2022-17724
[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Proposed Rules]
[Pages 53832-53985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-17724]
[[Page 53831]]
Vol. 87
Thursday,
No. 169
September 1, 2022
Part II
Commodity Futures Trading Commission
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Securities and Exchange Commission
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17 CFR Parts 275 and 279
Form PF; Reporting Requirements for All Filers and Large Hedge Fund
Advisers; Proposed Rule
Federal Register / Vol. 87 , No. 169 / Thursday, September 1, 2022 /
Proposed Rules
[[Page 53832]]
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COMMODITY FUTURES TRADING COMMISSION
RIN 3038-AF31
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-6083; File No. S7-22-22]
RIN 3235-AN13
Form PF; Reporting Requirements for All Filers and Large Hedge
Fund Advisers
AGENCIES: Commodity Futures Trading Commission and Securities and
Exchange Commission.
ACTION: Joint proposed rules.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
the ``Commissions'') are proposing to amend Form PF, the confidential
reporting form for certain SEC-registered investment advisers to
private funds, including those that also are registered with the CFTC
as a commodity pool operator (``CPO'') or commodity trading adviser
(``CTA''). The amendments are designed to enhance the Financial
Stability Oversight Council's (``FSOC's'') ability to monitor systemic
risk as well as bolster the SEC's regulatory oversight of private fund
advisers and investor protection efforts. In connection with the
amendments to Form PF, the SEC proposes to amend a rule under the
Investment Advisers Act of 1940 (the ``Advisers Act'') to revise
instructions for requesting a temporary hardship exemption. We also are
soliciting comment on the proposed rules and a number of alternatives,
including whether certain possible changes to the proposal should apply
to Form ADV.
DATES: Comments should be received on or before October 11, 2022.
ADDRESSES: Comments may be submitted by any of the following methods.
CFTC: Comments may be submitted to the CFTC by any of the following
methods.
CFTC Comments portal: https://comments.cftc.gov. Follow
the instructions for submitting comments through the website.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail above.
Please submit your comments using only one method. To avoid
possible delays with mail or in-person deliveries, submissions through
the CFTC website are encouraged. ``Form PF'' must be in the subject
field of comments submitted via email, 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 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 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: Comments may be submitted to the SEC by any of the following
methods:
Electronic Comments
Use the SEC's internet comment forms (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
Send an email to [email protected]. Please include
File Number S7-22-22 on the subject line.
Paper Comments
Send paper comments to Secretary, U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-22-22. This file number
should be included on the subject line if email 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 website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for
website 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. Operating conditions may limit access to
the SEC's Public Reference Room. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda, or other substantive items may be added by the
SEC or staff to the comment file during this rulemaking. A notification
of the inclusion in the comment file of any such materials will be made
available on the SEC's website. To ensure direct electronic receipt of
such notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: CFTC: Pamela Geraghty, Associate
Director; Michael Ehrstein, Special Counsel; Andrew Ruggiero, Attorney-
Advisor at (202) 418-6700, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW Washington, DC 20581. SEC: Alexis
Palascak, Lawrence Pace, Senior Counsels; Christine Schleppegrell,
Acting Branch Chief at (202) 551-6787 or [email protected], Investment
Adviser Regulation Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The CFTC and SEC are requesting public
comment on the following under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (``Advisers Act'').1 2
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\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any section of the Advisers Act, we are referring
to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any section of these
rules, we are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR 275], in which these rules are published.
\2\ Form PF is a joint form between the SEC and CFTC only with
respect to sections 1 and 2 of the Form.
[[Page 53833]]
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Agency Reference CFR citation
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CFTC & SEC...................... Form PF \2\....... 17 CFR 279.9.
SEC............................. Rule 204(b)-1..... 17 CFR 275.204(b)-
1.
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Table of Contents
I. Introduction
II. Discussion
A. Proposed Amendments to the General Instructions
1. Reporting Master-Feeder Arrangements and Parallel Fund
Structures
2. Reporting Private Funds that Invest in Other Funds
3. Reporting Timelines
B. Proposed Amendments Concerning Basic Information about the
Adviser and the Private Funds it Advises
1. Proposed Amendments to Section 1a of Form PF--Identifying
Information
2. Proposed Amendments to Section 1b of Form PF--Concerning All
Private Funds
3. Proposed Amendments to Section 1c of Form PF--Concerning All
Hedge Funds
C. Proposed Amendments Concerning Information about Hedge Funds
Advised by Large Private Fund Advisers
1. Proposed Amendments to Section 2a
2. Proposed Amendments to Section 2b
D. Proposed Amendments To Enhance Data Quality
E. Proposed Additional Amendments
III. Economic Analysis
A. Introduction
B. Economic Baseline and Affected Parties
1. Economic Baseline
2. Affected Parties
C. Benefits and Costs
1. Benefits
2. Costs
D. Reasonable Alternatives
1. Alternatives to Proposed Amendments to General Instructions,
Proposed Amendments to Enhance Data Quality, and Proposed Additional
Amendments
2. Alternatives to Proposed Amendments to Basic Information
about the Adviser and the Private Funds It Advises
3. Alternatives to Proposed Amendments to Information about
Hedge Funds Advised by Large Private Fund Advisers
4. Alternatives to the Definition of the Term ``Hedge Fund''
E. Request for Comment
IV. Paperwork Reduction Act
A. Form PF
1. Purpose and Use of the Information Collection
2. Confidentiality
3. Burden Estimates
B. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Consideration of Impact on the Economy
VII. Statutory Authority
I. Introduction
The Commissions are proposing to amend sections of Form PF, the
form that certain SEC-registered investment advisers, including those
that also are registered with the CFTC as a CPO or CTA, use to report
confidential information about the private funds that they advise.\3\
The proposed amendments are designed to enhance FSOC's monitoring and
assessment of systemic risk and to provide additional information for
FSOC's use in determining whether and how to deploy its regulatory
tools. The proposed amendments also are designed to collect additional
data for use in the Commissions' regulatory programs, including
examinations, investigations and investor protection efforts relating
to private fund advisers.\4\ Finally, the proposed amendments also are
designed to improve the usefulness of this data.\5\
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\3\ Specifically, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act''), mandated that the SEC
and the CFTC, in consultation with the FSOC, jointly promulgate
rules governing the form and substance of reports required by
investment advisers to private funds to be filed with the SEC, and
with the CFTC for those that are dually-registered with both
Commissions. Public Law 111-203, 124 Stat. 1376 (2010). See, 15
U.S.C. 80b-11. See also, 17 CFR 4.27(d). The result was Sections 1
and 2 of Form PF, which were jointly promulgated. See Reporting by
Investment Advisers to Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on Form PF, Advisers Act
Release No. 3308 (Oct. 31, 2011), [76 FR 71128 (Nov. 16, 2011)]
(``2011 Form PF Adopting Release'') at section I. In 2014, the SEC
amended Form PF section 3 in connection with certain money market
fund reforms. See Money Market Fund Reform; Amendments to Form PF,
Advisers Act Release No. 3879 (July 23, 2014), [79 FR 47736 (Aug.
14, 2014)] (``2014 Form PF Amending Release'').
\4\ Any reference to the ``Commissions'', or ``we'', as it
relates to the collection and use of Form PF data are meant to refer
to the agencies in their separate or collective capacities, and such
data from filings made pursuant to 17 CFR 275.204(b)-1, by and
through Private Fund Reporting Depository, a subsystem of the
Investment Adviser Registration Depository (``IARD''), and reports,
analysis, and memoranda produced pursuant thereto. Further, as the
collection is being made pursuant to the Advisers Act and the IARD
is subject to the authority and control of the SEC, as of the date
of this proposal, it should not be assumed that the CFTC has direct,
or timely access to such data. The Commissions will continue to
engage in interagency discussions on the sharing of portions of Form
PF data relevant to the CFTC consistent with the terms of existing
interagency agreements or arrangements related to the sharing of
data.
\5\ Additionally, the Federal Reserve Board uses this data for
research and analysis.
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An adviser must file Form PF if (1) it is registered or required to
register with the SEC as an investment adviser, (2) it manages one or
more private funds, and (3) the adviser and its related persons
collectively had at least $150 million in private fund assets under
management as of the last day of its most recently completed fiscal
year.\6\ A CPO or CTA that also is registered or required to register
with the SEC as an investment adviser and satisfies the other
conditions described above must file Form PF with respect to any
commodity pool it manages that is a private fund. Most private fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors. Certain larger advisers provide more
information on a more frequent basis, including more detailed
information on particular hedge funds and liquidity funds.
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\6\ See 17 CFR 275.204(b)-1. Advisers Act section 202(a)(29)
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 (``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 (or, in the case of a qualifying venture
capital fund, 250 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.
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Form PF provides the Commissions and FSOC with important
information about the basic operations and strategies of private funds
and has helped establish a baseline picture of the private fund
industry for use in assessing systemic risk. We now have almost a
decade of experience analyzing the information collected on Form PF. In
that time, the private fund industry has grown in size and evolved in
terms of business practices, complexity of fund structures, and
investment strategies and exposures.\7\ For example,
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certain investment strategies, including credit, digital asset,\8\
litigation finance,\9\ and real estate strategies, have become more
common since the form was adopted.\10\ Similarly, we understand that
qualifying hedge fund exposures to repurchase agreements (``repos''),
reverse repurchase agreements (``reverse repos''), and U.S. treasury
securities have increased in recent years.\11\ Experience with Form PF
data also has identified potential ways to improve data quality,
including in instances where existing reporting may not identify fully
the potential risks, such as in the reporting of certain master-feeder
arrangements.
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\7\ The value of private fund net assets reported on Form PF has
more than doubled, growing from $5 trillion (net) in 2013 to $12
trillion (net) by the end of the third quarter of 2021, while the
number of private funds reported on the form has increased by nearly
55 percent in that time period. Unless otherwise noted, the private
funds statistics used in this Release are from the Private Funds
Statistics Third Quarter 2021. Division of Investment Management,
Private Fund Statistics Third Quarter 2021, (Mar. 30, 2022),
available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q3.pdf (``Private Fund
Statistics Q3 2021''). Any comparisons to earlier periods are from
the private funds statistics from that period, all of which are
available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. SEC staff began publishing the private fund
statistics in 2015, including data from 2013. Therefore, many
comparisons in this Release discuss the almost nine year span from
the beginning of 2013 through third quarter 2021. Some discussion in
this Release compares data from a shorter time span, because the SEC
staff published such data later than 2013. Staff reports,
statistics, and other staff documents (including those cited herein)
represent the views of SEC staff and are not a rule, regulation, or
statement of the SEC. The SEC has neither approved nor disapproved
the content of these documents and, like all staff statements, they
have no legal force or effect, do not alter or amend applicable law,
and create no new or additional obligations for any person.
\8\ See Zuckerman, Gregory, Mainstream Hedge Funds Pour Billions
of Dollars Into Crypto, The Wall Street Journal (March 2022)
available at https://www.wsj.com/articles/mainstream-hedge-funds-
pour-billions-of-dollars-into-crypto-
11646808223#:~:text=Brevan%20Howard%20launched%20a%20cryptocurrency,a
nd%20investing%20in%20blockchain%20technology.
\9\ See Burnett, David and Pierce, John, The Emerging Market for
Litigation Funding, The Hedge Fund Journal (June 2013) available at
https://thehedgefundjournal.com/the-emerging-market-for-litigation-funding/.
\10\ See Private Fund Statistics Q3 2021, supra footnote 7, at
p. 24.
\11\ A qualifying hedge fund is defined in Form PF as ``any
hedge fund that has a net asset value (individually or in
combination with any feeder funds, parallel funds and/or dependent
parallel managed accounts) of at least $500 million as of the last
day of any month in the fiscal quarter immediately preceding [the
adviser's] most recently completed fiscal quarter.'' See Form PF
Glossary of Terms. From 2015 through the end of 2020, qualifying
hedge fund exposure to repos doubled to $2 trillion, while from 2013
through the end of 2020, qualifying hedge fund borrowings
attributable to reverse repos more than doubled to $1.3 trillion.
For the same period, qualifying hedge fund exposure to U.S. treasury
securities increased by almost 70 percent to $1.7 trillion in
aggregate qualifying hedge fund gross notional exposure.
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Based on this experience and in light of these changes, the
Commissions and FSOC have identified information gaps and situations
where revised information would improve our understanding of the
private fund industry and the potential systemic risk within it. We
believe more detailed information, including with respect to strategies
and exposures, would provide better empirical data to FSOC with which
it may assess better the extent to which the activities of private
funds or their advisers pose systemic risks. We expect that FSOC would
use the new information collected on Form PF, together with market data
from other sources, to assist in determining whether and how to deploy
its regulatory tools.\12\ This may include, for instance, identifying
private fund advisers that merit further analysis or deciding whether
to recommend to a primary financial regulator, like the SEC or CFTC,
more stringent regulation of the financial activities that FSOC
determines may create or increase systemic risk. This revised
information also would improve our ability to protect investors.\13\
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\12\ Under the Dodd-Frank Act, FSOC must monitor emerging risks
to U.S. financial stability and employ its regulatory tools to
address those risks. S. REP. NO. 111-176, at 2-3 (2010).
\13\ The SEC also recently proposed amendments to the SEC-only
sections of Form PF (sections 3, 4, 5, and newly proposed section 6)
that would (1) require current reporting for large hedge fund
advisers and advisers to private equity funds, (2) decrease the
reporting threshold for large private equity advisers and amend
reporting requirements for large private equity advisers, and (3)
amend reporting requirements for large liquidity fund advisers.
Amendments to Form PF to Require Current Reporting and Amend
Reporting Requirements for Large Private Equity Advisers and Large
Liquidity Fund Advisers, Investment Advisers Act Release No. 5950
(Jan. 26, 2022), [87 FR 9106 (Feb. 17, 2022)] (``2022 SEC Form PF
Proposal'').
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The Commissions have consulted with FSOC to gain input on this
proposal, and to help ensure that Form PF continues to provide FSOC
with information it can use to carry out its monitoring obligations and
assess systemic risk in light of changes in the private fund industry
over the past decade. The Commissions are jointly proposing amendments
to the form's general instructions, as well as section 1 of Form PF,
which would apply to all Form PF filers. The Commissions also are
jointly proposing amendments to section 2 of Form PF, which would apply
to large hedge fund advisers who advise qualifying hedge funds (i.e.,
hedge funds that have a net asset value of at least $500 million).\14\
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\14\ Unless stated otherwise, terms in this release that are
defined in the Form PF Glossary of Terms are as defined therein.
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II. Discussion
A. Proposed Amendments to the General Instructions
We are proposing amendments to the Form PF general instructions
designed to improve data quality and comparability and to enhance
investor protection efforts and systemic risk assessment.\15\
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\15\ Additional proposed changes to the General Instructions
concerning amendments to enhance data quality concerning
methodologies and additional amendments are discussed in sections
II.D and II.E of this Release, as well as the proposal to amend
Instruction 3 to reflect our proposal to remove section 2a, which is
discussed in footnote 138, and accompanying text.
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1. Reporting Master-Feeder Arrangements and Parallel Fund Structures
Private funds often use complex structures to invest, including
master-feeder arrangements and parallel fund structures.\16\ We are
proposing amendments to Form PF that generally would require advisers
to report separately each component fund of a master-feeder arrangement
and parallel fund structure.\17\ However, an adviser would continue to
aggregate these structures for purposes of determining whether the
adviser meets a reporting threshold.\18\
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\16\ A ``master-feeder arrangement'' is an arrangement in which
one or more funds (``feeder funds'') invest all or substantially all
of their assets in a single private fund (``master fund''). A
``parallel fund structure'' is a structure in which one or more
private funds (each, a ``parallel fund'') pursues substantially the
same investment objective and strategy and invests side by side in
substantially the same positions as another private fund. See Form
PF Glossary of Terms.
\17\ Proposed Instruction 6. We also propose to amend
Instruction 3 to reflect the proposed approach for reporting master-
feeder arrangements and parallel fund structures. See infra footnote
18.
\18\ Proposed Instruction 5. For example, an adviser would
aggregate private funds that are part of the same master-feeder
arrangement in determining whether the adviser is a large hedge fund
adviser that must complete section 2 of Form PF. In connection with
these proposed changes, we propose to amend the term ``reporting
fund'' and Instruction 3 so they would no longer discuss reporting
aggregated information. Additionally, we propose to reorganize
current Instruction 5 and current Instruction 6 so they reflect the
proposed approach for when to aggregate certain funds. Current
Instruction 5 instructs advisers about when to aggregate information
about certain funds for purposes of reporting thresholds and
responding to questions. Current Instruction 6 instructs advisers
about how to aggregate information about certain funds. Proposed
Instruction 5 would instruct advisers on when to aggregate
information about certain funds for purposes of determining whether
they meet reporting thresholds. Proposed Instruction 6 would
instruct advisers about how to report information about certain
funds when responding to questions.
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Currently, Form PF provides advisers with flexibility to respond to
questions regarding master-feeder arrangements and parallel fund
structures either in the aggregate or separately, as long as they do so
consistently throughout Form PF.\19\ In adopting this approach in 2011,
the Commission stated that requiring advisers to aggregate or
disaggregate funds in a manner inconsistent with their internal
recordkeeping and
[[Page 53835]]
reporting may impose additional burdens and that, as long as the
structure of those arrangements is adequately disclosed, a prescriptive
approach to aggregation was not necessary.\20\ However, based on
experience reviewing Form PF data, we observed that when some advisers
report in aggregate and some advisers report separately, this can
result in obscured risk profiles (e.g., asset size, counterparty
exposure, investor liquidity) and made it difficult to compare complex
structures, undermining the utility of the data collected. We believe
prescribing the way advisers report a master-feeder arrangement and
parallel fund structure would provide better insight into the risks and
exposures of these arrangements.
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\19\ Current Instruction 5.
\20\ 2011 Form PF Adopting Release, supra footnote 3, at text
following n.332.
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Accordingly, we propose to require an adviser to report each
component fund of a master-feeder arrangement and parallel fund
structure, except where a feeder fund invests all its assets in a
single master fund and/or ``cash and cash equivalents'' (i.e., a
disregarded feeder fund).\21\ In the case of a disregarded feeder fund
in Question 6, advisers instead would identify the disregarded feeder
fund and look through to any disregarded feeder fund's investors in
responding to certain questions regarding fund investors on behalf of
the applicable master fund. The master fund effectively is a conduit
through which a disregarded feeder fund invests and we do not believe
separate reporting for such a feeder fund is necessary for data
analysis purposes.
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\21\ See proposed Instruction 6. The proposal would revise the
term ``cash and cash equivalents,'' as described in section II.B.2
in this Release.
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In addition, we propose to no longer allow advisers to report any
``parallel managed accounts,'' (which is distinguished from ``parallel
fund structure''), except advisers would continue to be required to
report the total value of all parallel managed accounts related to each
reporting fund.\22\ We continue to believe that including parallel
managed accounts in the reporting may reduce the quality of data while
imposing additional burdens on advisers.\23\ Data regarding the total
value of parallel managed accounts, however, allow FSOC to take into
account the greater amount of assets an adviser may be managing using a
given strategy for purposes of analyzing the data reported on Form
PF.\24\
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\22\ Proposed Instruction 6. A ``parallel managed account'' is
any managed account or other pool of assets managed by the adviser
that pursues substantially the same investment objective and
strategy and invests side by side in substantially the same
positions as the identified private fund. See Form PF Glossary of
Terms. Currently, advisers may, but are not required to, report
information regarding parallel managed accounts in response to
certain questions, except they must report the total value of all
parallel managed accounts related to each reporting fund. See
current Instruction 5.
\23\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.334, and accompanying text (the Commission was persuaded that
aggregating parallel managed accounts for reporting purposes would
be difficult and ``result in inconsistent and misleading data''
because the characteristics of parallel managed accounts are often
somewhat different from the funds with which they are managed). For
example, in a separately managed account a client generally selects
an adviser's strategy but tailors it to the client's own investment
guidelines.
\24\ Id. at text following n.336.
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We request comment on the proposed amendments.
1. Should we amend Form PF to require advisers to report component
funds of master-feeder arrangements and parallel fund structures
separately except for disregarded feeder funds, as proposed? Would the
proposed amendments lead to more accurate data regarding the risk
profiles of reporting funds and improve comparability? Would the
proposed amendments enhance investor protection efforts and systemic
risk assessment? Are there better ways to meet these objectives? For
example, should Form PF require advisers to report only at the master
fund level or the feeder fund level?
2. Do you agree that the master fund is effectively a conduit
through which a disregarded feeder fund invests and that separate
reporting for such a feeder fund is not necessary for data analysis
purposes? Should we require advisers to report additional information
regarding disregarded feeder funds? For example, should we require
advisers to report the total cash holdings of such funds?
3. Are there other exceptions for reporting each component of a
master-feeder arrangement or parallel fund structures separately that
we should adopt?
4. Should we continue to require advisers to report only limited
information on parallel managed accounts? If we should require
additional reporting from parallel managed accounts, what additional
information should we require? Should reporting of any such additional
information be mandatory or voluntary?
5. Should we continue to require advisers to aggregate structures
when determining whether they meet reporting thresholds?
6. Form PF currently does not require an adviser to report
information regarding a private fund advised by any of the adviser's
related persons, unless the adviser identified that related person as
one for which the adviser is filing Form PF. Should we take a different
approach and require an adviser to include information regarding
private funds advised by any of the adviser's related persons if they
are part of a master-feeder arrangement or parallel fund structure
managed by the adviser? Or, would an adviser have difficulty gathering
the information necessary to report this information for private funds
managed by the adviser's related persons whose operations are genuinely
independent of the adviser's own operations?
7. Could ``parallel managed accounts,'' be interpreted as
overlapping with ``parallel fund structure?'' If so, should we remove
the phrase ``or other pool of assets'' in the definition of ``parallel
managed account'' to prevent that?
2. Reporting Private Funds That Invest in Other Funds
We are proposing amendments to Form PF regarding how advisers
report private fund investments in other private funds, trading
vehicles, and other funds that are not private funds.
Investments in other private funds. We propose to amend Instruction
7, which addresses how advisers treat private fund investments in other
private funds (e.g., a ``fund of funds''). Currently, advisers include
the value of private fund investments in other private funds in
determining whether the adviser meets the filing threshold to file Form
PF.\25\ We believe this requirement is implicit in the current form and
we propose to amend Instruction 7 to make it explicit. Current Form PF
permits an adviser to disregard the value of a private fund's equity
investments in other private funds for purposes of both the form's
reporting thresholds (e.g., whether it qualifies as a large hedge fund
adviser) and responding to questions on Form PF, as long as it does so
consistently throughout Form PF, subject to certain exceptions.\26\
Under the proposal, the form would continue to permit an adviser to
include or exclude the value of investments in other private funds
(including internal and external private funds) when determining
whether the
[[Page 53836]]
adviser meets the thresholds for reporting as a large hedge fund
adviser, large liquidity fund adviser, or large private equity adviser,
and whether a hedge fund is a qualifying hedge fund.\27\ The
Commissions continue to believe that allowing this flexibility for
these reporting thresholds avoids duplicative reporting, which reduces
the burden of reporting for advisers and improves the quality of the
data reported.\28\ For example, under these instructions an adviser may
exclude an investment in an external private fund that would already be
counted through another adviser's reporting obligations.
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\25\ Form PF Instruction 1 provides that certain advisers meet
the filing threshold if they and their related persons,
collectively, had at least $150 million in private fund assets under
management as of the last day of their most recently completed
fiscal year.
\26\ For example, under the current instructions, an adviser is
not permitted to disregard any liabilities of the private fund, even
if incurred in connection with an investment in other private funds.
See current Instruction 7.
\27\ See current Instruction 7 and proposed Instruction 7.
\28\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.128, and accompanying text.
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However, we believe the form's current flexibility on whether to
disregard underlying funds when responding to questions has undermined
the utility of the data collected, as it provides unclear, inconsistent
data on the scale of reporting funds' exposures. Therefore, we propose
to amend Instruction 7 to require an adviser to include the value of a
reporting fund's investments in other private funds when responding to
questions on Form PF, unless otherwise directed by the instructions to
a particular question.\29\ We believe that requiring advisers to report
fund of funds arrangements in a consistent manner would allow the
Commissions and FSOC to understand better these fund structures by
providing greater insight into the scale and exposures of reporting
funds.
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\29\ For example, an adviser would report the value of the
reporting fund's investments in other private funds when reporting
its gross asset value and net asset value in proposed Questions 11
and 12; however, Question 3 would specify that advisers must exclude
the value of the reporting fund's investment in other internal
private funds when providing a breakdown of their regulatory assets
under management and net assets under management.
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Currently, advisers are not required to, but nonetheless have the
option to, ``look through'' a reporting fund's investments in any other
entity (including other private funds), except in instances when the
form directs otherwise.\30\ As a result, some advisers may ``look
through'' a reporting fund's investments in other entities, while
others do not, leading to unclear data, inconsistent comparisons, and
less precise analysis across advisers. Therefore, we propose to amend
Instruction 7 to provide that, when responding to questions, advisers
must not ``look through'' a reporting fund's investments in internal
private funds or external private funds (other than a trading vehicle,
as described below), unless the question instructs the adviser to
report exposure obtained indirectly through positions in such funds or
other entities.\31\ We also propose to take the same approach with
regard to a reporting fund's investments in funds or other entities
that are not private funds or trading vehicles.\32\ These proposed
amendments are designed to improve data quality and comparisons, so the
Commissions and FSOC understand what Form PF data is from advisers
``looking through'' a reporting fund's investments, which we believe
would lead to more effective systemic risk assessments and investor
protection efforts.
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\30\ See current Instruction 8.
\31\ See proposed Instruction 7. For example, advisers would not
``look through'' to the creditors of or counterparties to other
private funds in responding to questions that ask about a reporting
fund's borrowings and counterparty exposures. See proposed Question
18 (concerning borrowings) and proposed Questions 27 and 28
(concerning counterparty exposures). However, selected questions in
section 2 of the form would require advisers to report indirect
exposure resulting from positions held through other entities
including private funds, and advisers would ``look through'' the
reporting fund's investments in internal private funds and external
private funds in responding to those questions. See e.g., proposed
Question 32 (concerning reporting fund exposures).
\32\ See proposed Instruction 8 and supra footnote 31 (which
provides examples that also apply to advisers to reporting funds
that invest in funds and other entities that are not private funds
or trading vehicles).
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Trading vehicles. Some private funds wholly own separate legal
entities that hold assets, incur leverage, or conduct trading or other
activities as part of the private fund's investment activities, but do
not operate a business (each, a ``trading vehicle'').\33\ We propose to
amend Form PF's general instructions to explain how advisers would
report information if the reporting fund uses a trading vehicle.\34\
Specifically, if the reporting fund uses a trading vehicle, and the
reporting fund is its only equity owner, the adviser would either (1)
identify the trading vehicle in section 1b, and report answers on an
aggregated basis for the reporting fund and such trading vehicle, or
(2) report the trading vehicle as a separate reporting fund. An adviser
would have to report the trading vehicle separately if the trading
vehicle holds assets, incurs leverage, or conducts trading or other
activities on behalf of more than one reporting fund. If reporting
separately, (1) advisers would report the trading vehicle as a hedge
fund if a hedge fund invests through the trading vehicle; (2) advisers
would report the trading vehicle as a qualifying hedge fund if a
qualifying hedge fund invests through the trading vehicle; (3)
otherwise, advisers would report the trading vehicle as a liquidity
fund, private equity fund, or other type of fund based on its
activities.\35\
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\33\ We propose to add ``trading vehicle'' to the Form PF
Glossary of Terms.
\34\ See proposed Instruction 7. We propose to make a conforming
change to Instruction 8 to reference this new instruction.
\35\ See proposed Instruction 7.
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Private funds may use trading vehicles for various purposes,
including (1) for jurisdictional, tax, or other regulatory purposes, or
(2) to ``ring-fence'' assets in light of liability or bankruptcy
concerns associated with a particular investment (i.e., structure
assets so counterparties would only have recourse against the trading
vehicle and not against the private fund). Currently, Form PF does not
require advisers to identify trading vehicles. As a result, Form PF
does not provide a clear window into the use of trading vehicles and
the risks they present. For example, if a trading vehicle is ring-
fenced, current Form PF does not provide a view into the assets or
collateral on which a counterparty to such trading vehicle relies or
the size and nature of the trading vehicle's exposure. In addition,
where more than one reporting fund invests through a particular trading
vehicle, the activities of multiple reporting funds are blended and
potentially obscured. The proposed amendments are designed to address
these concerns by providing more information on the extent private
funds use trading vehicles to conduct investment activities. The
proposed amendments also are designed to provide improved visibility
into position sizes and counterparty exposures through trading
vehicles. Having a clear, unobscured view into position sizes and
counterparty exposures through trading vehicles is designed to help
ensure accurate systemic risk assessment and analysis to further
investor protection efforts, by providing the Commissions and FSOC with
a view into the assets or collateral on which a counterparty to such
trading vehicle relies and the size and nature of the trading vehicle's
exposure.
Investments in funds that are not private funds. Under the
proposal, advisers would continue to include the value of the reporting
fund's investments in funds and other entities that are not private
funds, in determining reporting thresholds and responding to questions,
unless otherwise directed, as Form PF currently requires.\36\ For the
reasons discussed above, we are proposing that, when responding to
questions, however,
[[Page 53837]]
advisers must not ``look through'' a reporting fund's investments in
funds or other entities that are not private funds, or trading
vehicles, unless the question instructs the adviser to report exposure
obtained indirectly through positions in such funds or other
entities.\37\
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\36\ See Instruction 8.
\37\ See supra footnote 32, and accompanying text (discussing
proposed amendments to Instruction 8).
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We request comment on the proposed amendments.
8. Would the proposed amendments concerning reporting fund
investments in other private funds, trading vehicles, and other funds
that are not private funds provide a better understanding of the
structure of private funds, and improve data quality and comparability?
Is there a better way to meet these objectives? Should Form PF provide
more or less flexibility to advisers in how they treat these types of
private fund investments? For example, instead of allowing advisers the
flexibility to include or exclude a private fund's investments in other
private funds (including internal private funds and external private
funds) in determining whether they meet thresholds for filing as a
large hedge fund adviser, large liquidity adviser, or large private
equity adviser, and whether a reporting fund is a qualifying hedge
fund, should we require advisers to include or exclude such
investments? Should we require external qualifying hedge funds to be
excluded, to avoid receiving duplicate data? If Form PF should provide
more flexibility, how would we help ensure data is understandable and
comparable across advisers?
9. Would the proposed amendments regarding trading vehicles provide
a clearer picture of how private funds use trading vehicles and their
market risks? Would the proposed amendments provide improved visibility
into position sizes and counterparty exposures? Is there a better way
to meet these objectives? For example, should Form PF require advisers
to report whether a trading vehicle is ring-fenced for liability
purposes?
10. Under the proposal, if an adviser reports a trading vehicle as
a separate reporting fund, the adviser must report the trading vehicle
as a hedge fund, qualifying hedge fund, liquidity fund, private equity
fund, or other type of fund, if it meets certain requirements. Would
this proposed requirement help ensure advisers could not avoid
reporting the trading vehicle as a private fund that is subject to
additional reporting, such as a qualifying hedge fund? Is there a
better way to meet this objective? Should Form PF instead only require
advisers to report trading vehicles as investments in another fund?
11. Are the ``look through'' requirements concerning how to report
a reporting fund's investments in other entities clear? Should we
require advisers to not look through a reporting fund's investments in
other entities, unless the question instructs the adviser to report
exposure obtained indirectly through positions in such funds or other
entities, as proposed?
3. Reporting Timelines
We propose to amend Instruction 9 to require large hedge fund
advisers and large liquidity fund advisers to update Form PF within a
certain number of days after the end of each calendar quarter, rather
than after each fiscal quarter, as Form PF currently requires.\38\ All
other advisers would continue to file annual updates within 120
calendar days after the end of their fiscal year.\39\ Form PF would
continue to require all advisers to use fiscal quarters and years to
determine filing thresholds because advisers already make such
calculations under 17 CFR 279.1 (``Form ADV''), which requires annual
updates based on fiscal year.\40\
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\38\ Large hedge fund advisers generally would file within 60
calendar days after the end of each calendar quarter and large
liquidity fund advisers generally would file within 15 days after
the end of each calendar quarter. See proposed Instruction 9.
\39\ We also propose to amend the term ``data reporting date''
to reflect this proposed approach. See Form PF Glossary of Terms.
\40\ See Form PF Instructions 1 and 3; Form ADV and [17 CFR
275.204-1] Advisers Act rule 204-1 (amendments to Form ADV).
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Currently, fiscal quarter reporting significantly delays the time
at which the Commissions and FSOC receive a complete data set for a
calendar quarter. For example, large hedge fund advisers whose first
fiscal quarter ends on the calendar quarter end of March, would file
data covering January, February, and March by the end of May.\41\
However, large hedge fund advisers whose fiscal quarter ends in May
would not file their March data until the end of July, delaying
Commission and FSOC access to full calendar quarter data by all large
hedge fund advisers by four months. The proposed changes are designed
to provide a more complete data set sooner to improve the efficiency
and effectiveness of investor protection efforts and systemic risk
assessment. Based on Form ADV data as of December 2021, 99.2 percent of
private fund advisers already effectively file Form PF on a calendar
basis because their fiscal quarter or year ends on the calendar quarter
or year end, respectively.\42\ The 0.8 percent of private fund advisers
that have a non-calendar fiscal approach, which could cause a temporary
data gap, represents approximately 274 private funds, totaling $200
billion in gross asset value. Calendar quarter reporting also would
more closely align with reporting on [17 CFR pt. 4, app. A] Form CPO-
PQR, which requires calendar quarterly reporting, allowing easier
integration of these data sets.
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\41\ See current Instruction 9 (requiring large hedge fund
advisers to update Form PF within 60 calendar days after the end of
their first, second, and third fiscal quarters, among other things).
\42\ We are presenting data from all private fund advisers, not
just those who would file on a quarterly basis (i.e., large hedge
fund advisers and large liquidity fund advisers), to avoid
potentially disclosing proprietary information of individual Form PF
filers, and to be inclusive considering that the population of
quarterly filers versus annual filers may change over time.
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We request comment on the proposed amendments.
12. Should we revise the reporting timelines, as proposed?
13. Should Form PF continue to require advisers to determine filing
thresholds by fiscal year given corresponding Form ADV requirements?
Alternatively, should Form PF require all Form PF filers to use
calendar years and quarters for all Form PF purposes, including in
determining filing thresholds and when to update Form PF?
14. Should we reduce the number of days by which filers must update
Form PF to receive data sooner? How would this relieve or increase
burdens? For example, should Form PF require large hedge fund advisers
to update Form PF within 30 calendar days after the end of each
calendar or fiscal quarter, rather than 60 calendar days? Should Form
PF require large liquidity fund advisers to report within 10 calendar
days after the end of each calendar quarter, rather than 15 calendar
days? Should annual filers file within 30 calendar days after the end
of their fiscal year, rather than 120 calendar days?
15. Should Form PF reporting timelines be more or less consistent
with Form CPO-PQR?
B. Proposed Amendments Concerning Basic Information About the Adviser
and the Private Funds it Advises
Each adviser required to file Form PF must complete all or part of
section 1. The proposed amendments to section 1 are designed to provide
greater insight into private funds' operations and strategies, and
assist in identifying trends, including those that could create
systemic risk, which in turn is designed to enhance investor protection
efforts and systemic risk assessment. The
[[Page 53838]]
proposed changes are designed to improve comparability across advisers,
improve data quality, and reduce reporting errors, based on our
experience with Form PF filings.
1. Proposed Amendments to Section 1a of Form PF--Identifying
Information
Section 1a requires an adviser to report identifying information
about the adviser and the private funds it manages. We are proposing
several amendments to collect additional identifying information
regarding the adviser, its related persons, as well as their private
fund assets under management.
LEI for advisers and related persons. Legal entity identifiers, or
``LEIs,'' help identify entities and link data from different sources
that use LEIs.\43\ Currently, Form PF requires advisers to report the
LEI for certain entities, if they have one, such as for the reporting
fund and any parallel funds.\44\ Form PF's current definition of
``LEI'' provides that, in the case of a financial institution that has
not been assigned an LEI, advisers must provide the RSSD ID assigned by
the National Information Center of the Board of Governors of the
Federal Reserve System (``Federal Reserve Board''), if the financial
institution has an RSSD ID.\45\ We propose to remove this requirement
and, instead, provide that advisers must not substitute any other
identifier that does not meet the definition of an LEI.\46\ However,
advisers would use the RSSD ID, if the financial institution has one,
for questions that specifically request an RSSD ID, and for questions
that require advisers to report any other identifying information where
the type of information is not specified.\47\ These proposed amendments
are designed to improve data quality because, based on experience with
the current form, reporting RSSD IDs as LEIs makes it more difficult
for staff to link data efficiently and effectively.
