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2011-2175

  • Federal Register, Volume 76 Issue 29 (Friday, February 11, 2011)[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]

    [Proposed Rules]

    [Pages 8068-8155]

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

    [FR Doc No: 2011-2175]

    [[Page 8067]]

    Vol. 76

    Friday,

    No. 29

    February 11, 2011

    Part V

    Commodity Futures Trading Commission

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    17 CFR Part 4

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    Securities and Exchange Commission

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    17 CFR Parts 275 and 279

    Reporting by Investment Advisers to Private Funds and Certain

    Commodity Pool Operators and Commodity Trading Advisors on Form PF;

    Proposed Rule

    Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 /

    Proposed Rules

    [[Page 8068]]

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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-3145; 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 proposed rule.

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

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

    the ``Commissions'') are proposing 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 proposed SEC rule would require investment

    advisers registered with the SEC that advise one or more private funds

    to file Form PF with the SEC. The proposed CFTC rule would require

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

    (``CTAs'') registered with the CFTC to satisfy certain proposed CFTC

    filing 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 advise one or more private funds. 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. These advisers would file these reports

    electronically, on a confidential basis.

    DATES: Comments should be received on or before April 12, 2011.

    ADDRESSES: Comments may be submitted by any of the following methods:

    CFTC

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,

    Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    ``Form PF'' must be in the subject field of comments submitted via

    e-mail, and clearly indicated on written submissions. All comments must

    be submitted in English, or if not, accompanied by an English

    translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the CFTC to consider information that

    may be exempt from disclosure under the Freedom of Information Act, a

    petition for confidential treatment of the exempt information may be

    submitted according to the established procedures in 17 CFR 145.9.

    The CFTC reserves the right, but shall have no obligation, to

    review, prescreen, filter, redact, refuse, or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, including, but not limited to, obscene

    language. All submissions that have been redacted or removed that

    contain comments on the merits of the rulemaking will be retained in

    the public comment file and will be considered as required under the

    Administrative Procedure Act and other applicable laws, and may be

    accessible under the Freedom of Information Act, 5 U.S.C. 552, et seq.

    (``FOIA'').

    SEC

    Electronic Comments

    Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

    Send an e-mail to rule-comments@sec.gov. Please include

    File Number S7-05-11 on the subject line; or

    Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

    Paper Comments

    Send paper comments in triplicate to Elizabeth M. Murphy,

    Secretary, Securities and Exchange Commission, 100 F Street, NE.,

    Washington, DC 20549-1090.

    All submissions should refer to File Number S7-05-11. This file number

    should be included on the subject line if e-mail is used. To help us

    process and review your comments more efficiently, please use only one

    method. The SEC will post all comments on the SEC's Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web

    site viewing and printing in the SEC's Public Reference Room, 100 F

    Street, NE., Washington, DC 20549 on official business days between the

    hours of 10 a.m. and 3 p.m. All comments received will be posted

    without change; we do not edit personal identifying information from

    submissions. You should submit only information that you wish to make

    available publicly.

    FOR FURTHER INFORMATION CONTACT: CFTC: Daniel S. Konar II, Attorney-

    Advisor, Telephone: (202) 418-5405, E-mail: dkonar@cftc.gov, Amanda L.

    Olear, Special Counsel, Telephone: (202) 418-5283, E-mail:

    aolear@cftc.gov, or Kevin P. Walek, Assistant Director, Telephone:

    (202) 418-5405, E-mail: 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, Attorney-Adviser, Sarah G. ten Siethoff, Senior

    Special Counsel, or David A. Vaughan, Attorney Fellow, 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 requesting public comment on

    proposed rule 4.27(d) [17 CFR 4.27(d)] under the Commodity Exchange Act

    (``CEA'') \1\ and proposed Form PF. The SEC is requesting public

    comment on proposed rule 204(b)-1 [17 CFR 275.204(b)-1] and proposed

    Form PF [17 CFR 279.9] under the Investment Advisers Act of 1940 [15

    U.S.C. 80b] (``Advisers Act'').\2\

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

    \2\ 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 would be

    published. In addition, in this Release, when we refer to the

    ``Advisers Act,'' we refer to the Advisers Act as in effect on July

    21, 2011.

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    I. Background

    A. The Dodd-Frank Act

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

    Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\

    While the Dodd-Frank Act provides for wide-ranging reform of financial

    regulation, one stated focus of this legislation is to

    [[Page 8069]]

    ``promote the financial stability of the United States'' by, among

    other measures, establishing better monitoring of emerging risks using

    a system-wide perspective.\4\ To further this goal, Title I of the

    Dodd-Frank Act establishes the Financial Stability Oversight Council

    (``FSOC''), which is comprised of the leaders of various financial

    regulators (including the Commissions' Chairmen) and other

    participants.\5\ The Dodd-Frank Act directs FSOC to monitor emerging

    risks to U.S. financial stability and to require that the Board of

    Governors of the Federal Reserve System (``FRB'') supervise designated

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

    stability in the event of their material financial distress or failure

    or because of their activities.\6\ In addition, the Dodd-Frank Act

    directs FSOC to recommend to the FRB heightened prudential standards

    for designated nonbank financial companies.\7\

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    \3\ Public Law 111-203, 124 Stat. 1376 (2010).

    \4\ See S. Conf. Rep. No. 111-176, at 2-3 (2010) (``Senate

    Committee Report'').

    \5\ Section 111 of the Dodd-Frank Act provides that the voting

    members of FSOC will be the Secretary of the Treasury, the Chairman

    of the FRB, the Comptroller of the Currency, the Director of the

    Bureau of Consumer Financial Protection, the Chairman of the SEC,

    the Chairperson of the Federal Deposit Insurance Corporation, the

    Chairperson of the CFTC, the Director of the Federal Housing Finance

    Agency, the Chairman of the National Credit Union Administration

    Board and an independent member appointed by the President having

    insurance expertise. FSOC will also have five nonvoting members,

    which are the Director of the Office of Financial Research, the

    Director of the Federal Insurance Office, a state insurance

    commissioner, a state banking supervisor and a state securities

    commissioner.

    \6\ Section 112 of the Dodd-Frank Act.

    \7\ Id.

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    The Dodd-Frank Act anticipates that FSOC will be supported in these

    responsibilities by various regulatory agencies, including the

    Commissions. To that end, the Dodd-Frank Act amends certain statutes,

    including the Advisers Act, to authorize or direct certain Federal

    agencies to support FSOC. Title IV of the Dodd-Frank Act amends the

    Advisers Act to generally require that advisers to hedge funds and

    other private funds \8\ register with the SEC.\9\ Congress required

    this registration in part because it believed that ``information

    regarding [the] size, strategies and positions [of large private funds]

    could be crucial to regulatory attempts to deal with a future crisis.''

    \10\ To that end, Section 404 of the Dodd-Frank Act, which amends

    section 204(b) of the Advisers Act, directs the SEC to require private

    fund advisers \11\ to maintain records and 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 by FSOC.\12\ The records and reports must 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.\13\ The SEC must issue jointly with the CFTC, after

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

    such reports required to be filed with respect to private fund advisers

    also registered with the CFTC.\14\

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    \8\ 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 of 1940 (15

    U.S.C. 80a-3) (``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.

    \9\ The Dodd-Frank Act requires such private fund adviser

    registration by amending section 203(b)(3) of the Advisers Act to

    repeal the exemption from registration for any adviser that during

    the course of the preceding 12 months had fewer than 15 clients and

    neither held itself out to the public as an investment adviser nor

    advised any registered investment company or business development

    company. See section 403 of the Dodd-Frank Act. See also infra note

    11 for the definition of ``private fund adviser.'' There are

    exemptions from the registration requirement, including exemptions

    for advisers to venture capital funds and advisers to private funds

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

    States. There also is an exemption for ``foreign private advisers,''

    which are investment advisers with no place of business in the

    United States, fewer than 15 clients in the United States and

    investors in the United States in private funds advised by the

    adviser, and less than $25 million in assets under management from

    such clients and investors. See sections 402, 407 and 408 of the

    Dodd-Frank Act. 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-3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10,

    2010) (``Private Fund Exemption Release''); Rules Implementing

    Amendments to the Investment Advisers Act of 1940, Investment

    Advisers Act Release No. IA-3110 (Nov. 19, 2010), 75 FR 77,052 (Dec.

    10, 2010) (``Implementing Release''). References in this Release to

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

    form and glossary as they are proposed to be amended in the

    Implementing Release.

    \10\ See Senate Committee Report, supra note 4, at 38.

    \11\ 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. We are not

    proposing that advisers solely to venture capital funds or advisers

    to private funds that in the aggregate have less than $150 million

    in assets under management in the United States (``exempt reporting

    advisers'') be required to file Form PF.

    \12\ While Advisers Act section 204(b)(1) could be read in

    isolation to imply that the SEC requiring private fund systemic risk

    reporting is discretionary, other amendments to the Advisers Act

    made by the Dodd-Frank Act (such as Advisers Act section 204(b)(5)

    and 211(e) suggest that Congress intended such rulemaking to be

    mandatory. See also Senate Committee Report, supra note 4, at 39

    (``this title requires private fund advisers * * * to disclose

    information regarding their investment positions and strategies.'').

    \13\ See section 404 of the Dodd-Frank Act.

    \14\ See section 406 of the Dodd-Frank Act.

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    This joint proposal is designed to fulfill this statutory mandate.

    Under proposed Advisers Act rule 204(b)-1, private fund advisers would

    be required to file Form PF with the SEC. Private fund advisers that

    also are registered as CPOs or CTAs with the CFTC would file Form PF to

    satisfy certain CFTC systemic risk reporting requirements.\15\

    Information collected about private funds on Form PF, together with

    information the SEC collects on Form ADV and the information the CFTC

    separately has proposed CPOs file on Form CPO-PQR and CTAs file on Form

    CTA-PR, will provide FSOC and the Commissions with important

    information about the basic operations and strategies of private funds

    and will be important in FSOC obtaining a baseline picture of potential

    systemic risk across both the entire private fund industry and in

    particular kinds of private funds, such as hedge funds.\16\

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    \15\ 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, all private

    fund advisers that are also registered as CPOs and CTAs with the

    CFTC would be required to file Schedule A of proposed Form CPO-PQR

    (for CPOs) or Schedule A of proposed Form CTA-PR (for CTAs).

    Additionally, to the extent that they operate or advise commodity

    pools that do not satisfy the definition of ``private fund'' under

    the Dodd-Frank Act, private fund advisers that are also registered

    as CPOs or CTAs would still be required to file proposed Form CPO-

    PQR (for CPOs) and proposed Form CTA-PR (for CTAs), as applicable.

    \16\ The information reported through the various reporting

    forms is designed to be complementary, and not duplicative.

    Information reported on Form ADV would be publicly available, while

    information reported on Form PF and proposed Forms CPO-PQR and CTA-

    PR would be confidential to the extent permitted under applicable

    law. Form ADV and Form PF also have different principal purposes.

    Form ADV primarily aims at providing the SEC and investors with

    basic information about advisers (including private fund advisers)

    and the funds they manage for investor protection purposes, although

    Form ADV information also will be available to FSOC. Information on

    Form ADV is designed to provide the SEC with information necessary

    to its administration of the Advisers Act and to efficiently

    allocate its examination resources based on the risks the SEC

    discerns or the identification of common business activities from

    information provided by advisers. See Implementing Release, supra

    note 9. In contrast, the Commissions intend to use Form PF primarily

    as a confidential systemic risk disclosure tool to assist FSOC in

    monitoring and assessing systemic risk, although it also would be

    available to assist the Commissions in their regulatory programs,

    including examinations and investigations and investor protection

    efforts relating to private fund advisers.

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    [[Page 8070]]

    Information the SEC obtains through reporting under section 404 of

    the Dodd-Frank Act is to be shared with FSOC as FSOC considers

    necessary for purposes of assessing the systemic risk posed by private

    funds and generally is to remain confidential.\17\ Our staffs have

    consulted with staff representing FSOC's members in developing this

    proposal. We note that simultaneous with our staffs' FSOC consultations

    relating to this rulemaking, FSOC has been building out its standards

    for assessing systemic risk across different kinds of financial firms

    and has recently proposed standards for determining which nonbank

    financial companies should be designated as subject to FRB

    supervision.\18\

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    \17\ See section 404 of the Dodd-Frank Act; infra note 39 and

    accompanying text.

    \18\ See, e.g., Authority to Require Supervision and Regulation

    of Certain Nonbank Financial Companies, Financial Stability

    Oversight Council Release (Jan. 18, 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) (``FSOC Designation ANPR'').

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    B. International Coordination

    In assessing systemic risk, the Dodd-Frank Act requires that FSOC

    coordinate with foreign financial regulators.\19\ This coordination may

    be particularly important in assessing systemic risk associated with

    hedge funds and other private funds because they often operate globally

    and make significant investments in firms and markets around the

    world.\20\ As others have recognized, ``[g]iven the global nature of

    the markets in which [private fund] managers and funds operate, it is

    imperative that a regulatory framework be applied on an internationally

    consistent basis.'' \21\ International regulatory coordination also has

    been cited as a critical element in facilitating financial regulators'

    formulation of a comprehensive and effective response to future

    financial crises.\22\ Collecting consistent and comparable information

    is of added value in private fund systemic risk reporting because it

    would aid in the assessment of systemic risk on a global basis and thus

    enhance the utility of information sharing among U.S. and foreign

    financial regulators.\23\

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    \19\ See section 175 of the Dodd-Frank Act.

    \20\ See Damian Alexander, Global Hedge Fund Assets Rebound to

    Just Over $1.8 Trillion, Hedge Fund Intelligence (Apr. 7, 2010)

    (``HFI'').

    \21\ Group of Thirty, Financial Reform: A Framework for

    Financial Stability (Jan. 15, 2009).

    \22\ See U.S. Department of the Treasury, Financial Regulatory

    Reform: A New Foundation (2009), at 8; and Equipping Financial

    Regulators with the Tools Necessary to Monitor Systemic Risk, Senate

    Banking Subcommittee on Security and International Trade and

    Finance, Feb. 12, 2010 (testimony of Daniel K. Tarullo, member of

    the FRB). See also Group of 20 and the International Monetary Fund,

    The Global P Crisis for Fure Regulation of Financial Institutions

    and M arkets and for Liquidity Management (Feb. 4, 2009).

    \23\ 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.

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    Recognizing this benefit, our staffs participated in the

    International Organization of Securities Commissions' (``IOSCO'')

    preparation of a report regarding hedge fund oversight.\24\ Among other

    matters, this report recommended that hedge fund advisers provide to

    their national regulators information for the identification, analysis,

    and mitigation of systemic risk. It also recommended that regulators

    cooperate and share information where appropriate in order to

    facilitate efficient and effective oversight of globally active hedge

    funds and to help identify systemic risks, risks to market integrity,

    and other risks arising from the activities or exposures of hedge

    funds.\25\ The types of information that IOSCO recommended regulators

    gather from hedge fund advisers is consistent with and comparable to

    the types of information we propose to collect from hedge funds through

    Form PF, as described in further detail below.\26\

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    \24\ Technical Committee of the International Organization of

    Securities Commissions, Hedge Funds O (June 2009), available at

    https://www.iosco.org/library/pubdocs/pdf/IOSCOPD293.pdf (``IOSCO

    Report'').

    \25\ Id. at 3.

    \26\ See IOSCO Report, supra note 24, at 14; Press Release,

    International Regulators Publish Systemic Risk Data Requirements for

    Hedge Funds (Feb. 25, 2010), available at https://www.iosco.org/news/pdf/IOSCONEWS179.pdf. The IOSCO Report states that systemic

    risk information that hedge fund advisers should provide to

    regulators should include, for example: (1) Information on their

    prime brokers, custodian, and background information on the persons

    managing the assets; (2) information on the manager's larger funds

    including the net asset value, predominant strategy/regional focus

    and performance; (3) leverage and risk information, including

    concentration risk of the hedge fund adviser's larger funds; (4)

    asset and liability information for the manager's larger funds; (5)

    counterparty risk, including the biggest sources of credit; (6)

    product exposure for all of the manager's assets; and (7) investment

    activity known to represent a significant proportion of such

    activity in important markets or products. Some of this information

    would be collected through the revised Form ADV, as proposed by the

    SEC in the Implementing Release, rather than Form PF.

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    In addition, our staffs have consulted with the United Kingdom's

    Financial Services Authority (the ``FSA''), which has conducted a

    voluntary semi-annual survey since October 2009 by sampling the largest

    hedge fund groups based in the United Kingdom.\27\ Because many hedge

    fund advisers are located in the United Kingdom and subject to the

    jurisdiction of the FSA, this coordination has been particularly

    important.\28\ UK hedge fund advisers complete this survey on a

    voluntary basis, and the survey collects information regarding all

    funds managed by the particular hedge fund adviser as well as for

    individual funds with at least $500 million in assets. The information

    the survey collects is designed to help the FSA better understand hedge

    funds' use of leverage, ``footprints'' in various asset classes

    (including concentration and liquidity issues), the scale of asset/

    liability mismatches, and counterparty credit risks.\29\ In addition,

    for more than five years the FSA has been conducting a semi-annual

    survey of hedge fund counterparties to assist it in assessing trends in

    counterparty credit risk, margin requirements, and other matters.\30\

    Our staffs' consultation with the FSA as they designed and conducted

    their hedge fund surveys has been very informative, and we have

    incorporated into proposed Form PF many of the types of information

    collected through the FSA surveys.

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    \27\ The survey canvasses approximately 50 FSA-authorized

    investment managers. See, e.g., Financial Services Authority,

    Assessing Possible Sources of Systemic Risk from Hedge Funds: A

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

    the Hedge Fund Survey (Jul. 2010), available at http://www.fsa.gov.uk/pubs/other/hf_report.pdf (``FSA Survey'').

    \28\ According to Hedge Fund Intelligence, U.K.-based advisers

    manage approximately 16% of global hedge fund assets. This

    concentration of hedge fund advisers is second only to the United

    States (managing approximately 76% of global hedge fund assets). See

    HFI, supra note 20.

    \29\ FSA Survey, supra note 27.

    \30\ Id.

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    SEC staff also has consulted with Hong Kong's Securities and

    Futures Commission regarding hedge fund oversight and data collection

    because Hong Kong is an important jurisdiction for hedge funds in

    Asia.\31\ This consultation also has proven helpful in designing

    proposed Form PF.

