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2011-28549

  • Federal Register, Volume 76 Issue 221 (Wednesday, November 16, 2011)[Federal Register Volume 76, Number 221 (Wednesday, November 16, 2011)]

    [Rules and Regulations]

    [Pages 71128-71239]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-28549]

    [[Page 71127]]

    Vol. 76

    Wednesday,

    No. 221

    November 16, 2011

    Part II

    Commodities and Future Trading Commission

    Securities and Exchange Commission

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    17 CFR Parts 4, 275 and 279

    Reporting by Investment Advisers to Private Funds and Certain

    Commodity Pool Operators and Commodity Trading Advisors on Form PF;

    Final Rule

    Federal Register / Vol. 76 , No. 221 / Wednesday, November 16, 2011 /

    Rules and Regulations

    [[Page 71128]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 4

    RIN 3038-AD03

    SECURITIES AND EXCHANGE COMMISSION

    17 CFR Parts 275 and 279

    [Release No. IA-3308; File No. S7-05-11]

    RIN 3235-AK92

    Reporting by Investment Advisers to Private Funds and Certain

    Commodity Pool Operators and Commodity Trading Advisors on Form PF

    AGENCIES: Commodity Futures Trading Commission and Securities and

    Exchange Commission.

    ACTION: Joint final rules.

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    SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the

    Securities and Exchange Commission (``SEC'') (collectively, ``we'' or

    the ``Commissions'') are adopting new rules under the Commodity

    Exchange Act and the Investment Advisers Act of 1940 to implement

    provisions of Title IV of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act. The new SEC rule requires investment advisers

    registered with the SEC that advise one or more private funds and have

    at least $150 million in private fund assets under management to file

    Form PF with the SEC. The new CFTC rule requires commodity pool

    operators (``CPOs'') and commodity trading advisors (``CTAs'')

    registered with the CFTC to satisfy certain CFTC filing requirements

    with respect to private funds, should the CFTC adopt such requirements,

    by filing Form PF with the SEC, but only if those CPOs and CTAs are

    also registered with the SEC as investment advisers and are required to

    file Form PF under the Advisers Act. The new CFTC rule also allows such

    CPOs and CTAs to satisfy certain CFTC filing requirements with respect

    to commodity pools that are not private funds, should the CFTC adopt

    such requirements, by filing Form PF with the SEC. Advisers must file

    Form PF electronically, on a confidential basis. The information

    contained in Form PF is designed, among other things, to assist the

    Financial Stability Oversight Council in its assessment of systemic

    risk in the U.S. financial system.

    DATES: The effective date for the addition of 17 CFR 4.27 (rule 4.27

    under the Commodity Exchange Act), 17 CFR 275.204(b)-1 (rule 204(b)-1

    under the Investment Advisers Act of 1940) and 17 CFR 279.9 (Form PF),

    as well as the revision to the authority citation for 17 CFR part 4, is

    March 31, 2012. See section III of this Release for compliance dates.

    FOR FURTHER INFORMATION CONTACT: CFTC: Amanda L. Olear, Special

    Counsel, Telephone: (202) 418-5283, Email: aolear@cftc.gov, or Kevin P.

    Walek, Assistant Director, Telephone: (202) 418-5463, Email:

    kwalek@cftc.gov, Division of Clearing and Intermediary Oversight,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street NW., Washington, DC 20581; SEC: David P. Bartels, Senior

    Counsel, or Sarah G. ten Siethoff, Senior Special Counsel, at (202)

    551-6787 or IArules@sec.gov, Office of Investment Adviser Regulation,

    Division of Investment Management, U.S. Securities and Exchange

    Commission, 100 F Street NE., Washington, DC 20549-8549.

    SUPPLEMENTARY INFORMATION: The CFTC is adopting rule 4.27 [17 CFR 4.27]

    under the Commodity Exchange Act (``CEA'') \1\ and Form PF.\2\ The SEC

    is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] and Form PF [17 CFR

    279.9] under the Investment Advisers Act of 1940 [15 U.S.C. 80b]

    (``Advisers Act'').\3\

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    \1\ 7 U.S.C. 1a.

    \2\ Form PF is a joint form between the SEC and the CFTC only

    with respect to sections 1 and 2 of the Form. Sections 3 and 4 of

    the Form are adopted solely by the SEC.

    \3\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the

    Advisers Act, or any paragraph of the Advisers Act, we are referring

    to 15 U.S.C. 80b of the United States Code, at which the Advisers

    Act is codified, and when we refer to Advisers Act rule 204(b)-1, or

    any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1

    of the Code of Federal Regulations in which this rule will be

    published. In addition, when we refer to the ``Investment Company

    Act,'' or any paragraph of the Investment Company Act, we are

    referring to 15 U.S.C. 80a of the United States Code, at which the

    Investment Company Act of 1940 is codified.

    Table of Contents

    I.Background

    A. The Dodd-Frank Act and the Financial Stability Oversight

    Council

    B. International Coordination

    II. Discussion

    A. Who Must File Form PF

    1. ``Hedge Fund'' Definition

    2. ``Liquidity Fund'' Definition

    3. ``Private Equity Fund'' Definition

    4. Large Private Fund Adviser Thresholds

    5. Aggregation of Assets Under Management

    6. Reporting for Affiliated and Sub-Advised Funds

    7. Exempt Reporting Advisers

    B. Frequency of Reporting

    1. Annual and Quarterly Reporting

    2. Reporting Deadlines

    3. Initial Reports

    4. Transition Filings, Final Filings and Temporary Hardship

    Exemptions

    C. Information Required on Form PF

    1. Section 1 of Form PF

    2. Section 2 of Form PF

    3. Section 3 of Form PF

    4. Section 4 of Form PF

    5. Aggregation of Master-Feeder Arrangements, Parallel Fund

    Structures, and Parallel Managed Accounts

    D. Confidentiality of Form PF Data

    E. Filing Fees and Format for Reporting

    III. Effective and Compliance Dates

    IV. Paperwork Reduction Act

    A. Burden Estimates for Annual Reporting by Smaller Private Fund

    Advisers

    B. Burden Estimates for Large Hedge Fund Advisers

    C. Burden Estimates for Large Liquidity Fund Advisers

    D. Burden Estimates for Large Private Equity Advisers

    E. Burden Estimates for Transition Filings, Final Filings, and

    Temporary Hardship Exemption Requests

    F. Aggregate Hour Burden Estimates

    G. Cost Burden

    V. Economic Analysis

    A. Benefits

    B. Costs

    C. CFTC Statutory Findings

    1. General Costs and Benefits

    2. Section 15(a) Determination

    VI. Final Regulatory Flexibility Analysis

    A. Need for and Objectives of the New Rule

    B. Significant Issues Raised by Public Comment

    C. Small Entities Subject to the Rule

    D. Projected Reporting, Recordkeeping and Other Compliance

    Requirements

    E. Agency Action To Minimize Effect on Small Entities

    VII. Statutory Authority

    Text of Final Rules

    I. Background

    A. The Dodd-Frank Act and the Financial Stability Oversight Council

    On July 21, 2010, President Obama signed into law the Dodd-Frank

    Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\4\

    One significant focus of this legislation is to ``promote the financial

    stability of the United States'' by, among other measures, establishing

    better monitoring of emerging risks using a system-wide perspective.\5\

    To further this goal, the Act establishes the Financial Stability

    Oversight Council (``FSOC'') and directs it to monitor risks to the

    U.S. financial system. The Act also gives FSOC a number of tools to

    carry out this mission.\6\ For instance, FSOC may

    [[Page 71129]]

    determine that a nonbank financial company will be subject to the

    supervision of the Board of Governors of the Federal Reserve System

    (``FRB'') if the company may pose risks to U.S. financial stability as

    a result of its activities or in the event of its material financial

    distress.\7\ In addition, FSOC may issue recommendations to primary

    financial regulators, like the SEC and CFTC, for more stringent

    regulation of financial activities that FSOC determines may create or

    increase systemic risk.\8\

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    \4\ Public Law 111-203, 124 Stat. 1376 (2010).

    \5\ S. Rep. No. 111-176, at 2-3 (2010) (``Senate Committee

    Report'').

    \6\ See Sections 113 and 120 of the Dodd-Frank Act. In a recent

    rulemaking release, FSOC explained that its response to any

    potential threat to financial stability will be based on an

    assessment of the circumstances. See Authority to Require

    Supervision and Regulation of Certain Nonbank Financial Companies,

    Financial Stability Oversight Counsel Release (Oct. 11, 2011)

    (``FSOC Second Notice'').

    \7\ Section 113 of the Dodd-Frank Act. The Dodd-Frank Act also

    directs FSOC to recommend to the FRB heightened prudential standards

    for designated nonbank financial companies. Section 112(a)(2) of the

    Dodd-Frank Act.

    \8\ Section 120 of the Dodd-Frank Act.

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    The Dodd-Frank Act anticipates that various regulatory agencies,

    including the Commissions, will support FSOC.\9\ To that end, the Dodd-

    Frank Act amended section 204(b) of the Advisers Act to require that

    the SEC establish reporting and recordkeeping requirements for advisers

    to private funds,\10\ many of which must also register for the first

    time as a consequence of the Dodd-Frank Act.\11\ These new requirements

    may include maintaining records and filing reports containing such

    information as the SEC deems necessary and appropriate in the public

    interest and for investor protection or for the assessment of systemic

    risk by FSOC.\12\ The SEC and CFTC must jointly issue, after

    consultation with FSOC, rules establishing the form and content of any

    reports to be filed under this new authority.\13\

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    \9\ See, e.g., section 112(d)(1) of the Dodd-Frank Act, which

    authorizes FSOC to collect information from member agencies to

    support its functions. See also FSOC Second Notice, supra note 6

    (explaining that information reported on Form PF will be important

    to FSOC's policy-making in regard to the assessment of systemic risk

    among private fund advisers).

    \10\ Section 202(a)(29) of the Advisers Act defines the term

    ``private fund'' as ``an issuer that would be an investment company,

    as defined in section 3 of the Investment Company Act, but for

    section 3(c)(1) or 3(c)(7) of that Act.'' Section 3(c)(1) of the

    Investment Company Act provides an exclusion from the definition of

    ``investment company'' for any ``issuer whose outstanding securities

    (other than short-term paper) are beneficially owned by not more

    than one hundred persons and which is not making and does not

    presently propose to make a public offering of its securities.''

    Section 3(c)(7) of the Investment Company Act provides an exclusion

    from the definition of ``investment company'' for any ``issuer, the

    outstanding securities of which are owned exclusively by persons

    who, at the time of acquisition of such securities, are qualified

    purchasers, and which is not making and does not at that time

    propose to make a public offering of such securities.'' The term

    ``qualified purchaser'' is defined in section 2(a)(51) of the

    Investment Company Act.

    \11\ See sections 402, 403, 407 and 408 of the Dodd-Frank Act.

    The SEC recently adopted rule 203-1(e) providing a transition period

    for certain private advisers previously relying on the repealed

    exemption in section 203(b)(3) of the Advisers Act. The transition

    rule requires these advisers to register with the SEC by March 30,

    2012. See Rules Implementing Amendments to the Investment Advisers

    Act of 1940, Investment Advisers Act Release No. IA-3221 (June 22,

    2011), 76 FR 42950 (July 19, 2011) (``Implementing Adopting

    Release''). See also Exemptions for Advisers to Venture Capital

    Funds, Private Fund Advisers With Less Than $150 Million in Assets

    Under Management, and Foreign Private Advisers, Investment Advisers

    Act Release No. IA-3222 (June 22, 2011), 76 FR 39646 (July 6, 2011)

    (``Exemptions Adopting Release'').

    \12\ The Dodd-Frank Act does not identify specific information

    to be included in these reports, but section 204(b) of the Advisers

    Act does require that the records and reports required under that

    section cumulatively include a description of certain information

    about private funds, such as the amount of assets under management,

    use of leverage, counterparty credit risk exposure, and trading and

    investment positions for each private fund advised by the adviser.

    See Reporting by Investment Advisers to Private Funds and Certain

    Commodity Pool Operators and Commodity Trading Advisors on Form PF,

    Investment Advisers Act Release No. 3145 (January 26, 2011), 76 FR

    8068 (February 11, 2011) (``Proposing Release'') at n. 13 and

    accompanying text.

    \13\ See section 211(e) of the Advisers Act.

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    On January 26, 2011, in a joint release, the CFTC and SEC proposed

    new rules and a new reporting form intended to implement this statutory

    mandate.\14\ In the release, the SEC proposed new Advisers Act rule

    204(b)-1, which would require private fund advisers to file Form PF

    periodically with the SEC.\15\ In addition, the CFTC proposed new rule

    4.27,\16\ which would require private fund advisers that are also

    registered as CPOs or CTAs with the CFTC to satisfy certain proposed

    CFTC systemic risk reporting requirements, should the CFTC adopt such

    requirements, by filing Form PF.\17\ Today, we are adopting these

    proposed rules and Form PF with several changes from the proposal that

    are designed to respond to commenter concerns. Consistent with the

    proposal, advisers must report on Form PF certain information regarding

    the private funds they manage, and this information is intended to

    complement information the SEC collects on Form ADV and information the

    CFTC separately has proposed to collect from CPOs and CTAs.\18\

    Collectively, these reporting forms will provide FSOC and the

    Commissions with important information about the basic operations and

    strategies of private funds and help establish a baseline picture of

    potential systemic risk in the private fund industry.

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    \14\ As discussed below, Form PF is a joint form between the SEC

    and the CFTC only with respect to sections 1 and 2 of the Form.

    \15\ Throughout this Release, we use the term ``private fund

    adviser'' to mean any investment adviser that (i) Is registered or

    required to register with the SEC (including any investment adviser

    that is also registered or required to register with the CFTC as a

    CPO or CTA) and (ii) advises one or more private funds. Advisers

    solely to venture capital funds or advisers solely to private funds

    that in the aggregate have less than $150 million in assets under

    management in the United States that rely on the exemption from

    registration under, respectively, section 203(l) or 203(m) of the

    Advisers Act (``exempt reporting advisers'') are not required to

    file Form PF. See infra section II.A.7 of this Release.

    \16\ Because the CFTC is not adopting the remainder of proposed

    CEA rule 4.27 at the same time as it is adopting this rule, the CFTC

    has modified the designation of CEA rule 4.27(d) to be the sole text

    of that section. See Commodity Pool Operators and Commodity Trading

    Advisors: Amendments to Compliance Obligations (Jan. 26, 2011), 76

    FR 7976 (Feb. 11, 2011) (``CFTC Proposing Release''). Additionally,

    the CFTC has made some revisions to the text of rule 4.27 to: (1)

    Clarify that the filing of Form PF with the SEC will be considered

    substitute compliance with certain CFTC reporting obligations (i.e.,

    for Schedules B and C of Form CPO-PQR and Schedule B of Form CTA-PR

    as proposed) should the CFTC determine to adopt such requirements

    and (2) to allow CPOs and CTAs who are otherwise required to file

    Form PF the option of submitting on Form PF data regarding commodity

    pools that are not private funds as substitute compliance with

    certain CFTC reporting obligations (i.e., for Schedules B and C of

    Form CPO-PQR and Schedule B of Form CTA-PR as proposed) should the

    CFTC determine to adopt such requirements.

    \17\ For these private fund advisers, filing Form PF through the

    Form PF filing system would be a filing with both the SEC and CFTC.

    Irrespective of their filing a Form PF with the SEC, the CFTC has

    proposed that all private fund advisers that are also registered as

    CPOs and CTAs with the CFTC would be required to file Schedule A of

    Form CPO-PQR (for CPOs) or Schedule A of Form CTA-PR (for CTAs). See

    CFTC Proposing Release, supra note 16.

    \18\ See Proposing Release, supra note 12, at n. 16, comparing

    the purposes of Form ADV and Form PF. References in this Release to

    Form ADV or terms defined in Form ADV or its glossary are to the

    form and glossary as amended in the Implementing Adopting Release,

    supra note 11.

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    The SEC is adopting Advisers Act rule 204(b)-1 and Form PF to

    enable FSOC to obtain data that will facilitate monitoring of systemic

    risk in U.S. financial markets. Our understanding of the utility to

    FSOC of the data to be collected is based on our staffs' consultations

    with staff representing the members of FSOC. The design of Form PF is

    not intended to reflect a determination as to where systemic risk

    exists but rather to provide empirical data to FSOC with which it may

    make a determination about the extent to which the activities of

    private funds or their advisers pose such risk. The information made

    available to FSOC will be collected for FSOC's use by the Commissions

    in their role as the primary regulators of private fund advisers. The

    policy judgments implicit in the information required to be reported on

    Form PF reflect FSOC's role as the primary user of the reported

    [[Page 71130]]

    information for the purpose of monitoring systemic risk. The SEC would

    not necessarily have required the same scope of reporting if the

    information reported on Form PF were intended solely for the SEC's use.

    We expect the information collected on Form PF and provided to FSOC

    will be an important part of FSOC's systemic risk monitoring in the

    private fund industry.\19\ We note that, simultaneous with the

    consultations between our staffs and the staff representing FSOC's

    members, FSOC has been building out its standards for assessing

    systemic risk across different kinds of financial firms and has

    proposed guidance and standards for determining which nonbank financial

    companies should be designated as subject to FRB supervision.\20\ In

    its most recent release on this subject, FSOC confirmed that the

    information reported on Form PF is important not only to conducting an

    assessment of systemic risk among private fund advisers but also to

    determining how that assessment should be made.\21\

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    \19\ See section 204(b) of the Advisers Act. Today, regulators

    have little reliable data regarding this rapidly growing sector and

    frequently have to rely on data from other sources, which when

    available may be incomplete. See, e.g., FSOC 2011 Annual Report,

    http://www.treasury.gov/initiatives/fsoc/Pages/annual-report.aspx

    (``FSOC 2011 Annual Report'') at 69. The SEC recently adopted

    amendments to Form ADV that will require the reporting of important

    information regarding private funds, but this includes little or no

    information regarding, for instance, performance, leverage or the

    riskiness of a fund's financial activities. See Implementing

    Adopting Release, supra note 11. The data collected through Form PF

    will be more reliable than existing data regarding the industry and

    significantly extend the data available through the revised Form

    ADV.

    \20\ See, e.g., FSOC Second Notice, supra note 6; Authority to

    Require Supervision and Regulation of Certain Nonbank Financial

    Companies, Financial Stability Oversight Council Release (Jan. 18,

    2011), 76 FR 4555 (Jan. 26, 2011); Advance Notice of Proposed

    Rulemaking Regarding Authority to Require Supervision and Regulation

    of Certain Nonbank Financial Companies, Financial Stability

    Oversight Council Release (Oct. 1, 2010), 75 FR 61653 (Oct. 6,

    2010).

    \21\ See FSOC Second Notice, supra note 6 (``[FSOC] recognizes

    that the quantitative thresholds it has identified for application

    during [the initial stage of review] may not provide an appropriate

    means to identify a subset of nonbank financial companies for

    further review in all cases across all financial industries and

    firms. While [FSOC] will apply [such] thresholds to all nonbank

    financial companies, including * * * asset management companies,

    private equity firms, and hedge funds, these companies may pose

    risks that are not well-measured by the quantitative thresholds

    approach. * * * Using [Form PF] and other data, [FSOC] will consider

    whether to establish an additional set of metrics and thresholds

    tailored to evaluate hedge funds and private equity firms and their

    advisers.'').

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    The Commissions received more than 35 letters responding to the

    proposal, with trade associations, investment advisers and law firms

    accounting for most of the comments. Commenters representing investors

    were generally supportive of the proposal but thought it should have

    required more of private fund advisers.\22\ Some of these supporters

    argued, in particular, for more detailed and more frequent reporting

    than we proposed.\23\ In contrast, advisers and those writing on their

    behalf expressed concern regarding the scope, frequency and timing of

    the proposed reporting.\24\ A number of these commenters generally

    supported the systemic risk monitoring goals of the Dodd-Frank Act or

    the broad framework of the proposal but argued that specific aspects of

    the proposal were impractical or burdensome.\25\ We respond to these

    comments in section II of this Release.

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    \22\ See, e.g., comment letter of the American Federation of

    Labor and Congress of Industrial Organizations (Apr. 12, 2011)

    (``AFL-CIO Letter''); comment letter of the Council of Institutional

    Investors (Apr. 11, 2011) (``CII Letter'') (agreeing that ``the

    SEC's proposal will facilitate FSOC's ability to promote the

    soundness of the U.S. financial system'' but noting that the

    commenter's own working group report favored real-time reporting of

    position-level information).

    \23\ See AFL-CIO Letter (``We support the Proposed Rule, but

    believe it should be strengthened in a few key areas by requiring

    more frequent reporting, omitting the arbitrary distinction by

    investment strategy, and adding additional disclosure requirements

    necessary to protect investors and prevent systemic risks.'');

    comment letter of the Americans for Financial Reform (Apr. 12, 2011)

    (``AFR Letter'') (endorsing the AFL-CIO Letter).

    \24\ See, e.g., comment letter of the Alternative Investment

    Management Association (Apr. 12, 2011) (``AIMA General Letter'');

    comment letter of the Investment Adviser Association (Apr. 12, 2011)

    (``IAA Letter''); comment letter of the Managed Funds Association

    (Apr. 8, 2011) (``MFA Letter''); comment letter of the Private

    Equity Growth Capital Council (Apr. 12, 2011) (``PEGCC Letter'');

    comment letter of Seward & Kissel, LLP (Apr. 12, 2011) (``Seward

    Letter''); comment letter of the Securities Industry and Financial

    Markets Association, Asset Management Group (Apr. 12, 2011) (``SIFMA

    Letter'').

    \25\ See, e.g., comment letter of BlackRock Inc. (Apr. 12, 2011)

    (``BlackRock Letter''); IAA Letter (stating that they ``fully

    support the Commission's goal of enhancing transparency of private

    funds that may be deemed to present systemic risk to the U.S.

    financial markets'' but arguing that the proposal is too broad in

    scope); MFA Letter (supporting ``the approach proposed by the SEC

    and CFTC to collect information from registered private fund

    managers through periodic, confidential reports on Form PF'' and

    stating that the collection of data from market participants,

    including investment advisers and the funds they manage, ``is a

    critical component of effective systemic risk monitoring and

    regulation'').

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    This rulemaking is intended primarily to support FSOC, consistent

    with the mandate to adopt private fund reporting requirements under the

    Dodd-Frank Act. Determinations made with respect to the Form PF

    reporting requirements have been made in furtherance of this goal and

    to comply with this legislative mandate.

    B. International Coordination

    The Dodd-Frank Act states that FSOC shall coordinate with foreign

    financial regulators in assessing systemic risk.\26\ In recognition of

    this, our proposal discussed the potential importance of international

    regulatory coordination in responding to future financial crises.\27\ A

    number of groups have continued to advance international efforts

    relating to the collection of systemic risk information. For example,

    recent reports from the Financial Stability Board (``FSB''),

    International Monetary Fund (``IMF'') and Bank for International

    Settlements (``BIS'') emphasize the importance of identifying and

    addressing gaps in the information available to systemic risk

    regulators.\28\ One goal of this coordination is to collect comparable

    information regarding private funds, which will aid in the assessment

    of systemic risk on a global basis.\29\ Several commenters agreed that

    international coordination in connection with private fund reporting is

    important and encouraged us to take an approach consistent with

    international precedents.\30\

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    \26\ See section 175(b) of the Dodd-Frank Act. See also

    Proposing Release, supra note 12, at nn. 19-22 and accompanying

    text.

    \27\ See Proposing Release, supra note 12, at section I.B.

    \28\ See, e.g., FSB, IMF and BIS, Macroprudential Policy Tools

    and Frameworks, Update to G20 Finance Ministers and Central Bank

    Governors (Feb. 14, 2011) (highlighting the need for ``[d]esign and

    collection of better information and data to support systemic risk

    identification and modelling [sic]''); FSB, Shadow Banking: Scoping

    the Issues, A Background Note of the Financial Stability Board (Apr.

    12, 2011) (``FSB Shadow Banking Report'') (``authorities should cast

    the net wide, looking at all non-bank credit intermediation to

    ensure that data gathering and surveillance cover all the activities

    within which shadow banking-related risks might arise''); FSB and

    IMF, The Financial Crisis and Information Gaps, Implementation

    Progress Report (June 2011) (``Report on Information Gaps'').

    \29\ See, e.g., Report on Information Gaps, supra note 28, at 5.

    The Commissions expect that they may share information reported on

    Form PF with various foreign financial regulators under information

    sharing agreements in which the foreign regulator agrees to keep the

    information confidential.

    \30\ See, e.g., comment letter of the American Bar Association,

    Federal Regulation of Securities Committee and Private Equity and

    Venture Capital Committee (Apr. 11, 2011) (``ABA Committees

    Letter''); AIMA General Letter; comment letter of the Committee on

    Capital Markets Regulation (Apr. 12, 2011) (``CCMR Letter'').

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    To this end, our staffs have consulted with the United Kingdom's

    Financial Services Authority (the ``FSA''), the European Securities and

    Markets Authority (``ESMA''), the International Organization of

    Securities Commissions (``IOSCO'') and Hong Kong's Securities and

    Futures Commission.\31\ The FSA

    [[Page 71131]]

    was the first to develop significant experience with hedge fund

    reporting, conducting a voluntary, semi-annual survey beginning in

    October 2009 by sampling large hedge fund groups based in the United

    Kingdom.\32\ IOSCO, in turn, used the guidelines established in the FSA

    Survey, together with its own report on hedge fund oversight, in

    coordinating a survey of hedge funds conducted by IOSCO's members

    (including the SEC and CFTC) as of the end of September 2010.

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    \31\ These consultations began prior to issuance of the Form PF

    proposal and have continued during the development of the final

    rules and Form. See also Proposing Release, supra note 12, at nn.

    24-32 and accompanying text.

    \32\ See, e.g., Financial Services Authority, Assessing the

    Possible Sources of Systemic Risk from Hedge Funds: A Report on the

    Findings of the Hedge Fund Survey and the Hedge Fund as Counterparty

    Survey (July 2011), available at http://www.fsa.gov.uk/pubs/other/hedge_fund_report_july2011.pdf (``FSA Survey''). See also

    Proposing Release, supra note 12, at nn. 27-30 and accompanying

    text.

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    Most recently, ESMA has proposed its own template for private fund

    reporting, which shares many common elements with the FSA Survey (as

    well as the IOSCO survey and Form PF).\33\ ESMA's proposed template

    will serve as the basis for mandatory private fund reporting in Europe

    under the European Union's Directive on alternative investment fund

    managers (``EU Directive'') and is expected eventually to supersede the

    FSA Survey in the United Kingdom. The proposed ESMA template is broader

    in scope than the FSA Survey, requiring information about a wide range

    of alternative investment funds, including private equity funds,

    venture capital funds and real estate funds.\34\ Form PF includes many

    of the types of information collected through the FSA Survey and

    proposed to be collected in the ESMA template, and a number of the

    changes we are making from the proposal further align Form PF with

    these international approaches to private fund reporting.\35\

    ---------------------------------------------------------------------------

    \33\ See ESMA's draft technical advice to the European

    Commission on possible implementing measures of the Alternative

    Investment Fund Managers Directive, ESMA/2011/209 (July 2011),

    available at http://www.esma.europa.eu/index.php?

    page=consultation--details&id=185 (``ESMA Proposal''). See also

    Directive 2011/61/EU of the European Parliament and of the Council

    of 8 June 2011 on Alternative Investment Fund Managers and amending

    Directives 2003/41/EU and 2009/65/EC and Regulations (EC) No 1060/

    2009 and (EU) No 1095/2010 (published July 1, 2011, in the Official

    Journal of the European Union).

    \34\ For additional discussion of international efforts relating

    to systemic risk monitoring in private equity funds, see Proposing

    Release, supra note 12, at nn. 33-35 and accompanying text.

    \35\ See, e.g., infra notes 227, 231, 244-246, 258, 279, 283 and

    297 and accompanying text.

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    II. Discussion

    The SEC is adopting Form PF and rule 204(b)-1 under the Advisers

    Act with several changes from the proposal that are designed to respond

    to commenter concerns. Under the new rule, SEC-registered investment

    advisers must report systemic risk information to the SEC on Form PF if

    they advise one or more private funds.\36\ The final rule and changes

    from the proposal are discussed below.\37\

    ---------------------------------------------------------------------------

    \36\ See Advisers Act rule 204(b)-1.

    \37\ As noted above, section 204(b) of the Advisers Act gives

    the SEC authority to establish both reporting and recordkeeping

    requirements for private fund advisers. See supra note 12 and

    accompanying text. One commenter asked why the SEC proposed

    reporting requirements before proposing recordkeeping requirements

    for private fund advisers, expressing concern that advisers would

    need to know what records to maintain in order to report on Form PF.

    See comment letter of Congressman Darrell E. Issa, Chairman of the

    House Committee on Oversight and Government Reform (Sept. 20, 2011)

    (``Issa Letter''). Recordkeeping requirements serve a number of

    important purposes, such as ensuring that advisers maintain adequate

    documentation relevant to the disposition of their clients' and

    investors' assets and that SEC examiners are able to effectively

    inspect advisers' operations. The SEC does not believe, however,

    that establishing recordkeeping requirements is a necessary

    prerequisite to establishing reporting requirements.

    ---------------------------------------------------------------------------

    In addition, the CFTC is adopting rule 4.27 with minor

    revisions.\38\ This new rule provides that, for registered CPOs and

    CTAs that are also registered as investment advisers with the SEC and

    are required to file Form PF, filing Form PF serves as substitute

    compliance for certain of the CFTC's proposed systemic risk reporting

    requirements should the CFTC adopt such requirements.\39\ The CFTC has

    revised the new rule to allow CPOs and CTAs who are otherwise required

    to file Form PF the option of submitting on Form PF data regarding

    commodity pools that are not private funds as substitute compliance

    with certain of the CFTC's proposed systemic risk reporting

    requirements should the CFTC adopt such requirements.\40\ The CFTC

    believes that the revisions to the CEA rule adopted in this Release

    provide additional clarity with respect to the filing obligations of

    dually registered CPOs and CTAs. Because commodity pools that are

    reported or required to be reported on Form PF are categorized as hedge

    funds for purposes of Form PF, as discussed below, CPOs and CTAs filing

    Form PF need to complete only the sections applicable to hedge fund

    advisers.\41\

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    \38\ See supra note 16.

    \39\ See CEA rule 4.27. For purposes of this rule, it is the

    CFTC's position that any false or misleading statement of a material

    fact or material omission in the jointly adopted sections (sections

    1 and 2) of Form PF that is filed by these CPOs and CTAs shall

    constitute a violation of section 6(c)(2) of the CEA.

    \40\ Id.

    \41\ Form PF is a joint form between the SEC and the CFTC only

    with respect to sections 1 and 2 of the Form. Accordingly, private

    fund advisers that are also CPOs or CTAs would be obligated to

    complete only section 1 and, if they meet the applicable threshold,

    section 2 of Form PF.

    ---------------------------------------------------------------------------

    As discussed above and in the Proposing Release, we have designed

    Form PF, in consultation with staff representing FSOC's members, to

    provide FSOC with information important to its understanding and

    monitoring of systemic risk in the private fund industry.\42\ Based on

    our staffs' consultations with staff representing FSOC's members, we

    expect that FSOC will use the information collected on Form PF,

    together with market data from other sources, to assist in determining

    whether and how to deploy its regulatory tools. This may include, for

    instance, identifying private funds that merit further analysis or

    deciding whether to recommend to a primary financial regulator, like

    the SEC or CFTC, more stringent regulation of the financial activities

    of the private fund industry.\43\

    ---------------------------------------------------------------------------

    \42\ See Proposing Release, supra note 12, at section II.A and

    at n. 49.

    \43\ See supra note 6.

    ---------------------------------------------------------------------------

    Although the Form we are adopting will provide information useful

    to FSOC's regulatory mission, the Form has not been designed to be

    FSOC's exclusive source of information regarding the private fund

    industry.\44\ FSOC's recently proposed guidance regarding its process

    for designating nonbank financial companies that may pose risks to U.S.

    financial stability for FRB supervision helps to illustrate how FSOC

    may use the Form PF data along with other data sources.\45\ This

    guidance would establish a three-stage process for determinations, at

    least in non-emergency situations. In the first and second stages, FSOC

    would screen firms using progressively more granular analyses of

    publicly available data and data that, like Form PF, are collected by

    other regulators. In the third stage, FSOC would work with the Office

    of Financial Research (``OFR'') to conduct an in-depth review of

    specific firms identified in the first two stages, and this would

    generally involve OFR collecting additional, targeted information

    directly from these firms.\46\

    [[Page 71132]]

    Similarly, in determining whether to exercise its other authorities for

    addressing potential systemic risks, we expect that FSOC would likely

    utilize data from other sources in addition to Form PF.

    ---------------------------------------------------------------------------

    \44\ See Proposing Release, supra note 12, at n. 50 and

    accompanying text.

    \45\ See FSOC Second Notice, supra note 6. See also section 113

    of the Dodd-Frank Act for a discussion of the matters that FSOC must

    consider when determining whether a U.S. nonbank financial company

    will be supervised by the FRB and subject to prudential standards.

    \46\ See sections 153 and 154 of the Dodd-Frank Act. One

    commenter expressed support for our approach, agreeing that, ``Form

    PF should be used to obtain enough information to make a preliminary

    assessment, which can be followed up with data requests and dialogue

    for those firms who may potentially pose systemic risks--Form PF

    should not be considered the `complete picture' of the private fund

    industry.'' AIMA General Letter.

    ---------------------------------------------------------------------------

    Form PF is primarily intended to assist FSOC in its monitoring

    obligations under the Dodd-Frank Act, but the Commissions may use

    information collected on Form PF in their regulatory programs,

    including examinations, investigations and investor protection efforts

    relating to private fund advisers. In section VI.A of this Release, we

    discuss some of the ways in which the SEC could use proposed Form PF

    data for its regulatory activities and investor protection efforts.

    As discussed in more detail below, the amount and type of

    information required on Form PF varies based on both the size of the

    adviser and the types of funds managed. For instance, Form PF requires

    more detailed information from advisers managing a large amount of

    hedge fund or liquidity fund assets than from advisers managing fewer

    assets or other types of funds. This scaled approach is intended to

    provide FSOC with a broad picture of the private fund industry while

    relieving smaller advisers from much of the detailed reporting.\47\

    Based on our staffs' consultations with staff representing FSOC's

    members, we understand that obtaining this broad picture will help FSOC

    to contextualize its analysis and assess whether systemic risk may

    exist across the private fund industry and to identify areas where OFR

    may want to obtain additional information. This scaled approach is also

    designed to reflect the different implications for systemic risk that

    may be presented by different investment strategies.

    ---------------------------------------------------------------------------

    \47\ In this Release, we refer to advisers that do not satisfy a

    Large Private Fund Adviser threshold as ``smaller private fund

    advisers.'' This is not intended to imply that these advisers are

    small, only that they fall under certain of the Form's reporting

    thresholds. See section VI of this Release for a discussion of

    entities that are regarded as small for purposes of the Advisers

    Act.

    ---------------------------------------------------------------------------

    A. Who Must File Form PF

    An investment adviser must file Form PF if it: (1) Is registered or

    required to register with the SEC; (2) advises one or more private

    funds; and (3) had at least $150 million in regulatory assets under

    management attributable to private funds as of the end of its most

    recently completed fiscal year.\48\ A CPO or CTA that is also

    registered or required to register with the SEC as an investment

    adviser and satisfies the other conditions described above must file

    Form PF with respect to any commodity pool it manages that is a

    ``private fund'' and may file Form PF with respect to any commodity

    pool it manages that is not a ``private fund.'' \49\ By filing Form PF

    with respect to these commodity pools, a CPO will be deemed to have

    satisfied certain filing requirements for these pools under the CFTC's

    regulatory regime should the CFTC adopt such requirements.\50\

    ---------------------------------------------------------------------------

    \48\ See Advisers Act rule 204(b)-1. This rule requires advisers

    to calculate the value of private fund assets under management

    pursuant to instructions in Form ADV, which provide a uniform method

    of calculating assets under management for regulatory purposes under

    the Advisers Act. See Implementing Adopting Release, supra note 11,

    at section II.A.3 (discussing the rationale underlying the new

    instructions for calculating assets under management for regulatory

    purposes).

    \49\ See supra note 10 for the definition of ``private fund.''

    \50\ See CEA rule 4.27. In the Proposing Release, the CFTC

    stated that a CPO registered with the CFTC that is also registered

    as a private fund adviser with the SEC will be deemed to have

    satisfied its filing requirements for Schedules B and C of Form CPO-

    PQR by completing and filing the applicable portions of Form PF for

    each of its commodity pools that satisfy the definition of ``private

    fund'' in the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    We have modified the conditions under which an adviser must file

    Form PF by adding a minimum reporting threshold of $150 million in

    private fund assets under management.\51\ Under the proposal, all

    private fund advisers registered with the SEC would have been required

    to file Form PF. The Dodd-Frank Act modified the Advisers Act's minimum

    registration requirements so that most advisers with less than $100

    million in assets under management must register with one or more

    states rather than the SEC.\52\ In addition, the Dodd-Frank Act created

    exemptions from SEC registration for advisers solely to venture capital

    funds and for advisers solely to private funds that in the aggregate

    have less than $150 million in assets under management in the United

    States.\53\ As a result, under our proposed approach, most advisers

    with under $100 million in assets under management, and many advisers

    with less than $150 million in private fund assets under management,

    would not have reported on Form PF because they would not be registered

    with the SEC. However, some registered advisers with relatively few

    private fund assets would have been required to report on Form PF while

    exempt advisers with less than $150 million in private fund assets

    under management would not have been required to file Form PF.

    ---------------------------------------------------------------------------

    \51\ See Advisers Act rule 204(b)-1.

    \52\ See section 203A of the Advisers Act. See also Implementing

    Adopting Release, supra note 11, at section II.A.

    \53\ See sections 203(l) and 203(m) of the Advisers Act and

    rules 203(l)-1 and 203(m)-1 under the Advisers Act. See also

    Exemptions Adopting Release, supra note 11.

    ---------------------------------------------------------------------------

    Commenters argued that this outcome was not justified from a

    systemic risk perspective and recommended a minimum reporting threshold

    for advisers based on the amount of private fund assets under

    management.\54\ One commenter proposed setting the threshold at $150

    million to match the new private fund adviser exemption under section

    203(m) of the Advisers Act.\55\ From the perspective of systemic risk

    monitoring, it does not appear at this time that the value of gathering

    this information from registered advisers with less than $150 million

    in private fund assets under management justifies the burden to these

    advisers.

    ---------------------------------------------------------------------------

    \54\ See, e.g., IAA Letter; Seward Letter. Two commenters also

    supported a minimum reporting threshold based on the size of

    individual funds, suggesting an exclusion for funds ``with net asset

    values of less than $250 million and that are less than 5% of a

    manager's assets under management * * *.'' MFA Letter; see also

    BlackRock Letter. We do not believe that a threshold based on fund

    size would be appropriate because the aggregate amount of assets in

    smaller funds that an adviser controls may contribute significantly

    to the adviser's total ability to affect financial markets and the

    $150 million minimum reporting threshold that we are adopting, based

    on the adviser's private fund assets under management, will

    adequately differentiate between advisers with only smaller funds

    and those with significant fund assets.

    \55\ See IAA Letter.

    ---------------------------------------------------------------------------

    Most private fund advisers that are required to file Form PF will

    only need to complete section 1 of the Form. This section requires

    advisers to provide certain basic information regarding any private

    funds they advise in addition to information about their private fund

    assets under management and their funds' performance and use of

    leverage. We describe the information to be collected under section 1

    of Form PF in further detail in section II.C.1 of this Release.

    As discussed below, however, certain larger private fund advisers

    must complete additional sections of Form PF, which require more

    detailed information.\56\ Specifically, three types

    [[Page 71133]]

    of ``Large Private Fund Advisers'' would be required to complete

    certain additional sections of Form PF:

    ---------------------------------------------------------------------------

    \56\ See Instruction 3 to Form PF. With this scaled approach,

    the reporting requirements we are adopting reflect the Dodd-Frank

    Act directive that, in formulating systemic risk reporting and

    recordkeeping for investment advisers to mid-sized private funds,

    the SEC take into account the size, governance, and investment

    strategy of such funds to determine whether they pose systemic risk.

    See section 203(n) of the Advisers Act. The Dodd-Frank Act also

    provides that the SEC may establish different reporting requirements

    for different classes of fund advisers, based on the type or size of

    private fund being advised. See section 204(b) of the Advisers Act.

    ---------------------------------------------------------------------------

    Any adviser having at least $1.5 billion in regulatory

    assets under management attributable to hedge funds as of the end of

    any month in the prior fiscal quarter; \57\

    ---------------------------------------------------------------------------

    \57\ See Instruction 3 to Form PF. To determine whether an

    adviser must file a quarterly report at the end of the second

    quarter, it must look to its hedge fund assets under management as

    of the end of each month in the first quarter. See infra text

    accompanying note 112. We have modified the amount of this threshold

    from the proposal. For a discussion of this modification and the

    reasons for establishing the threshold at this amount, see below in

    section II.A.4.a of this Release (including notes 90-92 and

    accompanying text).

    ---------------------------------------------------------------------------

    Any adviser managing a liquidity fund and having at least

    $1 billion in combined regulatory assets under management attributable

    to liquidity funds and registered money market funds as of the end of

    any month in the prior fiscal quarter; \58\ and

    ---------------------------------------------------------------------------

    \58\ See supra note 57. For a discussion of the reasons for

    establishing the threshold at this amount, see below in section

    II.A.4.a of this Release.

    ---------------------------------------------------------------------------

    Any adviser having at least $2 billion in regulatory

    assets under management attributable to private equity funds as of the

    last day of the adviser's most recently completed fiscal year.\59\

    ---------------------------------------------------------------------------

    \59\ See Instruction 3 to Form PF. For a discussion of the

    reasons for establishing the threshold at this amount, see below in

    section II.A.4.a of this Release.

    ---------------------------------------------------------------------------

    These large advisers must complete additional sections of Form PF,

    with large hedge fund advisers completing section 2 and large liquidity

    fund and private equity fund advisers completing sections 3 and 4,

    respectively.\60\ The information each of these sections requires is

    tailored to the type of fund, focusing on relevant areas of financial

    activity that have the potential to raise systemic concerns. We discuss

    these areas of financial activity as they relate to hedge funds,

    liquidity funds and private equity funds in greater detail in the

    Proposing Release and below.\61\

    ---------------------------------------------------------------------------

    \60\ As adopted, Form PF requires advisers to determine whether

    they meet the large adviser thresholds less frequently than was

    proposed (quarterly rather than daily for hedge fund and liquidity

    fund advisers and annually rather than quarterly for private equity

    advisers). We discuss this change in section II.A.4 of this Release.

    \61\ See sections II.A.1, II.A.2 and II.A.3 of the Proposing

    Release, supra note 12, and sections II.C.2, II.C.3 and II.C.4 of

    this Release.

    ---------------------------------------------------------------------------

    1. ``Hedge Fund'' Definition

    Registered advisers managing hedge funds must submit information on

    Form PF regarding the financing and activities of these funds in

    section 1 of the Form, and large hedge fund advisers are required to

    provide additional information in section 2 of the Form.\62\ Form PF

    defines ``hedge fund'' generally to include any private fund having any

    one of three common characteristics of a hedge fund: (a) A performance

    fee that takes into account market value (instead of only realized

    gains); (b) high leverage; or (c) short selling.\63\ Solely for

    purposes of Form PF, a commodity pool that is reported or required to

    be reported on Form PF is treated as a hedge fund.

    ---------------------------------------------------------------------------

    \62\ Several commenters debated whether the hedge fund industry

    generally, or any hedge fund in particular, could pose systemic

    risk. See, e.g., AFL-CIO Letter and CII Letter, identifying hedge

    fund activities that could have systemic consequences; and AIMA

    General Letter and MFA Letter, arguing that no hedge fund operating

    today is likely to be systemically significant. Even among skeptical

    commenters, however, there was recognition that ``there is no

    concrete data to draw conclusions either way, and that the exercise

    [of reporting] will be useful to allow the FSOC to make evidence-

    based conclusions.'' AIMA General Letter; see also MFA Letter. As

    discussed in the Proposing Release, we believe that Congress

    expected hedge fund advisers would be required to report under Title

    IV of the Dodd-Frank Act and that information regarding certain

    activities of hedge funds may be important to FSOC's monitoring of

    systemic risk. See Proposing Release, supra note 11, at nn. 54-61

    and accompanying text.