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\43\ Form PF generally defines ``LEI'' as: the ``legal entity
identifier'' assigned by or on behalf of an internationally
recognized standards setting body and required for reporting
purposes by the U.S. Department of the Treasury's Office of
Financial Research or a financial regulator. See Form PF Glossary of
Terms.
\44\ See current Question 5(d) and current Question 7(e).
Current Form PF also requires large liquidity advisers to report the
LEI for each security and repo held by the reporting fund, if they
have one. See current Question 63(d) and current Question 63(g),
respectively. Current Form PF also requires large private equity
advisers to report the LEI for each of the reporting fund's
controlled portfolio companies that constitute a financial industry
portfolio company. See current Question 76.
\45\ See current Form PF Glossary of Terms. Currently, if an LEI
has not been assigned and there is no RSSD ID, then the adviser
would leave that line blank.
\46\ See proposed Form PF Glossary of Terms.
\47\ See e.g., proposed Question 9. We also would add ``RSSD
ID'' to the Form PF Glossary of Terms and define it as the
identifier assigned by the National Information Center of the
Federal Reserve Board, if any. See Form PF Glossary of Terms.
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While Form PF currently requires advisers to provide the LEI for
entities such as reporting funds and parallel funds, if the entities
have one, it does not require advisers to report the LEI for itself and
its related persons.\48\ We propose to require advisers to provide the
``LEI'' for themselves and their ``related persons,'' if they have an
LEI.\49\ This proposed amendment is designed to help identify advisers
and their related persons and link data from other data sources that
use this identifier.
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\48\ See e.g., current Question 5 and current Question 7.
\49\ See Proposed Question 1. We also propose to require
advisers to provide the LEI for other entities, if the other
entities have one, including internal private funds (see proposed
Question 7 and proposed Question 15), trading vehicles (see proposed
Question 9), and counterparties (see proposed Question 27 and
proposed Question 28). A ``related person'' has the meaning provided
in Form ADV. See Form PF Glossary of Terms. Form ADV defines a
``related person'' as any advisory affiliate and any person that is
under common control with the adviser. See Form ADV Glossary of
Terms.
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We request comment on the proposed amendments.
16. Should we require advisers to report ``LEI'' for financial
institutions that have one and only report ``RSSD ID'' as a secondary
identification where asked, as proposed? Would the proposed amendments
help us improve data quality and help link data more efficiently and
effectively from other sources that use LEIs and RSSD IDs? Is there a
better way to meet these objectives?
17. Should Form PF require advisers to report the LEI for certain
entities, if they have one, as proposed, such as the adviser and each
related person, as well as internal private funds, trading vehicles,
creditors, and counterparties, or others? Alternatively, should Form PF
require any entities to obtain LEIs if they do not have them? Would
those entities seek to obtain LEIs in the future absent any regulatory
requirement to do so?
18. Are there other data sources we also should use that would
allow us to link entities across forms?
19. Should we amend the term ``LEI'' in Form PF to match Form ADV
or any other forms that use the term or a similar term?
Assets under management. We are proposing to revise how advisers
report assets under management attributable to certain private funds.
Current Question 3 requires advisers to provide a breakdown of
regulatory assets under management and net assets under management.
These data are designed to show the size of the adviser and the nature
of the adviser's activities. We propose to amend the instructions to
direct advisers to exclude the value of private funds' investments in
other internal private funds to avoid double counting of fund of funds
assets.\50\ Advisers would include the value of trading vehicle assets
because, under the proposed definition, they would be wholly owned by
one or more reporting funds.\51\ These proposed amendments are designed
to provide a more accurate view of the assets managed by the adviser
and its related persons, as well as the general distribution of those
assets among various types of private funds, because accurately viewing
the scale of these managed assets is important to effectively assess
systemic risk and further investor protection efforts.
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\50\ See proposed Question 3.
\51\ See proposed Question 3. See proposed Form PF Glossary of
Terms.
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We request comment on the proposed amendments.
20. Would the proposed amendments prevent double counting fund of
funds assets? Is there a better way to meet this objective? Should we
include private funds managed by the adviser's related persons in the
definition of internal private fund for these purposes? Are there other
types of investments that should be disregarded in order to prevent
double counting? Are there other approaches to trading vehicles?
21. Form PF currently requires advisers to provide a breakdown of
assets under management and regulatory assets under management based on
certain categories of private funds. Should we require advisers to
provide a breakdown for more, fewer, or different categories of private
funds than Form PF currently provides? For example, should Question 3
include categories such as special purpose vehicles, private credit
funds, or types of fund of funds?
Explanation of assumptions. We are proposing to amend current
Question 4, which advisers use to explain assumptions that they make in
responding to questions on Form PF. Specifically, we propose to add an
instruction directing advisers to provide the question number when the
assumptions relate to a particular question.\52\ This amendment is
designed to help assess data more efficiently and
[[Page 53839]]
improve comparability, based on experience with the form.
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\52\ See proposed Question 4.
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We request comment on the proposed amendments.
22. Is there a better way to achieve our objectives of assessing
data more efficiently and improving comparability?
2. Proposed Amendments to Section 1b of Form PF--Concerning All Private
Funds
Section 1b requires advisers to report certain identifying and
other basic information about each private fund the adviser manages.
The proposal would amend section 1b to require advisers to report
additional identifying information about the private funds they manage
as well as the private funds' assets, financing, investor
concentration, and performance. The proposed changes are designed to
provide greater insight into private funds' operations and strategies
and assist in identifying trends that we believe would enhance investor
protection efforts and FSOC's systemic risk assessment. At the same
time, we believe the proposed amendments would help improve data
quality and comparability, based on experience with Form PF.
Type of private fund. We are proposing several amendments to
identify different types of reporting funds better, and help isolate
data according to fund type, to allow for more targeted analysis.
Currently, advisers indicate a reporting fund's type on the Private
Fund Reporting Depository (``PFRD'') filing system, and by filling out
particular sections of the form.\53\ We have found instances, however,
where advisers have identified a reporting fund differently on Form PF
than on Form ADV, even though the definitions of each fund type are the
same on both forms. This may be due to error, or may be due to the
fund's characteristics changing between deadlines for Form ADV and Form
PF. Accordingly, to help prevent reporting errors and help ensure
accuracy concerning the reporting fund's type, we propose to require
advisers to identify the reporting fund by selecting one type of fund
from a list: hedge fund that is not a qualifying hedge fund, qualifying
hedge fund, liquidity fund, private equity fund, real estate fund,
securitized asset fund, venture capital fund, or ``other.'' \54\ If an
adviser identifies the reporting fund as ``other,'' the adviser would
describe the reporting fund in Question 4, including why it would not
qualify for any of the other options.
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\53\ For advisers that are also CPOs or CTAs, filing Form PF
through PFRD is filing with both the SEC and CFTC. See Instruction 3
(instructing advisers to file particular sections of Form PF,
depending on their circumstances. For example, all Form PF filers
must file section 1 and large hedge fund advisers also must file
section 2).
\54\ Proposed Question 6(a).
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In addition, we propose to require an adviser to indicate whether
the reporting fund is a ``commodity pool,'' which is categorized as a
hedge fund on Form PF.\55\ Although the CFTC does not, as of the date
of this proposal, consider Form PF reporting on commodity pools as
constituting substituted compliance with CFTC reporting requirements,
some CPOs may continue to report such information on Form PF.\56\ This
proposed amendment would allow for analysis of hedge fund data both
with and without commodity pools reported on the form.
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\55\ Proposed Question 6(b). Form PF defines ``commodity pool''
as defined in section 1a(10) of the U.S. Commodity Exchange Act, as
amended. See Form PF Glossary of Terms.
\56\ Previously, the CFTC permitted dually registered CPO-
investment advisers to submit Form PF in lieu of certain CFTC
reporting requirements. See Compliance Requirements for Commodity
Pool Operators on Form CPO-PQR, (Oct. 9, 2020) [85 FR 71772 (Nov.
10, 2020)] (``Form CPO-PQR Release'').
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Finally, we propose to require advisers to report whether a
reporting fund operates as a UCITS or AIF, or markets itself as a money
market fund outside the United States, and in which countries (if
applicable).\57\ These proposed amendments are designed to allow the
Commissions and FSOC to filter data for more targeted analysis to
better understand the potential exposure to beneficial owners outside
the United States and to avoid double counting when Form PF data is
aggregated with other data sets that include UCITS, AIFs, and money
market funds that are marketed outside the United States.
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\57\ See proposed Question 6(c) through (h). We propose to
define the term ``UCITS'' as Undertakings for Collective Investment
in Transferable Securities, as defined in the UCITS Directive of the
European Parliament and of the Council (No. 2009/65/EC), as amended,
or as captured by the Collective Investment Schemes (Amendment etc.)
(EU Exit) Regulations 2019, as amended. We propose to define ``AIF''
as an alternative investment fund that is not regulated under the
UCITS Directive, as defined in the Directive of the European
Parliament and of the Council on alternative investment fund
managers (No. 2011/61/EU), as amended, or an alternative investment
fund that is captured by the Alternative Investment Fund Managers
(Amendment etc.) (EU Exit) Regulations 2019, as amended. See Form PF
Glossary of Terms.
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We request comment on the proposed amendments.
23. Should Form PF require advisers to report additional
identifying information about the private funds they advise, as
proposed? Would the proposed amendments help identify each type of
reporting fund, allow the Commissions and FSOC to filter data
concerning types of funds, and conduct more targeted analysis? Is there
a better way to meet these objectives?
24. Should proposed Question 6 include more, fewer, or different
categories of private funds? For example, should the form include a
category for funds that may be ``hybrid'' funds that may have
characteristics of different types of private funds? Should proposed
Question 6 include an ``other'' category, as proposed? Alternatively,
should proposed Question 6 not include an ``other'' category and
instead require that advisers select the best fit among the specific
categories? Are there other ways to limit the types of funds that may
report as ``other?''
25. Should Form PF require advisers to explain in Question 4 why
they choose ``other'' as a category, as proposed? Would this proposed
requirement clarify what type of fund the reporting fund is, if it does
not fit within the other categories? Is there a better way of
identifying what type of fund the reporting fund is? Should Form PF
require the adviser to include more, less, or different information in
the explanation?
26. Should Form PF require advisers to identify if the reporting
fund is a commodity pool, as proposed? Are any CPOs currently reporting
information regarding any commodity pools, even if they are not private
funds? If so, why? Alternatively, should we revise the definition of
``hedge fund'' so it would not include commodity pools? If we exclude
commodity pools from the definition of ``hedge fund,'' should we amend
Form PF to require advisers to report the same or different information
about commodity pools as they do for hedge funds?
27. Should Form PF require advisers to report whether and in which
countries the reporting company operates as a UCITS or AIF, or markets
itself as a money market fund outside the United States, as proposed?
Would the proposed amendment allow us and FSOC to filter data for more
targeted analysis to better understand the potential exposure to
beneficial owners outside the United States and to avoid double
counting when Form PF data is aggregated with other data sets that
include UCITS and AIFs? Is there a better way to meet these objectives?
28. Should Form PF define UCITS and AIF, as proposed? Would the
proposed definitions keep the terms evergreen if directives change or
new ones apply? If not, how should we define these terms? For example,
should we provide less detail in the definition
[[Page 53840]]
about the directives to keep the definitions evergreen?
Master-feeder arrangements, internal private funds, external
private funds, and parallel fund structures. To reflect that advisers
would report components of master-feeder arrangements and parallel fund
structures separately, we propose to amend Form PF to require advisers
to report identifying information about master-feeder arrangements and
other private funds (e.g., funds of funds), including internal private
funds, and external private funds.\58\ Form PF currently requires
advisers to report identifying information about parallel funds, and
would continue to do so under the proposal.\59\ The proposal also would
require advisers to report the value of the reporting fund's
investments in other private funds (e.g., funds of funds), as current
Question 10 requires, but with more detail.\60\ Specifically, the
proposal would require advisers to report the value of the reporting
fund's equity investments in external private funds and internal
private funds (including the master fund and each internal private
fund), which would comprise the total investments in other private
funds.\61\ These amendments are designed to help map complex fund
structures and cross reference private fund information across Form PF
filings, to provide more complete and accurate information about each
fund's risk profile.
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\58\ For master-feeder arrangements, advisers would report the
name of the feeder fund, its private fund identification number, and
whether the feeder fund is a separate reporting fund or a
disregarded feeder fund. For internal private funds that invest in
the reporting fund, advisers would report the name of the internal
private fund, its LEI, if it has one, and its private fund
identification number. See proposed Question 7. If the reporting
fund invests in external private funds, advisers would report the
name of the master fund, its private fund identification number, and
the master fund's LEI, if it has one. If the reporting fund invests
in internal private funds, advisers would report the internal
private fund's name, its private fund identification number, and its
LEI, if it has one. Proposed Question 15.
\59\ See current Question 7 and proposed Question 8.
\60\ This requirement would be part of proposed Question 15.
\61\ See proposed Question 15.
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In connection with these proposed amendments, in the Form PF
Glossary of Terms, we propose to remove the terms ``investments in
external private funds'' and ``investments in internal private funds,''
and replace them with ``external private funds'' (private funds that
neither the adviser nor the adviser's related persons advise) and
``internal private funds'' (private funds that the adviser or any of
the adviser's related persons advise), respectively. The proposed
definitions would not direct advisers to exclude ``cash management
funds,'' as is currently the case under the terms being removed,
because we observed that advisers determine whether a fund is a cash
management fund inconsistently. Therefore, this proposed amendment is
designed to improve data quality.
We request comments on the proposed amendments.
29. Would the proposed amendments help to map complex fund
structures and cross reference them to private fund information across
Form PF filings? Would the proposed amendments provide more complete
and accurate information about each fund's risk profile? Is there a
better way to meet these objectives?
30. Should the form require different or additional identifying
information to identify a master fund, feeder fund, internal private
fund, or external private fund?
31. Should Form PF require advisers to report the private fund
identification number for any feeder funds, as proposed, even though
advisers annually report the private fund identification number of any
feeder funds that invest in a private fund they advise on Form ADV?
\62\
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\62\ Form ADV, section 7.B.(1).A.6.
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32. Should Form PF define ``internal private funds,'' ``external
private funds,'' and ``trading vehicle,'' as proposed? Are there
alternative definitions we should adopt? For example, should we define
``internal private funds'' and ``external private funds'' to exclude
cash management funds as the current definitions of ``investments in
internal private funds'' and ``investments in external private funds''
do?
Withdrawal or redemption rights. The proposal would change how
advisers report withdrawal and redemption rights. Form PF currently
requires only large hedge fund advisers to report whether each
qualifying hedge fund provides investors with withdrawal or redemption
rights in the ordinary course.\63\ We propose to require all advisers
to provide this information for each reporting fund to inform the
Commissions and FSOC better of all reporting funds' susceptibility to
stress through investor redemptions, to help identify how widespread
the stress is.\64\ If the reporting fund provides investors with
withdrawal or redemption rights in the ordinary course, we propose to
require advisers to indicate how often withdrawals or redemptions are
permitted by selecting from a list of categories.\65\ Advisers would
report this information regardless of whether there are notice
requirements, gates, lock-ups, or other restrictions on withdrawals or
redemptions.\66\ We believe these proposed amendments would allow us
and FSOC to identify better reporting funds that may be affected by
investor withdrawals during certain market events, or vulnerable to
failure as a result of investor redemptions. We believe this
information also would provide insight into other data that all
reporting funds report. For example, we understand that private equity
funds that do not typically offer redemption rights in the ordinary
course likely have certain patterns of subscriptions and withdrawals,
and also report performance to investors and prospective investors as
an internal rate of return, rather than reporting based on changes in
the portfolio market value. We propose to define ``internal rate of
return'' in the proposed Form PF Glossary of Terms as the discount rate
that causes the net present value of all cash flows throughout the life
of the fund to be equal to zero. Analyzing reported information about
investor withdrawal or redemption rights together with reported
information about subscriptions and withdrawals or performance is
designed to help us identify developing trends relevant to identifying
systemic risk and would help us further investor protection efforts. We
request comment on the proposed amendments.
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\63\ Current Question 49(a).
\64\ To implement this, the proposal would move current Question
49(a) from section 2b, which requires large hedge fund advisers to
report information about qualifying hedge funds, to section 1b which
requires all advisers to report information about all the reporting
funds they advise, and redesignate it as Question 10. To accommodate
moving the question, the proposal would make corresponding
amendments to the instructions in current Question 49, which we
would redesignate as Question 52.
\65\ Proposed Question 10(b). The categories would be (1) any
business day, (2) at intervals of at least two business days and up
to a month, (3) at intervals longer than monthly up to quarterly,
(4) at intervals longer than quarterly up to annually, and (5) at
intervals of more than one year.
\66\ For example, if the reporting fund allows quarterly
redemptions that are subject to a gate, then the adviser would
select ``at intervals longer than monthly up to quarterly.''
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33. Should we require all advisers to report information about
withdrawal and redemption rights about all the reporting funds they
advise, as proposed? Alternatively, should only certain advisers report
this information for only certain reporting funds? If so, which ones
and why?
34. Should Form PF include more, fewer, or different categories for
the schedule of withdrawal or redemption
[[Page 53841]]
rights? As an alternative, should advisers be able to select ``other''
as a schedule category? Under what circumstances would an adviser
select ``other?''
35. Should we define ``internal rate of return'' as proposed? If
not, what alternative definitions should we use?
Trading vehicles. We are proposing to require advisers to provide
identifying information for any trading vehicle in which the reporting
fund holds investments or conducts activities.\67\ Advisers would
disclose the trading vehicle's legal name; LEI, if it has one; and any
other identifying information about the trading vehicle, such as the
RSSD ID, if it has one. This proposed amendment is designed to help the
Commissions and FSOC understand the reporting fund's activities,
including how it interacts with the market if the fund trades through a
trading vehicle and related counterparty exposures. The identifying
information also is designed to allow comparisons of Form PF data with
data from other sources that use such information to identify entities.
Enhancing the ability to compare Form PF data in this way is designed
to provide a more comprehensive view of the market, and therefore,
enhance investor protection efforts and systemic risk assessment.
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\67\ Proposed Question 9.
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We request comment on the proposed amendments.
36. Should all advisers provide identifying information for a
trading vehicle, including an LEI if it has one, as proposed?
Alternatively, should only certain advisers report it for certain
reporting funds?
37. Do any trading vehicles not have an LEI?
38. Should Form PF require more, less, or different identifying
information for the trading vehicle?
Gross asset value and net asset value. We propose several
amendments to the way advisers report gross asset value and net asset
value. We propose to require advisers who are filing quarterly updates
to report gross asset value and net asset value as of the end of each
month of the reporting period, rather than only reporting the
information as of the end of the reporting period, as Form PF currently
requires.\68\ This proposed amendment is designed to facilitate
analysis of other monthly Form PF data, including certain fund
performance and risk metrics.\69\
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\68\ See current Questions 8 and 9, and proposed Questions 11
and 12. We also propose to make amendments to the instructions in
current Question 8 (which we would redesignate as proposed Question
11) to correspond with the proposed instructions that would no
longer allow advisers to aggregate master-feeder arrangements, as
discussed above.
\69\ See e.g., proposed Question 23 (requiring all private fund
advisers to report monthly performance data, to the extent such
results are calculated for the reporting fund), supra footnote 98,
and accompanying text, and proposed Question 48 (requiring large
hedge funds to report monthly data concerning the reporting fund's
portfolio correlation), infra section II.C.2 of this Release.
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We also propose to add new Question 13 to require advisers to
separately report the value of unfunded commitments included in the
gross and net asset value reported in proposed Questions 11 and 12.\70\
Current Questions 8 and 9 require valuations based on the instruction
in Form ADV for calculating regulatory assets under management, which
requires advisers to include the amount of any unfunded
commitments.\71\ This approach reflects that, in the early years of a
private fund's life, its adviser typically earns fees based on the
total amount of capital commitments, which we presume reflects
compensation for efforts expended on behalf of the fund in preparation
for the investments.\72\ We continue to believe that net asset value
and gross asset value should include unfunded commitments so Form PF
data is comparable to Form ADV data. However, there are circumstances
where understanding the amount represented by unfunded commitments
would enhance our understanding of changes to a reporting fund's net
and gross asset value over time, inform us of trends, and improve data
comparability over the life of the fund. For example, knowing the value
of uncalled commitments would help the Commissions and FSOC more
accurately identify how much leverage a fund with uncalled commitments
has. Currently, the Commissions and FSOC only can infer this
information but it is unclear whether such inferences are correct.
Therefore, this proposed amendment is designed to improve data accuracy
and comparability, which is important for effective systemic risk
assessment and investor protection efforts.
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\70\ Form PF currently defines ``unfunded commitments'' as
``committed capital'' that has not yet been contributed to the
private equity fund by investors. We propose to amend the definition
so it refers to all reporting funds, not only private equity funds.
Form PF defines ``committed capital'' as any commitment pursuant to
which a person is obligated to acquire an interest in, or make
capital contributions to, the private fund. See Form PF Glossary of
Terms.
\71\ Form PF requires advisers to calculate gross asset value
and net asset value using regulatory assets under management, a
regulatory metric from Form ADV. See ``gross asset value'' and ``net
asset value'' as defined in Form PF Glossary of Terms; Form ADV:
Instructions for Part 1A, Instruction 5.b. An adviser must calculate
its regulatory assets under management on a gross basis, that is,
without deduction of any outstanding indebtedness or other accrued
but unpaid liabilities. In addition, an adviser must include the
amount of any uncalled capital commitments made to a private fund
managed by the adviser.
\72\ Rules Implementing Amendments to the Investment Advisers
Act of 1940, Advisers Act Release No. 3221 (June 22, 2011) [76 FR
42950, 42956 (July 19, 2011)], at text accompanying n.90.
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We request comment on the proposed amendments.
39. Should Form PF require advisers who are filing quarterly
updates to report information as of the end of each month of the
reporting period, as proposed? Would this requirement facilitate our
and FSOC's analysis of such advisers' other monthly Form PF data? Is
there a better way to meet this objective?
40. Should Form PF require advisers to report the value of unfunded
commitments included in the gross asset value and net asset value, as
proposed? Would the proposed amendment improve data accuracy and
comparability? Would the proposed amendment more accurately identify
how much leverage a fund with uncalled commitments has? Is there a
better way to meet this objective?
Inflows and outflows. We propose to add a question requiring
advisers to report information concerning the reporting fund's
activity, including contributions to the reporting fund, as well as
withdrawals and redemptions, which would include all withdrawals,
redemptions, or other distributions of any kind to investors.\73\ Form
PF would specify that, for purposes of the question, advisers must
include all new contributions from investors, but exclude contributions
of committed capital that they have already included in gross asset
value calculated in accordance with Form ADV instructions.\74\
Quarterly filers would provide this information for each month of the
reporting period. This proposed requirement is designed to facilitate
analysis of other monthly Form PF data, including certain fund
performance and risk metrics.\75\ Therefore, this amendment is designed
to improve data accuracy, and allow the Commissions and FSOC to analyze
data more efficiently. Inflows and outflows inform the Commissions and
FSOC of the relationship between flows and performance, changes to net
and gross asset value, as well as trends in the private fund industry.
Accordingly, this question is designed to provide a more accurate
baseline understanding of
[[Page 53842]]
inflows and outflows, so the Commissions and FSOC can, for example,
more accurately assess how much the private fund industry has grown
from flows versus performance. Inflows and outflows also can indicate
funding fragility, which can have systemic risk implications.
Therefore, this amendment also is designed to provide more accurate
data of inflows and outflows for systemic risk assessment and investor
protection efforts, including identifying activity that may not match
investor disclosures.
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\73\ See proposed Question 14.
\74\ Form PF would cite to Form ADV, Part 1A Instruction
6.e.(3).
\75\ See supra footnote 69.
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We request comment on the proposed amendments.
41. Should proposed Question 14 apply to advisers to all reporting
funds, as proposed, or only certain advisers to only certain reporting
funds?
42. Should proposed Question 14 instruct advisers to include or
exclude any other information? Would proposed Question 14 raise
operational challenges? For example, should the instructions specify
whether to include or exclude distributions that may be recallable by
the fund (i.e., ``recyclable capital commitments'' or capital that can
be recalled to invest during a portion of the investment period)?
43. Should Form PF require advisers to provide the amount of new
redemptions or subscriptions based on notices that would be payable or
expected after Form PF is due? If so, should all advisers submit such
data for all reporting funds, or should only certain advisers submit it
for only certain reporting funds?
Base currency. The proposal would require all advisers to identify
the base currency of all reporting funds, rather than only large hedge
fund advisers identifying this information for only qualifying hedge
funds.\76\ When a reporting fund uses a base currency other than U.S.
dollars in the current Form PF, the adviser must convert all monetary
values to U.S. dollars, unless otherwise specified, to complete Form
PF, which may cause inconsistencies in the data.\77\ Currently, the
Commissions and FSOC can identify such inconsistencies only for
qualifying hedge funds from current Question 31. Therefore, this
proposed change is designed to allow us and FSOC to interpret more
accurately responses to questions regarding foreign exchange exposures
and the effect of changes in currency rates on all reporting fund
portfolios to aid systemic risk assessment and investor protection
efforts across all reporting fund portfolios.
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\76\ To implement this, the proposal would move current Question
31 from current section 2b, which requires large hedge fund advisers
to report information about qualifying hedge funds, to section 1b
which requires all advisers to report information about all the
reporting funds they advise. See proposed Question 17.
\77\ See current Instruction 15. We also propose to revise
Instruction 15 to provide additional instructions concerning
currency conversions. See section II.D of this Release.
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We request comment on the proposed amendments.
44. Should we expand reporting of base currency information for all
reporting funds, as proposed? Would the proposed change allow us and
FSOC to interpret responses to questions regarding foreign exchange
exposures and the effect of changes in currency rates for these funds?
45. Would the proposed amendment improve efficiency?
Borrowings and types of creditors. The proposal would revise how
advisers report the reporting fund's ``borrowings.'' We propose to
revise the term ``borrowings'' to (1) specify that it includes
``synthetic long positions,'' which Form PF would define in the
Glossary of Terms, and (2) provide a non-exhaustive list of types of
borrowings.\78\ This proposed reporting approach is consistent with SEC
staff guidance from Form PF Frequently Asked Questions.\79\ This
proposed amendment is designed to improve data quality, based on
experience with the form. Current Question 12 requires advisers to
report the value of the reporting fund's borrowings and the types of
creditors. We propose to amend this question to require advisers to
indicate whether a creditor is based in the United States and whether
it is a ``U.S. depository institution,'' rather than a ``U.S. financial
institution'' as is currently required.\80\ This proposed amendment is
designed to make the categories more consistent with the categories the
Federal Reserve Board uses in its reports and analysis, to enhance
systemic risk assessment. The proposal would not require advisers to
distinguish between non-U.S. creditors that are depository institutions
and those that are not. We understand that it is difficult for advisers
to distinguish non-U.S. creditors by type, resulting in inconsistent
data that is less valuable for analysis.
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\78\ ``Borrowings'' would include, but would not be limited to
(1) cash and cash equivalents received with an obligation to repay;
(2) securities lending transactions (count cash and cash equivalents
and securities received by the reporting fund in the transaction,
including securities borrowed by the reporting fund for short
sales); (3) repo or reverse repo (count the cash and cash
equivalents and securities received by the reporting fund); (4)
negative mark-to-market of derivative transactions from the
reporting fund's point of view; and (5) the gross notional value of
``synthetic long positions.'' We propose to define a ``synthetic
long position'' in the Form PF Glossary of Terms (see the proposed
Form PF Glossary of Terms for the proposed definition.) We are
proposing this definition based on our understanding of the
instruments and to help ensure data quality to aid comparability.
\79\ See SEC staff Form PF Frequently Asked Questions, available
at https://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml
(``Form PF Frequently Asked Questions''). See Form PF Frequently
Asked Question 12.1 (which provides a non-exhaustive list of types
of borrowings).
\80\ See proposed Question 18. Form PF would define ``U.S.
depository institution'' as any U.S. domiciled depository
institution, including any of the following: (1) a depository
institution chartered in the United States, including any federally-
chartered or state-chartered bank, savings bank, cooperative bank,
savings and loan association, or an international banking facility
established by a depositary institution chartered in the United
States; (2) banking offices established in the United States by a
financial institution that is not organized or chartered in the
United States, including a branch or agency located in the United
States and engaged in banking not incorporated separately from its
financial institution parent, United States subsidiaries established
to engage in international business, and international banking
facilities; (3) any bank chartered in any of the following United
States affiliated areas: U.S. territories of American Samoa, Guam,
and the U.S. Virgin Islands; the Commonwealth of the Northern
Mariana Islands; the Commonwealth of Puerto Rico; the Republic of
the Marshall Islands; the Federated States of Micronesia; and the
Trust Territory of the Pacific Islands (Palau); or (4) a credit
union (including a natural person or corporate credit union). Form
PF defines ``U.S. financial institution'' as any of the following:
(1) a financial institution chartered in the United States (whether
federally-chartered or state-chartered); (2) a financial institution
that is separately incorporated or otherwise organized in the United
States but has a parent that is a financial institution chartered
outside the United States; or (3) a branch or agency that resides
outside the United States but has a parent that is a financial
institution chartered in the United States. See proposed Form PF
Glossary of Terms.
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We request comment on the proposed amendments.
46. Should Form PF define or redefine any terms related to proposed
Question 18? For example, should Form PF define ``U.S. depository
institution,'' ``synthetic long positions,'' and revise the term
``borrowings,'' as proposed? Could the definitions be clearer? Should
Form PF define the terms differently? For example, should ``synthetic
long position'' provide a different list of assets to be included or
excluded? Does the reference to deep-in-the-money options in the
definition of ``synthetic long position'' need further clarification?
If so, what clarifications should we make?
47. Would advisers find it difficult to distinguish among different
types of non-U.S. creditors? Should Form PF require advisers to
distinguish between non-U.S. creditors that are depository institutions
and those that are not, or non-U.S. creditors that are financial
institutions and those that are not?
Fair value hierarchy. Current Question 14 requires advisers to
report the assets and liabilities of each
[[Page 53843]]
reporting fund broken down using categories that are based on the fair
value hierarchy established under U.S. generally accepted accounting
principles.\81\ Current Question 14 is designed to provide insight into
the illiquidity and complexity of a fund's portfolio and the extent to
which the fund's value is determined using metrics other than market
mechanisms.\82\ We are proposing to revise how advisers report fair
value hierarchy in current Question 14, which we would redesignate as
proposed Question 20, in the following ways to improve data quality and
better understand the reporting fund's complexity and valuation
challenges:
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\81\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying n.204.
\82\ See 2011 Form PF Adopting Release, supra footnote 3, at
n.204.
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We propose to require advisers to indicate the date the
categorization was performed. This proposed amendment is designed to
show how old the data is. Some advisers report current fair value
hierarchy, while others report a prior year's fair value hierarchy if
the current data is not yet available.\83\ This can cause confusion
when analyzing the data, because the fair value hierarchy data concerns
a different time period than the other data advisers report on Form PF.
Therefore, we believe that adding a categorization date would help
ensure the data is not incorrectly categorized as applying to the wrong
time period, and in turn, would allow the Commissions and FSOC to
correlate data to other Form PF data and market events more accurately.
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\83\ Advisers are not required to update information that they
believe in good faith properly responded to Form PF on the date of
filing even if that information is subsequently revised for purposes
of their recordkeeping, risk management, or investor reporting (such
as estimates that are refined after completion of a subsequent
audit). See Instruction 16.
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We propose to direct advisers to report the absolute value
of all liabilities. Currently, advisers report liabilities
inconsistently, with some reporting absolute values and others
reporting negative values. This inconsistency causes errors when the
Commissions and FSOC aggregate this data and we believe the proposed
instruction would help reduce aggregation errors.
We propose to direct advisers to provide an explanation in
Question 4 if they report assets as a negative value. We have found
that some advisers have reported negative values for assets in
error.\84\ Therefore, this instruction is designed to reduce
inadvertent errors.
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\84\ We recognize that there may be cases when advisers
correctly report negative values, such as when subtracting fund of
fund investments.
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We propose to require advisers to separately report cash
and cash equivalents. Currently, Form PF does not explain where
advisers must report cash and cash equivalents in current Question 14.
While SEC staff have suggested that advisers generally should report
cash in the cost based column and cash equivalents in the applicable
column in the fair value hierarchy or the cost based column, depending
on the nature of the cash equivalents, we are proposing to add a
separate column for cash and cash equivalents.\85\ The proposed
categorization is designed to differentiate reported holdings of cash
and cash equivalents from harder to value assets that may be valued at
cost, and in turn, improve data quality and comparability.
---------------------------------------------------------------------------
\85\ See Form PF Frequently Asked Question 14.3, Form PF
Frequently Asked Questions, supra footnote 79.
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We propose to amend the definition of ``cash and cash
equivalents.'' The current definition of ``cash and cash equivalents''
includes ``government securities.'' \86\ When reporting cash and cash
equivalents, some advisers may include government securities with
longer maturities, while others do not, which results in inconsistent
reporting and may obscure our and FSOC's understanding of fund
exposures. Therefore, to improve data quality, we propose to remove
government securities from the definition of ``cash and cash
equivalents,'' and present it as its own line item in the proposed Form
PF Glossary of Terms.\87\ We also propose to amend the term ``cash and
cash equivalents'' so it would direct advisers to not include any
digital assets when reporting cash and cash equivalents. As discussed
in section II.B.3 of this Release, we propose to define ``digital
assets'' and require advisers to report them separately than other
types of assets.\88\ Therefore, this proposed amendment is designed to
ensure that the categories of ``cash and cash equivalents'' and
``digital assets'' are clearly distinct to help ensure accurate
reporting.
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\86\ Current Form PF defines ``government securities'' in the
current term ``cash and cash equivalents'' as (1) U.S. treasury
securities, (2) agency securities, and (3) any certificate of
deposit for any of the foregoing.
\87\ We propose to make corresponding amendments to the
definition of ``unencumbered cash'' to reflect that ``government
securities'' would be a distinct term from ``cash and cash
equivalents.'' This proposed amendment is not intended to change the
meaning of the term ``unencumbered cash.'' See Form PF Glossary of
Terms.
\88\ See e.g., proposed Question 25, which would include digital
assets as a strategy category for advisers to hedge funds.
---------------------------------------------------------------------------
We propose to add instructions directing advisers about
how to report data if their financial statement's audit is not yet
completed when Form PF is due. The instructions would state that
advisers should use the estimated values for the fiscal year and
explain that the information is an estimate in Question 4. The proposed
instructions also would provide that the adviser may, but is not
required to, amend Form PF when the audited financial statements are
complete.\89\ The instructions are consistent with responses to Form PF
Frequently Asked Questions and are designed to provide the Commissions
and FSOC with more recent information regarding the reporting fund than
may be possible if the reporting fund relied solely on audited
financial statement information (i.e., the reporting fund's previous
fiscal year's audited financial statements).\90\ Given that advisers
file Form PF sometimes months after their quarter and year ends,
depending on their size and the type of funds they advise, we believe
the proposed instruction would balance reporting burdens with more
timely information for assessing potential systemic risk and investor
protection concerns.
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\89\ Form PF Instruction 16 would continue to provide that an
adviser is not required to update information that it believes in
good faith properly responds to Form PF on the date of filing, even
if that information is subsequently revised, as Form PF currently
provides.
\90\ See Form PF Frequently Asked Question A.11, Form PF
Frequently Asked Questions, supra footnote 79.
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We request comment on the proposed amendments.
48. Should we require advisers to indicate the date the
categorization was performed, as proposed? Would this proposed
amendment help ensure the data is correctly categorized as applying to
the appropriate time period, and in turn, allow the Commissions and
FSOC to correlate data to other Form PF data and market events more
accurately? Is there a better way to meet this objective?
49. Should Form PF direct advisers to report the absolute value of
all liabilities, as proposed? Would this proposed amendment reduce
aggregation errors? Is there a better way to meet this objective?