    [[Page 8071]]

    Collectively, hedge fund advisers based in the United States, the

    United Kingdom, and Hong Kong represent over 92 percent of global hedge

    fund assets, and thus a broad consistency among these jurisdictions'

    hedge fund information collections, including our own, will facilitate

    the sharing of consistent and comparable information for systemic risk

    assessment purposes for most global hedge fund assets under

    management.\32\ Finally, in connection with the IOSCO report, IOSCO

    members (including the SEC and CFTC) agreed, on a ``best efforts''

    basis, to conduct a survey of hedge fund reporting data as of the end

    of September 2010 based on the guidelines established in the IOSCO

    report and the FSA survey. This internationally coordinated survey

    effort has also informed our proposed reporting.

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    \31\ According to Hedge Fund Intelligence, Hong Kong-based

    advisers manage approximately 0.54% of global hedge fund assets,

    which is the largest concentration of hedge fund advisers in Asia.

    See HFI, supra note 20.

    \32\ See HFI, supra note 20.

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    International efforts also have focused on potential systemic

    considerations arising out of other types of private funds, such as

    private equity funds. For example, an International Monetary Fund

    (``IMF'') staff paper has focused on ``extending the perimeter'' of

    effective regulatory oversight to capture all financial activities that

    may pose systemic risks, regardless of the type of institution in which

    they occur.\33\ The IMF paper proposed that these financial activities

    be subject to reporting obligations so that regulators may assess

    potential systemic risk and emphasized the need to capture all

    financial activities conducted on a leveraged basis, including

    activities of leveraged private equity vehicles.\34\ Others also have

    recognized a need for monitoring the private equity sector because

    having information on its potentially systemically important

    interactions with the financial system are an important part of

    regulators' obtaining the complete picture of the broader financial

    system that is so vital to effective systemic risk monitoring.\35\ We

    have taken these international efforts relating to systemic risk

    monitoring in private equity funds into account in the proposed

    reporting discussed below.

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    \33\ See Ana Carvajal et al., The Perimeter of Financial

    Regulation, IMF Staff Position Note SPN/09/07 (Mar. 26, 2009),

    available at http://www.imf.org/external/pubs/ft/spn/2009/spn0907.pdf.

    \34\ Id., at 8.

    \35\ See, e.g., Lorenzo Bini Smaghi, Member of the Executive

    Board of the European Central Bank, Going Forward--Regulation and

    Supervision after the Financial Turmoil, Speech by at the 4th

    International Conference of Financial Regulation and Supervision

    (Jun. 19, 2009), available at http://www.bis.org/review/r090623e.pdf

    (stating ``macro-prudential analysis needs to capture all components

    of financial systems and how they interact. This includes all

    intermediaries, markets and infrastructures underpinning them. In

    this respect, it is important to consider that at present some of

    these components, such as hedge funds, private equity firms or over-

    the-counter (OTC) financial markets, are not subject to micro-

    prudential supervision. But they need to be part of macro-prudential

    analysis and risk assessments, as they influence the overall

    behaviour of the financial system. To gain a truly ``systemic''

    perspective on the financial system, no material element should be

    left out.''); Private Equity and Leveraged Finance Markets, Bank for

    International Settlements Committee on the Global Financial System

    Working Paper No. 30 (Jul. 2008), available at http://www.bis.org/publ/cgfs30.pdf (``BIS Private Equity Paper'') (``Going forward, the

    Working Group believes that enhancing transparency and strengthening

    risk management practices [relating to private equity and leveraged

    finance markets] require special attention. * * * The recent market

    turmoil has demonstrated that a number of the risks in the leveraged

    finance market are likely to materialise in combination with other

    financial market risks in stressed market conditions. * * * In the

    public sector, there is a stronger case for developing early warning

    indicators and devoting more research efforts to modelling the

    dynamic relationships between risk factors with a view to

    understanding the interrelationships across markets and their impact

    on the financial sector.''). See also Macroeconomic Assessment Group

    established by the Financial Stability Board and the Basel Committee

    on Banking Supervision, Interim Report: Assessing the Macroeconomic

    Impact of the Transition to Stronger Capital and Liquidity

    Requirements (Aug. 2010), at section 5.2, available at http://www.financialstabilityboard.org/publications/r_100818b.pdf.

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

    II. Discussion

    The SEC is proposing a new rule 204(b)-1 under the Advisers Act to

    require that SEC-registered investment advisers report systemic risk

    information to the SEC on Form PF if they advise one or more private

    funds.\36\ For registered CPOs and CTAs that are also registered as

    investment advisers with the SEC and advise a private fund, this report

    also would serve as substitute compliance for a portion of the CFTC's

    proposed systemic risk reporting requirements under proposed Commodity

    Exchange Act rule 4.27(d).\37\ Because commodity pools that meet the

    definition of a private fund are categorized as hedge funds for

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

    would need to complete only the sections applicable to hedge fund

    advisers, and the form would be a joint form only with respect to those

    sections.\38\

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

    \37\ See proposed Commodity Exchange Act rule 4.27(d), which

    provides that these CPOs and CTAs would need to file other reports

    as required under rule 4.27 with respect to pools that are not

    private funds. For purposes of this proposed rule, it is the CFTC's

    position that any false or misleading statement of a material fact

    or material omission in the jointly proposed sections (sections 1

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

    shall constitute a violation of section 6(c)(2) of the Commodity

    Exchange Act. Proposed Form PF contains an oath consistent with this

    position.

    \38\ Thus, private fund advisers that also are CPOs or CTAs

    would be obligated to complete only section 1 and, if they met the

    applicable threshold, section 2 of Form PF. Accordingly, Form PF is

    a joint form between the SEC and the CFTC only with respect to

    sections 1 and 2 of the form.

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

    Form PF would elicit non-public information about private funds and

    their trading strategies the public disclosure of which, in many cases,

    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. Amendments to the Advisers Act

    added by the Dodd-Frank Act preclude the SEC from being compelled to

    reveal the information except in very limited circumstances.\39\

    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 404 of the Dodd-Frank Act. The Commissions would

    make information collected through Form PF available to FSOC, as is

    required by the Dodd-Frank Act, subject to the confidentiality

    provisions of the Dodd-Frank Act.\40\

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    \39\ See section 404 of the Dodd-Frank Act stating that

    ``[n]otwithstanding any other provision of law, the Commission [SEC]

    may not be compelled to disclose any report or information contained

    therein required to be filed with the Commission [SEC] under this

    subsection'' except to Congress upon agreement of confidentiality.

    Section 404 also provides that nothing prevents the SEC from

    complying with a request for information from any other federal

    department or agency or any self-regulatory organization requesting

    the report or information for purposes within the scope of its

    jurisdiction or an order of a court of the U.S. in an action brought

    by the U.S. or the SEC. Section 404 of the Dodd-Frank Act also

    states that the SEC shall make available to FSOC copies of all

    reports, documents, records, and information filed with or provided

    to the SEC by an investment adviser under section 404 of the Dodd-

    Frank Act as FSOC may consider necessary for the purpose of

    assessing the systemic risk posed by a private fund and that FSOC

    shall maintain the confidentiality of that information consistent

    with the level of confidentiality established for the SEC in section

    404 of the Dodd-Frank Act.

    \40\ See section 404 of the Dodd-Frank Act.

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

    We propose that each private fund adviser report basic information

    about the operations of its private funds on Form PF once each year. We

    propose that a relatively small number of Large Private Fund Advisers

    (described in section II.B below) instead be required to submit this

    basic information each quarter along with additional systemic risk

    related information required by Form PF concerning certain of their

    [[Page 8072]]

    private funds.\41\ In the sections below, we describe the principal

    reasons we believe that FSOC needs this information in order to monitor

    the systemic risk that may be associated with the operation of private

    funds.

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

    \41\ See proposed Instructions to Form PF. Our proposed

    reporting thus complies with the Dodd-Frank Act directive that, in

    formulating systemic risk reporting and recordkeeping for investment

    advisers to mid-sized private funds, the Commission take into

    account the size, governance, and investment strategy of such funds

    to determine whether they pose systemic risk. See section 408 of the

    Dodd-Frank Act. The Dodd-Frank Act also states 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 404 of the Dodd-Frank Act.

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    A. Purposes of Form PF

    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.\42\ It also requires FSOC to

    collect information from member agencies to support its functions.\43\

    Section 404 of the Dodd-Frank Act directs the SEC to support this

    effort by collecting from investment advisers to private funds such

    information as the SEC deems necessary and appropriate in the public

    interest and for the protection of investors or for the assessment of

    systemic risk.\44\ FSOC may, if it deems necessary, direct the Office

    of Financial Research (``OFR'') to collect additional information from

    nonbank financial companies.\45\

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    \42\ See section 112(a)(2)(C) of the Dodd-Frank Act.

    \43\ See section 112(d)(1) of the Dodd-Frank Act.

    \44\ Section 404 of the Dodd-Frank Act requires that reports and

    records that the SEC mandates be maintained for these purposes

    include a description of certain categories of information, such as

    assets under management, use of leverage, counterparty credit risk

    exposure, and trading and investment positions for each private fund

    advised by the adviser.

    \45\ See sections 153 and 154 of the Dodd-Frank Act.

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

    The Commissions are jointly proposing sections 1 and 2 of Form PF,

    and the SEC is proposing sections 3 and 4 of Form PF, to collect

    information necessary to permit FSOC to monitor private funds in order

    to identify any potential systemic threats arising from their

    activities. The information we currently collect about private funds

    and their activities is very limited and is not designed for the

    purpose of monitoring systemic risk.\46\ We do not currently collect

    information, for example, about hedge funds' primary trading

    counterparties or significant market positions. The SEC also does not

    currently collect data to assess the risk of a run on a private

    liquidity fund, a risk that could transfer into registered money market

    funds and into the broader short term funding markets and those that

    rely on those markets.\47\ While we are proposing to collect

    information on Form PF to assist FSOC in its monitoring obligations

    under the Dodd-Frank Act, the information collected on Form PF would be

    available to assist the Commissions in their regulatory programs,

    including examinations and investigations and investor protection

    efforts relating to private fund advisers.\48\

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    \46\ We note that the SEC has proposed amendments to Form ADV

    that also would require private funds to report certain basic

    information, such as the fund's prime broker and its gross and net

    asset values. See Implementing Release, supra note 9.

    \47\ See section II.A.3 of this Release for a discussion of

    liquidity funds and their potential risks.

    \48\ See SEC section VI.A of this Release for a discussion of

    how the SEC could use proposed Form PF data for its regulatory

    activities and investor protection efforts.

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

    We have designed Form PF, in consultation with staff representing

    FSOC's members, to provide FSOC with such information so that it may

    carry out its monitoring obligations.\49\ Based upon the information we

    propose to obtain from advisers about the private funds they advise,

    together with market data it collects from other sources, FSOC should

    be able to identify whether any private funds merit further analysis or

    whether OFR should collect additional information. We have not sought

    to design a form that would provide FSOC in all cases with all the

    information it may need to make a determination that a particular

    entity should be designated for supervision by the FRB.\50\ Such a

    form, if feasible, likely would require substantial additional and more

    detailed data addressing a wider range of possible fund profiles, since

    it could not be tailored to a particular adviser, and would impose

    correspondingly greater burdens on private fund advisers. This type of

    information gathering may be better accomplished by OFR through

    targeted information requests to specific private fund advisers

    identified through Form PF, rather than through a general reporting

    form.\51\

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

    \49\ Industry participants (in response to FSOC Designation

    ANPR, supra note 18) acknowledged the potentially important function

    that such reporting may play in allowing FSOC to monitor the private

    fund industry more generally and to assess the extent to which any

    private funds may pose systemic risk more specifically. See, e.g.,

    Comment Letter of the Managed Funds Association (Nov. 5, 2010)

    (``the enhanced regulation of hedge fund managers and the markets in

    which they participate following the passage of the Dodd-Frank Act

    ensures that regulators will have a timely and complete picture of

    hedge funds and their activities''), Comment Letter of the Coalition

    of Private Investment Companies (Nov. 5, 2010) (``the registration

    and reporting structure for private funds subject to SEC oversight

    will result in an unprecedented range and depth of data to the

    Council, its constituent members and the newly created Office of

    Financial Research. From this information, in addition to the

    information gathered by the Council, the Council should be able to

    assemble a clear picture of the overall U.S. financial network and

    how private investment funds fit into it, both on an individual and

    overall basis''), Comment Letter of the Private Equity Growth

    Council (Nov. 5, 2010) (``regulators also now have the authority to

    require all private equity firms and private equity funds to provide

    any additional data needed to assess systemic risk'') (``PE Council

    Letter''). Comment letters in response to the FSOC Designation ANPR

    are available at http://www.regulations.gov.

    \50\ See 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 shall be supervised by the FRB and subject

    to prudential standards.

    \51\ Recordkeeping requirements specific to private fund

    advisers for systemic risk assessment purposes will be addressed in

    a future release pursuant to our authority under section 404 of the

    Dodd-Frank Act.

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

    The amount of information a private fund adviser would be required

    to report on the proposed form would vary based on both the size of the

    adviser and the type of funds it advises. This approach reflects our

    initial view after consulting with staff representing FSOC's members

    that a smaller private fund adviser may present less risk to the

    stability of the U.S. financial system and thus merit reporting of less

    information.\52\ It also reflects our understanding that different

    types of private funds could present different implications for

    systemic risk and that reporting requirements should be appropriately

    calibrated.\53\ As discussed in more detail below, Form PF would

    require more detailed information from advisers managing a large amount

    of hedge fund or liquidity fund assets. Less information would be

    required regarding advisers managing a large amount of private equity

    fund assets because, after a review of available literature and

    consultation with staff representing FSOC's members, it appears that

    private equity funds may present less potential risk to U.S. financial

    stability. The principal reasons for Form PF's proposed reporting

    specific to hedge funds, liquidity funds, and private equity funds are

    discussed below.

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

    \52\ We discuss the information we propose requiring smaller

    private fund advisers report in section II.D.1 of this Release.

    \53\ Congress recognized this need as well. See supra note 41.

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

    1. Hedge Funds

    We believe that Congress expected hedge fund advisers would be

    required to report information to the Commissions under Title IV of the

    Dodd-Frank Act.\54\ After consulting with

    [[Page 8073]]

    staff representing FSOC's members, our initial view is that the

    investment activities of hedge funds \55\ may have the potential to

    pose systemic risk for several reasons and, accordingly, that advisers

    to these hedge funds should provide targeted information on Form PF to

    allow FSOC to gain a better picture of the potential systemic risks

    posed by the hedge fund industry. Hedge funds may be important sources,

    and users, of liquidity in certain markets. Hedge funds often use

    financial institutions that may have systemic importance to obtain

    leverage and enter into other types of transactions. Hedge funds employ

    investment strategies that may use leverage, derivatives, complex

    structured products, and short selling in an effort to generate

    returns. Hedge funds also may employ strategies involving high volumes

    of trading and concentrated investments. These strategies, and in

    particular high levels of leverage, can increase the likelihood that

    the fund will experience stress or fail, and amplify the effects on

    financial markets.\56\ While many hedge funds are not highly leveraged,

    certain hedge fund strategies employ substantial amounts of

    leverage.\57\ Significant hedge fund failures (whether caused by their

    investment positions or use of leverage or both) could result in

    material losses at the financial institutions that lend to them if

    collateral securing this lending is inadequate.\58\ These losses could

    have systemic implications if they require these financial institutions

    to scale back their lending efforts or other financing activities

    generally.\59\ The simultaneous failure of several similarly positioned

    hedge funds could create contagion through the financial markets if the

    failing funds liquidate their investment positions in parallel at

    firesale prices, thereby depressing the mark-to-market valuations of

    securities that may be widely held by other financial institutions and

    investors.\60\ Many of these concerns were raised in September 1998 by

    the near collapse of Long Term Capital Management, a highly leveraged

    hedge fund that experienced significant losses stemming from the 1997

    Russian financial crisis.\61\

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

    \54\ See Senate Committee Report, supra note 4, at 38 (``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. The case of Long-Term Capital Management, a hedge

    fund that was rescued through Federal Reserve intervention in 1998

    because of concerns that it was ``too-interconnected-to-fail,''

    shows that the activities of even a single hedge fund may have

    systemic consequences.'').

    \55\ See section II.B of this Release for a discussion of the

    definition of ``hedge fund'' in proposed Form PF. To prevent

    duplicative reporting, commodity pools that meet the definition of a

    private fund would be treated as hedge funds for purposes of Form

    PF. CPOs and CTAs that are not also registered as an investment

    adviser with the SEC would be required to file proposed Form CPO-PQR

    (for CPOs) and proposed Form CTA-PR (for CTAs) reporting similar

    information as Form PF requires for private fund advisers that

    advise one or more hedge funds. See Commodity Pool Operators and

    Commodity Trading Advisors: Amendments to Compliance Obligations,

    CFTC Release (Jan. --, 2011). Deeming commodity pools that meet the

    definition of a private fund to be hedge funds for purposes of Form

    PF, therefore, is designed to ensure that the CFTC obtains similar

    reporting regarding commodity pools that satisfy CFTC reporting

    obligations by the CPO or CTA filing proposed Form PF.

    \56\ See President's Working Group on Financial Markets, Hedge

    Funds, Leverage, and the Lessons of Long Term Capital Management

    (Apr. 1999), at 23, available at http://www.ustreas.gov/press/releases/reports/hedgfund.pdf (``PWG LTCM Report'').

    \57\ See FSA Survey, supra note 27, at 5 (showing borrowings as

    a multiple of net equity ranging from 100% in strategies such as

    managed futures to 1400% in the fixed income arbitrage hedge fund

    strategy).

    \58\ See, e.g., Id.; Ben S. Bernanke, Hedge Funds and Systemic

    Risk, Speech at the Federal Reserve Bank of Atlanta's 2006 Financial

    Market's Conference (May 16, 2006), available at http://www.federalreserve.gov/newsevents/speech/bernanke20060516a.htm

    (``Bernanke''); Nicholas Chan et al., Systemic Risk and Hedge Funds,

    National Bureau of Economic Research Working Paper 11200 (Mar.

    2005), available at http://www.nber.org/papers/w11200.pdf; Andrew

    Lo, Regulatory Reform in the Wake of the Financial Crisis of 2007-

    2008, 1 J. Fin. Econ. P. 4 (2009); and John Kambhu et al., Hedge

    Funds, Financial Intermediation, and Systemic Risk, FRBNY Econ. P.

    Rev. (Dec. 2007) (``Kambhu'').

    \59\ Kambhu, supra note 58; Financial Stability Forum, Update of

    the FSF Report on Highly Leveraged Institutions (May 19, 2007).

    \60\ See Bernanke, supra note 58; David Stowell, An Introduction

    to Investment Banks, Hedge Funds & Private Equity: The New Paradigm

    259-261 (2010).

    \61\ See PWG LTCM Report, supra note 56.