    \63\ See Glossary of Terms to Form PF. We are defining the term

    ``hedge fund'' in Form PF solely for purposes of determining what

    information an adviser is required to report on the Form. This

    definition does not apply with respect to any other form or

    regulation of either Commission unless otherwise specified. The SEC

    has recently adopted this same definition in amendments to Form ADV.

    See Implementing Adopting Release, supra note 11, at nn. 248-255 and

    accompanying text. The CFTC has not adopted any definition of

    ``hedge fund'' beyond that adopted solely for purposes of Form PF.

    ---------------------------------------------------------------------------

    A number of commenters addressed the ``hedge fund'' definition.

    Some of these suggested that we eliminate the distinctions among fund

    types and instead require all advisers to complete the entire Form so

    that advisers could not use the definitions to avoid reporting

    requirements.\64\ Others, however, urged us to narrow the definition so

    that fewer funds would be classified as hedge funds.\65\ Form PF

    generally requires more information regarding hedge funds than other

    types of funds, and in most cases, an adviser must conclude that a fund

    is not a hedge fund in order to classify it as one of the six other

    types of private fund defined in Form PF.\66\ As a result, narrowing

    the ``hedge fund'' definition in Form PF could have a significant

    effect on reporting. Commenters persuaded us, however, that certain

    revisions to the proposed definition would result in a more accurate

    grouping of funds, thereby improving the quality of the data collected

    and, at the same time, reducing the reporting burdens on some

    advisers.\67\

    ---------------------------------------------------------------------------

    \64\ See, e.g., AFL-CIO Letter.

    \65\ See, e.g., ABA Committees Letter; AIMA General Letter; IAA

    Letter; PEGCC Letter; SIFMA Letter; comment letter of TCW Group,

    Inc. (Apr. 12, 2011) (``TCW Letter'').

    \66\ See Glossary of Terms to Form PF. Altogether, the seven

    types of private fund defined in Form PF are: (1) Hedge fund; (2)

    liquidity fund; (3) private equity fund; (4) real estate fund; (5)

    securitized asset fund; (6) venture capital fund; and (7) other

    private fund.

    \67\ The ``hedge fund'' definition, as well as the six other

    private fund definitions used in Form PF, are also included in the

    SEC's recent revisions to Form ADV. See Implementing Adopting

    Release, supra note 11, at section II.C.1. Although the SEC received

    no comments on these same definitions in the context of that

    rulemaking, the SEC believes that having consistent definitions in

    the two forms is important. As a result, the SEC considered in the

    context of that rulemaking the comments received on these

    definitions in Form PF and determined, when adopting revisions to

    Form ADV, to make several changes in that form. The changes we are

    making to these definitions as used in Form PF conform the two sets

    of definitions so that both forms use identical terms (with the

    exception that, for purposes of Form PF, all commodity pools about

    which an adviser is reporting are treated as hedge funds, while in

    Form ADV, only commodity pools that are private funds are treated as

    hedge funds). See Implementing Adopting Release, supra note 11, at

    nn 248-255. The CFTC has not adopted any definition of ``hedge

    fund'' beyond that adopted solely for purposes of Form PF.

    ---------------------------------------------------------------------------

    First, we have expressly excluded from the ``hedge fund''

    definition in Form PF vehicles established for the purpose of issuing

    asset backed securities (``securitized asset funds'').\68\ One

    commenter noted that these funds could have been categorized as hedge

    funds under our proposal, which was not the intended result.\69\

    Although the issuance of asset backed securities may have systemic risk

    implications, the questions on Form PF regarding hedge funds would not

    yield relevant data regarding securitized asset funds. As a result,

    including responses regarding securitized asset funds in the hedge fund

    data could distort the information FSOC obtains from questions directed

    at hedge funds.

    ---------------------------------------------------------------------------

    \68\ Specifically, the ``hedge fund'' definition in Form PF now

    refers to any private fund having one of the listed characteristics

    and excludes securitized asset funds. Under the proposal, a fund

    that satisfied the ``hedge fund'' definition would have been

    categorized as a hedge fund even if it otherwise would have

    satisfied the ``securitized asset fund'' definition. As adopted,

    Form PF defines ``securitized asset fund'' as any private fund

    ``whose primary purpose is to issue asset backed securities and

    whose investors are primarily debt-holders.'' We have also modified

    this definition from the proposal so that it is no longer defined by

    reference to the ``hedge fund'' definition. See Glossary of Terms to

    Form PF.

    \69\ See TCW Letter.

    ---------------------------------------------------------------------------

    Second, we have modified clause (a) Of the ``hedge fund''

    definition in Form PF, which classifies a fund as a hedge fund if it

    uses performance fees or allocations that are calculated by taking into

    account unrealized gains. One

    [[Page 71134]]

    commenter pointed out that even funds that do not allow for the payment

    of such fees or allocations, such as private equity funds, may be

    required to accrue or allocate these amounts in their financial

    statements to comply with applicable accounting principles.\70\ It was

    not intended for funds that accrue or allocate these fees or

    allocations solely for financial reporting purposes to be classified as

    hedge funds, so we have clarified that clause (a) relates only to fees

    or allocations that may be paid to an investment adviser (or its

    related persons).\71\

    ---------------------------------------------------------------------------

    \70\ See TCW Letter.

    \71\ Some commenters objected to clause (a) of the ``hedge

    fund'' definition more generally, arguing that it is too broad

    because some traditional/long only funds use performance fees or

    allocations calculated by taking into account unrealized gains. See,

    e.g., AIMA General Letter; TCW Letter. However, based on our staffs'

    discussions with staff representing FSOC's members, we believe that

    funds using these types of fees are often active in markets that

    FSOC may desire to monitor for concentration risks. In addition,

    Form PF is intended to provide FSOC with a broad picture of the

    private fund industry so that it has context against which to assess

    systemic risk. An important part of this is gathering information

    about funds with similar characteristics, such as performance fees

    based on unrealized gains, so that industry-wide comparisons can be

    made. The inclusion of any particular fund in a reporting group,

    whether as a result of the private fund definitions or the reporting

    thresholds, does not represent a conclusion that the fund engages in

    activities that pose systemic risk.

    ---------------------------------------------------------------------------

    Third, we have addressed another commenter's concern that clause

    (a) could inadvertently capture certain private equity funds because,

    although these funds typically calculate currently payable performance

    fees and allocations based on realized amounts, they will sometimes

    reduce these fees and allocations by taking into account ``unrealized

    losses net of unrealized gains in the portfolio.'' \72\ Funds should

    not be classified as hedge funds for purposes of Form PF based solely

    on this practice, and we have clarified that clause (a) would not

    include performance fees or allocations the calculation of which may

    take into account unrealized gains solely for the purpose of reducing

    such fees or allocations to reflect net unrealized losses.

    ---------------------------------------------------------------------------

    \72\ See PEGCC Letter.

    ---------------------------------------------------------------------------

    Finally, several commenters asserted that clause (c) of the ``hedge

    fund'' definition, which looks to whether a fund may engage in short

    selling, should include an exception for a de minimis amount of short

    selling or exclude short selling intended to hedge the fund's

    exposures.\73\ However, short selling appears to be, for purposes of

    Form PF, a potentially important distinguishing feature of hedge funds,

    many of which may, as the name suggests, use short selling to hedge or

    manage risk of various types. On the other hand, we also understand

    that many funds pursuing traditional investment strategies use short

    positions to hedge foreign exchange risk and to manage the duration of

    interest rate exposure, and we are persuaded that including funds

    within the definition of ``hedge fund'' in Form PF solely because they

    use these particular techniques would dilute the meaningfulness of the

    category. Therefore, we have modified clause (c) to provide an

    exception for short selling that hedges currency exposure or manages

    duration.\74\

    ---------------------------------------------------------------------------

    \73\ See IAA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

    \74\ We have also made a change to clause (c) to clarify that

    this clause includes traditional short sales and any transaction

    resulting in a short exposure to a security or other asset (such as

    using a derivative instrument to take a short position). The purpose

    of this definition is to categorize funds that engage in certain

    types of market activity, and therefore, whether the definition

    applies should not depend on the form in which the fund engages in

    that activity.

    ---------------------------------------------------------------------------

    Commenters arguing that, instead of a definition, the Commissions

    should take an approach similar to that used in the FSA Survey, which

    outlined common hedge fund characteristics and allowed an adviser ``to

    make its own good faith judgment as to whether a particular fund is a

    hedge fund,'' were not persuasive.\75\ Such an approach could

    effectively defer to the adviser the determination of whether to report

    on Form PF information about hedge funds--an approach that might be

    appropriate for a voluntary survey, like the FSA's, but one that would

    significantly compromise the value of data collected for FSOC and thus

    would fail to achieve the purpose of this rulemaking.

    ---------------------------------------------------------------------------

    \75\ ABA Committees Letter. See also AIMA General Letter; IAA

    Letter; Seward Letter.

    ---------------------------------------------------------------------------

    Two other commenters suggested instead that we eliminate all of the

    private fund definitions and require that every private fund adviser

    complete the entire Form.\76\ These commenters were concerned that any

    distinction among funds tied to the amount or type of information

    required would encourage advisers to change strategies in order to

    avoid reporting. Although we are sensitive to these concerns, we

    believe that distinguishing fund types is important for two reasons.

    First, by distinguishing among types of funds, we are able to limit the

    information collection burdens on advisers to funds for which the

    information is most relevant.\77\ Second, separating reported data by

    fund strategy allows extraneous information to be excluded, which we

    believe will improve its utility to FSOC and the Commissions.

    ---------------------------------------------------------------------------

    \76\ See AFL-CIO Letter; AFR Letter.

    \77\ For instance, one commenter, in agreeing that Form PF

    appropriately differentiates ``between the reporting requirements

    for hedge funds and private equity funds,'' pointed out that section

    2 of the Form, which would be completed by large hedge fund

    advisers, contains many questions that ``are not relevant to private

    equity funds.'' This commenter also explained that requiring

    response to ``questions that are not directly related to'' the

    operations of private equity advisers would impose burdens on both

    FSOC and the advisers. See comment letter of Lone Star U.S.

    Acquisitions (Apr. 12, 2011) (``Lone Star Letter'').

    ---------------------------------------------------------------------------

    Several commenters also expressed concern that clauses (b) and (c)

    of the ``hedge fund'' definition in Form PF are too broad because many

    funds have the capacity to borrow or incur derivative exposures in

    excess of the specified amounts or to engage in short selling but do

    not in fact engage, or intend to engage, in these practices.\78\ These

    commenters generally argued that clauses (b) and (c) should focus on

    actual or contemplated use of these practices rather than potential

    use. Changes to the ``hedge fund'' definition in response to these

    comments have not been made because clauses (b) and (c) properly focus

    on a fund's ability to engage in these practices. Even a fund for which

    leverage or short selling is an important part of its strategy may not

    engage in that practice during every reporting period. Thus, the

    suggested approach could result in incomplete data sets for hedge

    funds, a class of funds that may be systemically significant. However,

    a private fund would not be a ``hedge fund'' for purposes of Form PF

    solely because its organizational documents fail to prohibit the fund

    from borrowing or incurring derivative exposures in excess of the

    specified amounts or from engaging in short selling so long as the fund

    in fact does not engage in these practices (other than, in the case of

    clause (c), short selling for the purpose of hedging currency exposure

    or managing duration) and a reasonable investor would understand, based

    on the fund's offering documents, that the fund will not engage in

    these practices.

    ---------------------------------------------------------------------------

    \78\ See, e.g., AIMA General Letter; IAA Letter; PEGCC Letter;

    SIFMA Letter; TCW Letter.

    ---------------------------------------------------------------------------

    Finally, some commenters recommended that a fund should not be

    classified as a ``hedge fund'' for purposes of Form PF unless it

    satisfies at least two of the prongs of the ``hedge fund'' definition

    (rather than any one prong).\79\ The definition is designed to identify

    funds that are an appropriate subject for the higher level of reporting

    to which hedge funds will be subject

    [[Page 71135]]

    under Form PF, and, based on our staffs' consultations with staff

    representing FSOC's members, we believe that any one of the identified

    characteristics is sufficient to appropriately distinguish a fund for

    this purpose. We have not, therefore, made the change these commenters

    suggested. The changes to the ``hedge fund'' definition discussed above

    are intended to more accurately group private funds for purposes of

    Form PF and, thereby, improve the quality of information reported.

    ---------------------------------------------------------------------------

    \79\ See, e.g., Lone Star Letter; PEGCC Letter; TCW Letter.

    ---------------------------------------------------------------------------

    2. ``Liquidity Fund'' Definition

    Registered advisers managing liquidity funds must submit

    information on Form PF regarding the financing and activities of these

    funds in section 1 of the Form, and large liquidity fund advisers are

    required to provide additional information in section 3 of the

    Form.\80\ For purposes of Form PF, a ``liquidity fund'' is any private

    fund that seeks to generate income by investing in a portfolio of short

    term obligations in order to maintain a stable net asset value per unit

    or minimize principal volatility for investors.\81\ Commenters did not

    address the ``liquidity fund'' definition, which the SEC is adopting as

    proposed.

    ---------------------------------------------------------------------------

    \80\ Form PF is a joint form between the SEC and the CFTC only

    with respect to sections 1 and 2 of the Form. Section 3 of the Form,

    which requires more specific reporting regarding liquidity funds, is

    only required by the SEC.

    \81\ See Glossary of Terms to Form PF. As discussed in the

    Proposing Release, liquidity funds can resemble registered money

    market funds, certain features of which may make them susceptible to

    runs and thus create the potential for systemic risk. See Proposing

    Release, supra note 12, at section II.A.2.

    ---------------------------------------------------------------------------

    3. ``Private Equity Fund'' Definition

    Registered advisers managing private equity funds must submit

    information on Form PF regarding the financing and activities of these

    funds in section 1 of the Form, and large private equity advisers are

    required to provide additional information in section 4 of the

    Form.\82\ Consistent with the proposal, Form PF defines ``private

    equity fund'' as any private fund that is not a hedge fund, liquidity

    fund, real estate fund, securitized asset fund or venture capital fund

    and does not provide investors with redemption rights in the ordinary

    course.\83\ Two commenters advocated for a definition of ``private

    equity fund'' that would not depend on whether a fund is a hedge

    fund.\84\ This approach could, however, create gaps between the

    definitions and encourage advisers to structure around the reporting

    requirements.\85\ The changes we have made to the ``hedge fund''

    definition substantially address the concerns of these commenters.\86\

    Therefore, we believe that the proposed approach to defining ``private

    equity fund'' continues to be appropriate for the purposes of Form PF.

    ---------------------------------------------------------------------------

    \82\ Form PF is a joint form between the SEC and the CFTC only

    with respect to sections 1 and 2 of the Form. Section 4 of the Form,

    which requires more specific reporting regarding private equity

    funds, is only required by the SEC.

    \83\ See Glossary of Terms to Form PF. The definitions of ``real

    estate fund'' and ``venture capital fund'' are being adopted as

    proposed, and changes to the definition of ``securitized asset

    fund'' are discussed above. See supra note 69. These definitions are

    primarily intended to exclude these types of funds from our

    definition of ``private equity fund'' to improve the quality of data

    reported on Form PF relating to private equity funds.

    \84\ See PEGCC Letter (proposing an alternative that largely

    inverts the proposed ``hedge fund'' definition but would allow for

    short selling and soften other distinctions); SIFMA Letter

    (suggesting an alternative that would define a ``private equity

    fund'' as a private fund having ``a large number of sophisticated,

    third-party institutional and high net worth investors'' and

    satisfying ten additional criteria, including that ``the fund and

    its investment activities are not subject to regulatory restrictions

    or limitations.'').

    \85\ Some commenters were concerned that creating any

    distinctions among funds would encourage advisers to change

    strategies in order to avoid reporting. See supra note 76 and

    accompanying text. The SEC believes, based on its staff's

    consultations with staff representing FSOC's members, that this risk

    is best addressed by tightly integrating the definitions.

    \86\ See supra notes 64-79 and accompanying text for a

    discussion of comments on the ``hedge fund'' definition and the

    changes we are making from the proposal. Some of these comments

    reflected concern that the breadth of the ``hedge fund'' definition

    would cause it to capture some private equity funds. Commenters

    arguing for an independent ``private equity fund'' definition

    expressed similar concerns. As discussed above, certain of the

    changes we are making to the ``hedge fund'' definition are designed

    to address these concerns.

    ---------------------------------------------------------------------------

    4. Large Private Fund Adviser Thresholds

    a. Amounts

    As noted above, we are adopting a threshold of $1.5 billion in

    hedge fund assets under management for large hedge fund adviser

    reporting, $1 billion in combined liquidity fund and registered money

    market fund assets under management for large liquidity fund adviser

    reporting, and $2 billion in private equity fund assets under

    management for large private equity fund adviser reporting.\87\ These

    thresholds are designed so that the group of Large Private Fund

    Advisers filing Form PF will be relatively small in number but

    represent a substantial portion of the assets of their respective

    industries. For example, we estimate that approximately 230 U.S.-based

    advisers each managing at least $1.5 billion in hedge fund assets

    represent over 80 percent of the U.S. hedge fund industry based on

    assets under management.\88\ Similarly, SEC staff estimates that the

    approximately 155 U.S.-based advisers each managing over $2 billion in

    private equity fund assets represent approximately 75 percent of the

    U.S. private equity fund industry based on committed capital.\89\

    ---------------------------------------------------------------------------

    \87\ As proposed, we are requiring that an adviser determine

    whether it meets a threshold and qualifies as a large hedge fund

    adviser, large liquidity fund adviser or large private equity

    adviser based solely on the assets under management attributable to

    the particular types of fund. Two commenters suggested that we

    instead require advisers to aggregate all of their assets under

    management, regardless of strategy, for purposes of the thresholds.

    See AFL-CIO Letter; AFR Letter. These commenters cautioned that our

    approach could allow advisers with substantial private fund assets

    under management to nevertheless avoid classification as a Large

    Private Fund Advisers. We are sensitive to these commenters'

    concerns, but we continue to believe that the hedge fund, liquidity

    fund and private equity fund business models are sufficiently

    distinct that for FSOC's purposes they are most appropriately

    analyzed on a separate basis.

    \88\ See Billion Dollar Club, HedgeFund Intelligence (``HFI'')

    (Oct. 3, 2011). We estimate that, in addition to the 230 U.S.-based

    hedge fund advisers that will exceed the threshold, approximately 23

    non-U.S. private fund advisers will also be classified as large

    hedge fund advisers, for a total of approximately 250 large hedge

    fund advisers. We have based this estimate of non-U.S. advisers on

    IARD data as of October 1, 2011, showing that, among currently

    registered private fund advisers, fewer than 10% are non-U.S.

    advisers. (We are not aware of any reason that recent changes in the

    exemptions available under the Advisers Act would affect the

    relative representation of U.S. and non-U.S. advisers.) One

    commenter suggested that estimates based on HFI data should be

    grossed up because the database is under-inclusive. See comment

    letter of the Alternative Investment Management Association (Jul.

    26, 2011) (``AIMA AUM Letter''). Although we acknowledge that this

    database is likely somewhat under-inclusive, we believe that the

    amount of assets under management not represented in the database is

    relatively small because the aggregate amount of assets reported to

    the database is consistent with other data sources estimating the

    total size of the hedge fund industry. In addition, we believe the

    uncounted assets are likely skewed toward the smaller advisers in

    the industry because the identity and size of the industry's largest

    advisers are relatively consistent across sources. As a result,

    although this database may under-represent the total amount of hedge

    fund industry assets under management, the count of large hedge fund

    advisers is likely to be relatively accurate. The changes to the

    ``hedge fund'' definition discussed above will likely result in

    fewer funds being classified as hedge funds than under the proposed

    definition. However, these changes are intended to more accurately

    group private funds for purposes of Form PF and should more closely

    align the definition to the estimates discussed above.

    \89\ Preqin. The Preqin data relating to private equity fund

    committed capital is available in File No. S7-05-11. We estimate

    that, in addition to the 155 U.S.-based private equity advisers that

    will exceed the threshold, approximately 16 non-U.S. private fund

    advisers will also be classified as large private equity advisers,

    for an approximate total of 170 large private equity advisers. See

    supra note 88 for a discussion of the basis for this estimate.

    ---------------------------------------------------------------------------

    The threshold we are adopting for large hedge fund advisers

    reflects an increase from the $1 billion threshold that we proposed. We

    do not expect,

    [[Page 71136]]

    however, that this increase will substantially change the group of

    advisers that were estimated in the proposal would be classified as

    large hedge fund advisers. Rather, the change is intended simply to

    adjust for a difference in how assets under management are measured in

    Form PF compared to how they are measured in the commercial databases

    that we consulted in proposing the $1 billion threshold amount. Form PF

    uses the definition of ``regulatory assets under management'' that the

    SEC recently adopted in connection with amendments to its Form ADV.

    This definition measures assets under management gross of outstanding

    indebtedness and other accrued but unpaid liabilities. One commenter

    pointed out, however, that the assets under management that advisers

    report to the currently available third-party databases are generally

    calculated on a net basis.\90\ In other words, without adjustment, our

    proposed threshold of $1 billion in gross assets would have captured

    advisers with less than $1 billion in net assets, expanding the group

    of advisers classified as large hedge fund advisers beyond what we

    intended.\91\ We believe this revised threshold strikes an appropriate

    balance between obtaining information regarding a significant portion

    of the hedge fund industry while minimizing the burden imposed on

    smaller advisers.\92\

    ---------------------------------------------------------------------------

    \90\ See AIMA AUM Letter.

    \91\ We are not aware of any existing source with data regarding

    the gross assets under management of U.S. hedge fund managers.

    Therefore, based on our staffs' consultations with staff

    representing FSOC's members, we have established this threshold by

    multiplying the proposed threshold by an industry average leverage

    ratio of 1.5 times net assets. The commenter suggested that industry

    leverage ranges between 1.5 and 3 times net assets but noted that

    leverage ratios over the preceding 12 months had dropped to 1.1

    times investment capital. See AIMA AUM Letter; see also MFA Letter

    (citing leverage ratios from 3.0 to as low as 1.16); Andrew Ang, et

    al., Hedge Fund Leverage, National Bureau of Economic Research (Feb.

    2011). We have used a leverage ratio at the lower end of this range

    because, without data regarding the industry's gross assets, it

    cannot confidently be estimated that a higher threshold would

    capture a portion of the industry sufficient to allow FSOC to

    effectively perform systemic risk assessments. Also, although the

    definition of ``regulatory assets under management'' is measured

    gross of certain liabilities, it does not capture all forms of

    leverage that may be included in the sources cited in the AIMA AUM

    Letter, such as off-balance sheet leverage. As a result, the

    leverage implied by ``regulatory assets under management'' may be

    lower than the leverage estimated based on these sources. The AIMA

    AUM Letter also suggested that the average leverage ratio used

    should be asset-weighted because advisers with over $1 billion in

    net assets under management tend to use greater amounts of leverage.

    However, these larger advisers would exceed the threshold even if

    measured on a net basis. The adjustment to the threshold to account

    for leverage is most relevant for the middle group of advisers, not

    the large advisers, and the leverage ratio we have used is

    consistent with the leverage ratio this commenter estimates for

    advisers with $200 million to $1 billion in net assets under

    management.

    \92\ Similar adjustments to the thresholds applicable to

    liquidity fund advisers and private equity fund advisers have not

    been made because we understand these strategies typically involve

    little leverage at the fund level. See infra note 306 and

    accompanying text.

    ---------------------------------------------------------------------------

    An adviser managing liquidity funds must combine liquidity fund and

    registered money market fund assets for purposes of determining whether

    it meets the threshold for more extensive reporting regarding its

    liquidity funds. Liquidity funds and registered money market funds

    often pursue similar strategies, invest in the same securities and

    present similar risks. An adviser is, however, only required to report

    information about unregistered liquidity funds on Form PF. This

    information will supplement data the SEC collects about registered

    money market funds on its Form N-MFP and provide FSOC a more complete

    picture of large liquidity pools and their management. The SEC expects

    this approach to the reporting threshold to capture approximately 80 of

    the most significant managers of liquidity funds.\93\ Commenters

    supported this approach, which we are adopting as proposed.\94\

    ---------------------------------------------------------------------------

    \93\ See also Proposing Release, supra note 12, at n. 89. The

    estimate of the number of large liquidity fund advisers is based on

    the number of advisers with at least $1 billion in registered money

    market fund assets under management, as reported on Form N-MFP as of

    October 1, 2011.

    \94\ See AFL-CIO Letter; AFR Letter.

    ---------------------------------------------------------------------------

    Based on our staffs' consultations with staff representing FSOC's

    members, we believe that requiring basic information from all

    registered advisers over the minimum reporting threshold but more

    extensive and detailed information only from advisers meeting the

    higher thresholds is important to enabling FSOC to obtain a broad

    picture of the private fund industry. We understand that obtaining this

    broad picture will help FSOC to contextualize its analysis and assess

    whether systemic risk may exist across the private fund industry and to

    identify areas where OFR may want to obtain additional information. At

    the same time, requiring that only these Large Private Fund Advisers

    complete additional reporting requirements under Form PF will provide

    systemic risk information for a substantial majority of private fund

    assets while minimizing burdens on smaller private fund advisers that

    are less likely to pose systemic risk concerns.

    Although thresholds set at a higher amount could still yield

    information regarding much or a majority of the private fund industry's

    assets under management, such thresholds would potentially impede

    FSOC's ability to obtain a representative picture of the private fund

    industry. The activities of private fund advisers may differ

    significantly depending on size because, for instance, some strategies

    may be practical only at certain scales.\95\ As a result, obtaining

    information regarding, for instance, 50 percent or 60 percent of the

    industry's assets under management may not be sufficient to confidently

    draw conclusions regarding the remaining portion of the industry.

    However, because relatively few advisers manage most of the industry's

    assets under management, a substantial reduction in the potential

    burdens of reporting can be achieved without sacrificing the ability to

    obtain a more representative picture. For example, setting the

    threshold to cover, for instance, 80 percent of industry assets under

    management rather than 100 percent would relieve thousands of advisers

    from more detailed reporting while still obtaining a reasonably

    representative picture.\96\ There are, however, limits to the range

    within which this tradeoff can be effectively made. For example,

    setting the thresholds to cover, for instance, 60 percent of industry

    assets under management rather than 80 percent would relieve a

    relatively small segment of advisers from more detailed reporting but

    might not result in a picture broad enough to be representative.

    Accordingly, the thresholds have been established to balance FSOC's

    need for a broad, representative set of data regarding the private fund

    industry with the desire to limit the potential burdens of private fund

    systemic risk reporting.

    ---------------------------------------------------------------------------

    \95\ For example, one commenter cited evidence suggesting that

    the use of leverage varies significantly with fund size, though they

    did not state whether this variation continues among advisers with

    over $1 billion in net assets under management. See AIMA AUM Letter.

    See also Ibbotson, Roger G., Peng Chen, and Kevin X. Zhu, 2011, The

    ABCs of Hedge Funds: Alphas, Betas, and Costs, Financial Analysts

    Journal 67 (1) (``Ibbotson, et al.'') at 17-18 (discussing possible

    explanations for observed differences in returns for larger and

    smaller hedge funds).

    \96\ In the PRA analysis below, the SEC estimates that the large

    adviser thresholds will result in approximately 500 advisers

    reporting additional information in section 2, 3 or 4 of Form PF

    while approximately 3,070 advisers will report information only in

    section 1 and another 700 will not report on Form PF at all because

    of the minimum reporting threshold. See infra section IV.A of this

    Release.

    ---------------------------------------------------------------------------

    Commenters expressed support for a tiered reporting system based on

    size.\97\

    [[Page 71137]]

    However, most commenters thought the proposed threshold of $1 billion

    was either too high or too low.\98\ Commenters arguing for a lower

    threshold expressed concern that, at $1 billion, regulators would

    receive insufficient information to monitor certain types of market

    behavior with potentially systemic consequences.\99\ In contrast, a

    number of commenters argued that even an adviser with $1 billion in

    assets under management could not pose systemic risk.\100\ Several of

    these commenters supported an increase to $5 billion, which they argued

    would still capture over half the hedge fund industry while ensuring

    that advisers have sufficient operational capabilities to complete the

    Form.\101\

    ---------------------------------------------------------------------------

    \97\ See, e.g., comment letter of Coalition of Private

    Investment Companies (Mar. 31, 2011) (``CPIC Letter'') and MFA

    Letter.

    \98\ Compare AFL-CIO Letter and AFR Letter (supporting a lower

    threshold) to AIMA General Letter; IAA Letter; MFA Letter; PEGCC

    Letter; SIFMA Letter (supporting a higher threshold). See also

    comment letter of George Merkl (Feb. 22, 2011) (``Merkl February

    Letter'') (supporting the proposed thresholds).

    \99\ See AFL-CIO Letter (arguing that the proposal would not

    allow regulators to monitor ``herding'' behavior, which it defines

    as the tendency for market participants to trade together on one

    side of the market; also suggesting that, at a minimum, advisers

    with between $150 million and $1 billion in assets under management

    ``should be required to complete all applicable sections of Form PF

    on a semi-annual basis.''); AFR Letter.

    \100\ See, e.g., AIMA General Letter (also questioning whether

    the SEC and FSOC have the capacity to analyze the data from all the

    advisers above the proposed threshold); IAA Letter; MFA Letter;

    comment letter of Olympus Partners (Apr. 1, 2011) (``Olympus

    Letter''); PEGCC Letter (preferring that there be no large adviser

    category for private equity fund advisers because, in their view,

    these advisers pose little systemic risk); Seward Letter; SIFMA

    Letter; comment letter of the United States Chamber of Commerce,

    Center for Capital Markets Competitiveness (Apr. 12, 2011) (``USCC

    Letter'').

    \101\ See, e.g., AIMA General Letter (asserting that a $5

    billion threshold ``still captures around 50-60% of the US hedge

    fund industry assets or just over 75 large hedge fund managers.'');

    MFA Letter (``Based on estimates, 77 hedge fund managers

    representing approximately 50-60% of hedge fund industry assets

    would exceed this [$5 billion] threshold.''); Seward Letter; USCC

    Letter (citing figures similar to those provided in the AIMA General

    Letter and the MFA Letter in support of a $5 billion threshold).

    Other commenters asserted that the thresholds should take into

    account measures of leverage or derivatives exposures rather than

    just assets under management. See, e.g., ABA Committees Letter; AIMA

    General Letter. As discussed above, measuring these thresholds using

    ``regulatory assets under management,'' as defined in Form ADV,

    implies adjustment for some forms of leverage. Two commenters

    suggested that, instead of assets under management, the adviser's

    proprietary assets are the most appropriate measure of assets at

    risk. See PEGCC Letter; USCC Letter. However, private fund advisers

    exercise significant discretion over the assets they manage, which

    makes assets under management a more accurate measure of an

    adviser's ability to affect the U.S. financial system.

    ---------------------------------------------------------------------------

    We have carefully considered these comments in light of the

    information we understand FSOC desires and its intended use by FSOC.

    Based on this, the SEC has determined to adopt the proposed threshold

    for large liquidity fund advisers and to increase the threshold for

    large private equity fund advisers to $2 billion. We are adopting the

    threshold for large hedge fund advisers with the corrective change

    discussed above. Although we understand commenters' concerns that the

    proposed thresholds are too high and will not permit regulators to

    detect certain group behaviors among smaller private fund advisers, we

    believe at this time that the amount of additional information that

    would be required for this purpose would impose a significant burden on

    these smaller advisers and not significantly expand FSOC's ability to

    understand the industry.

    On the other hand, in light of the information we understand FSOC

    desires and its intended use by FSOC, we are also not persuaded that a

    larger increase in the thresholds would be appropriate. Commenters

    supporting an increase may be correct that an adviser just exceeding

    these thresholds could not be large enough to pose systemic risk.

    However, the thresholds are not intended to establish a cutoff

    separating the risky from the safe but rather to provide FSOC with

    sufficient context for the assessment of systemic risk while minimizing

    the burden imposed on smaller advisers.\102\ We understand based on our

    staffs' consultation with staff representing FSOC's members that, in

    order to assess potential systemic risk posed by the activities of

    certain funds, FSOC would benefit from access to data about funds that,

    on an individual basis, may not be a source of systemic risk. As

    discussed above, the increase that some commenters supported would

    result in coverage of a substantially smaller part of the industry,

    potentially impeding FSOC's ability to obtain a broad picture of the

    private fund industry.\103\

    ---------------------------------------------------------------------------

    \102\ See supra text accompanying notes 94-96. As noted above,

    the FSOC Second Notice highlights that even establishing guidelines

    for evaluating private fund advisers may require the context that

    Form PF will provide. See supra note 21.

    \103\ In particular, the activities of private fund advisers may

    differ significantly depending on size and that the portion of

    industry assets represented by advisers with over $5 billion in

    private fund assets under management may look substantially

    different from the portion of industry assets represented by

    advisers with between, for instance, $1 billion and $5 billion.

    ---------------------------------------------------------------------------

    The SEC is, however, persuaded that an increase in the threshold

    for large private equity advisers that is smaller than some commenters

    advocated can be made without sacrificing the ability to obtain a broad

    picture of the private equity industry. SEC staff estimates that an

    increase in this threshold to $2 billion from the proposed $1 billion

    will reduce the portion of U.S. private equity industry assets covered

    by the more detailed reporting in section 4 of the Form from

    approximately 85 percent to approximately 75 percent.\104\ At the same

    time, it reduces the number of U.S.-based advisers SEC staff estimates

    will be categorized as large private equity advisers from approximately

    270 to approximately 155.\105\ This will significantly mitigate the

    number of advisers subject to the more detailed reporting while still

    covering a substantial majority of industry assets. As a result of this

    change, section 4 of Form PF will cover a smaller portion of U.S.

    private equity industry assets than section 2 covers of U.S. hedge fund

    industry assets. However, the SEC believes this result is appropriate

    because private equity funds tend to pursue a narrower range of

    strategies than hedge funds, reducing concerns regarding the level of

    representativeness.

    ---------------------------------------------------------------------------

    \104\ See supra note 89.

    \105\ See supra note 89.

    ---------------------------------------------------------------------------

    b. Frequency of Testing

    The proposal would have required hedge fund and liquidity fund

    advisers to measure whether they had crossed these thresholds on a

    daily basis and private equity advisers to measure them on a quarterly

    basis. The proposed approach was based on our understanding that, as a

    matter of ordinary business practice, advisers are aware of hedge fund

    and liquidity fund assets under management on a daily basis, but are

    likely to be aware of private equity fund assets under management only

    on a quarterly basis.

    However, several commenters argued that advisers would have

    difficulty monitoring on a daily basis the value of private funds

    holding complex or illiquid investments.\106\ One commenter also noted

    that, in any given quarter, an adviser could experience significant

    spikes in the value of its assets under management.\107\ These

    commenters suggested a variety of alternatives, such as testing at the

    end of the prior reporting period,\108\ using an average over the

    period (possibly based on values at the end of each month in the

    quarter),\109\ or testing at the end of each month.\110\ We are

    persuaded that requiring daily testing of complex or illiquid

    investments could impose a substantial burden on some advisers,

    [[Page 71138]]

    and we have, accordingly, modified the Form so that advisers need only

    test whether their hedge fund or liquidity fund assets meet the

    relevant threshold as of the end of each month.\111\ In addition, as

    some commenters suggested, the test will look back one quarter so that

    these advisers know at the start of each reporting period whether they

    will be required to complete the more detailed reporting required of

    large hedge fund advisers and large liquidity fund advisers.\112\ We

    did not adopt an approach using an average because it would add

    unnecessary complexity and potentially allow an adviser whose assets

    under management have grown significantly during a quarter to delay

    more detailed reporting for an additional quarter.

    ---------------------------------------------------------------------------

    \106\ See, e.g., ABA Committees Letter; BlackRock Letter; MFA

    Letter; Seward Letter.

    \107\ See ABA Committees Letter.

    \108\ See BlackRock Letter; MFA Letter.

    \109\ See ABA Committees Letter; AIMA General Letter; IAA

    Letter.

    \110\ See Seward Letter.

    \111\ See Instruction 3 to Form PF.

    \112\ Id. See also supra note 108.

    ---------------------------------------------------------------------------

    Commenters also objected to the proposed quarterly testing with

    respect to private equity advisers, suggesting that even such

    infrequent testing may be difficult for some advisers.\113\ As we

    discuss in further detail below, large private equity fund advisers

    will be required to report information regarding their private equity

    funds only on an annual (rather than quarterly) basis, with the result

    that quarterly testing of the threshold is unnecessary.\114\

    Accordingly, advisers need only test whether their private equity fund

    assets meet the relevant threshold at the end of each fiscal year.\115\

    ---------------------------------------------------------------------------

    \113\ See Merkl February Letter (noting that some private equity

    funds do not provide first and third quarter financial statements to

    investors); PEGCC Letter (suggesting annual testing and asserting

    that the less volatile nature of private equity investments would

    not justify the cost of quarterly valuation).

    \114\ See section II.B of this Release.

    \115\ See Instruction 3 to Form PF.

    ---------------------------------------------------------------------------

    5. Aggregation of Assets Under Management

    For purposes of determining whether an adviser meets the $150

    million minimum reporting threshold or is a Large Private Fund Adviser

    for purposes of Form PF, the adviser must aggregate together:

    Assets of managed accounts advised by the firm that pursue

    substantially the same investment objective and strategy and invest in

    substantially the same positions as private funds advised by the firm

    (``parallel managed accounts'') unless the value of those accounts

    exceeds the value of the private funds with which they are managed;

    \116\ and

    ---------------------------------------------------------------------------

    \116\ See Instructions 1, 3, 5, and 6 to Form PF; and Glossary

    of Terms to Form PF. See also definitions of ``dependent parallel

    management account,'' ``hedge fund assets under management,''

    ``liquidity fund assets under management,'' and ``private equity

    fund assets under management'' in the Glossary of Terms to Form PF.

    ---------------------------------------------------------------------------

    Assets of private funds advised by any of the adviser's

    ``related persons'' other than related persons that are separately

    operated.\117\

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    \117\ See Instructions 3 and 5 to Form PF. ``Related person'' is

    defined generally as: (1) All of the adviser's officers, partners,

    or directors (or any person performing similar functions); (2) all

    persons directly or indirectly controlling, controlled by, or under

    common control with the adviser; and (3) all of the adviser's

    employees (other than employees performing only clerical,

    administrative, support or similar functions). For purposes of Form

    PF, a related person is ``separately operated'' if the advisers is

    not required to complete section 7.A. of Schedule D to Form ADV with

    respect to that related person. See Glossary of Terms to Form PF and

    Glossary of Terms to Form ADV. In addition, an adviser may, but is

    not required to, file one consolidated Form PF for itself and its

    related persons. See infra section II.A.6 of this Release.

    ---------------------------------------------------------------------------

    These aggregation requirements are designed to prevent an adviser

    from avoiding Form PF reporting requirements by re-structuring how it

    provides advice.

    We have modified these aggregation requirements from the proposal.

    As adopted, an adviser may exclude parallel managed accounts if the

    value of those accounts is greater than the value of the private funds

    with which they are managed.\118\ This change recognizes that, as some

    commenters noted, an adviser managing a relatively small amount of

    private fund assets could end up crossing a reporting threshold simply

    because it has a significant separate account business using a similar

    strategy.\119\ We believe this approach is consistent with section

    204(b) of the Advisers Act, the focus of which is private fund

    reporting.\120\ We remain concerned, however, that advisers focusing on

    private funds may increasingly structure investments as separate

    accounts to avoid Form PF reporting requirements, which could diminish

    the utility to FSOC of the information collected on Form PF.\121\

    Accordingly, an adviser must still include the value of parallel

    managed accounts in determining whether it meets a reporting threshold

    if the value of those accounts is less than the value of the private

    funds managed using substantially the same strategy.\122\

    ---------------------------------------------------------------------------

    \118\ See supra note 116.

    \119\ See IAA Letter; TCW Letter.

    \120\ An adviser managing primarily separate accounts would, of

    course, still be subject to the applicable Form PF reporting

    requirements if its private fund assets, taken alone, would cause it

    to exceed one or more reporting thresholds.

    \121\ Commenters disagreed over whether such evasion was likely.

    One commenter supported the proposed aggregation rules, agreeing

    that they ``will prevent [an adviser from splitting itself] into

    smaller components to avoid reporting requirements that are

    triggered by the amount of assets that are managed by an investment

    adviser.'' Merkl February Letter. Another commenter, however, was

    skeptical that advisers would re-structure to avoid reporting

    because clients typically determine the structure of their

    investments. See IAA Letter. Although clients may in many cases

    dictate the form of investment, we believe that advisers are not

    without influence in such structuring decisions and may prefer to

    avoid reporting on Form PF. (We note that advisers, as fiduciaries,

    may not subordinate clients' interests to their own such as by

    altering the structure of investments in a way that is not in the

    client's best interest in an attempt to remain under the reporting

    thresholds.)

    \122\ See supra note 116. Some commenters also encouraged us to

    narrow the definition of ``parallel managed account'' so that fewer

    accounts or fewer types of accounts would be covered. See, e.g.,

    AIMA General Letter; IAA Letter (suggesting that we replace

    ``substantially the same'' with the ``same''); comment letter of the

    Investment Company Institute (Apr. 12, 2011); TCW Letter (suggesting

    we exclude registered investment companies, undertakings for

    collective investment in transferable securities (UCITS) and

    SICAVs). We have, however, determined to adopt this definition as

    proposed because we believe that it appropriately reflects the total

    amount of assets that an adviser is managing using a particular

    strategy. In addition, the changes we are making with respect to how

    these account assets are treated for purposes of the reporting

    thresholds, as well as changes discussed below that allow advisers

    not to aggregate these account assets with their private funds for

    reporting purposes, substantially address the concerns of these

    commenters. See infra note 335 and accompanying text.

    ---------------------------------------------------------------------------

    We have also modified these aggregation requirements from the

    proposal so that advisers may exclude the assets under management of

    related persons that are separately operated.\123\ There was general

    support for the proposed aggregation of related persons.\124\ However,

    commenters argued that ``[r]equiring aggregation of funds managed by

    `any related person' is not possible for many large institutions such

    as a large firm which operates under separate business units with

    independent asset management functions and decision making by

    affiliated entities.'' \125\

    ---------------------------------------------------------------------------

    \123\ See supra note 117. See also Proposing Release, supra note

    12, for the proposed version of Instructions 3, 5 and 6 to Form PF.

    \124\ See, e.g., Merkl February Letter.

    \125\ TCW Letter. See also IAA Letter.

    ---------------------------------------------------------------------------

    We are persuaded that advisers may have difficulty gathering the

    information necessary to aggregate the assets of related persons whose

    operations are genuinely independent of their own and that, with an

    appropriate standard of separateness, the risk of evasion is

    substantially mitigated. Having considered several existing SEC

    standards of separateness, we believe that the most appropriate for

    this purpose is the standard the SEC recently adopted in Item 7.A of

    Form ADV for determining whether an adviser must complete section 7.A

    of Schedule D to that form with respect to a related

    [[Page 71139]]

    person.\126\ Although the Item 7.A standard was adopted for a somewhat

    different regulatory purpose, we believe it suits this role as well. In

    addition, every adviser filing Form PF will have already considered

    this standard with respect to its related persons, which means that

    applying the standard in the context of Form PF will impose little or

    no incremental burden on advisers. Accordingly, for purposes of

    determining whether an adviser meets one or more of the reporting

    thresholds, the adviser need only aggregate its private fund assets

    with those of its related persons for which it is required to complete

    section 7.A of Schedule D to Form ADV.\127\

    ---------------------------------------------------------------------------

    \126\ One commenter suggested that we use the standard under

    section 13 of the Securities Exchange Act of 1934 (``Exchange Act'')

    or look to whether the related persons ``share information about

    investment decisions on a real time basis.'' TCW Letter. We are

    concerned that using the standard under sections 13(d) and 13(g) of

    the Exchange Act would impose additional burdens on advisers as

    compared to the Item 7.A standard because advisers will not

    necessarily have considered the former in the ordinary course of

    business, and we believe the alternative proposed by this commenter

    would make it too easy to conclude that a related person is

    separately operated.

