund: A information collected under section 1 of using market value posed by the activities of private equity Form PF is described in further detail in funds. Does it identify the ways in (instead of only realized gains), high section II.D.1 of this Release. Certain leverage or short selling. We are not which private equity fund activities larger private fund advisers would be might generate systemic risk? Are there aware of any standard definition of a required to complete additional sections 84 other ways that private equity funds or hedge fund, although we note that our of Form PF, which require more proposed definition is broadly based on their activities could create systemic detailed information. those used in the FSA survey and in the risk? Is the preliminary view that Three types of ‘‘Large Private Fund IOSCO report described in section I.B private equity fund activities may have Advisers’’ would be required to less potential to create systemic risk complete certain additional sections of above and thus generally would than hedge funds and liquidity funds Form PF: 80 promote international consistency in correct? Many advisers to private equity • Advisers managing hedge funds 81 funds have noted that certain features of that collectively have at least $1 billion See proposed Glossary of Terms to Form PF. This definition also is the same as the SEC has the private equity business model, such in assets as of the close of business on proposed in amendments to Form ADV. See as its reliance on long-term capital any day during the reporting period for Implementing Release, supra note 9. For purposes commitments from investors, lack of the required report; of the definition, the fund should not net long and • short positions in calculating its borrowings but substantial debt at the private equity Advisers managing a liquidity fund and having combined liquidity fund and should include any borrowings or notional fund level, and investment primarily in exposure of another person that are guaranteed by the equity of a diverse range of private registered money market fund assets of the fund or that the fund may otherwise be companies, mitigate its potential to pose at least $1 billion as of the close of obligated to satisfy. In addition, a commodity pool that meets the definition of a private fund is treated systemic risk.77 Do private equity funds business on any day during the reporting period for the required report; as a hedge fund for purposes of Form PF. not have any potential to create 82 and See proposed Glossary of Terms to Form PF. systemic risk? Is the monitoring of • 83 See proposed Glossary of Terms to Form PF. private equity fund activities Advisers managing private equity Proposed Form PF would define ‘‘real estate fund’’ funds that collectively have at least $1 unnecessary to assess systemic risk as any private fund that is not a hedge fund, that billion in assets as of the close of does not provide investors with redemption rights generally? Please explain your views business on the last day of the quarterly in the ordinary course and that invests primarily in and discuss their implications for the real estate and real estate-related assets. Proposed reporting period for the required report. reporting proposed on Form PF. Form PF would define ‘‘securitized asset fund’’ as any private fund that is not a hedge fund and that 1. Types of Funds issues asset backed securities and whose investors 75 For example, some noted the role of private Proposed Form PF would define are primarily debt-holders. These definitions are equity investments in companies that the ‘‘hedge fund’’ as any private fund that (1) designed to encompass entities that we believe are government ultimately bailed out during the typically considered real estate or securitized asset financial crisis. See, e.g., Casey Ross, Cerberus’ has a performance fee or allocation funds, respectively, and are primarily intended to Success Hurt by a Pair of Gambles, The Boston calculated by taking into account exclude these types of funds from our definition of Globe (Mar. 25, 2010) (discussing private equity unrealized gains; (2) may borrow an private equity fund to improve the quality of data investments in GMAC and Chrysler Corp., both of amount in excess of one-half of its net reported on Form PF relating to private equity which received government ); and Louise funds. Proposed Form PF would define ‘‘venture Story, For Private Equity, A Very Public Disaster, capital fund’’ as any private fund meeting the N.Y. Times (Aug. 8, 2009) (same). 78 Proposed Advisers Act rule 204(b)–1. definition of venture capital fund in rule 203(l)-1 76 See section II.D.4 of this Release for a 79 Proposed CEA rule 4.27(d). A CPO registered of the Advisers Act for consistency. See proposed discussion of the information we propose requiring with the CFTC that is also registered as a private Glossary of Terms to Form PF. See also Private certain private equity fund advisers report on Form fund adviser with the SEC will be deemed to have Fund Exemption Release, supra note 9, for a PF. satisfied its filing requirements for Schedules B and discussion of proposed Advisers Act rule 203(l)–1. 77 See, e.g., PE Council Letter, supra note 49; C of proposed Form CPO–PQR by completing and 84 See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC Testimony of Mark Tresnowksi, General Counsel, filing the applicable portions of Form PF for each Cir. 2006) (‘‘ ‘Hedge funds’ are notoriously difficult Madison Dearborn Partners, before the Senate of its commodity pools that satisfy the definition of to define. The term appears nowhere in the federal Banking Subcommittee on Securities, Insurance and ‘‘private fund’’ in the Dodd-Frank Act. securities laws, and even industry participants do Investment, July 15, 2009. 80 See proposed Instruction 3 to Form PF. not agree upon a single definition.’’)

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hedge fund reporting.85 Moreover, we systemic risk that FSOC will want to approximately 250 U.S.-based advisers believe that any fund meeting this monitor. The SEC recognizes that its managing over $1 billion in private definition is an appropriate subject for proposed definition of liquidity fund equity fund assets represent this higher level of reporting even if the potentially could capture some short- approximately 85 percent of the U.S. fund would not otherwise be considered term funds. Are there ways that private equity fund industry based on a hedge fund. the SEC could define a liquidity fund to committed capital.88 The Commissions request comment capture all potential substitutes for The SEC is proposing that private on the hedge fund definition proposed money market funds, but not short-term fund advisers combine liquidity fund in Form PF.86 Does this proposed bond funds? The SEC requests comment and registered money market fund definition capture the appropriate on the liquidity fund definition assets for purposes of determining features of funds that should be subject proposed in Form PF. whether the adviser meets the threshold to more detailed reporting as ‘‘hedge Our proposed definition of a private for more extensive reporting regarding funds’’? Many private funds sell short. Is equity fund is intended to distinguish its liquidity funds because it the bright line of classifying any private private equity funds from other private understands that an adviser’s liquidity fund that engages in short selling as a funds based upon the lack of funds and registered money market hedge fund appropriate? Is the proposed redemption rights and their not being funds often pursue similar strategies leverage threshold for hedge funds set at engaged in certain investment strategies and invest in the same securities and the appropriate level? One alternative (such as , real estate or thus are subject to many of the same approach we could take is to not define venture capital), while these funds risks. Historically, most advisers of a hedge fund in Form PF and simply would typically have performance fees enhanced cash funds or other require that all advisers managing in based on realized gains. Has the SEC unregistered money market funds also excess of $1 billion in private fund appropriately distinguished private advised a substantial amount of assets (regardless of strategy) complete equity funds from other types of private registered money market fund assets, section 2 of Form PF. Would this be a funds in its proposed definition? Should and so the SEC’s criteria for liquidity more effective approach? For purposes others be excluded? The SEC requests fund reporting is expected to encompass of Form PF, a commodity pool satisfying comment on the private equity fund most significant managers of liquidity the definition of a ‘‘private fund’’ is definition proposed in Form PF. funds, which it estimates number categorized as a hedge fund. Is this 2. Large Private Fund Adviser around 80 advisers.89 treatment appropriate? We believe that requiring basic The proposed definition of liquidity Thresholds information from all advisers about all fund is designed to capture all potential As noted above, we are proposing $1 private funds but more extensive and substitutes for money market funds billion in hedge fund assets under because we believe these funds may be management as the threshold for large detailed information only from advisers susceptible to runs and otherwise pose hedge fund adviser reporting, $1 billion with these amounts of assets under in combined liquidity fund and management in hedge funds, private 85 The FSA survey is voluntary and does not registered money market fund assets equity funds, and liquidity funds would proscriptively define a hedge fund, but states that under management as the threshold for allow FSOC to effectively conduct basic if a fund generally satisfies a number of the large liquidity fund adviser reporting, monitoring for potential systemic risk in following criteria, it should be deemed to fall these private fund industries and to within the scope of the FSA hedge fund survey: and $1 billion in private equity fund (1) Employs techniques assets under management as the identify areas where OFR may want to that can include the use of short selling, derivatives, threshold for large private equity fund obtain additional information. In and leverage; (2) takes in external investor money; adviser reporting. Advisers would be addition, requiring that only these Large (3) are not UCITS funds; (4) pursue absolute Private Fund Advisers complete returns; (5) charge performance-based fees; (6) have required to measure whether these broader mandates than traditional funds which give thresholds have been crossed daily for additional reporting requirements under managers more flexibility to shift strategy; (7) have hedge funds and liquidity funds and Form PF would provide systemic risk higher trading volumes/fund turnover; and (8) quarterly for private equity funds based information for most private fund assets frequently set a high minimum investment limit. while minimizing burdens on smaller The IOSCO Report generally considered as a hedge on our belief that, as a matter of fund all investment schemes displaying a ordinary business practice, advisers are private fund advisers that are less likely combination of some of the following aware of hedge fund and liquidity fund to pose systemic risk concerns. The characteristics: (1) Borrowing and leverage assets under management on a daily proposed approach thus incorporates restrictions are not applied; (2) significant performance fees are paid to the manager in basis, but are likely to be aware of Congress’ directive in section 408 of the addition to an annual ; (3) investors private equity fund assets under Dodd-Frank Act to take into account the are typically permitted to redeem their interests management only on a quarterly basis. size, governance, and investment periodically, e.g., quarterly, semi-annually or We designed these thresholds so that strategy of advisers to mid-sized private annually; (4) often significant ‘own’ funds are invested by the manager; (5) derivatives are used, the group of Large Private Fund funds in determining whether they pose often for speculative purposes, and there is an Advisers that would be included based systemic risk and formulating systemic ability to short sell securities; and (6) more diverse on the proposed thresholds is relatively risk reporting and recordkeeping risks or complex products are involved. small in number but represents the large requirements for private funds.90 See IOSCO Report, supra note 24, at 4–5. 86 The SEC previously defined private fund for majority of their respective industries purposes of registration of advisers to hedge funds based on assets under management. For 88 Preqin. The Preqin data relating to private by focusing on the structure of the fund to example, we understand that the equity fund committed capital is available in File differentiate it from other pooled investment approximately 200 U.S.-based advisers No. S7–05–11. vehicles, while the definition of hedge fund we 89 See, e.g., iMoneyNet, Enhanced Cash Report propose today for purposes of Form PF reporting managing at least $1 billion in hedge (3rd quarter 2009). The estimate of the number of focuses on the strategy of the fund in order to fund assets represent over 80 percent of large liquidity fund advisers is based on the number monitor trading strategies and behaviors which the U.S. hedge fund industry based on of advisers with at least $1 billion in registered could contribute to systemic risk. See Registration assets under management.87 Similarly, money market fund assets under management. under the Advisers Act of Certain Hedge Fund 90 We note that the SEC has proposed to collect Advisers, Investment Advisers Act Release No. 2333 SEC staff estimates that the information regarding the governance of private (Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) fund advisers through Form ADV. See (rulemaking vacated, Goldstein, 451 F.3d at 884). 87 See HFI, supra note 20. Implementing Release, supra note 9.