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

    Accordingly, proposed Form PF would include questions about large

    hedge funds' investments, use of leverage and collateral practices,

    counterparty exposures, and market positions that are designed to

    assist FSOC in monitoring and assessing the extent to which stresses at

    those hedge funds could have systemic implications by spreading to

    prime brokers, credit or trading counterparties, or financial

    markets.\62\ This information also is designed to help FSOC observe how

    hedge funds behave in response to certain stresses in the markets or

    economy. We request comment on this analysis of the potential systemic

    risk posed by hedge funds. Does it adequately identify the ways in

    which hedge funds might generate systemic risk? Are there other ways

    that hedge funds could create systemic risk? Are hedge funds not a

    potential source of systemic risk? Please explain your views and

    discuss their implications for the reporting we propose on Form PF.

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

    \62\ See section II.D.2 of this Release.

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

    2. Liquidity Funds

    ``Liquidity funds'' also may be important to FSOC's monitoring and

    assessment of potential systemic risks, and the SEC believes

    information concerning them, therefore, should be included on Form

    PF.\63\ The proposed Form PF would define a liquidity fund as a 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.\64\ Liquidity

    funds thus can resemble money market funds, which are registered under

    the Investment Company Act of 1940 and seek to maintain a ``stable''

    net asset value per share, typically $1, through the use of the

    ``amortized cost'' method of valuation.\65\

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

    \63\ 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 would require more specific reporting regarding liquidity

    funds, would only be required by the SEC.

    \64\ See section II.B of this Release for a discussion of the

    definition of ``liquidity fund'' in proposed Form PF.

    \65\ Under the amortized cost method, securities are valued at

    acquisition cost, with adjustments for amortization of premium or

    accretion of discount, instead of at fair market value. To prevent

    substantial deviations between the amortized cost share price and

    the mark-to-market per-share value of the fund's assets (its

    ``shadow NAV''), a money market fund must periodically compare the

    two. If there is a difference of more than one-half of 1 percent

    (typically, $0.005 per share), the fund must re-price its shares, an

    event colloquially known as ``breaking the buck.'' See Money Market

    Fund Reform, Investment Company Act Release No. 28807 (June 30,

    2009), 74 FR 32688 (July 8, 2009), at section III (``MMF Reform

    Proposing Release'').

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

    A report recently released by the President's Working Group on

    Financial Markets (the ``PWG MMF Report'') discussed in detail how

    certain features of registered money market funds, many of which are

    shared by liquidity funds, may make them susceptible to runs and thus

    create the potential for systemic risk.\66\ The PWG MMF Report

    describes how some investors may consider liquidity funds to function

    as substitutes for registered money market funds and the potential for

    systemic risk that

    [[Page 8074]]

    results.\67\ During the financial crisis, several sponsors of

    ``enhanced cash funds,'' a type of liquidity fund, committed capital to

    those funds to prevent investors from realizing losses in the

    funds.\68\ The fact that sponsors of certain liquidity funds felt the

    need to support the stable value of those funds suggests that they may

    be susceptible to runs like registered money market funds.

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

    \66\ Report of the President's Working Group on Financial

    Markets: Money Market Fund Reform Options (Oct. 2010), available at

    http://treas.gov/press/releases/docs/10.21%20PWG%20Report%20Final.pdf. The PWG MMF Report states that the

    work of the President's Working Group on Financial Reform relating

    to money market funds is now being taken over by FSOC. The SEC has

    discussed previously registered money market funds' susceptibility

    to runs. See MMF Reform Proposing Release, supra note 65, at section

    III.

    \67\ PWG MMF Report, supra note 66, at section 3.h (``These

    vehicles typically invest in the same types of short-term

    instruments that MMFs hold and share many of the features that make

    MMFs vulnerable to runs, so growth of unregulated MMF substitutes

    would likely increase systemic risks. However, such funds need not

    comply with rule 2a-7 or other [Investment Company Act] protections

    and in general are subject to little or no regulatory oversight. In

    addition, the risks posed by MMF substitutes are difficult to

    monitor, since they provide far less market transparency than

    MMFs.'').

    \68\ See, e.g., Sree Vidya Bhaktavatsalam, BlackRock Earnings

    Beat Estimates on Hedge-Fund Fees, Bloomberg (Jan. 17, 2008)

    (``During the fourth quarter, BlackRock spent $18 million to support

    the net asset value of two enhanced cash funds whose values fell as

    the credit markets got squeezed''); Sree Vidya Bhaktavatsalam &

    Christopher Condon, Federated Investors Bails Out Cash Fund After

    Losses, Bloomberg (Nov. 20, 2007).

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

    Registered money market funds are subject to extensive regulation

    under Investment Company Act rule 2a-7, which imposes credit-quality,

    maturity, and diversification requirements on money market fund

    portfolios designed to ensure that the funds' investing remains

    consistent with the objective of maintaining a stable net asset

    value.\69\ While liquidity funds are not required to comply with rule

    2a-7, we understand that many liquidity funds can suspend redemptions

    or impose gates on shareholder redemptions upon indications of stress

    at the fund. As a result, the risk of runs at liquidity funds may be

    mitigated. The information that the SEC is proposing to require

    advisers to liquidity funds report is designed to allow FSOC to assess

    liquidity funds' susceptibility to runs and ability to otherwise pose

    systemic risk.

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

    \69\ See 17 CFR 270.2a-7.

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

    The SEC requests comment on this analysis of the potential systemic

    risk posed by liquidity funds. Does it adequately identify the ways in

    which liquidity funds might generate systemic risk? Are there other

    ways that liquidity funds could create systemic risk? Do liquidity

    funds lack any potential to create systemic risk? Please explain your

    views and discuss their implications for the reporting proposed on Form

    PF.

    3. Private Equity Funds

    It is the SEC's initial view, after consultation with staff

    representing FSOC's members, that the activities of private equity

    funds, certain of their portfolio companies, or creditors involved in

    financing private equity transactions also may be important to the

    assessment of systemic risk and, therefore, that large advisers to

    these funds should provide targeted information on Form PF to allow

    FSOC to conduct basic systemic risk monitoring.\70\

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

    \70\ See section II.B of this Release for a discussion of the

    definition of ``private equity fund'' in 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 4 of the form, which would require more

    specific reporting regarding private equity funds, would only be

    required by the SEC.

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

    One aspect of the private equity business model that some have

    identified as potentially having systemic implications is its method of

    financing buyouts of companies. Leveraged private equity transactions

    often rely on banks to provide bridge financing until the permanent

    debt financing for the transaction is completed, whether through a

    syndicated bank loan or issuance of high yield bonds by the portfolio

    company or both.\71\ When market conditions suddenly turn, these

    institutions can be left holding this potentially risky bridge

    financing (or committed to provide the final bank financing, but no

    longer able to syndicate or securitize it and thus forced to hold it)

    at precisely the time when credit market conditions, and therefore the

    institutions' own general exposure to private equity transactions and

    other committed financings, have worsened.\72\ For example, prior to

    the recent financial crisis, a trend in private equity transactions was

    for private equity firms to enter into buyout transactions with seller-

    favorable financing conditions and terms that placed much of the risk

    of market deterioration after the transaction agreement was signed on

    the financing institutions and the private equity adviser.\73\

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

    \71\ See Steven M. Davidoff, The Failure of Private Equity, 82

    S. Cal. L. Rev. 481, 494 (2009) (``Davidoff'').

    \72\ See Senior Supervisors Group, Observations on Risk

    Management Practices during the Recent Market Turbulence, at 2 (Mar.

    6, 2008), available at http://www.occ.gov/publications/publications-by-type/other-publications/pub-other-risk-mgt-practices-2008.pdf

    (``Firms likewise found that they could neither syndicate to

    external investors their leveraged loan commitments to corporate

    borrowers nor cancel their commitments to fund those loans despite

    material and adverse changes in the availability of funding from

    other investors in the market''); BIS Private Equity Paper, supra

    note 35, at 1-2 (``Conditions in the leveraged loan market

    deteriorated in the second half of 2007, and demand for leveraged

    finance declined sharply. An initial temporary adverse investor

    reaction to loose lending terms and low credit spreads prevailing in

    early 2007 became more protracted over the course of the second half

    of the year as the turbulence in financial markets deepened and

    contraction in demand for leveraged loans became more severe. Global

    primary market leveraged loan volumes shrank by more than 50% in the

    second half of 2007. The contraction in demand for leveraged loans

    revealed substantial exposure of arranger banks to warehouse risk.

    Undistributed loans will contribute to increased funding costs and

    capital requirements for banks in 2008, on top of other offbalance

    sheet products that they have been forced to bring on-balance sheet.

    Moreover, with leveraged loan indices trading close to 90 cents on a

    dollar in March 2008, realisation of warehouse risks has resulted in

    significant mark to market losses to banks''); Bank of England,

    Financial Stability Report, at 19 (Oct. 2007), available at http://www.bankofengland.co.uk/publications/fsr/2007/fsrfull0710.pdf

    (``Bank of England'') (``The near closure of primary issuance

    markets for collateralised loan obligations, and an increase in risk

    aversion among investors, left banks unable to distribute leveraged

    loans that they had originated earlier in the year. This exacerbated

    a problem banks already faced, as debt used to finance a number of

    high-profile private-equity sponsored leveraged buyouts (LBOs) had

    remained on their balance sheets.'').

    \73\ See Davidoff, supra note 71, at 495-496 (noting the trend

    in private equity transaction agreements signed prior to the

    financial crisis to have no financing condition and to have limited

    ``market outs'' and ``lender outs'' in the debt commitment letters

    and further noting that ``by agreeing to a more certain debt

    commitment letter and providing bridge financing, the banks now took

    on the risk of market deterioration between the time of signing and

    closing.''). Bank regulators and industry observers also noted the

    trend in private equity financing prior to the financial crisis for

    banks to enter into ``covenant lite'' loans, which did not require

    borrowers to meet certain performance metrics for cash flow or

    profits. See The Economics of Private Equity Investments: Symposium

    Summary, FRBSF Economic Letter (Feb. 29, 2008), available at http://www.frbsf.org/publications/economics/letter/2008/el2008-08.html

    (noting growth in the first half of 2007 in such ``covenant lite''

    loans); Financial Stability Forum, Report of the Financial Stability

    Forum on Enhancing Market and Institutional Resilience, at 7 (Apr.

    7, 2008), available at http://www.financialstabilityboard.org/publications/r_0804.pdf (``Another segment that saw rapid growth in

    volume accompanied by a decline in standards was the corporate

    leveraged loan market, where lenders agreed to weakened loan

    covenants to obtain the business of private equity funds.''); Bank

    of England, supra note 73, at 27 (``Market intelligence suggested

    that private equity sponsors had considerable market power to impose

    aggressive capital structures, tight spreads and weak covenants

    because investor demand was so strong. But in August, the flow of

    new LBOs came to a virtual standstill and the debt of a sequence of

    high-profile companies could not be sold [by banks].'').

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

    In addition, some industry observers have noted that the leveraged

    buyout investment model of imposing significant amounts of leverage on

    their portfolio companies in an effort to meet investment return

    objectives subjects those portfolio companies to greater risk in the

    event of economic stress.\74\ If private equity funds conduct a

    [[Page 8075]]

    leveraged buyout of an entity that could be systemically important,

    information about that investment could be important in FSOC monitoring

    and assessing potential systemic risk.\75\

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

    \74\ See, e.g., Paying the Price, The Economist (Jul. 31, 2010)

    (``Pension funds could decide to make a geared bet on equities by

    borrowing money and investing in the S&P 500 index. But they would

    understandably regard such a strategy as highly risky. Giving money

    to private-equity managers, who then use debt to acquire quoted

    companies, is viewed in an entirely different light but amounts to

    the same gamble''). See also BIS Private Equity Paper, supra note

    35, at 24-25.

    \75\ For example, some noted the role of private equity

    investments in companies that the government ultimately bailed out

    during the financial crisis. See, e.g., Casey Ross, Cerberus'

    Success Hurt by a Pair of Gambles, The Boston Globe (Mar. 25, 2010)

    (discussing private equity investments in GMAC and Chrysler Corp.,

    both of which received government bailouts); and Louise Story, For

    Private Equity, A Very Public Disaster, N.Y. Times (Aug. 8, 2009)

    (same).

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

    For these reasons, the SEC believes certain information on the

    activities of private equity funds and their portfolio companies is

    relevant for purposes of monitoring potential systemic risk.\76\ In

    addition, based on the SEC's consultations with staff representing

    FSOC's members, private equity transaction financings, and their

    interconnected impact on the lending institutions, could be a useful

    area for FSOC to monitor in fulfilling its duty to gain a comprehensive

    picture of the financial services marketplace in order to identify

    potential threats to the stability of the U.S. financial system.

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

    \76\ See section II.D.4 of this Release for a discussion of the

    information we propose requiring certain private equity fund

    advisers report on Form PF.

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

    The SEC requests comment on this analysis of the potential systemic

    risk posed by the activities of private equity funds. Does it identify

    the ways in which private equity fund activities might generate

    systemic risk? Are there other ways that private equity funds or their

    activities could create systemic risk? Is the preliminary view that

    private equity fund activities may have less potential to create

    systemic risk than hedge funds and liquidity funds correct? Many

    advisers to private equity funds have noted that certain features of

    the private equity business model, such as its reliance on long-term

    capital commitments from investors, lack of substantial debt at the

    private equity fund level, and investment primarily in the equity of a

    diverse range of private companies, mitigate its potential to pose

    systemic risk.\77\ Do private equity funds not have any potential to

    create systemic risk? Is the monitoring of private equity fund

    activities unnecessary to assess systemic risk generally? Please

    explain your views and discuss their implications for the reporting

    proposed on Form PF.

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    \77\ See, e.g., PE Council Letter, supra note 49; Testimony of

    Mark Tresnowksi, General Counsel, Madison Dearborn Partners, before

    the Senate Banking Subcommittee on Securities, Insurance and

    Investment, July 15, 2009.

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    B. Who Must File Form PF

    We propose that any investment adviser registered or required to

    register with the SEC that advises one or more private funds must file

    a Form PF with the SEC.\78\ A CPO or CTA that also is a registered

    investment adviser that advises one or more private funds would be

    required to file Form PF with respect to any advised commodity pool

    that is a ``private fund.'' By filing Form PF with respect to these

    private funds, a CPO will be deemed to have satisfied certain of its

    filing requirements for these funds.\79\ Under these rules, most

    private fund advisers would be required to complete only section 1 of

    Form PF, providing certain basic information regarding any hedge funds

    they advise in addition to information about their private fund assets

    under management and more generally about their funds' performance and

    use of leverage. The information collected under section 1 of Form PF

    is described in further detail in section II.D.1 of this Release.

    Certain larger private fund advisers would be required to complete

    additional sections of Form PF, which require more detailed

    information.

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    \78\ Proposed Advisers Act rule 204(b)-1.

    \79\ Proposed CEA rule 4.27(d). 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 proposed 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.

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

    Three types of ``Large Private Fund Advisers'' would be required to

    complete certain additional sections of Form PF: \80\

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    \80\ See proposed Instruction 3 to Form PF.

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

    Advisers managing hedge funds that collectively have at

    least $1 billion in assets as of the close of business on any day

    during the reporting period for the required report;

    Advisers managing a liquidity fund and having combined

    liquidity fund and registered money market fund assets of at least $1

    billion as of the close of business on any day during the reporting

    period for the required report; and

    Advisers managing private equity funds that collectively

    have at least $1 billion in assets as of the close of business on the

    last day of the quarterly reporting period for the required report.

    1. Types of Funds

    Proposed Form PF would define ``hedge fund'' as any private fund

    that (1) has a performance fee or allocation calculated by taking into

    account unrealized gains; (2) may borrow an amount in excess of one-

    half of its net asset value (including any committed capital) or may

    have gross notional exposure in excess of twice its net asset value

    (including any committed capital); or (3) may sell securities or other

    assets short.\81\ As noted above, ``liquidity fund'' would be defined

    as 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.\82\ ``Private equity fund'' would be defined 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\

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

    \81\ See proposed Glossary of Terms to Form PF. This definition

    also is the same as the SEC has proposed in amendments to Form ADV.

    See Implementing Release, supra note 9. For purposes of the

    definition, the fund should not net long and short positions in

    calculating its borrowings but should include any borrowings or

    notional exposure of another person that are guaranteed by the fund

    or that the fund may otherwise be obligated to satisfy. In addition,

    a commodity pool that meets the definition of a private fund is

    treated as a hedge fund for purposes of Form PF.

    \82\ See proposed Glossary of Terms to Form PF.

    \83\ See proposed Glossary of Terms to Form PF. Proposed Form PF

    would define ``real estate fund'' as any private fund that is not a

    hedge fund, that does not provide investors with redemption rights

    in the ordinary course and that invests primarily in real estate and

    real estate-related assets. Proposed Form PF would define

    ``securitized asset fund'' as any private fund that is not a hedge

    fund and that issues asset backed securities and whose investors are

    primarily debt-holders. These definitions are designed to encompass

    entities that we believe are typically considered real estate or

    securitized asset funds, respectively, and 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. Proposed Form PF would define ``venture

    capital fund'' as any private fund meeting the definition of venture

    capital fund in rule 203(l)-1 of the Advisers Act for consistency.

    See proposed Glossary of Terms to Form PF. See also Private Fund

    Exemption Release, supra note 9, for a discussion of proposed

    Advisers Act rule 203(l)-1.

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

    Our proposed definition of hedge fund would cover any private fund

    that has any one of three common characteristics of a hedge fund: A

    performance fee using market value (instead of only realized gains),

    high leverage or short selling. We are not aware of any standard

    definition of a hedge fund,\84\ although we note that our proposed

    definition is broadly based on those used in the FSA survey and in the

    IOSCO report described in section I.B above and thus generally would

    promote international consistency in

    [[Page 8076]]

    hedge fund reporting.\85\ Moreover, we believe that any fund meeting

    this definition is an appropriate subject for this higher level of

    reporting even if the fund would not otherwise be considered a hedge

    fund.

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

    \84\ See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (``

    `Hedge funds' are notoriously difficult to define. The term appears

    nowhere in the federal securities laws, and even industry

    participants do not agree upon a single definition.'')