    \127\ See supra note 117. The relevant instruction to Item 7.A

    of Form ADV reads as follows: ``You do not need to complete Section

    7.A. of Schedule D for any related person if: (1) You have no

    business dealings with the related person in connection with

    advisory services you provide to your clients; (2) you do not

    conduct shared operations with the related person; (3) you do not

    refer clients or business to the related person, and the related

    person does not refer prospective clients or business to you; (4)

    you do not share supervised persons or premises with the related

    person; and (5) you have no reason to believe that your relationship

    with the related person otherwise creates a conflict of interest

    with your clients.''

    ---------------------------------------------------------------------------

    For purposes of both the reporting thresholds and responding to

    questions on Form PF, an adviser may exclude any assets invested in the

    equity of other private funds.\128\ In addition, if any of the

    adviser's private funds invests substantially all of its assets in the

    equity of other private funds and, aside from those investments, holds

    only cash, cash equivalents and instruments intended to hedge currency

    risk, the adviser may complete only section 1b with respect to that

    fund and otherwise disregard that fund.\129\ These instructions are

    intended to avoid duplicative reporting, which reduces the burden of

    reporting for advisers and improves the quality of the data reported.

    ---------------------------------------------------------------------------

    \128\ See Instruction 7 to Form PF. The adviser must, however,

    treat these assets consistently for purposes of Form PF. For

    example, an adviser may not count these assets when determining

    whether the fund's borrowing may exceed half its net asset value and

    then disregard these assets for purposes of the reporting

    thresholds. Although this instruction allows an adviser to disregard

    these investments in other private funds, it would not allow an

    adviser to disregard any liabilities of the private fund, even if

    incurred in connection with an investment in other private funds.

    \129\ See Instruction 7 to Form PF. Solely for purposes of this

    instruction, an adviser is also permitted to treat as a private fund

    any non-U.S. fund that would be a private fund had it used U.S.

    jurisdictional means in offering its securities. A non-U.S. fund

    that has never used U.S. jurisdictional means in the offering of the

    securities it issues would not be a private fund. See infra note

    134; Exemptions Adopting Release, supra note 11, at n.294 and

    accompanying text.

    ---------------------------------------------------------------------------

    Based on our staffs' consultation with staff representing FSOC's

    members, we have expanded from the proposal the scope of assets that

    may be disregarded under this instruction. The proposed instruction

    would have allowed advisers to disregard only fund of funds that invest

    exclusively in other private funds.\130\ Commenters expressed concern

    that the proposed instruction would prove too narrow to accommodate

    many funds of funds, noting that these funds often hold cash or some

    amount of direct investments.\131\ These commenters generally sought a

    broader exclusion for funds of funds, suggesting alternatives that

    would allow these funds to hold essentially unlimited dollar amounts of

    direct investments while not reporting on Form PF.\132\ In light of the

    purpose for which information is collected on Form PF, we are not

    convinced that an adviser should not have to report on a fund's direct

    investments simply because it primarily holds investments in other

    private funds. However, we are persuaded that our proposed exception

    for funds of funds was too narrow in that it did not allow for a de

    minimis amount of cash, cash equivalents and currency hedges. These

    limited non-private fund holdings appear unlikely, on their own, to

    raise systemic concerns. We are also persuaded that, even where a fund

    is not necessarily a ``fund of funds'' but holds investments in other

    private funds, reporting on those investments is unnecessary because

    information regarding the other private funds will, in most cases, be

    reported separately on Form PF, and we have modified the instructions

    accordingly.\133\

    ---------------------------------------------------------------------------

    \130\ See the Proposing Release, supra note 12, for the proposed

    version of Instruction 7 to Form PF. We have also added a new

    Instruction 8, which clarifies that, except as provided in

    Instruction 7, all investments in other funds should be included for

    all purposes under Form PF but that advisers are not required to

    ``look through'' the other funds to the underlying assets (unless

    the other fund's purpose is to act as a holding company for the

    private fund's investments).

    \131\ See, e.g., ABA Committees Letter; comment letter of Akina

    Limited (Feb. 25, 2011) (``Akina Letter''); MFA Letter; PEGCC

    Letter; comment letter of Sidley Austin, LLP (submitted to the CFTC)

    (Apr. 12, 2011) (``Sidley Letter''); SIFMA Letter.

    \132\ Id. Some commenters also suggested that advisers should

    not report even the limited information required in section 1b with

    respect to funds of funds. See, e.g., ABA Committees Letter; Sidley

    Letter; SIFMA Letter. However, as one commenter pointed out, these

    funds may be employing leverage at the fund of funds level, which

    would not be reported if these funds did not complete this section.

    See Merkl February Letter. In addition, information collected in

    section 1b will provide regulators with information regarding the

    extent of these funds' investments in other private funds, and

    certain of the information collected in this section may be

    important to our investor protection mission. See infra notes 133

    and 197.

    \133\ See Instruction 7 to Form PF. We have, however, added a

    new question 10 to Form PF, which requires the adviser to disclose

    the amount that each private fund has invested in other private

    funds. This will allow regulators to understand the extent to which

    these investments occur and are otherwise being disregarded on Form

    PF. See infra note 197.

    ---------------------------------------------------------------------------

    If an adviser's principal office and place of business is outside

    the United States, the adviser may exclude any private fund that,

    during the adviser's last fiscal year, was not a United States person,

    was not offered in the United States, and was not beneficially owned by

    any United States person.\134\ This approach is designed to reduce the

    duplication of reporting requirements that foreign regulators may

    impose and to allow an adviser to report with respect to only those

    private funds that are more likely to implicate U.S. regulatory

    interests.

    ---------------------------------------------------------------------------

    \134\ See Instruction 1 to Form PF. This portion of Instruction

    1 is only necessary for those funds that fall within the definition

    of ``private fund.'' A non-U.S. fund that has never used U.S.

    jurisdictional means in the offering of the securities it issues

    would not be a private fund. See Exemptions Adopting Release, supra

    note 11, at n.294 and accompanying text. We have modified this

    instruction from the proposal to more closely follow the

    requirements of Regulation S; the instruction now looks to whether

    the offering was made ``in the United States'' rather than ``to * *

    * any United States person.'' See also Glossary of Terms to Form PF.

    ``United States person'' is defined for purposes of Form PF by

    reference to the definition in rule 203(m)-1, which tracks the

    definition of a ``U.S. person'' under Regulation S but contains a

    special rule for discretionary accounts maintained for the benefit

    of United States persons. See Exemptions Adopting Release, supra

    note 11, at section II.B.4.

    ---------------------------------------------------------------------------

    Reporting for Affiliated and Sub-advised Funds

    An adviser may, but is not required to, report the private fund

    assets that it manages and the private fund assets that its related

    persons manage on a single Form PF.\135\ This is intended to provide

    private fund advisers with reporting flexibility and convenience,

    allowing affiliated entities that share reporting and risk management

    systems to report jointly while also permitting affiliated entities

    that operate separately to report separately. Commenters did not

    address

    [[Page 71140]]

    this aspect of the proposal, which we are adopting as proposed.

    ---------------------------------------------------------------------------

    \135\ See Instruction 2 to Form PF. See supra note 117 for the

    definition of ``related person.''

    ---------------------------------------------------------------------------

    With respect to sub-advised funds, to prevent duplicative

    reporting, only one adviser should report information on Form PF with

    respect to that fund.\136\ For reporting efficiency and to prevent

    duplicative reporting, if the adviser that completes information in

    section 7.B.1. of Schedule D to Form ADV with respect to any private

    fund is also required to file Form PF, the same adviser is responsible

    for reporting on Form PF with respect to that fund.\137\ However, if

    the adviser that completes information on Schedule D to Form ADV with

    respect to the private fund is not required to file Form PF (such as in

    the case of an exempt reporting adviser), then another adviser must

    report on that fund on Form PF.\138\ If none of the advisers to a fund

    is required to file Form PF because they are all exempt reporting

    advisers or do not exceed the minimum reporting threshold, Instruction

    4 to Form PF would not require any adviser to file the Form with

    respect to that fund. Commenters did not address this aspect of the

    proposal.

    ---------------------------------------------------------------------------

    \136\ Each adviser that meets the criteria for reporting on Form

    PF has an independent obligation to file the Form with respect to

    every fund it advises. See Advisers Act rule 204(b)-1(a);

    Instructions 1 and 3 to Form PF. However, when one adviser files

    Form PF with respect to a fund for a given reporting period, the

    other advisers are relieved of their obligation to file for that

    fund.

    \137\ See Instruction 4 to Form PF. We have modified this

    instruction from the proposal to clarify who would report in the

    case that the adviser completing section 7.B.1 of Schedule D to Form

    ADV with respect to a particular private fund is an exempt reporting

    adviser or does not meet the new minimum reporting threshold of $150

    million in private fund assets under management.

    \138\ See Instruction 4 to Form PF. See supra note 48 and

    accompanying text.

    ---------------------------------------------------------------------------

    7. Exempt Reporting Advisers

    Only private fund advisers registered with the SEC (including those

    that are also registered with the CFTC as CPOs or CTAs) must file Form

    PF.\139\ As noted above, the Dodd-Frank Act created exemptions from SEC

    registration under the Advisers Act for advisers solely to venture

    capital funds and for advisers solely to private funds that in the

    aggregate have less than $150 million in assets under management in the

    United States.\140\ We believe that Congress' determination to exempt

    these advisers from SEC registration indicates Congress' belief that

    regular reporting of detailed systemic risk information may not be

    necessary because they are sufficiently unlikely to pose this kind of

    risk.\141\ After consultation with staff representing FSOC's members

    and in light of the basic information that the SEC obtains from exempt

    reporting advisers on Form ADV, the SEC did not propose to extend Form

    PF reporting to these advisers.\142\ Commenters that addressed this

    aspect of the proposal agreed that exempt reporting advisers should not

    be required to file Form PF, and we have adopted this approach as

    proposed.\143\

    ---------------------------------------------------------------------------

    \139\ See Advisers Act rule 204(b)-1.

    \140\ See supra note 53 and accompanying text.

    \141\ See Senate Committee Report, supra note 5, at 74 (``The

    Committee believes that venture capital funds * * * do not present

    the same risks as the large private funds whose advisers are

    required to register with the SEC under this title. Their activities

    are not interconnected with the global financial system, and they

    generally rely on equity funding, so that losses that may occur do

    not ripple throughout world markets but are borne by fund investors

    alone.''). See also Exemptions Adopting Release, supra note 11.

    \142\ See Implementing Adopting Release, supra note 11, for a

    discussion of the information exempt reporting advisers are required

    to provide on Form ADV.

    \143\ See AIMA General Letter; Lone Star Letter. To the extent

    an exempt reporting adviser is registered with the CFTC as a CPO or

    CTA, the CFTC has proposed that the adviser would be obligated to

    file either Form CPO-PQR or CTA-PR, respectively.

    ---------------------------------------------------------------------------

    B. Frequency of Reporting

    1. Annual and Quarterly Reporting

    Most private fund advisers, including large private equity advisers

    and smaller private fund advisers, are required to complete and file

    Form PF only once per fiscal year.\144\ Large hedge fund advisers and

    large liquidity fund advisers, on the other hand, must update

    information relating to their hedge funds or liquidity funds,

    respectively, each fiscal quarter.\145\ Periodic reporting will permit

    FSOC to monitor periodically certain key information relevant to

    assessing systemic risk posed by these private funds on both an

    individual and aggregate basis. More frequent, quarterly reporting for

    large hedge fund and large liquidity fund advisers is necessary in

    order to provide FSOC with timely data to identify emerging trends in

    systemic risk.\146\

    ---------------------------------------------------------------------------

    \144\ See Instruction 9 to Form PF.

    \145\ Even these advisers, however, need only update information

    regarding other types of funds they manage on an annual basis. For

    example, a large hedge fund adviser that also manages a small amount

    of liquidity fund and private equity fund assets must update

    information relating to its hedge funds each quarter but only needs

    to update information relating to its liquidity funds and private

    equity funds when it submits its fourth quarter filing. An adviser

    that is both a large hedge fund adviser and a large liquidity fund

    adviser must file quarterly updates regarding both its liquidity

    funds and hedge funds. See Instruction 9 to Form PF.

    \146\ See Proposing Release, supra note 12, at section II.C. We

    also noted in the Proposing Release that we understood hedge fund

    advisers already collect and calculate on a quarterly basis much of

    the information that Form PF requires relating to hedge funds. One

    commenter argued that this is only true with respect to the

    information required in sections 1a and 1b of Form PF. See comment

    letter of Fidelity Investments (Apr. 12, 2011) (``Fidelity

    Letter''); see also MFA Letter. We have taken these comments into

    account in determining to extend the reporting deadlines for hedge

    fund advisers, as discussed below in section II.B.2 of this Release.

    We note, however, that another commenter also stated that ``Form PF

    for the most part * * * [requests] information that is part of, or

    should be part of, the existing risk management processes at the

    responding institutions,'' and as such ``this information will

    either be something the adviser produces already, or arguably

    should.'' Comment letter of MSCI Inc. (submitted to the CFTC) (Apr.

    11, 2011) (``MSCI Letter''). Commenters did not address the ability

    of liquidity funds to prepare and submit quarterly filings, and we

    continue to believe, as discussed in the Proposing Release, that

    most liquidity fund advisers collect on a monthly basis much of the

    information that we are requiring in section 3 of Form PF and that

    quarterly reporting should, as a result, be relatively efficient for

    these advisers.

    ---------------------------------------------------------------------------

    The filing requirements we are adopting differ from the proposal in

    two principal respects. First, the proposal would have required large

    private equity advisers to report on a quarterly, rather than annual,

    basis. Second, under the proposal, once an adviser became subject to

    quarterly reporting, it would have been required to update information

    with respect to all of its private funds each quarter (not just for the

    type of private fund that caused it to exceed the large adviser

    threshold).\147\

    ---------------------------------------------------------------------------

    \147\ The proposal also would have required reporting based on

    calendar quarters rather than the adviser's fiscal quarters. We have

    made this change because some advisers with quarterly updating

    obligations will now only need to update information about certain

    funds on an annual basis. The annual reporting is intended to align

    with typical end of fiscal year reporting activities, and requiring

    advisers to file separate annual and fourth quarter reports would

    impose additional burdens. We believe this change will, in practice,

    have little effect on the reporting (based on IARD data as of

    October 1, 2011, only about 2% of all registered advisers report a

    fiscal year ending in a month other than March, June, September or

    December, though the total may be slightly higher because IARD does

    not distinguish among, for instance, mid-month and end-of-month

    fiscal year ends).

    ---------------------------------------------------------------------------

    A number of commenters responded to our proposal regarding the

    frequency of reporting. One agreed that quarterly reporting would be

    appropriate, and two others argued that advisers should report even

    more frequently because market conditions and portfolios can change

    rapidly.\148\ On the other hand, a number of commenters disagreed with

    the proposal, suggesting instead that Large Private Fund Advisers

    should report no more than semi-annually.\149\ These commenters argued

    that semi-

    [[Page 71141]]

    annual reporting would reduce the burden to advisers while also giving

    regulators more time to analyze the data, and several compared Form PF

    to the FSA Survey, which has been conducted on a voluntary, semi-annual

    basis.\150\ Another commenter stated that the generally illiquid

    portfolios of private equity funds fluctuate little in value throughout

    the year, in its view, making quarterly reporting unnecessary.\151\

    ---------------------------------------------------------------------------

    \148\ See CPIC Letter (supporting the proposal with respect to

    large private funds advisers); AFL-CIO Letter and AFR Letter

    (arguing for more frequent reporting).

    \149\ See, e.g., ABA Committees Letter; BlackRock Letter;

    Fidelity Letter; comment letter of Kleinberg, Kaplan, Wolff & Cohen,

    P.C. (submitted to the SEC) (Apr. 12, 2011) (``Kleinberg General

    Letter''); MFA Letter; SIFMA Letter; USCC Letter.

    \150\ See, e.g., ABA Committees Letter; Kleinberg General

    Letter.

    \151\ See PEGCC Letter.

    ---------------------------------------------------------------------------

    After consultation with staff representing FSOC's members, we

    continue to believe that quarterly reporting is important to provide

    FSOC with meaningfully current information with respect to the hedge

    fund and liquidity fund industries and to allow FSOC to identify

    rapidly emerging trends among these types of funds.\152\ Although some

    commenters suggested that the speed with which markets and portfolios

    change may warrant even more frequent reporting, we believe at this

    time that the additional benefit to FSOC from reporting more often than

    once a quarter would not justify the additional burdens imposed on

    advisers.\153\ On the other hand, we are also not convinced that less

    frequent (e.g., semi-annual) reporting would provide sufficient, or

    sufficiently timely, information to enable FSOC to identify and respond

    to rapidly emerging trends. In addition, we believe that international

    approaches to private fund reporting may be shifting in favor of

    quarterly, rather than semi-annual, reporting.\154\

    ---------------------------------------------------------------------------

    \152\ Moreover, we believe that quarterly reporting helps to

    discourage ``window-dressing'' around the reporting dates. See infra

    notes 285-292 and accompanying text.

    \153\ See supra note 148. We also note that FSOC has the

    authority to direct OFR to gather additional data where systemic

    risk concerns merit the reporting. See, e.g., sections 153 and 154

    of the Dodd-Frank Act.

    \154\ ESMA's proposed reporting template would impose quarterly

    reporting requirements on private fund advisers. See ESMA Proposal,

    supra note 33.

    ---------------------------------------------------------------------------

    With respect to large private equity advisers, however, the SEC is

    persuaded that the generally illiquid nature of private equity fund

    portfolios means that trends emerge more slowly in that sector.\155\ As

    a result, the proposal has been modified so that large private equity

    advisers are required to report information regarding private equity

    funds on an annual basis only.\156\

    ---------------------------------------------------------------------------

    \155\ See supra note 151.

    \156\ See Instruction 9 to Form PF.

    ---------------------------------------------------------------------------

    Fewer commenters addressed the frequency of reporting for smaller

    advisers. One commenter agreed that annual reporting would be

    appropriate for these advisers,\157\ and several others argued that

    smaller advisers should report more frequently, proposing at least

    semi-annual filings.\158\ Again, although we acknowledge the potential

    value of more frequent reporting from smaller private fund advisers, we

    are concerned about the burden this would impose. At this time, we are

    not convinced that more frequent reporting from smaller private fund

    advisers would, from a systemic risk monitoring perspective, be

    justified by the value of the additional data.

    ---------------------------------------------------------------------------

    \157\ See AIMA General Letter.

    \158\ See AFL-CIO Letter; AFR Letter. See also MFA Letter

    (arguing that all advisers, large and small, should report on a

    semi-annual basis).

    ---------------------------------------------------------------------------

    As noted above, the requirements we are adopting also differ from

    the proposal in that even those advisers who must report on a quarterly

    basis are only required to do so with respect to the type of fund that

    caused them to exceed the reporting threshold. We are adopting this

    approach in part because these other funds will include private equity

    funds, venture capital funds and real estate funds, all of which are

    likely to have generally illiquid portfolios and for which we believe

    annual reporting is appropriate, as explained above. This approach also

    reflects the different implications for systemic risk that may be

    presented by different investment strategies.

    Reporting Deadlines

    Large private equity advisers and smaller private fund advisers

    have 120 days from the end of their fiscal years to file Form PF.\159\

    In contrast, large hedge fund advisers have 60 days from the end of

    each fiscal quarter, and large liquidity fund advisers have 15

    days.\160\ The deadlines we are adopting for large hedge fund advisers,

    large private equity advisers and smaller advisers are longer than the

    deadlines we proposed. In particular, we have extended the deadline for

    large hedge fund advisers from 15 days to 60 days, the deadline for

    large private equity fund advisers from 15 days to 120 days and the

    deadline for smaller private fund advisers from 90 days to 120

    days.\161\

    ---------------------------------------------------------------------------

    \159\ See Instruction 9 to Form PF; Advisers Act rule 204(b)-

    1(a).

    \160\ See Instruction 9 to Form PF. As discussed above, a large

    hedge fund adviser (or large liquidity fund adviser) that also

    manages other types of funds must file quarterly updates with

    respect to its hedge funds (or liquidity funds, as applicable) but

    only needs to update information regarding its other funds when it

    files its fourth quarter update. Such an adviser may comply with its

    filing obligations by initially filing a fourth quarter update that

    includes only information about its hedge funds (or liquidity funds,

    as applicable) within 60 days (or 15 days, as applicable) and then

    amending its filing within 120 days after the end of the quarter to

    include information about its other funds.

    \161\ We noted in the Proposing Release that the proposed 90 day

    deadline would allow these advisers to file amendments at the same

    time as they file their Form ADV annual updating amendment, which

    may make certain aspects of the reporting more efficient, such as

    reporting assets under management. Proposing Release, supra note 12,

    at section II.C. We believe these efficiencies will still be

    realized because the reporting continues to be ``as of'' the same

    date as the annual reports on Form ADV and an adviser may still file

    on or after the date on which it files Form ADV.

    ---------------------------------------------------------------------------

    The proposed deadline of 15 days for large hedge fund and private

    equity fund advisers attracted significant opposition. Commenters

    offered a number of reasons to extend the deadline, including that: (1)

    15 days is not enough time to prepare and submit a report with reliably

    accurate data, particularly where the adviser must value illiquid fund

    assets; \162\ (2) other SEC reporting requirements allow more time;

    \163\ (3) the FSA Survey has allowed more time (approximately 30 to 45

    days in the most recent surveys) and required less detail; \164\ (4)

    the same personnel will be closing the books at the end of the quarter

    and completing Form PF; \165\ and (5) the more current the information

    reported, the greater the consequences should it become public.\166\

    These commenters suggested alternatives that ranged from 45 to 120

    days.\167\ We understand from the comments, however, that the proposed

    reporting deadlines would be more problematic for some types of

    advisers than for

    [[Page 71142]]

    others. For instance, commenters focusing on private equity advisers

    generally suggested longer deadlines than commenters focusing on hedge

    fund advisers, and the valuation of illiquid portfolios is likely to be

    a more common problem for private equity advisers.\168\ Also, although

    a number of commenters addressed hedge fund advisers and private equity

    advisers, none commented specifically on whether liquidity fund

    advisers could meet the proposed deadline.

    ---------------------------------------------------------------------------

    \162\ See, e.g., ABA Committees Letter; AIMA General Letter;

    BlackRock Letter; IAA Letter; MFA Letter; USCC Letter.

    \163\ See, e.g., ABA Committees Letter (noting that Forms N-SAR

    and N-Q, used by registered investment companies, allow 60 days);

    AIMA General Letter (pointing to Form 13F (allowing 45 days), Form

    10-K (allowing at least 60 days), and Form 10-Q (allowing at least

    40 days)); Fidelity Letter; Kleinberg General Letter; MFA Letter

    (pointing to the 120 days allowed for audited financial statements

    under the Advisers Act custody rule); TCW Letter.

    \164\ See, e.g., AIMA General Letter; IAA Letter.

    \165\ See, e.g., Kleinberg General Letter.

    \166\ See, e.g., AIMA General Letter; Kleinberg General Letter.

    Some commenters also pointed to the Form's proposed signature page,

    which would have required advisers to certify that the information

    provided is ``true and correct,'' arguing that this standard would

    be difficult to satisfy in 15 days. See, e.g., AIMA General Letter.

    As discussed below, we are not adopting the proposed certification

    requirement. See infra notes 183-185 and accompanying text.

    \167\ See, e.g., AIMA General Letter (45 days); Akina Letter

    (120 days for private equity fund data); BlackRock Letter (120

    days); CPIC Letter (45 days, at least initially); Fidelity Letter

    (preferably 90 days, but no less than 45 days); IAA Letter (90

    days); Kleinberg General Letter (60 days); Lone Star Letter (60 days

    for private equity fund data); Merkl February Letter (four months

    for private equity fund data); MFA Letter (120 days); PEGCC Letter

    (at least 90 days for private equity fund data); Seward Letter (120

    days); SIFMA Letter (120 days); TCW Letter (60 days); USCC Letter

    (120 days).

    \168\ Id.

    ---------------------------------------------------------------------------

    We are persuaded that longer deadlines are appropriate for large

    hedge fund advisers and large private equity fund advisers and that,

    with respect to large private equity fund advisers in particular, the

    work required to value the generally illiquid portfolios of private

    equity funds favors a substantially longer reporting deadline than was

    proposed.\169\ A few commenters favored a deadline for large hedge fund

    advisers longer than the one we are adopting, but several commenters

    indicated that a deadline shorter than the one we are adopting would be

    adequate.\170\ We believe that our revised approach strikes an

    appropriate balance between the need to provide FSOC with timely data

    and the ability of these advisers to prepare and submit Form PF. We

    also believe it will reduce the burden of reporting for these advisers.

    ---------------------------------------------------------------------------

    \169\ We note that many of the questions in section 4, which

    large private equity fund advisers must file, relate to information

    that should be available on the financial statements of their

    portfolio companies. By extending the deadline to 120 days for these

    advisers, we anticipate that the burden of reporting will be reduced

    because, in many cases, they will now be able to delay reporting

    until after receiving financial statements from their portfolio

    companies.

    \170\ See supra note 167.

    ---------------------------------------------------------------------------

    Fewer commenters addressed the proposed reporting deadline of 90

    days for smaller advisers. One commenter supported the proposal,\171\

    but several argued that smaller advisers should have more than 90 days

    to prepare and submit their filings.\172\ Several commenters noted that

    the Advisers Act custody rule allows advisers up to 120 days to

    distribute audited financial statements to investors when relying on

    the annual audit provision under that rule.\173\ We believe that our

    revised deadline of 120 days will enable these advisers to benefit from

    the availability of financial statements and also help to avoid

    crowding advisers' calendars with end of year reporting obligations

    while at the same time providing FSOC with reasonably timely data.

    ---------------------------------------------------------------------------

    \171\ See AIMA General Letter.

    \172\ See, e.g., BlackRock Letter (120 days); MFA Letter (120

    days); PEGCC Letter (150 days for private equity fund data).

    \173\ See, e.g., BlackRock Letter; MFA Letter; USCC Letter. See

    also Advisers Act rule 206(4)-2(b)(4).

    ---------------------------------------------------------------------------

    3. Initial Reports

    Newly registering private fund advisers are subject to the same

    Form PF reporting deadlines as currently registered advisers.\174\

    Advisers are not, however, required to file Form PF with respect to any

    period that ended prior to the effective date of their registrations.

    Accordingly, a smaller private fund adviser that registers during its

    2013 fiscal year must file Form PF within 120 days following the end of

    its 2013 fiscal year. It would not, however, need to file Form PF for

    its 2012 fiscal year. Similarly, a large hedge fund adviser that

    registers during its third fiscal quarter must file Form PF within 60

    days following the end of that quarter but need not file for the

    preceding fiscal quarter.\175\

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    \174\ See Advisers Act rule 204(b)-1(a); supra section II.B.2 of

    this Release.

    \175\ Whether an adviser is a large hedge fund or large

    liquidity fund adviser would be determined as of the date specified

    in Form PF, not the date of registration. When filing an initial

    Form PF, a large hedge fund or large liquidity fund adviser that

    also manages other types of private fund may rely on the

    instructions in the Form allowing it to delay updating information

    regarding these other fund types when filing an update.

    ---------------------------------------------------------------------------

    We have extended the deadlines for initial filings from the 15 days

    that we proposed. One commenter argued that the proposed deadline would

    be too short and suggested 90 days instead.\176\ We believe the revised

    initial filing deadlines are more consistent with the deadlines for

    updating Form PF discussed above in section II.B.2 of this Release.

    ---------------------------------------------------------------------------

    \176\ See AIMA General Letter.

    ---------------------------------------------------------------------------

    4. Transition Filings, Final Filings and Temporary Hardship Exemptions

    An adviser must file Form PF to report that it is transitioning to

    only filing Form PF annually with the Commissions or to report that it

    no longer meets the requirements for filing Form PF no later than the

    last day on which the adviser's next Form PF update would be

    timely.\177\ This allows us to determine promptly whether an adviser's

    discontinuance in reporting is due to it no longer meeting the form's

    reporting thresholds as opposed to a lack of attention to its filing

    obligations. Advisers may also avail themselves of a temporary hardship

    exemption in a similar manner as with other SEC filings if they are

    unable to file Form PF electronically in a timely manner due to

    unanticipated technical difficulties.\178\ No commenters addressed the

    proposed transition filings, final filings or temporary hardship

    exemption, and we are adopting them as proposed.

    ---------------------------------------------------------------------------

    \177\ See Instruction 9 to Form PF.

    \178\ See Advisers Act rule 204(b)-1(f); Instruction 14 to Form

    PF. The adviser would complete and file on paper Item A of section

    1a and section 5 of Form PF, checking the box in section 1a

    indicating that it is requesting a temporary hardship exemption. The

    adviser must file any request for a temporary hardship exemption no

    later than one business day after the electronic Form PF filing was

    due. The adviser must then submit the filing that is the subject of

    the Form PF paper filing in electronic format with the Form PF

    filing system no later than seven business days after the filing was

    due.

    ---------------------------------------------------------------------------

    C. Information Required on Form PF

    The questions contained in Form PF reflect relevant requirements

    and considerations under the Dodd-Frank Act, consultations with staff

    representing FSOC's members, and the Commissions' experience in

    regulating those private fund advisers that are already registered with

    the Commissions. As discussed above, with respect to hedge fund

    advisers in particular, the information collected on Form PF is also

    broadly based on the guidelines initially developed in the FSA Survey

    and the IOSCO report on hedge fund oversight, and many of the more

    detailed items are similar to questions proposed to be included in

    ESMA's reporting template.\179\ Form PF has been designed to collect

    information to assist FSOC in monitoring and assessing systemic risks

    that private funds may pose, as discussed in section II.A above.

    ---------------------------------------------------------------------------

    \179\ See supra section I.B of this Release.

    ---------------------------------------------------------------------------

    Commenters' reactions to the scope of Form PF varied, with some

    proposing further enhancements and others arguing that the proposed

    reporting is excessive. Commenters arguing for expanded reporting

    recommended additional questions about counterparty exposures and short

    selling or suggested having all advisers complete the entire form.\180\

    In contrast, critics of the proposal argued that information required

    on Form PF would be unduly burdensome to provide or is available to

    regulators from other sources.\181\ A few commenters who objected to

    other aspects of the proposal recommended adding several questions that

    were originally proposed on Form ADV.\182\ Although this would expand

    the Form, these commenters believed that these

    [[Page 71143]]

    questions, which relate to valuation, beneficial ownership and the

    identity of service providers, would require competitively sensitive or

    proprietary information and would be more appropriately reported

    confidentially on Form PF.

    ---------------------------------------------------------------------------

    \180\ See, e.g., AFL-CIO Letter; AFR Letter; Merkl February

    Letter; MSCI Letter; comment letter of Plexus Consulting Group (Feb.

    28, 2011). See also supra note 76 and accompanying text.

    \181\ See, e.g., AIMA General Letter; IAA Letter; Olympus

    Letter; PEGCC Letter. See infra note 309 and accompanying text.

    \182\ See IAA Letter; MFA Letter; Seward Letter.

    ---------------------------------------------------------------------------

    As discussed in greater detail below, Form PF, as adopted,

    addresses the concerns of many commenters with changes from the

    proposal that we believe will significantly reduce the burden of

    reporting and clarify how commenters are expected to respond. At the

    same time, the final Form preserves much of the information that the

    proposal would require. Our revised approach is intended to respond to

    industry concerns while still providing FSOC the information it needs

    to monitor systemic risk across the private fund industry.

    Two of the changes we are making, in particular, illustrate this

    revised approach. The first is the removal of the proposed

    certification language. This would have required an authorized

    individual to affirm ``under penalty of perjury'' that the statements

    made in Form PF are ``true and correct.'' \183\ This certification was

    borrowed from the SEC's existing Advisers Act reporting form, Form ADV.

    However, a number of commenters expressed concern that such a standard

    would be inappropriate for Form PF because the Form requires advisers

    to provide estimates and exercise significant judgment in preparing

    responses.\184\ In consideration of the nature of the information

    required on Form PF, we are persuaded that a certification is

    unnecessary and that a signature confirming that the Form is filed with

    proper authority is sufficient.\185\

    ---------------------------------------------------------------------------

    \183\ See Question 2 and Instruction 11 to Form PF. If the

    adviser is also registered with the CFTC as CPO or CTA, the

    signature page also requires the signatory to acknowledge that

    misstatements or omissions of material fact on Form PF constitute a

    violation of the CEA. This acknowledgement is included simply to

    remove any doubt created by the filing of the Form through the SEC

    rather than directly with the CFTC, which is merely a matter of

    convenience for advisers.

    \184\ See, e.g., ABA Committees Letter; AIMA General Letter;

    Kleinberg General Letter; MFA Letter; PEGCC Letter. Some of these

    commenters also saw the certification standard and the reporting

    deadlines as related issues, arguing that the more quickly advisers

    are required to report, the less confidence they will have in their

    estimates. See, e.g., BlackRock Letter; Fidelity Letter; PEGCC

    Letter; SIFMA Letter; USCC Letter. As discussed above in section

    II.B.2 of this Release, we have also extended the proposed filing

    deadlines. Several commenters compared Form PF to other SEC forms

    and suggested that we either require just a signature without a

    certification or that we use a less stringent standard, such as good

    faith. See MFA Letter (pointing to the certification in the SEC's

    Schedule 13G). See also ABA Committees Letter (comparing Form PF to

    other SEC forms, including Form N-SAR, Form N-Q, Schedule 13D and

    Schedule 13G); AIMA General Letter (pointing to Schedule 13G);

    BlackRock Letter; Kleinberg General Letter.

    \185\ We note, however, that even absent the certification, a

    willful misstatement or omission of a material fact in any report

    filed with the SEC under the Advisers Act is unlawful. See section

    207 of the Advisers Act. We have also added an instruction to the

    Form that clarifies when an adviser is required to amend its filing

    to correct an error. In particular, Instruction 16 to Form PF

    explains that an adviser is not required to update information that

    it believes in good faith properly responded to Form PF on the date

    of filing even if that information is subsequently revised for

    purposes of the adviser's recordkeeping, risk management or investor

    reporting (such as estimates that are refined after completion of a

    subsequent audit). The instruction also explains that large hedge

    fund advisers and large liquidity fund advisers that comply with

    their fourth quarter filing obligations by submitting an initial

    filing followed by an amendment in accordance with Instruction 8 to

    Form PF will not be viewed as affirming responses regarding one fund

    solely by providing updated information regarding another fund at a

    later date.

    ---------------------------------------------------------------------------

    The second change is to increase the ability of advisers to rely on

    their internal methodologies when reporting on Form PF.\186\ A number

    of commenters encouraged this approach, recommending ``that the

    instructions to the Form be modified to confirm that advisers be able

    to rely on the same internal reporting procedures and practices when

    reporting on the Form that they would use when reporting to advisory

    clients, unless directly contradicted by the instructions.'' \187\ The

    revised approach strikes an appropriate balance between easing the

    burden on advisers by allowing them to rely on their existing practices

    and ensuring that FSOC receives comparable data across the industry.

    This change is intended, together with the removal of the

    certification, to clarify that Form PF does not require the time or

    expense involved in, for instance, an audit of the information included

    on Form PF, and we anticipate that these changes will reduce the burden

    that many advisers incur in completing the Form.\188\

    ---------------------------------------------------------------------------

    \186\ See Instruction 15 to Form PF. As noted in the

    instruction, we would expect reporting on Form PF to be consistent

    with information the adviser uses for internal and investor

    reporting purposes. Methodologies also must be consistently applied,

    and to the extent we have indicated how an adviser should respond to

    a question, the answer should be consistent with our instructions.

    In addition to this general instruction, we have increased the

    ability of advisers to rely on their own methodologies with a number

    of specific changes throughout the Form, including permitting

    advisers to report performance using their existing practices,

    allowing flexibility in reporting interest rate sensitivities and

    changing the frequency and substance of reporting for large private

    equity advisers. See, e.g., infra notes 202, 241-242, 247-248 and

    258-260 and accompanying text and section II.C.4.

    \187\ BlackRock Letter. See also IAA Letter; MFA Letter; PEGCC

    Letter; SIFMA Letter; TCW Letter.

    \188\ If audited information is available at the time an adviser

    files Form PF, we would of course expect responses to Form PF to be

    consistent with that audited information.

    ---------------------------------------------------------------------------

    The information that Form PF requires and the changes made from the

    proposal are discussed in detail below.

    1. Section 1 of Form PF

    Each adviser required to file Form PF must complete all or part of

    section 1. This section of the Form is divided into three parts:

    section 1a requires information regarding the adviser's identity and

    assets under management, section 1b requires limited information

    regarding the size, leverage and performance of all private funds

    subject to the reporting requirements, and section 1c requires

    additional basic information regarding hedge funds. We are adopting

    Form PF with several changes to the information that advisers are

    required to report in section 1. These changes, which are discussed in

    detail below, are intended to respond to industry concerns while still

    providing FSOC the information it needs to monitor systemic risk across

    the private fund industry. In general, we expect that these changes

    will reduce the burden of responding to the Form and more closely align

    the Form with ESMA's proposed reporting template.

    a. Section 1a of Form PF

    Item A of section 1a seeks identifying information about the

    adviser, such as its name and the name of any of its related persons

    whose information is also reported on the adviser's Form PF. The

    adviser will also be required to provide its large trader

    identification number, if any.\189\ The addition of the large trader

    identification number will enhance the value of Form PF information by

    allowing it to be quickly and accurately linked to other information

    that may be available to the SEC while imposing little additional

    burden. Section 1a also requires basic aggregate information about the

    private funds managed by the adviser, such as the portion of gross

    (i.e., regulatory) and net assets under management attributable to

    certain types of private funds.\190\ This identifying information

    [[Page 71144]]

    will assist us and FSOC in monitoring the amount of assets managed by

    private fund advisers and the general distribution of those assets

    among various types of private funds.\191\ This information also

    provides data about the size of the adviser, the nature of the

    adviser's activities and the extent to which assets are managed rather

    than owned, which are factors that FSOC must consider in making a

    determination to designate a nonbank financial company for FRB

    supervision under the Dodd-Frank Act.\192\

    ---------------------------------------------------------------------------

    \189\ See Question 1 on Form PF.

    \190\ See Question 3 on Form PF. This question requires the

    adviser to report the portion of its assets under management that

    are attributable to hedge funds, liquidity funds, private equity

    funds, real estate funds, securitized asset funds, venture capital

    funds, other private funds, and funds and accounts other than

    private funds. We have modified the instructions to Question 3 to

    improve their consistency and to respond to a commenter's request

    for clarification regarding the meaning of ``funds and accounts

    other than private funds.'' See MFA Letter. We have also determined

    not to adopt a proposed question that would have required advisers

    to report their aggregate gross and net regulatory assets under

    management because this information can be derived from the data

    reported in Question 3. See the Proposing Release, supra note 12,

    for the proposed Question 3 on Form PF.

    \191\ Question 4 in section 1a of Form PF also permits an

    adviser to explain any assumptions it made in responding to Form PF.

    This question is optional. One commenter expressed support for

    ``providing space for managers to describe any assumptions they make

    in responding to a question,'' and we are adopting this question

    substantially as proposed. See MFA Letter.

    \192\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    ---------------------------------------------------------------------------

    b. Section 1b of Form PF

    Section 1b of Form PF elicits certain identifying and other basic

    information about each private fund the adviser manages. The adviser

    generally must complete a separate section 1b for each private

    fund.\193\ This section of the Form requires reporting of each private

    fund's gross and net assets and the aggregate notional value of its

    derivative positions.\194\ It also requires basic information about the

    fund's borrowings, including a breakdown showing whether the creditor

    is based in the United States and whether it is a financial

    institution.\195\ Advisers must also report the percentage of the

    fund's equity held by the five largest equity holders, which provides

    information about the concentration of the fund's investor base.\196\

    Two new questions, which we have added in connection with other changes

    to the Form, also require the value of the fund's investments in other

    private funds and of the parallel managed accounts managed alongside

    the fund.\197\

    ---------------------------------------------------------------------------

    \193\ However, if the adviser elects to report on an aggregated

    basis regarding the funds comprising a master-feeder arrangement or

    a parallel fund structure, it would only file a single section 1b

    for the master fund in the master-feeder arrangement or for the

    largest fund in the parallel fund structure. We have modified the

    approach to aggregation of master-feeder arrangements and parallel

    fund structures to allow advisers more flexibility in determining

    how to report. See Instruction 5 to Form PF. This change is

    discussed in greater detail below in section II.C.5 of this Release.

    \194\ See Questions 8, 9 and 13 on Form PF. With respect to

    Question 13 and similar questions regarding the value of

    derivatives, the Form requires the adviser to report the gross

    notional value of its funds' derivative positions, except that

    options must be reported using their delta adjusted notional value.

    See Instruction 15 to Form PF. In contrast, Questions 8 and 9, and

    similar questions that refer to gross asset value or net asset

    value, require valuations based on the instruction in Form ADV for

    calculating regulatory assets under management. See definitions of

    ``gross asset value'' and ``net asset value'' in the Glossary to

    Form PF.

    \195\ See Question 12 on Form PF. One commenter suggested that

    the amount of borrowings should be netted where a private fund is

    both a lender to and a creditor of a counterparty. See MFA Letter.

    The commenter's approach would, however, obscure the total amount of

    leverage the fund has incurred, and we have clarified that such

    amounts should not be netted. Also, in response to this commenter,

    we have modified the instructions to clarify that collateral should

    not be netted against borrowings. We have also modified this

    question, and other questions on the Form requiring a breakdown of

    creditor types, to split the non-financial institution category into

    U.S. and non-U.S. creditors. This change is intended to increase the

    usefulness of this data for the FRB's flow of funds report, which is

    an important tool for evaluating trends in and risks to the U.S.

    financial system. See infra note 475.

    We proposed that advisers completing section 1b also report the

    identity of, and amount owed to, each creditor to which the fund

    owed an amount equal to or greater than 5 percent of the fund's net

    asset value as of the reporting date. See the Proposing Release,

    supra note 12, for the proposed Question 10 on Form PF. This

    question has been moved to section 2b of the Form so that only large

    hedge fund advisers must provide this information. This change is

    intended to respond to commenter concerns that completing this

    question will be burdensome but also preserve information regarding

    interconnectedness that may be important to FSOC's monitoring of

    systemic risk among large hedge funds. See, e.g., PEGCC Letter.

    \196\ See Question 15 on Form PF. For purposes of this question

    and Question 16 on Form PF, beneficial owners are persons who would

    be counted as beneficial owners under section 3(c)(1) of the

    Investment Company Act or who would be included in determining

    whether the owners of the fund are qualified purchasers under

    section 3(c)(7) of that Act. (15 U.S.C. 80a-3(c)(1) or (7)). The

    proposal would have required that advisers report the number of

    beneficial owners of the fund. However, we are not adopting this

    question because, as a result of our revised approach to reporting

    on parallel managed accounts, this information will largely

    duplicate information collected on Form ADV, and we do not believe

    that receiving updated responses on a quarterly basis from large

    hedge fund advisers and large liquidity fund advisers is necessary

    with respect to this information. See infra section II.C.5 of this

    Release. See also the Proposing Release, supra note 12, for the

    proposed Question 12(a) on Form PF; Question 13 of section 7.B.1. of

    Schedule D to Form ADV.

    \197\ See Questions 10 and 11 on Form PF. Question 10, which

    asks for the value of the fund's investments in other private funds,

    has been added because our expanded Instruction 7 otherwise allows

    these investments to be disregarded on Form PF and it is important

    that FSOC have a basic measure of the extent of assets not otherwise

    reflected on the Form. This will also serve as a measure of

    interconnectedness among private funds. See supra notes 128 and 131

    and accompanying text for a discussion of Instruction 7. Question

    11, relating to the value of parallel managed accounts, has been

    added for similar reasons. See infra section II.C.5 of this Release

    for a discussion of our revised approach to reporting on parallel

    managed accounts.