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We request comment on the proposed These proposed aggregation Form PF.95 This would allow affiliated thresholds. Are there more appropriate requirements are designed to prevent an entities that share reporting and risk dividing lines as to when a private fund adviser from avoiding the proposed management systems to report jointly adviser should be required to report Large Private Fund Adviser reporting while also permitting affiliated entities more information? Should any of the requirements by re-structuring the that operate separately to report assets under management thresholds be manner of providing private fund advice separately. With respect to sub-advised lower or higher? Are the daily (for hedge internally within the private fund funds, to prevent duplicative reporting, fund and liquidity fund managers) and manager group. The adviser also would only one adviser would report quarterly (for private equity fund be required to exclude any assets in any information on Form PF with respect to managers) measurement periods for the account that are solely invested in other that fund. For reporting efficiency and assets under management thresholds set funds (i.e., internal or external fund of to prevent duplicative reporting, we are appropriately? Should we, as proposed, funds) in order to avoid duplicative proposing that if an adviser completes base the threshold on the amount of reporting.93 We request comment on information on Schedule D of Form assets under management? If not, what these proposed aggregation ADV with respect to any private fund, should we base it on? requirements. Would these proposed the same adviser would be responsible We request comment on our proposed aggregation rules appropriately meet our for reporting on Form PF with respect approach of only requiring these Large goal of preventing improper avoidance to that fund.96 We request comment on Private Fund Advisers to report of the reporting requirements while this approach. Should we not allow additional information on Form PF. Will giving a complete picture of private advisers to file a consolidated form with collecting the information required by fund assets managed by a particular its related persons? Are there other sections 2, 3, and 4 of Form PF only private fund adviser group? Would persons related to a private fund adviser from advisers managing in excess of aggregating in a different manner be that should also be able to report on these asset thresholds provide adequate more effective at meeting our goal? Form PF on a consolidated basis? For information about potential systemic Should funds that invest most (e.g., 95 example, should we adjust Form PF to risk in these industries? Should we percent), but not all, of their assets in permit consolidated reporting with instead require that all private fund other funds be excluded from Form PF related persons that are exempt advisers registered with the SEC reporting? Would excluding such funds reporting advisers in the event an complete all of the information on Form still provide FSOC with a complete adviser chooses to voluntarily report PF appropriate to the type of private enough picture of private fund activities exempt reporting adviser information? funds they advise regardless of fund size to have an adequate baseline for Should we allow a different or assets under management? Are there systemic risk monitoring purposes? arrangement on reporting of sub-advised funds? If so, what would those advisers to other types of private funds If the adviser’s principal office and arrangements be? that should be required to report more place of business is outside the United information on Form PF? For example, States, the adviser could exclude any 5. Exempt Reporting Advisers and Other should advisers to other types of private private fund that during the last fiscal Advisers Not Registered With the SEC fund report more information if they year was neither a United States person We are proposing that only private manage in excess of a certain threshold nor offered to, or beneficially owned by, fund advisers registered with the SEC of that type of private fund assets? 94 any United States person. This aspect (including those that are also registered 3. Aggregation of Assets Under of the proposed form is designed to with the CFTC as CPOs or CTAs) file Management allow an adviser to report with respect Form PF.97 The Dodd-Frank Act created to only those private funds that are more exemptions from SEC registration under For purposes of determining whether likely to implicate U.S. regulatory an adviser is a Large Private Fund the Advisers Act for advisers solely to interests. We request comment on this venture capital funds or for advisers to Adviser for purposes of Form PF, each aspect of the proposed form. Should we adviser would have to aggregate private funds that in the aggregate have require different reporting relating to less than $150 million in assets under together: foreign advisers or foreign private • Assets of managed accounts advised management in the United States funds? (‘‘exempt reporting advisers’’).98 We are by the firm that pursue substantially the not proposing that exempt reporting same investment objective and strategy 4. Reporting for Affiliated and advisers be required to file Form PF.99 and invest in substantially the same Subadvised Funds We believe that Congress’ determination positions as the private fund (‘‘parallel To provide private fund advisers with to exempt these advisers from SEC managed accounts’’); 91 and reporting flexibility and convenience, registration indicates Congress’ belief • Assets of that type of private fund the adviser could, but is not required to, that they are sufficiently unlikely to advised by any of the adviser’s ‘‘related report the private fund assets that it pose systemic risk that regular reporting persons.’’ 92 manages and the private fund assets that of detailed information may not be necessary.100 Based on consultation 91 See proposed Instructions 3, 5, and 6 to Form its related persons manage on a single PF; and proposed Glossary of Terms to Form PF. See also definitions of ‘‘hedge fund assets under similar functions). See proposed Glossary of Terms 95 See proposed Instruction 2 to Form PF. See management,’’ ‘‘liquidity fund assets under to Form PF and Glossary of Terms to Form ADV. supra note 92 for the definition of ‘‘related person.’’ management,’’ and ‘‘private equity fund assets under The adviser would be permitted, but not required, 96 See proposed Instruction 4 to Form PF. management’’ in the proposed Glossary of Terms to to file one consolidated Form PF for itself and its 97 See proposed Advisers Act rule 204(b)–1. Form PF. related persons. See section II.B.4 of this Release 98 See Private Fund Exemption Release, supra 92 See proposed Instructions 3 and 5 to Form PF. below. note 9; Implementing Release, supra note 9. ‘‘Related person’’ is defined generally as: (1) All of 93 See proposed Instruction 7 to Form PF. 99 To the extent an exempt reporting adviser is the adviser’s officers, partners, or directors (or any 94 See proposed Instruction 1 to Form PF. ‘‘United registered with the CFTC as a CPO or CTA, that person performing similar functions); (2) all persons States person’’ would have the meaning provided in adviser would be obligated to file either proposed directly or indirectly controlling, controlled by, or proposed rule 203(m)-1 of the Advisers Act, and Form CPO–PQR or CTA–PR, respectively. under common control with the adviser; and (3) all ‘‘principal office and place of business’’ would have 100 See Senate Committee Report, supra note 4, at of the adviser’s employees (other than employees the same meaning as in Form ADV. See Private 74 (‘‘The Committee believes that venture capital performing only clerical, administrative, support or Fund Exemption Release, supra note 9. Continued

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with staff representing FSOC’s members the adviser’s fiscal year).103 This next Form PF update would be and on the basic information that the frequency of reporting would allow the timely.106 This would allow us to SEC has proposed requiring exempt Commissions and FSOC to periodically determine promptly whether an reporting advisers report to the SEC on monitor certain key information adviser’s discontinuance in reporting is Form ADV, the SEC is not proposing to relevant to assessing systemic risk posed due to it no longer meeting the form’s extend Form PF reporting to these by these private funds on an aggregate reporting thresholds as opposed to a advisers. basis. It also would allow these advisers lack of attention to its filing obligations. Our proposed rules, however, would to file amendments at the same time as Advisers also would be able to avail require some advisers managing less they file their Form ADV annual themselves of a temporary hardship than $150 million in private fund assets updating amendment, which may make exemption in a similar manner as with to report limited information on Form certain aspects of the reporting more other Commission filings if they are PF. While Congress exempted from efficient, such as reporting assets under unable to file Form PF electronically in registration with the SEC advisers solely management. Finally, this timing will a timely manner due to unanticipated to private funds that in the aggregate facilitate FSOC’s compilation and technical difficulties.107 have less than $150 million in assets analysis of Form PF and Form ADV data We request comment on our proposed under management, it provided no such for these filers since both sets of data filing frequency. Are the filing exemption for advisers with less than will be reported as of the same date. requirements for private fund advisers $150 million in private fund assets Large Private Fund Advisers would be frequent enough to assess high-level under management that also, for required to complete and file a Form PF systemic risk posed by private funds? example, advise individual clients with no later than 15 days after the end of Should smaller private fund advisers over $100 million in assets under each calendar quarter.104 Our have to file more frequently or less management. Because this latter group preliminary view is that, unlike for frequently? Should Large Private Fund of advisers is registered with the SEC smaller private fund advisers, quarterly Advisers be required to file Form PF and thus is subject to the full range of reporting for Large Private Fund more frequently (such as monthly) or investor protection efforts that Advisers is necessary in order to less frequently (such as annually or accompany registration, and because of provide FSOC with timely data to semiannually)? Is 90 days for an annual the limited burden of the basic identify emerging trends in systemic update or 15 days for a quarterly update reporting, we believe it is appropriate to risk. We understand that hedge fund too long to ensure reporting of timely require these advisers to complete and advisers already collect and calculate information? Would more or less time file section 1 of Form PF. We request much of the information that would be be more appropriate? Specifically, comment on this approach. Should we required by Form PF relating to hedge would 15 days be enough time for Large require that exempt reporting advisers funds on a quarterly basis.105 As a Private Fund Advisers to prepare and file Form PF? 101 Why or why not? If so, result, quarterly reporting on Form PF file quarterly reports? Is there which portions of Form PF should we would coincide with most hedge fund information in the form that should be require that exempt reporting advisers advisers’ internal reporting cycles and amended promptly if it becomes complete? leverage data collection systems and inaccurate? Should Large Private Fund processes already existing at these Advisers be required to file Form PF as C. Frequency of Reporting advisers. In addition, we believe that of the end of each calendar quarter or The Commissions propose to require most liquidity fund advisers collect on as of the end of each fiscal quarter? that all private fund advisers other than a monthly basis much of the Currently, we anticipate that the the Large Private Fund Advisers information that we are proposing be proposed rules requiring filing of Form discussed above complete and file a reported in section 3 of Form PF and PF would have a compliance date of Form PF on an annual basis. A newly thus quarterly reporting should be December 15, 2011, at which time Large registering adviser’s initial Form PF relatively efficient for these advisers. Private Fund Advisers would begin filing would be submitted within 15 We anticipate that Large Private Fund filing 15 days after the end of each days of the end of its next occurring Advisers would be able to collect and quarter (i.e., Large Private Fund calendar quarter after registering with file this information within 15 days after Advisers would need to make their the SEC so that FSOC can begin the end of each quarter, which is initial Form PF filing by January 15, including this data in its analysis as sufficiently timely for FSOC’s use in 2012). This timing should allow soon as possible.102 Annual updates conducting systemic risk monitoring. sufficient time for Large Private Fund would be due no later than the last day Advisers would be required to file Advisers to develop systems for on which the adviser may timely file its Form PF to report that they are collecting the information required on annual updating amendment to Form transitioning to only filing Form PF Form PF and prepare for filing. We ADV (currently, 90 days after the end of annually with the Commissions or to currently anticipate that this timeframe report that they no longer meet the also would give the SEC sufficient time funds * * * do not present the same risks as the requirements for filing Form PF no later to create and program a system to accept large private funds whose advisers are required to 108 register with the SEC under this title. Their than the last day on which the adviser’s filings of Form PF. We are proposing activities are not interconnected with the global financial system, and they generally rely on equity 103 See proposed Advisers Act rule 204(b)–1(e). 106 See proposed Instruction 8 to Form PF. funding, so that losses that may occur do not ripple 104 See proposed Instruction 7 to Form PF. 107 See proposed rule 204(b) 1(f). The adviser throughout world markets but are borne by fund 105 See Report of the Asset Manager’s Committee would check the box in Section 1a of Form PF investors alone.’’). See also Private Fund Exemption to the President’s Working Group on Financial indicating that it was requesting a temporary Release, supra note 9. Markets, Best Practices for the Hedge Fund Industry hardship exemption and complete Section 5 of 101 Section 404 of the Dodd-Frank Act states that (Jan. 15, 2009), available at http:// Form PF no later than one business day after the the SEC ‘‘shall issue rules requiring each investment www.amaicmte.org/Public/AMC%20Report%20- electronic Form PF filing was due and submit the adviser to a private fund to file reports containing %20Final.pdf (discussing best practices on filing that is the subject of the Form PF paper filing such information as the [SEC] deems necessary and disclosing to investors performance data, assets in electronic format with the Form PF filing system appropriate in the public interest and for the under management, risk management practices no later than seven business days after the filing protection of investors or for the assessment of (including on asset types, geography, leverage, and was due. systemic risk,’’ (emphasis added). concentrations of positions) with which SEC staff 108 The SEC will work closely with the firm it 102 See proposed rule 204(b)–1(a). understands many hedge funds comply). selects to create and program a system for Form PF

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that the rules allow smaller private fund adviser, such as its name and the name breakdown of the fund’s borrowing advisers until 90 days after the end of of any of its related persons whose based on whether the creditor is a U.S. their first fiscal year occurring on or information is also reported on the , foreign financial after the compliance date of the adviser’s Form PF. Section 1a also institution or non-financial institution proposed rule to file their first Form PF would require reporting of basic as well as the identity of, and amount (with the expectation that this would aggregate information about the private owed to, each creditor to which the result in smaller private fund advisers funds managed by the adviser, such as fund owed an amount equal to or greater with a December 31 fiscal year end total and net assets under management, than 5 percent of the fund’s net asset filing their first Form PF by March 31, and the amount of those assets that are value as of the reporting date. This 2012) because we anticipate that some attributable to certain types of private section would require reporting of of these advisers may require more time funds.111 This identifying information certain basic information about how to prepare for their initial Form PF filing would assist us and FSOC in monitoring concentrated the fund’s investor base is, and so that the first group of private the amount of assets managed by private such as the number of beneficial owners fund advisers filing Form PF would all fund advisers and the general of the fund’s equity and the percentage be reporting based generally on distribution of those assets among of the fund’s equity held by the five information as of December 31, 2011.109 various types of private funds. largest equity holders.114 Finally, Under this proposed compliance date Section 1b of Form PF would elicit section 1b would require monthly and and transition rule, smaller private fund certain identifying and other basic quarterly performance information advisers would have at least eight information about each private fund about each fund. months after adoption of the proposed advised by the investment adviser. The The information required by section form, depending on their fiscal year adviser generally would need to 1b would allow FSOC to monitor certain end, to file their first Form PF. We complete a separate section 1b for each systemic trends for the broader private request comment on when advisers private fund it advised. However, fund industry, such as how certain should be required to comply with the because feeder funds typically invest kinds of private funds perform and proposed rules and file Form PF. Do the substantially all their assets in a master exhibit correlated performance behavior compliance dates and transition times fund, to prevent duplicative reporting under different economic and market that we have proposed provide the adviser must report information in conditions and whether certain funds sufficient time for smaller advisers and section 1b on an aggregated basis for are taking significant risks that may Large Private Fund Advisers to prepare private funds that are part of a master- have systemic implications.115 It would for filing? feeder arrangement and so would not allow FSOC to monitor borrowing file a separate section 1b for any feeder practices for the broader private fund D. Information Required on Form PF 112 fund. industry, which may have Section 1b would require reporting of The questions contained in proposed interconnected impacts on banks each private fund’s gross and net assets Form PF reflect relevant requirements (including specific banks) and thus the and the aggregate notional value of its and considerations under the Dodd- broader financial system. We believe positions.113 It also would Frank Act, consultations with staff that collecting both monthly and require basic information about the representing FSOC’s members, and the quarterly performance data also would fund’s borrowings, including a Commissions’ experience in regulating allow FSOC to monitor the data at those private fund advisers that are 111 sufficient granularity to track trends. already registered with the Section 1 would require the adviser to indicate the adviser’s total ‘‘regulatory assets under Finally, section 1c would require Commissions. As discussed above, with management,’’ using the same proposed definition reporting of certain information only respect to hedge fund advisers in of that term as used on proposed amendments to about hedge funds managed by the particular, the information we propose Part 1 of Form ADV, and its net assets under management, which subtracts out any liabilities of adviser, such as their investment requiring registered advisers to file on the private funds. See Implementing Release, supra strategies, percentage of the fund’s Form PF also is broadly based on the note 9. Form PF, however, would require the assets managed using computer-driven guidelines discussed in the IOSCO adviser to aggregate parallel managed accounts with trading algorithms, significant trading Report with many of the more detailed related private funds in reporting its assets under management (even if the accounts are not counterparty exposures (including items generally tracking questions ‘‘securities portfolios’’ within the meaning of identity of counterparties),116 and contained in the surveys of large hedge proposed Instruction 5.b, Instructions to Part 1A of trading and clearing practices.117 This fund advisers conducted by the FSA Form ADV), and thus the total and net assets under information will enable FSOC to and other IOSCO members.110 We management figures reported in section 1a of Form PF may differ from what the adviser reports on expect that the information collected on Form ADV. Proposed question 2 would require the 114 See proposed question 12 on Form PF. Form PF would assist FSOC in adviser to report what portion of these assets under 115 This information also would be useful for monitoring and assessing any systemic management are attributable to hedge funds, advancing the Commissions’ investor protection risk, as discussed in section II.A above, liquidity funds, private equity funds, real estate goals. funds, securitized asset funds, venture capital 116 Specifically, proposed questions 19 and 20 on that may be posed by private funds. We funds, other private funds, and funds and accounts Form PF would require the adviser to identify the discuss below the information that Form other than private funds. See section II.B.1 of this five trading counterparties to which the fund has PF would require. Release for a discussion of these different types of the greatest net counterparty credit exposure funds and their proposed definitions for purposes (measured as a percentage of the fund’s net asset 1. Section 1 of Form PF. value) and that have the greatest net counterparty 112 See proposed Instructions 5 and 6 to Form PF. credit exposure to the fund (measured in U.S. Section 1 would apply to all When providing responses in Form PF with respect dollars). investment advisers required to file to a private fund, the adviser also must include any 117 More specifically, proposed question 21 on Form PF. Item A of Section 1a seeks parallel managed accounts related to the private Form PF would require estimated breakdowns of identifying information about the fund. Id. percentages of the hedge fund’s securities and 113 The form would require the adviser to report derivatives traded on a regulated exchange versus the total gross notional value of its funds’ derivative over the counter and percentages of the hedge filings and will monitor whether it could do so on positions, except that options would be reported fund’s securities, derivatives, and repos cleared by this timeframe. using their delta adjusted notional value. Long and a central clearing counterparty (‘‘CCP’’) versus 109 See proposed Advisers Act rule 204(b)–1(g). short positions would not be netted. See proposed bilaterally (or, in the case of repos, that constitute 110 See supra note 24. Form PF, instructions to question 11. a tri-party repo).