    \85\ The FSA survey is voluntary and does not proscriptively

    define a hedge fund, but states that if a fund generally satisfies a

    number of the following criteria, it should be deemed to fall within

    the scope of the FSA hedge fund survey: (1) Employs investment

    management techniques that can include the use of short selling,

    derivatives, and leverage; (2) takes in external investor money; (3)

    are not UCITS funds; (4) pursue absolute returns; (5) charge

    performance-based fees; (6) have broader mandates than traditional

    funds which give managers more flexibility to shift strategy; (7)

    have higher trading volumes/fund turnover; and (8) frequently set a

    high minimum investment limit. The IOSCO Report generally considered

    as a hedge fund all investment schemes displaying a combination of

    some of the following characteristics: (1) Borrowing and leverage

    restrictions are not applied; (2) significant performance fees are

    paid to the manager in addition to an annual management fee; (3)

    investors are typically permitted to redeem their interests

    periodically, e.g., quarterly, semi-annually or annually; (4) often

    significant `own' funds are invested by the manager; (5) derivatives

    are used, often for speculative purposes, and there is an ability to

    short sell securities; and (6) more diverse risks or complex

    underlying products are involved. See IOSCO Report, supra note 24,

    at 4-5.

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

    The Commissions request comment on the hedge fund definition

    proposed in Form PF.\86\ Does this proposed definition capture the

    appropriate features of funds that should be subject to more detailed

    reporting as ``hedge funds''? Many private funds sell short. Is the

    bright line of classifying any private fund that engages in short

    selling as a hedge fund appropriate? Is the proposed leverage threshold

    for hedge funds set at the appropriate level? One alternative approach

    we could take is to not define a hedge fund in Form PF and simply

    require that all advisers managing in excess of $1 billion in private

    fund assets (regardless of strategy) complete section 2 of Form PF.

    Would this be a more effective approach? For purposes of Form PF, a

    commodity pool satisfying the definition of a ``private fund'' is

    categorized as a hedge fund. Is this treatment appropriate?

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

    \86\ The SEC previously defined private fund for purposes of

    registration of advisers to hedge funds by focusing on the structure

    of the fund to differentiate it from other pooled investment

    vehicles, while the definition of hedge fund we propose today for

    purposes of Form PF reporting focuses on the strategy of the fund in

    order to monitor trading strategies and behaviors which could

    contribute to systemic risk. See Registration under the Advisers Act

    of Certain Hedge Fund Advisers, Investment Advisers Act Release No.

    2333 (Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) (rulemaking

    vacated, Goldstein, 451 F.3d at 884).

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

    The proposed definition of liquidity fund is designed to capture

    all potential substitutes for money market funds because we believe

    these funds may be susceptible to runs and otherwise pose systemic risk

    that FSOC will want to monitor. The SEC recognizes that its proposed

    definition of liquidity fund potentially could capture some short-term

    bond funds. Are there ways that the SEC could define a liquidity fund

    to capture all potential substitutes for money market funds, but not

    short-term bond funds? The SEC requests comment on the liquidity fund

    definition proposed in Form PF.

    Our proposed definition of a private equity fund is intended to

    distinguish private equity funds from other private funds based upon

    the lack of redemption rights and their not being engaged in certain

    investment strategies (such as securitization, real estate or venture

    capital), while these funds would typically have performance fees based

    on realized gains. Has the SEC appropriately distinguished private

    equity funds from other types of private funds in its proposed

    definition? Should others be excluded? The SEC requests comment on the

    private equity fund definition proposed in Form PF.

    2. Large Private Fund Adviser Thresholds

    As noted above, we are proposing $1 billion in hedge fund assets

    under management as the threshold for large hedge fund adviser

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

    market fund assets under management as the threshold for large

    liquidity fund adviser reporting, and $1 billion in private equity fund

    assets under management as the threshold for large private equity fund

    adviser reporting. Advisers would be required to measure whether these

    thresholds have been crossed daily for hedge funds and liquidity funds

    and quarterly for private equity funds based on our belief 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. We designed these thresholds so that the group of

    Large Private Fund Advisers that would be included based on the

    proposed thresholds is relatively small in number but represents the

    large majority of their respective industries based on assets under

    management. For example, we understand that the approximately 200 U.S.-

    based advisers managing at least $1 billion in hedge fund assets

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

    assets under management.\87\ Similarly, SEC staff estimates that the

    approximately 250 U.S.-based advisers managing over $1 billion in

    private equity fund assets represent approximately 85 percent of the

    U.S. private equity fund industry based on committed capital.\88\

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

    \87\ See HFI, supra note 20.

    \88\ Preqin. The Preqin data relating to private equity fund

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

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

    The SEC is proposing that private fund advisers combine liquidity

    fund and registered money market fund assets for purposes of

    determining whether the adviser meets the threshold for more extensive

    reporting regarding its liquidity funds because it understands that an

    adviser's liquidity funds and registered money market funds often

    pursue similar strategies and invest in the same securities and thus

    are subject to many of the same risks. Historically, most advisers of

    enhanced cash funds or other unregistered money market funds also

    advised a substantial amount of registered money market fund assets,

    and so the SEC's criteria for liquidity fund reporting is expected to

    encompass most significant managers of liquidity funds, which it

    estimates number around 80 advisers.\89\

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

    \89\ See, e.g., iMoneyNet, Enhanced Cash Report (3rd quarter

    2009). 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.

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

    We believe that requiring basic information from all advisers about

    all private funds but more extensive and detailed information only from

    advisers with these amounts of assets under management in hedge funds,

    private equity funds, and liquidity funds would allow FSOC to

    effectively conduct basic monitoring for potential systemic risk in

    these private fund industries and to identify areas where OFR may want

    to obtain additional information. In addition, requiring that only

    these Large Private Fund Advisers complete additional reporting

    requirements under Form PF would provide systemic risk information for

    most private fund assets while minimizing burdens on smaller private

    fund advisers that are less likely to pose systemic risk concerns. The

    proposed approach thus incorporates Congress' directive in section 408

    of the Dodd-Frank Act to take into account the size, governance, and

    investment strategy of advisers to mid-sized private funds in

    determining whether they pose systemic risk and formulating systemic

    risk reporting and recordkeeping requirements for private funds.\90\

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

    \90\ We note that the SEC has proposed to collect information

    regarding the governance of private fund advisers through Form ADV.

    See Implementing Release, supra note 9.

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

    [[Page 8077]]

    We request comment on the proposed thresholds. Are there more

    appropriate dividing lines as to when a private fund adviser should be

    required to report more information? Should any of the assets under

    management thresholds be lower or higher? Are the daily (for hedge fund

    and liquidity fund managers) and quarterly (for private equity fund

    managers) measurement periods for the assets under management

    thresholds set appropriately? Should we, as proposed, base the

    threshold on the amount of assets under management? If not, what should

    we base it on?

    We request comment on our proposed approach of only requiring these

    Large Private Fund Advisers to report additional information on Form

    PF. Will collecting the information required by sections 2, 3, and 4 of

    Form PF only from advisers managing in excess of these asset thresholds

    provide adequate information about potential systemic risk in these

    industries? Should we instead require that all private fund advisers

    registered with the SEC complete all of the information on Form PF

    appropriate to the type of private funds they advise regardless of fund

    size or assets under management? Are there advisers to other types of

    private funds that should be required to report more information on

    Form PF? For example, should advisers to other types of private fund

    report more information if they manage in excess of a certain threshold

    of that type of private fund assets?

    3. Aggregation of Assets Under Management

    For purposes of determining whether an adviser is a Large Private

    Fund Adviser for purposes of Form PF, each adviser would have to

    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 the private fund (``parallel

    managed accounts''); \91\ and

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

    \91\ See proposed Instructions 3, 5, and 6 to Form PF; and

    proposed Glossary of Terms to Form PF. See also definitions of

    ``hedge fund assets under management,'' ``liquidity fund assets

    under management,'' and ``private equity fund assets under

    management'' in the proposed Glossary of Terms to Form PF.

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

    Assets of that type of private fund advised by any of the

    adviser's ``related persons.'' \92\

    \92\ See proposed 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). See proposed Glossary

    of Terms to Form PF and Glossary of Terms to Form ADV. The adviser

    would be permitted, but not required, to file one consolidated Form

    PF for itself and its related persons. See section II.B.4 of this

    Release below.

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

    These proposed aggregation requirements are designed to prevent an

    adviser from avoiding the proposed Large Private Fund Adviser reporting

    requirements by re-structuring the manner of providing private fund

    advice internally within the private fund manager group. The adviser

    also would be required to exclude any assets in any account that are

    solely invested in other funds (i.e., internal or external fund of

    funds) in order to avoid duplicative reporting.\93\ We request comment

    on these proposed aggregation requirements. Would these proposed

    aggregation rules appropriately meet our goal of preventing improper

    avoidance of the reporting requirements while giving a complete picture

    of private fund assets managed by a particular private fund adviser

    group? Would aggregating in a different manner be more effective at

    meeting our goal? Should funds that invest most (e.g., 95 percent), but

    not all, of their assets in other funds be excluded from Form PF

    reporting? Would excluding such funds still provide FSOC with a

    complete enough picture of private fund activities to have an adequate

    baseline for systemic risk monitoring purposes?

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

    \93\ See proposed Instruction 7 to Form PF.

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

    If the adviser's principal office and place of business is outside

    the United States, the adviser could exclude any private fund that

    during the last fiscal year was neither a United States person nor

    offered to, or beneficially owned by, any United States person.\94\

    This aspect of the proposed form is designed to allow an adviser to

    report with respect to only those private funds that are more likely to

    implicate U.S. regulatory interests. We request comment on this aspect

    of the proposed form. Should we require different reporting relating to

    foreign advisers or foreign private funds?

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

    \94\ See proposed Instruction 1 to Form PF. ``United States

    person'' would have the meaning provided in proposed rule 203(m)-1

    of the Advisers Act, and ``principal office and place of business''

    would have the same meaning as in Form ADV. See Private Fund

    Exemption Release, supra note 9.

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

    4. Reporting for Affiliated and Subadvised Funds

    To provide private fund advisers with reporting flexibility and

    convenience, the adviser could, 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.\95\ This would allow

    affiliated entities that share reporting and risk management systems to

    report jointly while also permitting affiliated entities that operate

    separately to report separately. With respect to sub-advised funds, to

    prevent duplicative reporting, only one adviser would report

    information on Form PF with respect to that fund. For reporting

    efficiency and to prevent duplicative reporting, we are proposing that

    if an adviser completes information on Schedule D of Form ADV with

    respect to any private fund, the same adviser would be responsible for

    reporting on Form PF with respect to that fund.\96\ We request comment

    on this approach. Should we not allow advisers to file a consolidated

    form with its related persons? Are there other persons related to a

    private fund adviser that should also be able to report on Form PF on a

    consolidated basis? For example, should we adjust Form PF to permit

    consolidated reporting with related persons that are exempt reporting

    advisers in the event an adviser chooses to voluntarily report exempt

    reporting adviser information? Should we allow a different arrangement

    on reporting of sub-advised funds? If so, what would those arrangements

    be?

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

    \95\ See proposed Instruction 2 to Form PF. See supra note 92

    for the definition of ``related person.''

    \96\ See proposed Instruction 4 to Form PF.

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

    5. Exempt Reporting Advisers and Other Advisers Not Registered With the

    SEC

    We are proposing that only private fund advisers registered with

    the SEC (including those that are also registered with the CFTC as CPOs

    or CTAs) file Form PF.\97\ The Dodd-Frank Act created exemptions from

    SEC registration under the Advisers Act for advisers solely to venture

    capital funds or for advisers to private funds that in the aggregate

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

    States (``exempt reporting advisers'').\98\ We are not proposing that

    exempt reporting advisers be required to file Form PF.\99\ We believe

    that Congress' determination to exempt these advisers from SEC

    registration indicates Congress' belief that they are sufficiently

    unlikely to pose systemic risk that regular reporting of detailed

    information may not be necessary.\100\ Based on consultation

    [[Page 8078]]

    with staff representing FSOC's members and on the basic information

    that the SEC has proposed requiring exempt reporting advisers report to

    the SEC on Form ADV, the SEC is not proposing to extend Form PF

    reporting to these advisers.

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

    \97\ See proposed Advisers Act rule 204(b)-1.

    \98\ See Private Fund Exemption Release, supra note 9;

    Implementing Release, supra note 9.

    \99\ To the extent an exempt reporting adviser is registered

    with the CFTC as a CPO or CTA, that adviser would be obligated to

    file either proposed Form CPO-PQR or CTA-PR, respectively.

    \100\ See Senate Committee Report, supra note 4, 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 Private Fund Exemption Release, supra note 9.

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

    Our proposed rules, however, would require some advisers managing

    less than $150 million in private fund assets to report limited

    information on Form PF. While Congress exempted from registration with

    the SEC advisers solely to private funds that in the aggregate have

    less than $150 million in assets under management, it provided no such

    exemption for advisers with less than $150 million in private fund

    assets under management that also, for example, advise individual

    clients with over $100 million in assets under management. Because this

    latter group of advisers is registered with the SEC and thus is subject

    to the full range of investor protection efforts that accompany

    registration, and because of the limited burden of the basic reporting,

    we believe it is appropriate to require these advisers to complete and

    file section 1 of Form PF. We request comment on this approach. Should

    we require that exempt reporting advisers file Form PF? \101\ Why or

    why not? If so, which portions of Form PF should we require that exempt

    reporting advisers complete?

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

    \101\ Section 404 of the Dodd-Frank Act states that the SEC

    ``shall issue rules requiring each investment adviser to a private

    fund to file reports containing such information as the [SEC] deems

    necessary and appropriate in the public interest and for the

    protection of investors or for the assessment of systemic risk,''

    (emphasis added).

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

    C. Frequency of Reporting

    The Commissions propose to require that all private fund advisers

    other than the Large Private Fund Advisers discussed above complete and

    file a Form PF on an annual basis. A newly registering adviser's

    initial Form PF filing would be submitted within 15 days of the end of

    its next occurring calendar quarter after registering with the SEC so

    that FSOC can begin including this data in its analysis as soon as

    possible.\102\ Annual updates would be due no later than the last day

    on which the adviser may timely file its annual updating amendment to

    Form ADV (currently, 90 days after the end of the adviser's fiscal

    year).\103\ This frequency of reporting would allow the Commissions and

    FSOC to periodically monitor certain key information relevant to

    assessing systemic risk posed by these private funds on an aggregate

    basis. It also 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. Finally, this timing will facilitate

    FSOC's compilation and analysis of Form PF and Form ADV data for these

    filers since both sets of data will be reported as of the same date.

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

    \102\ See proposed rule 204(b)-1(a).

    \103\ See proposed Advisers Act rule 204(b)-1(e).

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

    Large Private Fund Advisers would be required to complete and file

    a Form PF no later than 15 days after the end of each calendar

    quarter.\104\ Our preliminary view is that, unlike for smaller private

    fund advisers, quarterly reporting for Large Private Fund Advisers is

    necessary in order to provide FSOC with timely data to identify

    emerging trends in systemic risk. We understand that hedge fund

    advisers already collect and calculate much of the information that

    would be required by Form PF relating to hedge funds on a quarterly

    basis.\105\ As a result, quarterly reporting on Form PF would coincide

    with most hedge fund advisers' internal reporting cycles and leverage

    data collection systems and processes already existing at these

    advisers. In addition, we believe that most liquidity fund advisers

    collect on a monthly basis much of the information that we are

    proposing be reported in section 3 of Form PF and thus quarterly

    reporting should be relatively efficient for these advisers. We

    anticipate that Large Private Fund Advisers would be able to collect

    and file this information within 15 days after the end of each quarter,

    which is sufficiently timely for FSOC's use in conducting systemic risk

    monitoring.

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

    \104\ See proposed Instruction 7 to Form PF.

    \105\ See Report of the Asset Manager's Committee to the

    President's Working Group on Financial Markets, Best Practices for

    the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing

    best practices on disclosing to investors performance data, assets

    under management, risk management practices (including on asset

    types, geography, leverage, and concentrations of positions) with

    which SEC staff understands many hedge funds comply).

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

    Advisers would be required to file Form PF to report that they are

    transitioning to only filing Form PF annually with the Commissions or

    to report that they no longer meet the requirements for filing Form PF

    no later than the last day on which the adviser's next Form PF update

    would be timely.\106\ This would allow 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 also would be able to avail themselves

    of a temporary hardship exemption in a similar manner as with other

    Commission filings if they are unable to file Form PF electronically in

    a timely manner due to unanticipated technical difficulties.\107\

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

    \106\ See proposed Instruction 8 to Form PF.

    \107\ See proposed rule 204(b) 1(f). The adviser would check the

    box in Section 1a of Form PF indicating that it was requesting a

    temporary hardship exemption and complete Section 5 of Form PF no

    later than one business day after the electronic Form PF filing was

    due and 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.

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

    We request comment on our proposed filing frequency. Are the filing

    requirements for private fund advisers frequent enough to assess high-

    level systemic risk posed by private funds? Should smaller private fund

    advisers have to file more frequently or less frequently? Should Large

    Private Fund Advisers be required to file Form PF more frequently (such

    as monthly) or less frequently (such as annually or semiannually)? Is

    90 days for an annual update or 15 days for a quarterly update too long

    to ensure reporting of timely information? Would more or less time be

    more appropriate? Specifically, would 15 days be enough time for Large

    Private Fund Advisers to prepare and file quarterly reports? Is there

    information in the form that should be amended promptly if it becomes

    inaccurate? Should Large Private Fund Advisers be required to file Form

    PF as of the end of each calendar quarter or as of the end of each

    fiscal quarter?

    Currently, we anticipate that the proposed rules requiring filing

    of Form PF would have a compliance date of December 15, 2011, at which

    time Large Private Fund Advisers would begin filing 15 days after the

    end of each quarter (i.e., Large Private Fund Advisers would need to

    make their initial Form PF filing by January 15, 2012). This timing

    should allow sufficient time for Large Private Fund Advisers to develop

    systems for collecting the information required on Form PF and prepare

    for filing. We currently anticipate that this timeframe also would give

    the SEC sufficient time to create and program a system to accept

    filings of Form PF.\108\ We are proposing

    [[Page 8079]]

    that the rules allow smaller private fund advisers until 90 days after

    the end of their first fiscal year occurring on or after the compliance

    date of the proposed rule to file their first Form PF (with the

    expectation that this would result in smaller private fund advisers

    with a December 31 fiscal year end filing their first Form PF by March

    31, 2012) because we anticipate that some of these advisers may require

    more time to prepare for their initial Form PF filing and so that the

    first group of private fund advisers filing Form PF would all be

    reporting based generally on information as of December 31, 2011.\109\

    Under this proposed compliance date and transition rule, smaller

    private fund advisers would have at least eight months after adoption

    of the proposed form, depending on their fiscal year end, to file their

    first Form PF. We request comment on when advisers should be required

    to comply with the proposed rules and file Form PF. Do the compliance

    dates and transition times that we have proposed provide sufficient

    time for smaller advisers and Large Private Fund Advisers to prepare

    for filing?