    ---------------------------------------------------------------------------

    Section 1b also requires that advisers report in response to

    Question 17 the performance of each fund, both on a gross basis and net

    of management fees and incentive fees and allocations. Advisers must

    provide performance information that is consistent with the performance

    results they report to investors (or use internally, if not reported to

    investors). Advisers are required, at a minimum, to report annual

    performance results for the fund's most recently completed fiscal year

    but only need to report monthly and quarterly performance information

    if that information is already being calculated for the fund.

    Question 17 has been modified from the proposal in response to

    commenter concerns regarding the burden of providing performance

    results in the form proposed.\198\ In particular, it omits the

    requirement to report the change in net asset value, allows advisers to

    report performance gross and net of management fees and incentive fees

    and allocations (rather than gross and net of incentive fees and

    allocations only) and makes reporting of monthly and quarterly

    performance mandatory only for those funds for which advisers are

    already calculating performance results with that frequency. Commenters

    were concerned primarily that the proposed instructions to this

    question would require advisers to calculate performance in a manner

    different from that used for investor reporting purposes or more

    frequently than is their current practice.\199\ A number of commenters

    explained that funds with illiquid portfolios, such as private equity

    funds, typically do not calculate performance on a monthly (and in many

    cases, even quarterly) basis and that calculating performance more

    frequently would impose a significant burden on these advisers.\200\ As

    discussed above, we are persuaded that trends emerge more slowly in

    private funds having illiquid portfolios, meaning that developments in

    these funds may be tracked using information reported on a less

    frequent basis.\201\ We believe that the revised approach, which allows

    advisers to rely on their existing procedures for calculating and

    reporting fund performance, significantly reduces the burden of

    responding to this question but will nonetheless yield valuable

    information for FSOC.\202\

    ---------------------------------------------------------------------------

    \198\ See infra notes 199 and 200.

    \199\ See, e.g., ABA Committees Letter; MFA Letter (recommending

    that ``the Form be revised to request (i) Gross performance and (ii)

    performance net of all fees'' and suggesting that advisers be

    permitted to report what they report to private fund investors).

    \200\ See, e.g., ABA Committees Letter; IAA Letter; Merkl

    February Letter; MFA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

    \201\ See supra text accompanying note 156.

    \202\ See Question 17 on Form PF. See also Proposing Release,

    supra note 12, at text accompanying n. 115 for a discussion of

    potential uses for this data.

    ---------------------------------------------------------------------------

    [[Page 71145]]

    We have also added to section 1b two questions that the SEC

    originally proposed as part of the expanded private fund reporting in

    Form ADV.\203\ The first, Question 14, requires that advisers report

    the assets and liabilities of each fund broken down using categories

    that are based on the fair value hierarchy established under U.S.

    generally accepted accounting principles (``GAAP'').\204\ The second,

    Question 16, requires that advisers provide the approximate percentage

    of each fund beneficially owned by certain types of investors.\205\ As

    discussed in the Implementing Adopting Release, the SEC determined not

    to adopt these questions on Form ADV in response to commenter concerns

    that they would result in the public disclosure of competitively

    sensitive or proprietary information.\206\ We have added these

    questions to Form PF (with the modifications discussed below) because,

    as the SEC explained in the Implementing Adopting Release, this

    information may be important to FSOC's systemic risk monitoring

    activities and to our investor protection mission.\207\

    ---------------------------------------------------------------------------

    \203\ See Questions 14 and 16 on Form PF.

    \204\ Advisers must report this information annually (or on

    their fourth quarter updates, in the case of large hedge fund and

    large liquidity fund advisers). This question will provide

    information indicating the illiquidity and complexity of a fund's

    portfolio and the extent to which the fund's value is determined

    using metrics other than market mechanisms. In a recent rulemaking

    release, FSOC identified this fair value categorization as the type

    of information that may be important for assessing liquidity risk

    and maturity mismatch, one factor in determining whether a nonbank

    financial company may pose systemic risk. See FSOC Second Notice,

    supra note 6. See also Rules Implementing Amendments to the

    Investment Advisers Act of 1940, Investment Advisers Act Release No.

    3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (``Implementing

    Proposing Release'') for the proposed version of Form ADV, Part 1A,

    section 7.B.(1)A. of Schedule D, question 12. See also FASB ASC 820-

    10-50-2b.

    We have modified this question from the proposal to expressly

    include definitions for Levels 1, 2 and 3 of the hierarchy. This

    change is intended to minimize ambiguity for advisers that do not

    utilize GAAP or another international accounting standard that

    requires the contemplated breakdown of assets and liabilities.

    Advisers that already prepare this breakdown for financial reporting

    purposes should respond to this question using the fair value

    hierarchy established under the applicable accounting standard.

    \205\ See the Implementing Proposing Release for the proposed

    version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D,

    question 17.

    \206\ See Implementing Adopting Release, supra note 11, at nn.

    246-247. Information filed on Form ADV is made available to the

    public through the Investment Adviser Public Disclosure (IAPD) Web

    site. In contrast, information filed on Form PF will generally

    remain confidential. See infra section II.D of this Release.

    \207\ Id. Several commenters responding to the Proposing Release

    also encouraged us to move these questions from Form ADV to Form PF.

    See IAA; MFA Letter; Seward Letter.

    ---------------------------------------------------------------------------

    Commenters responding to these questions as proposed on Form ADV

    argued that they would be difficult or burdensome to complete. With

    respect to Question 14, commenters argued that some private funds--

    especially non-U.S. funds--do not use generally accepted accounting

    principles (whether U.S. or international) or obtain audited financial

    statements, making the requirement to report a breakdown of fair values

    potentially costly.\208\ We understand, however, that the group of

    funds not using some form of generally accepted accounting standard is

    relatively small and that most private funds already utilize GAAP or

    other international accounting standards that require the contemplated

    breakdown of assets and liabilities.\209\ In addition, funds are not

    required to adopt GAAP for these purposes, and Question 14 does not

    require that the valuations within the breakdown of assets and

    liabilities be audited, or even determined in accordance with GAAP. For

    instance, an adviser could rely on the procedure for calculating fair

    value that is specified in a private fund's governing documents.\210\

    As a result, we are not convinced that the aggregate burden

    attributable to this reporting is unreasonable or even as significant

    as some commenters contend. The question has, however, been modified

    from the proposal to require a breakdown only by category and not by

    class.\211\ For advisers that do not already prepare this breakdown for

    financial reporting purposes, this revised approach will significantly

    reduce the work required to respond to this question.\212\ Such

    advisers may, nevertheless, incur additional costs to complete this

    question, and we are sensitive to these costs. We believe, however,

    that this question will provide valuable information for FSOC's

    systemic risk monitoring activities and our investor protection mission

    and that the associated burden is warranted.\213\

    ---------------------------------------------------------------------------

    \208\ Comment letter of the American Bar Association, Federal

    Regulation of Securities Committee and Private Equity and Venture

    Capital Committee (Jan. 31, 2011) (commenting on the Implementing

    Proposing Release, supra note 204) (``ABA Committees Implementing

    Proposal Letter''); comment letter of the Alternative Investment

    Management Association (Jan. 24, 2011) (commenting on the

    Implementing Proposing Release, supra note 204) (``AIMA Implementing

    Proposal Letter''); comment letter of Dechert LLP (Jan. 24, 2011)

    (commenting on the Implementing Proposing Release, supra note 204);

    comment letter of the Investment Adviser Association (Jan. 24, 2011)

    (commenting on the Implementing Proposing Release, supra note 204)

    (``IAA General Implementing Proposal Letter''); comment letter of

    Katten, Muchin, Rosenman, LLP (Jan. 24, 2011) (commenting on the

    Implementing Proposing Release, supra note 204); comment letter of

    George Merkl (Jan. 25, 2011) (commenting on the Implementing

    Proposing Release, supra note 204); comment letter of the National

    Venture Capital Association (Jan. 24, 2011) (commenting on the

    Implementing Proposing Release, supra note 204). Some of these

    commenters further contended that investors would bear any new audit

    costs or that advisers would not necessarily have audited numbers

    within 90 days after fiscal year end, when Form ADV is due. See,

    e.g., ABA Committees Implementing Proposal Letter; AIMA Implementing

    Proposal Letter; IAA General Implementing Proposal Letter.

    \209\ See, e.g., Implementing Proposing Release, supra note 204,

    at n. 56. Indeed, even in the context of this rulemaking, the

    Managed Funds Association suggested that we use a GAAP standard to

    measure advisers' assets, asserting that ``GAAP information is

    regularly reported across the industry and is a data point that most

    managers track in the ordinary course * * *'' MFA Letter. Others

    advisers may use international accounting standards requiring

    substantially similar information. In the Implementing Adopting

    Release, the SEC estimated that only about 3% of registered advisers

    have at least one private fund client that may not be audited. See

    Implementing Adopting Release, supra note 11, at nn. 634-636 and

    accompanying text.

    \210\ The fair valuation process need not be the result of a

    particular mandated procedure and the procedure need not involve the

    use of a third-party pricing service, appraiser or similar outside

    expert. The fund's governing documents may provide, for example,

    that the fund's general partner determines the fair value of the

    fund's assets. We would, however, expect that an adviser that

    calculates fair value in accordance with GAAP or another basis of

    accounting for financial reporting purposes will also use that same

    basis for purposes of determining the fair value of its assets and

    liabilities for this purpose.

    This question has been modified from the proposal to include a

    column titled ``cost-based'' for those assets and liabilities valued

    on the fund's financial statements using a measurement attribute

    other than fair value. This change recognizes that, even among

    advisers that already prepare a similar fair value breakdown for

    financial reporting purposes in accordance with GAAP, some assets

    and liabilities are not accounted for at fair value and, therefore,

    would not be included in the fair value hierarchy disclosures.

    \211\ In other words, although an adviser will need to provide

    the fund's aggregate assets and liabilities categorized as Level 1,

    2 or 3, it will not need to indicate the types of assets and

    liabilities in each of those categories.

    \212\ In addition, for advisers that already prepare this

    breakdown for financial reporting purposes, this revised approach

    will reduce the amount of information that needs to be re-entered on

    Form PF.

    \213\ See supra note 204 for a discussion of potential uses for

    this data.

    ---------------------------------------------------------------------------

    Commenters also expressed concern regarding the burden of reporting

    the types of beneficial owners investing in each fund, as required in

    Question 16.\214\ One of these commenters noted,

    [[Page 71146]]

    for instance, that many advisers either do not have this information or

    keep this information on a basis different from that set out in the

    Form.\215\ We believe, however, that many advisers to private funds are

    already collecting some of this beneficial ownership data as part of

    their processes for analyzing compliance with exemptions under the

    Investment Company Act and the Securities Act of 1933.\216\ To the

    extent this information is not currently collected, we do not

    anticipate that adding this to the information advisers already

    routinely collect from fund investors will impose a significant burden.

    We acknowledge, however, that advisers managing funds with securities

    outstanding prior to the adoption of Form PF would have to take

    additional steps in order to obtain this information because the

    investor diligence process will already have been completed. As a

    result, with respect to beneficial interests outstanding prior to March

    31, 2012, that have not been transferred on or after that date,

    advisers may respond to Question 16 using good faith estimates based on

    data available to them without making additional inquiries of

    investors.

    ---------------------------------------------------------------------------

    \214\ Comment letter of Debevoise & Plimpton, LLP (Jan. 24,

    2011) (commenting on the Implementing Proposing Release, supra note

    204) (``Debevoise Implementing Proposal Letter''); IAA General

    Implementing Proposal Letter; comment letter of Shearman & Sterling,

    LLP (Jan. 24, 2011) (commenting on the Implementing Proposing

    Release, supra note 204) (``Shearman Implementing Proposal

    Letter''). These commenters argued that advisers may have difficulty

    obtaining the required information for certain types of funds,

    particularly for funds established before the adoption of the

    reporting requirement.

    \215\ See IAA General Implementing Proposal Letter (stating that

    the reporting would require ``significant system enhancements'').

    \216\ 15 U.S.C. 77a.

    ---------------------------------------------------------------------------

    Question 16 has also been modified by adding a row for non-U.S.

    investors about which the adviser does not have and cannot reasonably

    obtain beneficial ownership information.\217\ This change acknowledges

    that obtaining beneficial ownership information about certain non-U.S.

    investors may be difficult for some advisers and ameliorates that

    burden by allowing advisers to report only the size of the ownership

    interest about which data is not available. We have also modified from

    the proposal some of the other categories in this question based on our

    consultations with staff representing FSOC's members. In particular, we

    have split out categories regarding individuals and pension plans to

    obtain a slightly more granular breakdown and added a category for

    sovereign wealth funds and foreign official institutions. We intend

    these changes to increase the usefulness of this data for the FRB's

    flow of funds report, a tool that is used for evaluating trends in and

    risks to the U.S. financial system.\218\

    ---------------------------------------------------------------------------

    \217\ An adviser may only report in this category beneficial

    ownership interests that are held through a chain involving one or

    more third-party intermediaries. If the beneficial owner has, for

    instance, simply interposed a wholly-owned holding company or trust

    as the legal owner, the interest would need to be reported in one of

    the other categories of beneficial owner.

    \218\ See infra note 475. See also Flow of Funds Accounts of the

    United States, available at http://www.federalreserve.gov/releases/z1/.

    ---------------------------------------------------------------------------

    The information that section 1b requires is designed to allow FSOC

    to monitor certain systemic trends for the broader private fund

    industry, such as how certain kinds of private funds perform and

    exhibit correlated performance behavior under different economic and

    market conditions and whether certain funds are taking significant

    risks that may have systemic implications. It is also intended to allow

    FSOC to monitor borrowing practices across the private fund industry,

    which may have interconnected impacts on banks and thus the broader

    financial system. Question 14, which requires that advisers report the

    assets and liabilities of each fund broken down using categories that

    are based on the fair value hierarchy established under GAAP, will

    provide information indicating the illiquidity and complexity of a

    fund's portfolio and the extent to which the fund's value is determined

    using metrics other than market mechanisms. In a recent rulemaking

    release, FSOC identified this fair value categorization as the type of

    information that may be important for assessing liquidity risk and

    maturity mismatch, one factor in determining whether a nonbank

    financial company may pose systemic risk.\219\ Finally, as noted above,

    certain of the information that section 1b requires is designed for use

    in the FRB's flow of funds report, a tool that is used for evaluating

    trends in and risks to the U.S. financial system.\220\

    ---------------------------------------------------------------------------

    \219\ See supra note 204.

    \220\ See supra note 218 and accompanying text.

    ---------------------------------------------------------------------------

    c. Section 1c of Form PF

    Section 1c is the final part of section 1 and requires advisers to

    report information regarding the hedge funds they manage, if any. This

    information includes each fund's investment strategies \221\ and the

    percentage of the fund's assets managed using high-frequency trading

    strategies.\222\ Advisers must also report each hedge fund's

    significant counterparty exposures (including identity of

    counterparties).\223\ In response to comments, we have modified the

    questions regarding counterparty exposures to clarify instructions and

    to reduce the reporting burden by more closely aligning the

    requirements with information already determined in connection with

    many contractual trading arrangements.\224\

    ---------------------------------------------------------------------------

    \221\ See Questions 19 and 20 on Form PF. One commenter,

    although advising caution in using strategy data to analyze industry

    trends, asserted that the reporting could provide valuable

    information about emerging systemic risk. See MSCI Letter (``a

    buildup of assets in one or a set of related strategies should cause

    the FSOC to question the market's capacity to support such a

    strategy * * *'' and create ``conditions where crowded trades could

    be unwound quickly, with a systemic impact.''). Another commenter

    suggested that we revise the question to allow reporting as of the

    end of the reporting period rather than over the course of the

    period and to permit advisers to report based on capital allocation

    rather than net asset value. See MFA Letter. We have revised the

    instructions to permit both these options. We have, however, also

    retained the requirement to report based on percentage of net asset

    value because we believe this will provide valuable information

    regarding leverage.

    \222\ See Question 21 on Form PF. Some commenters suggested

    removing this question because, in their view, it would not provide

    information relevant to systemic risk assessment. See, e.g., AIMA

    General Letter; MFA Letter. This information may, however, be

    important to understanding how hedge funds interact with the markets

    and their role in providing trading liquidity. We have modified the

    instructions to this question to make it easier for advisers to

    determine whether a particular fund is using a relevant strategy.

    \223\ See Questions 22 and 23 on Form PF.

    \224\ See MFA Letter. Specifically, these questions have been

    modified to (i) Clarify that exposure should be mark-to-market

    exposure (rather than potential exposure), (ii) narrow the

    conditions under which affiliates are treated as a single

    counterparty group in order to track legal and contractual

    arrangements among the parties, (iii) focus on counterparties

    generally (rather than just trading counterparties), (iv) reference

    exposures before taking into account collateral postings and (v) be

    less prescriptive regarding the treatment of assets in custody and

    unsettled trades.

    ---------------------------------------------------------------------------

    Finally, section 1c requires information regarding each hedge

    fund's trading and clearing practices in Question 24 and activities

    conducted outside the securities and derivatives markets in Question

    25. Some commenters supported the reporting required in Question

    24.\225\ However, one commenter expressed concern that the question as

    proposed would require burdensome manual aggregation.\226\ In response,

    we have simplified this question by requiring a less detailed

    breakdown, removing the sub-classes of securities and derivatives

    included in the proposal. We expect that, by requiring less refinement

    in the categories of investments, these changes will reduce the burden

    of responding to this question. The revisions also align this question

    with the similar questions in the FSA Survey and ESMA's proposed

    reporting template.\227\

    ---------------------------------------------------------------------------

    \225\ See AFL-CIO Letter; AFR Letter.

    \226\ See MFA Letter.

    \227\ See ESMA Proposal, supra note 33.

    ---------------------------------------------------------------------------

    The information required in section 1c is designed to enable FSOC

    to monitor systemic risk that could be transmitted through counterparty

    exposure, track how different strategies are affected by and correlated

    with different market stresses, and follow the

    [[Page 71147]]

    extent of private fund activities conducted away from regulated

    exchanges and clearing systems. This information could be important to

    understanding interconnectedness, which relates to the factors that

    FSOC must consider in making a determination to designate a nonbank

    financial company for FRB supervision under the Dodd-Frank Act.\228\

    ---------------------------------------------------------------------------

    \228\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    ---------------------------------------------------------------------------

    Several commenters agreed that some or all of the information

    required in section 1c would be valuable.\229\ For instance, one

    commenter, referring to the counterparty information, argued that

    ``[f]rom a systemic risk perspective, this is the most relevant

    information on the form, as it goes to the heart of the issue of

    connectivity.'' \230\ Some of these questions, including those about

    significant trading counterparty exposures and trading and clearing

    practices, are based on the FSA Survey, and some of the changes from

    the proposal discussed above more closely align this section with the

    FSA Survey and ESMA's proposed reporting template, which will promote

    international consistency in hedge fund reporting.\231\

    ---------------------------------------------------------------------------

    \229\ See AFL-CIO Letter; AFR Letter; MSCI Letter.

    \230\ See MSCI Letter; infra note 274.

    \231\ For example, ESMA's proposed reporting template would ask

    for identification of the hedge fund's top five counterparties in

    terms of net credit exposure. It would also ask for estimates of the

    percentage of the fund's securities or derivatives traded on a

    regulated exchange versus over the counter and the percentage of the

    fund's derivatives and repos cleared by a central clearing

    counterparty versus bilaterally. In addition, the template would

    require advisers to identify a predominant trading strategy using

    categories similar to those on Form PF. See ESMA Proposal, supra

    note 33.

    ---------------------------------------------------------------------------

    2. Section 2 of Form PF

    A private fund adviser must complete section 2 of Form PF if it had

    at least $1.5 billion in hedge fund assets under management as of the

    end of any month in the prior fiscal quarter.\232\ This section of the

    Form requires additional information regarding the hedge funds these

    advisers manage, which we have tailored to focus on relevant areas of

    financial activity that have the potential to raise systemic concerns.

    This information corresponds to areas of potential concern that were

    identified in the Proposing Release and is designed to assist FSOC in

    monitoring and assessing the extent to which stresses at hedge funds

    could have systemic implications.

    ---------------------------------------------------------------------------

    \232\ See Instruction 3 to Form PF; supra section II.A.4 of this

    Release.

    ---------------------------------------------------------------------------

    We are adopting Form PF with several changes to the information

    that advisers are required to report in section 2. These changes, which

    are discussed in detail below, are intended to respond to industry

    concerns while still providing FSOC the information it needs to monitor

    systemic risk across the hedge fund industry. In general, we expect

    that these changes will reduce the burden of responding to the Form and

    more closely align the Form with ESMA's proposed reporting template.

    a. Section 2a of Form PF

    Section 2a requires certain aggregate information about the hedge

    funds the adviser manages. For example, Question 26 requires the

    adviser to report the value of assets invested (on a short and long

    basis) in different types of securities and commodities (e.g.,

    different types of equities, fixed income securities, derivatives, and

    structured products). One commenter acknowledged the importance of

    collecting this information, agreeing that it ``could feed a variety of

    possible systemic risk indices.'' \233\ Some commenters, however,

    expressed concern regarding the amount of detail required in this

    question,\234\ and the commenter who generally supported this question

    nonetheless thought the asset classes placed too much emphasis on asset

    backed securities when compared with other asset classes.\235\ In

    response, the amount of detail regarding asset backed securities has

    been reduced so that the adviser need only provide a breakdown of

    mortgage backed securities, asset backed commercial paper,

    collateralized debt and loan obligations, other asset backed securities

    and other structured products.\236\ We continue to believe, however,

    that the remaining detail in this question is justified by the

    potential value of this information to FSOC's systemic risk monitoring

    activities.\237\ One commenter suggested that, instead of the proposed

    categories of assets, we allow advisers to report based on GAAP

    classifications under FAS 157.\238\ We do not believe this is a

    workable alternative because FAS 157 does not employ a standard set of

    asset classes, and the value of this information depends in part on the

    ability of regulators to make comparisons across funds.\239\ We also

    believe that our approach is more consistent with international hedge

    fund reporting standards.\240\

    ---------------------------------------------------------------------------

    \233\ MSCI Letter.

    \234\ See, e.g., ABA Committees Letter; MFA Letter.

    \235\ See MSCI Letter.

    \236\ This question has also been modified to separate foreign

    exchange derivatives used for investment from those used for hedging

    in response to a comment arguing that the proposed category should

    exclude foreign currency hedges. See MFA Letter. We have also added

    a category for physical real estate, which was not included in the

    FSA Survey but has been added in ESMA's proposed reporting template,

    in order to increase international consistency. See ESMA Proposal,

    supra note 33; see also supra note 31. In addition, following

    consultation with staff representing FSOC's members, we have

    separated investments in money market funds from other types of cash

    management funds and deposits from other types of cash equivalents.

    These changes are intended to provide additional detail regarding

    how cash equivalents are held because, at times of economic stress,

    these forms of holdings may have different implications for systemic

    risk.

    \237\ See Proposing Release, supra note 12, at text accompanying

    n. 120 for a discussion of potential uses for this data.

    \238\ See MFA Letter (this comment letter refers only to GAAP

    categories, but the commenter clarified on a call with staff that it

    was referring to the classifications under FAS 157).

    \239\ We note that nothing would prevent an adviser from relying

    on its classifications of assets for financial reporting purposes

    when completing Form PF to the extent that asset classes overlap.

    \240\ See FSA Survey; ESMA Proposal, supra note 33.

    ---------------------------------------------------------------------------

    Question 26 also requires the adviser to report the duration,

    weighted average tenor or 10-year bond equivalent of fixed income

    portfolio holdings (including asset backed securities). This differs

    from the proposal, which would have required all advisers to report

    duration. We are giving advisers the option of instead reporting

    weighted average tenor or 10-year bond equivalents because we

    understand from comments received that advisers use a wide range of

    metrics to measure interest rate sensitivity.\241\ We expect that this

    revised approach will reduce the burden of reporting because advisers

    will generally be able to rely on their existing practices when

    providing this information. This approach may limit the ability of

    regulators to make comparisons across advisers but will still yield

    valuable information about sensitivities to interest rate changes.\242\

    ---------------------------------------------------------------------------

    \241\ See ABA Committees Letter; MFA Letter.

    \242\ See MSCI Letter (arguing that duration information may not

    be valuable for making comparisons across the industry because there

    are many ways in which it may be calculated).

    ---------------------------------------------------------------------------

    Question 27 requires the adviser to report the value of turnover in

    certain assets classes (including listed equities, corporate bonds,

    sovereign bonds and futures) in the hedge funds' portfolios during the

    reporting period. This is intended to provide an indication of the

    adviser's frequency of trading in those markets and the amount of

    liquidity hedge funds contribute to those markets. The proposal would

    have required the adviser to calculate a single turnover rate for its

    entire hedge fund portfolio. However, commenters warned that this would

    prove difficult to calculate if an adviser trades in many different

    instrument types and, in particular, that the value of certain types of

    derivatives would overwhelm the influence of other instruments on the

    aggregate turnover

    [[Page 71148]]

    number.\243\ These commenters suggested instead that we ask for

    turnover by asset class, as was done in the FSA Survey (and, more

    recently, ESMA's proposed reporting template).\244\ We found these

    comments persuasive and have revised the question to request turnover

    in targeted asset classes.\245\

    ---------------------------------------------------------------------------

    \243\ See ABA Committees Letter; MFA Letter. Some commenters

    also argued that this question would not provide information

    valuable to monitoring systemic risk. See, e.g., ABA Committees

    Letter; Fidelity Letter; SIFMA Letter. However, based on our

    consultation with staff representing FSOC's members, we believe that

    turnover will provide important insight into the role of hedge funds

    in providing trading liquidity in certain markets.

    \244\ See FSA Survey, supra note 32; ESMA Proposal, supra note

    33.

    \245\ This is generally consistent with the international

    standards, though, unlike the FSA Survey and ESMA's proposed

    reporting template, we do not include derivatives (other than

    futures) because we have focused on assets classes where we believe

    turnover is currently most likely to occur at rates that raise

    systemic concerns.

    ---------------------------------------------------------------------------

    Question 27 has also been revised to request turnover data

    expressed as the value of transactions during the period rather than as

    a rate. This change has been made in order to make the data easier to

    compare to broader market data and to improve the comparability of the

    data with data that is or would be collected on the FSA survey and

    ESMA's proposed reporting template. In addition, we believe that the

    revised approach will be less burdensome for advisers than calculating

    the proposed portfolio turnover rate because advisers would have been

    required to determine the value of purchases and sales during the

    period as an intermediate step in calculating the portfolio turnover

    rate.\246\

    ---------------------------------------------------------------------------

    \246\ See the Proposing Release, supra note 12, for the proposed

    definition of ``turnover rate'' in the Glossary of Terms to Form PF.

    ---------------------------------------------------------------------------

    Finally, in response to Question 28, the adviser must report a

    geographical breakdown of investments held by the hedge funds it

    advises.\247\ This question has been modified from the proposal to

    require a less detailed breakdown (focusing on regions rather than

    countries) with additional, separate disclosure regarding investment in

    particular countries of interest. These changes are intended to respond

    to comments we received suggesting that advisers do not track this

    information in a manner consistent with our proposed, more granular

    geographical breakdown.\248\ We anticipate that the revised approach

    will reduce the burden of responding to this question because the less

    granular categories should allow more advisers to rely on their

    existing classifications.

    ---------------------------------------------------------------------------

    \247\ See Question 28 on Form PF.

    \248\ See ABA Committees Letter; MFA Letter. We have not, as one

    commenter suggested, used any particular service provider's

    methodology of categorizing geographical exposures because our staff

    understands, based on conversations with industry representatives,

    that there is no single methodology that hedge fund advisers employ.

    See MFA Letter (suggesting that we use ``Bloomberg's country of risk

    methodology''). In response to commenter concerns, we have removed

    some of the instructions regarding how the location of investments

    should be determined and expanded Instruction 15 to explain that the

    numerator should be calculated in the same manner as gross asset

    value. See MFA Letter. These changes allow advisers to rely on their

    internal methodologies and service provider reports in determining

    where to report investments and, by using gross asset value, rather

    than the more general value definition set out in Instruction 15,

    avoid the possibility that the reported value of certain derivative

    instruments would overwhelm the influence of other instruments. We

    have also added a ``supranational'' region, which is intended to

    capture investments that, because of their multinational scope,

    cannot meaningfully be placed in a single region.

    ---------------------------------------------------------------------------

    The information required in section 2a is designed to assist FSOC

    in monitoring asset classes in which hedge funds may be significant

    investors and trends in hedge funds' exposures. In particular, it is

    intended to allow FSOC to identify concentrations in particular asset

    classes (or in particular geographic regions) that are building or

    transitioning over time. It will also aid FSOC in examining large hedge

    fund advisers' role as a source of liquidity in different asset

    classes. In some cases, section 2a requires that the information be

    broken down into categories that are designed to facilitate use in the

    FRB's flow of funds report, a tool that is used for evaluating trends

    in and risks to the U.S. financial system.\249\ This information also

    is designed to address requirements under section 204(b)(3) of the

    Advisers Act specifying certain mandatory contents for records and

    reports that must be maintained and filed by advisers to private funds.

    For example, it will provide information about the types of assets held

    and trading practices.

    ---------------------------------------------------------------------------

    \249\ See supra note 218 and infra note 475. For example, in

    some cases the data is required to be broken down between issuers

    that are financial institutions and those that are not. The FRB

    publishes flow of funds data on a quarterly basis.

    ---------------------------------------------------------------------------

    One commenter expressed concern that advisers do not collect or

    calculate the exposure or turnover information that section 2a requires

    on a monthly basis or track geographical concentrations.\250\ As

    discussed above, we are adopting section 2a with several changes that

    are designed to address commenters' concerns and reduce the reporting

    burden, though we continue to believe that monthly exposure and

    turnover values will be important to allow FSOC to track trends in the

    industry and to discourage ``window dressing.'' \251\ We acknowledge

    that advisers may incur additional burdens in responding to these

    questions, and we have taken this into account in considering the costs

    and benefits of this rulemaking.\252\ The revised approach to the

    information required in section 2a strikes an appropriate balance

    between the burden imposed and need for the information.

    ---------------------------------------------------------------------------

    \250\ See ABA Committees Letter.

    \251\ See infra notes 285-292 and accompanying text. See also

    Proposing Release, supra note 12, at text accompanying n. 120 for a

    discussion of potential uses for this data.

    \252\ See infra sections IV.B and V of this Release (discussing

    increases in our burden and cost estimates in response to comments

    received).

    ---------------------------------------------------------------------------

    b. Section 2b of Form PF

    Consistent with our proposal, section 2b of Form PF requires a

    large hedge fund adviser to report certain additional information about

    any hedge fund it advises that has a net asset value of at least $500

    million as of the end of any month in the prior fiscal quarter (a

    ``qualifying hedge fund'').\253\ Two commenters disagreed with limiting

    reporting on section 2b to hedge funds with net assets of $500 million

    or more, arguing that information regarding smaller funds is important

    to monitoring certain group behaviors relevant to systemic risk and

    that smaller funds are equally likely to engage in improper activities,

    such as insider trading.\254\ Two other commenters argued for a higher

    threshold, suggesting that no fund of this size could be systemically

    important.\255\ We are adopting the

    [[Page 71149]]

    threshold as proposed because we believe it balances the needs of FSOC

    for information regarding relatively large hedge funds and the burdens

    of the more detailed reporting that section 2b requires.\256\

    ---------------------------------------------------------------------------

    \253\ See Instruction 3 to Form PF. An adviser is not required

    to complete section 2 with respect to a fund of hedge funds that

    satisfies the requirements described in Instruction 7 to Form PF.

    For purposes of determining whether a private fund is a qualifying

    hedge fund, the adviser must aggregate any parallel funds and funds

    that are part of the same master-feeder arrangement and, to the

    extent discussed above in section II.A.5 of this Release, any

    parallel managed accounts and relevant funds of related persons. See

    Instructions 5 and 6 to Form PF and the definition of ``qualifying

    hedge fund'' in the Glossary of Terms to Form PF. See also infra

    section II.C.5 of this Release for a discussion of parallel funds,

    master-feeder arrangements and aggregation for reporting purposes.

    This aggregation is intended to prevent an adviser from structuring

    its activities to avoid the reporting requirements.

    \254\ See AFL-CIO Letter; AFR Letter.

    \255\ See Fidelity Letter (arguing that the FSA threshold of

    $500 million, upon which the qualifying hedge fund threshold used in

    the Form PF is based, should be scaled to $2.4 billion based on the

    relative size of equity markets in the United States and the United

    Kingdom); SIFMA Letter. As discussed above, these comments appear to

    be based on the mistaken premise that the thresholds are intended to

    establish a cutoff separating the risky from the safe. To the

    contrary, the reporting thresholds are intended only to ensure that

    FSOC has sufficient context for its analysis while minimizing the

    burden imposed on advisers. We understand based on our staffs'

    consultation with staff representing FSOC's members that, in order

    to assess potential systemic risk posed by the activities of certain

    funds, FSOC would benefit from access to data about funds that, on

    an individual basis, may not be a source of systemic risk.

    \256\ In addition, certain of the information that would be

    obtained with respect to smaller hedge funds will already have been

    captured on an aggregate basis in section 2a.

    ---------------------------------------------------------------------------

    Also consistent with our proposal, Question 30 in section 2b

    requires reporting of the same information as that requested in section

    2a regarding exposure to different types of assets except, in this

    case, the information is reported for each qualifying hedge fund,

    rather than on an aggregate basis. This question has been modified from

    the proposal in the same manner as Question 26.\257\

    ---------------------------------------------------------------------------

    \257\ See supra notes 233-242 and accompanying text for a

    discussion of those changes.

    ---------------------------------------------------------------------------

    Section 2b also requires, on a per fund basis, data not requested

    in section 2a. For instance, the adviser must report information

    regarding the qualifying hedge fund's portfolio liquidity,\258\

    holdings of unencumbered cash \259\ and concentration of

    positions.\260\ These questions have been modified from the proposal to

    allow advisers to rely more on their own methodologies in responding,

    consistent with our changes to Instruction 15 to the Form, and to align

    the Form more closely with ESMA's proposed reporting template. A new

    Question 31 has been added, which requires the adviser to identify the

    reporting fund's base currency because this information is necessary to

    interpret responses to questions regarding foreign exchange exposures

    and the effect of changes in currency rates on the reporting fund's

    portfolio.\261\

    ---------------------------------------------------------------------------

    \258\ See Question 32 on Form PF. This question requires

    reporting of the percentage of the fund's portfolio capable of being

    liquidated within different time periods. See Proposing Release,

    supra note 12, at text accompanying n. 124 for a discussion of

    potential uses for this data. We have modified the instructions to

    this question to address commenter concerns by allowing advisers to

    rely more on their own methodologies in responding. See CCMR Letter;

    MFA Letter. We have also conformed the liquidity periods to those

    included in ESMA's proposed reporting template. See ESMA Proposal,

    supra note 33. One commenter objected to the question more

    generally, saying that the data is not currently tracked in the

    manner required and many firms would need to ``devote significant

    time and resources'' to building models and systems. TCW Letter.

    Another commenter, however, supported this question, noting that

    ``[t]his [information] is increasingly a request of hedge fund

    investors, particularly for comingled funds, where a given investor

    can be adversely impacted by a sudden large redemption by another

    party.'' MSCI Letter. We have taken into account both of these

    comments in considering the costs and benefits of this rulemaking

    and believe that the value of the information to FSOC warrants the

    potential burden imposed. See infra sections IV.B and V of this

    Release (discussing increases in our burden and cost estimates in

    response to comments received).

    \259\ See Question 33 on Form PF. In response to a comment we

    received, we have modified the definition of ``unencumbered cash''

    to include the value of ``overnight repos'' used for liquidity

    management (so long as the assets purchased are U.S. treasury

    securities or agency securities) because we are satisfied that, for

    this purpose, the liquidity of these positions is sufficiently cash-

    like. See MFA Letter.

    \260\ See Questions 34 and 35 on Form PF. Question 34 requires

    the total number of open positions held by the fund, and Question 35

    requires reporting, for each position that represents 5% or more of

    the fund's net asset value, of the position's portion of the fund's

    net asset value and sub-asset class. One commenter asked for

    clarification regarding the meaning of ``position,'' as used in

    these questions and elsewhere in the Form. See MFA Letter. In

    response, we have added an instruction to the Form explaining that

    advisers should determine whether a set of legal and contractual

    rights constitutes a ``position'' in a manner consistent with their

    internal recordkeeping and risk management procedures. See

    Instruction 15 to Form PF. This general instruction also supplants

    the detailed instructions proposed in Question 35, which have,

    accordingly, been removed.

    \261\ See also Question 30, regarding reporting fund exposures,

    and Question 42, regarding the effect of changes in certain market

    factors on the fund's portfolio.

    ---------------------------------------------------------------------------

    In Questions 36 through 38, the adviser must also provide

    information regarding the fund's collateral practices with

    counterparties.\262\ These questions have been significantly modified

    from the proposal in order to reduce the amount of detail required,

    including by removing the breakdown of collateral into initial and

    variation margin. These changes were made because a commenter persuaded

    us that ``[w]hile some of this information is potentially illuminating

    in the context of systemic risk * * * this section [as proposed] is

    more burdensome than it need be for its purpose.'' \263\ We have also

    modified these questions by requiring information regarding

    rehypothecation only with respect to the fund's aggregate collateral

    (rather than on a counterparty-by-counterparty basis). Commenters

    persuaded us that, because collateral is often fungible, this question

    would have been difficult to answer as proposed and that the additional

    detail is unnecessary.\264\ We anticipate that these changes will

    reduce the burden of responding to these questions.

    ---------------------------------------------------------------------------

    \262\ Questions 36 and 37 focus on collateral practices with the

    fund's top five counterparties, and Question 38 focuses on

    rehypothecation of the fund's aggregate collateral.

    \263\ MSCI Letter.

    \264\ See MFA Letter; MSCI Letter.

    ---------------------------------------------------------------------------

    Question 39 in section 2b also requires the adviser to report

    whether the hedge fund cleared any trades directly through a central

    clearing counterparty (``CCP'') during the reporting period. The

    proposal would have required the adviser to identify the three CCPs to

    which the fund has the greatest net counterparty credit exposure and

    provide the amount of that exposure. The information this question

    requires has been significantly reduced because commenters argued

    persuasively that the fund's relationship is typically with a swap

    dealer, futures commission merchant or direct clearing member who then

    interacts with the CCP rather than directly with a CCP and that, as a

    result, advisers ``may not have easy access to the data requested by

    this question.'' \265\ If responses to the revised question indicate

    that many reporting funds clear transactions directly through CCPs, the

    Commissions may consider in the future whether a question like the one

    proposed should be added to the Form. The change to Question 39 will

    reduce the burden of responding to the Form.

    ---------------------------------------------------------------------------

    \265\ MFA Letter; see also AIMA General Letter.

    ---------------------------------------------------------------------------

    The information that Questions 30 through 35 require is designed to

    assist FSOC in monitoring the composition of hedge fund exposures over

    time as well as the liquidity of those exposures. In addition,

    information reported in response to Questions 36 through 38 is intended

    to aid FSOC in its monitoring of credit counterparties' unsecured

    exposure to hedge funds as well as the hedge fund's exposure and

    ability to respond to market stresses. Finally, Question 39 is intended

    to assist FSOC in monitoring whether hedge funds and CCPs become

    increasingly interconnected over time. This information could be

    important to understanding, for instance, concentrations in the hedge

    fund industry and interconnectedness, which relate to the factors that

    FSOC must consider in making a determination to designate a nonbank

    financial company for FRB supervision under the Dodd-Frank Act.\266\

    ---------------------------------------------------------------------------

    \266\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    ---------------------------------------------------------------------------

    Section 2b also requires for each qualifying hedge fund data

    regarding certain hedge fund risk metrics. For instance, Question 40

    requires the adviser to report value at risk (``VaR'') for each month

    of the reporting period if, during the reporting period, the adviser

    regularly calculated a VaR metric for the qualifying hedge fund. One

    commenter confirmed that, ``[f]or all but the most illiquid strategies,

    hedge fund managers utilize these statistical measures [VaR and similar

    measures] for internal management and

    [[Page 71150]]

    for investor reporting.'' \267\ We are adopting this question

    substantially as proposed but with several clarifying changes.\268\

    ---------------------------------------------------------------------------

    \267\ See MSCI Letter. This commenter, however, cautioned that

    variability in the calculation of VaR will make meaningful

    aggregation of this information difficult and suggested removing the

    question. As proposed, in order to minimize the reporting burden

    associated with this question, we are not requiring that all

    advisers calculate VaR using a standardized set of assumptions.

    Although this approach may, as the commenter suggested, reduce the

    ability of regulators to make comparisons across hedge funds using

    this data, we believe that it will also provide valuable risk

    information with respect to individual funds.

    \268\ For instance, we have specified the units for reporting

    the confidence interval and weighting factor, combined the ``none''

    and ``equal'' weighting options and clarified that the monthly

    reporting should be at the end of each month and not for the span of

    the month.

    ---------------------------------------------------------------------------

    In Question 41, the adviser must also indicate whether there are

    risk metrics other than, or in addition to, VaR that it considers

    important to managing the fund's risks. Several commenters, noting that

    some advisers do not use VaR, expressed concern that a negative

    response regarding the use of VaR would create a presumption that the

    adviser is not prudently managing risk.\269\ This new question will

    give advisers an opportunity to indicate that they are using risk

    metrics other than VaR, and it will also provide valuable information

    regarding industry practice that may inform FSOC's understanding of

    risk management and future rulemakings.

    ---------------------------------------------------------------------------

    \269\ See IAA Letter; MFA Letter.

    ---------------------------------------------------------------------------

    In addition, Question 42 requires the adviser to report the impact

    on the fund's portfolio from specified changes to certain identified

    market factors, if regularly considered in formal testing in the fund's

    risk management, broken down by the long and short components of the

    qualifying hedge fund's portfolio. We are adopting this question with

    several changes from the proposal.\270\ Most of the changes clarify the

    instructions, but the question has also been modified so that an

    adviser may omit a response to any market factor that it did not

    regularly consider in formal testing even if the factor could have an

    impact on the fund's portfolio or the adviser considered it

    qualitatively.\271\ Under the proposal, an adviser would have been

    permitted to omit a response with respect to a market factor only if it

    did not regularly consider that factor in the reporting fund's risk

    management, whether in formal testing or otherwise. This change has

    been made in response to commenter concerns regarding the potential

    burden of responding to this question.\272\ We believe it will reduce

    that burden in the aggregate because fewer advisers will need to

    provide detailed responses and for individual advisers because those

    without existing quantitative models will not be required to build or

    acquire them in order to respond to the question.

    ---------------------------------------------------------------------------

    \270\ These include changes intended to clarify (1) How the

    fund's portfolio should be separated into long and short components,

    (2) the period over which the changes should be deemed to occur and

    (3) how to address factors that would otherwise become negative when

    a given change is applied. We have also modified the magnitude of

    some of the market factor changes that advisers must test in order

    to reflect recent data on the frequency with which such changes may

    occur.

    \271\ For this purpose, ``formal testing'' means that the

    adviser has models or other systems capable of simulating the effect

    of a market factor on the fund's portfolio, not that the specific

    assumptions outlined in the question were used in testing. If the

    factor is relevant but not tested, the adviser would need to check a

    box to that effect but would not report a numerical response.

    \272\ See, e.g., TCW Letter. This commenter wrote that ``[a]n

    analyst at the firm estimated that it would take one to two days for

    the firm's systems to compute and verify the data for one fund's

    response to [this question].'' Based on a discussion with this

    commenter, our staff understands that this estimate assumes that the

    fund holds securities that are very complex to model (such as non-

    agency mortgage backed securities) and that the modeling is intended

    to achieve a high level of confidence. Our staff further understands

    that for many other asset classes, this modeling would require

    minutes or hours rather than days and that, even for complex

    securities, advisers are able to obtain approximations about which

    they are reasonably confident in significantly less time. As a

    result, we believe that this commenter's estimate represents an

    effort significantly beyond the likely average burden this question

    requires. We also understand that the majority of the estimated one

    to two days represents time spent allowing the adviser's systems to

    calculate the responses and not employee hours. We note, finally,

    that we have significantly extended the filing deadline for large

    hedge fund advisers, reducing the likelihood that this task will

    compete with other tasks for the firm's computing resources and,

    consequently, the potential systems costs associated with this

    question. See supra section II.B.2 of this Release. Nonetheless, we

    have taken this comment into account in considering the costs and

    benefits of this rulemaking. See infra sections IV.B and V of this

    Release (discussing increases in our burden and cost estimates in

    response to comments received).

