An Alston & Bird Report
Private equity funds could find themselves with much greater logistical reporting burdens if the Securities and Exchange Commission’s proposed amendments to Form PF are finalized. Our Securities Group and Investment Management Team investigate three ways the proposal would narrow the gap between the obligations of private equity and publicly traded companies.
- Large hedge funds and private equity funds would have just one day to report certain major events
- The reporting threshold would decrease to $1.5 billion in assets under management
- Reporting requirements for large liquidity funds would mirror those for money market funds
On January 26, 2022, the Securities and Exchange Commission (SEC) proposed amendments to a confidential reporting tool—Form PF—that would require greater and more frequent disclosure by private equity and large hedge fund advisers. The SEC and the Financial Stability Oversight Council (FSOC) use the information gathered by Form PF, first adopted in 2011, to monitor market activity, flag systemic risks, and inform policymaking. While the proposed amendments may better equip the SEC and FSOC to analyze and assess the market and the private fund industry through greater access to information, critics note that they will also likely impose much greater logistical burdens on private equity firms.
Under the current framework, advisers required to file Form PF have months to file after the end of the fiscal year or quarter in which the reported event occurred. Exact timetables vary based on the size and type of funds that are advised. Only large private equity advisers that manage $2 billion or more in private equity fund assets are subject to Form PF reporting requirements. The SEC noted that as currently drafted, Form PF does not require current reporting of information from advisers whose funds are facing stress, which could result in investor harm and create systemic risk.
The proposed changes would primarily affect disclosure obligations for private equity advisers in three ways:
- Requiring new current reporting of certain events for large hedge fund advisers and advisers to private equity funds.
- Decreasing the reporting threshold for large private equity advisers.
- Revising reporting requirements for large private equity advisers and large liquidity fund advisers.
1. New current reporting for large hedge fund advisers and advisers to private equity funds
Large hedge fund advisers
The proposed amendments would require large hedge fund advisers subject to Form PF reporting requirements to submit the form within one business day of an event that indicates significant stress at the fund with the potential to harm investors or signals risk in the broader financial system. Such events include:
- Certain extraordinary investment losses.
- Significant margin and counterparty default events.
- Material changes in prime broker relationships.
- Changes in unencumbered cash.
- Operations events.
- Events associated with withdrawals and redemptions.
Private equity fund advisers
Further, the proposed amendments would require advisers to private equity funds to submit current reports within one business day of the occurrence of reporting events related to:
- The execution of adviser-led secondary transactions.
- Implementation of general partner or limited partner clawbacks.
- Removal of a fund’s general partner.
- Termination of a fund’s investment period.
- Termination of a fund.
The one-day reporting would be a significant reduction in the reporting time currently allotted to advisers, with the aim of providing the SEC and FSOC with more contemporaneous information about certain events that could signal distress at qualifying funds or market instability.
2. Large private equity adviser reporting
The proposed amendments would decrease the reporting threshold for large private equity advisers to $1.5 billion from $2 billion in private equity fund assets under management. This would cast a wider net that would subject more large private equity advisers to the reporting requirements. Notably, the SEC highlighted that the current threshold encompasses a lower proportion of the industry than it did when originally introduced. The proposed amendment aims to reset the metrics to require disclosure from the same proportion of advisers (75%) subject to reporting on Form PF as at the time of its introduction in 2011.
Additionally, the SEC is proposing amendments to Section 4 of Form PF that would result in increased disclosure obligations for these large private equity advisers for:
- Fund strategies.
- Use of leverage and portfolio company financings.
- Controlled portfolio companies (CPCs) and CPC borrowings.
- Fund investments in different levels of a single portfolio company’s capital structure.
- Portfolio company restructurings or recapitalizations.
The proposed amendments seek to provide the FSOC with an enhanced ability to assess the systemic risk posed by private equity funds and their advisers, as well as to inform the SEC in its regulatory programs for the protection of investors.
3. Reporting requirements for large liquidity fund advisers
The proposed amendments would change current reporting requirements for large liquidity fund advisers to mirror those that would apply to money market funds reporting on the amended Form N-MFP proposed by the SEC on December 15, 2021. The proposed Form N-MFP adds numerous reporting requirements for money market funds, including enhanced disclosures related to a fund’s shareholders and disposition of nonmaturing portfolio investments. The collective goal of the amendments to Form N-MFP and Form PF is to obtain a more comprehensive picture of the short-term financing markets in which money market funds and liquidity funds both invest, allowing the SEC and FSOC to better assess short-term financing markets and facilitate oversight of those markets.