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    \108\ The SEC will work closely with the firm it selects to

    create and program a system for Form PF filings and will monitor

    whether it could do so on this timeframe.

    \109\ See proposed Advisers Act rule 204(b)-1(g).

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    D. Information Required on Form PF

    The questions contained in proposed 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 we propose requiring registered

    advisers to file on Form PF also is broadly based on the guidelines

    discussed in the IOSCO Report with many of the more detailed items

    generally tracking questions contained in the surveys of large hedge

    fund advisers conducted by the FSA and other IOSCO members.\110\ We

    expect that the information collected on Form PF would assist FSOC in

    monitoring and assessing any systemic risk, as discussed in section

    II.A above, that may be posed by private funds. We discuss below the

    information that Form PF would require.

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    \110\ See supra note 24.

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    1. Section 1

    Section 1 would apply to all investment advisers required to file

    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. Section 1a

    also would require reporting of basic aggregate information about the

    private funds managed by the adviser, such as total and net assets

    under management, and the amount of those assets that are attributable

    to certain types of private funds.\111\ This identifying information

    would 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.

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

    \111\ Section 1 would require the adviser to indicate the

    adviser's total ``regulatory assets under management,'' using the

    same proposed definition of that term as used on proposed amendments

    to Part 1 of Form ADV, and its net assets under management, which

    subtracts out any liabilities of the private funds. See Implementing

    Release, supra note 9. Form PF, however, would require the adviser

    to aggregate parallel managed accounts with related private funds in

    reporting its assets under management (even if the accounts are not

    ``securities portfolios'' within the meaning of proposed Instruction

    5.b, Instructions to Part 1A of Form ADV), and thus the total and

    net assets under management figures reported in section 1a of Form

    PF may differ from what the adviser reports on Form ADV. Proposed

    question 2 would require the adviser to report what portion of these

    assets under management 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. See section II.B.1 of this

    Release for a discussion of these different types of funds and their

    proposed definitions for purposes of Form PF.

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

    Section 1b of Form PF would elicit certain identifying and other

    basic information about each private fund advised by the investment

    adviser. The adviser generally would need to complete a separate

    section 1b for each private fund it advised. However, because feeder

    funds typically invest substantially all their assets in a master fund,

    to prevent duplicative reporting the adviser must report information in

    section 1b on an aggregated basis for private funds that are part of a

    master-feeder arrangement and so would not file a separate section 1b

    for any feeder fund.\112\

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    \112\ See proposed Instructions 5 and 6 to Form PF. When

    providing responses in Form PF with respect to a private fund, the

    adviser also must include any parallel managed accounts related to

    the private fund. Id.

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

    Section 1b would require reporting of each private fund's gross and

    net assets and the aggregate notional value of its derivative

    positions.\113\ It also would require basic information about the

    fund's borrowings, including a breakdown of the fund's borrowing based

    on whether the creditor is a U.S. financial institution, foreign

    financial institution or non-financial institution as well as 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. This section would require reporting of

    certain basic information about how concentrated the fund's investor

    base is, such as the number of beneficial owners of the fund's equity

    and the percentage of the fund's equity held by the five largest equity

    holders.\114\ Finally, section 1b would require monthly and quarterly

    performance information about each fund.

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

    \113\ The form would require the adviser to report the total

    gross notional value of its funds' derivative positions, except that

    options would be reported using their delta adjusted notional value.

    Long and short positions would not be netted. See proposed Form PF,

    instructions to question 11.

    \114\ See proposed question 12 on Form PF.

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

    The information required by section 1b would 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.\115\ It would allow FSOC to monitor borrowing

    practices for the broader private fund industry, which may have

    interconnected impacts on banks (including specific banks) and thus the

    broader financial system. We believe that collecting both monthly and

    quarterly performance data also would allow FSOC to monitor the data at

    sufficient granularity to track trends.

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

    \115\ This information also would be useful for advancing the

    Commissions' investor protection goals.

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

    Finally, section 1c would require reporting of certain information

    only about hedge funds managed by the adviser, such as their investment

    strategies, percentage of the fund's assets managed using computer-

    driven trading algorithms, significant trading counterparty exposures

    (including identity of counterparties),\116\ and trading and clearing

    practices.\117\ This information will enable FSOC to

    [[Page 8080]]

    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 extent of private fund

    activities conducted away from regulated exchanges and clearing

    systems. We have based some of this information, such as information

    about significant trading counterparty exposures and trading and

    clearing practices, on the FSA surveys, which would promote

    international consistency in hedge fund reporting.\118\

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    \116\ Specifically, proposed questions 19 and 20 on Form PF

    would require the adviser to identify the five trading

    counterparties to which the fund has the greatest net counterparty

    credit exposure (measured as a percentage of the fund's net asset

    value) and that have the greatest net counterparty credit exposure

    to the fund (measured in U.S. dollars).

    \117\ More specifically, proposed question 21 on Form PF would

    require estimated breakdowns of percentages of the hedge fund's

    securities and derivatives traded on a regulated exchange versus

    over the counter and percentages of the hedge fund's securities,

    derivatives, and repos cleared by a central clearing counterparty

    (``CCP'') versus bilaterally (or, in the case of repos, that

    constitute a tri-party repo).

    \118\ For example, the FSA survey asks for identification of the

    hedge fund's top five counterparties in terms of net credit

    exposure. It also asks 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 CCP versus bilaterally.

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

    We request comment on section 1 of proposed Form PF. Is there

    additional basic information that we should require from all advisers

    filing Form PF or regarding all of the hedge funds or other private

    funds that they manage? For example, should we require any of the more

    detailed information about their borrowing practices that we require

    regarding large hedge funds in Item B of section 2b? Is a creditor

    providing 5 percent of the fund's borrowings an appropriate threshold

    for significant creditors of whose identity FSOC may want to be aware

    for purposes of assessing the fund's interconnectedness in the

    financial system? Should the threshold be more or less? Are the top

    five equity holders in the fund an appropriate threshold for

    significant investors in the fund? Should the threshold be more or

    less? Should we require assets under management information for other

    private fund categories than those specified in question 4? Should we

    request that performance data be reported on a different basis than

    monthly and quarterly? Are there other primary investment strategies

    that hedge funds use that should be included in question 17? Is the

    information we have proposed requiring on the fund's borrowings

    necessary given that other questions in section 1b ask for information

    on the fund's gross and net assets? Will asking for the amount and

    identity of the five trading counterparties to which the fund has the

    greatest net counterparty credit exposure and that have the greatest

    net counterparty credit exposure to the fund appropriately track

    significant exposures for systemic risk assessment purposes? Have we

    requested appropriate information on trading and clearing practices

    sufficient to allow FSOC to examine systemic risks relating to trading

    and clearing outside of regulated exchanges and central clearing

    systems? Is there information in section 1 that we should not require,

    or that we should only require of large hedge fund advisers and why?

    With respect to the aggregation of master-feeder arrangements for

    reporting purposes, are there common situations in which an adviser

    will not have sufficient access to a feeder fund's information to

    report accurately on Form PF? If so, how should the form address those

    situations? We also request comment more generally on the definitions

    of terms we have proposed in the glossary of terms for Form PF.

    2. Section 2

    Form PF would require private fund advisers who had at least $1

    billion in hedge fund assets under management as of the close of

    business on any day during the reporting period to complete section

    2.\119\ Section 2a would require certain aggregate information about

    the hedge funds advised by Large Private Fund Advisers, such as the

    market 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). It also would require the adviser to report the duration of

    fixed income portfolio holdings (including asset backed securities), to

    indicate the assets' interest rate sensitivity, as well as the turnover

    rate of the adviser's aggregate portfolios during the reporting period

    to provide an indication of the adviser's frequency of trading.

    Finally, the adviser would be required to report a geographic breakdown

    of investments held by the hedge funds it advises.

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

    \119\ See section II.B of this Release.

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

    This information would assist FSOC in monitoring asset classes in

    which hedge funds may be significant investors and trends in hedge

    funds' exposures to allow FSOC to identify concentrations in particular

    asset classes (or in particular geographic regions) that are building

    or transitioning over time. It would aid FSOC in examining large hedge

    fund advisers' role as a source of liquidity in different asset

    classes. In some cases, we are proposing that the information be broken

    down into categories that would facilitate FSOC's use of flow of funds

    information, which is an important tool for evaluating trends in and

    risks to the U.S. financial system.\120\ This information also is

    designed to address requirements under section 404 of the Dodd-Frank

    Act specifying certain mandatory contents for records and reports that

    must be maintained and filed by advisers to private funds. For example,

    it would provide information about the types of assets held and trading

    and investment positions and practices.

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

    \120\ For example, we are proposing that in some cases the data

    be broken down between issuers that are financial institutions and

    those that are not. The FRB publishes flow of funds data, which is

    available at http://www.federalreserve.gov/releases/z1/.

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

    Section 2b of Form PF would require large hedge fund advisers to

    report certain additional information about any hedge fund they advise

    with a net asset value of at least $500 million as of the close of

    business on any day during the reporting period (a ``qualifying hedge

    fund'').\121\ For purposes of determining whether a private fund is a

    qualifying hedge fund, the adviser would have to aggregate any parallel

    managed accounts, parallel funds, and funds that are part of the same

    master-feeder arrangement, and would have to treat any private funds

    managed by its related person as if they were managed by the filing

    adviser.\122\ We are proposing this aggregation to prevent an adviser

    from structuring its activities to avoid the reporting requirement. We

    have selected $500 million as a threshold for more extensive individual

    hedge fund reporting because we believe that a $500 million hedge fund

    is a substantial fund the activities of which could have an impact on

    particular markets in which it invests or on its particular

    counterparties. We also believe that setting this threshold at this

    level would minimize reporting burdens on advisers to smaller or start

    up hedge funds that are less likely to have a systemic impact. Finally,

    this threshold is the same threshold used by the FSA in its hedge fund

    surveys and thus would create a certain level of consistency in

    reported data.

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

    \121\ See proposed Instruction 3 to Form PF. Advisers should not

    complete section 2 with respect to assets managed by a fund of hedge

    funds. See proposed Instruction 7 to Form PF.

    \122\ See proposed Instructions 5 and 6 to Form PF. Parallel

    funds are 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 proposed Glossary of Terms to Form PF.

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

    We request comment on the qualifying hedge fund threshold. Should

    it be lower or higher? If so, why? Should large hedge fund advisers

    have to report the information for all their hedge funds? Could all of

    such advisers' hedge funds, in the aggregate, potentially have a

    systemic impact that would merit such

    [[Page 8081]]

    reporting? Should Form PF have different requirements regarding

    aggregating parallel managed accounts, parallel funds, or feeder funds

    or aggregating hedge funds managed by affiliates?

    Section 2b would require reporting of the same information as that

    requested in section 2a regarding exposure to different types of

    assets.\123\ In this section, however, this information would be

    reported separately for each qualifying hedge fund the adviser manages.

    Section 2b also would require on a per fund basis data not requested in

    section 2a. The adviser would be required to report information

    regarding the qualifying hedge fund's portfolio liquidity,

    concentration of positions, collateral practices with significant

    counterparties, and the identity of, and clearing relationships with,

    the three central clearing counterparties to which the fund has the

    greatest net counterparty credit exposure.\124\ This information is

    designed to assist FSOC in monitoring the composition of hedge fund

    exposures over time as well as the liquidity of those exposures. The

    information also would 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 and

    interconnectedness with central clearing counterparties. Finally, some

    of this information, such as information about the identity of three

    central clearing counterparties to which the fund has the greatest net

    counterparty credit exposure and fund asset liquidity information, was

    broadly based on information requested by the FSA survey, which would

    promote international consistency in hedge fund reporting.\125\

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

    \123\ See proposed question 26 on Form PF.

    \124\ See proposed questions 27-34 on Form PF. For example,

    question 28 would require reporting of the percentage of the fund's

    portfolio capable of being liquidated within different time periods.

    Question 31 would require 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. Questions 32 and 33 would require reporting of initial and

    variation margin for collateral securing exposure to the fund's top

    five counterparty groups as well as the face amount of letters of

    credit posted and certain information on rehypothecation of such

    collateral.

    \125\ For example, the FSA survey asks for the percentage of the

    hedge fund's portfolio that can be liquidated within different time

    periods and the identity of the fund's top three CCPs in terms of

    net credit exposure.

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

    Section 2b also would require for each qualifying hedge fund data

    regarding certain hedge fund risk metrics, financing information, and

    investor information. If during the reporting period the adviser

    regularly calculated a value at risk (``VaR'') metric for the

    qualifying hedge fund, the adviser would have to report VaR for each

    month of the reporting period.\126\ The form also would require the

    adviser to report the impact on the fund's portfolio from specified

    changes to certain identified market factors, if regularly considered

    in the fund's risk management, broken down by the long and short

    components of the qualifying hedge fund's portfolio.\127\ This

    information is designed to allow FSOC to track basic sensitivities of

    the hedge fund to common market sensitivities, correlations in those

    factor sensitivities, and trends in those factor sensitivities among

    large hedge funds.

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

    \126\ If VaR was calculated, the adviser would have to report

    the confidence interval, time horizon, whether any weighting was

    used, and the method used to calculate VaR (historical simulation,

    Monte Carlo simulation, parametric, or other). If applicable, the

    adviser would have to report the historical lookback period used.

    The adviser would also have to report if it did not regularly

    calculate VaR. See proposed question 35 on Form PF.

    \127\ The market factors are changes in: equity prices, risk

    free interest rates, credit spreads, currency rates, commodity

    prices, option implied volatilities, ABS default rates, and

    corporate bond default rates. Advisers are permitted to omit a

    response with respect to any market factor that it did not regularly

    consider in the reporting fund's risk management. However, to be

    ``regularly considered'' in the fund's risk management does not

    require that the adviser have conducted stress testing on that

    market factor (it could simply mean, for example, that the fund's

    risk managers recognized that such a market factor could have an

    impact on the fund's portfolio). See proposed question 36 on Form PF

    and related instructions.

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

    Item D of Section 2b would require reporting of certain financing

    information for each qualifying hedge fund, including a monthly

    breakdown of its secured and unsecured borrowing and its derivatives

    exposures as well as information about the value of the collateral and

    letters of credit supporting the secured borrowing and derivatives

    exposures and the types of creditors. It also would require a breakdown

    of the term of the fund's committed financing. This information would

    assist FSOC in monitoring 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. Collecting financing data broken down on a

    monthly basis should provide FSOC with sufficient granularity to

    identify trends.

    Finally, Item E of section 2b would require the private fund

    adviser to report information about each qualifying hedge fund's

    investor composition and liquidity. For example, it contains questions

    about the fund's side pocket and gating arrangements and provides for a

    breakdown of the percentage of the fund's net asset value that is

    locked in for different periods of time.\128\ We believe this

    information may be important in allowing 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.

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

    \128\ A side pocket is a type of account used by private funds

    to separate illiquid assets from other more liquid fund investments.

    Only investors in the hedge fund at the time the asset is put in the

    side pocket (and not future investors) will be entitled to a share

    of proceeds from that investment. A gate is a restriction imposed by

    the manager of a private fund on permissible redemptions from the

    fund during a certain period of time. The standards for imposing

    suspensions and gates may vary among funds, so in responding to

    these questions, an adviser would be expected to make a good faith

    determination as to which provisions of the reporting fund's

    governing documents would likely be triggered during conditions that

    it views as significant market stress.

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

    The information in proposed section 2b also is designed to address

    requirements under section 404 of the Dodd-Frank Act for records and

    reports that the SEC requires of private fund advisers, such as

    monitoring the amount of assets under management and the use of

    leverage, counterparty credit risk exposure, trading and investment

    positions, and the types of assets held. We request comment on the

    information that we propose requiring large hedge fund advisers to

    report under section 2. Is there additional information with respect to

    the types of their investments, use of leverage, or counterparties that

    we should require and why? Have we asked for appropriate time period

    breakdowns of the fund's liquidity in terms of asset liquidity,

    financing liquidity, and investor liquidity? Is there other information

    we could ask to assess hedge funds' potential impact on liquidity in

    particular markets? Would the threshold in the proposed form capture

    significant central clearing counterparties? Does the proposed form ask

    sufficient questions regarding the fund's collateral practices to

    ensure that FSOC will be able to monitor the fund's unsecured exposure

    to significant counterparties? Should the form require reporting of

    hedge funds' investment in different types of instruments or

    commodities than those proposed in questions 23 and 27?

    Are there risk metrics or additional market factors that we should

    require? Should we require the proposed market factors but with

    different specified changes? Stress testing is an important metric for

    FSOC's assessment of potential systemic risk posed by hedge funds, but

    we understand that the type of stress testing conducted varies

    [[Page 8082]]

    substantially depending on the strategy of the particular hedge fund

    and among hedge funds pursuing the same strategy. Is there a better way

    for the form to assess the effects of stresses on hedge funds than the

    stress testing questions included in the proposed form? Should we

    request the geographic breakdown of the hedge fund's investments for

    different geographic regions or countries? Are there existing

    collections of data broken down by geographic regions or countries with

    which we should be consistent? Should we require more or less detailed

    information regarding the types of assets in which the fund invests?

    Is there information that we should not require and why? Is there

    information that we should require large hedge fund advisers to report

    regarding all of the hedge funds they manage that we only propose

    requiring qualifying hedge funds to report? Is there information in

    proposed Form PF that is unlikely to be reported in a comparable or

    meaningful fashion such that FSOC would be unable to draw any useful

    conclusions or insights for purposes of assessing systemic risk? If so,

    how could changes to the question or instructions to the question

    improve the utility of the information the form seeks? Are there any

    disclosure requirements in the SEC's proposed amendments to Form ADV

    (which will be publicly available) that should instead be reported

    through Form PF (which will not be publicly available) or vice versa?

    \129\

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

    \129\ See Implementing Release, supra note 9, for a discussion

    of the SEC's proposed amendments to Form ADV.

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

    We request comment more generally on the information we propose

    requiring in Form PF with respect to hedge funds and their advisers. Is

    there additional information that would be helpful to FSOC in

    monitoring for systemic risk with respect to hedge funds?

    We note that certain data in the proposed form, while filed with

    the Commissions on an annual or quarterly basis, would have to be

    reported on a monthly basis. In addition to providing more granular

    data to allow FSOC to better identify trends, this aspect of the

    proposal is designed to mitigate the ability of an adviser to ``window

    dress,'' or manipulate certain reported data to mask activities or

    risks undertaken by the private funds it manages.