    ---------------------------------------------------------------------------

    Some commenters would have preferred removal of Question 42

    entirely, arguing that it would not yield information valuable to

    systemic risk monitoring because the variability in responses would

    hinder the ability of regulators to make comparisons across funds.\273\

    However, although variability in the assumptions used to complete the

    question may limit certain types of industry-wide comparisons, the

    variability itself, when taken together with other information

    collected on the Form, may provide important comparative information.

    Based on our staffs' consultations with staff representing FSOC's

    members, we believe this question will also provide valuable risk

    information with respect to individual funds.\274\

    ---------------------------------------------------------------------------

    \273\ See IAA Letter; TCW Letter.

    \274\ See Proposing Release, supra note 12, at text accompanying

    n. 127 (discussing potential uses for this data). One commenter

    suggested removing this question in favor of expanding the questions

    regarding counterparty exposures so that an adviser would complete

    those questions using multiple stress scenarios to probe for

    contingent exposures. See MSCI Letter; see also supra note 230. We

    believe at this time that the question we are adopting strikes a

    more appropriate balance between the value of the information

    collected and the burden of reporting.

    ---------------------------------------------------------------------------

    Item D of section 2b also requires reporting of certain financing

    information for each qualifying hedge fund in Question 43. This

    question includes a monthly breakdown of the fund's secured and

    unsecured borrowing, the value of the collateral and other credit

    support posted in respect of the secured borrowing and the types of

    creditors. Question 43 has been modified from the proposal to clarify

    instructions and remove some of the detail regarding collateral

    postings (including information regarding rehypothecation of

    collateral, which is now covered on an aggregate basis elsewhere in

    section 2b).\275\ We anticipate that these changes will reduce the

    burden of responding to this question. One commenter argued that

    advisers would have difficulty responding to the parts of Question 43

    relating to the fund's borrowings via prime brokerage because they lack

    transparency into the prime brokerage relationship.\276\ This comment

    suggests, however, that prime brokers do not currently report this

    information to advisers, not that advisers are unable to obtain this

    information on request. It should be noted that advisers have

    successfully completed the FSA Survey, which includes a similar

    breakdown of borrowings (though not the collateral information), and

    that the revisions we have made to this question simplify the

    collateral reporting requirements.

    ---------------------------------------------------------------------------

    \275\ See supra note 264 and accompanying text.

    \276\ See MFA Letter.

    ---------------------------------------------------------------------------

    An adviser must also report in Questions 44 and 45 the fund's total

    notional derivatives exposures as well as the net mark-to-market value

    of its uncleared derivatives positions and the value of the collateral

    and other credit support posted in respect of those uncleared

    positions. Under the proposal, advisers would have reported only the

    notional value of the fund's derivatives positions and the value of

    collateral posted in respect of those positions. One commenter pointed

    out, however, that the ``absolute value of notional values cannot

    meaningfully be compared to variation margin amounts'' because margin

    is posted based on net

    [[Page 71151]]

    market values rather than notional amounts.\277\ At this commenter's

    suggestion, this question has been revised to request both notional

    value and net market value. We have, however, narrowed the scope of

    transactions about which collateral information is requested.

    Specifically, an adviser is required to report market values and

    collateral values only for transactions that are not cleared by a CCP.

    We have taken this approach because we believe margining practices

    associated with cleared derivatives make obtaining information

    regarding collateral practices in connection with those transactions

    unnecessary. For the same reasons discussed above in connection with

    changes made to Questions 36 and 37, this question has been revised to

    reduce the amount of detail required regarding the posting of

    collateral.\278\ We anticipate that these changes will, on net, reduce

    the burden of responding to Questions 44 and 45 and, by allowing

    comparisons of collateral practices to net exposures, provide more

    valuable information for FSOC.

    ---------------------------------------------------------------------------

    \277\ See MFA Letter.

    \278\ See supra notes 262-264 and accompanying text.

    ---------------------------------------------------------------------------

    In response to Questions 46 and 47, the adviser must provide a

    breakdown of the term of the fund's available financing and the

    identity of, and amount owed to, each creditor to which the fund owed

    an amount equal to or greater than 5 percent of the fund's net asset

    value as of the reporting date.\279\ One commenter argued that the

    breakdown of available financing should not include uncommitted lines

    of credit because the lender may not provide them on request.\280\

    However, the extent to which financing may become rapidly unavailable

    is precisely the information this question is designed to elicit. We

    are adopting Questions 46 and 47 substantially in the form

    proposed.\281\

    ---------------------------------------------------------------------------

    \279\ To improve international consistency, we have conformed

    the liquidity periods in Question 46 to those included in ESMA's

    proposed reporting template. See ESMA Proposal, supra note 33. As

    explained above, we have moved Question 47 from section 1b to

    section 2b. See supra note 195.

    \280\ See MFA Letter.

    \281\ But see, supra note 279. We have also added an instruction

    to Question 47 clarifying that the precise legal name of the

    creditor is not required.

    ---------------------------------------------------------------------------

    The information that Item D of section 2b requires is designed to

    assist FSOC in monitoring, among other things, the qualifying hedge

    fund's leverage, the unsecured exposure of credit counterparties to the

    fund, and the committed term of that leverage, which may be important

    to monitor if the fund comes under stress. This information is also

    relevant to the fund's interconnectedness and leverage, which relate to

    factors that FSOC must consider in making a determination to designate

    a nonbank financial company for FRB supervision under the Dodd-Frank

    Act.\282\

    ---------------------------------------------------------------------------

    \282\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    ---------------------------------------------------------------------------

    Item E of section 2b requires the adviser to report information

    about each qualifying hedge fund's investor composition and liquidity.

    Questions 48 and 49, for example, require information regarding the

    fund's side-pocket and gating arrangements. These questions have been

    modified to increase their clarity and to require numerical responses

    regarding gating arrangements only if investors have withdrawal or

    redemption rights in the ordinary course, potentially reducing the

    number of advisers that need to respond to all elements of Question 49.

    Question 48 has also been expanded so that the adviser must check a box

    indicating whether additional assets have been placed in a side-pocket

    since the end of the prior reporting period. Without this additional

    information, FSOC would not be able to distinguish between advisers

    frequently using side-pockets and those who have simply had a side-

    pocket in place for an extended period. We believe, therefore, that

    this additional information will be important to interpreting the

    information proposed to be collected. We do not anticipate that this

    addition will significantly increase the burden of responding to this

    question because we believe that advisers already track assets held in

    side-pockets and the response only requires checking a box.

    Finally, the adviser must provide, in Question 50, a breakdown of

    the percentage of the fund's net asset value that is locked in for

    different periods of time. This question has been modified from the

    proposal to clarify instructions and to improve international

    consistency by conforming the liquidity periods to those included in

    ESMA's proposed reporting template.\283\

    ---------------------------------------------------------------------------

    \283\ See ESMA Proposal, supra note 33.

    ---------------------------------------------------------------------------

    The information that Item E of section 2b requires is designed to

    allow FSOC to monitor the hedge fund's susceptibility to failure

    through investor redemptions in the event the fund experiences stress

    due to market or other factors. For instance, this information,

    together with information collected in Questions 32 and 46 and

    elsewhere on the Form, is intended to assist FSOC in determining

    whether the fund may have a mismatch in the maturity or liquidity of

    its assets and liabilities, which relate to factors that FSOC must

    consider in making a determination to designate a nonbank financial

    company for FRB supervision under the Dodd-Frank Act.\284\

    ---------------------------------------------------------------------------

    \284\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    ---------------------------------------------------------------------------

    Certain data in the Form, while filed with the Commissions on an

    annual or quarterly basis, must be reported on a monthly basis to

    provide sufficiently granular data to allow FSOC to better identify

    trends and to mitigate ``window dressing.'' \285\ Nearly all of these

    requirements appear in section 2 of the Form, which only large hedge

    fund advisers complete. Although no commenters expressly supported the

    monthly data requirements within the Form, some commenters recommended

    that large advisers be required to file more often than quarterly,

    which could impose a greater burden than monthly reporting on a

    quarterly filing.\286\ Several commenters, however, suggested that

    advisers should only report data as of the end of the quarterly

    reporting period.\287\ One commenter, while conceding that some funds

    already report certain data to investors on a monthly basis, asserted

    that such monthly reporting involves significantly less data and is

    based on internal valuation estimates only.\288\ Other commenters

    doubted that advisers would engage in ``window dressing'' and argued

    that the increased costs to advisers would outweigh the benefits.\289\

    ---------------------------------------------------------------------------

    \285\ See, e.g., Questions 27, 28, 31, 33, 34, 43, 44, 45, and

    56 on Form PF.

    \286\ See AFL-CIO Letter; AFR Letter. See also CII Letter.

    \287\ See, e.g., BlackRock Letter (arguing that data should be

    provided, at most, on a quarterly basis); Fidelity Letter; MFA

    Letter; SIFMA Letter (proposing that reporting be no more frequent

    than quarterly, at least for private equity fund advisers).

    \288\ See BlackRock Letter.

    \289\ See, e.g., Fidelity Letter; MFA Letter.

    ---------------------------------------------------------------------------

    Based on our staffs' consultations with staff representing FSOC's

    members, we agree with commenters who argued that rapidly changing

    markets and portfolios merit collecting certain information more often

    than on a quarterly basis, and we are not persuaded that the large

    hedge fund and large liquidity fund advisers required to respond to

    these questions will be overwhelmed by this reporting. Also, as

    discussed above, we have made several changes that increase the ability

    of advisers to rely on their own internal methodologies in responding

    to the Form, which is expected to ease the burden of reporting monthly

    information by clarifying that advisers need not incur substantial

    additional

    [[Page 71152]]

    burdens in verifying the data.\290\ Finally, the monthly data about

    which commenters were most concerned were the monthly performance data

    proposed to be collected in section 1b of the Form.\291\ Question 17

    has, however, been modified to require monthly data only in the case

    that the adviser is already calculating it, making the reporting burden

    essentially one of copying information onto the Form.\292\ Accordingly,

    except as discussed above, we are adopting the requirements to report

    monthly information as proposed.

    ---------------------------------------------------------------------------

    \290\ See supra note 188 and text accompanying.

    \291\ See Question 17 on Form PF; supra section II.C.1.b of this

    Release.

    \292\ See supra nn. 198-202 and accompanying text.

    ---------------------------------------------------------------------------

    3. Section 3 of Form PF

    A private fund adviser must complete section 3 of Form PF if it

    manages one or more liquidity funds and had at least $1 billion in

    combined liquidity fund and registered money market fund assets under

    management as of the end of any month in the prior fiscal quarter.\293\

    Section 3 requires that the adviser report certain information for each

    liquidity fund it manages. The adviser must provide information

    regarding the fund's portfolio valuation and its valuation methodology,

    as well as the liquidity of the fund's holdings.\294\ This section also

    requires information regarding whether the fund, as a matter of policy,

    is managed in compliance with certain provisions of rule 2a-7 under the

    Investment Company Act, which is the principal rule through which the

    SEC regulates registered money market funds.\295\ Items B and C of

    section 3 require the adviser to report the amount of the fund's assets

    invested in different types of instruments, information for each open

    position of the fund that represents 5 percent or more of the fund's

    net asset value and information regarding the fund's borrowings.\296\

    Finally, Item D of section 3 asks for certain information regarding the

    fund's investors, including the concentration of the fund's investor

    base and the liquidity of its ownership interests.\297\

    ---------------------------------------------------------------------------

    \293\ See sections II.A.2 and II.B.4 of this Release for the

    definition of ``liquidity fund'' and a discussion of this reporting

    threshold. See also Instructions 3, 5, and 6 to Form PF. Form PF is

    a joint form between the SEC and the CFTC only with respect to

    sections 1 and 2 of the form. Section 3 of the form, which requires

    more specific reporting regarding liquidity funds, is only required

    by the SEC.

    \294\ See Questions 52, 53, and 55 on Form PF. The SEC has

    modified the instructions to Question 55 to clarify the units in

    which responses are to be reported and to clarify that the net asset

    value requested in parts (a) and (b) of Question 55 is the net asset

    value reported to current and prospective investors, which may or

    may not be the same as the net asset value reported in Questions 9

    and 55(c), which are based on fair value.

    \295\ See Question 54 of Form PF. The restrictions in rule 2a-7

    are designed to ensure, among other things, that money market funds'

    investing remains consistent with the objective of maintaining a

    stable net asset value. Many liquidity funds state in investor

    offering documents that the fund is managed in compliance with

    Investment Company Act rule 2a-7 even though that rule does not

    apply to liquidity funds.

    \296\ See Questions 56-59 on Form PF. The SEC has modified these

    questions from the proposal by removing instructions that have been

    supplanted by general instructions. See Instruction 15 to Form PF.

    \297\ See Questions 60-64 on Form PF. For purposes of these

    questions, beneficial owners are persons who would be counted as

    beneficial owners under section 3(c)(1) of the Investment Company

    Act or who would be included in determining whether the owners of

    the fund are qualified purchasers under section 3(c)(7) of that Act.

    (15 U.S.C. 80a-3(c)(1) or (7)). The SEC has made clarifying changes

    to the instructions to Question 64. To improve international

    consistency, the SEC has also conformed the liquidity periods in

    Question 64 to those included in ESMA's proposed reporting template.

    See ESMA Proposal, supra note 33.

    ---------------------------------------------------------------------------

    The information that section 3 requires is designed to assist FSOC

    in assessing the risks undertaken by liquidity funds, their

    susceptibility to runs, and how their investments might pose systemic

    risks either among liquidity funds or through contagion to registered

    money market funds. In addition, this information is intended to aid

    FSOC in monitoring leverage practices among liquidity funds and their

    interconnectedness to securities lending programs, which relate to

    factors that FSOC must consider in making a determination to designate

    a nonbank financial company for FRB supervision under the Dodd-Frank

    Act.\298\ Finally, this information will assist FSOC in assessing the

    extent to which the liquidity fund is being managed consistent with

    restrictions imposed on registered money market funds that might

    mitigate their likelihood of posing systemic risk. Commenters generally

    did not address the requirements of section 3, and the SEC is,

    therefore, adopting this section of the Form substantially as

    proposed.\299\

    ---------------------------------------------------------------------------

    \298\ See section 113(a) of the Dodd-Frank Act; FSOC Second

    Notice, supra note 6.

    \299\ The SEC received only one comment specifically addressing

    the requirements of section 3, which questioned whether requiring

    information regarding investor liquidity is appropriate considering

    the focus of liquidity funds on short-term investments. See MFA

    Letter. The SEC continues to believe that this information is

    important to understanding whether a fund may suffer a mismatch

    between the maturity of its obligations and the maturity of its

    investments and is, therefore, adopting this question substantially

    as proposed. But see, supra note 297.

    ---------------------------------------------------------------------------

    4. Section 4 of Form PF

    A private fund adviser must complete section 4 of Form PF if it had

    at least $2 billion in private equity fund assets under management as

    of the end of its most recently completed fiscal year.\300\ This

    section of the Form requires additional information regarding the

    private equity funds these advisers manage, which has been tailored to

    focus on relevant areas of financial activity that have the potential

    to raise systemic concerns. As discussed in the Proposing Release,

    information regarding the activities of private equity funds, certain

    of their portfolio companies and the creditors involved in financing

    private equity transactions may be important to the assessment of

    systemic risk.\301\ The Proposing Release identified two practices of

    private equity funds, in particular, that could result in systemic

    risk: (1) The potential shift of market risk to lending institutions

    when bridge loans cannot be syndicated or refinanced; \302\ and (2) the

    imposition of substantial leverage on portfolio companies that may

    themselves be systemically significant.\303\

    ---------------------------------------------------------------------------

    \300\ See Instruction 3 to Form PF. See also sections II.A.3 and

    II.B.4 of this Release for the definition of ``private equity fund''

    and a discussion of this reporting threshold. Form PF is a joint

    form between the SEC and the CFTC only with respect to sections 1

    and 2 of the form. Section 4 of the form, which requires more

    specific reporting regarding private equity funds, is only required

    by the SEC.

    \301\ See Proposing Release, supra note 12, at section II.A.3.

    \302\ See Proposing Release, supra note 12, at nn. 71-73 and

    accompanying text.

    \303\ See Proposing Release, supra note 12, at nn. 74-75 and

    accompanying text.

    ---------------------------------------------------------------------------

    Several commenters agreed that the activities identified in the

    Proposing Release are important areas of concern for monitoring

    systemic risk with respect to private equity funds.\304\ Other

    commenters, however, disagreed with the analysis, arguing that private

    equity funds and their advisers do not have the potential to pose

    systemic risk.\305\ These commenters affirmed that certain

    characteristics identified in the

    [[Page 71153]]

    Proposing Release, including limitations on investor redemption rights

    and an absence of significant leverage at the fund level, are common to

    private equity funds and tend to mitigate their potential for systemic

    risk.\306\

    ---------------------------------------------------------------------------

    \304\ See, e.g., AFL-CIO Letter (pointing to evidence that the

    use of so-called ``covenant-lite'' loans is again expanding); CPIC

    Letter (noting the importance of gathering information about all

    types of entities using leverage and asserting that, ``the

    Commission should not be pressured to scale back further or provide

    broad exemptions for private equity funds.''); Merkl February

    Letter. See also Proposing Release, supra note 12, at n. 73 and

    accompanying text (discussing risks associated with ``covenant-

    lite'' loans).

    \305\ See, e.g., Olympus Letter; PEGCC Letter (contending that

    private equity funds are like any other shareholders and that they

    should not be singled out for ``a discriminatory and onerous

    reporting regime designed to monitor how their portfolio companies

    use leverage.''); SIFMA Letter.

    \306\ See, e.g., Olympus Letter; PEGCC Letter; SIFMA Letter.

    These commenters also noted that these funds typically focus on

    long-term investments and are legally isolated from the financial

    obligations of portfolio companies and other funds. They also

    asserted that private equity funds and their investments tend to be

    relatively small and are not interconnected. See also Proposing

    Release, supra note 12, at n. 77 and accompanying text.

    ---------------------------------------------------------------------------

    The SEC acknowledges that several potentially mitigating factors

    suggest that private equity funds may have less potential to pose

    systemic risk than some other types of private funds, and this has been

    taken into account in requiring substantially less information with

    respect to private equity funds than with respect to hedge funds or

    liquidity funds. The design of Form PF, however, is not intended to

    reflect a determination as to where systemic risk exists but rather to

    provide empirical data to FSOC with which it may make a determination

    about the extent to which the activities of private equity funds or

    their advisers pose such risk.\307\ Based on SEC staff's consultation

    with staff representing FSOC's members, the SEC continues to believe

    that targeted information regarding private equity leverage practices

    may be important to FSOC's monitoring of systemic risk.\308\

    ---------------------------------------------------------------------------

    \307\ One industry observer has explained the importance of

    transparency in allowing regulators to examine where risks may exist

    in the alternative investment industry, arguing that, ``[r]egulation

    has to aim at trying to prevent the next crisis, not simply cleaning

    up the mess from the previous one. It may indeed be the case that

    the alternative investment industry is too small and/or is leveraged

    at too low a level, at least relative to average bank sector

    leverage, to be a likely source of future systemic harm but the

    opacity issue, which has for a long time hampered supervisors'

    efforts to understand the industry's significance, makes this hard

    to tell. Requiring the industry to submit at least to disclosure and

    transparency obligations that help regulators and central banks do a

    better job of identifying systemic risk concentrations in the system

    is a reasonable step forward. Resistance to the imposition of

    obligations of this sort would merely serve to suggest that there is

    something to hide.'' Eilis Ferran, The Regulation of Hedge Funds and

    Private Equity: A Case Study in the Development of the EU's

    Regulatory Response to the Financial Crisis, University of Cambridge

    and European Corporate Governance Institute (Feb. 2011).

    \308\ See Proposing Release, supra note 12, at section II.A.3.

    ---------------------------------------------------------------------------

    One commenter argued that, if the SEC is concerned only with the

    use of leverage, the information could be gathered more effectively

    from the financial institutions that lend the money or, in the case of

    leveraged portfolio companies that are themselves financial

    institutions, incur the debt.\309\ Staff representing FSOC's members

    has explained to the SEC's staff, however, that collecting leverage

    data from private equity advisers has several potential advantages.

    First, it provides a more complete accounting than other data sources

    of the leverage that may have been imposed on portfolio companies.

    Although portfolio companies may take on leverage through financial

    institutions regulated in the United States, they may also incur

    leverage from other sources, including hedge funds and foreign

    financial institutions. As a result, portfolio company leverage

    information collected through U.S. bank regulators would likely provide

    an incomplete picture and may fail to capture trends with potential

    systemic importance, such as greater reliance on leverage obtained from

    outside the regulated financial sectors or from foreign sources. Even

    if regulators are only concerned about the risks that a portfolio

    company's debt may impose on financial institutions, those risks cannot

    be fully understood without information regarding the company's entire

    balance sheet, including debt from other sources.

    ---------------------------------------------------------------------------

    \309\ See PEGCC Letter.

    ---------------------------------------------------------------------------

    Second, because the SEC understands that private equity advisers

    routinely track the leverage of their portfolio companies, collecting

    data directly from these advisers is likely to be the most efficient

    means of monitoring portfolio company leverage. In contrast, obtaining

    portfolio company leverage information through bank regulators could be

    less efficient because (1) Banks are less likely to be actively

    tracking leverage information specifically attributable to portfolio

    companies, (2) bank regulators do not have a single collection

    mechanism for this data and (3) data may need to be aggregated across

    several different bank regulators.

    Third, collecting leverage data from private equity advisers would

    fill gaps in the data that could appear if FSOC were to attempt

    aggregating information from many different U.S. bank regulators. It

    also provides a check on any data that may be collected from other

    sources. Indeed, other types of information that the SEC collects from

    investment advisers has already proven valuable in cross-checking data

    that bank regulators collect.\310\

    ---------------------------------------------------------------------------

    \310\ The SEC's Form N-MFP, for instance, has provided a

    valuable check against information that banking regulators collect

    with respect to portfolio holdings of registered money market funds.

    ---------------------------------------------------------------------------

    Fourth, FSOC has stated that it is concerned that leveraged lending

    practices can raise systemic risk concerns.\311\ Private equity

    advisers are repeat participants in the leveraged loan market (often

    more so than other types of companies that access credit through these

    markets), and tracking their portfolio company leverage practices can

    signal trends in emerging risks in those markets. Indeed a recent study

    found that the private equity fund sponsors' bank relationships were an

    important factor in explaining the favorable loan terms obtained by

    private equity portfolio companies, both as a result of the private

    equity sponsor's repeat interactions reducing information asymmetries

    and the competition among banks to cross-sell other business to the

    private equity sponsor.\312\ This empirical data suggests that

    collecting data on private equity portfolio company leverage trends in

    fact may be the most efficient way to collect systemic risk trend data

    for the broader leveraged loan market because private equity portfolio

    companies' practices in this area may be a bellwether due to their

    sponsors' repeat player status. In addition, this approach appears

    consistent with an emerging international approach favoring broad

    monitoring of credit intermediation across the economy.\313\

    ---------------------------------------------------------------------------

    \311\ See FSOC 2011 Annual Report, supra note 19, at 12

    (``Although it is difficult to make definitive determinations

    regarding the appropriateness of risk pricing, there have been some

    indicators that credit underwriting standards might have overly

    eased in certain products, such as leveraged loans, reflecting the

    dynamics of competition among arranging bankers. * * * Sound

    underwriting standards, which were abandoned in the run-up to the

    crisis, will encourage greater investor confidence and stability in

    the market'').

    \312\ See Victoria Ivashina & Anna Kovner, The Private Equity

    Advantage: Leveraged Buyout Firms and Relationship Banking, 24 Rev.

    of Fin. Studies 7 (July 2011).

    \313\ See FSB Shadow Banking Report, supra note 28; ESMA

    Proposal, supra note 33; Proposing Release, supra note 12, at n. 33.

    See also CPIC Letter (affirming the importance of gathering

    information about all types of entities using leverage).

    ---------------------------------------------------------------------------

    The SEC is, however, adopting Form PF with several significant

    changes that reduce the frequency of reporting with respect to private

    equity funds, as discussed above, and more closely align the required

    reporting with information available on portfolio company financial

    statements. These changes, which are discussed in detail below and in

    section II.B of this Release, are intended to respond to industry

    concerns while still providing FSOC the information it needs to monitor

    the potential for systemic risk across the private fund industry. In

    general, we expect that these changes will reduce the burden of

    responding to the Form.

    [[Page 71154]]

    Section 4 requires that large private equity advisers report

    certain information for each private equity fund they manage, including

    certain information about guarantees of portfolio company obligations

    and the leverage of the portfolio companies that the fund controls.

    Specifically, Question 66 requires information about the amount of

    guarantees that the adviser, the reporting fund or any other related

    person of the adviser issues in respect of a portfolio company's

    obligations.\314\ Questions 67 through 70 require the adviser to

    report: (1) The weighted average debt-to-equity ratio of controlled

    portfolio companies in which the fund invests, (2) the range of that

    debt-to-equity ratio among these portfolio companies and (3) the

    aggregate gross asset value of these portfolio companies.\315\

    ---------------------------------------------------------------------------

    \314\ Following consultation with staff representing FSOC's

    members, we have broadened the scope of this question to capture

    guarantees from the adviser and its related persons rather than just

    those from the reporting fund. This change is intended to allow FSOC

    and other regulators to confirm broadly whether the adviser or the

    reporting fund has direct or indirect exposure to the liabilities of

    portfolio companies in excess of the amounts of their investments.

    In addition to Question 66, the proposal included a separate

    question regarding the fund's borrowings, but a commenter pointed

    out that this substantially duplicated the information requested in

    Question 13 on Form PF, so the proposed question is not being

    adopted. See comment letter of George Merkl (Mar. 23, 2011). See

    also the Proposing Release, supra note 12, for the proposed version

    of Question 57 on Form PF.

    \315\ A ``controlled portfolio company'' is defined as a

    portfolio company that is controlled by the private equity fund,

    either alone or together with the private equity fund's affiliates

    or other persons that are, as of the reporting date, part of a club

    or consortium investing in the portfolio company. ``Control'' has

    the same meaning as used in Form ADV and generally means the power,

    directly or indirectly, to direct the management or policies of a

    person, whether through ownership of securities, by contract, or

    otherwise. See Glossary of Terms to Form PF; Glossary of Terms to

    Form ADV. One commenter suggested the average ratio required in

    Question 68 would be unreliable because it depends on accounting

    methodologies, which may vary. See PEGCC Letter. While this measure

    may have its limitations, the SEC believes, based on its staff's

    consultations with staff representing FSOC's members, that this

    question will provide an important indication of portfolio company

    leverage and is not aware of an alternative that would yield more

    reliable information without imposing additional burdens on

    advisers. Question 70, regarding the aggregate gross asset value of

    the reporting fund's controlled portfolio companies, has been added

    to provide a measure of scale as context for interpreting the

    average leverage ratio. An adviser must already know this

    information in order to calculate the average leverage ratio, so the

    SEC does not expect this addition to meaningfully increase the

    reporting burden.

    ---------------------------------------------------------------------------

    In addition, Questions 71 and 72 ask for the total amount of

    borrowings categorized as current liabilities and as long-term

    liabilities on the most recent balance sheets of the fund's controlled

    portfolio companies. These questions replace the question that the SEC

    proposed, which would have required advisers to report the maturity

    profile of the debt of its private equity funds' controlled portfolio

    companies.\316\ This change has been made in response to commenter

    concerns regarding the burden of gathering the data that would have

    been required to respond to the question as proposed.\317\ The SEC

    anticipates that these changes will reduce the burden of responding to

    these questions because less information is required and the

    information will be readily available on the financial statements of

    the fund's controlled portfolio companies.

    ---------------------------------------------------------------------------

    \316\ See the Proposing Release, supra note 12, (discussing the

    proposed version of Question 62 on Form PF).

    \317\ See IAA Letter.

    ---------------------------------------------------------------------------

    In response to Questions 73 and 74, the adviser must report the

    portion of the controlled portfolio companies' borrowings that is

    payment-in-kind or zero coupon,\318\ and whether the fund or any of its

    controlled portfolio companies experienced an event of default on any

    of its debt during the reporting period.\319\ In addition, Question 75

    requires the adviser to provide the identity of the institutions

    providing bridge financing to the adviser's controlled portfolio

    companies and the amount of that financing. Question 76 requires

    certain information if the fund controls any financial industry

    portfolio company, such as the portfolio company's name, its debt-to-

    equity ratio, and the percentage of the portfolio company beneficially

    owned by the fund.\320\ Question 79 requires the adviser to report

    whether any of its related persons co-invest in any of the fund's

    portfolio companies.

    ---------------------------------------------------------------------------

    \318\ See Question 73 on Form PF. One commenter argued that the

    SEC should not include this question because it has not identified

    any systemic risk associated with this type of indebtedness. See

    PEGCC Letter. The indebtedness in question, however, allows the

    borrower to increase its leverage by deferring interest payments

    (all at a time subsequent to the creditors making their credit

    determinations) and may result in additional risk being shifted to

    systemically important financial institutions or other holders of

    the debt.

    \319\ See Question 74 on Form PF. One commenter suggested this

    question should cover only controlled portfolio companies rather

    than all of the fund's portfolio companies, and the SEC has made

    this change. See ABA Committees Letter; see also infra discussion

    accompanying notes 324-327. This commenter also suggested that

    potential events of default that have not ripened into events of

    default should not require an affirmative response, and the SEC has

    modified the instructions to this address this comment.

    \320\ A ``financial industry portfolio company'' generally is

    defined as a nonbank financial company, as defined in the Dodd-Frank

    Act, or a bank, savings association, bank holding company, financial

    holding company, savings and loan holding company, credit union, or

    other similar company regulated by a federal, state or foreign

    banking regulator. See Glossary of Terms to Form PF. One commenter

    suggested this question should cover only controlled portfolio

    companies rather than all of the fund's portfolio companies, and the

    SEC has made this change. See ABA Committees Letter; see also IAA

    Letter; see also infra discussion accompanying notes 324-327. The

    SEC has added a requirement to report the gross asset value of each

    financial industry portfolio company to provide a measure of scale

    as context for interpreting the leverage ratio. This information

    should be readily available on portfolio company financial

    statements, so the SEC does not expect this addition to meaningfully

    increase the reporting burden.

    ---------------------------------------------------------------------------

    The information that Question 66 requires is intended to provide

    FSOC information regarding the exposure of large private equity

    advisers and their funds to the risks of their portfolio companies. The

    information that Questions 67 through 76 require is designed to allow

    FSOC to assess the potential exposure of banks and other lenders to the

    portfolio companies of funds managed by large private equity advisers

    and to monitor whether trends in those areas could have systemic

    implications. Information reported in response to Question 76 is also

    intended to allow FSOC to monitor investments by the funds of large

    private equity advisers in companies in the financial industry that may

    be particularly important to the stability of the financial system.

    Finally, Questions 77 and 78 require a breakdown of the fund's

    investments by industry and by geography.\321\ Two commenters suggested

    removing these questions, arguing that the value of the information

    would not exceed the burden of reporting it.\322\ Regulators, however,

    will be able to use this information to monitor global and industry

    concentrations among private equity funds, and concentration is one of

    the factors that FSOC must consider in making a determination to

    designate a nonbank financial company for FRB supervision under the

    Dodd-Frank Act.\323\ In addition, the information required is largely

    based on the financial statements of the controlled portfolio companies

    and, therefore, should be readily available to the adviser.

    ---------------------------------------------------------------------------

    \321\ The SEC has modified the instructions to these questions

    to reflect clarifications suggested by a commenter. See Merkl

    February Letter. Question 78, which requires a geographical

    breakdown of investments in portfolio companies, has also been

    modified for reasons discussed above. See supra note 247 and

    accompanying text.

    \322\ See Merkl February Letter; PEGCC Letter.

    \323\ See section 113(a) of the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    Most of the reporting in section 4 relates to portfolio companies

    because the SEC understands that leverage in private equity structures

    is generally incurred at the portfolio company level.

    [[Page 71155]]

    This reporting is limited to controlled portfolio companies, rather

    than portfolio companies generally, to ensure that advisers are able to

    obtain the relevant information without incurring potentially

    substantial additional burdens. Several commenters suggested, however,

    that the proposed standard of ``control'' was too low, leaving advisers

    responsible for reporting information they may not be entitled to

    access.\324\ The SEC is not persuaded that advisers are likely to have

    such difficulty obtaining the information required concerning

    controlled portfolio companies because the majority of this information

    is available from the financial statements of the portfolio companies

    or relates to the fund's own investments in the portfolio

    companies.\325\ In addition, modifications from the proposal have

    replaced a requirement for information that may not have been available

    on portfolio company financial statements with a requirement for

    information that will appear on any audited portfolio company's

    financial statements.\326\ Accordingly, the SEC is adopting the

    definition of ``controlled portfolio company'' substantially as

    proposed.\327\

    ---------------------------------------------------------------------------

    \324\ See, e.g., ABA Committees Letter (suggesting instead ``a

    standard of majority voting control''); IAA Letter (asserting that

    an adviser may not have access to some of the required data ``even

    if the fund owns 50% or more of such portfolio company''); PEGCC

    Letter. See supra note 315 (discussing the definition of

    ``control.)''

    \325\ Advisers may not know the North American Industry

    Classification System, or NAICS, codes for its controlled portfolio

    companies, but this information should be readily obtainable from

    the company. The details regarding bridge loans required in Question

    75 on the Form may not be available directly from a controlled

    portfolio company's financial statements, but it is likely either

    that the adviser was involved in arranging or consenting to the

    loans (because the loans were an important part of the fund's

    investment in the company or because they were incurred after the

    fund obtained a controlling interest in the company) or were the

    subject of the fund's due diligence prior to investing in the

    company.

    \326\ See supra note 317 and accompanying text.

    \327\ The SEC has, however, made one change to this definition,

    which clarifies that whether a group is a club or consortium for

    this purpose should be determined as of the reporting date. In other

    words, the adviser need not aggregate the control rights of another

    fund with those of its own solely because, at some point prior to

    the reporting date, such as the date of acquisition, they formed a

    club or consortium.

    ---------------------------------------------------------------------------

    Two commenters supported collecting the information proposed to be

    required in section 4.\328\ However, they also argued that the required

    reporting should not be restricted to controlled portfolio companies

    but should extend to all of the fund's portfolio companies. In their

    view, the largest portfolio companies are the least likely to have a

    controlling shareholder and the most likely to pose systemic risk. The

    SEC is sensitive to this concern but believes at this time that

    requesting information regarding all portfolio companies would increase

    the difficulty of responding to section 4 without a sufficiently large

    corresponding increase in the value of the data collected.

    ---------------------------------------------------------------------------

    \328\ See AFL-CIO Letter; AFR Letter.

    ---------------------------------------------------------------------------

    5. Aggregation of Master-Feeder Arrangements, Parallel Fund Structures

    and Parallel Managed Accounts

    For purposes of reporting information on Form PF, an adviser may

    provide information regarding master-feeder arrangements and parallel

    fund structures in the aggregate or separately, provided that it does

    so consistently throughout the Form.\329\ For example, an adviser may

    complete either a single section 1b for all of the funds in a master-

    feeder arrangement or a separate section 1b for each fund in the

    arrangement. Any adviser choosing to aggregate funds in the reporting

    must check the ``yes'' box in Question 6 or Question 7, as applicable,

    and, in the case of Question 7, provide the additional information

    required with respect to the other funds in the parallel fund

    structure.\330\ Advisers are not required to report information

    regarding parallel managed accounts other than to complete Question 11

    in section 1b of the Form.\331\

    ---------------------------------------------------------------------------

    \329\ See Instructions 5 and 6 to Form PF. The aggregation

    requirements for reporting purposes differ from the aggregation

    requirements for determining whether the adviser or any fund meets a

    reporting threshold. See supra section II.A.5. A ``parallel fund

    structure'' is a structure in which one or more private funds

    pursues substantially the same investment objective and strategy and

    invests side by side in substantially the same positions as another

    private fund. See Glossary of Terms to Form PF. A ``master-feeder

    arrangement'' is an arrangement in which one or more funds (``feeder

    funds'') invest all or substantially all of their assets in a single

    private fund (``master fund'').

    \330\ See also supra note 193 and accompanying text.

    \331\ See Instructions 5 and 6 to Form PF. See also supra note

    197.

    ---------------------------------------------------------------------------

    These aggregation requirements have been modified from the

    proposal, which would have required advisers to report aggregated

    information regarding master-feeder arrangements and parallel managed

    accounts but separate information regarding parallel funds. One

    commenter recommended that ``the Commissions instead provide managers

    with flexibility to provide information about private funds in a manner

    that best represents the activities of their funds and is consistent

    with their internal reporting procedures, while providing complete

    information to regulators.'' \332\ We are persuaded that requiring

    advisers to aggregate or disaggregate funds in a manner inconsistent

    with their internal recordkeeping and reporting may impose additional

    burdens and that, so long as the structure of those arrangements is

    adequately disclosed, a prescriptive approach to aggregation is not

    necessary.

    ---------------------------------------------------------------------------

    \332\ MFA Letter.

    ---------------------------------------------------------------------------

    With respect to parallel managed accounts, commenters encouraged us

    not to require aggregation for reporting purposes or at least limit the

    questions that require advisers to aggregate parallel managed accounts

    for reporting purposes.\333\ In particular, these commenters argued

    that aggregating these funds for reporting purposes would be difficult

    and ``result in inconsistent and misleading data'' because their

    characteristics are often somewhat different from the funds with which

    they are managed.\334\ We are persuaded that including parallel managed

    accounts in the reporting may reduce the quality of data while imposing

    additional burdens on advisers. As a result, the instructions have been

    revised so that advisers are not required to aggregate parallel managed

    accounts with their private funds for reporting purposes.\335\ A

    question has, however, been added to the Form requiring advisers to

    report the total amount of parallel managed accounts related to each

    reporting fund.\336\ This will allow FSOC to take into account the

    greater amount of assets an adviser may be managing using a given

    strategy for purposes of analyzing the data reported on Form PF.

    ---------------------------------------------------------------------------

    \333\ See, e.g., IAA Letter; TCW Letter. One commenter agreed

    that the proposal appropriately required reporting on parallel

    managed accounts. See AIMA General Letter. For the reasons discussed

    below, however, we are persuaded that the better approach is not to

    require aggregation of these accounts for reporting purposes.

    \334\ IAA Letter. See also MFA Letter.

    \335\ See Instructions 5 and 6 to Form PF. The approach we are

    adopting is also similar to the approach used in the FSA Survey,

    which asks for only limited information regarding ``strategy

    assets.'' See IAA Letter.

    \336\ See question 12 of Form PF.

    ---------------------------------------------------------------------------

    D. Confidentiality of Form PF Data

    Form PF elicits non-public information about private funds and

    their trading strategies, the public disclosure of which could

    adversely affect the funds and their investors. The SEC does not intend

    to make public Form PF information identifiable to any particular

    adviser or private fund, although the SEC may use Form PF information

    in an enforcement action. The Dodd-Frank Act amends the Advisers Act to

    preclude the SEC from being compelled to reveal this information except

    in very limited

    [[Page 71156]]

    circumstances.\337\ Similarly, the Dodd-Frank Act exempts the CFTC from

    being compelled under FOIA to disclose to the public any information

    collected through Form PF and requires that the CFTC maintain the

    confidentiality of that information consistent with the level of

    confidentiality established for the SEC in section 204(b) of the

    Advisers Act.\338\ The Commissions will make information collected

    through Form PF available to FSOC, as the Dodd-Frank Act requires,

    subject to the confidentiality provisions of the Dodd-Frank Act.\339\

    ---------------------------------------------------------------------------

    \337\ See Proposing Release, supra note 12, at n.39.

    \338\ Form PF data is filed with the SEC, and made available to

    the CFTC, pursuant to section 204(b) of the Advisers Act, making

    this data subject to the confidentiality protections applicable to

    data required to be filed under that section.

    \339\ See section 204(b) of the Advisers Act.

    ---------------------------------------------------------------------------

    The Dodd-Frank Act contemplates that Form PF data may also be

    shared with other Federal departments or agencies or with self-

    regulatory organizations, in addition to the CFTC and FSOC, for

    purposes within the scope of their jurisdiction.\340\ In each case, any

    such department, agency or self-regulatory organization would be exempt

    from being compelled under FOIA to disclose to the public any

    information collected through Form PF and must maintain the

    confidentiality of that information consistent with the level of

    confidentiality established for the SEC in section 204(b) of the

    Advisers Act.\341\ Prior to sharing any Form PF data, the SEC also

    intends to require that any such department, agency or self-regulatory

    organization represent to us that it has in place controls designed to

    ensure the use and handling of Form PF data in a manner consistent with

    the protections established in the Dodd-Frank Act.\342\

    ---------------------------------------------------------------------------

    \340\ See section 204(b)(8)(B)(i) of the Advisers Act.

    \341\ See sections 204(b)(9) and (10) of the Advisers Act.

    \342\ This would be consistent with the SEC's current practice

    of requiring that it receive, prior to sharing nonpublic information

    with other regulators, ``such assurances of confidentiality as the

    [SEC] deems appropriate.'' See section 24(c) of the Exchange Act and

    rule 24c-1 thereunder.

    ---------------------------------------------------------------------------

    Certain aspects of the Form PF reporting requirements also help to

    mitigate the potential risk of inadvertent or improper disclosure. For

    instance, because data on Form PF generally could not, on its own, be

    used to identify individual investment positions, the ability of a

    competitor to use Form PF data to replicate a trading strategy or trade

    against an adviser is limited.\343\ In addition, the deadlines for

    filing Form PF have, in most cases, been significantly extended from

    the proposal.\344\ Some commenters supported these extensions in part

    because filings will, as a result, generally contain less current, and

    therefore less sensitive, data.\345\

    ---------------------------------------------------------------------------

    \343\ Questions 26, 30, 35 and 57 on Form PF ask about exposures

    of the reporting fund but require only that the adviser identify the

    exposure within broad asset classes, not the individual investment

    position. Large private equity advisers must identify any financial

    industry portfolio companies in which the reporting fund has a

    controlling interest, but these investments are likely to be in

    private companies whose securities are not widely traded (and,

    therefore, do not raise the same trading concerns) or in public

    companies about which information regarding significant beneficial

    owners is already made public under sections 13(d) and 13(g) of the

    Exchange Act.

    \344\ See supra section II.B.2 of this Release (discussing

    filing deadlines).

    \345\ See infra note 351 and accompanying text.

    ---------------------------------------------------------------------------

    In addition, our staff is working to design controls and systems

    for the use and handling of Form PF data in a manner that reflects the

    sensitivity of this data and is consistent with the confidentiality

    protections established in the Dodd-Frank Act. As discussed below, this

    will include programming the Form PF filing system with appropriate

    confidentiality protections.\346\ For instance, SEC staff is studying

    whether multiple access levels can be established so that SEC employees

    are allowed only as much access as is reasonably needed in connection

    with their duties.

    ---------------------------------------------------------------------------

    \346\ See infra section II.E of this Release.

    ---------------------------------------------------------------------------

    Several commenters confirmed that the information collected on Form

    PF is competitively sensitive or proprietary and emphasized the

    importance of controls for safekeeping.\347\ These commenters also made

    several recommendations for protecting the data, including: (1) Storing

    identifying information using a code; \348\ (2) limiting the ability to

    transfer Form PF data by email or portable media; \349\ (3) limiting

    access to personnel who ``need to know''; \350\ (4) extending filing

    deadlines so the data contains less current information; \351\ and (5)

    sharing the data with other regulators only in aggregated and anonymous

    form.\352\ As discussed above, the deadlines for filing Form PF have,

    in most cases, been significantly extended from the proposal.\353\ SEC

    staff is also carefully considering the other recommendations of

    commenters in designing controls and systems for Form PF.

    ---------------------------------------------------------------------------

    \347\ See, e.g., ABA Committees Letter; AIMA General Letter;

    CPIC Letter; MFA Letter; SIFMA Letter.

    \348\ ABA Committees Letter; Kleinberg General Letter; Seward

    Letter.

    \349\ ABA Committees Letter.

    \350\ Id.