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monitor systemic risk that could be clearing practices sufficient to allow information also is designed to address transmitted through counterparty FSOC to examine systemic risks relating requirements under section 404 of the exposure, track how different strategies to trading and clearing outside of Dodd-Frank Act specifying certain are affected by and correlated with regulated exchanges and central clearing mandatory contents for records and different market stresses, and follow the systems? Is there information in section reports that must be maintained and extent of private fund activities 1 that we should not require, or that we filed by advisers to private funds. For conducted away from regulated should only require of large hedge fund example, it would provide information exchanges and clearing systems. We advisers and why? With respect to the about the types of assets held and have based some of this information, aggregation of master-feeder trading and investment positions and such as information about significant arrangements for reporting purposes, are practices. trading counterparty exposures and there common situations in which an Section 2b of Form PF would require trading and clearing practices, on the adviser will not have sufficient access to large hedge fund advisers to report FSA surveys, which would promote a feeder fund’s information to report certain additional information about any international consistency in hedge fund accurately on Form PF? If so, how hedge fund they advise with a net asset reporting.118 should the form address those value of at least $500 million as of the We request comment on section 1 of situations? We also request comment close of business on any day during the proposed Form PF. Is there additional more generally on the definitions of reporting period (a ‘‘qualifying hedge basic information that we should terms we have proposed in the glossary fund’’).121 For purposes of determining require from all advisers filing Form PF of terms for Form PF. whether a private fund is a qualifying or regarding all of the hedge funds or 2. Section 2 hedge fund, the adviser would have to other private funds that they manage? aggregate any parallel managed For example, should we require any of Form PF would require private fund accounts, parallel funds, and funds that the more detailed information about advisers who had at least $1 billion in are part of the same master-feeder their borrowing practices that we hedge fund assets under management as arrangement, and would have to treat require regarding large hedge funds in of the close of business on any day any private funds managed by its related Item B of section 2b? Is a creditor during the reporting period to complete person as if they were managed by the providing 5 percent of the fund’s section 2.119 Section 2a would require filing adviser.122 We are proposing this borrowings an appropriate threshold for certain aggregate information about the aggregation to prevent an adviser from significant creditors of whose identity hedge funds advised by Large Private structuring its activities to avoid the FSOC may want to be aware for Fund Advisers, such as the market value reporting requirement. We have selected purposes of assessing the fund’s of assets invested (on a short and long $500 million as a threshold for more interconnectedness in the financial basis) in different types of securities and extensive individual hedge fund system? Should the threshold be more (e.g., different types of reporting because we believe that a $500 or less? Are the top five equity holders equities, fixed income securities, million hedge fund is a substantial fund in the fund an appropriate threshold for derivatives, and structured products). It the activities of which could have an significant investors in the fund? also would require the adviser to report impact on particular markets in which Should the threshold be more or less? the duration of fixed income portfolio it invests or on its particular Should we require assets under holdings (including asset backed counterparties. We also believe that management information for other securities), to indicate the assets’ setting this threshold at this level would private fund categories than those interest rate sensitivity, as well as the minimize reporting burdens on advisers specified in question 4? Should we turnover rate of the adviser’s aggregate to smaller or start up hedge funds that request that performance data be portfolios during the reporting period to are less likely to have a systemic impact. reported on a different basis than provide an indication of the adviser’s Finally, this threshold is the same monthly and quarterly? Are there other frequency of trading. Finally, the threshold used by the FSA in its hedge primary investment strategies that hedge adviser would be required to report a fund surveys and thus would create a funds use that should be included in geographic breakdown of investments certain level of consistency in reported question 17? Is the information we have held by the hedge funds it advises. data. proposed requiring on the fund’s This information would assist FSOC We request comment on the borrowings necessary given that other in monitoring in which qualifying hedge fund threshold. Should questions in section 1b ask for hedge funds may be significant it be lower or higher? If so, why? Should information on the fund’s gross and net investors and trends in hedge funds’ large hedge fund advisers have to report assets? Will asking for the amount and exposures to allow FSOC to identify the information for all their hedge identity of the five trading concentrations in particular asset funds? Could all of such advisers’ hedge counterparties to which the fund has the classes (or in particular geographic funds, in the aggregate, potentially have greatest net counterparty credit regions) that are building or a systemic impact that would merit such exposure and that have the greatest net transitioning over time. It would aid counterparty credit exposure to the fund FSOC in examining large hedge fund are financial institutions and those that are not. The appropriately track significant advisers’ role as a source of liquidity in FRB publishes flow of funds data, which is exposures for systemic risk assessment different asset classes. In some cases, we available at http://www.federalreserve.gov/releases/ purposes? Have we requested are proposing that the information be z1/. 121 See proposed Instruction 3 to Form PF. appropriate information on trading and broken down into categories that would Advisers should not complete section 2 with facilitate FSOC’s use of flow of funds respect to assets managed by a fund of hedge funds. 118 For example, the FSA survey asks for information, which is an important tool See proposed Instruction 7 to Form PF. identification of the hedge fund’s top five for evaluating trends in and risks to the 122 See proposed Instructions 5 and 6 to Form PF. counterparties in terms of net credit exposure. It 120 Parallel funds are a structure in which one or more also asks for estimates of the percentage of the U.S. financial system. This private funds pursues substantially the same fund’s securities or derivatives traded on a investment objective and strategy and invests side regulated exchange versus over the counter and the 119 See section II.B of this Release. by side in substantially the same positions as percentage of the fund’s derivatives and repos 120 For example, we are proposing that in some another private fund. See proposed Glossary of cleared by a CCP versus bilaterally. cases the data be broken down between issuers that Terms to Form PF.

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reporting? Should Form PF have period the adviser regularly calculated a and gating arrangements and provides different requirements regarding (‘‘VaR’’) metric for the for a breakdown of the percentage of the aggregating parallel managed accounts, qualifying hedge fund, the adviser fund’s net asset value that is locked in parallel funds, or feeder funds or would have to report VaR for each for different periods of time.128 We aggregating hedge funds managed by month of the reporting period.126 The believe this information may be affiliates? form also would require the adviser to important in allowing FSOC to monitor Section 2b would require reporting of report the impact on the fund’s portfolio the hedge fund’s susceptibility to failure the same information as that requested from specified changes to certain through investor redemptions in the in section 2a regarding exposure to identified market factors, if regularly event the fund experiences stress due to different types of assets.123 In this considered in the fund’s risk market or other factors. section, however, this information management, broken down by the long The information in proposed section would be reported separately for each and short components of the qualifying 2b also is designed to address qualifying hedge fund the adviser hedge fund’s portfolio.127 This requirements under section 404 of the manages. Section 2b also would require information is designed to allow FSOC Dodd-Frank Act for records and reports on a per fund basis data not requested to track basic sensitivities of the hedge that the SEC requires of private fund in section 2a. The adviser would be fund to common market sensitivities, advisers, such as monitoring the amount required to report information regarding correlations in those factor sensitivities, of assets under management and the use the qualifying hedge fund’s portfolio and trends in those factor sensitivities of leverage, counterparty credit risk liquidity, concentration of positions, among large hedge funds. exposure, trading and investment collateral practices with significant Item D of Section 2b would require positions, and the types of assets held. counterparties, and the identity of, and reporting of certain financing We request comment on the information clearing relationships with, the three information for each qualifying hedge that we propose requiring large hedge central clearing counterparties to which fund, including a monthly breakdown of fund advisers to report under section 2. the fund has the greatest net its secured and unsecured borrowing Is there additional information with counterparty credit exposure.124 This and its derivatives exposures as well as respect to the types of their investments, information is designed to assist FSOC information about the value of the use of leverage, or counterparties that in monitoring the composition of hedge collateral and letters of credit we should require and why? Have we fund exposures over time as well as the supporting the secured borrowing and asked for appropriate time period liquidity of those exposures. The derivatives exposures and the types of breakdowns of the fund’s liquidity in information also would aid FSOC in its creditors. It also would require a terms of asset liquidity, financing monitoring of credit counterparties’ breakdown of the term of the fund’s liquidity, and investor liquidity? Is there unsecured exposure to hedge funds as committed financing. This information other information we could ask to assess well as the hedge fund’s exposure and would assist FSOC in monitoring the hedge funds’ potential impact on ability to respond to market stresses and qualifying hedge fund’s leverage, the liquidity in particular markets? Would interconnectedness with central clearing unsecured exposure of credit the threshold in the proposed form counterparties. Finally, some of this counterparties to the fund, and the capture significant central clearing information, such as information about committed term of that leverage, which counterparties? Does the proposed form the identity of three central clearing may be important to monitor if the fund ask sufficient questions regarding the counterparties to which the fund has the comes under stress. Collecting financing fund’s collateral practices to ensure that greatest net counterparty credit data broken down on a monthly basis FSOC will be able to monitor the fund’s exposure and fund asset liquidity should provide FSOC with sufficient unsecured exposure to significant information, was broadly based on granularity to identify trends. counterparties? Should the form require information requested by the FSA Finally, Item E of section 2b would reporting of hedge funds’ investment in survey, which would promote require the private fund adviser to different types of instruments or international consistency in hedge fund report information about each qualifying commodities than those proposed in reporting.125 hedge fund’s investor composition and questions 23 and 27? Are there risk metrics or additional Section 2b also would require for each liquidity. For example, it contains market factors that we should require? qualifying hedge fund data regarding questions about the fund’s side pocket Should we require the proposed market certain hedge fund risk metrics, factors but with different specified financing information, and investor 126 If VaR was calculated, the adviser would have changes? Stress testing is an important information. If during the reporting to report the confidence interval, time horizon, whether any weighting was used, and the method metric for FSOC’s assessment of used to calculate VaR (historical simulation, Monte potential systemic risk posed by hedge 123 See proposed question 26 on Form PF. Carlo simulation, parametric, or other). If 124 See proposed questions 27–34 on Form PF. applicable, the adviser would have to report the funds, but we understand that the type For example, question 28 would require reporting historical lookback period used. The adviser would of stress testing conducted varies of the percentage of the fund’s portfolio capable of also have to report if it did not regularly calculate being liquidated within different time periods. VaR. See proposed question 35 on Form PF. 128 A side pocket is a type of account used by Question 31 would require reporting, for each 127 The market factors are changes in: equity private funds to separate illiquid assets from other position that represents 5% or more of the fund’s prices, risk free interest rates, credit spreads, more liquid fund investments. Only investors in the net asset value, of the position’s portion of the currency rates, commodity prices, implied hedge fund at the time the asset is put in the side fund’s net asset value and sub-asset class. Questions volatilities, ABS default rates, and corporate bond pocket (and not future investors) will be entitled to 32 and 33 would require reporting of initial and default rates. Advisers are permitted to omit a a share of proceeds from that investment. A gate is variation margin for collateral securing exposure to response with respect to any market factor that it a restriction imposed by the manager of a private the fund’s top five counterparty groups as well as did not regularly consider in the reporting fund’s fund on permissible redemptions from the fund the face amount of letters of credit posted and risk management. However, to be ‘‘regularly during a certain period of time. The standards for certain information on rehypothecation of such considered’’ in the fund’s risk management does not imposing suspensions and gates may vary among collateral. require that the adviser have conducted stress funds, so in responding to these questions, an 125 For example, the FSA survey asks for the testing on that market factor (it could simply mean, adviser would be expected to make a good faith percentage of the hedge fund’s portfolio that can be for example, that the fund’s risk managers determination as to which provisions of the liquidated within different time periods and the recognized that such a market factor could have an reporting fund’s governing documents would likely identity of the fund’s top three CCPs in terms of net impact on the fund’s portfolio). See proposed be triggered during conditions that it views as credit exposure. question 36 on Form PF and related instructions. significant market stress.