50. Should Form PF direct advisers to provide an explanation in
Question 4 if they report assets as a negative value, as proposed?
Would this proposed instruction reduce inadvertent errors?
51. Should advisers report cash or cash equivalents separately from
other
[[Page 53844]]
assets, as proposed? Are there other alternatives we should implement?
For example, should Form PF require advisers to report cash in the cost
based column and cash equivalents in the applicable column in the fair
value hierarchy or the cost based column, depending on the nature of
the cash equivalents? \91\
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\91\ See supra footnote 85.
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52. Would the proposed amendments to the terms ``cash and cash
equivalents'' and ``unencumbered cash,'' and the addition of
``government securities'' allow for more precise reporting for these
types of assets? Alternatively, should the definition of ``cash and
cash equivalents'' provide that government securities would be included
in cash equivalents if they are eligible to be held by money market
funds under the risk-limiting condition set forth in [17 CFR 270.2a-
7(d)(1)(i)] Investment Company Act rule 2a-7(d)(1)(i), which generally
prohibits a money market fund from acquiring any instrument with a
remaining maturity of greater than 397 calendar days? Should this
language be more comparable with other requirements of Form PF, which
require large liquidity fund advisers to report the dollar amount of a
liquidity fund's assets that have a maturity greater than 397 days?
\92\ Should Form PF provide distinct line items for the term ``cash''
and ``cash equivalents,'' and revise questions to refer to each term,
as applicable? Should the term ``unencumbered cash'' continue to refer
to government securities, as proposed, or should we modify the term
differently? For example, should ``unencumbered cash'' refer to U.S.
treasury bills, rather than government securities?
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\92\ See e.g., Form PF, section 3, current Question 55(i). The
SEC recently proposed amendments to Form PF section 3, which would
redesignate current Question 55(i) to reflect new numbering. See
2022 SEC Form PF Proposal, supra footnote 13.
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53. Should Form PF direct advisers to report estimated values if
their financial statement's audit is not yet completed when Form PF is
due, as proposed? Alternatively, should we require advisers to update
Form PF with updated values when the audited financial statements are
complete?
Beneficial Ownership of the Reporting Fund. Current Question 16
requires advisers to specify the approximate percentage of the
reporting funds' equity that is beneficially owned by different groups
of investors. We propose to require advisers to provide more granular
information regarding the following groups of beneficial owners.\93\
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\93\ See proposed Question 22.
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Advisers would indicate whether beneficial owners that are
broker-dealers, insurance companies, non-profits, pension plans,
banking or thrift institutions are U.S. persons or non-U.S.
persons.\94\ This proposed amendment is designed to allow the
Commissions and FSOC to conduct more targeted analysis about risks
presented in the United States separate from risks presented abroad.
With regard to pension plans, in particular, it is currently unclear
how advisers must report assets in non-U.S. pension plans: as
governmental pension plans or foreign official institutions. Therefore,
this proposed amendment also is designed to improve data quality, based
on experience with the form.
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\94\ We understand that, in some cases, an adviser may not be
able to determine what type of non-U.S. entity the investor is.
Current Question 16 already provides a category that would address
that scenario in certain circumstances, and we would maintain that
approach. If investors that are not United States persons and about
which certain beneficial ownership information is not known and
cannot reasonably be obtained because the beneficial interest is
held through a chain involving one or more third-party
intermediaries, advisers currently report this in current Question
16(m), which we would redesignate as proposed Question 22(s).
---------------------------------------------------------------------------
Advisers would indicate whether beneficial owners that are
private funds are either internal private funds (i.e., managed by the
adviser or its related persons) or external private funds. This
proposed amendment is designed to help the Commissions and FSOC
understand the interconnectedness of private funds to each other, which
would aid systemic risk assessment and investor protection efforts.
Furthermore, this information is designed to help the Commissions and
FSOC understand a reporting fund's risk from investor demands for
liquidity, because beneficial owners that are external private funds
may have less predictable withdrawals than internal private funds.
We would specify that ``state'' investors are U.S. state
investors to improve data quality and reduce potential confusion.\95\
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\95\ The proposal also would include instructions to proposed
Question 22, as well as current Question 15, which we would
redesignate as proposed Question 21 (concerning a certain percentage
of beneficial ownership), providing that if the reporting fund is
the master fund in a master-feeder arrangement, advisers must look
through any disregarded feeder fund (i.e., a feeder fund that is not
required to be separately reported). This proposed amendment is
designed to implement the proposed master-feeder reporting. See
section II.A.1 of this Release.
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The proposal would provide that if advisers report information in
the ``other'' category, they must describe in Question 4 the type of
investor, why it would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' This
proposed amendment is designed to improve data quality by providing
context to the adviser's selection of the ``other'' category, and help
ensure that advisers do not inadvertently report information in the
wrong category.
We request comment on the proposed amendments.
54. Should we revise the reporting categories as proposed? Should
we eliminate, add, or change any categories? For example, should we add
categories for security-based swap dealers that are U.S. persons and
those that are not? The instructions for current Question 16 require
advisers to include each investor in only one group. Therefore, if we
require advisers to report whether an investor is a security-based swap
dealer, how should they report the investor if the investor also
qualifies for another category, such as broker-dealers or ``banking or
thrift institutions?'' For example, should the list be non-exclusive?
Is there a better way to address cases when advisers may not be able to
determine what type of entity the investor is? \96\
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\96\ See supra footnote 94.
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55. Should Form PF require advisers to explain their response when
they select ``other'' as a category, as proposed? Should Form PF
require the adviser to include more, less, or different information in
the explanation? Would this proposed change provide context to the
adviser's selection of the ``other'' category and help prevent
misreporting?
56. Should we add instructions to current Question 15 (which we
propose to redesignate as proposed Question 21) to allow good faith
estimates in determining beneficial interests outstanding before March
31, 2012 (the effective date of Form PF), that have not been
transferred on or after that date, as current Question 16 does and Form
PF would continue to provide in proposed Question 22?
57. Current Question 16 includes a category concerning broker-
dealers. Under the proposal, advisers would distinguish between broker-
dealers that are U.S. persons and those that are not U.S. persons.
Should Form PF define ``broker-dealer'' or use different terms so the
categories would be more consistent with the Federal Reserve Board's
reports and analysis? Is there a way to achieve this objective while
ensuring the terms are consistent with the SEC's definition of the
terms? For example, should Form PF use and define the term ``broker''
or ``dealer'' as they are defined in the Securities Exchange Act of
1934 (``Exchange Act'')? \97\ Should Form PF
[[Page 53845]]
use and define the term ``foreign broker or dealer'' as it is defined
in [17 CFR 240.15a-6(b)(3)] (``Exchange Act rule 15a-6(b)(3)'')? Should
Form PF use the term ``securities brokers and dealers,'' and define it
the following way: Firms that buy and sell securities for a fee, hold
an inventory of securities for resale, or do both? Are the firms that
make up this sector those that submit information to the SEC on one of
two reporting forms, either [17 CFR 249.617] Form X-17A-5, Financial
and Operational Combined Uniform Single Report of Brokers and Dealers
(``FOCUS Report'') or [17 CFR 449.5] Form G-405, on Finances and
Operations of Government Securities Brokers and Dealers (``FOGS
Report'')?
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\97\ 15 U.S.C. 78c(a)(4) and 15 U.S.C. 78c(a)(5).
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Fund Performance. We are proposing several amendments regarding
fund performance reporting in current Question 17, which we would
redesignate as proposed Question 23.\98\ Currently, Form PF requires
all advisers to report gross and net fund performance for specified
fiscal periods using a table in current Question 17. The table in
current Question 17 requires advisers to provide monthly and quarterly
performance results in the table only if such results are calculated
for the reporting fund. This requirement would remain, but we propose
to add instructions specifying which lines to complete depending on
whether the adviser is submitting an initial filing, annual update, or
quarterly update.\99\ We also propose to amend the instructions to the
table to specify that if gross and net performance is reported to
current and prospective investors, counterparties, or otherwise in a
currency other than U.S. dollars, advisers must report the data using
that currency. We believe this instruction is implied in the current
form and we propose to amend this instruction to make it explicit. We
also propose to require advisers to identify the currency in Question
4.\100\ This proposed amendment is designed to inform the Commissions
and FSOC of the currency the adviser used to report the reporting
fund's gross and net performance, for more accurate and informed
analysis.
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\98\ In a separate release, the SEC is proposing a new rule
under the Advisers Act to require advisers to provide certain fund
performance information to its private funds' investors in quarterly
statements. See Private Fund Advisers; Documentation of Registered
Investment Adviser Compliance Reviews, Advisers Act Release No. IA-
5955 (Feb. 9, 2022) [87 FR 16886, (Mar. 24, 2022)].
\99\ We also propose to reorganize the table so monthly,
quarterly, and yearly data is presented in separate categories, but
this change would not affect reporting; advisers would report
information according to the same intervals, as they currently do.
We also propose to amend the table to refer to the end date of each
applicable month, quarter, and year, rather than last day of the
fiscal period, to reflect the proposed amendments to the reporting
period, as discussed above. See supra section II.A.3 of this
Release, and proposed Question 23(a).
\100\ See proposed Question 23(a).
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We also propose to create an exception to the tabular reporting. If
the reporting fund's performance is reported to current and prospective
investors, counterparties, or otherwise as an internal rate of return
since inception, the adviser would report its performance as an
internal rate of return.\101\ If such information is reported to
current and prospective investors, counterparties, or otherwise, in a
currency other than U.S. dollars, advisers would report the data using
that currency, and identify the currency in Question 4. This approach
is designed to acknowledge that advisers calculate performance data
differently for different types of private funds. For example, advisers
of private equity funds may use internal rate of return to calculate
performance data, while advisers to liquidity funds and hedge funds may
use a periodic rate of return. These calculations may differ in the way
they reflect realized and unrealized gains, among other things.
Therefore, the proposed change is designed to allow the Commissions and
FSOC to improve the usefulness and quality of performance data to
conduct more accurate analysis, including comparisons, and
aggregations.
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\101\ See proposed Question 23 instructions, and proposed
Question 23(b). Proposed Question 23(b) also would require that if
the fund reports different performance results to different groups,
advisers must provide the most representative results and explain
their selection in Question 4. The instructions to proposed Question
23(b) would specify that internal rates of return for periods longer
than one year must be annualized, while internal rates of return for
periods one year or less must not be annualized. This instruction is
designed to help ensure consistent reporting for accurate
comparisons.
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The proposal would require advisers to report additional
performance-related information if the adviser calculates a market
value on a daily basis for any position in the reporting fund's
portfolio. In such a case, the adviser would report the following:
The ``reporting fund aggregate calculated value'' at the
end of the reporting period.\102\ Advisers that file a quarterly update
also would report the reporting fund aggregate calculated value as of
the end of the first and second month of the reporting period.\103\
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\102\ We would define the term ``reporting fund aggregate
calculated value'' in the Form PF Glossary of Terms. See proposed
Form PF Glossary of Terms and proposed Question 23(c).
\103\ See proposed Question 23(c)(i).
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The reporting fund's volatility of the natural log of the
daily ``rate of return'' for each month of the reporting period,
following a prescribed methodology.\104\ Advisers would report whether
the reporting fund uses a different methodology than is prescribed in
Form PF to report to current and prospective investors, counterparties,
or otherwise, and if so, they would describe it in Question 4.\105\
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\104\ We would define ``rate of return'' for a reporting fund as
the percentage change in the reporting fund aggregate calculated
value in the reporting fund's base currency from one date to
another, and adjusted for subscriptions and redemptions. For a
portfolio position, the ``rate of return'' would be the percentage
change in the ``position calculated value,'' adjusted for income
earned. We would define ``position calculated value'' in the Form PF
Glossary of Terms. The prescribed methodology would be the standard
deviation of the natural log of one plus each of the daily rates of
return in the month, annualized by the square root of 252 trading
days. When calculating the natural log of a daily rate of return,
the rate of return, which is expressed as a percent, must first be
converted to a decimal value and then one must be added to the
decimal value. See proposed Form PF Glossary of Terms and Question
23(c)(ii).
\105\ See proposed Question 23(c)(iii).
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Whether the reporting fund had one or more days with a
negative daily rate of return during the reporting period. If so,
advisers would report (1) the most recent peak to trough drawdown, and
indicate whether the drawdown was continuing on the data reporting
date, (2) the largest peak to trough drawdown, (3) the largest single
day drawdown, and (4) the number of days with a negative daily rate of
return in the reporting period.\106\ These measures are designed to
help us and FSOC understand risk, particularly in reporting funds with
unique return patterns that are poorly measured using volatility alone.
We understand that advisers use drawdown metrics, therefore, this
question also is designed to be more reflective of industry practice,
and in turn improve data quality.
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\106\ See proposed Question 23(iv).
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Together, the proposed changes are designed to allow the
Commissions and FSOC to more accurately compare volatility across
different fund types to identify market trends (e.g., volatility of a
specific fund type), for systemic risk assessment and investor
protection efforts. For example, if several reporting funds that engage
in similar trading activity experience a surge in volatility, the
volatility itself or the reporting funds' response to the volatility
may impact others who also are engaging in similar trading activity,
which could pose systemic risk, and negatively affect investors.
We request comments on the proposed amendments.
[[Page 53846]]
58. Would the proposed changes improve data quality and provide the
Commissions and FSOC with a more robust picture of fund performance?
59. Should we amend the table in current Question 17, as proposed?
For example, should we specify that if a reporting fund's gross and net
performance is reported to current and prospective investors,
counterparties, or others in a currency other than U.S. dollars,
advisers must report the data using that currency, as proposed? Should
we require advisers to identify the currency in Question 4, as
proposed?
60. Do different types of private funds calculate performance data
differently based on industry conventions, or otherwise? Do the
proposed requirements and defined terms accurately capture the right
types of performance reporting for investor protection and systemic
risk assessment? Is there a better way to meet these objectives?
61. As an alternative, should Form PF require advisers to report
the reporting fund aggregate calculated value information only for
reporting funds that meet a certain asset threshold?
62. Should Form PF require advisers to follow the prescribed
methodology to compute the reporting fund's volatility of the daily
rate of return, as proposed, or should Form PF require advisers to
follow a different methodology? If so, what methodology should Form PF
prescribe and why? Should advisers have the flexibility to use their
own methodology to compute the reporting fund's volatility of the daily
rate of return? If advisers use their own methodology, how could the
Commissions and FSOC ensure data could be aggregated and compared?
63. Could the instructions on how to calculate the volatility of
the daily rate of return be clearer? For example, should the form
include a calculation worksheet for advisers to fill out to help
advisers calculate the volatility of rates of return?
64. Should we define ``position calculated value,'' ``reporting
fund aggregate calculated value,'' and ``rate of return,'' as proposed?
65. We are not defining the term ``drawdown.'' Should Form PF
define ``drawdown?'' For example, should Form PF define ``drawdown'' as
the maximum loss in the value over a specified time internal? Should
Form PF define or redefine any other terms?
66. Should Form PF specify what ``peak to trough'' means? For
example, should ``peak to trough'' mean the percentage decline from
portfolio's highest value (peak) to lowest value (trough) following the
establishment of the highest value (peak)? Are there industry standards
for determining peak to trough? For example, should Form PF provide
guidance on when the ``peak'' or ``trough'' should be reset? As an
alternative to requiring information about ``peak to trough,'' should
Form PF require advisers to report the maximum drawdown? If so, should
Form PF define ``maximum drawdown'' as the largest decline over any
time interval within the reporting period?
67. Should Form PF require advisers to report information about the
negative daily rates of return, as proposed? Alternatively, should Form
PF require the largest peak to trough drawdown over a rolling 10-day
period, or in each month?
68. Alternatively, should Form PF require advisers to report the
daily mark to market calculations, or both the daily rate of return and
the daily mark to market calculations?
69. Are the instructions clear for reporting funds that have base
currencies other than U.S. dollars? Should we revise the form further
to accommodate data concerning such funds?
3. Proposed Amendments to Section 1c of Form PF--Concerning All Hedge
Funds
Section 1c requires advisers to report information about the hedge
funds they advise. We propose to require advisers to report additional
information about hedge funds to provide greater insight into hedge
funds' operations and strategies, assist in identifying trends, and
improve data quality and data comparability for purposes of systemic
risk assessments and to further investor protection efforts. We also
propose to remove certain questions where other questions would provide
the same or more useful data to streamline reporting and reduce
reporting burdens without compromising investor protection efforts and
systemic risk analysis.
Investment Strategies. We propose to amend how advisers report
hedge fund investment strategies.\107\ We propose to require advisers
to indicate which investment strategies best describe the reporting
fund's strategies on the last day of the reporting period, rather than
allowing advisers flexibility to report information as of the data
reporting date or throughout the reporting period, as Form PF currently
provides.\108\ This amendment is designed to improve data quality by
specifying how to report information if the reporting fund changes
strategies over time.
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\107\ We would amend current Question 20, and redesignate it as
proposed Question 25.
\108\ See current Question 20.
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We also propose to update the strategy categories that advisers can
select to reflect our understanding of hedge fund strategies better,
and improve data quality and comparability, based on experience with
the form. For example, we propose to include more granular categories
for equity strategies, such as factor driven, statistical arbitrage,
and emerging markets. Similarly, we propose to include more granular
categories for credit strategies, such as litigation finance, emerging
markets, and asset-backed/structured products. These more granular
categories are designed to allow the Commissions and FSOC to conduct
more targeted analysis and improve comparability among advisers and
hedge funds, which the Commissions and FSOC can use to more accurately
identify and address systemic risk and investor protection issues in
times of stress. We also propose to add categories that have become
more commonly pursued by hedge funds since Form PF was adopted, such as
categories concerning real estate and digital assets.\109\ Today,
advisers may report information regarding these strategies in the
``other'' category, resulting in less robust Form PF data for analysis,
especially when such analysis filters results based on strategy.\110\
Therefore, the additional categories are designed to improve reporting
quality and data comparability across advisers, based on experience
with the form. If advisers select the ``other'' category, we propose to
require them to describe in Question 4 the investment strategy, why the
reporting fund would not qualify for any of the other categories, and
any other information to explain the selection of ``other.'' This
proposed change is designed to improve data quality by providing
context to the adviser's selection of the ``other'' category. It also
is designed to help us ensure that advisers are not misreporting
information in the ``other'' category when they should be reporting
information in a different category.
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\109\ Aggregate qualifying hedge fund gross notional exposure to
physical real estate has grown by 72 percent from the second quarter
2018 through the third quarter of 2021, to $146 billion. See Private
Funds Statistics, supra footnote 7, First Quarter 2020 (showing data
from the second quarter of 2018), and Third Quarter 2021.
\110\ The amount of hedge fund exposure that advisers attribute
to the ``other'' category has more than doubled to $57 billion, from
2013 through third quarter 2021. See Private Funds Statistics, supra
footnote 7.
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In connection with these proposed amendments, we propose to define
the term ``digital asset'' as an asset that is
[[Page 53847]]
issued and/or transferred using distributed ledger or blockchain
technology (``distributed ledger technology''), including, but not
limited to, so-called ``virtual currencies,'' ``coins,'' and
``tokens.'' These types of assets also are commonly referred to as
``crypto assets.'' \111\ We view these terms as synonymous. We are
proposing the term and definition to be consistent with the SEC's
recent statement on digital assets, and we believe that such term and
definition would provide a consistent understanding of the type of
assets we intend to address.\112\ The SEC proposed to add the same term
and definition to SEC's section of Form PF in the 2022 SEC Form PF
Proposal.\113\ The definition is designed to help ensure that advisers
report digital asset strategies accurately.
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\111\ See e.g., FSOC 2021 Annual Report, at 184-185, available
at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf (noting that another industry term for
``digital asset'' is ``crypto asset'').
\112\ See Custody of Digital Asset Securities by Special Purpose
Broker-Dealers, Exchange Act Release No. 90788 (Dec. 23, 2020) [86
FR 11627 (Feb. 26, 2021)], at n.1.
\113\ 2022 SEC Form PF Proposal, supra footnote 13.
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We request comment on the proposed amendments.
70. Should Form PF direct advisers to report information about the
reporting fund's strategies on the last day of the reporting period, as
proposed? Would this proposed amendment improve data quality, and
reduce ambiguity?
71. Should Form PF continue to provide that the strategies are
mutually exclusive and direct advisers to not report the same assets
under multiple strategies, as it currently does? Alternatively, should
Form PF allow advisers to report the same assets under multiple
strategies?
72. Should Form PF include more, fewer, or different categories?
Would the proposed categories improve reporting accuracy and data
comparability across advisers? Are there other strategies that are
important to track for assessing systemic risk or for the protection of
investors?
73. Are there categories that advisers report in the ``other''
category that Form PF should include as their own categories? Should we
remove the ``other'' category?
74. Should we require more specific disclosure of what each digital
asset represents? If so, what kinds of descriptions would be needed and
in what detail? For example, should the description include the rights
the digital asset provides to the holder? Should Form PF distinguish,
for example, between digital assets that represent an ability to
convert or exchange the digital asset for fiat currency or another
asset, including another digital asset, and those that do not represent
such a right to convert or exchange? For those digital assets that
represent a right to convert or exchange for fiat currency or another
digital asset, should we distinguish between those where the redemption
obligation is supported by an unconditional guarantee of payment, such
as some ``central bank digital currencies,'' and those digital assets
redeemable upon demand from the issuer, whether or not collateralized
by a pool of assets or a reserve? Should we identify digital assets
that do not represent any direct or indirect obligation of any party to
redeem or those that represent an equity, profit, or other interest in
an entity?
75. Should Form PF define or re-define any terms that are listed as
a proposed strategy?
Should Form PF define ``digital asset,'' as proposed? If not,
please identify alternative elements that would better identify the
digital assets held by private funds. Should Form PF use the term
``crypto asset'' instead of the term ``digital asset''?
76. Some reporting funds report as hedge funds, but may hold
commodities that are not securities or may hold commodity derivatives
such as bitcoin futures that would make them a commodity pool. Should
Form PF include categories for funds that hold digital assets
regardless of how the fund characterizes itself based on the assets it
is holding or would the proposed categories (other than the ``other''
category) apply?
77. If advisers select the ``other'' category, should Form PF
require them to explain the selection, as proposed? Should Form PF
require the adviser to include more, less, or different information in
the explanation?
78. Should Form PF require advisers to provide explanations for any
other categories besides the ``other'' category, as proposed? For
example, if advisers report digital assets, should Form PF require
advisers to provide the name of the digital asset, or describe the
characteristics of the digital asset?
Counterparty exposures. Counterparty exposure informs the
Commissions and FSOC of the interconnectedness of hedge funds with the
broader financial services industry, which is a critical part of
systemic risk assessment and investor protection efforts. Understanding
counterparty exposures allows the Commissions and FSOC to assess who
may be impacted by a reporting fund's failure, and which reporting
funds may be impacted by a counterparty's failure. Counterparty
exposure concerning central clearing counterparties (``CCPs'') is of
importance to FSOC's systemic risk assessment efforts as evidenced by
the fact that FSOC has designated many CCP institutions as
``systemically important,'' and recommended that regulators continue to
coordinate to evaluate threats from both default and non-default losses
associated with CCPs.\114\
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\114\ Form PF defines ``CCP'' as central clearing counterparties
(or central clearing houses) (for example, CME Clearing, The
Depository Trust & Clearing Corporation, Fedwire and LCH Clearnet
Limited). See Financial Stability Oversight Council, 2012 Annual
Report, Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf. (concerning the designations);
Financial Stability Oversight Council, 2021 Annual Report, p. 14,
available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf. (concerning the recommendation).
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The proposal would add proposed Question 26, and revise current
Questions 22 and 23, and redesignate them as proposed Questions 27 and
28, to provide better insight into hedge funds' borrowing and financing
arrangements with counterparties, including CCPs. Proposed Question 26
would require advisers to hedge funds (other than qualifying hedge
funds) to complete a new table (the ``consolidated counterparty
exposure table'') concerning exposures that (1) the reporting fund has
to creditors and counterparties, and (2) creditors and other
counterparties have to the reporting fund.\115\ Advisers would report
the U.S. dollar value of the reporting fund's ``borrowing and
collateral received (B/CR),'' as well as its ``lending and posted
collateral (L/PC),'' aggregated across all counterparties, including
CCPs, as of the
[[Page 53848]]
end of the reporting period.\116\ The form would explain what exposures
to net.\117\ Advisers would classify information according to type
(e.g., unsecured borrowing, secured borrowing, derivatives cleared by a
CCP, and uncleared derivatives) and the governing legal agreement
(e.g., a prime brokerage or other brokerage agreement for cash margin
and securities lending and borrowing, a global master repurchase
agreement for repo/reverse repo, and International Swaps and
Derivatives Association (``ISDA'') master agreement for synthetic long
positions, ``synthetic short positions,'' and derivatives).\118\
Advisers would report transactions under a master securities loan
agreement as secured borrowings. Advisers would check a box if one or
more prime brokerage agreements provide for cross-margining of
derivatives and secured financing transactions. If advisers check the
box, we propose to include instructions about how to report secured
financing and derivatives in the consolidated counterparty exposure
table.
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\115\ Qualifying hedge funds would not complete this table
because section 2 would be revised to include similar questions that
require additional detail. See discussion at Section II.C of this
Release. Together the proposed questions in section 1c and similar
questions at section 2 would allow the Commissions and FSOC to
consolidate information relating to hedge funds' and qualifying
hedge funds' arrangements with creditors and other counterparties,
to support systemic risk assessment and investor protection efforts.
We propose to define the term ``consolidated counterparty exposure
table'' in the Form PF Glossary of Terms. For hedge funds, other
than qualifying hedge funds, it would mean the section 1c table (at
proposed Question 26) that collects the reporting fund's borrowing
and collateral received and lending and posted collateral aggregated
across all creditors and counterparties as of the end of the
reporting period. For qualifying hedge funds, it would mean the
section 2 table (at proposed Question 41) that collects the
reporting fund's borrowing and collateral received and lending and
posted collateral aggregated across all creditors and counterparties
as of the end of the reporting period.
\116\ We would define ``borrowing and collateral received (B/
CR)'' and ``lending and posted collateral (L/PC)'' in the Form PF
Glossary of Terms. We are proposing these definitions based on our
understanding of borrowing and lending and to help ensure data
quality and comparability. We also propose to amend the term ``gross
notional value'' to provide more detail on how to report it to aid
advisers completing the consolidated counterparty exposure table.
See proposed Form PF Glossary of Terms.
\117\ Advisers would net the reporting fund's exposure with each
counterparty and among affiliated entities of a counterparty to the
extent such exposures may be contractually or legally set-off or
netted across those entities or one affiliate guarantees or may
otherwise be obligated to satisfy the obligations of another under
the agreements governing the transactions. We would include
instructions providing that netting must be used to reflect net cash
borrowed from or lent to a counterparty, but must not be used to
offset securities borrowed and lent against one another, when
reporting prime brokerage and repo/reverse repo transactions. These
instructions are designed to help ensure data quality and
comparability. See proposed Question 26.
\118\ We propose to define ``ISDA'' as the International Swaps
and Derivatives Association. We also propose to define ``synthetic
short positions'' in the Form PF Glossary of Terms (see the proposed
Form PF Glossary of Terms for the proposed definition). We are
proposing this definition based on our understanding of the
instruments and to help ensure data quality to aid comparability.
See also supra footnote 78 (discussing the proposed definition of
``synthetic long position'').
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Form PF would continue to require advisers to report information
about individual counterparties that present the greatest exposure to
and from hedge funds.\119\ Under the proposal, however, advisers to
qualifying hedge funds would not complete proposed Questions 27 and 28,
if they complete certain similar questions in Form PF section 2, to
avoid duplication.\120\ We also propose to revise current Questions 22
and 23 to improve data quality.
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\119\ See current Questions 22 and 23, and proposed Questions 27
and 28.
\120\ See proposed Questions 42 and 43 in Form PF section 2, and
supra footnote 115.
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Although current Questions 22 and 23 provide instructions
on how to identify the counterparties, we understand that advisers have
been using different methodologies to identify them, and have
misidentified lending relationships, which has limited the utility and
comparability of the reported information. Therefore, we propose to
provide more detailed instructions for advisers to use to identify the
individual counterparties. For both proposed Questions 27 and 28,
advisers would use the calculations from the consolidated counterparty
exposure table to identify the counterparties.\121\ This proposed
amendment is designed to help ensure that the Commissions' and FSOC's
analysis can identify true data differences, without the distraction of
methodology differences, which can suggest differences where there are
none, and reduce circumstances where advisers would misidentify lending
relationships.
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\121\ See proposed Question 26 for the consolidated counterparty
exposure table. The proposal would define new terms related to the
consolidated counterparty exposure table: ``cash borrowing
entries,'' ``cash lending entries,'' ``collateral posted entries,''
and ``collateral received entries.'' See proposed Form PF Glossary
of Terms.
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Proposed Question 27 would require advisers to identify
each creditor or other counterparty (including CCPs) to which the
reporting fund owes a certain amount (before posted collateral) equal
to or greater than either (1) five percent of net asset value as of the
data reporting date or (2) $1 billion. If there are more than five such
counterparties, the adviser only would report the five counterparties
to which the reporting fund owes the largest dollar amount, before
taking into account collateral that the reporting fund posted. If there
are fewer than five such counterparties, the adviser only would report
the counterparties that meet the threshold. For example, if only three
counterparties meet the threshold, the adviser would report only three
counterparties. This would be a change from current Question 22, which
requires advisers to identify five counterparties to which the
reporting fund has the greatest mark-to-market net counterparty credit
exposure, regardless of the actual size of the exposure. The proposed
threshold is designed to highlight two different, significant,
potentially systemic, risks: five percent of net asset value represents
an amount of borrowing by a reporting fund that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Additionally, the $1 billion represents an amount that, in the case of
a very large fund, may not represent five percent of its net assets,
but may be large enough to create stress for certain of its
counterparties.
Proposed Question 28 would require advisers to provide
information for counterparties to which the reporting fund has net
mark-to-market counterparty credit exposure which is equal to or
greater than either (1) five percent of the reporting fund's net asset
value as of the data reporting date or (2) $1 billion, after taking
into account collateral received or posted by the reporting fund. If
there are more than five such counterparties, the adviser would only
report the five to which the reporting fund has the greatest mark-to-
market exposure after taking into account collateral received. If there
are fewer than five such counterparties, the adviser only would report
the counterparties that meet the threshold. This would be a change from
current Question 23, which requires advisers to identify five
counterparties to which the reporting fund has the greatest mark-to-
market net counterparty credit exposure, regardless of the actual size
of the exposure. The proposed threshold is designed to represent an
amount of lending from a reporting fund that, if a default occurred,
could cause a significant loss that could result in a forced unwind and
forced sales from the reporting fund's portfolio. Furthermore, we
believe that the five percent threshold level would be large enough to
constitute a shock to a reporting fund's net asset value and is an
often-used industry metric. The $1 billion threshold represents an
amount that, in the case of a very large counterparty, may not
represent five percent of its net assets, but may be large enough to
create stress for the reporting fund.
Currently, advisers report exposures that the reporting
fund has to counterparties as a percentage of the reporting fund's net
asset value, and advisers report exposures that counterparties have to
the reporting fund in U.S. dollars.\122\ We propose to require advisers
to report both data sets in U.S. dollars for consistency and
comparability.\123\
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\122\ See current Questions 22 and 23.
\123\ See proposed Questions 27 and 28.
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[[Page 53849]]
We propose to require advisers to report the amount of
collateral posted, to help inform the Commissions and FSOC of the
potential impact of a reporting fund or counterparty default.
We also propose to require advisers to report the
counterparty's LEI, if it has one, to help identify counterparties and
more efficiently link data from other data sources that use this
identifier.
Advisers would continue to indicate if a counterparty is
affiliated with a major financial institution, as Form PF currently
provides.\124\ If the financial institution is not listed on Form PF,
advisers would continue to have the option of selecting ``other'' and
naming the entity in the chart, as Form PF currently provides.
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\124\ See current Question 22 and current Question 23.
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However, we propose to require the adviser to also describe the
financial institution in Question 4. This proposed amendment is
designed to help the Commissions and FSOC efficiently and accurately
identify the entity, without having to contact advisers individually.
Together, the proposed amendments are designed to allow the
Commissions and FSOC to identify and align sources of borrowing and
lending to identify significant counterparty exposures, so that
different styles of borrowing would not be not obscured by methodology
differences or misidentified lending relationships, based on our
experience with the form. We request comment on the proposed
amendments.
79. Would the proposed amendments help us and FSOC identify which
advisers and reporting funds may have counterparty credit risk in the
event of a counterparty failure (including CCP failure) or other market
event that affects performance by prime brokers or other counterparties
(including CCPs)? Is there a better way to meet these objectives?
80. Are the proposed consolidated counterparty exposure table, its
instructions, and defined terms clear? Could they be clearer? Are there
circumstances not contemplated by the instructions that need to be
addressed? Is there an easier way for advisers to report counterparty
exposures that would provide comparable data? Should Form PF define the
terms ``counterparty exposure table,'' ``borrowing and collateral
received (B/CR),'' ``lending and posted collateral (L/PC),''
``synthetic short position,'' ``cash borrowing entries,'' ``cash
lending entries,'' ``collateral posted entries,'' ``collateral received
entries,'' and redefine ``gross notional value,'' as proposed? For
example, should ``synthetic short position'' provide a different list
of assets to be included or excluded? Should Form PF define or redefine
more, fewer, or different terms?
81. Should Form PF require advisers to identify more or less than
only significant counterparty exposures? Is the proposed threshold for
identifying the counterparties with the most significant exposure to
and from the reporting fund the right threshold? Does it represent an
amount of borrowing from a reporting fund that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio?
Is there a different threshold that would meet this objective? Should
advisers report all counterparties that meet the threshold, even if
there are more than five such counterparties? Should advisers report
the five counterparties that the reporting fund has the greatest
exposure to and from, even if they don't meet the proposed threshold?
82. Should Form PF provide more detailed instructions for advisers
to use to identify the individual counterparties, as proposed? Could
the instructions be clearer? If Form PF should have less detailed
instructions on how to identify the counterparties, how could the
Commissions and FSOC help ensure that the data would be comparable?
83. Should we require advisers to report values in U.S. dollars, as
proposed? Alternatively, should Form PF require advisers to report
values as a percentage of the reporting fund's net asset value? Should
Form PF require advisers to report amounts as both U.S. dollars and as
a percentage of the reporting fund's net asset value, or another way?
84. Should Form PF require advisers to report collateral posted, as
proposed? Would the proposed amendment help inform the Commissions and
FSOC of the potential impact of a reporting fund or counterparty
default? Is there a better way to meet this objective?
85. Should Form PF require advisers to report the counterparty's
LEI, if it has one?
86. If an adviser selects ``other,'' should we require the adviser
to describe the entity in Question 4? Alternatively, should we
eliminate the ``other'' category?
Trading and clearing mechanisms. We propose to revise how advisers
report information about trading and clearing mechanisms.\125\ These
types of data inform the Commissions and FSOC of the extent of private
fund activities that are conducted on and away from regulated exchanges
and clearing systems, which is important to understanding systemic risk
that could be transmitted through counterparty exposures.\126\ We
propose to require advisers to report (1) the value traded and (2) the
value of positions at the end of the reporting period, rather than
requiring advisers to report information as a percentage in terms of
value and trade volumes, as Form PF currently requires.\127\ This
proposed change is designed to simplify reporting because advisers
would compute the value before they convert it into a percentage;
therefore, this proposed change would eliminate an extra calculation
for advisers. It also is designed to provide the Commissions and FSOC
with data that can be more efficiently compared and aggregated among
advisers and other data sources. With data in dollar values, the
Commissions and FSOC could more effectively estimate the size, extent,
and pace of each hedge fund's participation in activity on or away from
regulated exchanges and clearing systems in relation to total values.
Understanding the size of hedge fund participation in activity on and
away from regulated exchanges and clearing systems is important to
assessing systemic risk, because activity that takes place on regulated
exchanges and clearing systems presents different risks than activity
that takes places away from regulated exchange and clearing systems.
For example, activity that takes place away from a regulated exchange
or clearing system may be less transparent, and may present more credit
risk than activity that takes place on a regulated exchange and a
clearing system that acts as a central counterparty that guarantees
trades.
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\125\ See current Questions 24, and 25, which we would
redesignate as proposed Questions 29 and 30.