    \351\ AIMA General Letter; Kleinberg General Letter.

    \352\ AIMA General Letter; Seward Letter.

    \353\ See supra notes 344-345 and accompanying text.

    ---------------------------------------------------------------------------

    In advance of the compliance date for Form PF, SEC staff will

    review the controls and systems in place for the use and handling of

    Form PF data.\354\ Depending on the progress at that time toward the

    development and deployment of these controls and systems, the SEC will

    consider whether to delay the compliance date for Form PF.

    ---------------------------------------------------------------------------

    \354\ See infra section III of this Release (discussing the

    compliance date for Form PF).

    ---------------------------------------------------------------------------

    E. Filing Fees and Format for Reporting

    Under Advisers Act rule 204(b)-1(b), Form PF must be filed through

    an electronic system designated by the SEC for this purpose. On

    September 30, 2011, the SEC issued notice of its determination that the

    Financial Industry Regulatory Authority (``FINRA'') will develop and

    maintain the filing system for Form PF as an extension of the existing

    Investment Adviser Registration Depository (``IARD'').\355\ This filing

    system will have certain features, including being programmed to

    reflect the heightened confidentiality protections created for Form PF

    filing information under the Dodd-Frank Act and allow for secure access

    by FSOC and other regulators as permitted under the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    \355\ See Approval of Filing Fees for Exempt Reporting Advisers

    and Private Fund Advisers, Investment Advisers Act Release No. IA-

    3297 (Sept. 30, 2011), 76 FR 62100 (Oct. 6, 2011).

    ---------------------------------------------------------------------------

    Under the Advisers Act rule 204(b)-1, advisers required to file

    Form PF must pay to the operator of the Form PF filing system fees that

    the SEC has approved.\356\ The SEC in a separate order has approved

    filing fees that reflect the costs reasonably associated with these

    filings and the development and maintenance of the filing system.\357\

    ---------------------------------------------------------------------------

    \356\ See Advisers Act rule 204(b)-1(d); section 204(c) of the

    Advisers Act.

    \357\ See Order Approving Filing Fees for Exempt Reporting

    Advisers and Private Fund Advisers, Investment Advisers Act Release

    No. IA-3305 (Oct. 24, 2011).

    ---------------------------------------------------------------------------

    We are working with FINRA to allow advisers to file Form PF either

    through a fillable form on the system Web site or through a batch

    filing process utilizing the eXtensible Markup Language (``XML'')

    tagged data format. In connection with the batch filing process, we

    anticipate publishing a taxonomy of XML data tags in advance of the

    compliance date for Form PF. We believe that certain advisers may

    prefer to report in XML format because it allows them to automate

    aspects of their reporting and thus minimize burdens and generate

    efficiencies for the adviser.

    [[Page 71157]]

    Commenters who addressed this aspect of the proposal supported

    having FINRA develop the reporting system as an extension of the IARD

    platform.\358\ Commenters also supported a batch filing capability,

    with one specifically agreeing that ``[a]utomated submission of

    information via the IARD or other electronic system to [utilize] the

    eXtensible Markup Language (XML) tagged data format or similar format

    is likely to be an important time saver for a large number of firms.''

    \359\

    ---------------------------------------------------------------------------

    \358\ See AIMA General Letter (agreeing that using the IARD and

    FINRA is a ``sensible solution.''); MFA Letter. We explained in the

    Form PF Proposing Release that the filing system would need to be

    programmed with special confidentiality protections designed to

    ensure the heightened confidentiality protections created for Form

    PF filing information under the Dodd-Frank Act. See Proposing

    Release, supra note 12, at n. 9 and accompanying text and section

    II.E. These commenters expressed the view that maintaining the

    confidentiality of Form PF data is an important consideration in

    developing the filing system. Our staffs are working closely with

    FINRA in designing controls and systems to ensure that Form PF data

    is handled and used in a manner consistent with the protections

    established in the Dodd-Frank Act, and as noted above, we are

    carefully considering recommendations from commenters in designing

    controls and systems for the use and handling of Form PF data.

    \359\ AIMA General Letter. See also Kleinberg General Letter.

    ---------------------------------------------------------------------------

    III. Effective and Compliance Dates

    The effective date for CEA rule 4.27, Advisers Act rule 204(b)-1

    and Form PF is March 31, 2012.

    The Commissions are adopting a two-stage phase-in period for

    compliance with Form PF filing requirements. For the following

    advisers, the compliance date for CEA rule 4.27 and Advisers Act rule

    204(b)-1 is June 15, 2012:

    Any adviser having at least $5 billion in assets under

    management attributable to hedge funds as of the last day of the fiscal

    quarter most recently completed prior to June 15, 2012; \360\

    ---------------------------------------------------------------------------

    \360\ For this purpose, advisers must calculate the value of

    assets under management pursuant to the instructions in Form ADV and

    aggregate assets under management in the same manner as they would

    when determining whether they satisfy reporting thresholds under

    Form PF. See supra section II.A.5 of this Release.

    ---------------------------------------------------------------------------

    Any adviser managing a liquidity fund and having at least

    $5 billion in combined assets under management attributable to

    liquidity funds and registered money market funds as of the last day of

    the fiscal quarter most recently completed prior to June 15, 2012;

    \361\ and

    ---------------------------------------------------------------------------

    \361\ Id.

    ---------------------------------------------------------------------------

    Any adviser having at least $5 billion in assets under

    management attributable to private equity funds as of the last day of

    its first fiscal year to end on or after June 15, 2012.\362\

    ---------------------------------------------------------------------------

    \362\ Id.

    ---------------------------------------------------------------------------

    For instance, an adviser with $5 billion in hedge fund assets under

    management as of March 31, 2012, must file its first Form PF within 60

    days following June 30, 2012.\363\ In addition, an adviser having a

    June 30 fiscal year end and $5 billion in private equity fund assets

    under management as of June 30, 2012, must file its first Form PF

    within 120 days following June 30, 2012.\364\

    ---------------------------------------------------------------------------

    \363\ This assumes the adviser's fiscal quarters are based on

    calendar quarters. Of course, if the adviser also exceeds the

    threshold for liquidity fund advisers, its filing would be due

    within 15 days.

    \364\ This assumes the adviser does not also exceed the $5

    billion threshold for hedge fund or liquidity fund advisers.

    ---------------------------------------------------------------------------

    For all other advisers, the compliance date for CEA rule 4.27 and

    Advisers Act rule 204(b)-1 is December 15, 2012. As a result, most

    advisers must file their first Form PF based on information as of

    December 31, 2012.

    This timing provides most private fund advisers with a significant

    amount of time to prepare for filing, requiring only the largest

    advisers, whose resources and systems should better position them to

    begin reporting, to report in less than a year following adoption of

    Form PF. This approach is designed to balance the need for regulators

    to begin collecting and analyzing data regarding the private fund

    industry with the ability of advisers to efficiently prepare for

    filing. We currently anticipate that this timeframe will also give the

    SEC sufficient time to create and program a system to accept filings of

    Form PF.\365\

    ---------------------------------------------------------------------------

    \365\ The SEC is working closely with FINRA to create and

    program a system for Form PF filings, and FINRA expects to be able

    to accept Form PF filings in this timeframe.

    ---------------------------------------------------------------------------

    We are adopting compliance dates that significantly extend the

    proposed compliance date of December 15, 2011. We are taking this

    approach, in part, because we are adopting these rules later than

    originally expected. The revised approach is also intended to respond

    to commenters who recommended a later compliance date. These commenters

    argued that the proposed compliance date would have provided advisers

    insufficient ``time to identify the information to be included,

    establish automated systems and procedures to collect and calculate the

    information, and develop procedures to review, complete and verify the

    Form.'' \366\ A majority of these commenters suggested extending

    compliance to at least nine months after publication of the final Form,

    though some argued for a year or more.\367\ In support of an extended

    compliance date, commenters emphasized that, without sufficient time to

    prepare for the initial filing, the reporting process will be manually

    intensive or require costly system enhancements.\368\ As explained

    above, our revised approach is designed to provide the largest

    advisers, whose resources and systems should better position them to

    begin reporting, at least eight months before they start filing Form

    PF, and the vast majority of advisers will have over a year before

    their first Form PF is due.

    ---------------------------------------------------------------------------

    \366\ MFA Letter. See also infra note 367.

    \367\ See, e.g., AIMA General Letter (nine months); BlackRock

    Letter (nine months); CPIC Letter (one year); Fidelity Letter (one

    year); IAA Letter (nine months); Kleinberg General Letter (one

    year); MFA Letter (nine months); PEGCC Letter (one year); TCW Letter

    (nine months); Seward Letter (two years); SIFMA Letter (nine

    months); USCC Letter (270 days).

    \368\ See AIMA General Letter; Kleinberg General Letter.

    ---------------------------------------------------------------------------

    IV. Paperwork Reduction Act

    SEC:

    Section 204(b) of the Advisers Act directs the SEC to require

    private fund advisers to file reports containing such information as

    the SEC deems necessary and appropriate in the public interest and for

    investor protection or for the assessment of systemic risk. Rule

    204(b)-1 and Form PF under the Advisers Act implement this requirement.

    Form PF contains a new ``collection of information'' within the meaning

    of the Paperwork Reduction Act (``PRA'').\369\ The title for the new

    collection of information is: ``Form PF under the Investment Advisers

    Act of 1940, reporting by investment advisers to private funds.'' For

    purposes of this PRA analysis, the paperwork burden associated with the

    requirements of rule 204(b)-1 is included in the collection of

    information burden associated with Form PF and thus does not entail a

    separate collection of information. The SEC is submitting this

    collection of information to the Office of Management and Budget

    (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. An agency may not conduct or sponsor, and a person is not

    required to respond to, a collection of information unless it displays

    a currently valid control number.

    ---------------------------------------------------------------------------

    \369\ 44 U.S.C. 3501-3521.

    ---------------------------------------------------------------------------

    Form PF is intended to provide FSOC with information that will

    assist it in fulfilling its obligations under the Dodd-Frank Act

    relating to nonbank financial companies and systemic risk

    monitoring.\370\ The SEC may also use the information in connection

    with its regulatory and examination programs.

    [[Page 71158]]

    The respondents to Form PF are private fund advisers.\371\ Compliance

    with Form PF is mandatory for any private fund adviser that had at

    least $150 million in regulatory assets under management attributable

    to private funds as of the end of its most recently completed fiscal

    year.

    ---------------------------------------------------------------------------

    \370\ See supra section I.A of this Release; see also of the

    Proposing Release, supra note 12, at section II.A.

    \371\ The requirement to file the Form applies to any investment

    adviser registered, or required to register, with the SEC that

    advises one or more private funds and had at least $150 million in

    regulatory assets under management attributable to private funds as

    of the end of its most recently completed fiscal year. See Advisers

    Act rule 204(b)-1(a). It does not apply to state-registered

    investment advisers or exempt reporting advisers.

    ---------------------------------------------------------------------------

    Specifically, smaller private fund advisers must report annually

    and provide only basic information regarding their operations and the

    private funds they advise. Large private equity advisers also must

    report on an annual basis but are required to provide additional

    information with respect to the private equity funds they manage.

    Finally, large hedge fund advisers and large liquidity fund advisers

    must report on a quarterly basis and provide more information than

    other private fund advisers.\372\ The PRA analysis set forth below

    takes into account the difference in filing frequencies among different

    categories of private fund adviser. It also reflects the fact that the

    additional information Form PF requires large hedge fund advisers to

    report is more extensive than the additional information required from

    large liquidity fund advisers, which in turn is more extensive than

    that required from large private equity advisers.

    ---------------------------------------------------------------------------

    \372\ See section II.A of this Release (describing who must file

    Form PF), section II.B of this Release (discussing the frequency

    with which private fund advisers must file Form PF), section II.C.2

    of this Release (describing the information that large hedge fund

    advisers must report on Form PF), and sections II.C.3 and II.C.4 of

    this Release (describing the information that large liquidity and

    private equity fund advisers must report on Form PF). See also

    Instruction 9 to Form PF (discussing the frequency with which

    private fund advisers must file Form PF).

    ---------------------------------------------------------------------------

    As discussed in section II of this Release, the SEC has sought to

    minimize the reporting burden on private fund advisers to the extent

    appropriate. In particular, the SEC has taken into account an adviser's

    size and the types of private funds it manages in designing scaled

    reporting requirements. In addition, where practical, the SEC has

    permitted advisers to rely on their existing practices and

    methodologies to report information on Form PF.\373\

    ---------------------------------------------------------------------------

    \373\ The SEC also believes that private fund advisers already

    collect or calculate some of the information required on the Form at

    least as often as they must file the Form. See supra note 146.

    ---------------------------------------------------------------------------

    Advisers must file Form PF through the Form PF filing system on the

    IARD.\374\ Responses to the information collections will be kept

    confidential to the extent permitted by law.\375\

    ---------------------------------------------------------------------------

    \374\ See section II.E of this Release.

    \375\ See section II.D. of this Release.

    ---------------------------------------------------------------------------

    A. Burden Estimates for Annual Reporting by Smaller Private Fund

    Advisers

    In the Implementing Adopting Release, the SEC estimated that there

    will be approximately 4,270 SEC-registered advisers managing private

    funds after taking into account recent changes to the Advisers Act and

    a year of normal growth in the population of registered advisers.\376\

    The SEC estimates that approximately 700 of these advisers will not be

    required to file Form PF because they have less than $150 million in

    private fund assets under management.\377\ Accordingly, the SEC

    anticipates that, when advisers begin reporting on Form PF, a total of

    approximately 3,570 advisers will be required to file all or part of

    the Form.\378\ Out of this total number, the SEC estimates that

    approximately 3,070 will be smaller private fund advisers, not meeting

    the thresholds as Large Private Fund Advisers.\379\ Commenters did not

    address the SEC's estimates of the total number of respondents or the

    number of smaller private fund advisers.\380\

    ---------------------------------------------------------------------------

    \376\ Specifically, the SEC estimated that (1) 3,320 private

    fund advisers that are currently registered with the SEC will remain

    registered after certain advisers make the switch to state

    registration prompted by the Dodd-Frank Act's amendments to section

    203A of the Advisers Act, (2) 750 advisers to private funds will

    register with the Commission as a result of the Dodd-Frank Act's

    elimination of the private adviser exemption and (3) 200 additional

    advisers to private funds will register in the next year. See

    Implementing Adopting Release, supra note 11, at n.637 and

    accompanying text. Estimates of registered private fund advisers are

    based in part on the number of advisers that reported a fund in

    Section 7.B of Schedule D to the version of Form ADV in use prior to

    the date of this release. Because these responses included funds

    that the adviser's related persons manage as well as those the

    adviser itself manages, these data may over-estimate the total

    number of private fund advisers.

    \377\ Based on IARD data as of October 1, 2011. See supra

    section II.A of this Release for a discussion of the minimum

    reporting threshold.

    \378\ 4,270 total private fund advisers - 700 with less than

    $150 million in private fund assets under management = 3,570

    advisers. The SEC notes, however, that if a private fund is advised

    by both an adviser and one or more subadvisers, only one of these

    advisers is required to complete Form PF. See section II.A.6 of this

    Release. As a result, it is likely that some portion of these

    advisers either will not be required to file Form PF or will be

    subject to a reporting burden lower than is estimated for purposes

    of this PRA analysis. The SEC has not attempted to adjust the burden

    estimates downward for this purpose because the SEC does not

    currently have reliable data with which to estimate the number of

    funds that have subadvisers.

    \379\ Based on the estimated total number of registered private

    fund advisers that would not meet the thresholds to be considered

    Large Private Fund Advisers. (3,570 estimated registered private

    fund advisers - 250 large hedge fund advisers - 80 large liquidity

    fund advisers - 170 large private equity fund advisers = 3,070

    smaller private fund advisers.)

    \380\ The SEC has updated these estimates to reflect: (1)

    Updated data from IARD, (2) the addition of a minimum reporting

    threshold of $150 million in private fund assets, which reduces the

    number of advisers subject to the reporting requirements, and (3)

    the revised estimates of large hedge fund advisers and large private

    equity advisers discussed in section II.A.4 of this Release. See

    supra section II.A of this Release and notes 88 and 89.

    ---------------------------------------------------------------------------

    Smaller private fund advisers must complete all or portions of

    section 1 of Form PF and file on an annual basis. As discussed in

    greater detail above, section 1 requires basic data regarding the

    reporting adviser's identity and certain information about the private

    funds it manages, such as performance, leverage and investor data.\381\

    If the reporting adviser manages any hedge funds, section 1 also

    requires basic information regarding those funds, including their

    investment strategies, counterparty exposures and trading and clearing

    practices.

    ---------------------------------------------------------------------------

    \381\ See supra section II.C.1.

    ---------------------------------------------------------------------------

    The SEC estimates that smaller private fund advisers will require

    an average of approximately 40 burden hours to compile, review and

    electronically file the required information in section 1 of Form PF

    for the initial filing and an average of approximately 15 burden hours

    for subsequent filings.\382\ These estimates reflect an increase

    compared to the proposal from 10 to 40 hours for the initial filing and

    from 3 to 15 hours for subsequent filings.

    ---------------------------------------------------------------------------

    \382\ These estimates are based, in part, on the SEC's

    understanding that much of the information in sections 1a and 1b of

    Form PF is currently maintained by most private fund advisers in the

    ordinary course of business. See supra note 146. In addition, the

    SEC expects the time required to determine the amount of the

    adviser's assets under management that relate to private funds of

    various types to be largely included in the approved burden

    associated with the SEC's Form ADV. As a result, responding to

    questions on Form PF that relate to assets under management and

    determining whether an adviser is a Large Private Fund Adviser

    should impose little or no additional burden on private fund

    advisers. Of course, not all questions on Form PF impose the same

    burden, and the burden of responding to questions may vary

    substantially from adviser to adviser. These estimates are intended

    to reflect averages for compiling, reviewing and filing the Form, do

    not indicate the time that may be spent on specific questions and

    may not reflect the time spent by an individual adviser.

    ---------------------------------------------------------------------------

    The SEC has increased these estimates to reflect comments

    suggesting that the estimates included in the proposal were too

    low.\383\ Commenters did not provide alternative estimates for these

    burdens. However, commenters addressing the

    [[Page 71159]]

    large hedge fund adviser burdens did provide alternative

    estimates.\384\ As discussed below, the SEC is also increasing its hour

    burden estimates with respect to large hedge fund advisers based on,

    among other things, the estimates these commenters provided.\385\ In

    the absence of specific commenter estimates for the smaller adviser

    reporting burden, the SEC has, therefore, scaled these estimates in

    proportion to the increases it is making to its burden hour estimates

    for large hedge fund advisers.

    ---------------------------------------------------------------------------

    \383\ See, e.g., AIMA General Letter; IAA Letter; SIFMA Letter.

    \384\ See, e.g., MFA Letter.

    \385\ See infra section IV.B of this Release.

    ---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken

    into account changes from the proposal that it expects, on the whole,

    to mitigate the burden of reporting the information required in section

    1. For instance, we have modified the requirement to report performance

    by allowing advisers to report monthly and quarterly results only if

    such results are already calculated for the fund.\386\ In addition, we

    have removed from section 1b a question requiring identification of

    significant creditors and substantially reduced the amount of

    information required with respect to trading and clearing practices in

    section 1c.\387\ We have also made several global changes to the Form

    that we anticipate will reduce the burden of reporting. These include

    the removal of the certification, the increased ability of advisers to

    rely on their existing methodologies and recordkeeping practices and

    allowing advisers to omit information regarding parallel managed

    accounts from their responses to the Form.\388\ We have also added four

    new questions in section 1b that will increase the burden of completing

    that portion of the Form, but the SEC expects the other changes

    described above to result in a net reduction in the burden of

    completing the Form relative to the proposal.\389\

    ---------------------------------------------------------------------------

    \386\ Several commenters argued that carrying out valuations to

    report monthly and quarterly performance for private equity funds

    would result in significant cost burdens and require significantly

    more time than was estimated. See, e.g., comment letter of Atlas

    Holdings (March 9, 2011) (``Atlas Letter''); PEGCC Letter. We have,

    however, modified the reporting requirements so that advisers only

    need to provide monthly and quarterly performance results to the

    extent already calculated. See supra notes 198-202 and accompanying

    text. In other words, because advisers will have always already

    calculated the required performance data for purposes other than

    reporting on Form PF, the burden of reporting it on the Form is

    essentially one of data entry.

    \387\ One commenter suggested the question we removed would have

    been ``very burdensome.'' See PEGCC Letter.

    \388\ See, e.g., supra section II.C.5 of this Release and notes

    183-188 and accompanying text.

    \389\ See supra section II.C.1 of this Release. The SEC

    originally proposed one of the new questions on Form ADV, and it

    requires that advisers report the assets and liabilities of each

    fund broken down using categories that are based on the fair value

    hierarchy established under GAAP. For advisers obtaining fund audits

    in accordance with GAAP or a similar international accounting

    standard, the burden of this question is simply that of entering the

    data on the Form. In the Implementing Adopting Release, the SEC

    estimated that approximately 3% of registered advisers have at least

    one private fund client that may not be audited. See Implementing

    Adopting Release, supra note 11, at nn. 634-636 and accompanying

    text. For this sub-group of advisers, the cost and hour burdens of

    determining fair values for the funds' assets have already been

    accounted for in connection with Form ADV because advisers are

    required to report regulatory assets under management in that form

    using the fair value of private fund assets. See Implementing

    Adopting Release, supra note 11, at section VI and nn. 632-641 and

    723 and accompanying text. The question does not require advisers to

    determine the fair value of liabilities for which they do not

    already make such determination, so this sub-group of advisers would

    not incur an incremental cost to fair value liabilities in order to

    respond to this question. This sub-group of advisers may incur an

    additional hours burden to determine the categories applicable to

    the fund's assets and liabilities, and in determining to increase

    its average hour burden estimates for both smaller private fund

    advisers and Large Private Fund Advisers, the SEC has taken into

    account the contribution of this additional hours burden.

    ---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized

    average annual burden of periodic filings will be 23 hours per smaller

    private fund adviser for each of the first three years,\390\ and the

    amortized aggregate annual burden of periodic filings for smaller

    private fund advisers will be 70,600 hours for each of the first three

    years.\391\

    ---------------------------------------------------------------------------

    \390\ The SEC estimates that a smaller private fund adviser will

    make 3 annual filings in three years, for an amortized average

    annual burden of 23 hours (1 initial filing x 40 hours + 2

    subsequent filings x 15 hours = 70 hours; and 70 hours / 3 years =

    approximately 23 hours). After the first three years, filers

    generally will not incur the start-up burdens applicable to the

    first filing.

    \391\ 23 burden hours on average per year x 3,070 smaller

    private fund advisers = 70,600 burden hours per year.

    ---------------------------------------------------------------------------

    B. Burden Estimates for Large Hedge Fund Advisers

    The SEC estimates that 250 advisers will be classified as large

    hedge fund advisers.\392\ As discussed above, large hedge fund advisers

    must complete section 1 of the Form and provide additional information

    regarding the hedge funds they manage in section 2 of the Form. These

    advisers must report information regarding the hedge funds they manage

    on a quarterly basis.

    ---------------------------------------------------------------------------

    \392\ See supra note 88.

    ---------------------------------------------------------------------------

    Because large hedge fund advisers generally must report more

    information on Form PF than other private fund advisers, the SEC

    estimates that these advisers will require, on average, more hours than

    other Large Private Fund Advisers to configure systems and to compile,

    review and electronically file the required information. Accordingly,

    the SEC estimates that large hedge fund advisers will require an

    average of approximately 300 burden hours for an initial filing and 140

    burden hours for each subsequent filing.\393\

    ---------------------------------------------------------------------------

    \393\ The estimates of hour burdens and costs for large hedge

    fund advisers provided in the Paperwork Reduction Act and cost-

    benefit analyses are based, in part, on burden data that advisers

    provided in response to the FSA Survey and on the experience of SEC

    staff. These estimates also assume that some Large Private Fund

    Advisers will find it efficient to automate some portion of the

    reporting process, which will increase the burden of the initial

    filing but reduce the burden of subsequent filings. This efficiency

    gain is reflected in our burden estimates, which are higher for the

    first report than subsequent reports, and certain of the anticipated

    automation costs are accounted for in our cost estimates. See infra

    note 435 and accompanying text. Of course, not all questions on Form

    PF impose the same burden, and the burden of responding to questions

    may vary substantially from adviser to adviser. These estimates are

    intended to reflect averages for compiling, reviewing and filing the

    Form, do not indicate the time that may be spent on specific

    questions and may not reflect the time spent by an individual

    adviser.

    ---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from

    75 to 300 hours for the initial filing and from 35 to 140 hours for

    subsequent filings. The SEC has increased these estimates to reflect

    comments suggesting that the estimates included in the proposal were

    too low.\394\ One industry group reported that some members attempted

    to complete the proposed version of Form PF for one or more funds and,

    ``[b]ased on their experience, and recognizing that efficiencies will

    develop over time, [this group estimated] that large managers on

    average will expend 150-300 hours to submit the initial Form.'' \395\

    The SEC has revised its

    [[Page 71160]]

    estimates in this PRA analysis based on the top end of this range,

    which represents a conservative interpretation of this commenter's

    estimate. This approach appears justified in this case based on other

    comments suggesting that the hours burden imposed on these advisers

    could be significantly higher than the SEC estimated in the Proposing

    Release.\396\

    ---------------------------------------------------------------------------

    \394\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General

    Letter; MFA Letter; TCW Letter.

    \395\ MFA Letter. This commenter referred to ``large managers''

    generally, but based on the context, this comment appears to relate

    to large hedge fund advisers specifically. This commenter went on to

    state that ``managers with more complex strategies will expend

    considerably more time.'' Other commenters addressing these

    estimates did not provide alternative estimates, though one

    indicated that some clients had already exceeded the Proposing

    Release's estimates in preparing to report on the proposed Form and

    another commenter, itself one of the largest private fund advisers

    in the United States, argued that the estimates were understated by

    ``orders of magnitude.'' See BlackRock Letter; see also Kleinberg

    General Letter. In addition, advisers that manage many funds may

    incur higher costs than advisers that manage fewer funds even if

    they manage similar amounts of assets. The SEC's estimates are

    intended to reflect average burdens, and it recognizes that

    particular advisers may, based on their circumstances, incur burdens

    substantially greater than or less than the estimated averages. In

    addition, we have based our estimates in part on data that advisers

    provided in response to the FSA Survey regarding the time required

    to complete that survey. Although Form PF generally requires more

    information regarding hedge funds than the FSA Survey, the SEC

    believes, based on this data and based on the MFA comment letter,

    that the average burden of completing Form PF is very unlikely to be

    in the thousands or tens of thousands of hours.

    \396\ See supra note 394 and accompanying text.

    ---------------------------------------------------------------------------

    The SEC notes, however, that this commenter's estimates were based

    on the Form as proposed and we have made a number of changes from the

    proposal that we expect, on the whole, to mitigate significantly the

    reporting burden. For example, we have modified a number of questions

    to reduce the amount of detail required or to allow advisers to rely

    more on their existing methodologies or recordkeeping practices,

    including questions regarding trading and clearing practices, interest

    rate sensitivities, geographical concentrations, turnover, collateral

    practices, CCP exposures and sensitivities to changes in specified

    market factors.\397\ We have also made several global changes to the

    Form that we anticipate will reduce the burden of reporting. These

    include allowing large hedge fund advisers to report only annually on

    funds that are not hedge funds, the removal of the certification,

    expanding the ability to disregard funds of funds and allowing advisers

    to omit information regarding parallel managed accounts from their

    responses to the Form.\398\ We have also added four new questions in

    section 1b, which will increase the burden of completing that portion

    of the Form.\399\ The SEC believes, however, that the increased burden

    attributable to these new questions is less than the reduced burden

    attributable to other changes to the Form because the new questions

    require limited information that, in many cases, will be readily

    available to advisers while some of the SEC's modifications to reduce

    the reporting burdens are intended to address areas of the Form that

    commenters identified as particularly burdensome. In light of these

    changes, the SEC believes that the commenter estimates, which were

    based on the proposed Form, likely represent an upper bound of the

    average burden to large hedge fund advisers.

    ---------------------------------------------------------------------------

    \397\ See supra section II.C.1 and II.C.2 of this Release.

    \398\ See, e.g., supra sections II.B.1 and II.C.5 of this

    Release and notes 129 and 183-188 and accompanying text.

    \399\ See supra section II.C.1.

    ---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized

    average annual burden of periodic filings will be 610 hours per large

    hedge fund adviser for each of the first three years.\400\ In the

    aggregate, the amortized annual burden of periodic filings will then be

    153,000 hours for large hedge fund advisers for each of the first three

    years.\401\

    ---------------------------------------------------------------------------

    \400\ The SEC estimates that a large hedge fund adviser will

    make 12 quarterly filings in three years, for an amortized average

    annual burden of 610 hours (1 initial filing x 300 hours + 11

    subsequent filings x 140 hours = 1,840 hours; and 1,840 hours / 3

    years = approximately 610 hours). After the first three years,

    filers generally will not incur the start-up burdens applicable to

    the first filing.

    \401\ 610 burden hours on average per year x 250 large hedge

    fund advisers = 153,000 hours.

    ---------------------------------------------------------------------------

    C. Burden Estimates for Large Liquidity Fund Advisers

    The SEC estimates that 80 advisers will be classified as large

    liquidity fund advisers.\402\ Commenters did not address this estimate.

    As discussed above, large liquidity fund advisers must complete section

    1 of the Form and provide additional information regarding the

    liquidity funds they manage in section 3 of the Form. In addition,

    these advisers must report information regarding the liquidity funds

    they manage on a quarterly basis.

    ---------------------------------------------------------------------------

    \402\ See supra note 88.

    ---------------------------------------------------------------------------

    Large liquidity fund advisers generally must report less

    information on Form PF than large hedge fund advisers but more

    information than large private equity advisers and smaller private fund

    advisers. Accordingly, the SEC estimates that large liquidity fund

    advisers will require, on average, fewer hours than large hedge fund

    advisers but more hours than other advisers to configure systems and to

    compile, review and electronically file the required information.

    Specifically, the SEC estimates these advisers will require an average

    of approximately 140 burden hours for an initial filing and 65 burden

    hours for each subsequent filing.\403\

    ---------------------------------------------------------------------------

    \403\ The estimates of hour burdens and costs for large

    liquidity fund advisers provided in the Paperwork Reduction Act and

    cost-benefit analyses are based, in part, on a comparison to the

    requirements and estimated burden for large hedge fund advisers

    (which estimates, in turn, are based in part on burden data that

    advisers provided in response to the FSA Survey) and on the

    experience of SEC staff. These estimates also assume that some Large

    Private Fund Advisers will find it efficient to automate some

    portion of the reporting process, which will increase the burden of

    the initial filing but reduce the burden of subsequent filings. This

    efficiency gain is reflected in our burden estimates, which are

    higher for the first report than subsequent reports, and certain of

    the anticipated automation costs are accounted for in our cost

    estimates. See infra note 435 and accompanying text. Of course, not

    all questions on Form PF impose the same burden, and the burden of

    responding to questions may vary substantially from adviser to

    adviser. These estimates are intended to reflect averages for

    compiling, reviewing and filing the Form, do not indicate the time

    that may be spent on specific questions and may not reflect the time

    spent by an individual adviser.

    ---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from

    35 to 140 hours for the initial filing and from 16 to 65 hours for

    subsequent filings. The SEC has increased these estimates to reflect

    comments suggesting that the estimates included in the proposal were

    too low.\404\ Commenters did not provide alternative estimates for

    these burdens. However, commenters addressing the large hedge fund

    adviser burdens did provide alternative estimates.\405\ As discussed

    above, the SEC is also increasing its hour burden estimates with

    respect to large hedge fund advisers based on, among other things, the

    estimates these commenters provided.\406\ In the absence of specific

    commenter estimates for the large liquidity fund adviser reporting

    burden, the SEC has, therefore, scaled these estimates in proportion to

    the increases it is making to its burden hour estimates for large hedge

    fund advisers.

    ---------------------------------------------------------------------------

    \404\ See, e.g., AIMA Letter; IAA Letter; BlackRock Letter. No

    commenters specifically addressed the burden estimates for liquidity

    fund advisers, though several commented on the burden estimates

    generally.

    \405\ See, e.g., MFA Letter.

    \406\ See supra section IV.B of this Release.

    ---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken

    into account changes from the proposal that it expects, on the whole,

    to mitigate the burden of reporting for large liquidity fund advisers.

    For instance, we have eliminated from section 1b a question requiring

    identification of significant creditors.\407\ We have also made several

    global changes that we anticipate will reduce the burden of reporting.

    These include allowing large liquidity fund advisers to report only

    annually on funds that are not liquidity funds, removing the

    certification, expanding the ability to disregard funds of funds, the

    increased ability of advisers to rely on their existing methodologies

    and recordkeeping practices and allowing advisers to omit information

    regarding parallel managed accounts from their responses to the

    Form.\408\ We have also

    [[Page 71161]]

    added four new questions in section 1b that will increase the burden of

    completing that portion of the Form, but the SEC expects the other

    changes described above to result in a net reduction in the burden of

    completing the Form relative to the proposal.\409\

    ---------------------------------------------------------------------------

    \407\ See supra section II.C.1 of this Release. One commenter

    suggested the question we removed would have been ``very

    burdensome.'' See PEGCC Letter.

    \408\ See, e.g., supra sections II.B.1 and II.C.5 of this

    Release and notes 129 and 183-188 and accompanying text.

    \409\ See supra section II.C.1 of this Release.

    ---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized

    average annual burden of periodic filings will be 290 hours per large

    liquidity fund adviser for each of the first three years.\410\ In the

    aggregate, the amortized annual burden of periodic filings will then be

    23,200 hours for large liquidity fund advisers for each of the first

    three years.\411\

    ---------------------------------------------------------------------------

    \410\ The SEC estimates that a large liquidity fund adviser will

    make 12 quarterly filings in three years, for an amortized average

    annual burden of 290 hours (1 initial filing x 140 hours + 11

    subsequent filings x 65 hours = 855 hours; and 855 hours / 3 years =

    approximately 290 hours). After the first three years, filers

    generally will not incur the start-up burdens applicable to the

    first filing.

    \411\ 290 burden hours on average per year x 80 large hedge fund

    advisers = 23,200 hours.

    ---------------------------------------------------------------------------

    D. Burden Estimates for Large Private Equity Advisers

    The SEC estimates that 170 advisers will be classified as large

    private equity advisers.\412\ As discussed above, large private equity

    advisers must complete section 1 of the Form and provide additional

    information regarding the private equity funds they manage in section 4

    of the Form. These advisers are only required to report on an annual

    basis.

    ---------------------------------------------------------------------------

    \412\ See supra note 89.

    ---------------------------------------------------------------------------

    Large private equity advisers generally must report less

    information on Form PF than other Large Private Fund Advisers but more

    information than smaller private fund advisers. Accordingly, the SEC

    estimates that large private equity advisers will require, on average,

    fewer hours than large hedge fund advisers and large liquidity fund

    advisers but more hours than other advisers to configure systems and to

    compile, review and electronically file the required information.

    Specifically, the SEC estimates these advisers will require an average

    of approximately 100 burden hours for an initial filing and 50 burden

    hours for each subsequent filing.\413\

    ---------------------------------------------------------------------------

    \413\ The estimates of hour burdens and costs for large private

    equity advisers provided in the Paperwork Reduction Act and cost-

    benefit analyses are based, in part, on a comparison to the

    requirements and estimated burden for large hedge fund advisers

    (which estimates, in turn, are based in part on burden data that

    advisers provided in response to the FSA Survey) and on the

    experience of SEC staff. These estimates also assume that some Large

    Private Fund Advisers will find it efficient to automate some

    portion of the reporting process, which will increase the burden of

    the initial filing but reduce the burden of subsequent filings. This

    efficiency gain is reflected in our burden estimates, which are

    higher for the first report than subsequent reports, and certain of

    the anticipated automation costs are accounted for in our cost

    estimates. See infra note 435 and accompanying text. Of course, not

    all questions on Form PF impose the same burden, and the burden of

    responding to questions may vary substantially from adviser to

    adviser. These estimates are intended to reflect averages for

    compiling, reviewing and filing the Form, do not indicate the time

    that may be spent on specific questions and may not reflect the time

    spent by an individual adviser.

    ---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from

    25 to 100 hours for the initial filing and from 12 to 50 hours for

    subsequent filings. The SEC has increased these estimates to reflect

    comments suggesting that the estimates included in the proposal were

    too low.\414\ Commenters did not provide alternative estimates for

    these burdens. However, commenters addressing the large hedge fund

    adviser burdens did provide alternative estimates.\415\ As discussed

    above, the SEC is also increasing its hour burden estimates with

    respect to large hedge fund advisers based on, among other things, the

    estimates these commenters provided.\416\ In the absence of specific

    commenter estimates for the large private equity adviser reporting

    burden, the SEC has, therefore, scaled these estimates in proportion to

    the increases it is making to its burden hour estimates for large hedge

    fund advisers.

    ---------------------------------------------------------------------------

    \414\ See, e.g., Atlas Letter; PEGCC Letter; USCC Letter.

    \415\ See, e.g., MFA Letter.

    \416\ See supra section IV.B of this Release.

    ---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken

    into account changes from the proposal that it expects, on the whole,

    to mitigate the burden of reporting for large private equity advisers.

    For instance, we have modified the requirement to report performance by

    allowing advisers to report monthly and quarterly results only if such

    results are already calculated for the fund.\417\ In addition, we have

    eliminated from section 1b a question requiring identification of

    significant creditors and have revised questions in section 4 requiring

    information regarding portfolio company leverage to align the

    information required more closely with information available on the

    balance sheets of those companies.\418\ We have also made several

    global changes to the Form that we anticipate will reduce the burden of

    reporting. These include requiring only annual (rather than quarterly)

    reporting, removing the certification, expanding the ability to

    disregard funds of funds, increasing the ability of advisers to rely on

    their existing methodologies and recordkeeping practices and allowing

    advisers to omit information regarding parallel managed accounts from

    their responses to the Form.\419\ We have also added four new questions

    in section 1b that will increase the burden of completing that portion

    of the Form, but the SEC expects the other changes described above to

    result in a net reduction in the burden of completing the Form relative

    to the proposal.\420\

    ---------------------------------------------------------------------------

    \417\ See supra note 386.

    \418\ See supra sections II.C.1 and II.C.4 of this Release. One

    commenter suggested the question we removed would have been ``very

    burdensome.'' See PEGCC Letter.

    \419\ See, e.g., supra sections II.B.1 and II.C.5 of this

    Release and notes 129 and 183-188 and accompanying text.

    \420\ See supra section II.C.1 of this Release.

    ---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized

    average annual burden of periodic filings will be 67 hours per large

    private equity adviser for each of the first three years.\421\ In the

    aggregate, the amortized annual burden of periodic filings will then be

    11,400 hours for large private equity advisers for each of the first

    three years.\422\

    ---------------------------------------------------------------------------

    \421\ The SEC estimates that a large private equity adviser will

    make 3 annual filings in three years, for an amortized average

    annual burden of 67 hours (1 initial filing x 100 hours + 2

    subsequent filings x 50 hours = 200 hours; and 200 hours / 3 years =

    approximately 67 hours). After the first three years, filers

    generally will not incur the start-up burdens applicable to the

    first filing.

    \422\ 67 burden hours on average per year x 170 large private

    equity advisers = 11,400 hours.

    ---------------------------------------------------------------------------

    E. Burden Estimates for Transition Filings, Final Filings and Temporary

    Hardship Exemption Requests

    In addition to periodic filings, a private fund adviser must file

    very limited information on Form PF in three situations.

    First, any adviser that transitions from quarterly to annual filing

    because it has ceased to be a large hedge fund or large liquidity fund

    adviser must file a Form PF indicating that it is no longer obligated

    to report on a quarterly basis. The SEC estimates that approximately 9

    percent of quarterly filers will need to make a transition filing each

    year with a burden of 0.25 hours, or a total of 7 burden hours per year

    for all private fund advisers.\423\ No commenters addressed these

    estimates. The SEC has not changed its estimates of the rate of

    transition filings and the burden hours per filing from the proposal,

    but it has reduced its estimate of the total burden hours per year

    because fewer filers will

    [[Page 71162]]

    be required to report on a quarterly basis.\424\

    ---------------------------------------------------------------------------

    \423\ This estimate is based on IARD data on the frequency of

    advisers to one or more private funds ceasing to have assets under

    management sufficient to cause them to be large hedge fund or large

    liquidity fund advisers. ((80 large liquidity fund advisers + 250

    large hedge fund advisers) x 0.09 x 0.25 hours = 7 hours.)

    \424\ Under the proposal, large private equity advisers would

    also have been required to file on a quarterly basis. See supra

    section II.B.1 of this Release.

    ---------------------------------------------------------------------------

    Second, filers who are no longer subject to Form PF's periodic

    reporting requirements must file a final report indicating that fact.

    The SEC estimates that approximately 8 percent of the advisers required

    to file Form PF will have to file such a report each year with a burden

    of 0.25 of an hour, or a total of 71 burden hours per year for all

    private fund advisers.\425\ No commenters addressed these estimates.

    The SEC has not changed its estimates of the rate of final filings and

    the burden hours per filing from the proposal, but it has reduced its

    estimate of the total burden hours per year because the addition of a

    minimum reporting threshold will result in fewer filers reporting on

    Form PF.\426\

    ---------------------------------------------------------------------------

    \425\ Estimate is based on IARD data on the frequency of

    advisers to one or more private funds withdrawing from SEC

    registration. (3,570 private fund advisers x 0.08 x 0.25 hours = 71

    hours.)

    \426\ See supra section II.A of this Release.

    ---------------------------------------------------------------------------

    Finally, an adviser experiencing technical difficulties in

    submitting Form PF may request a temporary hardship exemption by filing

    portions of Form PF in paper format.\427\ The information that must be

    filed is comparable to the information that Form ADV filers provide on

    Form ADV-H when requesting a temporary hardship exemption relating to

    that form. In the case of Form ADV-H, the SEC has estimated that the

    average burden of filing is 1 hour and that approximately 1 in every

    1,000 advisers will file annually.\428\ Assuming that Form PF filers

    request hardship exemptions at the same rate and that the applications

    impose the same burden per filing, the SEC expects approximately 4

    filers to request a temporary hardship exemption each year \429\ for a

    total of 4 burden hours.\430\ No commenters addressed these estimates,

    and they remain unchanged from the proposal.

    ---------------------------------------------------------------------------

    \427\ See Advisers Act rule 204(b)-1(f). The rule requires that

    the adviser complete and file Item A of Section 1a and Section 5 of

    Form PF, checking the box in Section 1a indicating that the filing

    is a request for a temporary hardship exemption.

    \428\ See Implementing Adopting Release, supra note 11, at

    section VI.F.

    \429\ 3,570 private fund advisers x 1 request per 1,000 advisers

    = approximately 4 advisers.

    \430\ 4 advisers x 1 hour per response = 4 hours.

    ---------------------------------------------------------------------------

    F. Aggregate Hour Burden Estimates

    Based on the foregoing, the SEC estimates that Form PF would result

    in an aggregate of 258,000 burden hours per year for all private fund

    advisers for each of the first three years, or 72 burden hours per year

    on average for each private fund adviser over the same period.\431\

    ---------------------------------------------------------------------------

    \431\ 70,600 hours for periodic filings by smaller advisers +

    153,000 hours for periodic filings by large hedge fund advisers +

    23,200 hours for periodic filings by large liquidity fund advisers +

    11,400 hours for periodic filings by large private equity fund

    advisers + 7 hours per year for transition filings + 71 hours per

    year for final filings + 4 hours per year for temporary hardship

    requests = approximately 258,000 hours per year. 258,000 hours per

    year / 3,570 total advisers = 72 hours per year on average.

    ---------------------------------------------------------------------------

    G. Cost Burden

    In addition to the hour burdens identified above, advisers subject

    to the Form PF reporting requirements will incur cost burdens. Firms

    required to file Form PF must also pay filing fees. In a separate

    order, the SEC has established filing fees for the Form PF filing

    system of $150 per annual filing and $150 per quarterly filing.\432\ We

    estimate that this will result in advisers paying aggregate filing fees

    of approximately $684,000 per year.\433\

    ---------------------------------------------------------------------------

    \432\ See supra section II.E of this Release.