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substantially depending on the strategy reporting period, rather than as of the the fund as a matter of policy is of the particular hedge fund and among last day of the month or quarter? If so managed in compliance with certain hedge funds pursuing the same strategy. what time period should the range or provisions of rule 2a–7 under the Is there a better way for the form to average cover and how should it be Investment Company Act of 1940, assess the effects of stresses on hedge calculated? We note that we have which is the principal rule through funds than the stress testing questions considered in other contexts different which the SEC regulates registered included in the proposed form? Should ways of disclosing information that can money market funds.134 This we request the geographic breakdown of fluctuate during a reporting period.130 information would assist FSOC in the hedge fund’s investments for Are there approaches in these other assessing the extent to which the different geographic regions or contexts that should be used in Form liquidity fund is being managed countries? Are there existing collections PF? What would be the best method of consistent with restrictions imposed on of data broken down by geographic avoiding ‘‘window dressing’’ in the form registered money market funds that regions or countries with which we and why? Is there information that might mitigate their likelihood of posing should be consistent? Should we require should not be reported on a monthly systemic risk. more or less detailed information basis or, in contrast, information that Section 3 also would require reporting regarding the types of assets in which should be reported on a monthly basis of certain information regarding the the fund invests? (in each case, when the information is liquidity fund’s portfolio. For example, Is there information that we should filed with the Commissions quarterly or it would ask, for each month of the not require and why? Is there annually)? Please explain your reporting period, for the fund’s net asset information that we should require large response. value, net asset value per share, market- based net asset value per share, hedge fund advisers to report regarding 3. Section 3 all of the hedge funds they manage that weighted average maturity (‘‘WAM’’), we only propose requiring qualifying Form PF would require private fund weighted average life (‘‘WAL’’), 7-day hedge funds to report? Is there advisers advising a liquidity fund and gross yield, amount of daily and weekly information in proposed Form PF that is managing at least $1 billion in liquid assets, and amount of assets with unlikely to be reported in a comparable combined liquidity fund and registered a maturity greater than 397 days.135 It or meaningful fashion such that FSOC money market fund assets as of the close also would require the fund to report would be unable to draw any useful of business on any day in the reporting the amount of its assets invested in conclusions or insights for purposes of period to complete and file the different types of instruments, broken 131 assessing systemic risk? If so, how could information on section 3. As down by the maturity of those changes to the question or instructions discussed above, to the extent that instruments, as well as information for to the question improve the utility of the liquidity funds function as unregistered each open position of the fund that information the form seeks? Are there substitutes for money market funds or represents 5 percent or more of the any disclosure requirements in the otherwise share certain basic fund’s net asset value.136 This SEC’s proposed amendments to Form characteristics of money market funds, information would assist FSOC in ADV (which will be publicly available) they may be susceptible to runs and assessing the risks undertaken by thus have the potential to pose systemic liquidity funds, their susceptibility to that should instead be reported through 132 Form PF (which will not be publicly risk. runs, and how their investments might Section 3 would require that these available) or vice versa? 129 pose systemic risks either among We request comment more generally private fund advisers report certain liquidity funds or through contagion to on the information we propose requiring information for each liquidity fund they registered money market funds. manage. The section includes questions in Form PF with respect to hedge funds Item C of Section 3 would require on whether the fund uses the amortized and their advisers. Is there additional reporting of any secured or unsecured cost method of valuation and/or the information that would be helpful to borrowing of the liquidity fund, broken penny rounding method of pricing in FSOC in monitoring for systemic risk down by creditor type and the maturity computing its net asset value per share with respect to hedge funds? profile of that borrowing, and of We note that certain data in the to help determine how the fund might whether the fund has in place a proposed form, while filed with the try to maintain a stable net asset value committed liquidity facility. This Commissions on an annual or quarterly that could make the fund more information would aid FSOC in susceptible to runs.133 It asks whether basis, would have to be reported on a monitoring leverage practices among monthly basis. In addition to providing 130 See Short-Term Borrowings Disclosure, 134 See proposed question 45 of Form PF. The more granular data to allow FSOC to Securities Act Release No. 9143 (Sept. 17, 2010), at restrictions in rule 2a–7 are designed to ensure, better identify trends, this aspect of the section II.A [75 Fed. Reg. 59866 (Sept. 28, 2010)]. among other things, that money market funds’ proposal is designed to mitigate the 131 See sections II.A.2 and II.B of this Release for investing remains consistent with the objective of ability of an adviser to ‘‘window dress,’’ a discussion of this reporting threshold and the maintaining a stable net asset value. Many liquidity definition of liquidity fund. For purposes of the $1 funds state in investor offering documents that the or manipulate certain reported data to billion threshold, an adviser would have to treat fund is managed in compliance with rule 2a–7 even mask activities or risks undertaken by any liquidity funds managed by any of the adviser’s though that rule does not apply to liquidity funds. the private funds it manages. related persons as though they were advised by the 135 See proposed question 46 of Form PF. WAM, Is there information that should be adviser. See proposed Instruction 3 to Form PF. WAL, daily liquid assets, and weekly liquid assets broken down further and reported as of Form PF is a joint form between the SEC and the are to be calculated in accordance with rule 2a–7 CFTC only with respect to sections 1 and 2 of the under the Investment Company Act. The 7-day smaller time increments, such as form. Section 3 of the form, which would require gross yield is to be calculated consistent with the weekly, or as of larger time increments? more specific reporting regarding liquidity funds, methodology required under Form N–MFP, which Is there information that should be would only be required by the SEC. must be filed by money market funds registered reported to show ranges, averages, high 132 See section II.A.2 of this Release. The SEC also with the SEC. See 17 CFR 274.201. notes that institutional investors—the principal 136 See proposed question 47 of Form PF. points, or low points during the investors in liquidity funds—were the primary Proposed question 48 of Form PF would require participants in the run on money market funds in reporting for each month of the reporting period, for 129 See Implementing Release, supra note 9, for a September 2008, rather than retail investors. See each of the fund’s positions representing 5% or discussion of the SEC’s proposed amendments to MMF Reform Proposing Release, supra note 65. more of its net asset value, of the position’s portion Form ADV. 133 See proposed questions 43 and 44 of Form PF. of the fund’s net asset value and sub-asset class.

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liquidity funds and their potential to companies in which the fund invests. companies.144 Finally, the form would magnify risks undertaken by the fund. Specifically, section 4 would require require a breakdown of the fund’s Finally, Item D of Section 3 would ask information about the outstanding investments by industry and by for certain information regarding the balance of the fund’s borrowings and geography, which should provide FSOC concentration of the fund’s investor guarantees.139 It also would require the with basic information about global and base, gating and redemption policies, adviser to report the weighted average industry concentrations that may be and investor liquidity.137 It also would debt-to-equity ratio of controlled relevant to monitoring risk exposures in require reporting of a good faith portfolio companies in which the fund the financial system.145 estimate of the percentage of the fund invests and the range of that debt to The SEC requests comment on the purchased using equity ratio among these portfolio information it proposes requiring collateral. The SEC believes this companies.140 It asks for the maturity regarding private equity funds in section information would be important in profile of its portfolio companies’ debt, 4. Is there additional information that allowing FSOC to monitor the for the portion of that debt that is the SEC should request and why? For susceptibility of the liquidity fund to a payment-in-kind or zero coupon, and example, are their additional lending run in the event the fund comes under whether the fund or any of its portfolio practices used in leveraged buyouts stress and its interconnectedness to companies experienced an event of about which the form should collect securities lending programs. default on any of its debt during the information? Are there particular The SEC requests comment on the reporting period.141 It also asks for the industries in which private equity funds information that it proposes requiring in identity of the institutions providing might invest that could be systemically section 3. Is there additional bridge financing to the adviser’s important? Should the Form ask information that the SEC should portfolio companies and the amount of additional questions specific to those require? For example, is there that financing.142 The SEC believes that industries? Should the form track information that the SEC requires to be this information would allow FSOC to private equity fund investments in reported for registered money market assess to what extent private equity different geographic and/or industry funds on Form N–MFP that the SEC also funds use leverage and the potential concentrations than those we have should require to be reported on Form exposure of banks and other lending proposed? Should the SEC request less PF for liquidity funds? Should the SEC providers to the larger private equity information and why? Should the SEC require reporting of more specific funds and their portfolio companies and not require any reporting on Form PF information about the holdings or types leverage among portfolio companies of specific to private equity funds? Why or of holdings of these liquidity funds? Is the larger private equity funds to why not? monitor whether trends in those areas the threshold for when the private fund E. Filing Fees and Format for Reporting adviser is required to report information could pose systemic implications for the in section 3 for an individual liquidity portfolio companies’ lenders. Under proposed Advisers Act rule fund appropriate for purposes of FSOC Section 4 also would require reporting 204(b)–1(b), Form PF would need to be to be able to monitor for potential of certain information if the fund invests filed through an electronic system systemic risk in this sector? Is five in any financial industry portfolio designated by the SEC for this purpose. percent an appropriate threshold for company, such as its name, its debt-to- There may be efficiencies realized if the considering a liquidity fund investment equity ratio, and the percentage of the current Investment Adviser Registration ‘‘ ’’ or investor to be significant for purposes portfolio company beneficially owned Depository ( IARD ) platform, which is of Form PF reporting? Is our proposed by the fund.143 This information would operated by the Financial Industry breakdown of the liquidity fund’s asset allow FSOC to monitor large private Regulatory Authority, were expanded maturity and investor liquidity equity funds’ investments in companies for this purpose, such as the possible appropriate? that may be particularly important to interconnectivity of Form ADV filings the stability of the financial system. and Form PF filings, and possible ease 4. Section 4 Section 4 also would ask whether any of filing with one password. The filing The SEC is proposing that section 4 of of the adviser’s related persons co-invest system would need to have certain Form PF require private fund advisers in any of the fund’s portfolio features, including being programmed managing at least $1 billion in private with special confidentiality protections equity fund assets as of the close of 139 See proposed questions 57 and 58. designed to ensure the heightened business on the last day of the reporting 140 See proposed questions 59–61. A ‘‘controlled confidentiality protections created for portfolio company’’ is defined as a portfolio Form PF filing information under the period to report certain information company that is controlled by the private equity about each private equity fund they fund, either alone or together with the private Dodd-Frank Act but to allow for secure manage.138 Section 4 would require equity fund’s related persons or other persons that access by FSOC and other regulators as reporting of certain information about are part of a club or consortium investing in the permitted under the Dodd-Frank Act. the fund’s borrowings and guarantees portfolio company. ‘‘Control’’ has the same meaning The SEC separately will decide on the as used in Form ADV, and generally means the system to be selected for the electronic and the leverage of the portfolio power, directly or indirectly, to direct the management or policies of a person, whether filing of Form PF. That determination 137 For example, question 52 would require through ownership of securities, by contract, or will be reflected in a separate notice. reporting of the percentage of the reporting fund’s otherwise. See proposed Glossary of Terms to Form Under the proposed rule, advisers equity that is beneficially owned by the beneficial PF; Glossary of Terms to Form ADV. required to file Form PF would be owner having the largest equity interest in the fund 141 See proposed questions 62–64. required to pay to the operator of the 142 and of how many investors beneficially own 5% or See proposed question 65. Form PF filing system fees that have more of the fund’s equity. 143 See proposed question 66. A ‘‘financial 138 See section II.B of this Release for a discussion industry portfolio company’’ generally is defined as of this reporting threshold and the definition of a nonbank financial company, as defined by section 144 See proposed question 69. ‘‘private equity fund.’’ Form PF is a joint form 102(a)(4) of the Dodd-Frank Act, bank or savings 145 See proposed questions 67 and 68. Industries between the SEC and the CFTC only with respect association, bank or financial would be identified using NAICS codes. ‘‘NAICS’’ to sections 1 and 2 of the form. Section 4 of the holding company, savings and loan holding stands for the ‘‘North American Industry form, which would require more specific reporting company, credit union, or Farm Credit System Classification System,’’ and is a system of industry regarding private equity funds, would only be institution. See proposed Glossary of Terms to Form classifications commonly used in the financial required by the SEC. PF. industry.