\126\ See supra footnote 114 and accompanying text (discussing
the role of CCPs); 2011 Form PF Adopting Release, supra footnote 3,
at n.228, and accompanying text.
\127\ Proposed Question 29 would specify that ``value traded''
is the total value in U.S. dollars of the reporting fund's
transactions in the instrument category and trading mode during the
reporting period. Proposed Question 29 also would specify that, for
derivatives, value traded would be the weighted average of the
notional amount of aggregate derivatives transactions entered into
by the reporting fund during the reporting period, except for the
following: (1) for options, advisers would use the delta adjusted
notional value, and (2) for interest rate derivatives, advisers
would use the ``10-year bond equivalent.'' This measurement is
designed to track standard industry convention. We propose to add
the term ``10-year bond equivalent'' to the Form PF Glossary of
Terms, as discussed in section II.C.2 of this Release. See infra
footnote 159.
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We also propose to require advisers to report information about
trading and clearing mechanisms for transactions in
[[Page 53850]]
interest rate derivatives separately from other types of derivatives.
Form PF data show that interest rate derivatives represent the largest
gross investment exposure of qualifying hedge funds.\128\ Therefore,
this amendment is designed to help ensure that the Commissions and FSOC
can identify risks of such a significant volume of activity on and away
from regulated exchanges and clearing systems, without the data being
obscured by other types of derivatives. The proposal would require
advisers to report interest rate derivatives and other types of
derivatives, by indicating the estimated amounts that were (1) traded
on a regulated exchange or swap execution facility, (2) traded over-
the-counter and cleared by a CCP, and (3) traded over the counter or
bilaterally transacted (and not cleared by a CCP). These proposed
categories reflect our understanding of how derivatives may be traded.
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\128\ See Private Funds Statistics, supra footnote 7.
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The proposal would continue to require advisers to report clearing
information concerning repos, but would specify how to report sponsored
repos, and would specify that advisers must report reverse repos with
repos.\129\ According to the Fixed Income Clearing Corporation
(``FICC''), FICC's sponsored repo service has expanded in 2017 and
2019, ultimately resulting in daily volume up to $300 million per day
as of 2021, with a peak in March 2020 of $564 billion.\130\ Sponsored
repos incorporate a different structure than other repos, in that FICC
serves as a counterparty to any sponsored trade and the sponsored
member bears responsibility for meeting the obligations of the
sponsored member on all transactions that it submits for clearing.
Adding a particular reference to sponsored repos would ensure that
advisers understand how sponsored repos cleared by a CCP should be
reported, i.e., as trades cleared at a CCP.\131\ Therefore, we propose
to provide a separate line item for sponsored repos. The proposed
amendment is designed to improve data quality concerning repos and
sponsored repos, to allow the Commissions and FSOC to conduct more
accurate and targeted systemic risk assessments and analysis concerning
investor protection efforts. We also propose to specify that advisers
must report reverse repos with repos. Current Question 24 requires
advisers to report ``repos,'' which some advisers could interpret to
include reverse repos, while others could interpret as excluding
reverse repos. Therefore, this proposed amendment is designed to
improve data quality.\132\
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\129\ The proposal also would explain that ``repo'' means
``securities in'' transactions and ``reverse repo'' means
``securities out'' transactions. Sponsored repos and sponsored
reverse repos would apply to transactions in which the reporting
fund has been sponsored by a sponsoring member of the Fixed Income
Clearing Corporation. We would revise how Form PF explains tri-party
repos to help ensure they do not exclude sponsored tri-party repos.
Currently, Form PF explains that a tri-party repo applies where repo
collateral is held at a custodian (not including a CCP) that acts as
a third party agent to both the repo buyer and the repo seller. We
propose to amend Form PF so it would explain that tri-party repo
would apply where the repo or reverse repo collateral is executed
using collateral management and settlement services of a third party
that does not act as a CCP. See Form PF Glossary of Terms (modifying
the terms ``repo'' and ``reverse repo'') and Question 29
instructions (discussing sponsored repos, sponsored reverse repos,
and tri-party repos).
\130\ See FICC Sponsored Repo in 2021, by DTCC Connection Staff
(Feb. 9, 2021), available at https://www.dtcc.com/dtcc-connection/articles/2021/february/09/ficc-sponsored-repo-in-2021.
\131\ Current Question 24.
\132\ See proposed Question 29.
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The proposal also would revise current Question 25, which requires
advisers to report the percentage of the reporting fund's net asset
value related to transactions not described in current Question 24,
which we would redesignate as proposed Question 29. The proposal would,
instead, require advisers to report both the value traded and the
position value as of the end of the reporting period for transactions
not described in proposed Question 29. These amendments are designed to
make proposed Question 30 data comparable with data from proposed
Question 29, so that together, Questions 29 and 30 would provide the
Commissions and FSOC with a complete data set of the adviser's trading
and clearing mechanisms during the reporting period.
We request comment on the proposed amendments.
87. Would the proposed amendments enhance analysis of clearance and
settlement, interest rate derivatives, as well as repos, reverse repos,
and sponsored repos?
88. Should Form PF require advisers to add repos and reverse repos
together when reporting information about trading and clearing
mechanisms, as proposed? Alternatively, should Form PF require advisers
to report information about repos separately from reverse repos?
89. Do the proposed reporting categories cover the types of trading
and clearing mechanisms used to trade derivatives? Should Form PF
include more or fewer trading and clearing categories?
90. Would the proposed amendments make data from proposed Questions
29 and 30 comparable, so that together, the questions would provide the
Commissions and FSOC with a complete data set of the adviser's trading
and clearing mechanisms during the reporting period? Is there a better
way to meet this objective?
91. Would the proposal to require advisers to report the value
traded and the value of positions as of the end of the reporting period
improve our ability to aggregate data and compare data among advisers?
Would requiring the values, instead of the percentages, provide the
Commissions and FSOC with a view into the extent of exposures across
reporting funds, which would inform the Commissions and FSOC as to how
much value would be at stake, given a market event? Are there better
ways to meet these objectives?
92. Should we amend the terms ``repo'' and ``reverse repo,'' as
proposed? Are the proposed definitions more consistent with how the
private fund industry understands repos and reverse repos? If not, how
should we define the terms, and would such definitions be consistent
with how the Commissions use the terms in other contexts? Should Form
PF refer to sponsored repos, as proposed?
Removing Certain Questions Concerning Hedge Funds. We propose to
remove current Questions 19 and 21 from the form. Current Question 19
requires advisers to hedge funds to report whether the hedge fund has a
single primary investment strategy or multiple strategies. Proposed
Question 25, which requires hedge fund advisers to disclose certain
information about each investment strategy, would provide this
information, as discussed above in this section II.B.3 of the Release.
We also propose to remove current Question 21, which requires hedge
fund advisers to approximate what percentage of the hedge fund's net
asset value was managed using high frequency trading strategies. We
believe the form's question on portfolio turnover, with proposed
revisions, would better inform our and FSOC's understanding of the
extent of trading by large hedge fund advisers and would better show
how larger hedge funds interact with the markets and provide trading
liquidity.\133\
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\133\ See proposed revisions to current Question 27, as
discussed in section II.C of this Release.
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We request comments on the proposed amendments.
93. Should we remove current Questions 19 and 21, as proposed?
Alternatively, should Form PF keep current Question 21, but revise it
to improve data quality? For example,
[[Page 53851]]
should Form PF define ``high frequency trading?''
94. Does the turnover data Form PF would collect provide more
informative data than current Question 21, which we propose to remove?
95. Should Form PF require advisers to report more or less turnover
data? For example, should Form PF require only large hedge fund
advisers to report the value of turnover during the month for the
qualifying hedge funds that they advise, as proposed, or should Form PF
require such information for all advisers who advise hedge funds of any
size?
96. Should Form PF remove any other questions that would be
answered by other questions that would provide the same or more useful
data?
C. Proposed Amendments Concerning Information About Hedge Funds Advised
by Large Private Fund Advisers
A private fund adviser must complete section 2 of Form PF if it had
at least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding the
adviser's most recently completed fiscal quarter.\134\ This section
requires additional information regarding the hedge funds these
advisers manage, which is tailored to focus on relevant areas of
financial activity that have the potential to raise systemic concerns.
We are proposing several amendments to this section, including
amendments that would remove aggregate reporting in section 2a, which
we have found to be less meaningful for analysis and more burdensome
for advisers to report, while preserving and enhancing reporting on a
per fund basis in section 2b. We also propose to retain certain
questions previously reported by advisers on an aggregate basis that we
believe are important for data analysis and systemic risk assessment,
but require reporting on a per fund basis. Collectively, the proposed
changes to section 2 are designed to provide better insight into the
operations and strategies employed by qualifying hedge funds and their
advisers, and improve data quality and comparability to enable FSOC to
monitor systemic risk better and enhance the Commissions' regulatory
programs and investor protection efforts. Furthermore, the proposal
would remove certain other reporting requirements that we have found to
be less useful based on our experience with Form PF since adoption,
which would help reduce reporting burdens for advisers while preserving
the Commissions' and FSOC's regulatory oversight.
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\134\ Section 2a requires a large hedge fund adviser to report
certain aggregate information about any hedge fund it advises and
section 2b requires a large hedge fund adviser to report certain
additional information about any hedge fund it advises that has a
net asset value of at least $500 million as of the last day of any
month in the fiscal quarter immediately preceding the adviser's most
recently completed fiscal quarter (a ``qualifying hedge fund'').
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Currently, the Form PF Glossary of Terms defines a ``hedge fund''
generally as any private fund (other than a securitized asset fund):
(a) with respect to which one or more investment advisers (or
related persons of investment advisers) may be paid a performance fee
or allocation calculated by taking into account unrealized gains (other
than a fee or allocation the calculation of which may take into account
unrealized gains solely for the purpose of reducing such fee or
allocation to reflect net unrealized losses);
(b) that 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
(c) that may sell securities or other assets short or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration).\135\
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\135\ See current Form PF Glossary of Terms for the complete
definition.
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The definition is designed to include any private fund having any
one of three common characteristics of a hedge fund: (1) a performance
fee that takes into account market value (instead of only realized
gains); (2) leverage; or (3) short selling. We request comment on
whether we should amend the definition of ``hedge fund'' as such term
is defined in the Form PF Glossary of Terms in order to address
potential data mismatches and improve data quality. Specifically, we
request comment on the following:
97. We understand that some reporting funds may consider themselves
``private equity funds,'' but advisers report them as hedge funds as
Form PF directs because the reporting fund's governing documents permit
the fund to engage in certain borrowing and short selling (even though
it did not do so at any time in the past, for example, 12 months) (a
``deemed hedge fund'' for purposes of this Release). Should we amend
the definition of ``hedge fund'' in the Form PF Glossary of Terms so
that such deemed hedge funds report as private equity funds and not
hedge funds? If so, how? Would such changes improve data quality by
excluding private equity strategies from reporting as hedge funds and
instead requiring such funds to report as private equity funds? If so,
and if we were to amend the definition of ``hedge fund'' in Form PF,
should we amend it for all purposes under Form PF or only certain
sections such as sections 1 and 2? Should we concurrently make
conforming definitional changes to any other forms, such as Form ADV
(or alternatively amend Form ADV so it would reference any revised
definition of ``hedge fund'' in Form PF)?
98. As an example, should we amend the definition of ``hedge fund''
so that, to qualify as a hedge fund under the leverage prong of the
definition, a fund would have to continue to satisfy subsection (b) of
the definition, but also must have actually borrowed or used any
leverage during the past 12 months, excluding any borrowings secured by
unfunded commitments (i.e., subscription lines of credit); \136\ and to
qualify as a hedge fund under the short selling prong of the
definition, the fund must have actually engaged in the short selling
activities described in subsection c of the definition during the past
12 months? \137\ If we were to amend the definition, would excluding
actual borrowings secured by unfunded commitments (i.e., subscription
lines of credit) appropriately exclude private equity funds, which
typically engage in such borrowings? Should any amended definition
require actual borrowing or short selling in the last 12 months?
Alternatively, should any amended definition require a longer or
shorter time period, such as 18 months or nine months, or different
time periods for borrowing versus short selling?
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\136\ Subsection (b) of the current definition of ``hedge fund''
states that a hedge fund is any private fund (other than a
securitized asset fund) that 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). See current Form PF Glossary of
Terms.
\137\ Subsection (c) of the current definition of ``hedge fund''
states that a hedge fund is any private fund (other than a
securitized asset fund) that may sell securities or other assets
short or enter into similar transactions (other than for the purpose
of hedging currency exposure or managing duration). See current Form
PF Glossary of Terms.
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99. Should any amended definition include a requirement for the
reporting fund to provide redemption rights in the ordinary course or
exclude actual portfolio company guarantees in the past 12 months (or
some other time period)? What other alternative changes to any amended
definition of ``hedge fund'' do you suggest?
100. Should any revised definition specify that subscription lines
of credit encompass both short term and long term subscription lines of
credit? If so,
[[Page 53852]]
should we specify what constitutes ``short term'' and ``long term''?
For example, should ``short term'' mean three to six months, or less
than the life of the fund, and should ``long term'' mean longer than
six months, or the life of the fund?
101. Would it be appropriate for any amended definition of ``hedge
fund'' to continue to include commodity pools or should commodity pools
be excluded?
1. Proposed Amendments to Section 2a
Removal of aggregate reporting. We propose to eliminate the
requirement for large hedge fund advisers to report certain aggregated
information about the hedge funds they manage.\138\ Based on our
experience using data obtained from Form PF since its adoption, we have
found that aggregated adviser level information combines funds with
different strategies and activities, thus making analyses less
meaningful. Aggregation can mask the directional exposures of
individual funds (e.g., positions held by one reporting fund may appear
to be offset by positions held in a different fund). Additionally,
there can be inconsistencies between data reported in the aggregate in
section 2a and on a per fund basis in section 2b (e.g., we have
observed in some instances that the sum of fund exposures advisers
report in current Question 30 on a per fund basis exceed the aggregate
figure reported in current Question 26). We believe that aggregating
information across funds may be burdensome for some advisers because
certain advisers may keep fund records on different systems, and
``rolling-up'' the data from different sources to report on the form
may be complex and time consuming. While advisers may be required to
aggregate certain types of investment holdings across their funds for
other regulatory purposes (e.g., certain U.S. registered equities for
Form 13F reporting), advisers generally do not aggregate all portfolio
investment exposure information across their funds other than for Form
PF reporting purposes, given that counterparties, markets, and
investors tend to interact with funds on an individual basis and not in
the aggregate at the adviser level.
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\138\ We propose to remove section 2a and redesignate section 2b
as section 2. In connection with the proposed removal of section 2a,
we propose to revise the general instructions to make corresponding
changes (including amending Instruction 3 to reflect the proposed
removal of section 2a), and propose to revise current Question 27
(reporting on the value of turnover in certain asset classes in
advisers' hedge funds' portfolios) and current Question 28
(reporting on the geographical breakdown of investments held by
advisers' hedge funds), move each of these questions to new section
2, and redesignate them as Question 34 and Question 35,
respectively. Furthermore, in connection with the proposed changes,
we would revise the term ``sub-asset class'' so it no longer refers
to Question 26, which the proposal would remove.
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We do not believe that removing section 2a would result in a
meaningful deterioration in the information collected because the vast
majority of gross hedge fund assets on which advisers report in the
aggregate in section 2a constitute the gross assets of qualifying hedge
funds that are reported in section 2b. For example, large hedge fund
advisers reported total gross notional exposure for qualifying hedge
funds in section 2b that constituted approximately 91 percent of the
total gross notional exposure reported on an aggregate basis by large
hedge fund advisers in section 2a as of the same date.\139\
Furthermore, as discussed in section II.B.3. above, we are also
proposing to enhance reporting for all hedge funds in section 1
(particularly section 1c), which we believe would mitigate against
potential data gaps that could result from the removal of section 2a,
given that advisers currently report information on all their hedge
funds in section 2a but only report on qualifying hedge funds in
section 2b. Additionally, certain information collected in section 2a
is duplicative of information already collected on a per fund basis in
section 2b.\140\ By continuing to require reporting on a per fund
basis, information reported in section 2b would allow the Commissions
and FSOC to compile aggregate figures.\141\
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\139\ As noted above, based on experience with Form PF since
adoption, we have found information gathered in section 2a for the
remaining 9 percent of funds to not be very useful given that it is
aggregated data across different funds.
\140\ For example, Question 26 of section 2a requires large
hedge fund advisers to report aggregated information on exposure to
different types of assets, which is effectively the same exposure
information reported on a per fund basis for each qualifying hedge
fund in current Question 30 of section 2b.
\141\ Additionally, we are proposing to move current Question 31
(base currency) currently required only for qualifying hedge funds
to section 1b. We are also proposing to enhance section 1c to
require more detailed information about hedge funds' borrowing and
financing arrangements (including posted collateral) and also
proposing to revise current Question 25 and current Question 26 to
require end of period reporting of the value of certain instrument
categories (including listed equities, interest rate derivatives and
other derivatives, and repo/reverse repos).
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We request comments on the proposed amendments.
102. Should we remove aggregate reporting by eliminating section 2a
as proposed? Alternatively, should we retain a subset of the questions
in section 2a to be reported on an aggregate basis? If so, which
questions and why?
103. Do you agree that counterparties, markets, and investors tend
to look at funds on an individual basis and not in the aggregate at the
adviser level and as such the proposed removal of section 2a would
reduce the burden on advisers having to report fund level data on an
aggregated basis?
104. Do you agree that aggregating information across funds may be
burdensome for some advisers? Do some advisers maintain fund records on
different systems such that ``rolling-up'' the data from different
sources to report on the form would be complex and time consuming?
2. Proposed Amendments to Section 2b
Current section 2b requires a large hedge fund adviser to report
certain additional information about any hedge fund it advises that is
a qualifying hedge fund.\142\ As noted in the 2011 Form PF Adopting
Release, information reported in section 2b 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 aids FSOC in
its monitoring of credit counterparties' unsecured exposure to hedge
funds as well as hedge funds' exposure and ability to respond to market
stresses and interconnectedness with CCPs. Based on our experience with
the data since Form PF was first adopted and our consultations with
FSOC, we are proposing to amend section 2b to do the following:
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\142\ In connection with the proposed amendments, we propose to
redesignate section 2b as section 2.
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(1) Enhance, expand, and simplify investment exposure reporting;
(2) Revise open and large position reporting;
(3) Revise borrowing and counterparty exposure reporting;
(4) Revise market factor effects reporting; and
(5) Make certain other changes designed to streamline and enhance
the value of data collected on qualifying hedge funds by: (a) adding
reporting on currency exposure, turnover, country and industry
exposure; (b) adding new reporting on CCPs; (c) streamlining risk
metric reporting and collecting new information on investment
performance by strategy and portfolio correlation; and (d) enhancing
portfolio and financing liquidity reporting.
a. Investment Exposure Reporting.
Reporting on qualifying hedge fund exposures to different types of
assets has been critical in helping to monitor the composition of hedge
fund exposures over time, particularly as it relates to
[[Page 53853]]
systemic risk monitoring. The proposal would (1) replace the table
format of current Question 30, which we would redesignate as Question
32, with narrative instructions and a ``drop-down'' menu while also
revising the instructions to specify how to report certain positions,
(2) require reporting based on ``instrument type'' within sub-asset
classes to identify whether the fund's investment exposure is achieved
through cash or physical investment exposure, through derivatives or
other synthetic positions, or indirectly (e.g., through a pooled
investment such as an ETF, an investment company, or a private fund),
(3) require the calculation of ``adjusted exposure'' for each sub-asset
class (i.e., require (in addition to value as currently reported) the
calculation of ``adjusted exposure'' for each sub-asset class that
allows netting across instrument types representing the same reference
asset within each sub-asset class, and, for fixed income, within a
prescribed set of maturity buckets), (4) require uniform interest rate
risk measure reporting for sub-asset classes that have interest rate
risk (while eliminating the current option to report one of duration,
weighted average tenor (WAT) or 10-year equivalents), and (5) amend the
list of reportable sub-asset classes consistent with these other
changes and collect enhanced information for some asset types.\143\
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\143\ In connection with the proposed amendments, we also
propose to remove Question 44, which under the proposal would be
duplicative of the new reporting requirements in proposed Question
32.
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Narrative reporting instructions and additional information on how
to report. The proposal would replace the existing complex table in
current Question 30 with reporting instructions that would use a series
of ``drop-down'' menu selections for each sub-asset class and the
applicable information required for each sub-asset class. This approach
is similar to the narrative instructions (and drop-down menus) already
in effect for current section 3 with respect to liquidity fund position
reporting.\144\ We believe that these changes and new format would
simplify and specify how to report the required information in proposed
Question 32. Additionally, the proposed changes may reduce filer
burdens compared to the current form because advisers are currently
required to enter ``N/A'' in each field for which there is not a
relevant position, while the proposal would only require advisers to
provide information for sub-asset classes in which their qualifying
hedge funds hold relevant positions. Furthermore, the proposal would
require advisers to report the absolute value of short positions,
include positions held in side-pockets as positions of the reporting
fund, and include any closed out and OTC forward positions that have
not yet expired or matured.
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\144\ See Form PF, Section 3, Question 63(f) and (g).
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We propose to amend the instructions to current Question 30 to
specify how advisers should classify certain positions. Specifically,
the proposed instructions would require advisers to choose the sub-
asset class that describes the position with the highest degree of
precision, which we believe would result in more accurate
classification of positions and therefore better data, rather than
simply noting that any particular position should only be included in a
single sub-asset class. This proposed change is designed to instruct
advisers on how to classify positions that could be accurately
classified in multiple sub-asset classes, and is consistent with SEC
staff Form PF Frequently Asked Questions.\145\ The proposal also would
add a new instruction that directs advisers to report cash borrowed via
reverse repo as the short value of repos, and refer advisers to the
proposed revised definitions of ``repo'' and ``reverse repo'' in the
Glossary of Terms, also consistent with SEC staff Form PF Frequently
Asked Questions.\146\ We believe this proposed change would reduce
confusion on how to report repo information and help reduce filer
errors. Finally, the amended instructions also would include a revised
list of sub-asset classes.\147\
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\145\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 26.2.
\146\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 26.5. See also supra footnote 129.
\147\ The proposed amendments to this list, as well as other
changes to instructions in specific parts of proposed Question 32,
are discussed below.
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We also propose to require advisers to provide additional
explanatory information in situations where a qualifying hedge fund
reports long or short dollar value exposure to ``catch-all'' sub-asset
class categories \148\ equal to or exceeding either (1) five percent of
a fund's net asset value or (2) $1 billion.\149\ We have observed that
some funds report significant amounts of assets in these ``catch-all''
categories. We chose the five percent threshold level because we
believe it represents a level that would identify exposure that could
be material to a fund's investment performance. The $1 billion
threshold represents a level for large funds (e.g., those with net
asset values in excess of $20 billion) that is large enough so as to
have potential systemic risk implications even if the position is less
than five percent of the fund. We propose to add this explanatory
requirement to inform our understanding of significant exposure
reported in these ``other'' sub-asset classes better, which we believe
is important for assessing systemic risk.
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\148\ These sub-asset classes include: loans (excluding
leveraged loans and repos), other structured products, other
derivatives, other commodities, digital assets, and investments in
other sub-asset classes.
\149\ Some filers report significant exposure to these ``other''
categories. For example, the public Private Fund Statistics Second
Quarter 2020 (``Private Fund Statistics Q2 2020'') (Table 46) shows
about $100 billion in aggregate QHF GNE reported as ``other loans,''
more than other asset categories of interest, such as ABS/structured
products (ex. MBS but including CLO/CDOs) (about $53 billion) and
convertible bonds ($95 billion) as of 2020 Q1. See Private Fund
Statistics Q2 2020 available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2020-q2.pdf.
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We request comment on the proposed amendments.
105. Should we amend the format of current Question 30 as proposed?
Do the proposed narrative instructions clarify and simplify reporting
for advisers? Alternatively, if the proposed format creates additional
complexity for filers, should only a subset of qualifying hedge funds
be required to complete proposed Question 32? If so, what should the
threshold be and why?
106. Do you agree that the proposed changes requiring advisers to
choose the sub-asset class that describes positions with the highest
degree of precision would result in more accurate classification of
positions and therefore better data for analysis? If not, what
alternatives do you suggest?
107. Currently, most sub-asset classes (e.g., equities, corporate
bonds) are not further divided to account for exposure by the sub-asset
class to a particular country or region. Instead, other questions on
Form PF collect this information (e.g., current Question 28). Should we
further divide sub-asset classes by geographic exposure? If so, would
the separation of sub-asset classes by U.S. and non-U.S. be helpful or
would even more granularity be appropriate?
108. As an alternative to the proposed requirement that advisers
provide additional explanatory information in situations where a
qualifying hedge fund has significant exposure to ``catch-all'' sub-
asset class categories (i.e., if the long or short dollar value is
equal to or exceeds either (1) five percent of a fund's net asset value
or (2) $1 billion), should we add additional sub-asset classes to
further break out the types of instruments that are being classified in
[[Page 53854]]
these ``catch-all'' buckets? If we should add more sub-asset classes,
what should they be? Is the proposed threshold for requiring that
advisers provide additional explanatory information set at the
appropriate level? Should it be higher or lower?
109. With respect to sub-asset classes pertaining to loans, should
we add additional sub-asset classes to capture loans originated by
banks versus other entities for purposes of monitoring systemic risk?
Should we require reporting on private funds' origination activities in
a separate question that would ask whether the private fund originate
loans and if so much has it originated?
110. Should any other sub-asset classes reflected in the proposal
be broken out separately in proposed Question 32? If so, what sub-asset
classes and why?
111. Should the short dollar value of repo match borrowings by
reverse repo reported in the counterparty exposure table in Question
41, and if they do not match, should we require explanation?
112. The current instructions to Question 30 require advisers to
include closed out and OTC forward positions that have not yet expired/
matured. However, SEC staff Form PF Frequently Asked Question 44.1
states that reporting is not required for closed out positions if
closed out with the same counterparty if there is no remaining legally
enforceable obligation. Further, we understand that advisers use
different internal methods to account for closed out and OTC forward
positions not yet expired/matured, which introduces inconsistencies in
data reported on Form PF. Should we require advisers to report closed
out and OTC forward positions that have not yet expired/matured even if
closed out as suggested by the current instructions? Alternatively,
should we only require reporting unless the OTC forward positions are
closed out with the same counterparty and there is no remaining legally
enforceable obligation (consistent with our proposed revision to
Instruction 15)?
113. Is it clear in proposed Question 32 how to classify positions
in certain sub-asset classes as ``long'' or ``short'' in light of the
proposed changes to Instruction 15 \150\ with respect to classifying
positions? Should we provide additional guidance specific to proposed
Question 32? If so, what additional instructions or guidance would be
helpful?
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\150\ See discussion at Section II.D of this Release.
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114. Current Question 30 and several other current and/or proposed
questions in Section 2 of Form PF would not be necessary if large hedge
fund advisers instead filed information about each qualifying hedge
fund's portfolio positions similar to what is required by Section 3 for
large liquidity fund advisers or on Form N-PORT for registered
investment companies. Should we require, or permit, large hedge fund
advisers to file this kind of position level information for qualifying
hedge private funds instead of, or as an optional alternative to,
responding to current Question 30 and certain other questions
concerning portfolio holdings, such as position concentrations,
currency, geographic and industry exposure, and market factor testing?
For example, if in lieu of completing current Question 30 (exposure
reporting), current Question 28 (country exposure), current Question 34
(position concentration), current Question 35 (large positions), and
current Question 44 (aggregate value of derivatives positions), and
potentially additional questions including those concerning
counterparty exposures, advisers could instead choose to file position
level information, would this help alleviate the reporting burden?
Separate reporting for positions held physically, synthetically or
through derivatives and indirect exposure. The proposal would require
advisers to report the dollar value of a qualifying hedge fund's long
positions and the dollar value of the fund's short positions in certain
sub-asset classes by ``instrument type'' (i.e., cash/physical
instruments, futures, forwards, swaps, listed options, unlisted
options, and other derivative products, ETFs, exchange traded product,
U.S. registered investment companies (excluding ETFs and money market
funds), non-U.S. registered investment companies, internal private fund
or external private fund, commodity pool, or other company, fund or
entity).\151\ For each month of the reporting period, advisers would be
required to report long and short positions in these sub-asset classes
held physically, synthetically or through derivatives, and indirectly
through certain entities,\152\ separately in order to provide the
Commissions and FSOC sufficient information to understand, monitor, and
assess qualifying hedge funds' exposures to certain types of assets and
investment products. The current instructions (and the associated
definitions) require advisers to combine exposure held physically,
synthetically, or through
[[Page 53855]]
derivatives when reporting certain fixed income and other sub-asset
classes.\153\ Even when certain sub-asset classes currently separate
physical and derivative exposure (e.g., listed equities), all
derivative instrument types are combined regardless of each derivative
instrument type's risk characteristics. Furthermore, the form's current
instructions for reporting investment exposure obtained through funds
or other entities are different. For example, instructions require
advisers to categorize ETFs based on the assets the ETF holds, while
other registered investment companies are reported as a separate sub-
asset class, and may obscure the extent of a reporting fund's exposure
to particular sub-asset classes. This difference and lack of
granularity in reporting makes it difficult to understand the
activities of qualifying hedge funds and limits the utility of data
collected for purposes of understanding the role qualifying hedge funds
play in certain market events. For example, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S treasury market.
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\151\ See Form PF Glossary of Terms (proposed definition of
``instrument type''). See also proposed Question 32(a). Sub-asset
classes that would require reporting by instrument type (see
proposed Question 32(a)(1)) include: listed equity issued by
financial institutions; American Depositary Receipts; other single
name listed equity; indices on listed equity; other listed equity;
unlisted equity issued by financial institutions; other unlisted
equity, investment grade corporate bonds issued by financial
institutions (other than convertible bonds); investment grade
corporate bonds not issued by financial institutions (other than
convertible bonds); non-investment grade corporate bonds issued by
financial institutions (other than convertible bonds); non-
investment grade corporate bonds not issued by financial
institutions (other than convertible bonds); investment grade
convertible bonds issued by financial institutions; investment grade
convertible bonds not issued by financial institutions; non-
investment grade convertible bonds issued by financial institutions;
non-investment grade convertible bonds not issued by financial
institutions; U.S. treasury bills; U.S. treasury notes and bonds;
agency securities; GSE bonds; sovereign bonds issued by G10
countries other than the U.S, other sovereign bonds (including
supranational bonds); U.S. state and local bonds; MBS; ABCP; CDO
(senior or higher); CDO (mezzanine); CDO (junior equity); CLO
(senior or higher); CLO (mezzanine); CLO (junior equity); other ABS,
other structured products; U.S. dollar interest rate derivatives;
non-U.S. currency interest rate derivatives; foreign exchange
derivatives; correlation derivatives; inflation derivatives;
volatility derivatives; variance derivatives; other derivatives,
agricultural commodities; crude oil commodities; natural gas
commodities; power and other energy commodities; gold commodities;
other (non-gold) precious metal commodities; base metal commodities;
other commodities; real estate; digital assets; investments in other
sub-asset classes. These sub-asset classes are reported at the sub-
asset class level and not by instrument type (see proposed Question
30(a)(2)): leveraged loans, loans (excluding leveraged loans and
repo); overnight repo, term repo (other than overnight), open repo;
sovereign single name CDS; financial institution single name CDS;
other single name CDS, index CDS; exotic CDS; U.S. currency
holdings, non-U.S. currency holdings, certificates of deposit, other
deposits, money market funds, other cash and cash equivalents
(excluding bank deposits, certificates of deposit and money market
funds). In connection with the proposal we also propose to amend the
Glossary of Terms to (i) amend the definitions of agency securities,
convertible bonds, corporate bonds, GSE bonds, leveraged loans,
sovereign bonds, and U.S. treasury securities, in each case to
include positions held indirectly through another entity, (ii)
remove the definitions of crude oil, derivative exposures to
unlisted equities, gold, natural gas, and power, and (iii) amend the
definitions of commodities and other commodities. See Form PF
Glossary of Terms. Additionally, for foreign exchange derivatives,
advisers would report forex swaps and currency swaps separately, and
in determining dollar value, would not net long and short positions
within sub-asset classes or instrument types (with the exception of
spot foreign exchange longs and shorts).
\152\ In determining the reporting fund's exposure to sub-asset
classes for positions held indirectly through entities, the proposal
would permit advisers to allocate the position among sub-asset
classes and instrument types using reasonable estimates consistent
with its internal methodologies and conventions of service
providers. Furthermore, if a reporting fund's position in any such
entity represents less than (1) 5% of the reporting fund's net asset
value and (2) $1 billion, the proposal would permit advisers to
report an entire entity position in one sub-asset class and
instrument type that best represents the sub-asset class exposure of
the entity, unless the adviser would allocate the exposure more
granularly under its own internal methodologies and conventions of
its service providers.
\153\ We propose to require advisers to report the dollar value
of long and short positions for the sub-asset class (and not
instrument type) for following sub-asset classes: leveraged loans,
loans (excluding leveraged loans and repo); overnight repo, term
repo (other than overnight), open repo; sovereign single name CDS;
financial institution single name CDS; other single name CDS, index
CDS; exotic CDS; U.S. currency holdings, non-U.S. currency holdings,
certificates of deposit, other deposits, money market funds, other
cash and cash equivalents (excluding bank deposits, certificates of
deposit and money market funds). See proposed Question 32(a).
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We request comment on the proposed amendments.
115. Do advisers' internal risk reporting systems track long and
short positions by instrument type? Does the proposed definition of
``instrument type'' present different types of risk such that it would
be valuable to collect information separately for each instrument? Are
the proposed instrument types appropriate? Alternatively, should we
aggregate instrument types so that there are fewer options or should
there be a different set of instrument types for different sub-asset
classes? If so, what should they be?
116. Should we require reporting of dollar value by instrument type
as proposed or for fewer sub-asset classes?
117. In proposed Question 32 we would not require advisers to
report positions in certain sub-asset classes by instrument type \154\
because we understand that exposure to these sub-asset classes would
generally be held physically (e.g., currency holdings) or through a
single instrument type (e.g., repo and credit-default swaps). Should we
also require reporting by instrument type for any of these sub-asset
classes?
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\154\ See supra footnote 151.
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118. Do the proposed amendments better capture exposures to sub-
asset classes held physically, synthetically or through derivatives,
and indirectly through certain entities? If not, how should we modify
the proposal to better capture these types of exposures?
Adjusted exposure reporting. While we would continue to require
advisers to report ``gross'' long and short exposure, i.e., the dollar
value of a qualifying hedge fund's long positions and dollar value of
the fund's short positions for various sub-asset classes (and by
instrument type for certain sub-asset classes as explained above), we
propose to require advisers to also report the ``adjusted'' exposure of
long and short positions for each sub-asset class in which a fund has a
reportable position.\155\ Based on our experience, we have found that
gross exposure reporting, while useful because the information
indicates fund size on a comparable basis among funds, may inflate some
qualifying hedge funds' reported long and short exposures in a way that
does not properly represent the economic exposure and market risk of a
reporting fund's portfolio. For example, when only looking at gross
exposure, certain relative value strategies that are designed to match
long and short exposures in the same or similar (highly correlated)
assets may reflect very high leverage, but not have the same level of
risk as portfolios with less leverage but that are more exposed
directionally. Furthermore, some advisers, for purposes of managing
risk, do not view their portfolio on a ``gross'' basis because they do
not believe it provides a meaningful measure of risk. We believe that
``gross'' exposure reporting by itself presents an incomplete picture
that represents a significant data gap for purposes of systemic risk
analysis.
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\155\ Proposed Question 32(b). See also Form PF Glossary of
Terms (proposed definition of ``adjusted exposure'').