    \433\ ((3,070 smaller private fund advisers + 170 large private

    equity advisers) x $150 per annual filing) + ((250 large hedge fund

    advisers + 80 large private equity advisers) x $150 per quarterly

    filing x 4 quarterly filings per year) = $684,000 per year.

    ---------------------------------------------------------------------------

    Several commenters suggested that advisers would also need to

    modify existing systems or deploy new systems to support Form PF

    reporting.\434\ As discussed in the Proposing Release and below, the

    SEC acknowledges that advisers may incur costs to develop systems and

    expects that Large Private Fund Advisers, in particular, may find it

    efficient to automate some portion of the reporting process, which will

    increase the burden of the initial filing but reduce the burden of

    subsequent filings.\435\ The SEC has assumed that some of the hours

    that it estimates advisers will spend on preparing their initial

    filings on Form PF will be attributable to programmers preparing

    systems for the reporting.\436\ The SEC understands that some advisers

    may outsource all or a portion of these systems requirements to

    software consultants, vendors, filing agents or other third-party

    service providers and believes that the emergence of such service

    providers may serve to make filing on Form PF more efficient than is

    reflected in its estimates.\437\

    ---------------------------------------------------------------------------

    \434\ See, e.g., BlackRock Letter; IAA Letter; Kleinberg General

    Letter; PEGCC Letter; SIFMA Letter.

    \435\ See infra section V.B of this Release, especially nn. 511-

    515; Proposing Release, supra note 11, at section V.B.

    \436\ See infra notes 511, 513 and 515.

    \437\ The SEC has based its estimates on the use of internal

    resources, for which some cost data is available, because it

    believes that an adviser would engage third-party service providers

    only if the external costs were comparable, or less than, the

    estimated internal costs of compiling, reviewing and filing the Form

    PF. As a result, the SEC's estimates of hour and cost burdens in

    this PRA analysis, and of costs in section V.B of this Release, may

    overstate the actual burdens and costs that will be incurred once

    third-party services become available.

    ---------------------------------------------------------------------------

    Advisers may also incur costs associated with the acquisition or

    use of hardware needed to perform computations or otherwise process the

    data required on Form PF.\438\ Smaller private fund advisers are

    unlikely to bear these costs because the information they are required

    to provide is limited and will, in many cases, already be maintained in

    the ordinary course of business.\439\ Even among Large Private Fund

    Advisers, these costs are likely to vary significantly. For instance,

    the cost to any Large Private Fund Adviser may depend on how many funds

    or the types of funds it manages, the state of its existing systems and

    the complexity of its business. In addition, large hedge fund and large

    liquidity fund advisers must file Form PF more frequently, on shorter

    deadlines and generally with more information than large private equity

    advisers, increasing the likelihood that filings will compete with

    other demands for computing resources and that additional resources

    will be required.

    ---------------------------------------------------------------------------

    \438\ See supra note 272.

    \439\ See supra note 382.

    ---------------------------------------------------------------------------

    Commenters did not provide estimates for the costs of acquiring or

    using hardware for purposes of Form PF. SEC staff contacted several

    organizations, including self-regulatory organizations, prime brokers

    and fund service providers, to help develop an estimate for these

    costs. Although these organizations generally were not able to provide

    such estimates, some expressed the view that the hardware costs would

    be small relative to the human capital costs and, for Large Private

    Fund Advisers, software development costs that Form PF imposes.\440\

    The SEC estimates, based in part on these conversations and the factors

    discussed above, that these costs will fall across a broad range for

    Large Private Fund Advisers. Those who are required to file less

    information, less frequently and on longer deadlines, who have excess

    capacity in their existing systems or whose business is relatively

    simple, may incur no incremental hardware costs. On the other hand,

    some Large Private Fund Advisers may need to acquire (or obtain the use

    of) computing resources equivalent to an additional server, which the

    SEC estimates would

    [[Page 71163]]

    cost approximately $50,000 fully deployed. This suggests an aggregate

    incremental cost in the first year of reporting between $0 and

    $25,000,000, though the actual cost is likely to fall in between these

    two end-points.\441\

    ---------------------------------------------------------------------------

    \440\ See supra notes 435-436 and accompanying text.

    \441\ $50,000 x 500 Large Private Fund Advisers = $25,000,000.

    ---------------------------------------------------------------------------

    CFTC:

    As adopted, CEA rule 4.27 does not impose any additional burden

    upon registered CPOs and CTAs that are dually registered as investment

    advisers with the SEC. By filing the Form PF with the SEC, these dual

    registrants would be deemed to have satisfied certain of their filing

    obligations with the CFTC should the CFTC adopt such requirements, and

    the CFTC is not imposing any additional burdens herein. Therefore, any

    burden imposed by Form PF through CEA rule 4.27 on entities registered

    with both the CFTC and the SEC has been accounted for within the SEC's

    calculations regarding the impact of this collection of information

    under the PRA or, to the extent the reporting may relate to commodity

    pools that are not private funds, the CFTC anticipates that it would

    account for this burden should it adopt a future rulemaking

    establishing reporting requirements with respect to those commodity

    pools.\442\

    ---------------------------------------------------------------------------

    \442\ 44 U.S.C. 3501-3521.

    ---------------------------------------------------------------------------

    V. Economic Analysis

    As discussed above, the Dodd-Frank Act amended the Advisers Act to,

    among other things, authorize the SEC to promulgate reporting

    requirements for private fund advisers. The Dodd-Frank Act also directs

    the SEC and CFTC to jointly issue, after consultation with FSOC, rules

    establishing the form and content of any reports to be filed under this

    new authority.\443\ In enacting Sections 404 and 406 of the Dodd-Frank

    Act, Congress determined to require that private fund advisers file

    reports with the SEC and specified certain types of information that

    should be subject to reporting and/or recordkeeping requirements, but

    Congress left to the SEC the determination of the specific information

    to be maintained or reported. When determining the form and content of

    such reports, the Dodd-Frank Act authorizes the SEC to require that

    private fund advisers file such information ``as necessary and

    appropriate in the public interest and for the protection of investors,

    or for the assessment of system risk by [FSOC].'' \444\

    ---------------------------------------------------------------------------

    \443\ See section 211(e) of the Advisers Act.

    \444\ See section 204(b)(1)(A) of the Advisers Act.

    ---------------------------------------------------------------------------

    The SEC is adopting Advisers Act rule 204(b)-1 and Form PF, and the

    CFTC is adopting CEA rule 4.27 and sections 1 and 2 of Form PF, to

    implement the private fund adviser reporting requirements that the

    Dodd-Frank Act directs the Commissions to promulgate. Under these new

    rules, private fund advisers having at least $150 million in private

    fund assets under management must file with the SEC information

    responsive to all or portions of Form PF on a periodic basis. The scope

    of the required information and the frequency of the reporting is

    related to the amount of private fund assets that each private fund

    adviser manages and the types of private fund to which those assets

    relate.\445\ Specifically, smaller private fund advisers must report

    annually and provide only basic information regarding their operations

    and the private funds they advise. Large private equity advisers also

    must report on an annual basis but are required to provide additional

    information with respect to the private equity funds they manage.

    Finally, large hedge fund advisers and large liquidity fund advisers

    must report on a quarterly basis and provide more information than

    other private fund advisers.

    ---------------------------------------------------------------------------

    \445\ See section II.A of this Release (describing who must file

    Form PF); see also section II.B of this Release (discussing the

    frequency with which private fund advisers must file Form PF);

    section II.C of this Release (describing the information that

    private fund advisers must report on Form PF). See also proposed

    Instruction 9 to Form PF for information regarding the frequency

    with which private fund advisers must file Form PF.

    ---------------------------------------------------------------------------

    The Advisers Act directs the SEC, when engaging in rulemaking that

    requires it to consider or determine whether an action is necessary or

    appropriate in the public interest, to consider, in addition to the

    protection of investors, whether the action will promote efficiency,

    competition and capital formation.\446\ The Commissions are sensitive

    to the costs and benefits of their respective rules and have carefully

    considered the costs and benefits of this rulemaking. The SEC's

    consideration of the costs and benefits of this rulemaking has included

    whether this rulemaking will promote efficiency, competition and

    capital formation. In the proposal, the Commissions identified certain

    costs and benefits of Advisers Act rule 204(b)-1, CEA rule 4.27 and

    Form PF and requested comment on all aspects of their cost-benefit

    analyses. The comments the Commissions received on those analyses are

    discussed below.

    ---------------------------------------------------------------------------

    \446\ See section 202(c) of the Advisers Act.

    ---------------------------------------------------------------------------

    In considering the benefits and costs of this rulemaking, we have

    also considered alternatives to the requirements we are adopting. All

    of these alternatives would require at least some registered private

    fund advisers to report at least some information because Congress

    directed the SEC to adopt such reporting requirements. Among the

    alternatives that we considered were requirements that varied along the

    following five dimensions: (1) Requiring more or less information; (2)

    requiring more or fewer advisers to complete the Form; (3) allowing

    advisers to rely more on their existing methodologies and recordkeeping

    practices in completing the Form (or, alternatively, requiring more

    standardized responses); (4) requiring more or less frequent reporting;

    and (5) allowing advisers more or less time to complete and file the

    Form.

    Alternatives along each of these dimensions have advantages and

    disadvantages. Obtaining more standardized information from more

    advisers more often and more quickly would likely improve the value of

    the Form PF data to FSOC and other regulators, and several commenters

    supported alternatives along one or more of these dimensions.\447\ The

    Commissions are concerned, however, that the costs of such changes may,

    in general, increase more quickly than the benefits.\448\ On the other

    hand, the Commissions have considered, and are adopting changes from

    the proposal, that allow advisers more time to file the Form,\449\

    permit large private equity advisers to file less frequently,\450\

    generally reduce the amount of information required,\451\ reduce the

    number of advisers required to file the Form\452\ and allow advisers to

    rely more on their existing methodologies and recordkeeping

    practices.\453\ A number of commenters supported these changes and, in

    some cases, would have preferred that we further reduce the reporting

    burdens.\454\ We believe, however, that the approach we are adopting

    strikes an appropriate balance between the benefits of the information

    to be collected and the costs to advisers

    [[Page 71164]]

    of providing it. These benefits and costs are discussed in greater

    detail below.

    ---------------------------------------------------------------------------

    \447\ See, e.g., AFL-CIO Letter; AFR Letter. See also CII

    Letter; MSCI Letter.

    \448\ See, e.g., supra discussion following notes 101 and 158

    and text accompanying note 256. We believe, however, that there are

    some exceptions, such as the additional information it has

    determined to request in section 1b of the Form. See supra section

    II.C.1 of this Release.

    \449\ See supra section II.B.2 of this Release.

    \450\ See supra section II.B.1 of this Release.

    \451\ See supra section II.C of this Release.

    \452\ See supra section II.A of this Release.

    \453\ See supra section II.C of this Release.

    \454\ See, e.g., IAA Letter; MFA Letter; PEGCC Letter; SIFMA

    Letter.

    ---------------------------------------------------------------------------

    A. Benefits

    We believe that Form PF will create two principal classes of

    benefits. First, the information collected will facilitate FSOC's

    understanding and monitoring of systemic risk in the private fund

    industry and assist FSOC in determining whether and how to deploy its

    regulatory tools with respect to nonbank financial companies. Second,

    we expect this information to enhance the Commissions' ability to

    evaluate and develop regulatory policies and improve the efficiency and

    effectiveness of our efforts to protect investors and maintain fair,

    orderly and efficient markets.

    Congress passed the Dodd-Frank Act in the wake of what some have

    called ``the greatest financial crisis since the Great Depression.''

    \455\ The crisis imposed immense costs on individuals and businesses,

    with millions of jobs disappearing from the U.S. economy, large numbers

    of families losing their homes to foreclosure, nearly $11 trillion in

    household wealth lost, including retirement accounts and life savings,

    and many businesses, large and small, facing serious challenges.\456\

    Congress responded to the crisis, in part, by establishing FSOC as the

    center of a framework intended ``to prevent a recurrence or mitigate

    the impact of financial crises that could cripple financial markets and

    damage the economy.'' \457\ The goal of this framework, in other words,

    is the avoidance of significant harm to the U.S. economy from future

    financial crises.

    ---------------------------------------------------------------------------

    \455\ The Financial Crisis Inquiry Report: Final Report of the

    National Commission on the Causes of the Financial and Economic

    Crisis in the United States, Financial Crisis Inquiry Commission

    (Jan. 2011) (``Financial Crisis Inquiry Report'') at xv.

    \456\ See id., at xv-xvi. See also Senate Committee Report,

    supra note 5, at 39.

    \457\ Id.

    ---------------------------------------------------------------------------

    Under the Dodd-Frank Act, FSOC must ``monitor emerging risks to

    U.S. financial stability'' and employ its regulatory tools to address

    those risks.\458\ For this purpose, the Dodd-Frank Act granted FSOC the

    ability to determine that a nonbank financial company will be subject

    to the supervision of the FRB if the company may pose risks to U.S.

    financial stability as a result of its activities or in the event of

    its material financial distress. FSOC may also recommend to the FRB

    heightened prudential standards for designated nonbank financial

    companies.\459\ In addition, the Dodd-Frank Act authorizes FSOC to

    issue recommendations to primary financial regulators for more

    stringent regulation of financial activities that it determines may

    create or increase systemic risk.\460\

    ---------------------------------------------------------------------------

    \458\ See id., at 2. See also supra note 6 and accompanying

    text.

    \459\ See supra note 7 and accompanying text.

    \460\ See supra note 8 and accompanying text.

    ---------------------------------------------------------------------------

    Congress recognized that FSOC would need information from private

    fund advisers to carry out its duties and to determine whether and how

    to exercise these regulatory authorities. For instance, a Senate

    committee report noted that ``no precise data regarding the size and

    scope of hedge fund activities are available[, and while] hedge funds

    are generally not thought to have caused the current financial crisis,

    information regarding their size, strategies, and positions could be

    crucial to regulatory attempts to deal with a future crisis.'' \461\ To

    that end, Congress mandated that the Commissions, as the primary

    regulators of private fund advisers, gather information from these

    advisers for FSOC's use. The Commissions have designed Form PF, in

    consultation with staff representing FSOC's members, to implement this

    mandate.\462\

    ---------------------------------------------------------------------------

    \461\ See Senate Committee Report, supra note 5, at 38.

    \462\ See section II.C of this Release (describing the

    information that private fund advisers must report on Form PF).

    ---------------------------------------------------------------------------

    Recent releases from FSOC illuminate how Form PF will serve an

    essential role in FSOC's monitoring of, and exercise of regulatory

    authority over, the private fund industry. For instance, in one

    release, FSOC confirmed that the information reported on Form PF is

    important not only to conducting an assessment of systemic risk among

    private fund advisers but also to determining how that assessment

    should be made.\463\ Guidance in this FSOC release also suggests the

    role Form PF data will play in the process of determining whether a

    private fund adviser or the funds it manages will be subject to FRB

    supervision.\464\ More specifically, the Dodd-Frank Act identifies

    certain factors that FSOC must consider in making a determination to

    designate a nonbank financial company for FRB supervision, and FSOC's

    recent guidance organizes those factors into categories, including

    size, interconnectedness, use of leverage, liquidity risk and maturity

    mismatch and concentration.\465\ As discussed in detail throughout

    section II.C of this Release, the information reported on Form PF is

    designed, in part, to provide FSOC with data to assess these factors in

    a manner that is relevant to the particular type of fund about which

    the adviser is reporting.\466\ Finally, we expect that FSOC will use

    Form PF data to supplement the data that it collects regarding other

    financial market participants and gain a broader view of the financial

    system than is currently available to regulators.\467\ In this manner,

    we believe that the information collected through Form PF could play an

    important role in FSOC's monitoring of systemic risk, both in the

    private fund industry and in the financial markets more broadly.

    ---------------------------------------------------------------------------

    \463\ See supra note 21 and accompanying text.

    \464\ In the proposed three-stage process for making such

    determinations, the first and second stages would utilize publicly

    available data and data that, like Form PF, is collected by other

    regulators. A third stage of screening would generally involve OFR

    collecting additional, targeted information directly from these

    firms, which FSOC would analyze along with Form PF data and other

    data used in the first two stages. See supra notes 45-46 and

    accompanying text.

    \465\ See FSOC Second Notice, supra note 6.

    \466\ See, e.g., supra notes 192, 228, 266, 282, 284, 298 and

    323 and accompanying text.

    \467\ See, e.g., Proposing Release, supra note 12, at n. 120 and

    accompanying text.

    ---------------------------------------------------------------------------

    In addition to the content of the Form, the reporting frequency,

    filing deadlines and reporting thresholds have been designed to provide

    FSOC the information it needs to monitor systemic risk across the

    private fund industry while balancing the burdens these reporting

    requirements will impose on advisers. For instance, although most

    advisers will only report annually on Form PF, large hedge fund and

    large liquidity fund advisers will report quarterly because we

    understand, based on our staffs' consultations with staff representing

    FSOC's members, that this will provide FSOC with timely data that it

    may use to identify emerging trends in systemic risk.\468\ The filing

    deadlines are, similarly, designed to provide FSOC with timely data so

    that it may understand and monitor systemic risk on a reasonably

    current basis.\469\ Moreover, as discussed above, the reporting

    thresholds are designed to provide FSOC with a broad picture of the

    private fund industry while relieving smaller advisers from much of the

    costs associated with the more detailed reporting.\470\ We understand

    that obtaining this broad picture will help FSOC to contextualize its

    analysis and assess whether systemic risk may exist across the private

    fund industry and to identify areas where OFR may

    [[Page 71165]]

    want to obtain additional information.\471\

    ---------------------------------------------------------------------------

    \468\ See supra section II.B.1 of this Release (discussing

    reporting frequency and comments on the proposed reporting

    frequency).

    \469\ See supra section II.B.2 of this Release (discussing

    reporting deadlines and comments on the proposed deadlines).

    \470\ See supra section II.A.4.a of this Release (discussing

    large adviser thresholds and comments on the proposed thresholds).

    See also section II.A of this Release (discussing the minimum

    reporting thresholds).

    \471\ Id.

    ---------------------------------------------------------------------------

    Certain publications from international groups and researchers have

    suggested that data like that collected on Form PF will be valuable to

    the regulation of systemic risk. For instance, as discussed above,

    several international groups have continued working to close

    information gaps by increasing the disclosures provided to

    regulators.\472\ These groups have emphasized the importance, in their

    view, of designing and collecting better information to support the

    identification and modeling of systemic risk.\473\ In addition,

    research papers have suggested that information regarding private funds

    should play an important role in monitoring systemic risk, and one

    study argues that more direct measures of systemic risk would be

    possible with information from the majority of funds in the

    industry.\474\ Another recent research paper argues that expanding the

    FRB's flow of funds data to include more detailed quarterly information

    regarding the holding and transfer of financial instruments, including

    information regarding the portfolios of hedge funds, ``would have been

    of material value to U.S. regulators in ameliorating the recent

    financial crisis and could be of aid in understanding the potential

    vulnerabilities of an innovative financial system in the future.''

    \475\ Others have commented on hedge fund reporting specifically,

    stating that ``[t]ransparency to regulators can help them measure and

    manage possible systemic risk and is relatively costless.'' \476\

    ---------------------------------------------------------------------------

    \472\ See supra notes 28-29 and accompanying text.

    \473\ Id.

    \474\ See, e.g., Nicholas Chan, Mila Getmansky, Shane Haas and

    Andrew Lo, Systemic Risk and Hedge Funds, in The Risks of Financial

    Institutions (Mark Carey and Rene Stulz, eds., 2007) at 238; Monica

    Billio, Mila Getmansky, Andrew Lo and Loriana Pelizzon, Econometric

    Measures of Systemic Risk in the Finance and Insurance Sectors,

    National Bureau of Economic Research (July 2010).

    \475\ Leonard Nakamura, Durable Financial Regulation: Monitoring

    Financial Instruments as a Counterpart to Regulating Financial

    Institutions, National Bureau of Economic Research (May 2011) at 1.

    \476\ Stephen Brown, et al., Hedge Funds, Mutual Funds, and

    ETFs, in Regulating Wall Street: The Dodd-Frank Act and the New

    Architecture of Global Finance 360 (Viral V. Acharya, et al., eds.,

    2011) (supporting ``regular and timely'' reporting of asset

    positions and leverage levels). See also Ferran, supra note 307, at

    28.

    ---------------------------------------------------------------------------

    Other academics and economists, while supporting regulatory efforts

    to assess and mitigate systemic risk, have cautioned that achieving the

    goal of substantially reducing systemic risk may prove difficult. For

    example, while the authors of one recent work support establishing

    ``early warning indicators'' for financial crises, they argue that the

    most significant challenge is not the design of a framework for

    systemic risk analysis but rather:

    the well-entrenched tendency of policy makers and market

    participants to treat the signals as irrelevant archaic residuals of

    an outdated framework, assuming that old rules of valuation no

    longer apply. If the past * * * is any guide, these signals will be

    dismissed more often than not.\477\

    ---------------------------------------------------------------------------

    \477\ Carmen M. Reinhart and Kenneth S. Rogoff, This Time is

    Different: Eight Centuries of Financial Folly (2009) (``Reinhart and

    Rogoff'') at 277, 280 and 281 (after observing this tendency to

    disregard signals of systemic risk, the authors conclude that this

    ``is why we also need to think about improving institutions,'' which

    may be important to reducing this risk).

    Accordingly, although collecting information on Form PF will

    increase the transparency of the private fund industry to regulators

    (an important prerequisite to understanding and monitoring systemic

    risk), transparency alone may not be sufficient to address systemic

    risk.\478\

    ---------------------------------------------------------------------------

    \478\ See also FSOC 2011 Annual Report, supra note 19, at ii

    (explaining that identifying and mitigating potential threats to

    financial stability ``is an inherently difficult exercise. No

    financial crisis emerges in exactly the same way as its

    predecessors, and the most significant future threats will often be

    the ones that are hardest to diagnose and preempt'' but going on to

    state that, ``[n]onetheless, there is a strong case for improving

    the quality of information available to the public, supervisors, and

    regulators about risks in financial institutions and markets.'')

    ---------------------------------------------------------------------------

    Some commenters agreed that Form PF data will ``facilitate FSOC's

    ability to promote the soundness of the U.S. financial system.'' \479\

    One commenter characterized Form PF as determining the extent to which

    FSOC and the SEC have access to ``data essential to monitoring systemic

    risks that, as we saw in 2007 and 2008, cause substantial damage to the

    financial markets and the broader economy when they go unchecked.''

    \480\ Another commenter stated that Form PF data could aid in the

    assessment of ``systemic risks due to connectivity and contagion.''

    \481\ One commenter who expressed reservations regarding specific

    aspects of the proposal nonetheless supported ``the approach proposed

    by the SEC and CFTC to collect information from registered private fund

    managers through periodic, confidential reports on Form PF'' and agreed

    that gathering data ``from different types of market participants,

    including investment advisers and the funds they manage, * * *is a

    critical component of effective systemic risk monitoring and

    regulation.'' \482\

    ---------------------------------------------------------------------------

    \479\ CII Letter. See also, e.g., AFL-CIO Letter; AFR Letter.

    \480\ AFL-CIO Letter.

    \481\ MSCI Letter (though also noting that they ``see less

    potential benefit from this exercise to track the formation of asset

    class bubbles'' and that certain of the requested information would

    be difficult to aggregate for purposes of industry-wide analysis;

    see section II.C for a discussion of some of this commenter's

    observations regarding use of particular data collected on Form PF).

    \482\ MFA Letter.

    ---------------------------------------------------------------------------

    Some commenters, however, doubted that Form PF would be beneficial

    for monitoring systemic risk.\483\ One commenter, for instance, argued

    that ``Form PF requires firms to calculate and disclose information

    with uncertain benefits to regulators, and the broad scope of private

    funds subject to this burden has not been justified.'' \484\ Others

    argued that particular types of funds, such as private equity funds,

    should be excluded from the reporting because they do not, in their

    view, have the potential to pose systemic risk or that certain of the

    proposed questions on Form PF would not prove beneficial for systemic

    risk analysis.\485\ As discussed above, based on SEC staff's

    consultation with staff representing FSOC's members, we continue to

    believe that targeted information regarding the leverage practices of

    private equity funds will provide information that FSOC may use to

    monitor activities and trends in this industry that are of potential

    systemic importance.\486\ In addition, we have made a number of changes

    from the proposal intended to address the specific concerns of these

    commenters and believe that Form PF, as adopted, will be an important

    source of information for FSOC as it carries out its duties as they

    relate to the private fund industry.\487\

    ---------------------------------------------------------------------------

    \483\ See, e.g., Fidelity Letter; PEGCC Letter; TCW Letter; USCC

    Letter.

    \484\ CCMR Letter; see also USCC Letter (acknowledging, however,

    that ``greater access to comprehensive market and industry

    information will assist [FSOC] in identifying emerging threats to

    the stability of the U.S. financial system.''); BlackRock Letter;

    SIFMA Letter.

    \485\ See, e.g., PEGCC Letter. See also supra section II.C of

    this Release.

    \486\ See supra notes 307-308 and accompanying text.

    \487\ See supra section II of this Release (discussing changes

    from the proposal).

    ---------------------------------------------------------------------------

    We cannot predict today what the scope of the next financial crisis

    will be, and Form PF is only one part of a broader framework

    established under the Dodd-Frank Act to monitor and address systemic

    risk.\488\ Other measures contemplated by the Dodd-Frank Act, including

    the so-called ``Volcker rule,'' enhanced regulation of swaps and the

    FRB's oversight of systemically important financial

    [[Page 71166]]

    institutions may be critical to identifying and mitigating the next

    financial crisis. We anticipate, however, that Form PF will improve the

    information available to regulators as they seek to prevent or mitigate

    the effects of future financial crises, and if this information helps

    to avoid even a small portion of the costs of a financial crisis like

    the most recent one, the benefits of Form PF will be very significant.

    ---------------------------------------------------------------------------

    \488\ See supra note 457 and accompanying text.

    ---------------------------------------------------------------------------

    Reporting on Form PF will also benefit investors and other market

    participants by improving the information available to the Commissions

    regarding the private fund industry and how it interacts with markets.

    Today, regulators have little reliable data regarding this rapidly

    growing sector and frequently have to rely on data from other sources,

    which when available may be incomplete. The SEC recently adopted

    amendments to Form ADV that will require the reporting of important

    information regarding private funds, but this includes little or no

    information regarding, for instance, performance, leverage or the

    riskiness of a fund's financial activities.\489\ As discussed above,

    the data collected through Form PF, which will be more reliable than

    existing data regarding the industry and significantly extend the data

    available through the revised Form ADV, will assist FSOC in identifying

    and addressing risks to U.S. financial stability. This may, in turn,

    protect investors and other market participants from significant

    losses.

    ---------------------------------------------------------------------------

    \489\ See Implementing Adopting Release, supra note 11.

    Information reported on Form ADV is made available to the public,

    while Form PF data generally will not be. See supra section II.D

    (discussing confidentiality of Form PF data). This has informed the

    SEC's determination to require certain private fund information on

    Form ADV and other private fund information on Form PF.

    ---------------------------------------------------------------------------

    In addition, this data will provide the Commissions with a more

    complete view of the financial markets in general and the private fund

    industry in particular. This broader perspective and more reliable data

    may enhance the Commissions' ability to develop and frame regulatory

    policies regarding the private fund industry, its advisers and the

    markets in which they participate, and to more effectively evaluate the

    outcomes of regulatory policies and programs directed at this sector,

    including for the protection of private fund investors. For instance,

    Form PF data may help the Commissions to discern relationships between

    regulatory actions and private fund results or activities.

    We also expect the Form PF data to improve the efficiency and

    effectiveness of the Commissions' oversight of private fund advisers by

    enabling staff to manage and analyze information related to the risks

    that private funds pose more quickly, more effectively and at a lower

    cost than is currently possible. This will allow the Commissions to

    more efficiently and effectively target their examination programs. The

    Commissions will be able to use Form PF information to generate reports

    on the industry, its characteristics and trends. We expect that these

    reports will help the Commissions to anticipate regulatory problems,

    allocate and reallocate resources, and more fully evaluate and

    anticipate the implications of various regulatory actions the

    Commissions may consider taking. This will increase both the efficiency

    and effectiveness of the Commissions' programs and, thereby, increase

    investor protection. Form PF data will also help the Commissions better

    understand the investment activities of private funds and the scope of

    their potential effect on investors and the markets that the

    Commissions regulate.

    Commenters generally focused on the benefits of Form PF as they

    relate to systemic risk rather than investor protection. However, one

    supporter, who represents twelve million workers and sponsors pension

    and employee benefit plans holding almost half a trillion dollars in

    assets, agreed that ``[c]omprehensive disclosure requirements for

    private funds will provide important protections for [its] members'

    retirement savings.'' \490\ On the other hand, some commenters who

    questioned Form PF's merits expressed skepticism regarding the Form's

    benefits generally, not just with respect to the monitoring of systemic

    risk.\491\ As discussed in detail above, we have made a number of

    changes from the proposal designed to address commenter concerns

    regarding certain aspects of the proposed reporting requirements.\492\

    However, we continue to believe that Form PF, as adopted, will increase

    the amount and quality of information available regarding a previously

    opaque area of investment activity and, thereby, enhance the ability of

    regulators to protect investors and maintain fair, orderly and

    efficient markets.

    ---------------------------------------------------------------------------

    \490\ AFL-CIO Letter. See also AFR Letter.

    \491\ See, e.g., supra note 484.

    \492\ See supra section II of this Release (discussing changes

    from the proposal).

    ---------------------------------------------------------------------------

    The Commissions believe that private fund advisers, investors in

    private funds and the companies in which private funds may invest will

    also enjoy certain benefits related to Form PF. For example, we

    identified above two principal classes of benefits--assistance to FSOC

    in carrying out its mission and improvements to the ability of

    regulators to protect investors and oversee markets--in which these

    groups will share, including indirectly as participants in the U.S.

    financial system. With respect to hedge fund advisers, for instance,

    data indicate that the number of funds shut down each year increased

    significantly during the recent financial crisis, suggesting that these

    advisers may benefit if a future financial crisis is averted or

    mitigated.\493\ Private fund investors and private fund advisers will

    also benefit if reporting on Form PF, by requiring advisers to review

    their fund's portfolios, trading practices and risk profiles, causes

    advisers to improve their risk management practices or internal

    controls.

    ---------------------------------------------------------------------------

    \493\ See HedgeFund Intelligence Global Review 2011, HFI (Spring

    2011) (``HFI 2011 Global Review'').

    ---------------------------------------------------------------------------

    Reporting on Form PF may also result in a positive effect on

    capital formation. Although Form PF data generally will be non-public,

    Form PF will increase transparency to regulators.\494\ The SEC believes

    that private fund advisers may, as a result, assess more carefully the

    risks associated with particular investments and, in the aggregate,

    allocate capital to investments with a higher value to the economy as a

    whole. To the extent that changes in investment allocations lead to

    improved economic outcomes in the aggregate, Form PF reporting may

    result in a positive effect on capital available for investment.

    ---------------------------------------------------------------------------

    \494\ See supra section II.D (discussing confidentiality of Form

    PF data).

    ---------------------------------------------------------------------------

    Should the CFTC adopt certain of its proposed systemic risk

    reporting requirements, the coordination between the CFTC and SEC on

    this rulemaking would result in significant efficiencies for any

    private fund adviser that is also registered as a CPO or CTA with the

    CFTC. This is because, under CEA rule 4.27, filing Form PF would

    satisfy both SEC and CFTC reporting obligations with respect to

    commodity pools that are ``private funds'' and CPOs and CTAs would have

    the option of reporting on Form PF regarding commodity pools that are

    not private funds to satisfy certain other CFTC reporting obligations,

    in each case should the CFTC adopt such reporting obligations.

    As discussed in section I.B of this Release, we have also

    coordinated with foreign financial regulators regarding the reporting

    of systemic risk information regarding private funds and

    [[Page 71167]]

    anticipate that this coordination, as reflected in Form PF, will result

    in greater efficiencies in private fund reporting, as well as

    information sharing and private fund monitoring among foreign financial

    regulators. Ongoing work among various international organizations has

    emphasized the importance of filling gaps in the data regarding

    financial market participants, and one goal of this coordination is to

    collect comparable information regarding private funds, which will aid

    in the assessment of systemic risk on a global basis.\495\ Several

    commenters agreed that international coordination in connection with

    private fund reporting is important and encouraged us to take an

    approach consistent with international precedents.\496\ We have made

    several changes from the proposal intended to more closely align Form

    PF with international precedent.\497\

    ---------------------------------------------------------------------------

    \495\ See supra note 29 and accompanying text.

    \496\ See supra note 30 and accompanying text.

    \497\ See supra note 35 and accompanying text.

    ---------------------------------------------------------------------------

    As discussed above, we also believe that private fund advisers

    already collect or calculate some of the information required on the

    Form at least as often as they must file the Form, creating

    efficiencies for, and benefiting, advisers in satisfying their

    reporting requirements.\498\

    ---------------------------------------------------------------------------

    \498\ See supra note 382; Proposing Release, supra note 12, at

    n.105; but see supra note 146.

    ---------------------------------------------------------------------------

    B. Costs

    Reporting on Form PF will also impose certain costs on private fund

    advisers and, potentially, other market participants. For the most

    part, these are the same costs discussed in the PRA analysis above

    because that analysis must account for the burdens of responding to the

    Commissions' reporting requirements. In order to minimize these direct

    costs, the reporting requirements are scaled to the adviser's size, the

    size of funds and the types of private funds each adviser manages. For

    instance, smaller private fund advisers and large private equity

    advisers generally must report less information and less frequently

    than large hedge fund advisers and large liquidity fund advisers.\499\

    This scaled approach is intended to provide FSOC with a broad picture

    of the private fund industry while relieving smaller advisers from much

    of the costs associated with the more detailed reporting. It is also

    designed to reflect the different implications for systemic risk that

    may be presented by different investment strategies, and thus seeks to

    adjust the costs of the reporting in proportion to the differing

    potential benefits of the information reported with respect to these

    strategies.

    ---------------------------------------------------------------------------

    \499\ See section II.A of this Release (describing who must file

    Form PF); section II.B of this Release (discussing the frequency

    with which private fund advisers must file Form PF); section II.C of

    this Release (describing the information that private fund advisers

    must report on Form PF). See also Instruction 9 to Form PF

    (discussing information regarding the frequency with which private

    fund advisers must file Form PF).

    ---------------------------------------------------------------------------

    We expect that the costs Form PF imposes will be most significant

    for the first report that a private fund adviser is required to file

    because the adviser will need to familiarize itself with the new

    reporting form and may need to configure its systems in order to

    efficiently gather the required information. We also anticipate that

    the initial report will require more attention from senior personnel,

    including compliance managers and senior risk management specialists,

    than will subsequent reports. In addition, we expect that some Large

    Private Fund Advisers will find it efficient to automate some portion

    of the reporting process, which will increase the burden of the initial

    filing but reduce the burden of subsequent filings.

    Several commenters addressed the cost estimates included in the

    Proposing Release. These commenters generally viewed these estimates as

    understated and, in several cases, argued that the costs of the initial

    report, in particular, would be greater than assumed.\500\ These

    commenters offered two common explanations for the higher than

    estimated costs: (1) ``[m]any of the requested items on Form PF are not

    tracked by advisory firms on the frequency, by the category or on a

    fund-by-fund basis in the manner requested by the proposed Form,''

    meaning that advisers would need to develop systems for the reporting

    or engage in a manual process of gathering and compiling data; \501\

    and (2) completing the Form will require gathering information from

    many different internal and external parties and systems.\502\

    ---------------------------------------------------------------------------

    \500\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General

    Letter; MFA Letter; PEGCC Letter; Seward Letter.

    \501\ TCW Letter; but see also supra note 146.

    \502\ See, e.g., Kleinberg General Letter; MFA Letter; PEGCC

    Letter.

    ---------------------------------------------------------------------------

    We have carefully considered comments suggesting that the reporting

    requirements would be more burdensome than estimated in the Proposing

    Release, and the SEC has substantially increased its estimates of the

    hour burdens included in this PRA analysis, which flow through to these

    estimates of costs.\503\ We have, however, also taken these comments

    into consideration in making a number of changes from the proposal that

    are intended to reduce the burdens of reporting on Form PF. These

    include global changes to the Form, such as allowing most advisers more

    time to file following the end of a fiscal period (reducing the

    likelihood that Form PF will compete with other priorities for

    advisers' resources or require employment of additional personnel),

    extending the compliance date, allowing large private equity advisers

    to report annually rather than quarterly, increasing the threshold for

    large private equity advisers and permitting greater reliance on

    advisers' existing methodologies and recordkeeping practices. We have

    also modified specific questions in response to comments so that

    responding to the Form is less burdensome.\504\ We expect, on the

    whole, that these changes will mitigate the cost of reporting.\505\ In

    addition, we have added a minimum reporting threshold, which will not

    reduce the burden to any particular filer of reporting but will reduce

    the aggregate burden that Form PF imposes because fewer advisers will

    be required to report.

    ---------------------------------------------------------------------------

    \503\ See supra notes 383, 394-395, 404 and 414 and accompanying

    text.

    \504\ See supra section II.C of this Release.

    \505\ See supra notes 388-389, 397-398, 407-409 and 418-420 and

    accompanying text. We also note that the original cost estimates, as

    well as the revised estimates included in this Release, include

    allocations for systems development among Large Private Fund

    Advisers (who are most likely to find automation cost effective) and

    assume that information would need to be gathered from many sources,

    both internal and external. See supra note 435 and accompanying

    text.

    ---------------------------------------------------------------------------

    After filing their initial reports, we anticipate that advisers

    will incur significantly lower costs because much of the work involved

    in the initial report is non-recurring and because of efficiencies

    realized from system configuration and reporting automation efforts

    accounted for in the initial reporting period. In addition, we estimate

    that senior personnel will bear less of the reporting burden in

    subsequent reporting periods, reducing costs though not necessarily

    reducing the burden hours.

    One commenter agreed that efficiencies will be realized over

    time,\506\ but another stated that, at least for private real estate

    funds, they would not.\507\ Having considered these comments, we

    continue to believe that, for the average adviser (and particularly for

    those with more liquid portfolios and greater systems capabilities),

    efficiencies will be realized over time.

    [[Page 71168]]

    We have, however, also increased the cost estimates for subsequent

    filings in recognition of concerns regarding the overall burden of the

    reporting and the possibility that efficiencies are not the same for

    all types of private fund adviser.

    ---------------------------------------------------------------------------

    \506\ See MFA Letter.

    \507\ See comment letter of The National Association of Real

    Estate Investment Managers (Mar. 24, 2011).

    ---------------------------------------------------------------------------

    Based on the foregoing, we estimate \508\ that the periodic filing

    requirements under Form PF (including configuring systems and

    compiling, automating, reviewing and electronically filing the report)

    will impose:

    ---------------------------------------------------------------------------

    \508\ We understand that some advisers may outsource all or a

    portion of their Form PF reporting responsibilities to software

    consultants, vendors, filing agents or other third-party service

    providers. We have based our estimates on the use of internal

    resources, for which some cost data is available, because we believe

    that an adviser would engage third-party service providers only if

    the external costs were comparable, or less than, the estimated

    internal costs of compiling, reviewing and filing the Form PF. The

    hourly wage data used in this Economic Analysis section of the

    Release is based on the Securities Industry and Financial Markets

    Association's Report on Management & Professional Earnings in the

    Securities Industry 2010 and Office Salaries in the Securities

    Industry 2010 (``SIFMA Earnings Reports''). This data has been

    modified to account for an 1,800-hour work-year and multiplied by

    5.35 for management and professional employees and by 2.93 for

    general and compliance clerks to account for bonuses, firm size,

    employee benefits and overhead.

    ---------------------------------------------------------------------------

    (1) 40 burden hours at a cost of $13,600 \509\ per smaller private

    fund adviser for the initial annual report;

    ---------------------------------------------------------------------------

    \509\ We expect that for the initial report these activities

    will most likely be performed equally by a compliance manager at a

    cost of $273 per hour and a senior risk management specialist at a

    cost of $409 per hour and that, because of the limited scope of

    information required from smaller private fund advisers, these

    advisers generally would not realize significant benefits from or

    incur significant costs for system configuration or automation.

    ($273/hour x 0.5 + $409/hour x 0.5) x 40 hours = approximately

    $13,600.

    ---------------------------------------------------------------------------

    (2) 15 burden hours at a cost of $4,200 \510\ per smaller private

    fund adviser for each subsequent annual report;

    ---------------------------------------------------------------------------

    \510\ We expect that for subsequent reports senior personnel

    will bear less of the reporting burden. As a result, we estimate

    that these activities will most likely be performed equally by a

    compliance manager at a cost of $273 per hour, a senior compliance

    examiner at a cost of $235 per hour, a senior risk management

    specialist at a cost of $409 per hour and a risk management

    specialist at a cost of $192 per hour. ($273/hour x 0.25 + $235/hour

    x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 15 hours =

    approximately $4,200.

    ---------------------------------------------------------------------------

    (3) 100 burden hours at a cost of $31,000 \511\ per large private

    equity fund adviser for the initial annual report;

    ---------------------------------------------------------------------------

    \511\ The SEC expects that for the initial report, of a total

    estimated burden of 100 hours, approximately 60 hours will most

    likely be performed by compliance professionals and 40 hours will

    most likely be performed by programmers working on system

    configuration and reporting automation. Of the work performed by

    compliance professionals, the SEC anticipates that it will be

    performed equally by a compliance manager at a cost of $273 per hour

    and a senior risk management specialist at a cost of $409 per hour.

    Of the work performed by programmers, the SEC anticipates that it

    will be performed equally by a senior programmer at a cost of $304

    per hour and a programmer analyst at a cost of $224 per hour. ($273/

    hour x 0.5 + $409/hour x 0.5) x 60 hours + ($304/hour x 0.5 + $224/

    hour x 0.5) x 40 hours = approximately $31,000.

    ---------------------------------------------------------------------------

    (4) 50 burden hours at a cost of $13,900 \512\ per large private

    equity fund adviser for each subsequent annual report;

    ---------------------------------------------------------------------------

    \512\ The SEC expects that for subsequent reports senior

    personnel will bear less of the reporting burden and that

    significant system configuration and reporting automation costs will

    not be incurred. As a result, the SEC estimates that these

    activities will most likely be performed equally by a compliance

    manager at a cost of $273 per hour, a senior compliance examiner at

    a cost of $235 per hour, a senior risk management specialist at a

    cost of $409 per hour and a risk management specialist at a cost of

    $192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x

    0.25 + $192/hour x 0.25) x 50 hours = approximately $13,900.

    ---------------------------------------------------------------------------

    (5) 300 burden hours at a cost of $93,100 \513\ per large hedge

    fund adviser for the initial quarterly report;

    ---------------------------------------------------------------------------

    \513\ We expect that for the initial report, of a total

    estimated burden of 300 hours, approximately 180 hours will most

    likely be performed by compliance professionals and 120 hours will

    most likely be performed by programmers working on system

    configuration and reporting automation. Of the work performed by

    compliance professionals, we anticipate that it will be performed

    equally by a compliance manager at a cost of $273 per hour and a

    senior risk management specialist at a cost of $409 per hour. Of the

    work performed by programmers, we anticipate that it will be

    performed equally by a senior programmer at a cost of $304 per hour

    and a programmer analyst at a cost of $224 per hour. ($273/hour x

    0.5 + $409/hour x 0.5) x 180 hours + ($304/hour x 0.5 + $224/hour x

    0.5) x 120 hours = approximately $93,100.

    ---------------------------------------------------------------------------

    (6) 140 burden hours at a cost of $38,800 \514\ per large hedge

    fund adviser for each subsequent quarterly report;

    ---------------------------------------------------------------------------

    \514\ We expect that for subsequent reports senior personnel

    will bear less of the reporting burden and that significant system

    configuration and reporting automation costs will not be incurred.

    As a result, we estimate that these activities will most likely be

    performed equally by a compliance manager at a cost of $273 per

    hour, a senior compliance examiner at a cost of $235 per hour, a

    senior risk management specialist at a cost of $409 per hour and a

    risk management specialist at a cost of $192 per hour. ($273/hour x

    0.25 + $235/hour x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 140

    hours = approximately $38,800.