    Is there information that should be broken down further and

    reported as of smaller time increments, such as weekly, or as of larger

    time increments? Is there information that should be reported to show

    ranges, averages, high points, or low points during the reporting

    period, rather than as of the last day of the month or quarter? If so

    what time period should the range or average cover and how should it be

    calculated? We note that we have considered in other contexts different

    ways of disclosing information that can fluctuate during a reporting

    period.\130\ Are there approaches in these other contexts that should

    be used in Form PF? What would be the best method of avoiding ``window

    dressing'' in the form and why? Is there information that should not be

    reported on a monthly basis or, in contrast, information that should be

    reported on a monthly basis (in each case, when the information is

    filed with the Commissions quarterly or annually)? Please explain your

    response.

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

    \130\ See Short-Term Borrowings Disclosure, Securities Act

    Release No. 9143 (Sept. 17, 2010), at section II.A [75 Fed. Reg.

    59866 (Sept. 28, 2010)].

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

    3. Section 3

    Form PF would require private fund advisers advising a liquidity

    fund and managing at least $1 billion in combined liquidity fund and

    registered money market fund assets as of the close of business on any

    day in the reporting period to complete and file the information on

    section 3.\131\ As discussed above, to the extent that liquidity funds

    function as unregistered substitutes for money market funds or

    otherwise share certain basic characteristics of money market funds,

    they may be susceptible to runs and thus have the potential to pose

    systemic risk.\132\

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

    \131\ See sections II.A.2 and II.B of this Release for a

    discussion of this reporting threshold and the definition of

    liquidity fund. For purposes of the $1 billion threshold, an adviser

    would have to treat any liquidity funds managed by any of the

    adviser's related persons as though they were advised by the

    adviser. See proposed Instruction 3 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 would require more

    specific reporting regarding liquidity funds, would only be required

    by the SEC.

    \132\ See section II.A.2 of this Release. The SEC also notes

    that institutional investors--the principal investors in liquidity

    funds--were the primary participants in the run on money market

    funds in September 2008, rather than retail investors. See MMF

    Reform Proposing Release, supra note 65.

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

    Section 3 would require that these private fund advisers report

    certain information for each liquidity fund they manage. The section

    includes questions on whether the fund uses the amortized cost method

    of valuation and/or the penny rounding method of pricing in computing

    its net asset value per share to help determine how the fund might try

    to maintain a stable net asset value that could make the fund more

    susceptible to runs.\133\ It asks whether the fund as a matter of

    policy is managed in compliance with certain provisions of rule 2a-7

    under the Investment Company Act of 1940, which is the principal rule

    through which the SEC regulates registered money market funds.\134\

    This information would 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.

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    \133\ See proposed questions 43 and 44 of Form PF.

    \134\ See proposed question 45 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 rule 2a-7 even though that rule does not apply to liquidity

    funds.

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

    Section 3 also would require reporting of certain information

    regarding the liquidity fund's portfolio. For example, it would ask,

    for each month of the reporting period, for the fund's net asset value,

    net asset value per share, market-based net asset value per share,

    weighted average maturity (``WAM''), weighted average life (``WAL''),

    7-day gross yield, amount of daily and weekly liquid assets, and amount

    of assets with a maturity greater than 397 days.\135\ It also would

    require the fund to report the amount of its assets invested in

    different types of instruments, broken down by the maturity of those

    instruments, as well as information for each open position of the fund

    that represents 5 percent or more of the fund's net asset value.\136\

    This information would 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.

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

    \135\ See proposed question 46 of Form PF. WAM, WAL, daily

    liquid assets, and weekly liquid assets are to be calculated in

    accordance with rule 2a-7 under the Investment Company Act. The 7-

    day gross yield is to be calculated consistent with the methodology

    required under Form N-MFP, which must be filed by money market funds

    registered with the SEC. See 17 CFR 274.201.

    \136\ See proposed question 47 of Form PF. Proposed question 48

    of Form PF would require reporting for each month of the reporting

    period, for each of the fund's positions representing 5% or more of

    its net asset value, of the position's portion of the fund's net

    asset value and sub-asset class.

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

    Item C of Section 3 would require reporting of any secured or

    unsecured borrowing of the liquidity fund, broken down by creditor type

    and the maturity profile of that borrowing, and of whether the fund has

    in place a committed liquidity facility. This information would aid

    FSOC in monitoring leverage practices among

    [[Page 8083]]

    liquidity funds and their potential to magnify risks undertaken by the

    fund. Finally, Item D of Section 3 would ask for certain information

    regarding the concentration of the fund's investor base, gating and

    redemption policies, and investor liquidity.\137\ It also would require

    reporting of a good faith estimate of the percentage of the fund

    purchased using securities lending collateral. The SEC believes this

    information would be important in allowing FSOC to monitor the

    susceptibility of the liquidity fund to a run in the event the fund

    comes under stress and its interconnectedness to securities lending

    programs.

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

    \137\ For example, question 52 would require reporting of the

    percentage of the reporting fund's equity that is beneficially owned

    by the beneficial owner having the largest equity interest in the

    fund and of how many investors beneficially own 5% or more of the

    fund's equity.

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

    The SEC requests comment on the information that it proposes

    requiring in section 3. Is there additional information that the SEC

    should require? For example, is there information that the SEC requires

    to be reported for registered money market funds on Form N-MFP that the

    SEC also should require to be reported on Form PF for liquidity funds?

    Should the SEC require reporting of more specific information about the

    holdings or types of holdings of these liquidity funds? Is the

    threshold for when the private fund adviser is required to report

    information in section 3 for an individual liquidity fund appropriate

    for purposes of FSOC to be able to monitor for potential systemic risk

    in this sector? Is five percent an appropriate threshold for

    considering a liquidity fund investment or investor to be significant

    for purposes of Form PF reporting? Is our proposed breakdown of the

    liquidity fund's asset maturity and investor liquidity appropriate?

    4. Section 4

    The SEC is proposing that section 4 of Form PF require private fund

    advisers managing at least $1 billion in private equity fund assets as

    of the close of business on the last day of the reporting period to

    report certain information about each private equity fund they

    manage.\138\ Section 4 would require reporting of certain information

    about the fund's borrowings and guarantees and the leverage of the

    portfolio companies in which the fund invests. Specifically, section 4

    would require information about the outstanding balance of the fund's

    borrowings and guarantees.\139\ It also would require the adviser to

    report the weighted average debt-to-equity ratio of controlled

    portfolio companies in which the fund invests and the range of that

    debt to equity ratio among these portfolio companies.\140\ It asks for

    the maturity profile of its portfolio companies' debt, for the portion

    of that debt that is payment-in-kind or zero coupon, and whether the

    fund or any of its portfolio companies experienced an event of default

    on any of its debt during the reporting period.\141\ It also asks for

    the identity of the institutions providing bridge financing to the

    adviser's portfolio companies and the amount of that financing.\142\

    The SEC believes that this information would allow FSOC to assess to

    what extent private equity funds use leverage and the potential

    exposure of banks and other lending providers to the larger private

    equity funds and their portfolio companies and leverage among portfolio

    companies of the larger private equity funds to monitor whether trends

    in those areas could pose systemic implications for the portfolio

    companies' lenders.

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

    \138\ See section II.B of this Release for a discussion of this

    reporting threshold and the definition of ``private equity fund.''

    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 would require more specific reporting regarding private equity

    funds, would only be required by the SEC.

    \139\ See proposed questions 57 and 58.

    \140\ See proposed questions 59-61. 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 related persons or other persons that are 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 proposed Glossary of Terms to Form PF; Glossary of

    Terms to Form ADV.

    \141\ See proposed questions 62-64.

    \142\ See proposed question 65.

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

    Section 4 also would require reporting of certain information if

    the fund invests in any financial industry portfolio company, such as

    its name, its debt-to-equity ratio, and the percentage of the portfolio

    company beneficially owned by the fund.\143\ This information would

    allow FSOC to monitor large private equity funds' investments in

    companies that may be particularly important to the stability of the

    financial system. Section 4 also would ask whether any of the adviser's

    related persons co-invest in any of the fund's portfolio

    companies.\144\ Finally, the form would require a breakdown of the

    fund's investments by industry and by geography, which should provide

    FSOC with basic information about global and industry concentrations

    that may be relevant to monitoring risk exposures in the financial

    system.\145\

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    \143\ See proposed question 66. A ``financial industry portfolio

    company'' generally is defined as a nonbank financial company, as

    defined by section 102(a)(4) of the Dodd-Frank Act, bank or savings

    association, bank holding company or financial holding company,

    savings and loan holding company, credit union, or Farm Credit

    System institution. See proposed Glossary of Terms to Form PF.

    \144\ See proposed question 69.

    \145\ See proposed questions 67 and 68. Industries would be

    identified using NAICS codes. ``NAICS'' stands for the ``North

    American Industry Classification System,'' and is a system of

    industry classifications commonly used in the financial industry.

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

    The SEC requests comment on the information it proposes requiring

    regarding private equity funds in section 4. Is there additional

    information that the SEC should request and why? For example, are their

    additional lending practices used in leveraged buyouts about which the

    form should collect information? Are there particular industries in

    which private equity funds might invest that could be systemically

    important? Should the Form ask additional questions specific to those

    industries? Should the form track private equity fund investments in

    different geographic and/or industry concentrations than those we have

    proposed? Should the SEC request less information and why? Should the

    SEC not require any reporting on Form PF specific to private equity

    funds? Why or why not?

    E. Filing Fees and Format for Reporting

    Under proposed Advisers Act rule 204(b)-1(b), Form PF would need to

    be filed through an electronic system designated by the SEC for this

    purpose. There may be efficiencies realized if the current Investment

    Adviser Registration Depository (``IARD'') platform, which is operated

    by the Financial Industry Regulatory Authority, were expanded for this

    purpose, such as the possible interconnectivity of Form ADV filings and

    Form PF filings, and possible ease of filing with one password. The

    filing system would need to have certain features, including being

    programmed with special confidentiality protections designed to ensure

    the heightened confidentiality protections created for Form PF filing

    information under the Dodd-Frank Act but to allow for secure access by

    FSOC and other regulators as permitted under the Dodd-Frank Act.

    The SEC separately will decide on the system to be selected for the

    electronic filing of Form PF. That determination will be reflected in a

    separate notice.

    Under the proposed rule, advisers required to file Form PF would be

    required to pay to the operator of the Form PF filing system fees that

    have

    [[Page 8084]]

    been approved by the SEC.\146\ We anticipate that Large Private Fund

    Advisers' filing fees would be set at a higher amount because their

    filings would be responsible for a larger proportion of system needs

    due to their more frequent and extensive filings. The SEC in a separate

    action would approve filing fees that reflect the reasonable costs

    associated with the filings and the establishment and maintenance of

    the filing system.\147\

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

    \146\ See proposed Advisers Act rule 204(b)-1(d).

    \147\ See section 204(c) of the Advisers Act.

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

    While we are not requiring that the information be filed in

    eXtensible Markup Language (``XML'') tagged data format, we expect to

    look for a filing system that could accept information filed in XML

    format. We intend to establish data tags to allow Form PF to be

    submitted in XML format with the SEC. Accordingly, advisers would be

    able to file the information in Form PF in XML format if they choose.

    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. We

    anticipate that we may eventually require Form PF filers to tag data

    submitted on Form PF using a refined, future taxonomy defined by us,

    working in collaboration with the industry. Thereafter, the usability

    of data contained in Form PF is expected to increase greatly because

    tagged data would be easier to sort and analyze. We note that private

    initiatives are underway to create such taxonomies.\148\ We request

    comment on our proposed system of electronic filing. Should we require

    that all filings be done in XML format? Should we allow or require the

    form to be provided in a format other than XML, such as eXtensible

    Business Reporting Language (``XBRL'')? Is there another format that is

    more widely used or would be more appropriate for the required data?

    Should smaller and/or Large Private Fund Advisers be charged different

    amounts than what we have anticipated charging? If so, why?

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

    \148\ See, e.g., http://www.operastandards.org.

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

    III. General Request for Comment

    The Commissions request comment on the rules and form proposed in

    this Release and comment on other matters that might have an effect on

    the proposals contained in this Release. Commenters should provide

    empirical data to support their views.

    IV. Paperwork Reduction Act

    CFTC

    Proposed CEA rule 4.27(d) 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, and the CFTC is not imposing any additional

    burdens herein. Therefore, any burden imposed by Form PF through

    proposed CEA rule 4.27(d) 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 Paperwork

    Reduction Act of 1995 (``PRA'').\149\

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

    \149\ 44 U.S.C. 3501-3521.

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

    SEC

    Section 404 of the Dodd-Frank Act, which amends 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. Proposed rule 204(b)-1 and Form PF

    under the Advisers Act, which would implement this requirement of the

    Dodd-Frank Act. Proposed Form PF contains a new ``collections of

    information'' within the meaning of the PRA.\150\ 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 proposed rule 204(b)-1 is included in the collection of

    information burden associated with proposed 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.

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

    \150\ 44 U.S.C. 3501-3521.

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

    Proposed Form PF is intended to provide FSOC with information that

    would facilitate fulfillment of its obligations under the Dodd-Frank

    Act relating to nonbank financial companies and systemic risk

    monitoring.\151\ The SEC also may use the information in connection

    with its regulatory and examination programs. The respondents to Form

    PF would be private fund advisers.\152\ Compliance with proposed Form

    PF would be mandatory for any private fund adviser. Smaller private

    fund advisers would be required to file Form PF only on an annual

    basis. These smaller private fund advisers would provide a limited

    amount of basic information about the operations of the private funds

    they advise.\153\ Large Private Fund Advisers would be required to file

    Form PF on a quarterly basis reporting additional information regarding

    the private funds they advise. The PRA analysis set forth below takes

    into account the fact that the additional information proposed Form PF

    would require that large hedge fund advisers report would be more

    extensive than the additional information required from large liquidity

    fund advisers, which in turn would be more extensive than that required

    from large private equity fund advisers.\154\

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

    \151\ See sections I.A and II.A of this Release.

    \152\ The requirement to file the form would apply to investment

    advisers registered, or required to register, with the SEC that

    advise one or more private funds. See proposed rule 204(b)-1(a). It

    would not apply to state-registered investment advisers or exempt

    reporting advisers.

    \153\ See section II.B of this Release for a description of who

    would be required to file Form PF, section II.C of this Release for

    information regarding the frequency with which smaller private fund

    advisers would be required to file Form PF, and section II.D.1 of

    this Release for a description of the information that smaller

    private fund advisers would be required to report on Form PF. See

    also proposed Instruction 8 to Form PF for information regarding the

    frequency with which smaller private fund advisers would be required

    to file Form PF.

    \154\ See section II.B of this Release for a description of who

    would be required to file Form PF, section II.C of this Release for

    information regarding the frequency with which Large Private Fund

    Advisers would be required to file Form PF, section II.D.2 of this

    Release for a description of the information that large hedge fund

    advisers would be required to report on Form PF, and sections II.D.3

    and II.D.4 of this Release for a description of the information that

    large liquidity and private equity fund advisers would be required

    to report on Form PF. See also proposed Instruction 8 to Form PF for

    information regarding the frequency with which Large Private Fund

    Advisers would be required to file Form PF.

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

    As discussed in section II.B 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 designed the reporting

    frequency based on when it understands advisers to private funds are

    already collecting certain information that Form PF would require. In

    addition, the SEC has based certain more specific reporting items on

    information that it understands large hedge fund advisers frequently

    collect

    [[Page 8085]]

    for purposes of reporting to investors in the funds.\155\

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

    \155\ See Report of the Asset Manager's Committee to the

    President's Working Group on Financial Markets, Best Practices for

    the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing

    best practices on disclosing to investors performance data, assets

    under management, and risk management practices (including on asset

    types, geography, leverage, and concentrations of positions) with

    which we understand many hedge funds comply).

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

    The information that Form PF would require would be filed through

    an electronic filing system expected to be operated by an entity

    designated by the SEC. Responses to the information collections would

    be kept confidential to the extent permitted by law.\156\

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

    \156\ See supra note 39 and accompanying text.

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

    A. Burden Estimates for Annual Reporting by Smaller Private Fund

    Advisers

    In the Implementing Release, the SEC estimated that 3,500 currently

    registered advisers would become subject to the private fund reporting

    requirements included in the proposed amendments to Form ADV.\157\ The

    SEC further estimated that 200 advisers to private funds would register

    with the SEC as a result of normal growth in the population of

    registered advisers and that 750 advisers to private funds would

    register as a result of the Dodd-Frank Act's elimination of the private

    adviser exemption.\158\ As a result, the SEC estimates that a total of

    approximately 4,450 registered investment advisers would become subject

    to the proposed private fund reporting requirements in Form ADV.\159\

    Because these advisers would also be required to report on Form PF, the

    SEC accordingly estimates that approximately 4,450 advisers would be

    required to file all or part of Form PF.\160\ Out of this total number,

    the SEC estimates that approximately 3,920 would be smaller private

    fund advisers, not meeting the thresholds for reporting as Large

    Private Fund Advisers.\161\

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

    \157\ See section V.B.2.a.ii of the Implementing Release. As

    proposed in the Implementing Release, advisers to private funds

    would be required to complete Item 7.B and Section 7.B of Schedule D

    to the amended Form ADV.

    \158\ Id. The 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 current version of Form ADV.

    Because these responses include funds advised by a related person

    rather than the adviser, these data may over-estimate the total

    number of private fund advisers.

    \159\ 3,500 currently registered advisers to private funds + 200

    advisers to private funds registering as a result of normal growth +

    750 newly registered advisers to private funds = 4,450 advisers.

    \160\ If a private fund is advised by both an adviser and one or

    more subadvisers, only one of these advisers would be required to

    complete Form PF. See section II.B.4 of this Release. As a result,

    it is likely that some portion of these advisers either would not be

    required to file Form PF or would 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.

    \161\ Based on the estimated total number of registered private

    fund advisers that would not meet the thresholds to be considered

    Large Private Fund Advisers. (4,450 estimated registered private

    fund advisers -200 large hedge fund advisers -80 large liquidity

    fund advisers -250 large private equity fund advisers = 3,920

    smaller private fund advisers.)

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

    Smaller private fund advisers would be required to complete all or

    portions of section 1 of Form PF and to file on an annual basis. As

    discussed in greater detail above, section 1 would require basic data

    regarding the reporting adviser's identity and certain information

    about the private funds it manages, such as performance, leverage, and

    investor concentration data.\162\ If the reporting adviser advises any

    hedge funds, section 1 also would require basic information regarding

    those funds, including their investment strategies, trading

    counterparty exposures, and trading and clearing practices.

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

    \162\ See supra section II.D.1.

