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SEC Adopts Form PF Amendments
Summary:
- On May 3rd, 2023, the Securities and Exchange Commission adopted amendments to Form PF which are required to be filed by advisers to private funds which includes most alternative investment managers.
- The Form PF modifications increase examination risk for RIAs particularly in situations where there is portfolio distress.
- This rule will go into effect as follows:
- Event reporting (Sections 5 and 6): 180 days after its publication in the Federal Register.
- All other sections: 365 days after its publication in the Federal Register.
- This rule is separate from the CFTC Form PF Rule, which is still in process.
Rule Provisions:
The provisions of the new Form PF rule compare with the proposal in the following way.
| Provision | Proposed Rule | Adopted Rule | Takeaways and Potential Impact |
|---|---|---|---|
| Event Reporting for Large Hedge Fund Advisers | Must file PF within one business day of the occurrence of: (1) Loss of more than 20% over a 10 day period; (2) Significant margin and default events [margin call; margin default; counterparty default]; (3) Material change of prime broker relationship; (4) More than a 20% change in unencumbered cash over 2 days; (5) Operational events including cyber; (6) Significant redemption events [more than 50% of NAV]; (7) Redemption gates or suspensions lasting longer than 5 days. | Must file PF as soon as practicable but no later than 72 hours from the occurrence of: (1) Loss of more than 20% of a fund’s Reporting Fund Aggregate Calculated Value (“RFACV”) for a consecutive 10 day period; (2) Significant margin increase and default events based on the margin change being more than 20% of 10-day average RFACV; (3) Fund manager default or inability to meet margin call; (4) Counterparty default representing an amount greater than 5% of RFACV; (5) Prime brokerage relationship terminated or materially restricted; (6) Disruptions in critical operational functions including functions impacting trading, valuation, and reporting; (7) Significant redemption requests [50% of NAV]; and (8) Redemption gates or suspensions lasting more than 5 days. | The adopted rule relaxed the time requirement for notifying the SEC about certain events and smoothed some of the calculations needed for reporting. However, the fact that the SEC will now have additional transparency into indicia of distress increases the risk of examination especially during times when managers may be dealing with more pressing and existential issues. |
| Event Reporting for Large Private Equity Advisers | Must file PF within one business day on the occurrence of: (1) GP-Led transactions; (2) GP clawback of more than 10%; (3) GP removal or termination of investment period. | Must file PF quarterly, 60 days after quarter end, upon the occurrence of: (1) Execution of a GP-Led transaction; (2) GP removal or termination of investment period. | The adopted rule relaxed the time requirement for notifying the SEC about certain events and removed the requirement to report GP Clawback effectuation. Nevertheless, the SEC will now have more transparency into potential issues at private equity managers with GP removals and investment period terminations being particularly interesting for examiners. As an unintended consequence, this provision may give more power to investors especially since investment period terminations will now have to be reported to regulators. |
| Lowered Threshold for Filing Form PF | Filing threshold lowered from $2 billion to $1.5 billion. | Removed | This requirement was removed in the adopted rule. |
| Periodic Private Equity Reporting | New reporting requirements included: (1) Controlled portfolio company ownership; (2) Investment strategy reporting; (3) Portfolio company restructuring or recapitalization; (4) Capital stack investing; (5) Fund level borrowings; (6) Portfolio company financing; (7) Floating rate borrowings of controlled portfolio companies; (8) Events of default; (9) Bridge financing and counterparties; (10) Additional geographic information. | New reporting requirements include: (1) Information about GP- or LP- clawbacks of more than 10% of the fund’s aggregate capital commitments; (2) Information on private equity strategies; (3) Fund level borrowings; (4) Events of default including detailed information about the entity (including PortCo) defaulting; (5) Information about entities providing bridge financings; (6) Geographical background of portfolio investments. | Periodic reporting was significantly watered down in the final Form PF rule with the following items removed completely: • Restructuring/recapitalization of a portfolio company; • Investments in different levels of a single portfolio company’s capital structure by related funds; • Financing of portfolio companies; • Floating rate borrowings of controlled portfolio companies; • Controlled portfolio companies owned by private equity funds. The adopted rule included a new reporting item for GP- and LP- clawbacks which was moved from the immediate reporting sections. |
Additional Takeaways:
- Increased Exam Risk – While the adopted rule is significantly scaled back from the proposal, it still provides additional risk information to the SEC and is very likely to be included in future exam scoping. Certain activities which historically carried less regulatory risk may now trigger examinations and increased scrutiny. For example, GP-Led transactions, distress at portfolio companies, and the triggering of clawbacks may trigger examinations and potentially enforcement investigations.
- Quick Implementation Dates – The immediate reporting requirements of this rule will be implemented 6 months after publication in the Federal Register and could begin to capture events, including GP-Led transactions, as soon as the beginning of 2024. This data is likely to be included in exam selections in late 2024.
- It Could Have Been Worse – The Commission chose not to adopt some items that may have been more challenging to report but would have significantly increased their ability to spot portfolio distress. This includes information about (1) Portfolio company restructurings; (2) investments in different parts of the capital structure; and (3) the nature of portfolio company financings. The SEC also did not lower the Form PF Large Adviser filing threshold and chose not to define certain crypto assets as securities.