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been approved by the SEC.146 We IV. Paperwork Reduction Act SEC also may use the information in connection with its regulatory and anticipate that Large Private Fund CFTC Advisers’ filing fees would be set at a examination programs. The respondents higher amount because their filings Proposed CEA rule 4.27(d) does not to Form PF would be private fund would be responsible for a larger impose any additional burden upon advisers.152 Compliance with proposed proportion of system needs due to their registered CPOs and CTAs that are Form PF would be mandatory for any dually registered as investment advisers more frequent and extensive filings. The private fund adviser. Smaller private with the SEC. By filing the Form PF SEC in a separate action would approve fund advisers would be required to file with the SEC, these dual registrants Form PF only on an annual basis. These filing fees that reflect the reasonable would be deemed to have satisfied costs associated with the filings and the smaller private fund advisers would certain of their filing obligations with provide a limited amount of basic establishment and maintenance of the the CFTC, and the CFTC is not imposing filing system.147 information about the operations of the any additional burdens herein. private funds they advise.153 Large While we are not requiring that the Therefore, any burden imposed by Form Private Fund Advisers would be information be filed in eXtensible PF through proposed CEA rule 4.27(d) required to file Form PF on a quarterly Markup Language (‘‘XML’’) tagged data on entities registered with both the basis reporting additional information format, we expect to look for a filing CFTC and the SEC has been accounted regarding the private funds they advise. system that could accept information for within the SEC’s calculations The PRA analysis set forth below takes filed in XML format. We intend to regarding the impact of this collection of into account the fact that the additional establish data tags to allow Form PF to information under the Paperwork information proposed Form PF would 149 be submitted in XML format with the Reduction Act of 1995 (‘‘PRA’’). require that large hedge fund advisers SEC. Accordingly, advisers would be SEC report would be more extensive than the additional information required from able to file the information in Form PF Section 404 of the Dodd-Frank Act, large liquidity fund advisers, which in in XML format if they choose. We which amends section 204(b) of the turn would be more extensive than that believe that certain advisers may prefer Advisers Act, directs the SEC to require required from large private equity fund to report in XML format because it private fund advisers to file reports advisers.154 allows them to automate aspects of their containing such information as the SEC reporting and thus minimize burdens deems necessary and appropriate in the As discussed in section II.B of this and generate efficiencies for the adviser. public interest and for investor Release, the SEC has sought to minimize We anticipate that we may eventually protection or for the assessment of the reporting burden on private fund require Form PF filers to tag data systemic risk. Proposed rule 204(b)–1 advisers to the extent appropriate. In submitted on Form PF using a refined, and Form PF under the Advisers Act, particular, the SEC has designed the future taxonomy defined by us, working which would implement this reporting frequency based on when it in collaboration with the industry. requirement of the Dodd-Frank Act. understands advisers to private funds Thereafter, the usability of data Proposed Form PF contains a new are already collecting certain contained in Form PF is expected to ‘‘collections of information’’ within the information that Form PF would increase greatly because tagged data meaning of the PRA.150 The title for the require. In addition, the SEC has based would be easier to sort and analyze. We new collection of information is: ‘‘Form certain more specific reporting items on information that it understands large note that private initiatives are PF under the Investment Advisers Act hedge fund advisers frequently collect underway to create such taxonomies.148 of 1940, reporting by investment We request comment on our proposed advisers to private funds.’’ For purposes 152 system of electronic filing. Should we of this PRA analysis, the paperwork The requirement to file the form would apply burden associated with the to investment advisers registered, or required to require that all filings be done in XML register, with the SEC that advise one or more format? Should we allow or require the requirements of proposed rule 204(b)–1 private funds. See proposed rule 204(b)–1(a). It is included in the collection of form to be provided in a format other would not apply to state-registered investment information burden associated with advisers or exempt reporting advisers. than XML, such as eXtensible Business 153 proposed Form PF and thus does not See section II.B of this Release for a ‘‘ ’’ description of who would be required to file Form Reporting Language ( XBRL )? Is there entail a separate collection of another format that is more widely used PF, section II.C of this Release for information information. The SEC is submitting this regarding the frequency with which smaller private or would be more appropriate for the collection of information to the Office of fund advisers would be required to file Form PF, required data? Should smaller and/or Management and Budget (‘‘OMB’’) for and section II.D.1 of this Release for a description Large Private Fund Advisers be charged review in accordance with 44 U.S.C. of the information that smaller private fund different amounts than what we have advisers would be required to report on Form PF. 3507(d) and 5 CFR 1320.11. An agency See also proposed Instruction 8 to Form PF for anticipated charging? If so, why? may not conduct or sponsor, and a information regarding the frequency with which smaller private fund advisers would be required to III. General Request for Comment person is not required to respond to, a collection of information unless it file Form PF. 154 See section II.B of this Release for a The Commissions request comment displays a currently valid control description of who would be required to file Form on the rules and form proposed in this number. PF, section II.C of this Release for information Release and comment on other matters Proposed Form PF is intended to regarding the frequency with which Large Private provide FSOC with information that Fund Advisers would be required to file Form PF, that might have an effect on the section II.D.2 of this Release for a description of the proposals contained in this Release. would facilitate fulfillment of its information that large hedge fund advisers would Commenters should provide empirical obligations under the Dodd-Frank Act be required to report on Form PF, and sections data to support their views. relating to nonbank financial companies II.D.3 and II.D.4 of this Release for a description of and systemic risk monitoring.151 The the information that large liquidity and private equity fund advisers would be required to report on Form PF. See also proposed Instruction 8 to Form 146 See proposed Advisers Act rule 204(b)–1(d). 149 44 U.S.C. 3501–3521. PF for information regarding the frequency with 147 See section 204(c) of the Advisers Act. 150 44 U.S.C. 3501–3521. which Large Private Fund Advisers would be 148 See, e.g., http://www.operastandards.org. 151 See sections I.A and II.A of this Release. required to file Form PF.

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for purposes of reporting to investors in the SEC estimates that approximately advisers would be 19,600 hours for each the funds.155 3,920 would be smaller private fund of the first three years.165 The information that Form PF would advisers, not meeting the thresholds for B. Burden Estimates for Quarterly require would be filed through an reporting as Large Private Fund Reporting by Large Private Fund electronic filing system expected to be Advisers.161 Advisers operated by an entity designated by the Smaller private fund advisers would SEC. Responses to the information be required to complete all or portions The SEC estimates that 530 of the collections would be kept confidential of section 1 of Form PF and to file on private fund advisers registered with the to the extent permitted by law.156 an annual basis. As discussed in greater SEC would meet one or more of the thresholds for reporting as Large Private A. Burden Estimates for Annual detail above, section 1 would require basic data regarding the reporting Fund Advisers.166 As discussed in Reporting by Smaller Private Fund section II.D above, Large Private Fund Advisers adviser’s identity and certain information about the private funds it Advisers would be required to report In the Implementing Release, the SEC manages, such as performance, leverage, more information on Form PF than estimated that 3,500 currently registered and investor concentration data.162 If smaller private fund advisers and would advisers would become subject to the the reporting adviser advises any hedge be required to report on a quarterly private fund reporting requirements funds, section 1 also would require basis. The amount of additional included in the proposed amendments information reported by a Large Private 157 basic information regarding those funds, to Form ADV. The SEC further including their investment strategies, Fund Adviser would depend, in part, on estimated that 200 advisers to private trading counterparty exposures, and whether it is a large hedge fund adviser, funds would register with the SEC as a trading and clearing practices. a large liquidity fund adviser, or large result of normal growth in the Based on the SEC’s experience with private equity fund adviser. A large population of registered advisers and other data filings, it estimates that hedge fund adviser would be required to that 750 advisers to private funds would smaller private fund advisers would report more information with respect to register as a result of the Dodd-Frank require an average of approximately 10 itself and the funds it advises than Act’s elimination of the private adviser burden hours to compile, review and would a large liquidity fund adviser, exemption.158 As a result, the SEC electronically file the required which in turn would report more estimates that a total of approximately information in section 1 of Form PF for information than a large private equity 4,450 registered investment advisers 167 the initial filing and an average of fund adviser. Of the total number of would become subject to the proposed Large Private Fund Advisers, the SEC approximately 3 burden hours for private fund reporting requirements in estimates that 200 are large hedge fund subsequent filings.163 Accordingly, the Form ADV.159 Because these advisers advisers, 80 are large liquidity fund amortized average annual burden of would also be required to report on advisers, and 250 are large private periodic filings would be 5 hours per Form PF, the SEC accordingly estimates equity fund advisers.168 smaller private fund adviser for each of that approximately 4,450 advisers 164 Because the proposed reporting would be required to file all or part of the first three years, and the requirements on Form PF for large Form PF.160 Out of this total number, amortized aggregate annual burden of hedge fund advisers would be the most periodic filings for smaller private fund extensive of the Large Private Fund 155 See Report of the Asset Manager’s Committee Advisers, the SEC estimates that these to the President’s Working Group on Financial SEC does not currently have reliable data with advisers would require, on average, Markets, Best Practices for the Hedge Fund Industry which to estimate the number of funds that have (Jan. 15, 2009), available at http:// subadvisers. more hours than other Large Private www.amaicmte.org/Public/AMC%20Report%20- 161 Based on the estimated total number of Fund Advisers to configure systems and %20Final.pdf (discussing best practices on registered private fund advisers that would not to compile, review and electronically disclosing to investors performance data, assets meet the thresholds to be considered Large Private file the required information. under management, and risk management practices Fund Advisers. (4,450 estimated registered private (including on asset types, geography, leverage, and fund advisers ¥200 large hedge fund advisers ¥80 Accordingly, the SEC estimates that concentrations of positions) with which we large liquidity fund advisers ¥250 large private large hedge fund advisers would require understand many hedge funds comply). equity fund advisers = 3,920 smaller private fund an average of approximately 75 burden 156 See supra note 39 and accompanying text. advisers.) hours for an initial filing and 35 burden 157 See section V.B.2.a.ii of the Implementing 162 See supra section II.D.1. hours for each subsequent filing.169 In Release. As proposed in the Implementing Release, 163 These estimates reflect the SEC’s advisers to private funds would be required to understanding that much of the information in 165 × complete Item 7.B and Section 7.B of Schedule D section 1 of Form PF is currently maintained by 5 burden hours on average per year 3,920 to the amended Form ADV. most private fund advisers in the ordinary course smaller private fund advisers = 19,600 burden 158 Id. The estimates of registered private fund of business. In addition, the time required to hours per year. advisers are based in part on the number of advisers determine a private fund adviser’s aggregate assets 166 See section II.B.2 of this Release for estimates that reported a fund in Section 7.B of Schedule D under management and the amount of assets under of the numbers of large hedge fund advisers, large to the current version of Form ADV. Because these management that relate to private funds of various liquidity fund advisers, and large private equity responses include funds advised by a related person types largely is expected to be included in the fund advisers. (200 large hedge fund advisers + 80 rather than the adviser, these data may over- approved burden associated with the SEC’s Form large liquidity fund advisers + 250 large private estimate the total number of private fund advisers. ADV (this information would only differ if the equity fund advisers = 530 Large Private Fund 159 3,500 currently registered advisers to private adviser managed parallel managed accounts). As a Advisers.) funds + 200 advisers to private funds registering as result, responding to questions on Form PF that 167 See supra sections II.D.2, II.D.3 and II.D.4. a result of normal growth + 750 newly registered relate to assets under management and determining 168 See supra section II.B.2. advisers to private funds = 4,450 advisers. whether an adviser is a Large Private Fund Adviser 169 The estimates of hour burdens and costs for 160 If a private fund is advised by both an adviser should impose little or no additional burden on Large Private Fund Advisers provided in the and one or more subadvisers, only one of these private fund advisers. Paperwork Reduction Act and cost benefit analyses advisers would be required to complete Form PF. 164 The SEC estimates that a smaller private fund are based on burden data provided by advisers in See section II.B.4 of this Release. As a result, it is adviser would make 3 annual filings in three years, response to the FSA hedge fund survey and on the likely that some portion of these advisers either for an amortized average annual burden of 5 hours experience of SEC staff. These estimates also would not be required to file Form PF or would be (1 initial filing × 10 hours + 2 subsequent filings assume that some Large Private Fund Advisers will subject to a reporting burden lower than is × 3 hours = 16 hours; and 16 hours ÷ 3 years = find it efficient to automate some portion of the estimated for purposes of this PRA analysis. The approximately 5 hours). After the first three years, reporting process, which would increase the burden SEC has not attempted to adjust the burden filers generally would not incur the start-up of the initial filing but reduce the burden of estimates downward for this purpose because the burdens applicable to the first filing. Continued