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

    Based on the SEC's experience with other data filings, it estimates

    that smaller private fund advisers would require an average of

    approximately 10 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 3 burden hours for subsequent

    filings.\163\ Accordingly, the amortized average annual burden of

    periodic filings would be 5 hours per smaller private fund adviser for

    each of the first three years,\164\ and the amortized aggregate annual

    burden of periodic filings for smaller private fund advisers would be

    19,600 hours for each of the first three years.\165\

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

    \163\ These estimates reflect the SEC's understanding that much

    of the information in section 1 of Form PF is currently maintained

    by most private fund advisers in the ordinary course of business. In

    addition, the time required to determine a private fund adviser's

    aggregate assets under management and the amount of assets under

    management that relate to private funds of various types largely is

    expected to be included in the approved burden associated with the

    SEC's Form ADV (this information would only differ if the adviser

    managed parallel managed accounts). 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.

    \164\ The SEC estimates that a smaller private fund adviser

    would make 3 annual filings in three years, for an amortized average

    annual burden of 5 hours (1 initial filing x 10 hours + 2 subsequent

    filings x 3 hours = 16 hours; and 16 hours / 3 years = approximately

    5 hours). After the first three years, filers generally would not

    incur the start-up burdens applicable to the first filing.

    \165\ 5 burden hours on average per year x 3,920 smaller private

    fund advisers = 19,600 burden hours per year.

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

    B. Burden Estimates for Quarterly Reporting by Large Private Fund

    Advisers

    The SEC estimates that 530 of the private fund advisers registered

    with the SEC would meet one or more of the thresholds for reporting as

    Large Private Fund Advisers.\166\ As discussed in section II.D above,

    Large Private Fund Advisers would be required to report more

    information on Form PF than smaller private fund advisers and would be

    required to report on a quarterly basis. The amount of additional

    information reported by a Large Private Fund Adviser would depend, in

    part, on whether it is a large hedge fund adviser, a large liquidity

    fund adviser, or large private equity fund adviser. A large hedge fund

    adviser would be required to report more information with respect to

    itself and the funds it advises than would a large liquidity fund

    adviser, which in turn would report more information than a large

    private equity fund adviser.\167\ Of the total number of Large Private

    Fund Advisers, the SEC estimates that 200 are large hedge fund

    advisers, 80 are large liquidity fund advisers, and 250 are large

    private equity fund advisers.\168\

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

    \166\ See section II.B.2 of this Release for estimates of the

    numbers of large hedge fund advisers, large liquidity fund advisers,

    and large private equity fund advisers. (200 large hedge fund

    advisers + 80 large liquidity fund advisers + 250 large private

    equity fund advisers = 530 Large Private Fund Advisers.)

    \167\ See supra sections II.D.2, II.D.3 and II.D.4.

    \168\ See supra section II.B.2.

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

    Because the proposed reporting requirements on Form PF for large

    hedge fund advisers would be the most extensive of the Large Private

    Fund Advisers, the SEC estimates that these advisers would 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 would require an average of approximately 75 burden hours for

    an initial filing and 35 burden hours for each subsequent filing.\169\

    In

    [[Page 8086]]

    contrast, large liquidity fund advisers, which would report more

    information than smaller private fund advisers or large private equity

    fund advisers but less information than large hedge fund advisers,

    would require an average of approximately 35 burden hours for an

    initial filing and 16 burden hours for each subsequent filing. Finally,

    the SEC estimates that large private equity fund advisers, which would

    report more information than smaller private fund advisers but less

    than other Large Private Fund Advisers, would require an average of

    approximately 25 burden hours for an initial filing and 12 burden hours

    for each subsequent filing. Based on these estimates, the amortized

    average annual burden of periodic filings would be 153 hours per large

    hedge fund adviser,\170\ 70 hours per large liquidity fund

    adviser,\171\ and 52 hours per large private equity fund adviser, in

    each case for each of the first three years.\172\ In the aggregate, the

    amortized annual burden of periodic filings would then be 30,600 hours

    for large hedge fund advisers,\173\ 5,600 hours for large liquidity

    fund advisers,\174\ and 13,000 hours for large private equity fund

    advisers,\175\ in each case for each of the first three years.

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

    \169\ The estimates of hour burdens and costs for Large Private

    Fund Advisers provided in the Paperwork Reduction Act and cost

    benefit analyses are based on burden data provided by advisers in

    response to the FSA hedge fund 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 would increase the burden of the initial

    filing but reduce the burden of subsequent filings, which has been

    taken into consideration in our burden estimates.

    \170\ The SEC estimates that a large hedge fund adviser would

    make 12 quarterly filings in three years, for an amortized average

    annual burden of 153 hours (1 initial filing x 75 hours + 11

    subsequent filings x 35 hours = 460 hours; and 460 hours / 3 years =

    approximately 153 hours). After the first three years, filers

    generally would not incur the start-up burdens applicable to the

    first filing.

    \171\ The SEC estimates that a large liquidity fund adviser

    would make 12 quarterly filings in three years, for an amortized

    average annual burden of 70 hours (1 initial filing x 35 hours + 11

    subsequent filings x 16 hours = 211 hours; and 211 hours / 3 years =

    approximately 70 hours). After the first three years, filers

    generally would not incur the start-up burdens applicable to the

    first filing.

    \172\ The SEC estimates that a large private equity fund adviser

    would make 12 quarterly filings in three years, for an amortized

    average annual burden of 52 hours (1 initial filing x 25 hours + 11

    subsequent filings x 12 hours = 157 hours; and 157 hours / 3 years =

    approximately 52 hours). After the first three years, filers

    generally would not incur the start-up burdens applicable to the

    first filing.

    \173\ 153 burden hours on average per year x 200 large hedge

    fund advisers = 30,600 hours.

    \174\ 70 burden hours on average per year x 80 large liquidity

    fund advisers = 5,600 hours.

    \175\ 52 burden hours on average per year x 250 large private

    equity fund advisers = 13,000 hours.

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

    C. Burden Estimates for Transition Filings, Final Filings and Temporary

    Hardship Exemption Requests

    In addition to periodic filings, a private fund adviser would be

    required to 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 Private Fund Adviser would be

    required to 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 Large Private Fund Advisers would need to make a transition

    filing each year with a burden of 0.25 hours, or a total of 12 burden

    hours per year for all private fund advisers.\176\

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

    \176\ 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 Private Fund

    Advisers. (530 Large Private Fund Advisers x 0.09 x 0.25 hours = 12

    hours.)

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

    Second, filers who are no longer subject to Form PF's periodic

    reporting requirements would file a final report indicating that fact.

    The SEC estimates that approximately 8 percent of the advisers required

    to file Form PF would have to file such an amendment each year with a

    burden of 0.25 of an hour, or a total of 89 burden hours per year for

    all private fund advisers.\177\

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

    \177\ Estimate is based on IARD data on the frequency of

    advisers to one or more private funds withdrawing from SEC

    registration. (4,450 private fund advisers x 0.08 x 0.25 hours = 89

    hours.)

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

    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.\178\ 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.\179\ Assuming that Form PF filers

    request hardship exemptions at the same rate and that the applications

    impose the same burden per filing, the SEC would expect approximately 4

    filers to request a temporary hardship exemption each year \180\ for a

    total of 4 burden hours.\181\

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

    \178\ See proposed SEC rule 204(b)-1(f). The proposed rule would

    require 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.

    \179\ See section V.F of the Implementing Release.

    \180\ 4,450 private fund advisers x 1 request per 1,000 advisers

    = approximately 4 advisers.

    \181\ 4 advisers x 1 hour per response = 4 hours.

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

    D. Aggregate Burden Estimates

    Based on the foregoing, the SEC estimates that Form PF would result

    in an aggregate of 68,905 burden hours per year for all private fund

    advisers for each of the first three years, or 15 burden hours per year

    on average for each private fund adviser over the same period.\182\

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

    \182\ 19,600 hours for periodic filings by smaller advisers +

    30,600 hours for periodic filings by large hedge fund advisers +

    5,600 hours for periodic filings by large liquidity fund advisers +

    13,000 hours for periodic filings by large private equity fund

    advisers + 12 hours per year for transition filings + 89 hours per

    year for final filings + 4 hours per year for temporary hardship

    requests = approximately 68,905 hours per year. 68,905 hours per

    year / 4,450 total advisers = 15 hours per year on average.

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

    E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the SEC solicits comments to:

    (i) Evaluate whether the proposed amendments to the collection of

    information are necessary for the proper performance of the functions

    of the SEC, including whether the information would have practical

    utility; (ii) evaluate the accuracy of the SEC's estimate of the burden

    of the proposed collection of information; (iii) determine whether

    there are ways to enhance the quality, utility, and clarity of the

    information to be collected; and (iv) determine whether there are ways

    to minimize the burden of the collection of information on those who

    are to respond, including through the use of automated collection

    techniques or other forms of information technology. In particular,

    would private fund advisers seek to automate all or part of their Form

    PF reporting obligations? Would automation be efficient only for Large

    Private Fund Advisers, or would smaller private fund advisers also be

    able to automate efficiently? What is the likely burden of automation?

    Would advisers use internal personnel or pay outside service providers

    to make needed system modifications or to perform all or part of their

    Form PF reporting obligations? If outside service providers are used,

    what is the likely cost and how would it impact our estimates of

    internal costs and hourly burdens for the proposed reporting?

    Persons desiring to submit comments on the collection of

    information requirements should direct them to the Office of Management

    and Budget, Attention: Desk Officer for the Securities and Exchange

    Commission, Office of Information and Regulatory Affairs, Room 10102,

    New Executive Office Building, Washington, DC 20503, and also should

    send a copy of their comments to Elizabeth M. Murphy, Secretary,

    Securities and Exchange Commission, 100 F Street, NE., Washington, DC

    20549-1090 with reference to File No. S7-05-11. Requests for materials

    submitted to OMB by the Commission with regard to this collection of

    information should be

    [[Page 8087]]

    in writing, refer to File No. S7-05-11, and be submitted to the

    Securities and Exchange Commission, Office of Investor Education and

    Advocacy, 100 F Street, NE., Washington, DC 20549-0213. OMB is required

    to make a decision concerning the collections of information between 30

    and 60 days after publication of this Release. Therefore, a comment to

    OMB is best assured of having its full effect if OMB receives it within

    30 days after publication of this Release.

    V. CFTC Cost-Benefit Analysis

    Section 15(a) of the CEA \183\ requires the CFTC to consider the

    costs and benefits of its actions before issuing rules, regulations, or

    orders under the CEA. By its terms, section 15(a) does not require the

    CFTC to quantify the costs and benefits of its rules, regulations or

    orders or to determine whether the benefits outweigh the costs. Rather,

    section 15(a) requires that the CFTC ``consider'' the costs and

    benefits of its actions. Section 15(a) further specifies that the costs

    and benefits shall be evaluated in light of the following five broad

    areas of 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. The CFTC may in its

    discretion give greater weight to any one of the five enumerated areas

    and could in its discretion determine that, notwithstanding the costs,

    a particular rule, regulation, or order is necessary or appropriate to

    protect the public interest or to effectuate any of the provisions or

    accomplish any of the purposes of the CEA.

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

    \183\ See 5 U.S.C. 801(a)(1)(B)(i).

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

    The proposed rule 4.27(d) would deem a CPO registered with the CFTC

    that is dually registered as a private fund adviser with the SEC to

    have satisfied its filing requirements for Schedules B and C of

    proposed 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. Under the proposed rule,

    most of 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.

    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.\184\ The Dodd-Frank

    Act also requires FSOC to collect information from member agencies to

    support its functions.\185\ The CFTC and the SEC are jointly proposing

    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.

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

    \184\ See section 112(a)(2)(C) of the Dodd-Frank Act.

    \185\ See section 112(d)(1) of the Dodd-Frank Act.

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

    With respect to costs, the CFTC has determined that: (1) Without

    the proposed reporting requirements imposed on dually-registered CPOs

    and CTAs, 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 proposed 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 proposed reporting requirements will create

    additional compliance costs for these registrants.

    The CFTC has determined that the proposed reporting requirements

    will provide a benefit to all investors and 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 would 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.

    The CFTC invites public comment on its cost-benefit considerations

    as concerns sections 1 and 2 of Form PF. Commenters are also invited to

    submit any data and other information that they may have quantifying or

    qualifying the perceived costs and benefits of this proposed rule with

    their comment letters.

    VI. SEC Economic Analysis

    As discussed above, the Dodd-Frank Act amended the Advisers Act to,

    among other things, authorize and direct the SEC to promulgate

    reporting requirements for private fund advisers. 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 SEC may

    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.

    The SEC is proposing rule 204(b)-1 and Form PF, to implement the

    private fund adviser reporting requirements that the Dodd-Frank Act

    contemplates. Under the proposed rule, private fund advisers would be

    required to 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 would be 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 would be required to report annually and provide

    only basic information regarding their operations and the private funds

    they advise, while Large Private Fund Advisers would report on a

    quarterly basis and provide more information.\186\

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

    \186\ See section II.B of this Release for a description of who

    would be required to file Form PF, section II.C of this Release for

    information regarding the frequency with which private fund advisers

    would be required to file Form PF, and section II.D of this Release

    for a description of the information that private fund advisers

    would be required to report on Form PF. See also proposed

    Instruction 8 to Form PF for information regarding the frequency

    with which private fund advisers would be required to file Form PF.

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

    The SEC is sensitive to the costs and benefits imposed by its

    rules. It has identified certain costs and benefits of proposed

    Advisers Act rule 204(b)-1 and Form PF, and it requests comment on all

    aspects of the cost-benefit analysis below, including identification

    and assessment of any costs and benefits not discussed in this

    analysis. In

    [[Page 8088]]

    connection with its consideration of the costs and benefits, the SEC

    also has considered whether the proposal would promote efficiency,

    competition, and capital formation. Section 202(c) of the Advisers Act

    requires 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.\187\

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

    \187\ 15 U.S.C. 80b-2(c).

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

    The SEC seeks comment and data on the value of the benefits

    identified. It also welcomes comments on the accuracy of the cost

    estimates in this analysis, and requests that commenters provide data

    that may be relevant to these cost estimates. In addition, the SEC

    seeks estimates and views regarding these costs and benefits for

    particular covered advisers, including small advisers, as well as any

    other costs or benefits that may result from the adoption of the

    proposed rule and form.

    Because proposed Advisers Act rule 204(b)-1 and Form PF would

    implement sections 404 and 406 of the Dodd-Frank Act, the benefits and

    costs considered by Congress in passing the Dodd-Frank Act are not

    entirely separable from the benefits and costs imposed by the SEC in

    designing the proposed rule and form. Accordingly, although the PRA

    hourly burden estimates discussed above, and their corresponding dollar

    cost estimates, are included in full below and in the PRA analysis

    above, a portion of the reporting costs is attributable to the

    requirements of the Dodd-Frank Act and not specific requirements of the

    proposed rule or form.

    A. Benefits

    The SEC believes Form PF may create two principal classes of

    benefits. First, the information collected through Form PF is expected

    to facilitate FSOC's monitoring of the systemic risks that private

    funds may pose and to assist FSOC in carrying out its other duties

    under the Dodd-Frank Act with respect to nonbank financial companies.

    Second, this information may enhance the ability of the SEC to evaluate

    and form regulatory policies and improve the efficiency and

    effectiveness of the SEC's monitoring of markets for investor

    protection and market vitality.

    The Dodd-Frank Act directs FSOC to monitor emerging risks to U.S.

    financial stability \188\ and to require FRB supervision of designated

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

    stability in the event of their material financial distress or failure

    or because of their activities.\189\ In addition, the Dodd-Frank Act

    directs FSOC to recommend to the FRB heightened prudential standards

    for designated nonbank financial companies.\190\

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

    \188\ See supra note 6 and accompanying text.

    \189\ Section 112(a)(2) of the Dodd-Frank Act.

    \190\ See supra note 7 and accompanying text.

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

    In enacting Sections 404 and 406 of the Dodd-Frank Act, Congress

    recognized that FSOC would need information from private fund advisers

    to help it carry out its duties. As a result, proposed Form PF is

    designed to gather information regarding the private fund industry that

    would be useful to FSOC in monitoring systemic risk.\191\ Systemic risk

    may arise from a variety of sources, including interconnectedness,

    changes in market liquidity and market concentrations, and so the

    information that Form PF elicits is intended to provide data that,

    individually or in the aggregate, would permit FSOC to identify where

    systemic risk may arise across a range of sources. The SEC expects that

    FSOC would use this 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. In

    this manner, the SEC believes 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.

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

    \191\ See section II.D of this Release for a description of the

    information that private fund advisers would be required to report

    on proposed Form PF.

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

    The proposed private fund reporting on Form PF would also benefit

    all investors and market participants by improving the information

    available to the SEC regarding the private fund industry. 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. As discussed above, the more reliable

    data collected through Form PF would assist FSOC in identifying and

    addressing risks to U.S. financial stability, potentially protecting

    investors and other market participants from significant losses. In

    addition, this data would provide the SEC 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

    its ability to form and frame regulatory policies regarding the private

    fund industry and its advisers, and to more effectively evaluate the

    outcomes of regulatory policies and programs directed at this sector,

    including for the protection of private fund investors.

    The SEC also estimates that the proposed rule may improve the

    efficiency and effectiveness of the SEC's oversight of private fund

    advisers by enabling SEC staff to manage and analyze information

    related to the risks posed by private funds more quickly, more

    effectively, and at a lower cost than is currently possible. This would

    allow the SEC to more efficiently and effectively target its

    examination program. The SEC would be able to use Form PF information

    to generate reports on the industry, its characteristics and trends.

    These reports may help the SEC anticipate regulatory problems, allocate

    and reallocate its resources, and more fully evaluate and anticipate

    the implications of various regulatory actions it may consider taking,

    which should increase both the efficiency and effectiveness of its

    programs and thus increase investor protection. Responses to many of

    the proposed questions would help the SEC better understand the

    investment activities of private funds and the scope of their potential

    effect on investors and the markets that the SEC regulates.

    The coordination with the CFTC would also result in significant

    efficiencies for private fund advisers that are also registered as a

    CPO or CTA with the CFTC because, under the proposed rules in this

    Release, these advisers would satisfy certain reporting obligations

    under both proposed Advisers Act rule 204(b)-1 and proposed CEA rule

    4.27(d) with respect to commodity pools that satisfy the definition of

    ``private fund'' (as proposed in Form PF) by filing Form PF. As

    discussed in section I.B of this Release, the SEC also has coordinated

    with foreign financial regulators regarding the reporting of systemic

    risk information regarding hedge funds and anticipates that this

    coordination, as reflected in proposed Form PF, would result in greater

    efficiencies in reporting by private fund advisers, as well as

    information sharing and private fund monitoring among foreign financial

    regulators.