    ---------------------------------------------------------------------------

    (7) 140 burden hours at a cost of $43,500 \515\ per large liquidity

    fund adviser for the initial quarterly report; and

    ---------------------------------------------------------------------------

    \515\ The SEC expects that for the initial report, of a total

    estimated burden of 140 hours, approximately 85 hours will most

    likely be performed by compliance professionals and 55 hours will

    most likely be performed by programmers working on system

    configuration and reporting automation. Of the work performed by

    compliance professionals, the SEC anticipates that it will be

    performed equally by a compliance manager at a cost of $273 per hour

    and a senior risk management specialist at a cost of $409 per hour.

    Of the work performed by programmers, the SEC anticipates that it

    will be performed equally by a senior programmer at a cost of $304

    per hour and a programmer analyst at a cost of $224 per hour. ($273/

    hour x 0.5 + $409/hour x 0.5) x 85 hours + ($304/hour x 0.5 + $224/

    hour x 0.5) x 55 hours = approximately $43,500.

    ---------------------------------------------------------------------------

    (8) 65 burden hours at a cost of $18,000 \516\ per large liquidity

    fund adviser for each subsequent quarterly report.

    ---------------------------------------------------------------------------

    \516\ The SEC expects that for subsequent reports senior

    personnel will bear less of the reporting burden and that

    significant system configuration and reporting automation costs will

    not be incurred. As a result, the SEC estimates that these

    activities will most likely be performed equally by a compliance

    manager at a cost of $273 per hour, a senior compliance examiner at

    a cost of $235 per hour, a senior risk management specialist at a

    cost of $409 per hour and a risk management specialist at a cost of

    $192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x

    0.25 + $192/hour x 0.25) x 65 hours = approximately $18,000.

    ---------------------------------------------------------------------------

    Assuming that there are 3,070 smaller private fund advisers, 250

    large hedge fund advisers, 80 large liquidity fund advisers, and 170

    large private equity fund advisers, the foregoing estimates suggest an

    annual cost of $107,000,000 \517\ for all private fund advisers in the

    first year of reporting and an annual cost of $59,800,000 in subsequent

    years.\518\

    ---------------------------------------------------------------------------

    \517\ (3,070 smaller private fund advisers x $13,600 per initial

    annual report) + (170 large private equity fund advisers x $31,000

    per initial annual report) + (250 large hedge fund advisers x

    $93,100 per initial quarterly report) + (250 large hedge fund

    advisers x 3 quarterly reports x $38,800 per subsequent quarterly

    report) + (80 large liquidity fund advisers x $43,500 per initial

    quarterly report) + (80 large liquidity fund advisers x 3 quarterly

    reports x $18,000 per subsequent quarterly report) = approximately

    $107,000,000.

    \518\ (3,070 smaller private fund advisers x $4,200 per

    subsequent annual report) + (170 large private equity fund advisers

    x $13,900 per subsequent annual report) + (250 large hedge fund

    advisers x 4 quarterly reports x $38,800 per subsequent quarterly

    report) + (80 large liquidity fund advisers x 4 quarterly reports x

    $18,000 per subsequent quarterly report) = approximately

    $59,800,000.

    ---------------------------------------------------------------------------

    The cost estimates above assume that risk and compliance personnel

    (and, in the case of Large Private Fund Advisers filing an initial

    report, programmers) will carry out the work of reporting on Form PF.

    Some commenters suggested that employees in portfolio management as

    well as legal, controller and other back office functions may also be

    involved in compiling, reviewing and filing Form PF.\519\ These

    commenters did not provide estimates for how the reporting burdens

    would be allocated among these groups of employees, and we believe the

    allocation is likely to vary significantly among advisers depending on

    the size and complexity of their operations. Based on available wage

    data, we do not believe that variations in the allocation of these

    responsibilities among the functions that we and commenters identified

    [[Page 71169]]

    would result in significantly different aggregate cost estimates.\520\

    ---------------------------------------------------------------------------

    \519\ See, e.g., Kleinberg General Letter; MFA Letter.

    \520\ For example, our estimates assume that the work is

    performed by compliance managers at $273 per hour, senior compliance

    examiners at $235 per hour, senior risk management specialists at

    $409 per hour, risk management specialists at $192 per hour and, in

    the case of Large Private Fund Advisers filing an initial report,

    programmers ranging from $304 to $224 per hour. Based on the SIFMA

    Earnings Reports, indicative costs in the other functions that

    commenters identified are: $287 per hour for a senior portfolio

    manager; $211 per hour for an intermediate portfolio manager; $430

    per hour for an assistant general counsel; $165 per hour for a fund

    senior accountant; $194 per hour for an intermediate business

    analyst; and $154 per hour for an operations specialist. An

    adviser's chief compliance officer (at a cost of $423 per hour) or

    controller (at a cost of $433 per hour) may also review the filing,

    though we would expect that in most cases their involvement would be

    more limited than that of more junior employees.

    ---------------------------------------------------------------------------

    In addition, as discussed above, a private fund adviser must file

    very limited information on Form PF if it needs to transition from

    quarterly to annual filing, if it is no longer subject to the reporting

    requirements of Form PF or if it requires a temporary hardship

    exemption under rule 204(b)-1(f). We estimate that transition and final

    filings will, collectively, cost private fund advisers as a whole

    approximately $5,200 per year.\521\ We further estimate that hardship

    exemption requests will cost private fund advisers as a whole

    approximately $760 per year.\522\ No commenters addressed these

    estimates. The estimate with respect to hardship exemptions is

    unchanged from the proposal. The estimate with respect to transition

    and final filings have been reduced because fewer filers will be

    required to report on a quarterly basis and the addition of a minimum

    reporting threshold means that fewer advisers will report in

    total.\523\

    ---------------------------------------------------------------------------

    \521\ The SEC estimates that, for the purposes of the PRA,

    transition filings will impose 7 burden hours per year on private

    fund advisers in the aggregate and that final filings will impose 71

    burden hours per year on private fund advisers in the aggregate. The

    SEC anticipates that this work will most likely be performed by a

    compliance clerk at a cost of $67 per hour. (7 burden hours + 71

    burden hours) x $67/hour = approximately $5,200.

    \522\ The SEC estimates that, for the purposes of the PRA,

    requests for temporary hardship exemptions will impose 4 burden

    hours per year on private fund advisers in the aggregate. The SEC

    anticipants that five-eighths of this work will most likely be

    performed by a compliance manager at a cost of $273 per hour and

    that three-eighths of this work will most likely be performed by a

    general clerk at a cost of $50 per hour. (($273 per hour x \5/8\ of

    an hour) + ($50 per hour x \3/8\ of an hour)) x 4 hours =

    approximately $760.

    \523\ See supra note 424.

    ---------------------------------------------------------------------------

    Advisers may also incur costs related to the modification or

    deployment of systems to support their reporting obligations under Form

    PF.\524\ As discussed above, certain of the anticipated costs to Large

    Private Fund Advisers of automating Form PF reporting are accounted for

    in our cost estimates.\525\ In addition, Large Private Fund Advisers

    may incur costs associated with the acquisition or use of hardware

    needed to perform computations or otherwise process the data required

    on Form PF.\526\ Commenters did not provide estimates for these costs.

    However, as discussed above, we estimate that these costs, which are

    likely to vary significantly among advisers, will range from $0 to

    $25,000,000 in the aggregate for the first year of reporting, with the

    actual costs likely to fall in between these two end-points.\527\

    ---------------------------------------------------------------------------

    \524\ See supra section IV.G of this Release.

    \525\ See supra note 438 and accompanying text.

    \526\ See supra notes 434-441 and accompanying text.

    \527\ Id.

    ---------------------------------------------------------------------------

    Based on the foregoing estimates, we estimate that the aggregate

    annual costs of Form PF, other than for hardware costs, are

    approximately $108,000,000 in the first year and $60,500,000 in

    subsequent years.\528\ In addition, we estimate that hardware costs

    will add between $0 and $25,000,000 in the first year.\529\

    ---------------------------------------------------------------------------

    \528\ $107,000,000 (for periodic reporting in the first year) +

    $5,200 (for transition and final filings) + $760 (for hardship

    requests) + $684,000 (for filing fees) = approximately $108,000,000.

    $59,800,000 (for periodic reporting in subsequent years) + $5,200

    (for transition and final filings) + $760 (for hardship requests) +

    $684,000 (for filing fees) = approximately $60,500,000.

    \529\ See supra notes 440-441 and accompanying text.

    ---------------------------------------------------------------------------

    Reporting requirements can also impose costs beyond the direct

    costs associated with compiling and submitting data, and advisers

    subject to the Form PF reporting requirements may incur costs that are

    more difficult to quantify. One commenter, for instance, suggested an

    adviser may incur indirect ``costs associated with the risk of

    disclosure of highly sensitive proprietary information.'' \530\ As

    discussed above, Form PF elicits non-public information about private

    funds and their trading strategies, the public disclosure of which

    could adversely affect the funds and their investors.\531\ We are,

    however, working to establish controls designed to protect this

    sensitive information from improper or inadvertent disclosure and

    believe that the risk of such disclosure is low.\532\ If an adviser's

    Form PF data were disclosed despite the controls intended to maintain

    its confidentiality, there is some risk that a competitor may be able

    to use an adviser's data to replicate the adviser's trading strategy or

    trade against the adviser, thereby potentially harming the

    profitability of the strategy to that adviser. However, because data on

    Form PF generally could not, on its own, be used to identify individual

    investment positions, the ability of a competitor to use Form PF data

    in this manner is limited.\533\ In addition, the deadlines for filing

    Form PF have, in most cases, been significantly extended from the

    proposal, meaning that the filings will generally contain less current,

    and therefore less sensitive, data.\534\ In the very unlikely event

    that improper or inadvertent disclosures of Form PF data occurred

    frequently, the disclosures could discourage advisers from investing

    the time and other resources required to develop novel strategies,

    potentially reducing the range of options available to investors and

    inhibiting financial innovation.

    ---------------------------------------------------------------------------

    \530\ CCMR Letter.

    \531\ See supra section II.D of this Release.

    \532\ See supra sections II.D and II.E of this Release.

    \533\ See supra note 343.

    \534\ See supra notes 351 and 344 and accompanying text.

    ---------------------------------------------------------------------------

    We do not expect this rulemaking to have a significant negative

    effect on competition because the information generally will be non-

    public and similar types of SEC-registered advisers will have

    comparable burdens under the Form.\535\ In addition, the SEC does not

    expect this rulemaking to have a significant negative effect on capital

    formation, again because the information collected generally will be

    non-public and, therefore, should not affect private fund advisers'

    ability to raise capital.

    ---------------------------------------------------------------------------

    \535\ See supra section II.D of this Release for a discussion of

    confidentiality of Form PF data.

    ---------------------------------------------------------------------------

    Although Form PF data generally will be non-public, Form PF will

    increase transparency to regulators.\536\ As discussed above, this may

    result in a positive effect on capital formation because advisers may,

    as a result, assess more carefully the risks associated with particular

    investments and, in the aggregate, allocate capital to investments with

    a higher value to the economy as a whole.\537\ However, this increased

    transparency could also have a negative effect on capital formation if

    it increases advisers' aversion to risk and, as a result, reduces

    investment in projects that may be risky but beneficial to the economy

    as a whole. To the extent that changes in investment allocations lead

    to reduced economic outcomes in the aggregate, Form PF reporting may

    result in a negative effect on capital available for investment.

    ---------------------------------------------------------------------------

    \536\ See supra section II.D of this Release for a discussion of

    confidentiality of Form PF data.

    \537\ See supra note 494 and accompanying text.

    ---------------------------------------------------------------------------

    The SEC also recognizes that the direct costs of completing and

    filing Form PF may reduce the amount of

    [[Page 71170]]

    capital that funds have available for investment or, if the costs are

    passed on to fund investors, reduce the amount of capital investors

    have available for investment. This could, in turn, affect capital

    formation.\538\ However, the direct costs of reporting on Form PF will,

    to some extent, only transfer capital from private fund advisers to

    other market participants, such as employees or service providers paid

    to complete the Form. Because private fund advisers may have different

    investment opportunities than these other market participants, this

    transfer may negatively affect aggregate economic outcomes. However,

    some of this transferred capital will be invested or spent and will not

    represent an aggregate loss to the economy. In addition, the direct

    costs of Form PF are, on average, small compared to other economic

    incentives that motivate private funds and their advisers to invest and

    grow.\539\

    ---------------------------------------------------------------------------

    \538\ One commenter expressed concern regarding the possible

    effects of Form PF reporting on economic growth, investors,

    investment opportunities, companies, markets, market liquidity and

    tax revenue as well as ``the cost in terms of jobs and capital.''

    Issa Letter. This commenter suggested that these potential negative

    effects could flow from several sources, including: (1) The

    possibility that advisers will locate funds outside the United

    States as a result of, or to avoid, Form PF compliance costs or that

    these costs will be passed on to investors, causing them to seek

    investment opportunities outside the United States; and (2) the

    possibility that advisers will form fewer funds, slow the growth of

    their funds or shut down existing funds as a result of, or to avoid,

    Form PF compliance costs. We address these possible sources of

    indirect costs below.

    \539\ See infra notes 545 and 548 and accompanying text.

    ---------------------------------------------------------------------------

    One commenter expressed concern that this rulemaking could cause

    advisers, private funds or investors to seek investment opportunities

    outside the U.S. as a result of, for instance, increased costs.\540\

    This rulemaking could impose costs on U.S. private fund advisers that

    non-U.S. private fund advisers would not bear unless they are subject

    to the Advisers Act and the Form PF reporting requirements. However,

    advisers generally would not be able to avoid these reporting

    obligations by simply organizing the fund in a third country because

    regulatory jurisdiction for Form PF does not depend solely on where the

    fund is formed.\541\ In addition, as noted above, ESMA has proposed a

    reporting regime similar to Form PF for alternative investment fund

    managers subject to the EU Directive. If that regime is adopted, we

    understand most such alternative investment managers would bear

    reporting costs similar to those that Form PF imposes. Accordingly, we

    believe the competitive impact of this difference in operating costs

    will be limited. We also do not expect that private funds will, to any

    significant extent, seek to avoid these regulatory burdens by foregoing

    participation in the U.S. capital markets because of the depth and

    liquidity of these markets and the stability afforded by the legal

    structures in the U.S.

    ---------------------------------------------------------------------------

    \540\ See Issa Letter.

    \541\ See supra note 134 and accompanying text.

    ---------------------------------------------------------------------------

    This commenter also suggested that some fund advisers may determine

    not to form a new private fund if the costs of Form PF outweigh the

    marginal benefits the adviser expects to obtain by forming the

    fund.\542\ Reduced fund formation could diminish competition and the

    number of choices available to investors. The SEC does not, however,

    believe the cost of reporting on Form PF will have a substantial

    negative effect on fund formation. An adviser with no existing private

    funds considering whether to form its first fund is likely to face

    little or no costs as a result of Form PF because it is unlikely to

    leap past a Large Private Fund Adviser Threshold and may not even

    exceed the minimum reporting threshold of $150 million in private fund

    assets under management.\543\ For an existing private fund adviser,

    forming a new private fund would increase the cost of reporting on Form

    PF, but the adviser would be able to leverage its experience and

    existing systems, making the incremental reporting more efficient than

    for an adviser first becoming subject to Form PF reporting

    requirements.\544\ In the case of either an adviser newly managing

    private funds or an adviser with existing private funds, the SEC

    believes that Form PF reporting costs are unlikely to discourage the

    formation of many funds because the costs of either becoming subject to

    Form PF as a smaller private fund adviser or reporting incrementally

    more information on Form PF are small when compared to possible

    management and performance fees. For example, the SEC estimates that

    the cost to smaller private fund advisers of completing and filing Form

    PF will average less than $14,000 per initial annual filing and $5,000

    per subsequent annual filing--or less than 0.01% of assets under

    management for the smallest adviser subject to Form PF reporting

    requirements--compared to annual management and performance fees that,

    at least among hedge fund advisers, average approximately 1.5% of

    assets under management and 20% of excess returns, respectively.\545\

    ---------------------------------------------------------------------------

    \542\ See Issa Letter.

    \543\ According to HFI data, even among the top 25 hedge fund

    launches reported in 2010, the average fund size was approximately

    $750 million, and existing advisers launched the majority of those

    funds in any case. This data also shows that, out of 135 total hedge

    fund launches reported in 2010 exceeding $50 million, at least 110

    of them raised under $300 million. HFI does not report in their

    annual global review hedge fund launches under $50 million. See HFI

    2011 Global Review, supra note 493. See also supra sections IV.A and

    IV.G of this Release (discussing estimates of Form PF reporting

    costs for smaller private fund advisers).

    \544\ In addition, in the case of large hedge fund advisers, the

    more detailed information they must file in section 2b of the Form

    only applies to qualifying hedge funds that have at least $500

    million in net assets.

    \545\ See Ibbotson, et al., supra note 95, at 15 (finding a

    management fee of 1.5% of assets under management and a 20%

    performance fee to be the median fee structure in the TASS hedge

    fund database). $14,000/$150,000,000 = approximately 0.009%.

    ---------------------------------------------------------------------------

    In addition, this commenter expressed concern that the Large

    Private Fund Adviser thresholds may encourage some private fund

    advisers with assets under management near but below the thresholds to

    attempt to staunch growth in their funds, either by refusing to admit

    new investors or by managing the investments of the funds, to remain

    below the thresholds.\546\ Similarly, this commenter suggested that

    some funds may even shut down to avoid Form PF reporting costs.\547\

    The SEC believes, however, that substantial economic incentives will

    likely counter such behavior, including private fund performance fees

    that incentivize the private fund adviser to continue advising its

    funds and maximize fund appreciation and return. For example, a hedge

    fund with an initial value of $1.5 billion that experiences a 1% excess

    return will net $3 million in performance fees, and a 1% growth in

    assets under management will net an additional $225,000 per year in

    management fees, compared to an estimated cost of between $210,000 and

    $260,000 in the first year of reporting.\548\ In addition, we believe

    the cost to an adviser of reporting will decline over time as the

    adviser becomes more familiar with the Form and realizes efficiencies

    while, at the same time, the adviser will continue to charge management

    fee and potentially collect performance fees each year. With

    [[Page 71171]]

    respect to the large adviser threshold specifically, we anticipate that

    business relations with investors that may be damaged if the adviser

    turns away investor assets may also motivate advisers to continue to

    permit the size of their funds to increase as a result of new

    investment.

    ---------------------------------------------------------------------------

    \546\ See Issa Letter.

    \547\ Id.

    \548\ The calculations assume a management fee of 1.5% of assets

    under management and a 20% performance fee. See supra note 545.

    $93,100 for the initial quarterly report + $38,800 for each

    subsequent quarterly reporting x 3 quarterly reports = approximately

    $210,000 for the first year of reporting. See supra notes 513-514.

    In addition, the SEC has estimated that a Large Private Fund Adviser

    may incur between $0 and $50,000 in costs for the acquisition or use

    of hardware in the first year of reporting. See supra note 441 and

    accompanying text.

    ---------------------------------------------------------------------------

    As discussed above, we believe that private fund advisers,

    investors in private funds and the companies in which private funds may

    invest will enjoy certain benefits related to Form PF.\549\ We

    recognize, however, that many of Form PF's benefits will be widely

    distributed across the financial system while its costs will be

    concentrated. Private fund advisers will bear most of these costs,

    though they may also pass some of these costs on to fund investors, and

    to the extent that capital available for investment is reduced, the

    companies in which private funds would otherwise invest may also bear

    costs. In addition, the costs of Form PF to an individual adviser will

    vary depending on factors such as the state of its existing systems and

    the complexity of its business. As a result, the costs and benefits of

    Form PF to particular advisers, particular investors, particular

    companies and individual American citizens will not be evenly

    distributed. For certain individuals and entities, the costs of Form PF

    may even exceed the benefits to them. However, we believe that the

    aggregate benefits of this rulemaking will be substantial. Moreover,

    the uneven distribution of the benefits and costs of Form PF reflects

    the potential for an uneven distribution of the costs and benefits of

    engaging in risky financial activities that may impose negative

    externalities.\550\

    ---------------------------------------------------------------------------

    \549\ See supra section V.A of this Release.

    \550\ See, e.g., Iman Anabtawi and Steven L. Schwarcz,

    Regulating Systemic Risk: Towards an Analytical Framework, 86 Notre

    Dame L. Rev. 4, 27 (2011) (arguing that financial market

    participants will not expend sufficient effort to identify and avoid

    conditions giving rise to systemic risk and explaining that one

    factor contributing to this behavior is that ``the benefits of

    exploiting finite capital resources accrue to individual market

    participants, each of whom is motivated to maximize use of the

    resource, whereas the costs of exploitation are distributed more

    widely.* * * The root of the commons problem in financial markets is

    the asymmetry in the distribution of gains and losses associated

    with investment decisions.* * * In the case of a positive outcome,

    the firm captures the full benefits of the investment's success. In

    the case of a negative outcome, however, the firm may not suffer the

    full consequences of the poor investment. Rather, if the firm fails

    or merely defaults, those consequences will impact financial market

    participants that rely on the soundness of the firm's financial

    condition. Furthermore, if the firm is deemed too systemically

    significant to fail, its loss may be absorbed by government as a

    lender of last resort. In either case, the uninternalized costs

    associated with risk-taking by financial firms leads them to

    overexploit scarce capital resources in the form of socially

    excessive risk-taking.'').

    ---------------------------------------------------------------------------

    C. CFTC Statutory Findings

    Rule 4.27, as finalized, would deem a CPO registered with the CFTC

    that is dually registered as a private fund adviser with the SEC to

    have satisfied certain reporting requirements that the CFTC may adopt

    by filing Form PF with the SEC. The CPOs and CTAs that are dually

    registered as private fund advisers would be required to provide

    annually a limited amount of basic information on Form PF about the

    operations of their private funds. Only large CPOs and CTAs that are

    also registered as private fund advisers with the SEC would have to

    submit on a quarterly basis the full complement of systemic risk

    related information required by Form PF.\551\ As noted above, the Dodd-

    Frank Act tasks FSOC with monitoring the financial services marketplace

    in order to identify potential threats to the financial stability of

    the United States.\552\ The Dodd-Frank Act also requires FSOC to

    collect information from member agencies--like the SEC and the CFTC--to

    support its functions.\553\ The CFTC and the SEC are jointly adopting

    sections 1 and 2 of Form PF as a means to collect the information

    necessary to permit FSOC to fulfill its obligation to monitor private

    funds, and in order to identify any potential systemic threats arising

    from their activities. The CFTC and the SEC do not currently collect

    the information that is covered in proposed sections 1 and 2 of Form

    PF.

    ---------------------------------------------------------------------------

    \551\ See 5 U.S.C. 801(a)(1)(B)(i).

    \552\ See section 112(a)(2)(C) of the Dodd-Frank Act.

    \553\ See section 112(d)(1) of the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    Section 15(a) of the CEA requires that the CFTC, before

    promulgating a regulation under the Act or issuing an order, consider

    the costs and benefits of its action. By its terms, CEA Section 15(a)

    does not require the CFTC to quantify the costs and benefits of a new

    regulation or determine whether the benefits of the regulation outweigh

    its costs. Rather, CEA section 15(a) simply requires the CFTC to

    ``consider the costs and benefits'' of its action. CEA section 15(a)(2)

    specifies that costs and benefits shall be evaluated in light of the

    following considerations: (1) Protection of market participants and the

    public; (2) efficiency, competitiveness and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations.\554\

    Accordingly, the CFTC could, in its discretion, give greater weight to

    any of the five considerations and could, in its discretion, determine

    that, notwithstanding its costs, a particular regulation was necessary

    or appropriate to protect the public interest or to effectuate any of

    the provisions or to accomplish any of the purposes of the Act.

    ---------------------------------------------------------------------------

    \554\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    Before promulgating these final rules, the CFTC sought public

    comment on the rules themselves, including the cost-benefit

    considerations of section 1 and 2 of Form PF.\555\ The CFTC also

    specifically invited commenters to submit ``any data or other

    information that they may have quantifying or qualifying the perceived

    costs and benefits of this proposed rule with their comment

    letters.''\556\ As noted above, the CFTC and the SEC received comments

    on the cost and benefits of the proposed regulations and the estimates

    of costs included in the Proposing Release, and they have carefully

    considered those comments. CEA Rule 4.27 does not impose any additional

    burdens or costs upon registered CPOs and CTAs that are dually

    registered as investment advisers with the SEC. By filing Form PF with

    the SEC, these dual registrants would be deemed to have satisfied

    certain reporting obligations with the CFTC, should the CFTC adopt such

    requirements.

    ---------------------------------------------------------------------------

    \555\ See generally, CFTC Proposing Release, supra note 16, at

    76 FR 8068, 8087 (for CFTC's request for comment on the cost-benefit

    considerations).

    \556\ See generally, CFTC Proposing Release, supra note 16, at

    76 FR 8068, 8087.

    ---------------------------------------------------------------------------

    1. General Costs and Benefits

    With respect to costs, the CFTC has determined that: (1) Without

    the reporting requirements imposed by this rulemaking, FSOC will not

    have sufficient information to identify and address potential threats

    to the financial stability of the United States (such as the near

    collapse of Long Term Capital Management); (2) the reporting

    requirements, once finalized, will provide the CFTC with better

    information regarding the business operations, creditworthiness, use of

    leverage, and other material information of certain registered CPOs and

    CTAs that are also registered as investment advisers with the SEC; and

    (3) while they are necessary to U.S. financial stability, the reporting

    requirements will create additional compliance costs for these

    registrants, as discussed in the foregoing portions of the Economic

    Analysis as well as in the PRA section of this Release.

    The CFTC has determined that the proposed reporting requirements

    will provide a benefit to all investors and

    [[Page 71172]]

    market participants by providing the CFTC and other policy makers with

    more complete information about these registrants and the potential

    risk their activities may pose to the U.S. financial system. In turn,

    this information will enhance the CFTC's ability to appropriately

    tailor its regulatory policies to the commodity pool industry and its

    operators and advisors. As mentioned above, the CFTC and the SEC do not

    have access to this information today and have instead been made to use

    information from other, less reliable sources.

    2. Section 15(a) Determination

    As stated above, section 15(a) of the CEA requires the CFTC to

    consider the costs and benefits of its actions in light of five broad

    areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations.

    a. Protection of Market Participants and the Public

    Should the CFTC adopt certain of its proposed systemic risk

    reporting requirements, the coordination between the CFTC and SEC on

    this rulemaking would result in significant efficiencies for any

    private fund adviser that is also registered as a CPO or CTA with the

    CFTC. This is because, under CEA rule 4.27, filling Form PF would

    satisfy both SEC and CFTC reporting obligations with respect to

    commodity pools that are ``private funds'' and may satisfy CFTC

    reporting obligations with respect to commodity pools that are not

    ``private funds,'' in each case should the CFTC adopt such reporting

    obligations. As noted above, the CFTC has determined that this

    coordination will protect such participants from duplicative reporting

    while still providing FSOC with needed information to fulfill its

    mission to protect the public from potential threats to the financial

    stability of the United States.

    Commodity pools that fall within the definition of private funds

    and will be filing Form PF represent a sector of collective investment

    vehicles that have experienced a substantial growth and have been the

    subject of international concern regarding their size in juxtaposition

    with the markets as a whole. This concern has led to several countries

    instituting similar data collection efforts and it is well recognized

    that the U.S. contingent of these funds represents a sizable portion of

    all trading by this type of entity. Thus, this combined SEC/CFTC effort

    will contribute substantially to a better understanding of the impact

    of private investment vehicles on both the U.S. and international

    markets and provide the information necessary to intelligently develop

    regulatory efforts and oversight programs to provide adequate

    protection of market participants and the public at large.

    Finally, the CFTC agrees with the SEC that Form PF, as adopted,

    will increase the amount and quality of information available regarding

    a previously opaque area of investment activity and, thereby, enhance

    the ability of regulators to protect investors and oversee the markets

    that they regulate.

    b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    Although the CFTC does not believe this rule relates directly to

    the efficiency or competitiveness of futures markets, the CFTC does

    recognize that the interconnectedness of the United States financial

    system is such that the integrity of futures markets depends on the

    financial stability of the entire financial system. To the extent that

    the information collected by Form PF assists the Commissions and FSOC

    to identify threats that may damage the United States financial system,

    the regulations herein indirectly protect the integrity of futures

    markets.

    c. Price Discovery

    The CFTC has not identified a specific effect on price discovery as

    a result of Form PF or related regulations.

    d. Sound Risk Management

    The Dodd-Frank Act tasks FSOC and its member agencies (including

    both the SEC and the CFTC) with mitigating risks to the financial

    stability the United States. The CFTC believes these regulations are

    necessary to fulfill that obligation. Risk management is provided by

    these regulations in two main ways: (1) Assisting FSOC in fulfilling

    its mission of protecting the systemic financial stability of the

    United States; and (2) improving the ability of regulators to oversee

    markets. These benefits are shared by market participants, at least

    indirectly, as a part of the United States financial system. In

    addition, CPOs and CTAs that are dually registered as investment

    advisers will benefit from these regulations to the extent that

    reporting on Form PF requires such entities to review their firms'

    portfolios, trading practices, and risk profiles; thus, the CFTC

    believes that these regulations may improve the sound risk management

    practices within their internal risk management systems.

    e. Other Public Interest Considerations

    The CFTC has not identified other public interest considerations

    related to the costs and benefits of these regulations.

    VI. Final Regulatory Flexibility Analysis

    SEC:

    The SEC has prepared the following Final Regulatory Flexibility

    Analysis (``FRFA'') regarding Advisers Act rule 204(b)-1 in accordance

    with section 4(a) of the Regulatory Flexibility Act (``RFA'').\557\ The

    SEC prepared the Initial Regulatory Flexibility Analysis (``IRFA'') in

    conjunction with the Proposing Release in January 2011.\558\

    ---------------------------------------------------------------------------

    \557\ 5 U.S.C. 603(a).

    \558\ See Proposing Release, supra note 12, at section VI.

    ---------------------------------------------------------------------------

    A. Need for and Objectives of the New Rule

    New Advisers Act rule 204(b)-1 and Form PF implement provisions of

    the Dodd-Frank Act by specifying information that private fund advisers

    must disclose confidentially to the SEC, which information the SEC will

    provide to FSOC for systemic risk assessment purposes. Under the new

    rule, private fund advisers must file information responsive to all or

    portions of Form PF on a periodic basis. The scope of the required

    information and the frequency of the reporting is related to the amount

    of private fund assets that each private fund adviser manages and the

    type of private fund to which those assets relate. Specifically,

    smaller private fund advisers and large private equity advisers must

    report annually, while large hedge fund and liquidity fund advisers

    must report quarterly and provide additional information regarding the

    hedge funds and liquidity funds, respectively, that they manage.\559\

    ---------------------------------------------------------------------------

    \559\ See section II.A of this Release (describing who must file

    Form PF), section II.B of this Release (discussing the frequency

    with which private fund advisers must file Form PF), and section

    II.C of this Release (describing the information that private fund

    advisers must report on Form PF). See also proposed Instruction 9 to

    Form PF for information regarding the frequency with which private

    fund advisers must file Form PF.

    ---------------------------------------------------------------------------

    B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA. In

    particular, we sought comment on the number of small entities,

    particularly small advisers, to which the new Advisers Act rule and

    reporting requirements would apply and the effect

    [[Page 71173]]

    on those entities, including whether the effects would be economically

    significant. None of the comment letters we received addressed the IRFA

    or the effect of the proposal on small entities, as that term was used

    in the IRFA.

    C. Small Entities Subject to the Rule

    Under SEC rules, for the purposes of the Advisers Act and the

    Regulatory Flexibility Act, an investment adviser generally is a small

    entity if it: (i) Has assets under management having a total value of

    less than $25 million; (ii) did not have total assets of $5 million or

    more on the last day of its most recent fiscal year; and (iii) does not

    control, is not controlled by, and is not under common control with

    another investment adviser that has assets under management of $25

    million or more, or any person (other than a natural person) that had

    total assets of $5 million or more on the last day of its most recent

    fiscal year.\560\

    ---------------------------------------------------------------------------

    \560\ See Advisers Act rule 0-7(a).

    ---------------------------------------------------------------------------

    Advisers Act rule 204(b)-1 requires an investment adviser

    registered with the SEC to file certain information on Form PF if it

    manages one or more private funds and had at least $150 million in

    regulatory assets under management attributable to private funds as of

    the end of its most recently completed fiscal year. Under section 203A

    of the Advisers Act, most advisers qualifying as small entities are

    prohibited from registering with the SEC and are instead registered

    with state regulators. Therefore, few small advisers will meet the

    registration criterion. Fewer still are likely to meet the minimum

    reporting threshold of $150 million in regulatory assets under

    management attributable to private funds. By definition, no small

    entities will, on their own, meet this threshold, which the SEC did not

    include in the proposal but has added in response to commenter

    concerns.\561\ Advisers are, however, required to determine whether

    they exceed this threshold by aggregating their private fund assets

    under management with those of their related persons (other than

    separately operated related persons), with the result that some small

    entities may be subject to Form PF reporting requirements.\562\ The SEC

    does not have a precise count of the number of advisers that may

    satisfy the minimum reporting threshold based on the aggregate private

    fund assets that it and its related persons manage because such

    advisers file separate reports on Form ADV. However, because of the new

    minimum reporting threshold, the group of small entities subject to the

    rule as adopted will be a subset of the group that would have been

    subject to the proposed rule. In the Proposing Release, the SEC

    estimated that approximately 50 small entities were registered with the

    SEC and advised one or more private funds.\563\ Accordingly, the SEC

    estimates that no more than 50 small entities are likely to become

    subject to Form PF reporting obligations under the final rule.

    ---------------------------------------------------------------------------

    \561\ See supra note 56-59 and accompanying text.

    \562\ See supra section II.A.5 of this Release. The SEC notes

    that related persons are permitted to file on a single Form PF. As a

    result, even in the case that a larger related person causes a small

    entity to exceed the minimum reporting threshold, the small entity

    may not ultimately bear the reporting burden. See supra section

    II.A.6 of this Release. In addition, under Advisers Act rule 0-

    7(a)(3), an adviser with affiliates exceeding the other small entity

    thresholds under that rule would not be regarded as a small entity,

    suggesting that it may not be possible both to qualify as a small

    entity under that rule and to satisfy the criteria that would

    subject an adviser to Form PF reporting obligations.

    \563\ See Proposing Release, supra note 12, at n.212 and

    accompanying text.

    ---------------------------------------------------------------------------

    D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Advisers Act rule 204(b)-1 and Form PF impose certain reporting and

    compliance requirements on advisers, including small advisers. A small

    adviser that is subject to the rule must complete all or part of

    section 1 of the Form. As discussed above, the SEC estimates that

    completing, reviewing and filing Form PF will cost approximately

    $13,600 for each small adviser in its first year of reporting and

    $4,200 per year for each subsequent year.\564\ In addition, small

    entities must pay a filing fee of $150 per annual filing.\565\

    ---------------------------------------------------------------------------

    \564\ See supra notes 509-510 and accompanying text.

    \565\ See supra note 432 and accompanying text.

    ---------------------------------------------------------------------------

    E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the SEC to consider

    significant alternatives that would accomplish the stated objective,

    while minimizing any significant impact on small entities. In

    connection with the proposed rules and amendments, the SEC considered

    the following alternatives: (1) The establishment of differing

    compliance or reporting requirements or timetables that take into

    account the resources available to small entities; (2) the

    clarification, consolidation, or simplification of compliance and

    reporting requirements under the rule for small entities; (3) the use

    of performance rather than design standards; and (4) an exemption from

    coverage of the rule, or any part thereof, for small entities.

    Regarding the first and fourth alternatives, the SEC is adopting a

    minimum reporting threshold of $150 million as well as reporting

    requirements and timetables that differ for entities of smaller sizes.

    A small entity adviser that is subject to the rule only needs to file

    Form PF annually and complete applicable portions of section 1 of the

    form.\566\ Large Private Fund Advisers must file additional

    information, and large hedge fund or large liquidity fund advisers must

    file more frequently. In addition, the filing fees that a smaller

    adviser must pay in a given year are lower than those that a large

    hedge fund or large liquidity fund advisers must pay over the same

    period. Regarding the second alternative, the information that a small

    entity subject to the rule must provide under section 1 of Form PF is

    much simpler than the information required of large hedge fund or large

    liquidity fund advisers and is consolidated in one section of the form.

    Regarding the third alternative, the SEC has, in a number of cases,

    permitted advisers to rely on their own methodologies in providing the

    information that the Form requires, though the use of performance

    standards is limited by the need to obtain comparable information from

    all filers.

    ---------------------------------------------------------------------------

    \566\ If the adviser has no hedge fund assets under management,

    it need not complete section 1.C of the Form. Advisers that manage a

    significant amount of both registered money market fund and

    liquidity fund assets must complete section 3 of Form PF, but there

    are no small entities that manage a registered money market fund.

    ---------------------------------------------------------------------------

    CFTC:

    Under CEA rule 4.27, the CFTC would not impose any additional

    burden upon registered CPOs and CTAs that are dually registered as

    investment advisers with the SEC because such entities are only

    required to file Form PF with the SEC. Further, certain CPOs registered

    with the CFTC that are also registered with the SEC would be deemed to

    have satisfied certain CFTC-related filing requirements, should the

    CFTC adopt such requirements, by completing and filing the applicable

    sections of Form PF with the SEC. Therefore, any burden imposed by Form

    PF through rule 4.27 on small entities registered with both the CFTC

    and the SEC has been accounted for within the SEC's calculations

    regarding the impact of this collection of information under the RFA

    or, to the extent the reporting may relate to commodity pools that are

    not private funds, the CFTC anticipates that it would account for this

    burden should it adopt a future rulemaking establishing

    [[Page 71174]]

    reporting requirements with respect to those commodity pools.

    Accordingly, the Chairman, on behalf of the CFTC, hereby certifies

    pursuant to 5 U.S.C. 605(b) that the rules as adopted will not have a

    significant impact on a substantial number of small entities.

    VII. Statutory Authority

    CFTC:

    The CFTC is adopting rule 4.27 [17 CFR 4.27] pursuant to its

    authority set forth in section 4n of the Commodity Exchange Act [7

    U.S.C. 6n].

    SEC:

    The SEC is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant to

    its authority set forth in sections 204(b) and 211(e) of the Advisers

    Act [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.

    The SEC is adopting rule 279.9 pursuant to its authority set forth

    in sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4 and

    15 U.S.C. 80b-11], respectively.

    List of Subjects

    17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators,

    Commodity trading advisors, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

    Text of Final Rules

    Commodity Futures Trading Commission

    For the reasons set out in the preamble, the CFTC is amending Title

    17, Chapter I of the Code of Federal Regulations as follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    0

    1. The authority citation for part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,

    and 23.

    0

    2. Add Sec. 4.27 to subpart B to read as follows:

    Sec. 4.27 Additional reporting by advisors of commodity pools.

    Except as otherwise expressly provided in this section, CPOs and

    CTAs that are dually registered with the Securities and Exchange

    Commission and are required to file Form PF pursuant to the rules

    promulgated under the Investment Advisers Act of 1940, shall file Form

    PF with the Securities and Exchange Commission in lieu of filing such

    other reports with respect to private funds as may be required under

    this section. In addition, except as otherwise expressly provided in

    this section, CPOs and CTAs that are dually registered with the

    Securities and Exchange Commission and are required to file Form PF

    pursuant to the rules promulgated under the Investment Advisers Act of

    1940, may file Form PF with the Securities and Exchange Commission in

    lieu of filing such other reports with respect to commodity pools that

    are not private funds as may be required under this section. Dually

    registered CPOs and CTAs that file Form PF with the Securities and

    Exchange Commission will be deemed to have filed Form PF with the

    Commission for purposes of any enforcement action regarding any false

    or misleading statement of a material fact in Form PF.

    Securities and Exchange Commission

    For the reasons set out in the preamble, the SEC is amending Title

    17, Chapter II of the Code of Federal Regulations as follows:

    PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    0

    3. The authority citation for part 275 continues to read in part as

    follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-

    4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.

    * * * * *

    0

    4. Section 275.204(b)-1 is added to read as follows:

    Sec. 275.204(b)-1 Reporting by investment advisers to private funds.

    (a) Reporting by investment advisers to private funds on Form PF.

    If you are an investment adviser registered or required to be

    registered under section 203 of the Act (15 U.S.C. 80b-3), you act as

    an investment adviser to one or more private funds and, as of the end

    of your most recently completed fiscal year, you managed private fund

    assets of at least $150 million, you must complete and file a report on

    Form PF (17 CFR 279.9) by following the instructions in the Form, which

    specify the information that an investment adviser must provide. Your

    initial report on Form PF is due no later than the last day on which

    your next update would be timely in accordance with paragraph (e) if

    you had previously filed the Form; provided that you are not required

    to file Form PF with respect to any fiscal quarter or fiscal year

    ending prior to the date on which your registration becomes effective.

    (b) Electronic filing. You must file Form PF electronically with

    the Form PF filing system on the Investment Adviser Registration

    Depository (IARD).

    Note to paragraph (b): Information on how to file Form PF is

    available on the Commission's Web site at http://www.sec.gov/iard.

    (c) When filed. Each Form PF is considered filed with the

    Commission upon acceptance by the Form PF filing system.

    (d) Filing fees. You must pay the operator of the Form PF filing

    system a filing fee as required by the instructions to Form PF. The

    Commission has approved the amount of the filing fee. No portion of the

    filing fee is refundable. Your completed Form PF will not be accepted

    by the operator of the Form PF filing system, and thus will not be

    considered filed with the Commission, until you have paid the filing

    fee.

    (e) Updates to Form PF. You must file an updated Form PF:

    (1) At least annually, no later than the date specified in the

    instructions to Form PF; and

    (2) More frequently, if required by the instructions to Form PF.

    You must file all updated reports electronically with the Form PF

    filing system.

    (f) Temporary hardship exemption.

    (1) If you have unanticipated technical difficulties that prevent

    you from submitting Form PF on a timely basis through the Form PF

    filing system, you may request a temporary hardship exemption from the

    requirements of this section to file electronically.

    (2) To request a temporary hardship exemption, you must:

    (i) Complete and file in paper format, in accordance with the

    instructions to Form PF, Item A of Section 1a and Section 5 of Form PF,

    checking the box in Section 1a indicating that you are requesting a

    temporary hardship exemption, no later than one business day after the

    electronic Form PF filing was due; and

    (ii) Submit the filing that is the subject of the Form PF paper

    filing in electronic format with the Form PF filing system no later

    than seven business days after the filing was due.

    (3) The temporary hardship exemption will be granted when you file

    Item A of Section 1a and Section 5 of Form PF, checking the box in

    Section 1a indicating that you are requesting a temporary hardship

    exemption.

    (4) The hardship exemptions available under Sec. 275.203-3 do not

    apply to Form PF.

    (g) Definitions. For purposes of this section:

    [[Page 71175]]

    (1) Assets under management means the regulatory assets under

    management as determined under Item 5.F of Form ADV (Sec. 279.1 of

    this chapter).

    (2) Private fund assets means the investment adviser's assets under

    management attributable to private funds.

    PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF

    1940

    0

    5. The authority citation for Part 279 continues to read as follows:

    Authority: 15 U.S.C. 80b-1, et seq.

    0

    6. Section 279.9 is added to read as follows:

    Sec. 279.9 Form PF, reporting by investment advisers to private

    funds.

    This form shall be filed pursuant to Rule 204(b)-1 (Sec.

    275.204(b)-1 of this chapter) by certain investment advisers registered

    or required to register under section 203 of the Act (15 U.S.C. 80b-3)

    that act as an investment adviser to one or more private funds.

    Note: The text of the following Form PF will not appear in the

    Code of Federal Regulations.

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    By the Commodity Futures Trading Commission.

    Dated: October 31, 2011.

    David A. Stawick,

    Secretary.

    By the Securities and Exchange Commission.

    Dated: October 31, 2011.

    Elizabeth M. Murphy,

    Secretary .

    [FR Doc. 2011-28549 Filed 11-15-11; 8:45 am]

    BILLING CODE 6351-01-P; 8011-01-P

    Last Updated: November 16, 2011