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contrast, large liquidity fund advisers, ceased to be a Large Private Fund each private fund adviser over the same which would report more information Adviser would be required to file a period.182 than smaller private fund advisers or Form PF indicating that it is no longer E. Request for Comment large private equity fund advisers but obligated to report on a quarterly basis. less information than large hedge fund The SEC estimates that approximately 9 Pursuant to 44 U.S.C. 3506(c)(2)(B), advisers, would require an average of percent of Large Private Fund Advisers the SEC solicits comments to: (i) approximately 35 burden hours for an would need to make a transition filing Evaluate whether the proposed initial filing and 16 burden hours for each year with a burden of 0.25 hours, amendments to the collection of each subsequent filing. Finally, the SEC or a total of 12 burden hours per year information are necessary for the proper estimates that large private equity fund for all private fund advisers.176 performance of the functions of the SEC, advisers, which would report more Second, filers who are no longer including whether the information information than smaller private fund subject to Form PF’s periodic reporting would have practical utility; (ii) evaluate the accuracy of the SEC’s advisers but less than other Large requirements would file a final report estimate of the burden of the proposed Private Fund Advisers, would require indicating that fact. The SEC estimates collection of information; (iii) determine an average of approximately 25 burden that approximately 8 percent of the whether there are ways to enhance the hours for an initial filing and 12 burden advisers required to file Form PF would quality, utility, and clarity of the hours for each subsequent filing. Based have to file such an amendment each information to be collected; and (iv) on these estimates, the amortized year with a burden of 0.25 of an hour, determine whether there are ways to average annual burden of periodic or a total of 89 burden hours per year minimize the burden of the collection of filings would be 153 hours per large for all private fund advisers.177 hedge fund adviser,170 70 hours per information on those who are to Finally, an adviser experiencing large liquidity fund adviser,171 and 52 respond, including through the use of hours per large private equity fund technical difficulties in submitting Form automated collection techniques or adviser, in each case for each of the first PF may request a temporary hardship other forms of information technology. 172 exemption by filing portions of Form PF In particular, would private fund three years. In the aggregate, the 178 amortized annual burden of periodic in paper format. The information that advisers seek to automate all or part of filings would then be 30,600 hours for must be filed is comparable to the their Form PF reporting obligations? large hedge fund advisers,173 5,600 information that Form ADV filers Would automation be efficient only for hours for large liquidity fund provide on Form ADV–H when Large Private Fund Advisers, or would advisers,174 and 13,000 hours for large requesting a temporary hardship smaller private fund advisers also be private equity fund advisers,175 in each exemption relating to that form. In the able to automate efficiently? What is the case for each of the first three years. case of Form ADV–H, the SEC has likely burden of automation? Would estimated that the average burden of advisers use internal personnel or pay C. Burden Estimates for Transition filing is 1 hour and that approximately outside service providers to make Filings, Final Filings and Temporary 1 in every 1,000 advisers will file needed system modifications or to Hardship Exemption Requests annually.179 Assuming that Form PF perform all or part of their Form PF In addition to periodic filings, a filers request hardship exemptions at reporting obligations? If outside service private fund adviser would be required the same rate and that the applications providers are used, what is the likely to file very limited information on Form impose the same burden per filing, the cost and how would it impact our PF in three situations. SEC would expect approximately 4 estimates of internal costs and hourly First, any adviser that transitions from filers to request a temporary hardship burdens for the proposed reporting? quarterly to annual filing because it has exemption each year 180 for a total of 4 Persons desiring to submit comments burden hours.181 on the collection of information subsequent filings, which has been taken into requirements should direct them to the D. Aggregate Burden Estimates consideration in our burden estimates. Office of Management and Budget, 170 The SEC estimates that a large hedge fund Attention: Desk Officer for the adviser would make 12 quarterly filings in three Based on the foregoing, the SEC years, for an amortized average annual burden of estimates that Form PF would result in Securities and Exchange Commission, 153 hours (1 initial filing × 75 hours + 11 an aggregate of 68,905 burden hours per Office of Information and Regulatory × subsequent filings 35 hours = 460 hours; and 460 year for all private fund advisers for Affairs, Room 10102, New Executive hours ÷ 3 years = approximately 153 hours). After the first three years, filers generally would not incur each of the first three years, or 15 Office Building, Washington, DC 20503, the start-up burdens applicable to the first filing. burden hours per year on average for and also should send a copy of their 171 The SEC estimates that a large liquidity fund comments to Elizabeth M. Murphy, adviser would make 12 quarterly filings in three 176 Estimate is based on IARD data on the Secretary, Securities and Exchange years, for an amortized average annual burden of 70 hours (1 initial filing × 35 hours + 11 subsequent frequency of advisers to one or more private funds Commission, 100 F Street, NE., filings × 16 hours = 211 hours; and 211 hours ÷ 3 ceasing to have assets under management sufficient Washington, DC 20549–1090 with years = approximately 70 hours). After the first to cause them to be Large Private Fund Advisers. reference to File No. S7–05–11. (530 Large Private Fund Advisers × 0.09 × 0.25 three years, filers generally would not incur the Requests for materials submitted to start-up burdens applicable to the first filing. hours = 12 hours.) 177 172 The SEC estimates that a large private equity Estimate is based on IARD data on the OMB by the Commission with regard to fund adviser would make 12 quarterly filings in frequency of advisers to one or more private funds this collection of information should be three years, for an amortized average annual burden withdrawing from SEC registration. (4,450 private × fund advisers × 0.08 × 0.25 hours = 89 hours.) of 52 hours (1 initial filing 25 hours + 11 182 19,600 hours for periodic filings by smaller × 178 subsequent filings 12 hours = 157 hours; and 157 See proposed SEC rule 204(b)–1(f). The advisers + 30,600 hours for periodic filings by large ÷ hours 3 years = approximately 52 hours). After the proposed rule would require that the adviser hedge fund advisers + 5,600 hours for periodic first three years, filers generally would not incur the complete and file Item A of Section 1a and Section filings by large liquidity fund advisers + 13,000 start-up burdens applicable to the first filing. 5 of Form PF, checking the box in Section 1a hours for periodic filings by large private equity 173 153 burden hours on average per year × 200 indicating that the filing is a request for a temporary fund advisers + 12 hours per year for transition large hedge fund advisers = 30,600 hours. hardship exemption. filings + 89 hours per year for final filings + 4 hours 174 70 burden hours on average per year × 80 large 179 See section V.F of the Implementing Release. per year for temporary hardship requests = liquidity fund advisers = 5,600 hours. 180 4,450 private fund advisers × 1 request per approximately 68,905 hours per year. 68,905 hours 175 52 burden hours on average per year × 250 1,000 advisers = approximately 4 advisers. per year ÷ 4,450 total advisers = 15 hours per year large private equity fund advisers = 13,000 hours. 181 4 advisers × 1 hour per response = 4 hours. on average.

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in writing, refer to File No. S7–05–11, systemic risk related information any data and other information that they and be submitted to the Securities and required by Form PF. may have quantifying or qualifying the Exchange Commission, Office of As noted above, the Dodd-Frank Act perceived costs and benefits of this Investor Education and Advocacy, 100 F tasks FSOC with monitoring the proposed rule with their comment Street, NE., Washington, DC 20549– financial services marketplace in order letters. 0213. OMB is required to make a to identify potential threats to the VI. SEC Economic Analysis decision concerning the collections of financial stability of the United information between 30 and 60 days States.184 The Dodd-Frank Act also As discussed above, the Dodd-Frank after publication of this Release. requires FSOC to collect information Act amended the Advisers Act to, Therefore, a comment to OMB is best from member agencies to support its among other things, authorize and direct assured of having its full effect if OMB functions.185 The CFTC and the SEC are the SEC to promulgate reporting receives it within 30 days after jointly proposing sections 1 and 2 of requirements for private fund advisers. publication of this Release. Form PF as a means to collect the In enacting Sections 404 and 406 of the information necessary to permit FSOC Dodd-Frank Act, Congress determined V. CFTC Cost-Benefit Analysis to fulfill its obligation to monitor private to require that private fund advisers file Section 15(a) of the CEA 183 requires funds, and in order to identify any reports with the SEC and specified the CFTC to consider the costs and potential systemic threats arising from certain types of information that should benefits of its actions before issuing their activities. The CFTC and the SEC be subject to reporting and/or rules, regulations, or orders under the do not currently collect the information recordkeeping requirements, but CEA. By its terms, section 15(a) does not that is covered in proposed sections 1 Congress left to the SEC the require the CFTC to quantify the costs and 2 of Form PF. determination of the specific and benefits of its rules, regulations or With respect to costs, the CFTC has information to be maintained or orders or to determine whether the determined that: (1) Without the reported. When determining the form benefits outweigh the costs. Rather, proposed reporting requirements and content of such reports, the SEC section 15(a) requires that the CFTC imposed on dually-registered CPOs and may require that private fund advisers ‘‘consider’’ the costs and benefits of its CTAs, FSOC will not have sufficient file such information ‘‘as necessary and actions. Section 15(a) further specifies information to identify and address appropriate in the public interest and that the costs and benefits shall be potential threats to the financial for the protection of investors’’ or for the evaluated in light of the following five stability of the United States (such as assessment of system risk. broad areas of concern: (1) Protection of the near collapse of Long Term Capital The SEC is proposing rule 204(b)–1 market participants and the public; Management); (2) the proposed and Form PF, to implement the private (2) efficiency, competitiveness and reporting requirements, once finalized, fund adviser reporting requirements that financial integrity of futures markets; will provide the CFTC with better the Dodd-Frank Act contemplates. (3) price discovery; (4) sound risk information regarding the business Under the proposed rule, private fund management practices; and (5) other operations, creditworthiness, use of advisers would be required to file public interest considerations. The leverage, and other material information information responsive to all or portions CFTC may in its discretion give greater of certain registered CPOs and CTAs of Form PF on a periodic basis. The weight to any one of the five that are also registered as investment scope of the required information and enumerated areas and could in its advisers with the SEC; and (3) while the frequency of the reporting would be discretion determine that, they are necessary to U.S. financial related to the amount of private fund notwithstanding the costs, a particular stability, the proposed reporting assets that each private fund adviser rule, regulation, or order is necessary or requirements will create additional manages and the type of private fund to appropriate to protect the public interest compliance costs for these registrants. which those assets relate. Specifically, or to effectuate any of the provisions or The CFTC has determined that the smaller private fund advisers would be accomplish any of the purposes of the proposed reporting requirements will required to report annually and provide CEA. provide a benefit to all investors and only basic information regarding their The proposed rule 4.27(d) would market participants by providing the operations and the private funds they deem a CPO registered with the CFTC CFTC and other policy makers with advise, while Large Private Fund that is dually registered as a private more complete information about these Advisers would report on a quarterly 186 fund adviser with the SEC to have registrants and the potential risk their basis and provide more information. satisfied its filing requirements for activities may pose to the U.S. financial The SEC is sensitive to the costs and Schedules B and C of proposed Form system. In turn, this information would benefits imposed by its rules. It has CPO–PQR by completing and filing the enhance the CFTC’s ability to identified certain costs and benefits of applicable portions of Form PF for each appropriately tailor its regulatory proposed Advisers Act rule 204(b)–1 of its commodity pools that satisfy the policies to the commodity pool industry and Form PF, and it requests comment definition of ‘‘private fund’’ in the Dodd- and its operators and advisors. As on all aspects of the cost-benefit Frank Act. Under the proposed rule, mentioned above, the CFTC and the SEC analysis below, including identification most of the CPOs and CTAs that are do not have access to this information and assessment of any costs and benefits dually registered as private fund today and have instead been made to not discussed in this analysis. In advisers would be required to provide use information from other, less reliable 186 annually a limited amount of basic sources. See section II.B of this Release for a information on Form PF about the description of who would be required to file Form The CFTC invites public comment on PF, section II.C of this Release for information operations of their private funds. Only its cost-benefit considerations as regarding the frequency with which private fund large CPOs and CTAs that are also concerns sections 1 and 2 of Form PF. advisers would be required to file Form PF, and registered as private fund advisers with Commenters are also invited to submit section II.D of this Release for a description of the the SEC would have to submit on a information that private fund advisers would be required to report on Form PF. See also proposed quarterly basis the full complement of 184 See section 112(a)(2)(C) of the Dodd-Frank Instruction 8 to Form PF for information regarding Act. the frequency with which private fund advisers 183 See 5 U.S.C. 801(a)(1)(B)(i). 185 See section 112(d)(1) of the Dodd-Frank Act. would be required to file Form PF.

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connection with its consideration of the financial companies that may pose risks industry and its advisers, and to more costs and benefits, the SEC also has to U.S. financial stability in the event of effectively evaluate the outcomes of considered whether the proposal would their material financial distress or regulatory policies and programs promote efficiency, competition, and failure or because of their activities.189 directed at this sector, including for the capital formation. Section 202(c) of the In addition, the Dodd-Frank Act directs protection of private fund investors. Advisers Act requires the SEC, when FSOC to recommend to the FRB The SEC also estimates that the engaging in rulemaking that requires it heightened prudential standards for proposed rule may improve the to consider or determine whether an designated nonbank financial efficiency and effectiveness of the SEC’s action is necessary or appropriate in the companies.190 oversight of private fund advisers by public interest, to consider, in addition In enacting Sections 404 and 406 of enabling SEC staff to manage and to the protection of investors, whether the Dodd-Frank Act, Congress analyze information related to the risks the action will promote efficiency, recognized that FSOC would need posed by private funds more quickly, competition, and capital formation.187 information from private fund advisers more effectively, and at a lower cost The SEC seeks comment and data on to help it carry out its duties. As a than is currently possible. This would the value of the benefits identified. It result, proposed Form PF is designed to allow the SEC to more efficiently and also welcomes comments on the gather information regarding the private effectively target its examination accuracy of the cost estimates in this fund industry that would be useful to program. The SEC would be able to use analysis, and requests that commenters FSOC in monitoring systemic risk.191 Form PF information to generate reports provide data that may be relevant to Systemic risk may arise from a variety on the industry, its characteristics and these cost estimates. In addition, the of sources, including trends. These reports may help the SEC SEC seeks estimates and views interconnectedness, changes in market anticipate regulatory problems, allocate regarding these costs and benefits for liquidity and market concentrations, and reallocate its resources, and more particular covered advisers, including and so the information that Form PF fully evaluate and anticipate the small advisers, as well as any other elicits is intended to provide data that, implications of various regulatory costs or benefits that may result from individually or in the aggregate, would actions it may consider taking, which the adoption of the proposed rule and permit FSOC to identify where systemic should increase both the efficiency and form. risk may arise across a range of sources. effectiveness of its programs and thus Because proposed Advisers Act rule The SEC expects that FSOC would use increase investor protection. Responses 204(b)–1 and Form PF would this data to supplement the data that it to many of the proposed questions implement sections 404 and 406 of the collects regarding other financial market would help the SEC better understand Dodd-Frank Act, the benefits and costs participants and gain a broader view of the investment activities of private considered by Congress in passing the the financial system than is currently funds and the scope of their potential Dodd-Frank Act are not entirely available to regulators. In this manner, effect on investors and the markets that separable from the benefits and costs the SEC believes that the information the SEC regulates. imposed by the SEC in designing the collected through Form PF could play The coordination with the CFTC proposed rule and form. Accordingly, an important role in FSOC’s monitoring would also result in significant although the PRA hourly burden of systemic risk, both in the private fund efficiencies for private fund advisers estimates discussed above, and their industry and in the financial markets that are also registered as a CPO or CTA corresponding dollar cost estimates, are more broadly. with the CFTC because, under the included in full below and in the PRA The proposed private fund reporting proposed rules in this Release, these analysis above, a portion of the on Form PF would also benefit all advisers would satisfy certain reporting reporting costs is attributable to the investors and market participants by obligations under both proposed requirements of the Dodd-Frank Act and improving the information available to Advisers Act rule 204(b)–1 and not specific requirements of the the SEC regarding the private fund proposed CEA rule 4.27(d) with respect proposed rule or form. industry. Today, regulators have little to commodity pools that satisfy the reliable data regarding this rapidly definition of ‘‘private fund’’ (as proposed A. Benefits growing sector and frequently have to in Form PF) by filing Form PF. As The SEC believes Form PF may create rely on data from other sources, which discussed in section I.B of this Release, two principal classes of benefits. First, when available may be incomplete. As the SEC also has coordinated with the information collected through Form discussed above, the more reliable data foreign financial regulators regarding PF is expected to facilitate FSOC’s collected through Form PF would assist the reporting of systemic risk monitoring of the systemic risks that FSOC in identifying and addressing information regarding hedge funds and private funds may pose and to assist risks to U.S. financial stability, anticipates that this coordination, as FSOC in carrying out its other duties potentially protecting investors and reflected in proposed Form PF, would under the Dodd-Frank Act with respect other market participants from result in greater efficiencies in reporting to nonbank financial companies. significant losses. In addition, this data by private fund advisers, as well as Second, this information may enhance would provide the SEC with a more information sharing and private fund the ability of the SEC to evaluate and complete view of the financial markets monitoring among foreign financial form regulatory policies and improve in general and the private fund industry regulators. the efficiency and effectiveness of the in particular. This broader perspective As discussed in section II.B of this SEC’s monitoring of markets for investor and more reliable data may enhance its Release, the SEC has designed the protection and market vitality. ability to form and frame regulatory reporting frequency in proposed Form The Dodd-Frank Act directs FSOC to policies regarding the private fund PF based on when it understands monitor emerging risks to U.S. financial advisers to private funds are already stability 188 and to require FRB 189 Section 112(a)(2) of the Dodd-Frank Act. compiling certain information that Form 190 supervision of designated nonbank See supra note 7 and accompanying text. PF would require, creating efficiencies 191 See section II.D of this Release for a for, and benefiting, the adviser in description of the information that private fund 187 15 U.S.C. 80b–2(c). advisers would be required to report on proposed satisfying its reporting obligations. The 188 See supra note 6 and accompanying text. Form PF. SEC also has based certain more specific