    As discussed in section II.B of this Release, the SEC has designed

    the reporting frequency in proposed Form PF based on when it

    understands advisers to private funds are already compiling certain

    information that Form PF would require, creating efficiencies for, and

    benefiting, the adviser in satisfying its reporting obligations. The

    SEC also has based certain more specific

    [[Page 8089]]

    reporting items on information that it understands large hedge fund

    advisers frequently calculate for purposes of reporting to investors in

    the funds.\192\

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

    \192\ See note 105 and accompanying text.

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

    The SEC does not expect that this proposal would have an effect on

    competition because the information generally would be non-public and

    similar types of advisers would have comparable burdens under the form.

    The SEC also does not expect that this proposal would have an effect on

    capital formation because the information generally would be non-public

    and thus should not impact private fund advisers' ability to raise

    capital or their market activities.

    B. Costs

    The proposed reporting requirement also would impose certain costs

    on private fund advisers. In order to minimize these costs, the scope

    of the required information and the frequency of the reporting

    generally would be less for private fund advisers that manage less

    private fund assets or that do not manage types of private funds that

    may be more likely to pose systemic risk. Specifically, smaller private

    fund advisers would be required to report annually and provide only

    basic information regarding their operations and the private funds they

    advise, while Large Private Fund Advisers would report on a quarterly

    basis and provide more information.\193\ Further, the additional

    information required from large hedge fund advisers would be more

    extensive than the additional information required from large liquidity

    fund advisers, which in turn would be more extensive than that required

    from large private equity fund advisers.

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

    \193\ See section II.B of this Release for a description of who

    would be required to file Form PF, section II.C of this Release for

    information regarding the frequency with which private fund advisers

    would be required to file Form PF, and section II.D of this Release

    for a description of the information that private fund advisers

    would be required to report on Form PF. See also proposed

    Instruction 8 to Form PF for information regarding the frequency

    with which private fund advisers would be required to file Form PF.

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

    The SEC expects that the costs of reporting would be most

    significant for the first report that a private fund adviser is

    required to file because the adviser would need to familiarize itself

    with the new reporting form and may need to configure its systems in

    order to efficiently gather the required information. The SEC also

    anticipates that the initial report would require more attention from

    senior personnel, including compliance managers and senior risk

    management specialists, than would subsequent reports. In addition, the

    SEC expects that some Large Private Fund Advisers would find it

    efficient to automate some portion of the reporting process, which

    would increase the burden of the initial filing but reduce the burden

    of subsequent filings.

    In subsequent reporting periods, the SEC anticipates that filers

    would incur significantly lower costs because much of the work involved

    in the initial report is non-recurring and because of efficiencies

    realized from system configuration and reporting automation efforts

    accounted for in the initial reporting period. In addition, the SEC

    estimates that senior personnel would bear less of the reporting burden

    in subsequent reporting periods, reducing costs though not necessarily

    reducing the burden hours.

    Based on the foregoing, the SEC estimates \194\ that, for the

    purposes of the PRA, the periodic filing requirements under Form PF

    (including configuring systems and compiling, automating, reviewing and

    electronically filing the report) would impose:

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

    \194\ The SEC understands that some advisers may outsource all

    or a portion of their Form PF reporting responsibilities to a filing

    agent, software consultant, or other third-party service provider.

    The SEC believes, however, 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. 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) 10 burden hours at a cost of $3,410 \195\ per smaller private

    fund adviser for the initial annual report;

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

    \195\ The SEC expects 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 10 hours =

    approximately $3,410.

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

    (2) 3 burden hours at a cost of $830 \196\ per smaller private fund

    adviser for each subsequent annual report;

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

    \196\ The SEC expects that for subsequent reports senior

    personnel will bear less of the reporting burden. 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 3 hours

    = approximately $830.

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

    (3) 75 burden hours at a cost of $23,270 \197\ per large hedge fund

    adviser for the initial quarterly report;

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

    \197\ The SEC expects that for the initial report, of a total

    estimated burden of 75 hours, approximately 45 hours will most

    likely be performed by compliance professionals and 30 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 45 hours + ($304/hour x 0.5 + $224/

    hour x 0.5) x 30 hours = approximately $23,270.

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

    (4) 35 burden hours at a cost of $9,700 \198\ per large hedge fund

    adviser for each subsequent quarterly report;

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

    \198\ 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 35 hours = approximately $9,700.

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

    (5) 35 burden hours at a cost of $10,860 \199\ per large liquidity

    fund adviser for the initial quarterly report;

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

    \199\ The SEC expects that for the initial report, of a total

    estimated burden of 35 hours, approximately 21 hours will most

    likely be performed by compliance professionals and 14 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 21 hours + ($304/hour x 0.5 + $224/

    hour x 0.5) x 14 hours = approximately $10,860.

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

    (6) 16 burden hours at a cost of $4,440 \200\ per large liquidity

    fund adviser for each subsequent quarterly report;

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

    \200\ 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 16 hours = approximately $4,440.

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

    (7) 25 burden hours at a cost of $7,760 \201\ per large private

    equity fund

    [[Page 8090]]

    adviser for the initial quarterly report; and

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

    \201\ The SEC expects that for the initial report, of a total

    estimated burden of 25 hours, approximately 15 hours will most

    likely be performed by compliance professionals and 10 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 15 hours + ($304/hour x 0.5 + $224/

    hour x 0.5) x 10 hours = approximately $7,760.

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

    (8) 12 burden hours at a cost of $3,330 \202\ per large private

    equity fund adviser for each subsequent quarterly report.

    \202\ 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 12 hours = approximately $3,330.

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

    Assuming that there are 3,920 smaller private fund advisers, 200 large

    hedge fund advisers, 80 large liquidity fund advisers, and 250 large

    private equity fund advisers, the foregoing estimates would suggest an

    annual cost of $30,200,000 \203\ for all private fund advisers in the

    first year of reporting and an annual cost of $15,800,000 in subsequent

    years.\204\

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

    \203\ (3,920 smaller private fund advisers x $3,410 per initial

    annual report) + (200 large hedge fund advisers x $23,270 per

    initial quarterly report) + (200 large hedge fund advisers x 3

    quarterly reports x $9,700 per subsequent quarterly report) + (80

    large liquidity fund advisers x $10,860 per initial quarterly

    report) + (80 large liquidity fund advisers x 3 quarterly reports x

    $4,440 per subsequent quarterly report) + (250 large private equity

    fund advisers x $7,760 per initial quarterly report) + (250 large

    private equity fund advisers x 3 quarterly reports x $3,330 per

    subsequent quarterly report) = approximately $30,200,000.

    \204\ (3,920 smaller private fund advisers x $830 per subsequent

    annual report) + (200 large hedge fund advisers x 4 quarterly

    reports x $9,700 per subsequent quarterly report) + (80 large

    liquidity fund advisers x 4 quarterly reports x $4,440 per

    subsequent quarterly report) + (250 large private equity fund

    advisers x 4 quarterly reports x $3,330 per subsequent quarterly

    report) = approximately $15,800,000.

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

    In addition, as discussed above, a private fund adviser would be

    required to file very limited information on Form PF if it needed to

    transition from quarterly to annual filing, if it were no longer

    subject to the reporting requirements of Form PF or if it required a

    temporary hardship exemption under proposed rule 204(b)-1(f). The SEC

    estimates that transition and final filings would, collectively, cost

    private fund advisers as a whole approximately $6,770 per year.\205\

    The SEC further estimates that hardship exemption requests would cost

    private fund advisers as a whole approximately $760 per year.\206\

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

    \205\ The SEC estimates that, for the purposes of the PRA,

    transition filings will impose 12 burden hours per year on private

    fund advisers in the aggregate and that final filings will impose 89

    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. (12 burden hours + 89

    burden hours) x $67/hour = approximately $6,770.

    \206\ 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.

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

    Finally, firms required to file Form PF would have to pay filing

    fees. The amount of these fees has not yet been determined.\207\

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    \207\ See supra note 147 and accompanying text.

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    C. Request for Comment

    The SEC requests comments on all aspects of the foregoing cost-

    benefit analysis, including the accuracy of the potential costs and

    benefits identified and assessed in this Release, as well as any other

    costs or benefits that may result from the proposals. The SEC

    encourages commenters to identify, discuss, analyze, and supply

    relevant data regarding these or additional costs and benefits. The SEC

    also requests comment on the foregoing analysis of the likely effect of

    the proposed rule on competition, efficiency, and capital formation.

    Commenters are requested to provide empirical data to support their

    views.

    In addition, for purposes of the Small Business Regulatory

    Enforcement Fairness Act of 1996, or ``SBREFA,'' \208\ the SEC must

    advise OMB whether a proposed regulation constitutes a ``major'' rule.

    Under SBREFA, a rule is considered ``major'' where, if adopted, it

    results in or is likely to result in: (1) An annual effect on the

    economy of $100 million or more; (2) a major increase in costs or

    prices for consumers or individual industries; or (3) significant

    adverse effects on competition, investment, or innovation.

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

    \208\ Public Law 104-121, Title II, 110 Stat. 857 (1996)

    (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note

    to 5 U.S.C. 601).

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

    We request comment on the potential impact of the proposed new rule

    and proposed rule amendments on the economy on an annual basis.

    Commenters are requested to provide empirical data and other factual

    support for their views to the extent possible.

    VII. Initial Regulatory Flexibility Analysis

    CFTC

    Under proposed rule 4.27(d), 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 by

    completing and filing the applicable sections of Form PF with the SEC.

    Therefore, any burden imposed by Form PF through proposed rule 4.27(d)

    on small entities registered with both the CFTC and the SEC has been

    accounted for within the SEC's initial calculations regarding the

    impact of this collection of information under the Regulatory

    Flexibility Act (``RFA'').\209\ Accordingly, the Chairman, on behalf of

    the CFTC, hereby certifies pursuant to 5 U.S.C. 605(b) that the

    proposed rules will not have a significant impact on a substantial

    number of small entities.

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

    \209\ 5 U.S.C. 603(a).

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

    SEC

    The SEC has prepared the following Initial Regulatory Flexibility

    Analysis (``IRFA'') regarding proposed Advisers Act rule 204(b)-1 in

    accordance with section 3(a) of the RFA.

    A. Reasons for Proposed Action

    The SEC is proposing rule 204(b)-1 and Form PF specifying

    information that private fund advisers must disclose confidentially to

    the SEC, which information the SEC will share with FSOC for systemic

    risk assessment purposes to help implement sections 404 and 406 of the

    Dodd-Frank Act. Under the proposed rule, private fund advisers would be

    required to 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 would be 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 would be required to report annually and provide

    only basic information regarding their operations and the private funds

    they advise, while Large Private Fund

    [[Page 8091]]

    Advisers would report on a quarterly basis and provide more

    information.\210\

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

    \210\ See section II.B of this Release for a description of who

    would be required to file Form PF, section II.C of this Release for

    information regarding the frequency with which private fund advisers

    would be required to file Form PF, and section II.D of this Release

    for a description of the information that private fund advisers

    would be required to report on Form PF. See also proposed

    Instruction 8 to Form PF for information regarding the frequency

    with which private fund advisers would be required to file Form PF.

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

    B. Objectives and Legal Basis

    As described more fully in sections I and II of this Release, the

    general objective of proposed Advisers Act rule 204(b)-1 is to assist

    FSOC in its obligations under the Dodd-Frank Act relating to nonbank

    financial companies and in monitoring systemic risk. The SEC is

    proposing rule 204(b)-1 and Form PF pursuant to the SEC's authority set

    forth in sections 404 and 406 of the Dodd-Frank Act, to be codified at

    sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4(b) and

    80b-11(e)].

    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.\211\

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    \211\ 17 CFR 275.0-7(a).

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

    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

    would be subject to the proposed rule and form. The SEC estimates that

    as of December 1, 2010, approximately 50 advisers that were small

    entities were registered with the SEC and advised one or more private

    funds.\212\

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

    \212\ Based on IARD data.

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

    D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed rule and form would impose certain reporting and

    compliance requirements on advisers, including small advisers. The

    proposed rule would require all small advisers registered with the SEC

    and that advise one or more private funds to file Form PF, completing

    all or part of section 1 of that form. As discussed above, the SEC

    estimates that completing, reviewing, and filing Form PF would cost

    $3,410 per year for each small adviser in its first year of reporting

    and $830 per year for each subsequent year.\213\ In addition, small

    entities would be required to pay a filing fee when submitting Form PF.

    The amount of the filing fee has not yet been determined, but we

    anticipate that Large Private Fund Advisers' filing fees would be set

    at a higher amount than small advisers.

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

    \213\ See supra notes 195-196 and accompanying text.

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

    E. Duplicative, Overlapping, or Conflicting Federal Rules

    The SEC has not identified any Federal rules that duplicate or

    overlap or conflict with the proposed rule.

    F. Significant Alternatives

    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: (i) The establishment of differing

    compliance or reporting requirements or timetables that take into

    account the resources available to small entities; (ii) the

    clarification, consolidation, or simplification of compliance and

    reporting requirements under the rule for small entities; (iii) the use

    of performance rather than design standards; and (iv) an exemption from

    coverage of the rule, or any part thereof, for small entities.

    Regarding the first and fourth alternatives, the SEC has proposed

    different reporting requirements and timetables for small entities. The

    proposed rule only would require small entity advisers to file Form PF

    annually and to complete applicable portions of section 1 of the

    form.\214\ These smaller advisers also would have to pay a smaller

    amount of filing fees than Large Private Fund Advisers. Regarding the

    second alternative, the information that would be required of small

    entities under section 1 of Form PF is quite simplified from the more

    extensive reporting that would be required of Large Private Fund

    Advisers and is consolidated in one section of the form.

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

    \214\ If the adviser had no hedge fund assets under management,

    it would not need to complete section 1.C of the proposed form.

    Advisers that manage both registered money market funds and

    liquidity funds would be required to complete section 3 of Form PF,

    but there are no small entities that manage a registered money

    market fund. See section II.B of this Release for a description of

    who would be required to file Form PF, section II.C of this Release

    for information regarding the frequency with which smaller private

    fund advisers would be required to file Form PF, and section II.D.1

    of this Release for a description of the information that smaller

    private fund advisers would be required to report on Form PF. See

    also proposed Instruction 8 to Form PF for information regarding the

    frequency with which smaller private fund advisers would be required

    to file Form PF.

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

    G. Solicitation of Comments

    The SEC encourages written comments on matters discussed in this

    IRFA. In particular, the SEC seeks comment on:

    The number of small entities that would be subject to the

    proposed rule; and

    Whether the effect of the proposed rule on small entities

    would be economically significant.

    Commenters are asked to describe the nature of any effect and

    provide empirical data supporting the extent of the effect.

    VIII. Statutory Authority

    CFTC

    The CFTC is proposing rule 4.27(d) [17 CFR 4.27(d)] pursuant to its

    authority set forth in section 4n of the Commodity Exchange Act [7

    U.S.C. 6n].

    SEC

    The SEC is proposing rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant

    to its authority set forth in sections 404 and 406 of the Dodd-Frank

    Act, to be codified at sections 204(b) and 211(e) of the Advisers Act

    [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.

    The SEC is proposing rule 279.9 pursuant to its authority set forth

    in sections 404 and 406 of the Dodd-Frank Act, to be codified at

    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 Part 275

    Reporting and recordkeeping requirements, Securities.

    [[Page 8092]]

    Text of Proposed Rules

    Commodity Futures Trading Commission

    For the reasons set out in the preamble, the CFTC is proposing to

    amend Title 17, Chapter I of the Code of Federal Regulations as

    follows:

    PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

    1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o,

    12a, and 23.

    * * * * *

    2. In Sec. 4.27, as proposed to be added elsewhere in this issue

    of the Federal Register, add paragraph (d) to read as follows:

    Sec. 4.27 Additional reporting by advisors of commodity pools.

    * * * * *

    (d) Investment advisers to private funds. CPOs and CTAs who are

    dually registered with the Securities and Exchange Commission and

    advise one or more private funds, as defined in section 202 of the

    Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)), shall file Form

    PF with the Securities and Exchange Commission. 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. Dually registered CPOs and CTAs must

    file such other reports as are required under this section with respect

    to all pools that are not private funds.

    * * * * *

    Securities and Exchange Commission

    For the reasons set out in the preamble, the SEC is proposing to

    amend Title 17, Chapter II of the Code of Federal Regulations as

    follows:

    PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    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.

    * * * * *

    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.

    Subject to paragraph (g), if you are an investment adviser registered

    or required to be registered under section 203 of the Act (15 U.S.C.

    80b-3) and act as an investment adviser to one or more private funds,

    you must complete and file a report on Form PF (17 CFR 279.9) within 15

    days of the end of the next calendar quarter by following the

    instructions in the Form, which specify the information that an

    investment adviser must provide.

    (b) Electronic filing. You must file Form PF electronically with

    the Form PF filing system.

    Note to paragraph (b): Information on how to file Form PF is

    available on the Commission's Web site at http://www.sec.gov/[----].

    (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) Amendments to Form PF. You must amend your Form PF:

    (1) At least annually, no later than the last day on which you may

    timely file your annual amendment to Form ADV under rule 204-1(a)(1)

    (17 CFR 275.204-1(a)(1)); and

    (2) More frequently, if required by the instructions to Form PF.

    You must file all amendments to Form PF 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 with the operator of the Form PF filing

    system in paper format 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.

    (g) Transition for certain filers. If you were an investment

    adviser registered or required to be registered under section 203 of

    the Act (15 U.S.C. 80b-3), act as an investment adviser to one or more

    private funds immediately prior to the compliance date of rule 204(b)-

    1, and are only required to complete all or portions of section 1 of

    Form PF, no later than 90 days after the end of your then-current

    fiscal year you must complete and file your initial report on Form PF

    by following the instructions in the Form, which specify the

    information that an investment adviser must provide.

    PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF

    1940

    5. The authority citation for part 279 continues to read as

    follows:

    Authority: 15 U.S.C. 80b-1, et seq.

    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 following Form PF will not appear in the Code of

    Federal Regulations.

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    By the Commodity Futures Trading Commission.

    Dated: January 26, 2011.

    David A. Stawick,

    Secretary.

    By the Securities and Exchange Commission.

    Dated: January 26, 2011.

    Elizabeth M. Murphy,

    Secretary.

    Appendix 1--Commodity Futures Trading Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Sommers

    (by proxy), Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    [FR Doc. 2011-2175 Filed 2-10-11; 8:45 am]

    BILLING CODE 8011-01-P; 6351-01-P

    Last Updated: February 14, 2011