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We propose to require advisers to determine adjusted exposure for
each ``sub-asset'' using a specified methodology that is designed to
facilitate comparisons of the reported data. Specifically, the proposal
would require advisers to calculate and report ``adjusted exposure'' of
long and short positions for each sub-asset class by netting (1)
positions that have the same underlying ``reference asset'' across
``instrument type'' (i.e., cash/physical instruments, futures,
forwards, swaps, listed options, unlisted options, other derivative
products, and positions held indirectly through another entity such as
ETFs, other exchange traded products,\156\ U.S. registered investment
companies (excluding ETFs and money market funds), investments in non-
U.S. registered investment companies,\157\ other private funds,
commodity pools, or other companies, funds or entities) and (2) fixed
income positions that fall within certain predefined maturity buckets
(i.e., 0 to 1 year, 1 to 2 year, 2 to 5 year, 5 to 10 year, 10 year, 10
to 15 year, 15 year, 15 to 20 year, and 20+ year).\158\
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\156\ In connection with this proposed amendment, we also
propose to define ``exchange traded product'' as ``an investment
traded on a stock exchange that invests in underlying securities or
assets, such as an ETF or exchange traded note.'' See Form PF
Glossary of Terms. Given that the exchange traded product market has
grown significantly since Form PF was first adopted, we believe that
activity in exchange traded products may present different systemic
risks than traditional listed equities and other instruments that
might be used to obtain exposure to underlying assets owned within
an ETF. Furthermore, we believe added insight into whether the
underlying sub-asset class exposure is held through an ETF would
enhance FSOC's analysis of systemic risk associated with this asset
class.
\157\ See Form PF Glossary of Terms (proposed definition of
``investments in non-U.S. registered investment companies'').
Furthermore, we also propose to remove the term ``U.S. registered
investment companies'' from the Form PF Glossary of Terms.
\158\ See Form PF Glossary of Terms. We propose to define
``reference asset'' as a security or other investment asset to which
a fund is exposed through direct ownership (i.e., a physical or cash
position), synthetically (i.e. the subject of a derivative or
similar instrument held by the fund), or indirect ownership (e.g.,
through ETFs, other exchange traded products, U.S. registered
investment companies, non-U.S. registered investment companies,
internal private funds, external private funds, commodity pools, or
other companies, funds, or entities). An adviser may identify a
reporting fund's reference assets according to its internal
methodologies and the conventions of service providers, provided
that these methodologies and conventions are consistently applied,
do not conflict with any instructions or guidance relating to Form
PF and reported information is consistent with information it
reports internally and to investors and counterparties.
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For purposes of determining ``adjusted exposure,'' we propose to
permit cross counterparty netting consistent with information reported
by a fund internally and to current and prospective investors, because
we believe it would better reflect the fund's economic exposure. For
example, a fund with market-neutral trades may lose substantial amounts
of capital in a period of market stress if prices diverge, regardless
of the identities of the counterparties. Additionally, counterparty
identification may be
[[Page 53856]]
ambiguous for some positions, such as when a fund simply has a long
position in an equity security traded over an exchange or purchased
from a broker without the use of any financing.
Finally, if a fund does not net across all instrument types in
monitoring the economic exposure of the fund's investment positions for
purposes of internal reporting and reporting to investors, we would (in
addition to adjusted exposure determined as specified above) also
require the adviser to report adjusted exposure based on an adviser's
internal methodologies and describe in Question 4 how the adviser's
internal methodology differs from the standard approach in proposed
Question 32. This additional information would provide better insight
into how these advisers assess the economic exposure of their reporting
fund's portfolio, while still ensuring an adviser provides information
that supports our and FSOC's ability to aggregate and compare the data
across funds.
We request comment on the proposed amendments.
119. The proposal would permit advisers to net across
counterparties without limit if consistent with methodologies used for
internal reporting and reporting to investors. Is this appropriate?
Alternatively, should we only allow cross-counterparty netting to the
extent that it is permitted by legal agreement?
120. Is the proposed definition of ``reference asset'' sufficiently
clear? Should we instead propose a definition that tailors the
definition to different asset classes (e.g., repo exposures could be
netted in accordance with GAAP rules for balance sheet netting,
treasury exposures could be netted within maturity buckets)?
121. The proposed definition of ``reference asset'' specifies using
the cheapest-to-deliver security for bond futures. Should additional or
alternative approaches for bond futures be included in the proposed
definition? Are there other potentially ambiguous cases that should be
clarified? If so, what are they?
122. Is the proposed method for determining adjusted exposure
appropriate? For example, is the proposed netting of fixed income
positions that fall within certain predefined maturity buckets
appropriate? Should we identify additional or different maturity
buckets? If so, which maturity buckets?
123. As an alternative, should we instead require ETFs, exchange
traded products, U.S. and non-U.S. registered investment companies,
other private funds, commodity pools, or other companies, funds or
entities to be reported as stand-alone sub-asset classes?
Require advisers to report a uniform interest rate risk measure. We
propose to require advisers to report the 10-year zero coupon bond
equivalent \159\ for all sub-asset classes with interest rate risk (by
instrument type if applicable) \160\ rather than providing advisers
with a choice to report duration, weighted average tenor (``WAT''), or
an unspecified 10-year bond equivalent.\161\ The proposal would require
advisers to report the 10-year zero coupon bond equivalent of the
dollar value of long and short positions in each sub-asset class (and
by instrument type, if applicable) as well as for the adjusted exposure
of long and short exposures for each sub-asset class for each monthly
period.
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\159\ We are proposing a new glossary definition of 10-year bond
equivalent to explain that the term 10-year bond equivalent means
``the equivalent position in a 10-year zero coupon bond, expressed
in the base currency of the reporting fund.'' See Form PF Glossary
of Terms (proposed definition of ``10-year bond equivalent''). We
also would make a conforming change to the definition of interest
rate derivative to use this new definition.
\160\ We propose to require advisers to report the 10-year zero
coupon bond equivalent for the following sub-asset classes:
investment grade corporate bonds issued by financial institutions
(other than convertible bonds); investment grade corporate bonds not
issued by financial institutions (other than convertible bonds);
non-investment grade corporate bonds issued by financial
institutions (other than convertible bonds); non-investment grade
corporate bonds not issued by financial institutions (other than
convertible bonds); investment grade convertible bonds issued by
financial institutions; investment grade convertible bonds not
issued by financial institutions; non-investment grade convertible
bonds issued by financial institutions; non-investment grade
convertible bonds not issued by financial institutions; U.S.
treasury bills; U.S. treasury notes and bonds; U.S. agency
securities; GSE bonds; sovereign bonds issued by G10 countries other
than the U.S; other sovereign bonds (including supranational bonds);
U.S. state and local bonds; leveraged loans; loans (excluding
leveraged loans and repo); overnight repo; term repo (other than
overnight); open repo; MBS; ABCP; Senior or higher CDO; Mezzanine
CDO; Junior equity CDO; Senior or higher CLO; Mezzanine CLO; Junior
equity CLO; other ABS; other structured product; U.S. dollar
interest rate derivatives; non-U.S. currency interest rate
derivatives; and certificates of deposit. See proposed Question
32(c).
\161\ See proposed Question 32(c).
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The proposed change is designed to improve reporting and obtain
better data, because the current approach, while providing optionality,
makes it difficult to compare and aggregate data reported by different
funds effectively. Furthermore, we believe that the 10-year zero coupon
bond equivalent is commonly used by hedge fund advisers and would be a
better and more consistent measure of interest rate risk than duration,
WAT, or the current unspecified 10-year equivalent. WAT may be an
incomplete measure because it does not always reflect the presence of
options embedded in bonds or differing sensitivity to interest rate
changes in circumstances where base currencies are subject to a higher
or lower risk-free rate, and it also may not be meaningful for interest
rate derivative products. Duration can tend toward infinity for certain
derivatives, which can provide little meaning or utility. In addition,
methodologies for calculations of duration and a 10-year equivalent (if
not standardized to a zero coupon bond) may vary, which can result in
variability among calculations. Therefore, we believe that by
eliminating additional reporting options, requiring the 10-year zero
coupon bond equivalent would provide a common denominator across funds
that advisers would be able to easily calculate and that would provide
a consistent and comparable metric. In this regard, we do not believe
the proposed requirement would create an additional burden for advisers
that currently report based on a 10-year equivalent for these types of
assets, which we estimate represents roughly 40 percent of the total
number of advisers responding to Question 30.\162\
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\162\ Based on analysis of Form PF data 2021Q4 and 2020Q4.
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We request comment on the proposed amendments.
124. Are the proposed changes with respect to reporting of the 10-
year zero coupon bond appropriate? If not, what alternative do you
suggest?
125. What would be the burden on advisers of standardizing
reporting to the 10-year zero coupon bond equivalent for sub-asset
classes with interest rate risk, by instrument type?
126. Alternatively, should we use a measure other than the 10-year
zero coupon bond equivalent and if so, what measure should be used
(e.g., duration, WAT or another measure?).
127. As an alternative to the 10-year zero coupon bond equivalent,
we considered whether to standardize the interest rate risk measure to
DV01, which we would define as the gain or loss for a 1 basis point
decline in the risk-free interest rate, expressed in U.S. dollars. In
this regard, we understand that both duration and a 10-year bond
equivalent rely on an initial calculation of DV01. Would DV01 be a
better alternative for standardization to provide consistent reporting
across all funds compared to the 10-year zero coupon bond equivalent?
If DV01 is preferred, should we use a different formula (e.g., a 1
basis point increase)? If we should use a different formula,
[[Page 53857]]
what should it be and why? Would the burden on advisers of
standardizing reporting to DV01 be different than standardizing to the
10-year zero coupon bond equivalent?
128. Should we define 10-year bond equivalent in the Glossary of
Terms as ``the equivalent position in a 10-year zero coupon bond,
expressed in the base currency of the reporting fund,'' as proposed?
The glossary definition of ``interest rate derivative'' requires
reporting relating to interest rate derivatives to be presented as ``in
terms of 10-year bond-equivalents.''
129. Do you agree that the 10-year zero coupon bond equivalent is
commonly used by hedge fund advisers and would be a better and more
consistent measure of interest rate risk than duration, WAT, or the
current unspecified 10-year equivalent?
Amended list of sub-asset classes. In proposed Question 32, we
would revise the list of reportable sub-asset classes in two ways.
First, some sub-asset classes are consolidated and tailored to reflect
our proposed reporting of the dollar value of long and short positions
by instrument type. For example, sub-asset classes for listed and
unlisted equity derivatives are combined with sub-asset classes for
listed and unlisted equities, and similarly, sub-asset classes for
physical commodities and commodity derivatives are combined.\163\
Likewise, some current sub-asset classes would now be reflected as
instrument types, such as internal private funds, external private
funds and registered investment companies (now separated in to ETFs,
U.S. registered investment companies and non-U.S. registered investment
companies). Second, the proposal would add new sub-asset classes to
provide additional information to help the Commissions and FSOC better
understand qualifying hedge funds' investment exposures to certain
asset types, and reduce reporting in certain ``catch-all'' sub-asset
classes, such as ``other listed equity.''
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\163\ In connection with the proposed amendments, we would amend
the definitions of ``listed equity'' and ``unlisted equity'' to
reflect that filers should include synthetic or derivative exposure
as well as positions held indirectly through another entity (e.g.,
through an ETF, exchange traded product, U.S.-registered investment
companies, non-U.S. registered investment companies, internal
private fund or external private fund, commodity pool, or other
company, fund or entity). Additionally, we would amend the
definition of ``listed equity derivatives'' to include derivatives
relating to ADRs, and other derivatives relating to indices on
listed equities. See Form PF Glossary of Terms (proposed definition
of ``listed equity,'' ``unlisted equity,'' and ``listed equity
derivatives'').
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Specifically, the proposal would: (1) expand equity exposure
reporting to add sub-asset classes for (a) listed equity securities
(including new sub-asset classes for other single name listed equities
and indices on listed equities), and (b) American depository receipts
(``ADRs''); (2) add additional sub-asset classes for reporting ``repo''
and ``reverse repo'' positions, based on term; (3) add additional sub-
asset classes for asset backed securities (``ABS'') and other
structured products; (4) add new sub-asset classes and revise existing
sub-asset classes that capture certain derivatives, including certain
credit derivatives and volatility and variance derivatives; (5) specify
sub-asset classes pertaining to investments in cash and cash
equivalents and commodities; and (6) add a new sub-asset class for
digital assets.
Listed Equity Securities
We propose to add new sub-asset classes for certain categories of
listed equity securities, specifically, for other single name listed
equities and indices on listed equities. This change is designed to
provide added granularity to reporting on listed equities \164\ given
the potential impact of these new sub-asset classes from an overall
systemic risk perspective, as the form currently only requires advisers
to single out and report for listed equities issued by financial
institutions with all other listed equities reported in a catch-all
category ``other listed equity.'' Identifying single equities
separately from equity index exposure can help distinguish broadly
diversified portfolios from those that could be more concentrated, and
also help to identify what strategies are being pursued by multi-
strategy funds. Additionally, single equity positions may be more
vulnerable to short squeezes \165\ (i.e., a type of manipulation in
which prices are manipulated upward to force short sellers out of their
positions, as short sellers are required by brokers to maintain margin
above a certain level, and as prices rise short sellers must add cash
to their margin accounts or close out their short positions) than index
positions, so the level of granularity the proposal would obtain with
respect to this information would help to identify better entities that
may be affected during a short squeeze event.
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\164\ See current Question 26 and current Question 30, which
require reporting on listed equities but do not separate out single
names from indices. Investments in single name equities involve
materially more idiosyncratic risks, such as the potential for more
extreme price movements that are not correlated to other market
movements, than investments in indices, and therefore we propose to
require separate reporting.
\165\ Single stock shorts often account for a higher portion of
the available float and/or often have a larger days to cover (i.e.,
the number of trading days to cover a short) than do shorts on ETFs.
As a result, a potential need to cover a short could generally have
a more pronounced effect on single stocks.
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We request comments on the proposed amendments.
130. Should we add new sub-asset classes for other single name
listed equities and indices on listed equities as proposed? Are the
proposed categories appropriate? If not, is there another alternative
that we should use?
ADRs
We propose to add a new sub-asset class for ADRs in line with how
ADRs are reported on the CFTC's Form CPO-PQR.\166\ While ADRs are
purchased in U.S. dollars, these instruments have currency risk because
the underlying security is priced in its home country currency, and the
ADR's U.S. dollar price fluctuates one-for-one with each movement in
the home currency. Accordingly, the proposal would require ADRs to be
reported separately from other listed equity instruments. This
requirement also would help increase the utility of the information
reported under the ``other listed equity'' sub-asset class on Form PF,
which requires reporting of multiple other sub-asset classes.
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\166\ As noted above, where applicable, we have proposed to
align Form PF with Form CPO-PQR to (1) enable filers that currently
are required to file both Form PF and Form CPO-PQR independently to
compile and use similar data in completing both forms and (2) enable
users of the reported data (e.g., FSOC and other regulatory
agencies) to (i) link data for funds that file both forms and (ii)
aggregate and compare data across data sets more easily.
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We request comment on the proposed amendments.
131. Should we break out ADRs separately from the ``other listed
equity'' category on Form PF as proposed?
Repurchase Agreements (``Repos'')
We propose to add additional sub-asset classes to the ``repos''
section of proposed Question 32 to capture a breakdown of repos by term
(e.g., overnight, other than overnight, and open term). Hedge funds
often borrow cash overnight and pledge securities such as government
bonds as collateral. We believe that collecting more information on the
different types of repos held by qualifying hedge funds would allow the
Commissions and FSOC to understand better the role of these funds in
potentially amplifying funding stresses and the risks associated with
short-term funding for certain trading strategies, particularly in
light of the issues the repo market experienced during the fall of 2019
and in March 2020.\167\
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\167\ See. e.g., 2021 Financial Stability Oversight Council
Annual Report at 12 and 159 available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
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[[Page 53858]]
We request comment on the proposed amendments.
132. Should we add additional sub-asset classes to the ``repos''
section of proposed Question 32 as proposed? Are the proposed
additional sub-asset classes appropriate? If not, is there another
alternative that we should use?
133. How often do hedge funds use ``open'' repo transactions (i.e.,
a repo with no defined term and which rolls over each day) and should
we combine the open and overnight repo categories? Alternatively,
should we require a breakdown of repo exposure by term in a separate
question in Item C ``financing information'' of section 2 instead of in
proposed Question 32?
Asset Backed Securities (``ABS'')/Structured Products
We propose to separate the collateralized debt obligation (``CDO'')
and collateralized loan obligation (``CLO'') sub-asset class in
proposed Question 32 into two separate sub-asset classes (one for CDOs
and one for CLOs), and further break out each of these new sub-asset
classes based on the seniority of the instrument (e.g., senior,
mezzanine, and junior tranches) similar to the reporting approach on
the CFTC's Form CPO-PQR.\168\ The proposed changes are designed to
provide separate reporting for CDOs and CLOs, which we believe is
important because CDOs and CLOs are fundamentally different financial
products and the current combined reporting obscures the specific
attributes of each product. Furthermore, given the recent focus on CLOs
by FSOC \169\ in monitoring systemic risk, we believe that having
detailed product specific data for CDOs and CLOs is justified due to
the potential value this information would provide for systemic risk
monitoring.
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\168\ See Form PF Glossary of Terms (proposed definitions of
``CDO'' and ``CLO''). The proposal would separate the current
definition of ``CDO/CLO'' into a separate definition for each
financial product. The definition of CDO would only include
collateralized debt obligations (including cash flow and synthetic)
and the definition of CLO would include collateralized loan
obligations (including cash flow and synthetic) other than MBS, and
would not include any positions held via CDS. See also supra
footnote 166 (regarding the proposed alignment of Form PF with Form
CPO-PQR).
\169\ See United States Government Accountability Office, Report
to Agency Officials, ``FINANCIAL STABILITY Agencies Have Not Found
Leveraged Lending to Significantly Threaten Stability but Remain
Cautious Amid Pandemic,'' December 2020, available at: https://www.gao.gov/assets/gao-21-167.pdf.
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We request comment on the proposed amendments.
134. Should we break out the CDO and CLO sub-asset class in
proposed Question 32 into two separate sub-asset classes (one for CDOs
and one for CLOs) as proposed? If not, what alternatives do you
suggest?
135. In proposed Question 32, we do not break out sub-asset classes
for derivatives exposures to ABS and structured products (e.g.,
forwards on MBS). Should these types of financial instruments be
reported as ``other derivatives'' in proposed Question 32 or should we
add additional sub-asset classes for reporting derivative exposures to
these instruments?
136. Would more granular reporting for CLOs and CDOs inform
monitoring and assessment of systemic risk? Instead of senior,
mezzanine, and junior categories, would investment grade and non-
investment grade categories be simpler and less burdensome for advisers
to report? Should other categories be added? If so, what categories?
Should advisers separately report securitizations and re-
securitizations, as required on the CFTC's Form CPO-PQR?
137. Should we collect separate information about MBS
securitizations and re-securitizations in proposed Question 32?
138. Does the real estate sub-asset class capture real estate
exposure through vehicles that are not MBS or other structured products
(e.g., commercial leases)? If not, how should we modify the proposal to
do so?
Credit, Foreign Exchange, Interest Rate, and Other Derivatives
We propose to revise the credit, foreign exchange (``forex''), and
interest rate and other derivative sub-asset classes to provide more
detailed reporting. For example, with respect to credit derivatives,
the proposal would collect more detail on single name CDS exposure to
capture better information on risk signals from these instruments by
adding separate sub-asset classes for sovereign single name CDS,
financial institution single name CDS, and other single name CDS (to
capture any credit derivatives that do not fall into the other
enumerated CDS categories).\170\ We believe that an increase in single
name CDS exposure may signify a bet against an entity or the market
more generally, which may have significant systemic risk implications,
particularly with respect to concentrated single-issuer positions that
can drive more extreme price movements and face difficulties in the
unwinding process, and for counterparties on the other side of highly
leveraged trades when the market moves against these positions.\171\
Furthermore, single name CDS exposure can represent important,
concentrated risk positions for a fund, similar to large single equity
positions, which can be connected to market contagion events, and have
systemic risk and market liquidity implications.
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\170\ See also Form PF Glossary of Terms (proposed revised
definition of ``single name CDS'').
\171\ The CFTC's Form CPO-PQR also requests information on
single name financial CDS, and the revised IOSCO Global Fund
Investment Survey also collects this information.
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Similarly, we propose to add more detailed reporting for foreign
exchange derivatives by adding separate sub-asset classes for forex
swaps and currency swaps consistent with reporting to the Bank for
International Settlements (``BIS''), while removing the less useful
requirement of separate reporting for foreign exchange derivatives used
for investment and hedging, as we have found the data of limited value
because we do not believe that information is reported consistently
across filers.\172\ We believe that adding separate reporting for
different types of foreign exchange instruments (e.g., forex swaps and
currency swaps) is appropriate because they have materially different
risk characteristics, including different maturity profiles, and may be
executed under different documentation which could affect their ability
to be netted against one another. We refer to the BIS framework because
we understand that it reflects a commonly accepted industry approach
for classifying these instruments. Furthermore, given the significance
of hedge funds' exposure to these instruments, we believe that more
granular information would better inform our understanding of systemic
risk issues that may arise from holdings in these different types of
instruments. We also propose to divide the current ``interest rate
derivatives'' sub-asset class into ``U.S. dollar interest rate
derivatives'' and ``non-U.S. currency interest rate derivatives.'' We
believe that added granularity would be important because we have found
that Form PF data consistently shows interest rate derivatives as the
sub-asset class to which qualifying hedge funds have the greatest
exposure over time. A
[[Page 53859]]
better understanding of whether these exposures are related to the U.S.
dollar yield curve or other countries' yield curves is important from a
systemic risk analysis perspective. Finally, we propose to add new sub-
asset classes for various types of derivatives that are regularly used
by hedge funds including correlation derivatives, inflation
derivatives, volatility derivatives, and variance derivatives, which
would both provide additional insight into how qualifying hedge funds
use these types of financial instruments and further limit the number
and type of derivatives that advisers report in the ``catch-all''
``other derivatives'' category.\173\
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\172\ In connection with these proposed changes, we also propose
to make changes to the definition of ``foreign exchange derivative''
to improve data quality with respect to how advisers report foreign
exchange derivative exposure. We propose to revise the definition to
(1) now include any derivative whose underlying asset is a currency
other than the base currency of the reporting fund, (2) provide
additional information on the treatment of cross- foreign exchange
versus regular foreign exchange, and (3) require reporting of both
legs of cross currency foreign exchange derivatives to reflect
exposures from such transactions. See Form PF Glossary of Terms
(proposed revised definition of ``foreign exchange derivative'').
\173\ In connection with these proposed amendments, we also
propose to add new definitions to the Glossary of Terms for
``correlation derivative,'' ``inflation derivative,'' ``volatility
derivative,'' and ``variance derivative.'' See Form PF Glossary of
Terms (proposed definitions of ``correlation derivatives,''
``inflation derivative,'' ``volatility derivative,'' and ``variance
derivative'').
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We request comment on the proposed amendments.
139. As proposed, are the sub-asset classes for reporting on types
of derivatives appropriate? For example, for forex derivatives, should
we clarify, for cross-currency pairs (where U.S. dollars are not
involved), that each leg of the transaction should be reported as long
and/or short? What other types of derivatives sub-asset classes should
be included or excluded, if any? Would the proposed sub-asset classes
for reporting on derivatives be overly burdensome for advisers?
140. Form CPO-PQR requires separate reporting for futures,
forwards, swaps and options. The proposed revisions captured in
proposed Question 32 would collect similar detail for the interest rate
derivative and foreign exchange categories, but not for other asset
categories. Would it be helpful to collect this level of detail for
other derivatives positions beyond interest rate and foreign exchange?
Additionally, should we add additional and/or standardization of
derivative reporting that would align with Financial Conduct Authority/
European Securities and Markets Authority data collection by capturing,
for each sub-asset class, the total gross notional value of contracts
including the total notional of futures and delta-adjusted notional of
options? Finally, should we amend the instructions to Question 30 to
require reporting of closed out and OTC forward positions which have
not yet expired/matured?
141. Should we give guidance on reporting total return swaps (e.g.,
as ``other credit derivatives'' or ``interest rate swaps'')?
142. With respect to the proposed addition of a new sub-asset class
for volatility derivatives, do hedge funds use volatility derivatives?
Additionally, are the sub-asset class categories in the proposed
volatility derivative section appropriate? If not, should we add other
sub-asset class categories or combine some of these categories?
143. Should we require a more granular break out of interest rate
derivative exposures? If so, what categories should we include? The
definition of ``interest rate derivative'' instructs advisers to
present interest rate derivatives as 10-year bond equivalents. As
noted, the proposal would specify that the 10-year zero coupon bond
equivalent would be required. Should we change how interest rate
derivatives should be reported (e.g., the total gross notional value of
outstanding contracts including the total notional value of futures and
delta-adjusted value of options)?
144. We propose to add new definitions for ``correlation
derivative,'' ``inflation derivative,'' ``volatility derivative,'' and
``variance derivative.'' Are these definitions appropriate? If not, how
would you modify one or more definitions?
145. As noted above, we believe adding separate reporting for
different types of foreign exchange instruments (e.g., forex swaps and
currency swaps) is appropriate because they have materially different
risk characteristics and may be executed under different documentation
and we refer to the BIS framework because we understand that it
reflects a commonly accepted industry approach for classifying these
instruments. Do you agree with our view, and is the proposed approach
appropriate? If not, what alternative approach do you suggest?
Cash and Commodities
We propose to make revisions to the sub-asset class categories for
cash and commodities.
We would require advisers to break out cash and cash equivalents
\174\ between U.S. currency holdings and non-U.S. currency holdings,
while also removing the current requirement to report on investments in
funds for cash management purposes (other than money market funds)
because in our experience advisers use inconsistent methods for
determining whether a private fund investment is being used for cash
management purposes and we believe that other information reported in
current section 2b is more useful for assessing liquidity management
(e.g., current Question 33 with respect to unencumbered cash).\175\
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\174\ Some advisers include treasuries in their reporting of
``cash'' because it was part of the definition of ``cash and cash
equivalents.'' We propose to revise the definition of ``cash and
cash equivalents'' to reflect that treasuries should not be included
in ``cash and cash equivalents'' sub-asset class. In connection with
this proposed change we also propose to add a new separate
definition for ``government securities.'' See Form PF Glossary of
Terms (proposed revised definition of ``cash and cash equivalents''
and proposed definition of ``government securities''). See also
discussion at Section II.B.2 of this Release regarding the revised
definitions of cash and cash equivalents and government securities.
\175\ Additionally, in many cases we would be able obtain more
information about all internal fund investments (including whether a
fund looks like a cash management vehicle) through the new
information the proposal would require to be reported in section 1b.
See discussion at Section II.B.2 of this Release.
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Additionally, we propose to broaden the current power commodity
sub-asset classes to also capture other energy commodities, and add
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities) to
provide added granularity with respect to these financial products
given their potential systemic risk implications and to better inform
our and FSOC's understanding of the activities of hedge funds in these
important commodities markets. We have found that a limitation of the
current form is that very different commodities (e.g., wheat and
nickel) are reported together in the same sub-asset class (i.e.,
``other commodities'') making the reported data less meaningful for
analysis. We believe that, with added granularity, we would be in a
better position to identify concentrated exposures to particular
commodities, data that could be valuable in the event of a dislocation
in a particular commodity market.\176\ The additional
[[Page 53860]]
commodity sub-asset classes that we propose to add, i.e., other (non-
gold) precious metals, agricultural commodities and base metal
commodities, were chosen because we believe they are most relevant from
a systemic risk perspective given the size of these markets and what we
currently know of hedge fund exposures to these markets.\177\
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\176\ For example, we believe the addition of a base metal
commodities sub-asset class would allow for identification of large
players in the base metals market (such as those impacted by the
March 2022 ``nickel squeeze''). During the March 2022 ``nickel
squeeze,'' the price of nickel rose unusually steeply and rapidly in
response to commodity price increases caused by Russia's invasion of
Ukraine, and this event, coupled with one or more market
participants holding large short positions, caused prices to
increase in an extreme manner (e.g., a one-day increase of 63% for
the generic first futures contract on March 7, 2022). See e.g.,
Shabalala, Zandi, Nickel booms on short squeeze while other metals
retreat, Reuters (March 2022) available at https://www.reuters.com/markets/europe/lme-nickel-jumps-another-10-after-record-rally-supply-fears-2022-03-08/; Nagarajan, Shalini, Nickel Trading Halted
at LME Until Friday After Wild Price Spike (businessinsider.com)
(March 2022) available at https://markets.businessinsider.com/news/
commodities/nickel-price-london-metal-exchange-suspends-trading-
shanghai-short-squeeze-2022-
3#:~:text=The%20London%20Metal%20Exchange%20has,17%25%20to%20their%20
daily%20limit.
\177\ These proposed change with respect to commodities sub-
asset classes would also better align Form PF with Form CPO-PQR.
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We request comment on the proposed amendments.
146. With respect to reporting on cash and cash equivalents, should
we request separate reporting for US and non-US deposits? Would
additional detail be burdensome for advisers? With respect to the
proposed category ``other cash and cash equivalents (excluding bank
deposits, certificates of deposit, money market funds and U.S. treasury
bills, notes and bonds),'' should we require advisers to provide a
description in Question 4 of what is reported in this sub-asset class?
147. We propose to add additional sub-asset classes for
commodities. Are the proposed additional commodities sub-asset classes
appropriate? If not, what alternatives do you suggest? Should we add
more or fewer sub-asset classes for commodities? If we should add more,
what additional sub-asset classes do you recommend? Should we add a
sub-asset class for other physical assets?
Digital Assets
The proposal would add a new sub-asset class for digital assets and
define the term ``digital asset.'' \178\ We have observed the growth as
well as the volatility of this asset class in recent years.\179\ We
understand that many hedge funds have been formed recently to invest in
digital assets, while many existing hedge funds are also allocating a
portion of their portfolios to digital assets.\180\ Accordingly, we
believe it is important to collect information on funds' exposures to
digital assets in order to understand better their overall market
exposures.
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\178\ See discussion at Section II.B.3 of this Release. See also
Form PF Glossary of Terms (proposed definitions of ``digital
asset'').
\179\ In early 2021 the digital asset market surpassed $1
trillion, mostly driven by the rise in Bitcoin's price, which some
speculate may be driven in part by hedge fund investments. See
Brettell, Karen and Chavez-Dreyfuss, Crypto market cap surges above
$1 trillion for first time, Reuters (January 2021) available at
https://www.reuters.com/world/china/crypto-market-cap-surges-above-1-trillion-first-time-2021-01-07/.
\180\ See C. Williamson, Managers Taking Bigger Steps Into
Crypto, Pensions&Investments (March 2022) available at https://www.pionline.com/cryptocurrency/hedge-fund-managers-taking-bigger-steps-cryptocurrency.
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We request comment on the proposed amendments.
148. Should the sub-asset class for ``digital assets'' provide more
granularity? For example, should we have separate sub-asset classes for
digital assets that represent an ability to convert or exchange the
digital asset for fiat currency or another asset, including another
digital asset, and those that do not represent such a right to convert
or exchange; for digital assets that represent a right to convert or
exchange for fiat currency or another digital asset, those where the
redemption obligation is supported by an unconditional guarantee of
payment, such as some ``central bank digital currencies,'' and those
redeemable upon demand from the issuer, whether or not collateralized
by a pool of assets or a reserve; for digital assets that do not
represent any direct or indirect obligation of any party to redeem; and
for digital assets that represent an equity, profit, or other interest
in an entity? Should we require advisers to report the digital asset by
name (e.g., Bitcoin and Ether) or describe its characteristics?
Open and Large Position Reporting
Advisers to qualifying hedge funds currently report (1) a fund's
total number of ``open positions'' determined on the basis of each
position and not with reference to a particular issuer or
counterparty,\181\ and (2) the percentage of a fund's net asset value
and sub-asset class for each open position that represents five percent
or more of a fund's net asset value.\182\ We have found that advisers
use different methods for identifying and counting their ``open
positions,'' which has made making meaningful comparisons among funds
difficult. This has also potentially obscured certain large exposures,
which may make concentration assessments less exact. For example, an
``open position'' might indicate a position held physically, or
synthetically through derivatives, or both. As such, we propose to
require that advisers provide information about a fund's investment
exposures based on ``reference assets,'' which would capture securities
or other assets to which a fund has exposure, be it direct or indirect
ownership, synthetic exposure, or exposure through derivatives.\183\
The proposal is designed to provide insight into the extent of a fund's
portfolio concentration and large exposures to any reference assets.
The proposal would require advisers to report (1) the total number of
reference assets to which a fund holds long and short netted exposure,
(2) the percentage of net asset value represented by the aggregated
netted exposures of reference assets with the top five long and short
netted exposures, and (3) the percentage of net asset value represented
by the aggregate netted exposures of reference assets representing the
top ten long and short netted exposures. We are proposing to require
reporting for the top five long and short netted positions and the top
ten netted long and short positions because combined these two metrics
provide a holistic view of a reporting fund's portfolio concentration.
We also understand that these are commonly used industry metrics for
assessing portfolio concentration levels. We propose to define ``netted
exposure'' as the sum of all positions with legal and contractual
rights that provide exposure to the same reference asset, taking into
account all positions, including offsetting and partially offsetting
positions, relating to the same reference asset (without regard to
counterparties or issuers of a derivative or other instrument that
reflects the price of the reference asset).\184\
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\181\ Current Question 34.
\182\ Current Question 35.
\183\ See proposed Question 39.
\184\ Netted exposure to a reference asset would either be long
or short, and advisers would determine the value of each netted
exposure to each reference asset in U.S. dollars, expressed as the
delta adjusted notional value, or as the 10-year bond equivalent for
reference assets that are fixed income assets. Advisers would not
report exposure to cash and cash equivalents. See proposed Question
39. See also Form PF Glossary of Terms (proposed definition of
``netted exposure'').
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The proposal also would require advisers to provide certain
information on a fund's reference asset to which the fund has gross
exposure (as of the end of each month of the reporting period) equal to
or exceeding (1) one percent of net asset value, if the reference asset
is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the debt security
issuance, (2) one percent of net asset value, if the reference asset is
a listed equity security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding the reporting date, or (3) (a) five
percent of the reporting fund's net asset value or (b) $1 billion.
Advisers would be required to report: (1) the dollar value (in U.S.
dollars) of all long and the dollar value (in U.S. dollars) of all
short positions with legal and contractual rights that provide exposure
to the reference asset; (2) netted exposure to the reference asset; (3)
sub-asset class and instrument
[[Page 53861]]
type; (4) the title or description of the reference asset; (5) the
reference asset issuer (if any) name and LEI; (6) CUSIP (if any); \185\
and (7) if the reference asset is a debt security, the size of issue,
and if the reference asset is a listed equity, the average daily
trading volume, measured over 90 days preceding the reporting date.
Additionally, advisers may at their option choose to provide the FIGI
for the reference asset, but they are not required to do so.\186\ We
propose to define ``gross exposure'' to a ``reference asset'' as the
sum of the absolute value of all long and short positions with legal
and contractual rights that provide exposure to the reference
asset.\187\ We considered varying levels of thresholds and believe that
the proposed thresholds described above are appropriate based on the
following reasoning. First, the five percent threshold has been carried
over from the current version of Form PF and is also a commonly used
metric for identifying significant positions in a portfolio.\188\ In
addition, while a portfolio is generally viewed as diversified when it
holds at least 20 different positions, when a position goes above five
percent it reduces portfolio diversification. Second, the $1 billion
threshold represents a level for large funds (e.g., those with net
asset values in excess of $20 billion) that is large enough so as to
have potential systemic risk implications even if the position is less
than five percent of the fund. Finally, the proposed one percent
threshold is aimed at limiting filer burdens while still providing
insight into the risks associated with a position that may be small
relative to a fund's overall portfolio but which constitutes a large
fraction of the market for a particular holding, given that a
liquidation by one fund can trigger a disorderly liquidation. A
disorderly liquidation of this kind may raise systemic risk concerns as
it may lead to liquidation losses at other funds for which the position
is more impactful and possibly lead to a cascade of additional unwinds.
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\185\ Advisers would also be required to provide at least one of
the following other identifiers: (1) ISIN; (2) ticker if ISIN is not
available); (3) other unique identifier (if ticker and ISIN are not
available). For reference assets with no CUSIP, or other identifier,
advisers would be required to describe the reference asset. See
proposed Question 40(a).
\186\ See proposed Question 40(a)(xi).
\187\ See proposed Question 40 and Form PF Glossary of Terms
(proposed revised definition of ``gross exposure'').
\188\ E.g., Schedule 13G/13D uses a five percent threshold.
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The purpose of these amendments is to improve our ability to assess
the magnitude of hedge fund portfolio concentration, as well as to
identify directional exposure. From a systemic risk and an investor
protection perspective, high portfolio concentration carries the risk
of amplified losses that can occur when a fund's investment represents
a large portion of a particular investment, asset class, or market
segment. Leveraged portfolios further amplify this risk. The proposed
amendments are designed to better capture a fund's concentration risk
(e.g., where gross exposure to a reference asset is large compared to
the fund's NAV and/or compared to the market for a reference security).