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reporting items on information that it would subsequent reports. In addition, (3) 75 burden hours at a cost of understands large hedge fund advisers the SEC expects that some Large Private $23,270 197 per large hedge fund adviser frequently calculate for purposes of Fund Advisers would find it efficient to for the initial quarterly report; reporting to investors in the funds.192 automate some portion of the reporting (4) 35 burden hours at a cost of The SEC does not expect that this process, which would increase the $9,700 198 per large hedge fund adviser proposal would have an effect on burden of the initial filing but reduce for each subsequent quarterly report; competition because the information the burden of subsequent filings. (5) 35 burden hours at a cost of generally would be non-public and In subsequent reporting periods, the $10,860 199 per large liquidity fund similar types of advisers would have SEC anticipates that filers would incur adviser for the initial quarterly report; comparable burdens under the form. significantly lower costs because much (6) 16 burden hours at a cost of The SEC also does not expect that this of the work involved in the initial report $4,440 200 per large liquidity fund proposal would have an effect on capital is non-recurring and because of adviser for each subsequent quarterly formation because the information efficiencies realized from system report; generally would be non-public and thus configuration and reporting automation (7) 25 burden hours at a cost of 201 should not impact private fund advisers’ efforts accounted for in the initial $7,760 per large private equity fund ability to raise capital or their market reporting period. In addition, the SEC activities. 197 The SEC expects that for the initial report, of estimates that senior personnel would a total estimated burden of 75 hours, approximately B. Costs bear less of the reporting burden in 45 hours will most likely be performed by subsequent reporting periods, reducing compliance professionals and 30 hours will most The proposed reporting requirement costs though not necessarily reducing likely be performed by programmers working on also would impose certain costs on system configuration and reporting automation. Of the burden hours. the work performed by compliance professionals, private fund advisers. In order to Based on the foregoing, the SEC minimize these costs, the scope of the the SEC anticipates that it will be performed estimates 194 that, for the purposes of the equally by a compliance manager at a cost of $273 required information and the frequency PRA, the periodic filing requirements per hour and a senior risk management specialist of the reporting generally would be less under Form PF (including configuring at a cost of $409 per hour. Of the work performed for private fund advisers that manage by programmers, the SEC anticipates that it will be systems and compiling, automating, less private fund assets or that do not performed equally by a senior programmer at a cost reviewing and electronically filing the of $304 per hour and a programmer analyst at a cost manage types of private funds that may report) would impose: of $224 per hour. ($273/hour × 0.5 + $409/hour × be more likely to pose systemic risk. 0.5) × 45 hours + ($304/hour × 0.5 + $224/hour × (1) 10 burden hours at a cost of 0.5) × 30 hours = approximately $23,270. Specifically, smaller private fund 195 $3,410 per smaller private fund 198 advisers would be required to report The SEC expects that for subsequent reports adviser for the initial annual report; annually and provide only basic senior personnel will bear less of the reporting 196 burden and that significant system configuration information regarding their operations (2) 3 burden hours at a cost of $830 per smaller private fund adviser for each and reporting automation costs will not be incurred. and the private funds they advise, while As a result, the SEC estimates that these activities Large Private Fund Advisers would subsequent annual report; will most likely be performed equally by a report on a quarterly basis and provide compliance manager at a cost of $273 per hour, a 194 193 The SEC understands that some advisers may senior compliance examiner at a cost of $235 per more information. Further, the outsource all or a portion of their Form PF reporting hour, a senior risk management specialist at a cost additional information required from responsibilities to a filing agent, software of $409 per hour and a risk management specialist large hedge fund advisers would be consultant, or other third-party service provider. at a cost of $192 per hour. ($273/hour × 0.25 + × × more extensive than the additional The SEC believes, however, that an adviser would $235/hour 0.25 + $409/hour 0.25 + $192/hour engage third-party service providers only if the × 0.25) × 35 hours = approximately $9,700. information required from large external costs were comparable, or less than, the 199 The SEC expects that for the initial report, of liquidity fund advisers, which in turn estimated internal costs of compiling, reviewing, a total estimated burden of 35 hours, approximately would be more extensive than that and filing the Form PF. The hourly wage data used 21 hours will most likely be performed by required from large private equity fund in this Economic Analysis section of the Release is compliance professionals and 14 hours will most based on the Securities Industry and Financial likely be performed by programmers working on advisers. Markets Association’s Report on Management & system configuration and reporting automation. Of The SEC expects that the costs of Professional Earnings in the Securities Industry the work performed by compliance professionals, reporting would be most significant for 2010. This data has been modified to account for the SEC anticipates that it will be performed the first report that a private fund an 1,800-hour work-year and multiplied by 5.35 for equally by a compliance manager at a cost of $273 adviser is required to file because the management and professional employees and by per hour and a senior risk management specialist 2.93 for general and compliance clerks to account at a cost of $409 per hour. Of the work performed adviser would need to familiarize itself for bonuses, firm size, employee benefits and by programmers, the SEC anticipates that it will be with the new reporting form and may overhead. performed equally by a senior programmer at a cost need to configure its systems in order to 195 The SEC expects that for the initial report of $304 per hour and a programmer analyst at a cost × × efficiently gather the required these activities will most likely be performed of $224 per hour. ($273/hour 0.5 + $409/hour equally by a compliance manager at a cost of $273 0.5) × 21 hours + ($304/hour × 0.5 + $224/hour × information. The SEC also anticipates per hour and a senior risk management specialist 0.5) × 14 hours = approximately $10,860. that the initial report would require at a cost of $409 per hour and that, because of the 200 The SEC expects that for subsequent reports more attention from senior personnel, limited scope of information required from smaller senior personnel will bear less of the reporting including compliance managers and private fund advisers, these advisers generally burden and that significant system configuration would not realize significant benefits from or incur and reporting automation costs will not be incurred. senior risk management specialists, than significant costs for system configuration or As a result, the SEC estimates that these activities automation. ($273/hour × 0.5 + $409/hour × 0.5) × will most likely be performed equally by a 192 See note 105 and accompanying text. 10 hours = approximately $3,410. compliance manager at a cost of $273 per hour, a 193 See section II.B of this Release for a 196 The SEC expects that for subsequent reports senior compliance examiner at a cost of $235 per description of who would be required to file Form senior personnel will bear less of the reporting hour, a senior risk management specialist at a cost PF, section II.C of this Release for information burden. As a result, the SEC estimates that these of $409 per hour and a risk management specialist regarding the frequency with which private fund activities will most likely be performed equally by at a cost of $192 per hour. ($273/hour × 0.25 + advisers would be required to file Form PF, and a compliance manager at a cost of $273 per hour, $235/hour × 0.25 + $409/hour × 0.25 + $192/hour section II.D of this Release for a description of the a senior compliance examiner at a cost of $235 per × 0.25) × 16 hours = approximately $4,440. information that private fund advisers would be hour, a senior risk management specialist at a cost 201 The SEC expects that for the initial report, of required to report on Form PF. See also proposed of $409 per hour and a risk management specialist a total estimated burden of 25 hours, approximately Instruction 8 to Form PF for information regarding at a cost of $192 per hour. ($273/hour × 0.25 + 15 hours will most likely be performed by the frequency with which private fund advisers $235/hour × 0.25 + $409/hour × 0.25 + $192/hour compliance professionals and 10 hours will most would be required to file Form PF. × 0.25) × 3 hours = approximately $830. Continued

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adviser for the initial quarterly report; approximately $6,770 per year.205 The empirical data and other factual support and SEC further estimates that hardship for their views to the extent possible. (8) 12 burden hours at a cost of exemption requests would cost private $3,330 202 per large private equity fund fund advisers as a whole approximately VII. Initial Regulatory Flexibility adviser for each subsequent quarterly $760 per year.206 Analysis report. Finally, firms required to file Form PF CFTC Assuming that there are 3,920 smaller would have to pay filing fees. The private fund advisers, 200 large hedge amount of these fees has not yet been Under proposed rule 4.27(d), the fund advisers, 80 large liquidity fund determined.207 CFTC would not impose any additional advisers, and 250 large private equity burden upon registered CPOs and CTAs fund advisers, the foregoing estimates C. Request for Comment that are dually registered as investment would suggest an annual cost of The SEC requests comments on all advisers with the SEC because such $30,200,000 203 for all private fund aspects of the foregoing cost-benefit entities are only required to file Form advisers in the first year of reporting analysis, including the accuracy of the PF with the SEC. Further, certain CPOs and an annual cost of $15,800,000 in potential costs and benefits identified registered with the CFTC that are also subsequent years.204 and assessed in this Release, as well as registered with the SEC would be In addition, as discussed above, a any other costs or benefits that may deemed to have satisfied certain CFTC- private fund adviser would be required result from the proposals. The SEC related filing requirements by to file very limited information on Form encourages commenters to identify, completing and filing the applicable PF if it needed to transition from discuss, analyze, and supply relevant sections of Form PF with the SEC. quarterly to annual filing, if it were no data regarding these or additional costs Therefore, any burden imposed by Form longer subject to the reporting and benefits. The SEC also requests PF through proposed rule 4.27(d) on requirements of Form PF or if it comment on the foregoing analysis of small entities registered with both the required a temporary hardship the likely effect of the proposed rule on CFTC and the SEC has been accounted exemption under proposed rule 204(b)– competition, efficiency, and capital for within the SEC’s initial calculations 1(f). The SEC estimates that transition formation. Commenters are requested to regarding the impact of this collection of and final filings would, collectively, provide empirical data to support their information under the Regulatory cost private fund advisers as a whole views. Flexibility Act (‘‘RFA’’).209 Accordingly, In addition, for purposes of the Small the Chairman, on behalf of the CFTC, likely be performed by programmers working on Business Regulatory Enforcement hereby certifies pursuant to 5 U.S.C. system configuration and reporting automation. Of Fairness Act of 1996, or ‘‘SBREFA,’’ 208 605(b) that the proposed rules will not the work performed by compliance professionals, the SEC anticipates that it will be performed the SEC must advise OMB whether a have a significant impact on a equally by a compliance manager at a cost of $273 proposed regulation constitutes a substantial number of small entities. per hour and a senior risk management specialist ‘‘major’’ rule. Under SBREFA, a rule is SEC at a cost of $409 per hour. Of the work performed considered ‘‘major’’ where, if adopted, it by programmers, the SEC anticipates that it will be performed equally by a senior programmer at a cost results in or is likely to result in: (1) An The SEC has prepared the following of $304 per hour and a programmer analyst at a cost annual effect on the economy of $100 Initial Regulatory Flexibility Analysis of $224 per hour. ($273/hour × 0.5 + $409/hour × million or more; (2) a major increase in × × × (‘‘IRFA’’) regarding proposed Advisers 0.5) 15 hours + ($304/hour 0.5 + $224/hour costs or prices for consumers or 0.5) × 10 hours = approximately $7,760. Act rule 204(b)–1 in accordance with individual industries; or (3) significant 202 The SEC expects that for subsequent reports section 3(a) of the RFA. senior personnel will bear less of the reporting adverse effects on competition, burden and that significant system configuration investment, or innovation. A. Reasons for Proposed Action and reporting automation costs will not be incurred. We request comment on the potential The SEC is proposing rule 204(b)–1 As a result, the SEC estimates that these activities impact of the proposed new rule and will most likely be performed equally by a and Form PF specifying information proposed rule amendments on the compliance manager at a cost of $273 per hour, a that private fund advisers must disclose senior compliance examiner at a cost of $235 per economy on an annual basis. confidentially to the SEC, which hour, a senior risk management specialist at a cost Commenters are requested to provide of $409 per hour and a risk management specialist information the SEC will share with at a cost of $192 per hour. ($273/hour × 0.25 + FSOC for systemic risk assessment × × 205 $235/hour 0.25 + $409/hour 0.25 + $192/hour The SEC estimates that, for the purposes of the purposes to help implement sections × 0.25) × 12 hours = approximately $3,330. PRA, transition filings will impose 12 burden hours 203 (3,920 smaller private fund advisers × $3,410 per year on private fund advisers in the aggregate 404 and 406 of the Dodd-Frank Act. per initial annual report) + (200 large hedge fund and that final filings will impose 89 burden hours Under the proposed rule, private fund advisers × $23,270 per initial quarterly report) + per year on private fund advisers in the aggregate. advisers would be required to file (200 large hedge fund advisers × 3 quarterly reports The SEC anticipates that this work will most likely information responsive to all or portions × $9,700 per subsequent quarterly report) + (80 be performed by a compliance clerk at a cost of $67 × large liquidity fund advisers × $10,860 per initial per hour. (12 burden hours + 89 burden hours) of Form PF on a periodic basis. The quarterly report) + (80 large liquidity fund advisers $67/hour = approximately $6,770. scope of the required information and × 3 quarterly reports × $4,440 per subsequent 206 The SEC estimates that, for the purposes of the the frequency of the reporting would be quarterly report) + (250 large private equity fund PRA, requests for temporary hardship exemptions related to the amount of private fund advisers × $7,760 per initial quarterly report) + (250 will impose 4 burden hours per year on private large private equity fund advisers × 3 quarterly fund advisers in the aggregate. The SEC anticipants assets that each private fund adviser reports × $3,330 per subsequent quarterly report) = that five-eighths of this work will most likely be manages and the type of private fund to approximately $30,200,000. performed by a compliance manager at a cost of which those assets relate. Specifically, 204 (3,920 smaller private fund advisers × $830 $273 per hour and that three-eighths of this work smaller private fund advisers would be per subsequent annual report) + (200 large hedge will most likely be performed by a general clerk at × 5 fund advisers × 4 quarterly reports × $9,700 per a cost of $50 per hour. (($273 per hour ⁄8 of an required to report annually and provide × 3 × subsequent quarterly report) + (80 large liquidity hour) + ($50 per hour ⁄8 of an hour)) 4 hours only basic information regarding their fund advisers × 4 quarterly reports × $4,440 per = approximately $760. operations and the private funds they 207 subsequent quarterly report) + (250 large private See supra note 147 and accompanying text. advise, while Large Private Fund equity fund advisers × 4 quarterly reports × $3,330 208 Public Law 104–121, Title II, 110 Stat. 857 per subsequent quarterly report) = approximately (1996) (codified in various sections of 5 U.S.C., 15 $15,800,000. U.S.C. and as a note to 5 U.S.C. 601). 209 5 U.S.C. 603(a).