Reporting positions that are large compared to market size also may
provide some insight about whether multiple firms are ``crowding'' into
trades in certain types of securities or other financial assets. We
believe that such ``crowding'' may increase the risk that one fund's
forced selling may trigger systemic effects across a particular market.
We also believe that collecting information about the composition of
exposure to a reference asset would allow us and FSOC to link the
information reported in proposed Question 40 to exposure reporting in
proposed Question 32, which would give the reported data added context
and facilitate understanding of a fund's investment portfolio and
assessment of any implications for systemic risk and investor
protection purposes. For example, in a convertible arbitrage trade
involving a position in a convertible bond and an offsetting position
in the equity securities of the same issuer, reference asset exposure
might be obtained by positions in two different sub-asset classes
(i.e., investment grade convertible bonds and equities) and using a
combination of instrument types (e.g., physical ownership and futures
or a swap). The combination of information reported in proposed
Question 32 and proposed Question 40 would facilitate our ability to
identify this type of situation, better understand a qualifying hedge
fund's investment approach and whether it is taking on concentrated
positions (potentially with leverage), and assess whether or not a
qualifying hedge fund's activities may have systemic risk or investor
protection implications.
We request comment on these proposed amendments.
149. The proposal would require advisers to report (1) the total
number of reference assets to which a fund holds long and short netted
exposure, (2) the percent of net asset value represented by the
aggregated netted exposures of reference assets with the top five long
and short netted exposures, and (3) the percent of net asset value
represented by the aggregate netted exposures of reference assets
representing the top ten long and short netted exposures. Are these
requirements appropriate? If not, how should we modify them? For
example, should we require reporting on more or fewer long and short
netted exposures rather than just the top five and the top ten? Instead
of requiring disclosure on specific exposures described above, should
we require a full position disclosure filing similar to Form N-PORT?
150. Does our proposed ``reference asset'' definition work in the
context of these questions? For example, does the definition capture
interest rate derivatives? If not, how should we modify the definition
or these questions to capture interest rate derivatives? If we should
collect information about interest rate derivatives, should we specify
reporting by maturity bucket and currency? If so, should we use the
same maturity buckets that we have proposed for purposes of calculating
``adjusted'' exposure in proposed Question 32?
151. Should the ``reference asset'' definition be more specific or
provide more guidance on how to ``look through'' certain instruments
(e.g., a correlation basket or an index (such as the NASDAQ) or ETFs or
other pooled vehicles and private funds)?
152. Should we provide additional guidance in the definition of
``reference asset'' such as instructing advisers to refer to the
``issuer''? Should we provide instructions or guidance on how advisers
should address ``reference assets'' that have varying term structures
(e.g., use maturity buckets)?
153. The proposal would require advisers to provide certain
information on a fund's reference asset to which the fund has gross
exposure (as of the end of each month of the reporting period) equal to
or exceeding (1) one percent of net asset value, if the reference asset
is a debt security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of the size of the debt security
issuance, (2) one percent of net asset value, if the reference asset is
a listed equity security and the reporting fund's gross exposure to the
reference asset exceeds 20 percent of average daily trading volume
measured over 90 days preceding, or (3) either (a) five percent of the
reporting fund's net asset value or (b) $1 billion. Are these
thresholds appropriate? If not, how should they be modified? Should
separate thresholds be used to compare netted exposures, and gross
exposures, to equity volume and debt issue size?
[[Page 53862]]
For fixed income, is the reference to ``debt security issuance'' clear?
While this reference is designed to capture a full issue size, should
it instead reference individual tranches of an issue?
154. For position reporting in Question 40, should we also require
advisers to report the number of shares, principal amount or other
unit, currency value and percent of value compared to NAV? Would this
be burdensome to report?
155. In Question 40, are there other unique identifiers, in
addition to or in lieu of LEI or CUSIP that we should add in addition
to those proposed (e.g., for commodities or indices)? Alternatively,
should we permit advisers to report FIGI in lieu of CUSIP in Question
40 rather the requiring advisers to report CUSIP?
b. Borrowing and Counterparty Exposure
Counterparty exposure. As noted above, we propose to revise and
enhance how advisers report information about their relationships with
creditors and other counterparties (including CCPs) and the associated
collateral arrangements for their hedge funds.\189\ For qualifying
hedge funds, we propose to include a new consolidated counterparty
exposure table, similar to the new consolidated counterparty exposure
table proposed for hedge funds in section 1c of the form,\190\ which
would capture all cash, securities, and synthetic long and short
positions by a reporting fund, a fund's credit exposure to
counterparties, and amounts of collateral posted and received. This
table would replace the information currently required by Questions 43,
44, 45, and 47, each of which would be deleted under the proposal.\191\
Under the proposal, proposed Questions 42 and 43 would continue to
collect information about a reporting fund's key individual
counterparties, but in more detail. These revisions are designed to
improve data quality and comparability, close data gaps and provide
better insight into qualifying hedge funds' borrowing and financing
relationships, their credit exposure to counterparties and collateral
practices, and also would enhance the Commissions' and FSOC's ability
to assess the activities of qualifying hedge funds and their
counterparties for investor protection purposes and in monitoring
systemic risk.
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\189\ See discussion at Section II.B.3 of this Release.
\190\ See discussion at Section II.B.3 of this Release.
\191\ In connection with the proposed removal of current
Question 44, we propose to make a corresponding amendment to current
Question 13, which would be redesignated as Question 19, to remove
an instruction that would no longer be relevant.
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The proposed new consolidated counterparty exposure table would be
designed to capture information on all non-portfolio credit exposure
that a qualifying hedge fund has to its counterparties (including CCPs)
and the exposure that creditors and other counterparties have to the
fund, taking into account netting. The new table would require advisers
to report in U.S. dollars, as of the end of each month of the reporting
period, a qualifying hedge fund's borrowings and other transactions
with creditors and other counterparties by type of borrowing or
transaction (e.g., unsecured, secured borrowing and lending under a
prime brokerage agreement, secured borrowing and lending via repo or
reverse repo, other secured borrowing and lending, derivatives cleared
by a CCP, and uncleared derivatives) and the collateral posted or
received by a reporting fund in connection with each type of borrowing
or other transaction.\192\ The proposed table also would require
advisers to qualifying hedge funds to (1) classify each type of
borrowing by creditor type (i.e., U.S. depository institution, U.S.
creditors that are not depository institutions, and non-U.S.
creditors); (2) classify posted collateral by type (e.g., cash and cash
equivalents, government securities, securities other than cash and cash
equivalents and government securities and other types of collateral or
credit support (including the face amount of letters of credit and
similar third party credit support) received and posted by a reporting
fund, and secured borrowing and lending (prime brokerage or other
brokerage agreement), and (3) report, at the end of each month of the
reporting period, the expected increase in collateral required to be
posted by the reporting fund if the margin increases by one percent of
position size for each type of borrowing or other transaction. We
believe that measuring the impact of a one percent margin change will
allow for a meaningful assessment of qualifying hedge funds'
vulnerability to changes in financing costs and identification of funds
that are most sensitive to potential margin changes. We also believe
that measuring this impact would provide a conventional way to obtain
data on funds' vulnerability to margin increases that is easy to scale
up for analysis purposes and allows for uniform comparisons across
hedge funds to see which funds have lockup agreements and which funds
do not. Furthermore, the proposed table is designed to consolidate
existing questions and provide more specific instructions in an effort
to eliminate information gaps and improve the reliability of data
collected. We believe that this new approach would collect better
information about a qualifying hedge fund's borrowing and financing,
cleared and uncleared derivatives positions, and collateral practices
as well as a fund's credit exposure to counterparties resulting from
excess margin, haircuts and positive mark-to-market derivatives
transactions, which we believe would enhance FSOC's systemic risk
assessments.
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\192\ The instructions would direct advisers to classify
borrowings and other transactions and associated collateral based on
the governing legal agreement (e.g., a prime brokerage or other
brokerage agreement for cash margin and securities lending and
borrowing, a global master repurchase agreement for repo/reverse
repo, and ISDA master agreement for synthetic long positions,
synthetic short positions and other derivatives), and instruct
advisers how to report when there is cross-margining under a fund's
prime brokerage agreement. We are also proposing to add new
definitions of ``synthetic long position'' and ``synthetic short
position'' to the Glossary of Terms. See Form PF Glossary of Terms
(proposed definitions of ``synthetic long position'' and ``synthetic
short position''). Additionally, the instructions would permit
advisers to net a reporting fund's exposure with each counterparty
and among affiliated entities of a counterparty to the extent such
exposures may be contractually or legally set-off or netted across
those entities and/or one affiliate guarantees or may otherwise be
obligated to satisfy the obligations of another under the agreements
governing the transactions. The instructions would also direct
advisers to classify borrowing by creditor type (e.g., percentage
borrowed from U.S. depository institutions, U.S. creditors that are
not U.S. depository institutions, non-U.S. creditors) based on the
legal entity that is the contractual counterparty for such borrowing
and not based on parent company or other affiliated group.
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We request comment on the proposed addition of this new table.
156. Is the information to be collected in the proposed new table
appropriate? If not, how should we modify the proposed reporting
requirements? Would reporting in the proposed new table be overly
burdensome for advisers? If so, how should we modify the proposed table
to reduce burdens on advisers?
157. Would the proposed table capture an accurate overall view of
the non-portfolio credit exposure that a qualifying hedge fund has in
aggregate to its counterparties (including CCPs) and the exposure that
creditors and other counterparties have to the fund? Are the table
instructions clear? Would the instructions properly capture a reporting
fund's borrowing and other transactions with creditors? Do we need to
modify the proposed instructions for calculating and reporting
associated collateral to clarify any matters? Do we need to modify the
instructions with
[[Page 53863]]
respect to netting to increase clarity or avoid undue burden?
158. We propose to specify how to classify certain types of
transactions based on legal agreement. We are proposing to classify all
transactions under a master securities loan agreement (``MSLA'') as
other secured borrowing. Is another classification more appropriate? If
so, what classification do you suggest? For example, should borrowing
and collateral received and lending and posted collateral under an MSLA
be reported in a separate category of borrowing or consolidated with
prime broker borrowing? Are the instructions provided for cross
margining reasonable and practicable, or should they be changed in any
way?
159. In connection with the proposal, we propose to add a new
definition for ``synthetic short position.'' Is the list of assets to
be included or excluded from the definition appropriate or should we
provide a different list of assets? If we should provide a different
list, what assets should be included and excluded?
160. Is it clear that advisers should calculate the expected
increase or decrease based on a margin increase of one percent of
position size in proposed Question 41 or should we provide further
guidance or clarify the question? Should the metric be something other
than the expected increase or decrease based on a margin increase of
one percent of position size? If so, what metric should be used?
161. As an alternative, should we include a drop-down box with
possible types of other secured borrowings (e.g., letters of credit,
loans secured by other collateral such as real estate, equipment,
receivables, etc.) and also include an ``other'' ``catch-all'' category
that would need to be explained in Question 4?
Significant counterparty reporting. The proposal would require
advisers, for each of their qualifying hedge funds, to identify all
creditors and counterparties (including CCPs) where the amount a fund
has borrowed (including any synthetic long positions) before posted
collateral equals or is greater than either (1) five percent of the
fund's net asset value or (2) $1 billion.\193\ We believe this
threshold is appropriate because it highlights two different but
potentially significant risks. First, five percent of a fund's net
asset value represents an amount of borrowing that, if repayment was
required, could be a significant loss of financing that could result in
a forced unwind and forced sales from the reporting fund's portfolio.
Second, $1 billion represents an amount that, in the case of a very
large fund, may not represent five percent of the fund's net asset
value, but may be large enough to create stress for certain of its
counterparties. This change is designed to specify how securities held
should be treated, avoiding a common source of error in how advisers
have completed the current form, and allowing both counterparty risks
related to collateralized transactions to be viewed in one place, i.e.,
the risk that collateral will not be returned, and the risk that the
borrower of cash will fail to repay the amount borrowed, risks that we
have found cannot be fully observed based on information collected on
the current form. For the top five creditors and other counterparties
from which a fund has borrowed the most (including any synthetic long
positions) before posted collateral, advisers would be required to
identify the counterparty (by name, LEI, and financial institutional
affiliation) and to provide information detailing a fund's transactions
and the associated collateral. We have proposed a ``top five''
reporting threshold as this level is consistent with the current
threshold for reporting on collateral practices on Form PF.\194\
Advisers would be required to present this information using a proposed
individual counterparty exposure \195\ table that follows the same
format as the new consolidated counterparty exposure table described
above for Question 41, including borrowings and other transactions by
type and collateral posted and received by type. For all other
creditors and counterparties from which the amount a fund has borrowed
(including any synthetic long positions) before posted collateral that
equals or is greater than either (1) five percent of the fund's net
asset value or (2) $1 billion, advisers would be required to identify
each counterparty (by name, LEI, and financial institution affiliation)
and report the amount of such borrowings and the collateral posted by
the fund in U.S. dollars.
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\193\ See proposed Question 42. Advisers would use calculations
performed to complete the new table in proposed Question 41 for
purposes of identifying the counterparties to be reported in
proposed Question 42 and Question 43, and the calculation method
would be designed to be similar to the calculations used to identify
counterparties in proposed Question 27 and proposed Question 28 in
order to facilitate aggregation and analysis of data across hedge
funds and qualifying hedge funds. Furthermore, if more than five
counterparties meet the threshold, advisers would complete an
individual counterparty exposure table for the top five creditors or
other counterparties to which a reporting fund owed the greatest
amount in respect of cash borrowing entries (before posted
collateral), and also identify all other creditors and
counterparties (including CCPs) to which the reporting fund owed an
amount in respect of cash borrowing entries (before posted
collateral) equal to or greater than either (1) five percent of the
reporting fund's net asset value as of the data reporting date or
(2) $1 billion. See also Form PF Glossary of Terms (proposed
definitions of ``cash borrowing entries'' and ``collateral posted
entries'').
\194\ See current Question 36.
\195\ In connection with the proposal, we propose to add a new
definition for ``individual counterparty exposure table'' to the
Form PF Glossary of Terms.
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Similarly, the proposal would require advisers, for each of their
qualifying hedge funds, to identify all counterparties (including CCPs)
to which a fund has net mark-to-market counterparty credit exposure
after collateral that equals or is greater than either (1) five percent
of the fund's net asset value or (2) $1 billion.\196\ We believe this
threshold is appropriate because both portions of the threshold
highlight potential systemic risk: five percent of net asset value is a
level that we believe represents significant exposure (based on the
impact on performance) in the event of counterparty default, and $1
billion, while it may not equal five percent of a large hedge fund's
assets, may indicate a larger systemic stress involving a fund's
counterparties. For the top five of these counterparties, advisers
would identify the counterparty (by name, LEI and financial institution
affiliation) and provide information detailing a fund's relationship
with these counterparties including associated collateral using the
same table required for individual counterparty reporting.\197\ The
proposal also would require qualifying hedge funds to identify all
other counterparties (by name, LEI, and financial institution
affiliation) to which a fund has net mark-to-market exposure after
collateral that equals or is greater than either (1) five percent of a
fund's net asset value or (2) $1 billion and would require these
advisers to report the amount of the exposure before and after
collateral posted by either the counterparty or the reporting fund as
applicable. The purpose of this new requirement is to enhance our
ability to understand the impact a particular counterparty failure like
those that occurred during the 2008 financial crisis and in the period
since (e.g., the failure of MF Global in 2011),\198\ which we believe
is important
[[Page 53864]]
for systemic risk assessments and from an investor protection
perspective. In assessing the risk to a fund of a counterparty default,
the proposal would look at whether a fund has net borrowing exposure or
net lending exposure to a counterparty. If the fund is a net borrower
with respect to a counterparty, we would measure cash borrowed by the
fund against collateral posted by fund. Alternatively, when the fund is
a net lender with respect to a counterparty, we would measure cash
loaned to the counterparty against collateral posted by the
counterparty to assess whether the counterparty has posted insufficient
collateral (relative to the amount borrowed).\199\
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\196\ See proposed Question 43.
\197\ Under the proposal, however, if an adviser completes the
table in Question 42 for a particular counterparty, the adviser
would not be required to complete the table twice.
\198\ See e.g., Gapper, John and Kaminska, Izabella, Downfall of
MF Global--US broker-dealer bankruptcy highlights global reach of
eurozone crisis, Financial Times (November 2011) available at
https://www.ft.com/content/2882d766-06fb-11e1-90de-00144feabdc0.
\199\ See Form PF Glossary of Terms (proposed definitions of
``cash borrowing entries,'' ``collateral posted entries,'' ``cash
lending entries,'' and ``collateral received entries'') for a
detailed description of these calculations.
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These proposed amendments are designed to streamline the form by
consolidating information currently collected in Question 47 into
proposed Question 42, and to improve the quality and comparability of
reported information and our ability to integrate the data obtained for
analysis with other regulatory data sets by specifying how advisers
determine borrowing and counterparty credit exposure.\200\ The proposed
changes, in conjunction with the proposed new consolidated counterparty
exposure table, would also provide a better overall view of hedge
funds' borrowing and other financing arrangements and counterparty
credit exposure and associated collateral, which we believe would
provide critical insight into (1) creditor and counterparty exposure to
qualifying hedge funds through synthetic long positions through
derivatives, (2) potential gaps in margin received by and posted by
qualifying hedge funds and the size of any such gaps, (3) qualifying
hedge funds' exposure to a large counterparty failure, and (4) the
expected impact on a fund's financing arrangements of a change in
margin requirements.
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\200\ The proposal would require creditor legal name and LEI,
which would aid in the identification of counterparties and
facilitate analysis of the interconnectedness of market participants
(e.g., Form N-PORT and Form N-CEN already collect LEI for registered
investment company counterparties, and including LEIs here would
facilitate analysis across data sets).
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Finally, the proposal would remove the requirement from current
Question 38 for advisers to report the percentage of the total amount
of collateral and other credit support that a fund has posted to
counterparties that may be re-hypothecated.\201\ We are proposing this
change because we believe that this reporting is burdensome for
advisers, and we have found that the data obtained is generally not
reliable because advisers cannot easily collect and report the required
information as re-hypothecation commonly occurs from omnibus accounts
into which advisers generally do not have visibility.\202\ We request
comment on the proposed amendments.
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\201\ We would redesignate Question 38 as Question 45.
\202\ See MFA Letter to Chairman Clayton, Sept. 17, 2018,
available at https://www.managedfunds.org/wp-content/uploads/2020/04/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf (noting
the rehypothecated securities are taken out of an omnibus account,
which makes reporting for advisers with any certainty difficult).
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162. Should we amend counterparty reporting as proposed, including
the proposed counterparty identifying information? Is the proposed
identifying information appropriate? If not, what alternatives do you
suggest? Would the proposed amendments lead to more accurate data
regarding counterparties?
163. We have proposed to limit more detailed reporting in proposed
Question 42 to the top five creditor and counterparties from which a
fund has borrowed the most (including any synthetic long positions)
before posted collateral, and in proposed Question 43 to the top five
counterparties to which a fund has the greatest net mark to market
counterparty credit exposure after collateral. Should we expand this
question to require more detailed reporting for the top, for example,
ten creditors and/or counterparties, as applicable? Alternatively,
should we further limit the scope of creditor and/or counterparty
reporting? Should we require that all creditor and/or counterparties be
listed?
164. Do advisers find the re-hypothecation reporting burdensome?
Are advisers able to collect and report information currently required
by Question 38 given omnibus accounts?
165. Are securities lending and borrowing different from other
types of trading and financing activities (e.g., repo/reverse repo,
prime broker borrowing) for purposes of counterparty monitoring and
risk assessment? If so, should we treat them differently?
166. As proposed, calculations in these questions would exclude
collateral that is not cash and cash equivalents or other securities to
avoid including letters of credit and other illiquid assets (e.g., real
estate) posted as collateral. What other types of collateral would be
omitted under this instruction? Would it omit types of collateral
commonly accepted by creditors and other counterparties? If so, how
should we modify the question?
167. This proposal would collect information about top
counterparties based on a fund's borrowing from each counterparty legal
entity, rather than borrowing from all entities affiliated with a major
financial institution. Could this approach result in data gaps where a
fund borrows from different counterparties with one affiliated group
below the reporting threshold? Alternatively, should we require funds
to aggregate borrowings from all affiliates of major counterparties,
and report on each affiliate in this counterparty reporting? What data
gaps might occur using this alternative approach? Is the proposed
threshold (i.e., equal to or greater than either (1) five percent of
the fund's net asset value or (2) $1 billion) for identifying
counterparties to which the fund is exposed appropriate? Will it
capture those counterparties to which the fund may have material
counterparty credit exposure? Should we adopt a combination of
thresholds (e.g., greater than five percent or $1 billion for
individual counterparties and greater than 10 percent or $1 billion for
any affiliated group of counterparties)?
c. Market Factor Effects
The proposal would require advisers to qualifying hedge funds to
respond to all market factors to which their portfolio is directly
exposed, rather than allowing advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with the reporting fund's risk management, as Form PF
currently provides.\203\ These proposed changes are designed to enhance
investor protection efforts and systemic risk assessment by allowing
the Commissions and FSOC to track better common market factor
sensitivities, as well as correlations and trends in those market
factor sensitivities.
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\203\ See current Question 42 and proposed Question 47. For
market factors that have no direct effect on a reporting fund's
portfolio, we propose to instruct filers to enter zero.
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We also propose to change the stress thresholds to (1) require
advisers to report one threshold for each market factor, rather than
two as is currently required, and (2) propose different thresholds for
certain market factors to capture stress scenarios that are plausible
but still infrequent market moves.\204\ Information resulting from
[[Page 53865]]
stress testing at thresholds in the current form (one low and one high)
is not useful because the thresholds are either too frequent (for the
lower threshold) or too extreme and may not result in accurate
estimates (for the higher threshold). Based on our experience with this
information, we do not believe that collecting data at multiple
thresholds \205\ for each market factor is significantly more
meaningful than collecting market factor sensitivity at a single
plausible but still infrequent threshold.
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\204\ For example, on the current form, advisers must report the
effect of an increase or decrease in equity prices by five percent
and by 20 percent, while under the proposal advisers would only
report the effect of a 10 percent increase or decrease, which is a
more plausible but still infrequent scenario.
\205\ See current Question 42.
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The proposal also would add a market factor test concerning non-
parallel risk free interest rate movements. It would test hedge fund
exposure to changes in the slope of the yield curve, which is currently
untested and can be a source of systemic risk when there are sudden
interest rate changes. For example, this market factor could provide
meaningful information on hedge funds that take complex positions, such
as market neutral strategies (e.g., basis trading in particular) and
other strategies that employ trades that take advantage of spreads in
yield curves coupled with high use of leverage.
The proposal also would revise the instructions so advisers would
report the long component and short component consistently with market
convention, rather than opposite from market convention, as Form PF
currently provides in order to reduce inadvertent mistakes in
completing the form.\206\ We request comment on the proposed
amendments.
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\206\ The proposal would amend the instructions to provide that
``risk free interest rates'' would include interest rate swap rates
in which a fixed rate is exchanged for a risk-free floating rate
such as the secured overnight financing rate (``SOFR'') or the
sterling overnight index average (``SONIA''). Additionally, the
proposal would amend the instructions to specify that (1) for market
factors involving interest rates and credit spreads, advisers should
separate the effect on its portfolio into long and short components
where (i) the long component represents the aggregate result of all
positions whose valuation changes in the opposite direction from the
market factor under a given stress scenario, and (ii) the short
component represents the aggregate result of all positions whose
valuation changes in the same direction as the market factor under a
given stress scenario, and (2) for market factors other than
interest rates and credit spreads, advisers should separate the
effect on its portfolio into long and short components where (i) the
long component represents the aggregate result of all positions
whose valuation changes in the same direction as the market factor
under a given stress scenario and (ii) the short component
represents the aggregate result of all positions whose valuation
changes in the opposite direction from the market factor under a
given stress scenario. See proposed Question 47.
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168. Should Form PF require advisers to qualifying hedge funds to
respond to all market factors, as proposed? Alternatively, should Form
PF allow advisers to omit a response to any market factor that it does
not regularly consider in formal testing in connection with the
reporting fund's risk management? Do advisers or their reporting funds
regularly consider all, some, or other market factors we are proposing?
If so which ones and why? Are adjustments needed for advisers that use
a different stress test methodology than that required by the question
as proposed?
169. Should we revise the stress thresholds, as proposed? Would the
proposed thresholds capture stress scenarios that are plausible but
still infrequent market moves? Is there a better way to meet this
objective? Are adjustments needed for advisers that test thresholds
similar, but not identical to, those proposed?
170. Should Form PF include a market factor concerning non-parallel
risk free interest rate movements, as proposed? Would this proposed
amendment provide meaningful exposure information for hedge funds that
take complex positions, such as market neutral strategies (e.g., basis
trading in particular) and other strategies that employ trades that
take advantage of spreads in yield curves coupled with a high use of
leverage? Would any of the other market factors better describe the
risks such strategies are exposed to?
171. Are the proposed amendments to how advisers would report long
and short components consistent with market convention? Do market
conventions vary by asset type? Would the proposed change relieve or
increase burdens? Please provide supportive data. Is there a more
effective way to require advisers to report long and short components
that would be consistent with market conventions and allow for data
comparability?
172. Are there any definitions or instructions that we should
clarify or change in this question?
173. As an alternative, should Form PF require all advisers to all
types of reporting funds to report market factor data? Which ones and
why?
d. Additional Amendments to Section 2b
Currency exposure reporting. The proposal would require qualifying
hedge funds to report for each month of the reporting period, in U.S.
dollars, (1) the net long value and short value of a fund's currency
exposure arising from foreign exchange derivatives and all other assets
and liabilities denominated in currencies other than a fund's base
currency, and (2) each currency to which the fund has long dollar value
or short dollar value exposure equal to or exceeding either (a) five
percent of a fund's net asset value or (b) $1 billion.\207\ In
responding, advisers would be required to include currency exposure
obtained indirectly though positions held in other entities (e.g.,
investment companies, other private funds, commodity pools or other
companies, funds or entities) and could report reasonable estimates if
consistent with internal methodologies and conventions of service
providers.\208\ This proposed requirement is designed to provide
insight into whether notional currency exposures reported by qualifying
hedge funds in Question 30 represent directional exposure or are hedges
of equity and/or fixed income positions. This new question would allow
us to understand whether a qualifying hedge fund's portfolio is exposed
to a given currency, and it would also provide a view into the fund's
currency exposure resulting from holdings in foreign securities (e.g.,
Eurobonds). While current Question 30 requires advisers to separate
currency exposure relating to hedging from other currency, we have
found that this data has not been very useful for determining whether a
currency position is speculative or a hedge. Additionally, we believe
that it is important to consider a qualifying hedge fund's currency
exposure to identify vulnerabilities to currency fluctuations and
market events that affect different countries and regions. Finally, we
believe the proposed threshold of either (1) five percent of a fund's
net asset value or (2) $1 billion for reporting individual currency
exposure is appropriate because it represents, in each prong of the
threshold, a material level of portfolio exposure to currency risk at
which we believe a deterioration in the value of a particular currency
could have a significant negative impact on a fund's investors. We also
believe that if multiple large funds have significant exposure to a
currency that is rapidly devaluing, this circumstance could raise
financial stability concerns, and this proposed reporting would better
enable review of this type of situation. More broadly, we also would be
able to use
[[Page 53866]]
the information obtained to identify concentrations in particular
currencies and assess the potential impact of market events that affect
particular currencies. We request comment on the proposed amendments.
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\207\ Proposed Question 33.
\208\ This instruction is designed to simplify and reduce the
burdens of reporting sub-asset class exposures. Furthermore, the
proposal would permit advisers to provide good faith estimates and
take currency hedges into account, if consistent with their internal
methodologies and information reported internally and to investors.
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174. Should we add new Question 33, as proposed?
175. Would this new question enhance systemic risk analysis,
including the impact of currency risk? Is there a better way to meet
this objective? How could we modify the proposed question to better
meet its objective?
176. Is the proposed threshold of either (1) five percent of a
fund's net asset value or (2) $1 billion for reporting individual
currency exposure appropriate? If not, what threshold is appropriate?
Turnover. The proposal would require reporting on a per fund basis
on the value of turnover in certain asset classes rather than on an
aggregate basis as currently required.\209\ We believe that requiring
this reporting on a per fund basis would provide more detailed
information to us and FSOC while at the same time simplifying reporting
for advisers. We understand that advisers do not currently aggregate
turnover related information among funds. Aggregating solely for Form
PF reporting is particularly burdensome as the required data is
typically on separate reporting systems and advisers must ``roll-up''
data from these sources to report on the form.
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\209\ Proposed Question 34. In connection with the proposed
amendments, the proposal would move reporting on the value of
turnover in certain asset classes and the geographical breakdown of
investments from section 2a to section 2b.
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We also propose to add new categories for turnover reporting that
would disaggregate combined categories and better capture turnover of
potentially relevant securities, such as various types of derivatives
(e.g., listed equity, interest rate, foreign exchange), which we
believe would help support analysis of hedge fund market activity.\210\
Furthermore, we propose to add a new consolidated foreign exchange and
currency swaps category and make other changes.\211\ During the March
2020 COVID-19-related market turmoil, FSOC sought to evaluate the role
hedge funds played in disruptions in the U.S. treasury market by
unwinding cash-futures basis trade positions and taking advantage of
the near-arbitrage between cash and futures prices of U.S. treasury
securities.\212\ Because the existing requirement regarding turnover
reporting on U.S. treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March 2020 market events,
was unable to obtain a complete picture of activity relating to long
treasuries and treasury futures. Given the significant size of hedge
funds' exposures to certain derivative products, we believe it is
important to gain more insight into trading activities with respect to
these financial instruments to better enable the Commissions and FSOC
to assess and monitor the activity of qualifying hedge funds for
systemic risk implications.\213\ Expanded reporting on turnover also
would provide better information for assessing trading frequency in
lieu of requiring advisers to report what percentage of their hedge
funds' net asset value is managed using high-frequency trading
strategies.\214\
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\210\ We also propose to break out some categories by futures,
swaps, and options as different types of derivatives have different
risk profiles and implications for systemic risk, and to add a
category for ``other derivative instrument types'' so that all
derivatives are reported.
\211\ We propose to add instructions requiring advisers to
report turnover in derivatives separately from turnover in physical
holdings for asset classes in proposed Question 32 and to make other
conforming changes to reflect changes to defined terms in the Form
PF Glossary of Terms.
\212\ See U.S. Credit Markets Interconnectedness and the Effects
of the COVID-19 Economic Shock, U.S. Securities Exchange Commission,
October 2020 available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. See Financial Stability Oversight
Council 2021 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
\213\ As of the end of the third quarter of 2021, interest rate
derivatives currently make up approximately 25 percent of gross
notional exposure (GNE) reported on Form PF, while foreign exchange
derivatives make up 15 percent of GNE. Additionally, commodity,
credit, and other derivatives when combined make up five percent, or
nearly $1.5 trillion. See Private Fund Statistics Q3 2021, supra
footnote 7.
\214\ See current Question 21. We propose to remove Question 21
as it would be redundant in light of the proposed expanded turnover
reporting.
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We request comment on the proposed Question 34.
177. Would the proposed detailed turnover reporting provide
additional insight into a fund's activities in key markets? Should
additional categories be added to provide a clearer view of turnover
and its potential to help us and FSOC identify and monitor activities
that could indicate systemic risk in the market? If so, what categories
do you suggest and why? Should we exclude any of the proposed
categories? If so, why?
178. The current instructions state that turnover value should be
reported as the sum of the absolute value of transactions, and as such
the reported value of turnover for certain derivatives may be very
large (reflecting notional value). Should we use a different measure
for valuing turnover (e.g., market value)? Recognizing that the current
instructions result in consistency in reported value among questions on
Form PF, would a different measure be more or less useful?
179. Do you agree that aggregating information may be burdensome
for some advisers? Do some advisers maintain the required data on
different systems such that ``rolling-up'' the data from different
sources to report on the form would be complex and time consuming?
Country and industry exposure. We are proposing to require advisers
to report all countries (by ISO country code) \215\ to which a
reporting fund has exposure equal to or exceeding either (1) five
percent of its net asset value or (2) $1 billion, and to report the
dollar value of long exposure and the dollar value of short exposure in
U.S. dollars, for each monthly period to improve data comparability
across funds.\216\ Under the current approach, only certain regions are
identified and these regions are not uniformly defined, which results
in data that is not consistent.\217\ In addition, at times we have
needed to identify countries of interest not on this list. As such, we
propose to replace the country of interest and regional reporting with
this new country level information. Finally, we believe that the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual countries and
geographic regions, and is a level that could significantly impact a
fund and its investors if, for example, there are currency fluctuations
or geopolitical instability. Furthermore, the data obtained would allow
for identification of industry concentrations in particular countries
and/or regions and help assess the potential impact of market events on
these geographic segments. We believe that the five percent threshold
level constitutes a reasonable shock to a fund's net asset value. For
example, to the extent there is a market-wide event, a worst-case
scenario would be for long positions to lose their full value, in this
shock case
[[Page 53867]]
at least five percent. Furthermore, and particularly for funds without
a benchmark, five percent is often evaluated for industry, individual
position, and country risk, and is a common and easy to measure
threshold. With respect to the $1 billion threshold, we believe it
constitutes sufficiently large nominal value exposure from a risk
perspective.
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\215\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
\216\ Proposed Question 35. In connection with the proposed
amendments, the proposal would move reporting on geographical
breakdown of investments from section 2a to section 2b.
\217\ Currently, consistent with staff guidance in Form PF
Frequently Asked Questions 28.1 and 28.2 advisers may report
geographical exposure based on internal methods and indicate in
Question 4 if methods do not reflect risk and economic exposure. See
Form PF Frequently Asked Questions, supra footnote 79.
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We also propose to add a new question that would require advisers
to provide information about each industry to which a reporting fund
has exposure equal to or exceeding either (1) five percent of its net
asset value or (2) $1 billion.\218\ Advisers would be required to
report, for each monthly period, the long dollar value and short dollar
value of a reporting fund's exposure by industry based on the NAICS
\219\ code of the underlying exposure. The purpose of this new question
would be to collect information that would provide insight into hedge
funds' industry exposures in a standardized way to allow for
comparability among funds and meaningful aggregation of data to assess
overall industry-specific concentrations. Further, we believe the
proposed threshold of either (1) five percent of net asset value or (2)
$1 billion is appropriate because it represents a material level of
portfolio exposure to risk relating to individual industries, and is a
level that could significantly impact a fund and its investors if, for
example, there are market or geopolitical events that affect
performance by a particular industry, such as the burst of the ``tech
bubble'' in the early 2000s or COVID-19's impact on airline,
accommodation and food service industries. Furthermore, the data
obtained would allow for identification of industry concentrations and
help assess the potential impact of market events on industries. While
we considered a lower threshold, we believe that the proposed threshold
strikes an appropriate balance between identifying significant industry
exposure and the burdens of reporting this information on Form PF. We
believe this information would be useful to the Commissions and FSOC in
monitoring systemic risk, particularly if multiple funds have
significant concentrations in industries that are experiencing periods
of stress or disruption.
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\218\ Proposed Questions 36.
\219\ North American Industry Classification System.
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When responding to these questions about country and industry
exposure, advisers would be required to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other company, funds
or entities). Without this requirement, a fund's exposure to geographic
regions and industries could be obscured and hinder the Commissions'
and FSOC's ability to assess risks and the potential impact of events
and trends that affect a particular industry or geographic region, both
of which could have implications for investors. While we believe that
advisers typically maintain this information, the proposed instructions
to these questions seek to minimize filer burdens by permitting
advisers to report reasonable estimates if such reporting is consistent
with internal methodologies and information reported internally and to
investors.
We request comment on the proposed Question 35 and proposed
Question 36.
180. Should we require advisers to report all countries (by ISO
country code) \220\ to which a reporting fund has exposure of equal to
or exceeding (1) five percent or more of its net asset value or (2) $1
billion, and to report exposure in U.S. dollars? Is this threshold
appropriate? If not, should the threshold be higher or lower? Do you
agree that removing regional level reporting is appropriate? Are there
any other alternatives? If so, what alternatives?
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\220\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
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181. Should we require advisers to provide information about each
industry to which a reporting fund has exposure equal to or exceeding
(1) five percent or more of its net asset value or (2) $1 billion? Is
this threshold appropriate? If not, should the threshold be higher or
lower?
182. With respect to requiring advisers to provide information
about portfolio industry exposure, what level of industry detail should
be gathered (for example, 2-digit NAICS codes represent 20 unique
industries)? Is it more burdensome to provide more detail, or does
aggregation to broader industry categories create additional burden?
183. We propose to modify the instructions to require that
investments be categorized based on concentration of risk and economic
exposure. Should we add instructions or guidance for currency crosses
or dollar denominated non-U.S. sovereign debt? Furthermore, current
Question 77 (for private equity funds) also uses NAICS codes for
reporting industry exposure. Should we use Global Industry
Classification Standard (GICS) codes or another classification
standard? Finally, how should ETFs and other exchange traded products
be reported in this question? Are these financial instruments typically
coded to industry sector? If not, what alternatives do you suggest and
why?
184. We propose to require advisers, when responding to proposed
Question 35 and proposed Question 36 to include exposure obtained
indirectly though positions held in other entities (e.g., investment
companies, other private funds, commodity pools or other funds or
entities). Is this appropriate? If not, why? Would this be overly
burdensome for advisers?
Central clearing counterparty (CCP) reporting. We propose to
require advisers to identify each CCP or other third party holding
collateral posted by a qualifying hedge fund in respect of cleared
exposures (including tri-party repo) equal to or exceeding either (1)
five percent of a reporting fund's net asset value or (2) $1
billion.\221\ The proposed new question would exclude counterparties
already reported in proposed Question 42 and proposed Question 43,\222\
and require advisers to provide information on: (1) the legal name of
the CCP or third party; (2) LEI (if available); (3) whether the CCP or
third party is affiliated with a major financial institution; (4) the
reporting fund's posted margin (in U.S. dollars); and (5) the reporting
fund's net exposure (in U.S. dollars). We are proposing this new
question based on our experience with Form PF since adoption as we have
found data gaps with respect to identifying qualifying hedge fund
exposures to CCPs and other third parties that hold collateral in
connection with cleared exposures. Furthermore, we understand that (1)
many large hedge fund advisers already track margin posted for cleared
exposures because margin requirements at any given time may well exceed
the clearinghouse's exposure to a fund and therefore are an important
credit risk exposure metric for a fund, and (2) that CCP recovery,
resiliency and resolution also are current concerns for some
advisers.\223\ Given these factors, we
[[Page 53868]]
believe that the burden of this proposed new question would be
justified by valuable insight the data obtained would provide into an
area that could have significant implications from a systemic risk
perspective. Additionally, we have chosen a reporting threshold of
equal to or exceeding either (1) five percent of net asset value or (2)
$1 billion to be consistent with the thresholds for other counterparty
exposure questions,\224\ as we believe that a qualifying hedge fund is
similarly exposed where a third party holds collateral irrespective of
whether the third party is a CCP or other counterparty. The proposal
would also remove current Question 39, which requires information about
transactions cleared directly through a CCP, as the information
collected is duplicative of information already collected in current
Question 24. We request comment on the proposed addition of new
Question 44.
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\221\ Proposed Question 44.
\222\ See discussion at Section II.C.2.b of this Release.
\223\ See ``A Path Forward For CCP Resilience, Recovery, And
Resolution,'' March 10, 2020 available at https://www.blackrock.com/corporate/literature/whitepaper/path-forward-for-ccp-resilience-recovery-and-resolution.pdf. See also J.P. Morgan Press Release,
March 10, 2020, available at https://www.jpmorgan.com/solutions/cib/markets/a-path-forward-for-ccp-resilience-recovery-and-resolution.
\224\ See discussion at Section II.C.2.b of this Release.
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185. Should we collect information about the exposure of qualifying
hedge funds to CCPs and other third parties holding collateral in
respect of cleared exposures? If so, what information should be
collected on these exposures? Does the proposed question collect
helpful information? Should we collect different information, more
information or less information? Is the proposed reported threshold of
equal to or exceeding either (1) five percent of a reporting fund's net
asset value or (2) $1 billion appropriate? If not, how should the
threshold be modified?
186. Do you agree that many large hedge fund advisers already track
margin posted for cleared exposures because margin requirements at any
given time may well exceed the clearinghouse's exposure to a fund and
therefore are an important credit risk exposure metric for a fund?
Additionally, do you agree that CCP recovery, resiliency, and
resolution also are current concerns for some advisers?
Risk metrics. We propose to eliminate the requirement that an
adviser indicate whether there are risk metrics other than, or in
addition to, Value at Risk (``VaR'') that the adviser considers
important to managing a reporting fund's risks.\225\ Advisers generally
do not report detailed information in response to this requirement.
Currently, about 60 percent of advisers to qualifying hedge funds
(representing about 75 percent of the aggregate gross asset value of
qualifying hedge funds) report using VaR or market factor changes in
managing their hedge funds.\226\ Instead, we propose to require
advisers to provide additional information about a reporting fund's
portfolio risk profile, including reporting on portfolio correlation,
investment performance by strategy and volatility of returns and
drawdowns.\227\ The proposal would expand the amount of data collected
by collecting risk data in circumstances where advisers do not use VaR
or market factor changes, and thus provide insight across all (rather
than only some) qualifying hedge funds. This new information would
provide uniform and consistently reported risk information that will
enhance our ability to monitor and assess investment risks of
qualifying hedge funds to gauge systemic risk. In particular,
volatility of returns and drawdown data is a simple measure of risk
that enables us to monitor risk-adjusted returns, changes in volatility
and thereby risk profiles.
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\225\ See current Question 41.
\226\ See Private Funds Statistics Q2 2020 (Table 58/59).
Current Question 40 requires advisers to report certain risk data if
the adviser regularly calculates VaR of the reporting fund. Current
Question 42 requires advisers, for specific market factors, to
determine the effect of specified changes on a reporting fund's
portfolio, but permits advisers to omit a response to any market
factor that they do not regularly consider in formal testing in
connection with a reporting fund's risk management.
\227\ See Proposed Question 48 (portfolio correlation), proposed
Question 49 (investment performance breakdown by strategy), and
proposed Question 23(c) (volatility of returns and drawdown
reporting). See discussion at Section II.B.2 of this Release. We
propose to also revise the title of Item C. of current section 2b to
``Reporting fund risk metrics and performance'' to reflect that the
proposal would add new questions on performance to this section of
the form.
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We request comment on the proposed removal of Question 41.
187. Do you agree with the proposed removal of Question 41?
Instead, should we change this question to make it easier for advisers
to report more detailed information? Do you believe that new Questions
48, 49 and 23(c) will provide better information about the risk
profiles of qualifying hedge funds?
Investment performance by strategy. The proposal would require
advisers to qualifying hedge funds that indicate more than one
investment strategy for a fund in proposed Question 25 to report
monthly gross investment performance by strategy if the adviser
calculates and reports this data for such fund, whether to current and
prospective investors, counterparties, or otherwise.\228\ An adviser
would be required to provide monthly performance results only if such
results are calculated for a reporting fund (whether for purposes of
reporting to current and prospective investors, counterparties, or
otherwise), but would not be required to respond to this question if
the adviser reports performance for the fund as an internal rate of
return. This question is designed to integrate Form PF hedge fund data
with the Federal Reserve Board's reporting on Financial Accounts of the
United States, which the Federal Reserve uses to track the sources and
uses of funds by sector, and which are a component of a system of
macroeconomic accounts including the National Income and Product
accounts and balance of payments accounts, all of which serve as a
comprehensive set of information on the economy's performance. We also
believe that this information could be helpful to the Commissions' and
FSOC's monitoring and analysis of strategy-specific systemic risk in
the hedge fund industry. We request comment on the proposed addition of
new Question 49.
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\228\ Proposed Question 49. The strategies in proposed Question
49 would be based on the strategies set forth in proposed Question
25 (the proposal would also revise the strategy categories in
current Question 20, which we would redesignate as Question 25, to
better reflect our understanding of hedge fund strategies and to
improve data quality and comparability). See discussion at Section
II.B.3 of this Release.
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188. Do you agree with the addition of new Question 49 as proposed?
If not, what alternatives would you suggest and why? Would responding
to this question be burdensome? If it would be overly burdensome, how
would you suggest we modify the proposal?
Portfolio correlation. The proposal would add a new question on
portfolio correlation to collect data on the effects of a breakdown in
correlation.\229\ Based on feedback from advisers filing Form PF and
data reported on Form PF, it appears that hedge funds using the most
leverage tend to engage in long/short, relative value, and similar
strategies that seek to pair trades in highly correlated instruments,
possibly with a focus on factor models. For these hedge funds, VaR
calculations that rely on static correlation matrices may not factor in
periods of market turmoil when assumed correlations break down.
Therefore, a breakdown in assumed correlations could cause these funds
to de-lever and could have a significant impact on financial stability,
particularly if there are ``crowded'' or overlapping positions across
funds, which could lead to cascade effects. We recommend a new question
that gathers data on the effects of a breakdown in assumed correlations
rather than just historical correlations. The proposed new question
would focus on assessing the risks associated with a correlation
breakdown, and would require qualifying hedge funds to report for
[[Page 53869]]
their portfolios (as of the end of each month of the reporting period)
(1) the average pairwise 3-month realized prior Pearson correlation of
each portfolio position's periodic (e.g., daily or weekly) total rates
of return using the greatest available frequency of data over the
measurement window (e.g., daily or weekly), (2) the frequency of the
data used over the prior 3-month window (e.g., daily or weekly) (3) the
expected annualized volatility utilizing 3-month realized prior Pearson
correlations of each portfolio position's periodic (e.g., daily or
weekly) total rates of return and assuming realized prior volatilities
of portfolio positions with the same frequency window as that chosen
when computing 3-month realized correlations, and (4) what the
resulting annualized volatility would be if a reporting fund uniformly
reduced or increased pairwise correlations by 20 percentage points
utilizing 3-month realized prior Pearson correlations of portfolio
positions' periodic rates of return and assuming 3-month realized prior
volatilities of portfolio positions' periodic rates of return with the
same frequency window as that chosen when computing 3-month realized
correlations. This question is designed to (1) isolate the impact of a
breakdown in correlation on the volatility of long/short funds that may
de-lever if there is an increase in their volatility, (2) avoid some of
the pitfalls of VaR models such as relying on backwards looking
assumptions on the relationship between securities, and (3) provide a
measure of volatility sensitivity in addition to one-day VaR. We
believe that this new question would not create a significant burden
for advisers because portfolio positions' periodic total rates of
return and corresponding correlation matrices are likely available for
most qualifying hedge funds. We request comment on the proposed
addition of new Question 48.
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\229\ Proposed Question 48.
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189. Are the effects of a breakdown in correlations useful for
monitoring systemic risk? Would this question provide helpful
information for purposes of comparing fund activities and assessing
risk? Does it offer insight into funds with a range of strategies or is
it useful for only some strategies? What other questions could isolate
the effects of a breakdown in correlations? Will it be burdensome for
advisers to qualifying hedge funds to respond to this question and, if
so, what burdens will be imposed? Are total rates of return and
corresponding correlation matrices readily available for most
qualifying hedge funds? If not, what strategies would have the most
difficulty completing this question? Are there less burdensome
questions that could help isolate the effects of a breakdown in
correlations?
190. As an alternative or in addition to measuring sensitivity to
correlation, would any of the following approaches be preferable to our
proposal: (1) subtract aggregate portfolio VaR from the sum of VaR
computed at the asset class level, or some other sub-portfolio level,
to measure the impact of diversification and the sensitivity to
correlation, or (2) combine single factor stress tests for the
portfolio assuming zero correlation?
191. As proposed, would responding to new Question 48 create an
undue burden for advisers? If so, how should we modify the question to
make it less burdensome for respondents? Does the flexibility embedded
in the proposed question (i.e., the flexibility for a fund to choose
its own frequency of position marks (be it daily, weekly, monthly))
make it easier for funds to respond?
192. Is the proposed 20 percentage point sensitivity metric
appropriate? If not, what alternative do you suggest?
Portfolio Liquidity. We propose to require advisers to include cash
and cash equivalents when reporting portfolio liquidity, rather than
excluding them, as the question currently provides.\230\ We understand
that reporting funds typically include cash and cash equivalents when
analyzing their portfolio liquidity. We believe the proposed change
would improve data quality by reducing inadvertent errors that result
from requiring advisers to report in a way that is different from how
they may report internally. We believe this proposed change is more
reflective of industry practice, and it is preferable to receive
reported data in a format that reflects how advisers typically analyze
portfolio liquidity.
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\230\ See current Question 32 and proposed Question 37.
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We also propose to amend the form's instructions to allow advisers
to assign each investment to more than one period, rather than
directing advisers to assign each investment to only one period, as
Question 32 currently provides. We understand that directing advisers
to assign an investment to only one period may make a reporting fund's
portfolio appear less liquid than it is because it would not reflect
that reporting funds may divide up sales in different periods (e.g., a
reporting fund could sell off a portion in the first time period, and
sell of the remainder in subsequent time periods). Therefore, this
proposed change is designed to reflect the liquidity of a reporting
fund's portfolio more accurately.
While advisers would continue to be able to rely on their own
methodologies to report portfolio liquidity, we propose to add an
instruction explaining that estimates must be based on a methodology
that takes into account changes in portfolio composition, position
size, and market conditions over time. Based on experience with the
form, we have found that some advisers have used static methodologies
that do not consider portfolio composition and position size relative
to the market, and therefore do not reflect a reasoned view about when
positions could be liquidated at or near carrying value. Therefore,
this proposed change is designed to continue to allow advisers to use
their own methodologies, but improve data quality to ensure that the
methodologies generate reporting that reflects a reasonable view of
portfolio liquidity in light of changes in portfolio composition and
size, and market conditions, over time.
Finally, to facilitate more accurate reporting, collect better
data, and reduce filer errors, we propose to amend the table to be
included in proposed Question 37 to reflect that information should be
reported as a percentage of NAV consistent with SEC staff Form PF
Frequently Asked Questions.\231\
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\231\ See Form PF Frequently Asked Questions, supra footnote 79,
Question 32.3.
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We request comment on the proposed amendments.
193. Should proposed Question 37's portfolio liquidity requirements
include cash and cash equivalents, as proposed, regardless of what
types of advisers would complete it? Would this proposed amendment help
the Commissions and FSOC better analyze portfolio liquidity? Would this
proposed change make Form PF more consistent with how the industry
analyzes portfolio liquidity? Is there a better way to meet these
objectives? For example, should Form PF instead require advisers to
report cash and cash equivalents for all reporting funds separately
than other positions when reporting portfolio liquidity?
194. Do you agree that reporting funds typically include cash and
cash equivalents when analyzing their portfolio's liquidity?
195. Should Form PF allow advisers to assign investments to more
than one period, as proposed? Would this proposed change more
accurately reflect the liquidity of a reporting fund's portfolio?
196. Should Form PF continue to allow advisers to rely on their own
[[Page 53870]]
methodologies in reporting on portfolio liquidity?
197. Should Form PF include an instruction that provides that
estimates must be based on a methodology that takes into account
changes in portfolio composition, position size, and market conditions
over time, as proposed? Would this proposed change improve data
quality? Is there a better way to achieve this objective? If we add the
instruction to this question, in particular, would it suggest that the
instruction would not apply to other liquidity analysis, or other
portfolio metrics?
198. As an alternative, should Form PF require all advisers to
report portfolio liquidity for all reporting funds?
199. Should Form PF change how advisers report portfolio liquidity
in any other ways? For example, should we require advisers to report
information in dollars, in addition to or instead of reporting as a
percentage of the portfolio, as Form PF currently requires? Would such
a requirement help the Commissions and FSOC to compare portfolio
liquidity with other data on Form PF that advisers report in dollars?
Financing Liquidity. Question 46 is designed to show the extent to
which financing may become rapidly unavailable for qualifying hedge
funds.\232\ We propose to amend current Question 46 to improve data
quality thereby supporting more effective systemic risk analysis.\233\
Advisers would provide the dollar amount of financing that is available
to the reporting fund, including financing that is available but not
used, by the following types: (1) ``unsecured borrowing,'' (2)
``secured borrowing'' via prime brokerage, (3) secured borrowing via
reverse repo, and (4) other secured borrowings.\234\ Currently, the
Commissions and FSOC infer this data from this question and current
Question 43 (concerning the reporting fund's borrowings).\235\ However,
these inferences may not be accurate given the number of assumptions
that currently go into making such inferences. This proposed
information would help us understand the extent to which a fund's
financing could be rapidly withdrawn and not replaced.
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\232\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying n.281.
\233\ We would redesignate Question 46 as Question 50.
\234\ Form PF defines ``unsecured borrowing'' as obligations for
borrowed money in respect of which the borrower has not posted
collateral or other credit support. Form PF defines ``secured
borrowing'' as obligations for borrowed money in respect of which
the borrower has posted collateral or other credit support. For
purposes of this definition, reverse repos are secured borrowings.
See Form PF Glossary of Terms. These categories are designed to be
consistent with borrowing categories that qualifying hedge funds
would report on the new counterparty exposure table.
\235\ Current Question 43 collects data on the reporting fund's
borrowing by type (e.g., unsecured, and secured by type, i.e., prime
broker, reverse repo or other), while current Question 46 only
collects a total amount of financing available, both used and
unused, with no breakdown by type of financing.
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We request comment on the proposed amendments.
200. Should Form PF require advisers to report the amount of
financing that is available to the reporting fund but not used, as a
dollar amount, as proposed? Alternatively, should Form PF require
advisers to report this information in a different way? For example,
should Form PF require advisers to report the amount of financing that
is available to the reporting fund but not used, as a percentage of
total financing? Would it be more or less burdensome for advisers to
report this information as a dollar amount than as a percentage of
total financing? Please provide supportive data.
201. As an alternative, should Form PF require all advisers to
report financing liquidity for any size hedge funds they advise? If so,
why?
D. Proposed Amendments To Enhance Data Quality
We are also proposing several amendments to the instructions to
Form PF to enhance data quality.\236\ Specifically, we are proposing
the following changes:
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\236\ Proposed Instruction 15 (provides guidelines for advisers
in responding to questions on Form PF relying on their own
methodology).
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Reporting of percentages. For questions that require information to
be expressed as a percentage, we propose to require that percentages be
rounded to the nearest one hundredth of one percent rather than rounded
to the nearest whole percent. We believe that this additional level of
precision is important, especially for questions where it is common for
filers to report low percentage values (e.g., risk metric questions
such as current Question 40 and current Question 42) to avoid
situations where advisers round to zero and no data is reported,
potentially obscuring small changes that may be meaningful from a risk
analysis or stress testing perspective.
Value of investment positions and counterparty exposures. We
propose to specify how private fund advisers determine the value of
investment positions (including derivatives) and counterparty
exposures. The proposed changes are designed to provide a more
consistent presentation of reported information on investment and
counterparty exposures to support more accurate aggregation and
comparisons among private funds by us and FSOC in assessing systemic
risk. Under the form's current instructions, advisers may report
portfolios with similar exposures differently.\237\ We understand that
some advisers net legs of partially offsetting trades when calculating
the value of derivatives positions in accordance with internal
methodologies, but others do not, resulting in inconsistent reporting
that may obscure a fund's risk profile. We propose to require these
trades to be reported independently on a gross basis, consistent with
derivatives reporting on Form N-PORT.\238\ We also propose to instruct
advisers that for all positions reported on Form PF, advisers should
not include as ``closed-out'' a position if the position is closed out
with the same counterparty and results in no credit or market exposure
to the fund, making the approach on Form PF with respect to closed out
positions consistent with rule 18f-4 of the Investment Company Act and
our understanding of filers' current practices.\239\
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\237\ See Form PF: General Instruction 15.
\238\ Specifically, proposed Instruction 15 requires that if a
question in Form PF requests information regarding a ``position'' or
``positions,'' advisers must treat legs of a transaction even if
offsetting or partially offsetting, or even if entered into with the
same counterparty under the same master agreement as two separate
positions, even if reported internally as part of a larger
transaction. See also instructions to N-PORT, General Instruction G.
\239\ See Use of Derivatives by Registered Investment Companies
and Business Development Companies, IC Release No. 34084 (Nov. 2,
2020), Section II.E.2.c. [85 FR 83162, 83210] Dec. 21, 2020. See
also Form PF Frequently Asked Questions, supra footnote 79, Question
44.1.
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Reporting of long and short positions. We propose to amend the
instructions regarding the reporting of long and short positions on
Form PF to improve the accuracy and consistency of reported data used
for systemic risk analysis. We propose to specify that if a question
requires the adviser to distinguish long positions from short
positions, the adviser should classify positions based on the
following: (1) a long position experiences a gain when the value of the
market factor to which it relates increases (and/or the yield of that
factor decreases), and (2) a short position experiences a loss when the
value of the market factor to which it relates increases (and/or the
yield of that factor decreases).
Calculating certain derivative values. We propose to amend the
instruction to provide that, (1) for calculating the value of interest
rate derivatives, ``value'' means the 10-year bond
[[Page 53871]]
equivalent, and (2) for calculating the value of options, ``value''
means the delta adjusted notional value (expressed as a 10-year bond
equivalent for options that are interest rate derivatives).\240\ The
amended instruction would also provide that in determining the value of
these derivatives, advisers should not net long and short positions or
offset trades, but should exclude closed-out positions that are closed
out with the same counterparty provided that there is no credit or
market exposure to the fund. The proposed amendments are designed to
provide more consistent reporting by advisers, which we believe would
help support more accurate aggregation of data, better comparisons
among funds, and a more accurate picture for purposes of assessing
systemic risk.\241\
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\240\ See Form PF Glossary of Terms (proposed definition of
``10-year bond equivalent'' specifies the zero coupon bond
equivalent).
\241\ This is consistent with prior staff positions. See Form PF
Frequently Asked Questions, supra footnote 79, Questions 24.3 and
26.1.
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Currency Conversions for Reporting in U.S. Dollars. We propose to
amend Instruction 15 to clarify that if a question requests a monetary
value, advisers should provide the information in U.S. dollars as of
the data reporting date or other requested date (as applicable) and use
a foreign exchange rate for the applicable date. We also propose to
amend Instruction 15 to provide that if a question requests a monetary
value for transactional data that covers a reporting period, advisers
should provide the information in U.S. dollars, rounded to the nearest
thousand, using foreign exchange rates as of the dates of any
transactions to convert local currency values to U.S. dollars.\242\
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\242\ See proposed Instruction 15.
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We request comment on the proposed amendments to Instruction 15.
202. Should we require reporting of ``gross'' positions and
exposure as proposed? Would the proposed approach cause advisers to
report misleading data? Would the proposed approach cause compliance or
operational issues? What other approach could we take to obtain
consistent data that would better reveal risks associated with a
particular fund? We understand that most advisers' risk management
systems incorporate offsetting or netting methods, but they may take
different approaches. Should we permit advisers to report using the
offsetting or netting methods they use internally? Would that provide
useful data? Should we instead require advisers to offset and net based
on a consistent, prescribed method?
203. The proposal would instruct advisers to not include as
``closed-out'' a position if the position is closed out with the same
counterparty and results in no credit or market exposure to the fund.
Do you agree that the proposed changes would make the approach on Form
PF with respect to closed out positions consistent with rule 18f-4 of
the Investment Company Act and filers' current practices? If not, what
alternative approach do you suggest?
204. Should we capture derivative exposure differently or request
additional measures of derivatives? For example, the CFTC's Form CPO-
PQR requires reporting of positive/negative open trade equity (OTE),
which refers to the amount of unrealized gain/loss on open derivative
positions. Would this measure improve our ability to assess and compare
private fund activities and assess systemic risk?
205. Does reporting to the nearest one hundredth of one percent
involve additional burdens compared to the current requirement to round
to the nearest one percent? Would it meaningfully increase the accuracy
of the reporting? Would permitting rounding to the nearest one percent
on any of the questions on Form PF that request information expressed
as a percentage reduce burdens on filers?
206. Are the proposed instructions with respect to classifying long
and short positions consistent with industry conventions? Are these
instructions clear for different types of products? If not, how should
they be modified? For example, are there any elements of the
Alternative Investment Fund Managers Directive or Open Protocol
Enabling Risk Aggregation that would be helpful to incorporate?
207. The proposal would require that advisers report two or more
legs of a transaction--even if offsetting--as separate positions. This
proposed amendment is designed to elicit a more consistent presentation
of investment and counterparty exposures. We understand, however, that
this approach may inflate the value of a reporting fund's long and
short investment exposures in a way that does not represent the
adviser's view of a reporting fund's investment exposures and the
associated risks. Is this a valid concern? Are there other approaches
we should use for investment exposure reporting? For example, should we
require netting of long and short positions under certain conditions
(e.g., identical underlying securities and same counterparty) when
consistent with the adviser's internal recordkeeping and risk
management? Should we require advisers to report exposures on both a
``gross'' basis as well as after all netting consistent with the
adviser's internal recordkeeping and risk management?
208. The proposal would amend the instruction to provide that, (1)
for calculating the value of interest rate derivatives, ``value'' means
the 10-year bond equivalent, and (2) for calculating the value of
options, ``value'' means the delta adjusted notional value (expressed
as a 10-year bond equivalent for options that are interest rate
derivatives). Is this approach appropriate? If not, what alternatives
do you suggest?
209. Are the proposed instructions with respect to reporting in
U.S. dollars when a question requests a monetary value appropriate? If
not, how should they be modified? If a reporting fund's base currency
is not U.S. dollars, how and when do advisers convert the base currency
to U.S. dollars? Should Form PF include additional instructions on how
or when to convert base currency to U.S. dollars? For example, should
Form PF require advisers to report the conversion rate? Is further
specificity needed regarding return series, volatility and other
percentage measures for funds that have base currencies other than the
U.S. dollar?
E. Proposed Additional Amendments
The proposal would make several additional amendments to the
general instructions to Form PF. Specifically, we propose to amend
Instruction 14 to allow advisers to request a hardship exemption
electronically to make it easier to submit a temporary hardship
exemption,\243\ and provide, by way of an amendment to rule 204(b)-1(f)
under the Advisers Act, that for purposes of determining the date on
which a temporary hardship exemption is filed, ``filed'' means the
earlier of the date the request is postmarked or the date it is
received by the Commission.\244\ We are
[[Page 53872]]
proposing the latter change to assist advisers with determining what
constitutes a ``filed'' temporary hardship exemption in the context of
the requirement that the request be filed no later than one business
day after a filer's electronic Form PF filing was due as required under
Instruction 14. Additionally, the proposal would amend Instruction 18
based on recent rule changes made by the CFTC with respect to Form CPO-
PQR.\245\ While the CFTC no longer considers Form PF reporting on
commodity pools as constituting substituted compliance with CFTC
reporting requirements, some CPOs may continue to report such
information on Form PF.
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\243\ The proposal would also update the mailing address to
which advisers requesting a temporary hardship exemption should mail
their exemption filing, include the email address for submitting
electronically the adviser's signed exemption filing in PDF format,
add an instruction noting that filers should not complete or file
any other sections of Form PF if they are filing a temporary
hardship exemption. See Proposed Instruction 14. The proposal would
indicate that the reference regarding the instruction pertaining to
temporary hardship exemptions should refer to Instruction 14 instead
of Instruction 13. See Form PF General Instruction 3, Section 5--
Advisers requesting a temporary hardship exemption.
\244\ We are also amending rule 204(b)-1(f) under the Advisers
Act to remove certain filing instructions in the rule for temporary
hardship exemptions and instead direct filers to the instructions in
the form. See 204(b)-1(f)(2)(i) (indicating that advisers should
complete and file Form PF in accordance with the instructions to
Form PF, no later than one business day after the electronic Form PF
filing was due).
\245\ See Form CPO-PQR Release, supra footnote 56.
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The proposal would revise the terms ``EEA,'' which Form PF defines
as the European Economic Area and ``G10,'' which Form PF defines as The
Group of Ten, to (1) remove outdated country compositions and (2)
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF if adopted, advisers would use the current composition as of the
data reporting date. This proposed amendment is designed to address
questions from advisers about whether to report data based on the
composition of the EEA and G10 as of the effective date of these
proposed amendments to Form PF if adopted, or the current composition
of the EEA and G10, if it changes.
We request comment on the proposed amendments.
210. Would the proposed amendments to Instruction 14 and to rule
204(b)-1(f) under the Advisers Act make it easier to submit a temporary
hardship exemption and assist advisers in determining the date on which
a temporary hardship exemption is filed? If not, are there
alternatives?
211. Would the proposed amendments to the Glossary of Terms
appropriately update the terms and provide clarification? Is there a
better way to meet these objectives? If so, please provide examples.
212. The proposal would amend Instruction 18 based on recent rule
changes made by the CFTC with respect to Form CPO-PQR. Is this proposed
change appropriate?
213. The proposal would remove the list of country compositions and
include an instruction that if the composition of the EEA or G10
changes after the effective date of these proposed amendments to Form
PF (if adopted), advisers would use the current composition as of the
data reporting date. Is this approach appropriate? If not, what
alternative approach do you suggest?
III. Economic Analysis
A. Introduction
The SEC is mindful of the economic effects, including the costs and
benefits, of the proposed amendments. Section 202(c) of the Advisers
Act provides that when the SEC is engaging in rulemaking under the
Advisers Act and is required to consider or determine whether an action
is necessary or appropriate in the public interest, the SEC shall also
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors.\246\ The
analysis below addresses the likely economic effects of the proposed
amendments, including the anticipated and estimated benefits and costs
of the amendments and their likely effects on efficiency, competition,
and capital formation. The SEC also discusses the potential economic
effects of certain alternatives to the approaches taken in this
proposal.
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\246\ 15 U.S.C. 80b-2(c).
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Many of the benefits and costs discussed below are difficult to
quantify. For example, the SEC cannot quantify the effects of how
regulators may adjust their policies and oversight of the private fund
industry in response to the additional data collected under the
proposed rule. Also, in some cases, data needed to quantify these
economic effects are not currently available and the SEC does not have
information or data that would allow such quantification. For example,
costs associated with the proposal may depend on existing systems and
levels of technological expertise within the private fund advisers,
which could differ across reporting persons. While the SEC has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The SEC seeks
comment on all aspects of the economic analysis, especially any data or
information that would enable a quantification of the proposal's
economic effects.
B. Economic Baseline and Affected Parties
1. Economic Baseline
As discussed above, the Commissions adopted Form PF in 2011, with
additional amendments made to section 3 along with certain money market
reforms in 2014.\247\ Form PF complements the basic information about
private fund advisers and funds reported on Form ADV.\248\ Unlike Form
ADV, Form PF is not an investor-facing disclosure form. Information
that private fund advisers report on Form PF is provided to regulators
on a confidential basis and is nonpublic.\249\ The purpose of Form PF
is to provide the Commissions and FSOC with data that regulators can
deploy in their regulatory and oversight programs directed at assessing
and managing systemic risk and protecting investors.\250\
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\247\ See supra footnote 3. When the SEC adopted the amendments
to section 3 in 2014 in connection with certain money market
reforms, it noted that under the proposal it was concerned that some
of the proposed money market reforms could result in assets shifting
from registered money market funds to unregistered products such as
liquidity funds, and that the proposed amendments were designed to
help the SEC and FSOC track any potential shift in assets and better
understand the risks associated with the proposed money market
reforms. See, e.g., D. Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators (DERA White Paper Jan. 2017)
(``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf; 2011 Form PF Adopting Release; 2014
Form PF Amending Release at 466; Commissioner Aguilar Statement,
July 23, 2014, available at https://www.sec.gov/news/public-statement/2014-07-23-open-meeting-statment-laa.
\248\ Investment advisers to private funds report on Form ADV,
on a public basis, general information about private funds that they
advise, including basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv. See also Investment
Adviser Public Disclosure, available at https://adviserinfo.sec.gov/.
\249\ As discussed above, SEC staff publish quarterly reports of
aggregated and anonymized data regarding private funds on the SEC's
website. See supra footnote 7; see also Private Fund Statistics Q3
2021
\250\ See supra section I.
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Private funds and their advisers play an important role in both
private and public capital markets. These funds, including hedge funds,
currently have more than $18.0 trillion in gross private fund
assets.\251\ Hedge funds in particular have more than $9.7 trillion in
gross private fund assets.\252\ Private funds invest in large and small
businesses and use strategies that range from long-term investments in
equity
[[Page 53873]]
securities to frequent trading and investments in complex instruments.
Their investors include individuals, institutions, governmental and
private pension funds, and non-profit organizations.
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\251\ These estimates are based on staff review of data from the
Private Fund Statistics report for the third quarter of 2021, issued
in March 2022. Private fund advisers who file Form PF currently have
$18.1 trillion in gross assets. See Private Fund Statistics Q3 2021.
\252\ See Division of Investment Management, Private Fund
Statistics, (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
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Before Form PF was adopted, the SEC and other regulators, including
the CFTC, had limited visibility into the economic activity of private
fund advisers and relied largely on private vendor databases about
private funds that covered only voluntarily provided private fund data
and did not represent the total population.\253\ Form PF represented an
improvement in available data about private funds, both in terms of its
reliability and completeness.\254\ Generally, investment advisers
registered (or required to be registered) with the Commission with at
least $150 million in private fund assets under management must file
Form PF. Smaller private fund advisers and all private equity fund
advisers file annually to report general information such as the types
of private funds advised (e.g., hedge funds, private equity funds, or
liquidity funds), fund size, use of borrowings and derivatives,
strategy, and types of investors.\255\ In addition, large private
equity advisers provide data about each private equity fund they
manage. Large hedge fund and liquidity fund advisers also provide data
about each reporting fund they manage, and are required to file
quarterly.\256\
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\253\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\254\ Id.
\255\ Id.
\256\ Id.
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The SEC and other regulators now have almost a decade of experience
with analyzing the data collected on Form PF. The collected data has
helped FSOC establish a baseline picture of the private fund industry
for the use in assessing systemic risk \257\ and improved the SEC's
oversight of private fund advisers.\258\ Form PF data also has enhanced
the SEC's and FSOC's ability to frame regulatory policies regarding the
private fund industry, its advisers, and the markets in which they
participate, as well as more effectively evaluate the outcomes of
regulatory policies and programs directed at this sector, including the
management of systemic risk and the protection of investors.\259\
Additionally, based on the data collected through Form PF filings,
regulators have been able to regularly inform the public about ongoing
private fund industry statistics and trends by generating quarterly
Private Fund Statistics reports \260\ and by making publicly available
certain results of staff research regarding the characteristics,
activities, and risks of private funds.\261\ As discussed above, these
data may also be used by the CFTC for the purposes of its regulatory
programs, including examinations, investigations and investor
protection efforts.\262\
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\257\ See, e.g., OFR, 2021 Annual Report to Congress (Nov.
2021), available at https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf; Financial Stability
Oversight Council, 2020 Annual Report, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
\258\ See, e.g., SEC 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-to-congress.pdf.
\259\ See supra footnotes 257, 258.
\260\ See supra footnote 249.
\261\ See, e.g., David C. Johnson and Francis A. Martinez, Form
PF Insights on Private Equity Funds and Their Portfolio Companies
(OFR Brief Series No. 18-01, June 14, 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; Hiltgen Paper; G. Aragon, T. Ergun, M.
Getmansky, and G. Girardi, Hedge Funds: Portfolio, Investor, and
Financing Liquidity, (DERA White Paper, May 2017), available at
https://www.sec.gov/files/dera_hf-liquidity.pdf; George Aragon,
Tolga Ergun, and Giulio Girardi, Hedge Fund Liquidity Management:
Insights for Fund Performance and Systemic Risk Oversight (DERA
White Paper, Apr. 2021), available at https://www.sec.gov/files/dera_hf-liquidity-management.pdf; Mathis S. Kruttli, Phillip J.
Monin, and Sumudu W. Watugala, The Life of the Counterparty: Shock
Propagation in Hedge Fund-Prime Broker Credit Networks (OFR Working
Paper No. 19-03, Oct., 2019), available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-03_the-life-of-the-counterparty.pdf; Mathias S. Kruttli, Phillip J. Monin,
Lubomir Petrasek, and Sumudu W. Watugala, Hedge Fund Treasury
Trading and Funding Fragility: Evidence from the COVID-19 Crisis
(Federal Reserve Board, Finance and Economics Discussion Series No.