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Advisers would report on a quarterly registered with the SEC and that advise advisers also would have to pay a basis and provide more information.210 one or more private funds to file Form smaller amount of filing fees than Large PF, completing all or part of section 1 Private Fund Advisers. Regarding the B. Objectives and Legal Basis of that form. As discussed above, the second alternative, the information that As described more fully in sections I SEC estimates that completing, would be required of small entities and II of this Release, the general reviewing, and filing Form PF would under section 1 of Form PF is quite objective of proposed Advisers Act rule cost $3,410 per year for each small simplified from the more extensive 204(b)–1 is to assist FSOC in its adviser in its first year of reporting and reporting that would be required of obligations under the Dodd-Frank Act $830 per year for each subsequent Large Private Fund Advisers and is relating to nonbank financial companies year.213 In addition, small entities consolidated in one section of the form. and in monitoring systemic risk. The would be required to pay a filing fee SEC is proposing rule 204(b)–1 and when submitting Form PF. The amount G. Solicitation of Comments Form PF pursuant to the SEC’s authority of the filing fee has not yet been set forth in sections 404 and 406 of the The SEC encourages written determined, but we anticipate that Large comments on matters discussed in this Dodd-Frank Act, to be codified at Private Fund Advisers’ filing fees would sections 204(b) and 211(e) of the IRFA. In particular, the SEC seeks be set at a higher amount than small comment on: Advisers Act [15 U.S.C. 80b–4(b) and advisers. 80b–11(e)]. • The number of small entities that E. Duplicative, Overlapping, or would be subject to the proposed rule; C. Small Entities Subject to the Rule Conflicting Federal Rules and Under SEC rules, for the purposes of The SEC has not identified any • Whether the effect of the proposed the Advisers Act and the Regulatory Federal rules that duplicate or overlap rule on small entities would be Flexibility Act, an investment adviser or conflict with the proposed rule. economically significant. generally is a small entity if it: (i) Has assets under management having a total F. Significant Alternatives Commenters are asked to describe the value of less than $25 million; (ii) did The Regulatory Flexibility Act directs nature of any effect and provide not have total assets of $5 million or the SEC to consider significant empirical data supporting the extent of more on the last day of its most recent alternatives that would accomplish the the effect. fiscal year; and (iii) does not control, is stated objective, while minimizing any VIII. Statutory Authority not controlled by, and is not under significant impact on small entities. In common control with another connection with the proposed rules and CFTC investment adviser that has assets under amendments, the SEC considered the management of $25 million or more, or following alternatives: (i) The The CFTC is proposing rule 4.27(d) any person (other than a natural person) establishment of differing compliance or [17 CFR 4.27(d)] pursuant to its that had total assets of $5 million or reporting requirements or timetables authority set forth in section 4n of the more on the last day of its most recent that take into account the resources Commodity Exchange Act [7 U.S.C. 6n]. fiscal year.211 available to small entities; (ii) the SEC Under section 203A of the Advisers clarification, consolidation, or Act, most advisers qualifying as small simplification of compliance and The SEC is proposing rule 204(b)–1 entities are prohibited from registering reporting requirements under the rule [17 CFR 275.204(b)–1] pursuant to its with the SEC and are instead registered for small entities; (iii) the use of authority set forth in sections 404 and with State regulators. Therefore, few performance rather than design 406 of the Dodd-Frank Act, to be small advisers would be subject to the standards; and (iv) an exemption from codified at sections 204(b) and 211(e) of proposed rule and form. The SEC coverage of the rule, or any part thereof, the Advisers Act [15 U.S.C. 80b–4 and estimates that as of December 1, 2010, for small entities. 15 U.S.C. 80b–11], respectively. approximately 50 advisers that were Regarding the first and fourth The SEC is proposing rule 279.9 small entities were registered with the alternatives, the SEC has proposed pursuant to its authority set forth in different reporting requirements and SEC and advised one or more private sections 404 and 406 of the Dodd-Frank funds.212 timetables for small entities. The Act, to be codified at sections 204(b) proposed rule only would require small D. Reporting, Recordkeeping, and Other and 211(e) of the Advisers Act [15 entity advisers to file Form PF annually Compliance Requirements U.S.C. 80b–4 and 15 U.S.C. 80b–11], and to complete applicable portions of respectively. The proposed rule and form would section 1 of the form.214 These smaller impose certain reporting and List of Subjects compliance requirements on advisers, 213 See supra notes 195–196 and accompanying including small advisers. The proposed text. 17 CFR Part 4 rule would require all small advisers 214 If the adviser had no hedge fund assets under management, it would not need to complete section Advertising, Brokers, Commodity 1.C of the proposed form. Advisers that manage Futures, Commodity pool operators, 210 See section II.B of this Release for a both registered money market funds and liquidity description of who would be required to file Form funds would be required to complete section 3 of Commodity trading advisors, Consumer PF, section II.C of this Release for information Form PF, but there are no small entities that manage protection, Reporting and recordkeeping regarding the frequency with which private fund a registered money market fund. See section II.B of requirements. advisers would be required to file Form PF, and this Release for a description of who would be section II.D of this Release for a description of the required to file Form PF, section II.C of this Release 17 CFR Part 275 information that private fund advisers would be for information regarding the frequency with which required to report on Form PF. See also proposed smaller private fund advisers would be required to Reporting and recordkeeping Instruction 8 to Form PF for information regarding file Form PF, and section II.D.1 of this Release for requirements, Securities. the frequency with which private fund advisers a description of the information that smaller private would be required to file Form PF. fund advisers would be required to report on Form 211 17 CFR 275.0–7(a). PF. See also proposed Instruction 8 to Form PF for smaller private fund advisers would be required to 212 Based on IARD data. information regarding the frequency with which file Form PF.

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Text of Proposed Rules 4. Section 275.204(b)–1 is added to (2) To request a temporary hardship Commodity Futures Trading read as follows: exemption, you must: Commission § 275.204(b)–1 Reporting by investment (i) Complete and file with the operator For the reasons set out in the advisers to private funds. of the Form PF filing system in paper preamble, the CFTC is proposing to (a) Reporting by investment advisers format Item A of Section 1a and Section amend Title 17, Chapter I of the Code to private funds on Form PF. Subject to 5 of Form PF, checking the box in of Federal Regulations as follows: paragraph (g), if you are an investment Section 1a indicating that you are adviser registered or required to be requesting a temporary hardship PART 4—COMMODITY POOL registered under section 203 of the Act exemption, no later than one business OPERATORS AND COMMODITY (15 U.S.C. 80b–3) and act as an day after the electronic Form PF filing TRADING ADVISORS investment adviser to one or more was due; and 1. The authority citation for part 4 private funds, you must complete and (ii) Submit the filing that is the continues to read as follows: file a report on Form PF (17 CFR 279.9) subject of the Form PF paper filing in within 15 days of the end of the next electronic format with the Form PF Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, filing system no later than seven 6l, 6m, 6n, 6o, 12a, and 23. calendar quarter by following the instructions in the Form, which specify business days after the filing was due. * * * * * the information that an investment 2. In § 4.27, as proposed to be added (3) The temporary hardship adviser must provide. elsewhere in this issue of the Federal exemption will be granted when you file (b) Electronic filing. You must file Register, add paragraph (d) to read as Item A of Section 1a and Section 5 of Form PF electronically with the Form follows: Form PF, checking the box in Section 1a PF filing system. indicating that you are requesting a § 4.27 Additional reporting by advisors of Note to paragraph (b): Information on how temporary hardship exemption. commodity pools. to file Form PF is available on the (g) Transition for certain filers. If you * * * * * Commission’s Web site at http:// were an investment adviser registered or www.sec.gov/[__]. (d) Investment advisers to private required to be registered under section funds. CPOs and CTAs who are dually (c) When filed. Each Form PF is 203 of the Act (15 U.S.C. 80b–3), act as registered with the Securities and considered filed with the Commission an investment adviser to one or more Exchange Commission and advise one upon acceptance by the Form PF filing private funds immediately prior to the or more private funds, as defined in system. compliance date of rule 204(b)–1, and section 202 of the Investment Advisers (d) Filing fees. You must pay the are only required to complete all or Act of 1940 (15 U.S.C. 80b–2(a)), shall operator of the Form PF filing system a portions of section 1 of Form PF, no file Form PF with the Securities and filing fee as required by the instructions later than 90 days after the end of your Exchange Commission. Dually to Form PF. The Commission has then-current fiscal year you must registered CPOs and CTAs that file Form approved the amount of the filing fee. complete and file your initial report on PF with the Securities and Exchange No portion of the filing fee is Form PF by following the instructions Commission will be deemed to have refundable. Your completed Form PF in the Form, which specify the filed Form PF with the Commission for will not be accepted by the operator of purposes of any enforcement action information that an investment adviser the Form PF filing system, and thus will must provide. regarding any false or misleading not be considered filed with the statement of a material fact in Form PF. Commission, until you have paid the PART 279—FORMS PRESCRIBED Dually registered CPOs and CTAs must filing fee. UNDER THE INVESTMENT ADVISERS file such other reports as are required (e) Amendments to Form PF. You ACT OF 1940 under this section with respect to all must amend your Form PF: pools that are not private funds. (1) At least annually, no later than the 5. The authority citation for part 279 * * * * * last day on which you may timely file continues to read as follows: Securities and Exchange Commission your annual amendment to Form ADV Authority: 15 U.S.C. 80b–1, et seq. under rule 204–1(a)(1) (17 CFR 275.204– For the reasons set out in the 1(a)(1)); and 6. Section 279.9 is added to read as preamble, the SEC is proposing to (2) More frequently, if required by the follows: amend Title 17, Chapter II of the Code instructions to Form PF. You must file of Federal Regulations as follows: § 279.9 Form PF, reporting by investment all amendments to Form PF advisers to private funds. PART 275—RULES AND electronically with the Form PF filing REGULATIONS, INVESTMENT system. This form shall be filed pursuant to ADVISERS ACT OF 1940 (f) Temporary hardship exemption. Rule 204(b)–1 (§ 275.204(b)–1 of this (1) If you have unanticipated technical chapter) by certain investment advisers 3. The authority citation for part 275 difficulties that prevent you from registered or required to register under continues to read in part as follows: submitting Form PF on a timely basis section 203 of the Act (15 U.S.C. 80b– Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– through the Form PF filing system, you 3) that act as an investment adviser to 2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4), may request a temporary hardship one or more private funds. 80b–6a, and 80b–11, unless otherwise noted. exemption from the requirements of this Note: The following Form PF will not * * * * * section to file electronically. appear in the Code of Federal Regulations.

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By the Commodity Futures Trading Dated: January 26, 2011. Dated: January 26, 2011. Commission. David A. Stawick, Elizabeth M. Murphy, Secretary. Secretary. By the Securities and Exchange Appendix 1—Commodity Futures Commission. Trading Commission Voting Summary On this matter, Chairman Gensler and Commissioners Dunn, Sommers (by proxy), Chilton and O’Malia voted in the affirmative; no Commissioner voted in the negative. [FR Doc. 2011–2175 Filed 2–10–11; 8:45 am] BILLING CODE 8011–01–P; 6351–01–P

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