2021-038, Apr. 2021), available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; Mathias S. Kruttli, Phillip
J. Monin, and Sumudu W. Watugala, Investor Concentration, Flows, and
Cash Holdings: Evidence from Hedge Funds (Federal Reserve Board,
Finance and Economics Discussion Series No. 2017-121 Dec. 15, 2017),
available at https://www.federalreserve.gov/econres/feds/investor-concentration-flows-and-cash-holdings-evidence-from-hedge-funds.htm.
\262\ See supra section I.
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However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where more granular and
timely information would improve the SEC's and FSOC's understanding of
the private fund industry and the potential systemic risk relating to
its activities, and improve regulators' ability to protect
investors.\263\ For example, as discussed above, when monitoring funds'
activities during recent market events like the March 2020 COVID-19
turmoil, the existing aggregation of U.S. treasury securities with
related derivatives did not reflect the role hedge funds played in the
U.S treasury market.\264\ Also during the COVID-19 market turmoil, FSOC
sought to evaluate the role hedge funds played in disruptions in the
U.S. treasury market by unwinding cash-futures basis trade positions
and taking advantage of the near-arbitrage between cash and futures
prices of U.S. treasury securities. Because the existing requirement
regarding turnover reporting on U.S. treasury securities is highly
aggregated, the SEC staff, during retrospective analyses on the March
2020 market events, was unable to obtain a complete picture of activity
relating to long treasuries and treasury futures.\265\ The need for
more granular and timely information collected on Form PF is further
heightened by the increasing significance of the private fund industry
to financial markets, and resulting regulatory concerns regarding
potential risks to U.S. financial stability from this sector.\266\ The
SEC's and FSOC's experiences analyzing Form PF data has also identified
certain areas of Form PF where questions result in data received that
is redundant to other questions, or instructions that result in
unnecessary reporting burden for some advisers.\267\
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\263\ See supra section I.
\264\ See supra section II.C.2.a.
\265\ See supra section II.C.2.d. This also includes the SEC's
and FSOC's experience analyzing data from multiple regulatory
filings. For example, one SEC staff paper has used Form PF data and
Form N-MPF data to study rule 2a-7 risk limits and implications of
money market reforms. See, e.g., Hiltgen Paper.
\266\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. See supra footnote 7. See also
Financial Stability Oversight Council Update on Review of Asset
Management Product and Activities (2014), available at https://www.treasury.gov/initiatives/fsoc/news/Documents/FSOC%20Update%20on%20Review%20of%20Asset%20Management%20Products%20and%20Activities.pdf.
\267\ Based on the PRA analysis in section IV.A.3, the current
costs associated with filing Form PF report are estimated to be
$4,173.75 per quarterly filing or $16,695 annually for smaller
private fund advisers, $41,737.50 per quarterly filing or $166,950
annually for large hedge fund advisers, $19,477.50 per quarterly
filing or $77,910 annually for large liquidity fund advisers, and
$27,825 per quarterly filing or $111,300 annually for large private
equity advisers. The calculation for large liquidity fund advisers
incorporates the adjustment explained in footnote 9 to Table 6
(yielding an estimate of costs prior to the proposal of $29,216.25/
105*70 = $19477.50). See Table 6. A 2018 industry survey of large
hedge fund advisers observed filing costs that ranged from 35% to
72% higher than SEC cost estimates. See Managed Funds Association,
``A Streamlined Form PF: Reducing Regulatory Burden,'' September 17,
2018, p. 3, available at https://www.managedfunds.org/wp-content/uploads/2018/09/MFA.Form-PF-Recommendations.attachment.final_.9.17.18.pdf. However, a 2015
academic survey of SEC-registered investment advisers to private
funds affirmed the SEC's cost estimates for smaller private fund
advisers' Form PF compliance costs, and observed that the SEC
overestimated Form PF compliance costs for larger private fund
advisers. See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9 Brooklyn Journal of Corporate, Financial, and
Commercial Law 428 (2015).
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[[Page 53874]]
2. Affected Parties
The proposal amends the general instructions and basic information
reporting requirements facing all categories of private fund advisers.
As discussed above, these include, but are not limited to, advisers to
hedge funds, private equity funds, real estate funds, securitized asset
funds, liquidity funds, and venture capital funds.\268\ The proposal
further amends reporting requirements for large hedge fund advisers,
including specific revisions for large hedge fund advisers to
qualifying hedge funds.\269\
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\268\ See supra section I.
\269\ Form PF currently defines ``hedge fund'' broadly to
include any private fund (other than a securitized asset fund) that
has any of the following three characteristics: (1) a performance
fee or allocation that takes into account unrealized gains, or (2) a
high leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notional
exposure in excess of twice its net asset value (including committed
capital)) or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary of Terms. ``Large'' hedge fund
advisers are those, collectively with their related persons, with at
least $1.5 billion in hedge fund assets under management as of the
last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter. Qualifying
hedge funds are hedge funds that have a net asset value
(individually or in combination with any feeder funds, parallel
funds and/or dependent parallel managed accounts) of at least $500
million as of the last day of any month in the fiscal quarter
immediately preceding the adviser's most recently completed fiscal
quarter. See supra section II.C.
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Hedge funds, the focus of part of the proposal, are one of the
largest categories of private funds,\270\ and as such play an important
role in the U.S. financial system due to their ability to mobilize
large pools of capital, take economically important positions in a
market, and their extensive use of leverage, derivatives, complex
structured products, and short selling.\271\ While these features may
enable hedge funds to generate higher returns as compared to other
investment alternatives, the same features may also create spillover
effects in the event of losses (whether caused by their investment and
derivatives positions or use of leverage or both) that could lead to
significant stress or failure not just at the affected fund but also
across financial markets.\272\
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\270\ See infra footnote 273.
\271\ See, e.g., Lloyd Dixon, Noreen Clancy, and Krishna B.
Kumar, Hedge Fund and Systemic Risk, RAND Corporation (2012); John
Kambhu, Til Schuermann, and Kevin Stiroh, Hedge Funds, Financial
Intermediation, and Systemic Risk, Federal Reserve Bank of New
York's Economic Policy Review (2007).
\272\ See supra footnotes 257, 266.
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In the third quarter of 2021, there were 9,484 hedge funds reported
on Form PF, managed by 1,758 advisers, with nearly $9.8 trillion in
gross assets under management, which represented approximately 54% of
assets reported by private fund advisers.\273\ Currently, hedge fund
advisers with between $150 million and $2 billion in regulatory assets
(that do not qualify as large hedge fund advisers) file Form PF
annually, in which they provide general information about funds they
advise such as the types of private funds advised, fund size, their use
of borrowings and derivatives, strategy, and types of investors. Large
hedge fund advisers (those with at least $1.5 billion in regulatory
assets under management attributable to hedge funds) \274\ file Form PF
quarterly, in which they provide data about each hedge fund they
managed during the reporting period (irrespective of the size of the
fund). Large hedge fund advisers must report more information on Form
PF about qualifying hedge funds (those with at least $500 million as of
the last day of any month in the fiscal quarter immediately preceding
the adviser's most recently completed fiscal quarter) \275\ than other
hedge funds they manage during the reporting period. In the third
quarter of 2021, there were 2,013 qualifying hedge funds reported on
Form PF, managed by 592 advisers, with $8.3 trillion in gross assets
under management, which represented approximately 85 percent of the
reported hedge fund assets.\276\
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\273\ In the third quarter of 2021, hedge fund assets accounted
for 54 percent of the gross asset value (``GAV'') ($9.8/$18.1
trillion) and 42.5 percent of the net asset value (``NAV'') ($5.1/
$12.0 trillion) of all private funds reported on Form PF. Private
Fund Statistics Q3 2021 at p. 5.
\274\ See supra footnote 269.
\275\ Id.
\276\ In the third quarter of 2021, qualifying hedge fund assets
accounted for 85 percent of the GAV ($8.3/$9.8 trillion) and 82
percent of the NAV ($4.2/$5.1 trillion) of all hedge funds reported
on Form PF. Private Fund Statistics Q3 2021 at pp. 4-5.
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Private equity funds are another large category of funds in the
private fund industry. In the third quarter of 2021, there were 15,835
private equity funds reported on Form PF, managed by 1,455 advisers,
with $4.8 trillion in gross assets under management, which represented
over one quarter of the reported gross assets in the private fund
industry.\277\ Many private equity funds focus on long-term returns by
investing in a private, non-publicly traded company or business--the
portfolio company--and engage actively in the management and direction
of that company or business in order to increase its value.\278\ Other
private equity funds may specialize in making minority investments in
fast-growing companies or startups.\279\
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\277\ In the third quarter of 2021, private equity assets
accounted for 26 percent of the GAV ($4.8/$18.1 trillion) and 35
percent of the NAV ($4.1/$12.0 trillion) of all private funds
reported on Form PF. Private Fund Statistics Q3 2021 at p. 5.
\278\ After purchasing controlling interests in portfolio
companies, private equity advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., Private Equity Funds, Securities and Exchange
Commission, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
\279\ Id.
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For the remaining categories of funds (real estate funds,
securitized asset funds, liquidity funds, venture capital funds, and
other private funds), advisers required to file Form PF had, in the
third quarter of 2021, investment discretion over $3.5 trillion in
gross assets under management.\280\ These assets were managed by 1,442
fund advisers managing 12,019 funds.\281\
---------------------------------------------------------------------------
\280\ Private Fund Statistics Q3 2021 at p. 5.
\281\ Private Fund Statistics Q3 2021 at p. 4.
---------------------------------------------------------------------------
Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\282\ Private funds that rely on the exclusion from the
definition of ``investment company'' provided in Section 3(c)(7) of the
Investment Company Act are limited to investors that are also qualified
purchasers (as defined in section 2(a)(51) of the Investment Company
Act). Retail U.S. investors with exposure to private funds are
typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\283\ In the
third quarter of 2021, public pension plans had $1,586
[[Page 53875]]
billion invested in reporting private funds while private pension plans
had $1,263 billion invested in reporting private funds, making up 13.2
percent and 10.5 percent of the overall beneficial ownership in the
private equity industry, respectively.\284\ Private fund advisers have
also sought to be included in individual investors' retirement plans,
including their 401(k)s.\285\
---------------------------------------------------------------------------
\282\ See, e.g., Private Equity Funds, Securities and Exchange
Commission, (Investor.gov: Private Equity Funds), available at
https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity; Hedge
Funds, Securities and Exchange Commission (Investor.gov: Hedge
Funds), available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
\283\ See supra footnotes 251, 282.
\284\ Private Fund Statistics Q3 2021 at p. 15.
\285\ See, e.g., Dep't of Labor, Information Letter (June 3,
2020), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.
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C. Benefits and Costs
1. Benefits
The proposal is designed to facilitate two primary goals the SEC
sought to achieve with reporting on Form PF as articulated in the
original adopting release, namely: (1) facilitating FSOC's
understanding and monitoring of potential systemic risk relating to
activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the SEC's abilities
to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the SEC's efforts to protect investors
and maintain fair, orderly, and efficient markets.\286\
---------------------------------------------------------------------------
\286\ See supra section I. While the proposed amendments are
also designed to improve the usefulness of this data for the CFTC,
this economic analysis does not include the benefits associated with
enhancements to the CFTC's use of reporting on Form PF.
---------------------------------------------------------------------------
The SEC believes the proposal would accomplish these goals in three
key ways, each discussed in detail in the following sections. First,
the proposal would provide for solutions to potential reporting errors
and issues of data quality when analyzing Form PF filings across
advisers and when analyzing multiple different regulatory filings.
Higher quality data across different funds and across different
regulatory filings can allow the SEC and FSOC to develop an
understanding of one set of advisers and apply it to other advisers
more rapidly, or apply lessons from one financial market to other
financial markets. This can help the SEC and FSOC develop more
effective regulatory responses, and help the SEC protect investors by
identifying areas in need of outreach, examinations, and investigations
in response to potential systemic risks, conflicting arrangements
between advisers and investors, and other sources of investor harm.
Second, the proposal would help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry in terms of ownership, size, investment
strategies, and exposures. This can improve the SEC's and FSOC's
understanding of new developing systemic risks and potential
conflicting arrangements, thereby further aiding in the development of
regulatory responses, and also aiding the SEC in efforts to protect
investors by identifying areas in need of outreach, examinations, and
investigations.
Third, the proposal would streamline reporting and reduce reporting
burdens without compromising investor protection efforts and systemic
risk analysis. This would improve the efficiency and effectiveness of
the SEC's efforts to protect investors and maintain fair, orderly and
efficient markets.
The SEC anticipates that the increased ability for the SEC's and
FSOC's oversight, resulting from the proposed amendments, could promote
better functioning and more stable financial markets, which may lead to
efficiency improvements. The SEC does not anticipate significant
effects of the proposed amendments on competition in the private fund
industry because the reported information generally would be nonpublic
and similar types of advisers would have comparable burdens under the
amended Form. For similar reasons, the SEC does not anticipate
significant effects of the proposed amendments on capital formation.
The proposal would amend the general instructions (as well as
implement additional amendments), section 1 (requiring basic
information about advisers and the private funds they advise), and
section 2 (requiring information about hedge funds advised by large
private fund advisers) of Form PF. The benefits associated with each of
these specific elements are discussed in greater detail below.
a. Proposed Amendments to General Instructions, Proposed Amendments To
Enhance Data Quality, and Proposed Additional Amendments
The proposal would update the Form PF general instructions to
revise how all private fund advisers satisfy certain requirements on
Form PF, it would issue a series of amendments to enhance data quality,
and it would lastly issue a series of additional amendments.\287\ There
are five categories of such proposals.
---------------------------------------------------------------------------
\287\ See supra section II.A, II.D, II.E.
---------------------------------------------------------------------------
First, the proposal would amend the general instructions for
reporting of master-feeder arrangements and parallel fund
structures.\288\ These revisions to the general instructions would
improve consistency of reporting associated with measuring private fund
interconnectedness and investment in other private funds by revising
instructions for reporting of ownership structures and revising
instructions that were previously ambiguous and resulted in reporting
errors and issues of data quality across advisers. For example, as
discussed above, Form PF currently provides advisers with flexibility
to respond to questions regarding master-feeder arrangements, parallel
fund structures, and use of funds of funds either in the aggregate or
separately, as long as they do so consistently throughout Form PF. The
revised instructions would specify how to respond to these questions to
prevent some advisers from responding in the aggregate and some
advisers from responding separately.\289\ The proposal would also
require reporting on the total value of parallel managed accounts.\290\
The SEC anticipates these improved data would assist the SEC and FSOC
in assessing potential risks to financial stability resulting from
increasingly complex ownership and investment structures of private
funds. While master-feeder arrangements, parallel fund structures, and
use of funds of funds all allow private funds to benefit from larger
pools of capital, diversify risk, and enjoy shared returns,\291\ these
same features have inherent risks of
[[Page 53876]]
spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well.
Complex ownership structures may also create conflicts of interest when
the same individuals serve as directors on boards of both master and
feeder funds under a single owner,\292\ and may also mask instances of
fraud and a private fund's methods for committing fraud.\293\ Investor
protection efforts would therefore benefit from more consistent data
providing connections from master funds to feeder funds and other
ownership information.
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\288\ See supra section II.A.1. However, an adviser would
continue to aggregate these structures for purposes of determining
whether the adviser meets a reporting threshold.
\289\ Similar benefits would be obtained from proposed revisions
to Instruction 7, which address that advisers to funds of funds
currently have flexibility to choose whether to disregard a private
fund's equity investments in other private funds for all Form PF
purposes so long as they do so consistently throughout Form PF.
Other proposed revisions could also provide benefits associated with
consistency of reporting by revising instructions to avoid error
across filers, such as the revisions to Instruction 8 that the
instruction on which investments to include in determining reporting
thresholds and responding to questions applies only to investments
in funds that are not private funds, and to provide that advisers
would not be required to look through a reporting fund's investments
in any other fund that is not a private fund, other than a trading
vehicle. See supra section II.A.2. Similar benefits would also be
obtained from the proposed amendments updating instructions to
provide conformity with CFTC's amendments to Form CPO-PQR, including
those that specify when advisers that are also CPOs should complete
particular sections of Form PF. See supra section II.E, see also
Proposed Instruction 18.
\290\ See supra section II.A.1.
\291\ See, e.g., Robert Harris, Tim Jenkinson, Steven Kaplan,
Ruediger Stucke, Financial Intermediation in Private Equity: How
Well Do Funds of Funds Perform?, 129 Journal of Financial Economics
2, 287-305 (Aug. 2018).
\292\ See, e.g., Todd Ehret, Platinum Fraud Charges Shine Light
On Cayman Director Responsibilities, Reuters Financial Regulatory
Forum, March 30, 2017, available at https://www.reuters.com/article/bc-finreg-cayman-private-structure/platinum-fraud-charges-shine-light-on-cayman-director-responsibilities-idUSKBN17030J.
\293\ See, e.g., Melvyn Teo, Lessons Learned from Hedge Fund
Fraud, Eureka Hedge, Oct. 2009, available at https://www.eurekahedge.com/Research/News/506/Lessons-Learned-From-Hedge-Fund-Fraud.
---------------------------------------------------------------------------
Second, the proposal would amend the general instructions for
reporting for private funds that invest in other funds or trading
vehicles.\294\ Specifically, the proposal would revise Instructions 7
and 8 to require advisers to include information pertaining to their
trading vehicles when completing Form PF.\295\ Because private funds
may use trading vehicles for a wide variety of purposes, more complete
and accurate visibility into asset class exposures, position sizes, and
counterparty exposures relied on by trading vehicles can enhance the
SEC's and FSOC's systemic risk and financial stability assessment
efforts and the SEC's efforts to protect investors by identifying areas
in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\294\ These proposed amendments would include requiring advisers
to include the value of a private fund's investments in other
private funds when determining whether the adviser must file Form
PF; requiring an adviser to include the value of a reporting fund's
investments in other private funds when responding to questions on
the fund, but to not look through its investments in other private
funds when responding to questions about the reporting fund's
investment and other activities; amending the general instructions
to explain how advisers would report information if the reporting
fund holds investments or conducts activities through a trading
vehicle; amending Instruction 8 to indicate that the instruction on
which investments to include in determining reporting thresholds and
responding to questions applies only to investments in funds that
are not private funds; and providing that advisers would not be
required to look through a reporting fund's investments in any other
fund that is not a private fund, other than a trading vehicle. See
supra section II.A.2.
\295\ See supra section II.A.2.
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Third, the proposal would amend the general instructions for
reporting timelines by revising Instruction 9 to require large hedge
fund advisers and large liquidity fund advisers to update Form PF
within a certain number of days after the end of each calendar quarter,
rather than each fiscal quarter, as Form PF currently requires.\296\
The SEC anticipates that these amendments would improve the consistency
of reporting across different private fund advisers, across quarterly
and annual filings, and across different regulatory forms,\297\ which
may improve the ability of regulators to analyze filing data across
fund advisers and across different regulatory forms by resolving
reporting errors and issues of data quality. These data analyses are
important contributors to the SEC's and FSOC's efforts to assess
systemic risk and develop a complete picture of private fund markets.
The SEC anticipates that these improved reporting alignments may
enhance the SEC's and FSOC's abilities to assess potential risks
presented by private funds.\298\ For example, as discussed above,
academic research has used Form PF data and Form N-MPF data to study
rule 2a-7 risk limits and implications of money market reforms.\299\
Standardizing data across regulatory filings can lead to further
industry insights from combined regulatory filing data, and these
industry insights may improve systemic risk assessment and regulator
investor protection efforts. However, as discussed above, because
almost all large hedge fund advisers and large liquidity fund advisers
already effectively file on a calendar quarter basis because their
fiscal quarter ends on the calendar quarter, the SEC anticipates that
these benefits may be marginal.\300\
---------------------------------------------------------------------------
\296\ See supra section II.A.3.
\297\ See supra section II.A.3.
\298\ While the amendments to general instructions associated
with reporting timelines would primarily offer economic benefits
associated with improvement in data quality and resolutions to data
gaps, the proposed amendments to reporting timelines would also
provide a potential improvement to regulators' ability to evaluate
markets for investor protection efforts and systemic risk
assessment, in that they accelerate the provision of data from
quarterly reporting. See supra section II.A.3. Moreover, as the
proposal would make reporting timelines more consistent, there could
be reduced costs associated with regulatory filings, as private fund
advisers reduce their need to track differentiated calendar quarter
and fiscal quarter data.
\299\ See supra section III.B.1.
\300\ See supra section II.A.3. Specifically, and as discussed
above, based on staff analysis of Form ADV data as of December 2021,
99.2 percent of private fund advisers already effectively file on a
calendar basis because their fiscal quarter or year ends on the
calendar quarter or year end, respectively. The 0.8 percent of
private fund advisers that have a non-calendar fiscal approach
represents approximately 274 private funds, totaling $200 billion in
gross asset value. See supra section II.A.3.
---------------------------------------------------------------------------
Fourth, the proposal would issue a series of amendments that impact
several sections of Form PF and which would broadly enhance data
quality by potentially resolving reporting errors and issues of data
quality. These amendments would specify that reported percentages be
rounded to the nearest one hundredth of one percent, provide consistent
instruction for reporting of investment and counterparty exposures,
provide consistent instruction on the reporting of long and short
positions, and provide consistent instruction for reporting of
derivative values.\301\ We believe the resulting improved data quality
would improve the ability of the SEC and FSOC to evaluate market risk
and measure industry trends, thereby increasing the efficiency with
which regulatory responses are developed, improving systemic risk
assessment and regulator programs to protect investors.
---------------------------------------------------------------------------
\301\ See supra section II.D.
---------------------------------------------------------------------------
Lastly, the proposal would issue a series of additional amendments
that would amend instructions related to temporary hardship exemptions,
provide conformity with the CFTC's amendments to Form CPO-PQR
(including those that specify when advisers that are also CPOs should
complete particular sections of Form PF), and revise definitions of the
terms EEA and G10 within Form PF.\302\ The additional amendments
updating instructions to the temporary hardship exemption to Form PF,
by way of an amendment to rule 204(b)-1(f) under the Advisers Act,
would make it easier to submit a temporary hardship exemption and would
assist advisers in determining what constitutes a ``filed'' temporary
hardship exemption.\303\ These amendments may facilitate more
successful submissions of temporary hardship exemptions by private fund
advisers who require one, and may thereby reduce costs to those private
fund advisers. Similarly, by providing conformity with the CFTC's
amendments to Form CPO-PQR, including those that specify when advisers
that are also CPOs should complete particular sections of Form PF, and
revising definitions associated with the terms EEA and G10, the
proposal may reduce confusion for advisers filing Form PF, thereby
reducing the burden of filing.\304\
---------------------------------------------------------------------------
\302\ See supra section II.E, Proposed Instruction 18.
\303\ See supra section II.E.
\304\ See supra section II.E, Proposed Instruction 18.
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[[Page 53877]]
b. Proposed Amendments to Basic Information About the Adviser and the
Private Funds it Advises
The proposed amendments to section 1, which requires all private
fund advisers to report information about the adviser and the private
funds they manage, include revisions to section 1a (concerning basic
identifying information),\305\ revisions to section 1b (concerning all
of a private fund adviser's private funds),\306\ and revisions to
section 1c (more specifically concerning all of a private fund
adviser's hedge funds).\307\ The proposed changes would provide greater
insight into all private funds' operations and strategies, and would
further assist in assessing industry trends. This section discusses how
the SEC believes the proposed changes would thereby enhance the SEC's
and FSOC's systemic risk assessment efforts and the SEC's efforts to
protect investors by identifying areas in need of outreach,
examination, or investigation. This would be accomplished in four key
ways.
---------------------------------------------------------------------------
\305\ See supra section II.B.1.
\306\ See supra section II.B.2.
\307\ See supra section II.B.3.
---------------------------------------------------------------------------
First, the proposed changes would provide more prescriptive
requirements to improve comparability across advisers and reduce
reporting errors and issues of data quality by aligning data across
filers and across regulatory filings, based on experience with the
form. This greater alignment could improve the efficiency with which
the SEC and FSOC evaluate market risk and measure industry trends,
thereby increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulator programs to
protect investors. For example, revisions to section 1a (relating to
adviser reporting of identifying information for all private funds they
advise) would revise instructions on the use of LEIs and RSSD IDs for
advisers and related persons, and could help link data more efficiently
between Form PF and other regulatory filings that use these universal
identifiers.\308\ Several revisions to section 1b (relating to adviser
reporting of basic information for all private funds they advise) would
modify instructions and could prevent advisers from inadvertently
reporting different fund types on different regulatory filings (or,
when different reporting on two different forms is appropriate, the
revised instructions are designed to solicit the reason for
differentiated reporting), facilitating more robust data analyses that
use combined data from multiple regulatory forms.\309\ Revisions to
section 1c would require advisers to indicate which investment
strategies best describe the reporting fund's strategies on the last
day of the reporting period, addressing any ambiguity about how to
report information if the reporting fund changes strategies over
time.\310\ The SEC believes these revisions to section 1, and
others,\311\ would improve the accuracy and reliability of Form PF
data, thereby potentially improving the SEC's and FSOC's efforts to
assess developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improving the SEC's
efforts to protect investors by identifying areas in need of outreach,
examination, or investigation.
---------------------------------------------------------------------------
\308\ See supra section II.B.1. For example, the proposed
reporting of a fund's and its adviser's LEI is consistent with the
way fund relationships are reported in the Global LEI system. See,
e.g., LEI ROC, Policy on Fund Relationships and Guidelines for the
Registration of Investment Funds in the Global LEI System (May 20,
2019), available at https://www.leiroc.org/publications/gls/roc_20190520-1.pdf.
\309\ See supra section II.B.2. For example, the Division of
Investment Management relies on Form PF and Form ADV filings in
providing quarterly summaries of private fund industry statistics
and trends. See, e.g., Division of Investment Management, Private
Fund Statistics, (Aug. 21, 2021), available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\310\ See supra section II.B.3.
\311\ Other proposed revisions that would provide this benefit
include the proposal revising reporting of regulatory versus net
assets under management; reporting of assumptions the adviser makes
in responding to questions on Form PF; reporting of types of fund;
reporting of master-feeder arrangements, internal/external private
funds, and parallel fund structures; reporting of monthly gross and
net asset values; reporting of the value of unfunded commitments;
reporting on the value of borrowing activity; reporting of fair
value hierarchy; reporting of beneficial ownership; reporting of
fund performance; more granular reporting of hedge fund strategies;
more granular reporting of hedge fund counterparty exposures
including identification of counterparties representing a fund's
greatest exposure; and more granular reporting of hedge fund trading
and clearing mechanisms. See supra section II.B.
---------------------------------------------------------------------------
Second, the proposal would expand the data collected by the forms
into newly emerging areas of risk. These expanded areas of reporting
broadly capture key trends in (i) private fund advisers' ownership
structures, and (ii) private fund advisers' investment and trading
strategies, including increasing exposures to new asset classes,
changing exposures across different categories of counterparties, and
increasing use of financial tools for increasing fund performance.
With respect to updated reporting on ownership structures, as
discussed above, interconnected ownership structures have inherent
risks of spillovers in losses, as losses in a master fund or underlying
investment of a fund of funds cause losses in connected funds as well,
and so enhanced data on detailed ownership structures could improve
systemic risk assessment efforts.\312\ These improved data could also
contribute to efforts to protect investors from conflicts of interest
and other sources of potential harm.\313\ The types of enhancements to
Form PF's data on interconnected ownership structures include, for
example, requiring advisers to provide LEIs for themselves and any of
their related persons, such as reporting funds and parallel funds,\314\
and expanding the required reporting detail on the value of the
reporting fund's investments in funds of funds.\315\ Similar to the
amendments to general instructions, the SEC believes that these
revisions would improve measurement of these complex ownership
structures, thereby potentially improving the SEC's and FSOC's efforts
to assess developing systemic risks and FSOC's efforts to assess
broader financial instability, as well as potentially improving the
SEC's efforts to protect investors from conflicting arrangements and
identify other areas in need of outreach, examination, or
investigation.\316\
---------------------------------------------------------------------------
\312\ See supra section III.C.1.a.
\313\ Id.
\314\ See supra section II.B.1.
\315\ See supra section II.B.2.
\316\ See supra section III.C.1.a.
---------------------------------------------------------------------------
Many revisions would also keep Form PF filings up to date with key
developing trends among private fund advisers' investing and trading
practices. These revisions would improve consistency of reporting of
modern private fund issues across fund advisers, provide more complete
and accurate information on developing trends, and improve the SEC's
and FSOC's abilities to effectively and efficiently assess new systemic
risks and other potential sources of investor harm, as well as inform
the SEC's and FSOC's broader views on the private fund landscape.
For example, in Form PF section 1c, the proposal would require
hedge funds to report whether their investment strategy includes
digital assets,\317\ which are a growing and increasingly important
area of hedge fund strategy.\318\ The proposal would
[[Page 53878]]
therefore help the SEC and FSOC to assess new sources of potential
systemic risk and develop regulatory responses, and would further allow
the SEC to analyze new areas of potential investor harm to determine
any necessary outreach, examination, or investigation.
---------------------------------------------------------------------------
\317\ See supra section II.B.3.
\318\ See, e.g., AIMA, PwC, and Elwood Asset Management, 3rd
Annual Global Crypto Hedge Fund Report 2021, available at https://www.aima.org/educate/aima-research/third-annual-global-crypto-hedge-fund-report-2021.html (concluding that approximately a fifth of
hedge funds were investing in such assets in 2021, with on average
three percent of their total hedge fund assets under management
invested, and 86 percent of those hedge funds intended to deploy
more capital into this asset class by the end of 2021); see also
supra footnote 111 and accompanying text.
---------------------------------------------------------------------------
As another example, the proposal would introduce several questions
on counterparty exposures, corresponding to both CCP exposures and
bilateral counterparty (i.e., non-CCP) exposures. These additions to
Form PF include requiring advisers to report hedge fund borrowing,
lending, and collateral with respect to transactions involving both
their bilateral counterparties and CCPs, requiring reporting of hedge
fund derivative and repo activity that was cleared by a CCP (as well as
activity not cleared by a CCP), and instructing advisers on what
exposures to net.\319\ There are two economic considerations associated
with counterparty exposure reporting on Form PF. First and foremost,
bilateral exposures and CCP exposures have different risk profiles,
with CCPs offering risk reduction mechanisms and other economic
benefits by netting trading across counterparties and across different
assets within an asset class or by centralizing clearance and
settlement activities.\320\ The SEC therefore believes the proposal
could help Form PF provide insight into relative trends in bilateral
trading versus central counterparty trading and resulting systemic
risks from counterparty exposures. Second, while CCPs reduce the
systemic risk associated with the failure of any single hedge fund or
other private fund, the failure of a large CCP itself could potentially
represent a substantial systemic risk event in the future.\321\ While a
systemic risk event such as the failure of a CCP has never occurred in
the United States, CCPs in other countries have failed,\322\ and the
SEC believes the proposal could help Form PF provide new insights into
the potential for such systemic risk events in the future. FSOC has
also designated many CCP institutions as ``systemically important,''
\323\ and recommends that regulators continue to coordinate to evaluate
threats from both default and non-default losses associated with
CCPs.\324\
---------------------------------------------------------------------------
\319\ See supra section II.B.3.
\320\ Siro Aramonte and Wenqian Huang, Costs and Benefits of
Switching to Central Clearing, BIS Quarterly Review (Dec. 2019),
available at https://www.bis.org/publ/qtrpdf/r_qt1912z.htm; Albert
J. Menkveld & Guillaume Vuillemey, The Economics of Central
Clearing, 13 Ann. Rev. Fin. Econ. 153 (2021).
\321\ Id.
\322\ For example, the Hong Kong Futures Guarantee Corporation
failed during the stock market crash of 1987. See Menkveld &
Vuillemey, supra footnote 320.
\323\ Financial Stability Oversight Council, 2012 Annual Report,
Appendix A, available at https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.
\324\ Financial Stability Oversight Council, 2021 Annual Report,
p. 14, available at https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.
---------------------------------------------------------------------------
The SEC therefore believes these revisions, and others like
them,\325\ would help the SEC and FSOC better understand the modern
landscape of the private fund industry, thereby potentially improving
the SEC's and FSOC's efforts to assess developing systemic risks and
FSOC's efforts to assess broader financial instability, as well as
potentially improving the SEC's efforts to protect investors by
identifying areas in need of outreach, examination, or investigation.
---------------------------------------------------------------------------
\325\ Other proposed revisions that would provide this benefit
include the proposal reporting of withdrawal and redemption rights;
reporting of other inflows and outflows; more granular reporting of
hedge fund strategies; more granular reporting of hedge fund
counterparty exposures including identification of counterparties
representing a fund's greatest exposure; and more granular reporting
of hedge fund trading and clearing mechanisms. See supra section
II.B.
---------------------------------------------------------------------------
Third, there are revisions that would expand the scope of certain
questions from only covering qualifying hedge funds advised by large
hedge fund advisers to covering all hedge funds advised by any private
fund adviser. By expanding the universe of private funds that are
covered by several questions, the proposal would enhance the SEC's and
FSOC's ability to conduct broad, representative measurements regarding
the private fund industry. For example, the proposal would require all
advisers to report whether each reporting fund they advise provides
investors with withdrawal or redemption rights in the ordinary course,
rather than only requiring large hedge fund advisers to report it for
the qualifying hedge funds they advise, as Form PF currently
requires.\326\ Because the activities of private fund advisers may
differ significantly depending on their size, this enhanced coverage
would potentially enhance regulators' abilities to obtain a
representative picture of the private fund industry and lead to more
robust conclusions regarding emerging industry trends and
characteristics. The SEC believes these proposed amendments, and
others,\327\ would enhance regulator's picture of the private fund
industry, thereby potentially improving the SEC's and FSOC's efforts to
assess developing systemic risks and FSOC's efforts to assess broader
financial instability, as well as potentially improving the SEC's
efforts to protect investors by identifying areas in need of outreach,
examination, or investigation.
---------------------------------------------------------------------------
\326\ See supra section II.B.2.
\327\ The proposed revisions to reporting of base currency would
provide similar benefits. See supra section II.B.
---------------------------------------------------------------------------
Lastly, certain proposed changes would streamline reporting and
reduce reporting burden by removing certain questions where other
questions provide the same or superseding information. For example, the
proposal would remove current Question 19, which requires advisers to
hedge funds to report whether the hedge fund has a single primary
investment strategy or multiple strategies, and would also remove
current Question 21, which requires advisers to hedge funds to
approximate what percentage of the hedge fund's net asset value was
managed using high frequency trading strategies.\328\ The SEC believes
that these revisions would directly lower the costs and help reduce
part of the burden on advisers of completing Form PF filings.\329\
---------------------------------------------------------------------------
\328\ See supra section II.B.3.
\329\ These benefits from streamlined reporting and reduced
reporting burden would be offset by increased costs associated with
the additional and more granular detail that would be required on
Form PF under the proposal. See infra section III.C.2, IV.A.3.
---------------------------------------------------------------------------
c. Proposed Amendments to Information About Hedge Funds Advised by
Large Private Fund Advisers
The proposed changes to section 2 would provide greater insight
into operations and strategies into hedge funds advised by large
private fund advisers specifically, and would also assist in assessing
broader hedge fund industry trends. This section discusses how the SEC
believes the proposed changes would thereby enhance the SEC's and
FSOC's investor protection and systemic risk assessment efforts. This
would be accomplished in three key ways.
As with section 1, first, the proposed changes would provide more
prescriptive requirements to improve comparability across advisers and
reduce reporting errors and issues of data quality, based on experience
with the form. This would be accomplished by standardizing reporting of
information across different advisers and across different regulatory
filings. For example, the proposed amendments to Question 30 (on
qualifying hedge fund exposures to different types of assets) would
replace the existing
[[Page 53879]]
complex table in Question 30 with reporting instructions that would use
a series of drop-down menu selections and provide additional narrative
reporting instructions and additional information on how to report
exposures.\330\ Similarly, advisers to qualifying hedge funds would now
be required to report the 10-year zero coupon bond equivalent for all
sub-asset classes with interest rate risk, rather than providing
advisers with a choice to report duration, WAT, or an unspecified 10-
year equivalent.\331\ Several revisions (relating to adviser reporting
of basic information for all hedge funds that it advises) would revise
instructions relating to reporting of adjusted long and short exposures
and market factor effects on a hedge fund's portfolio.\332\ These
revisions could potentially prevent, for example, data errors
associated with reporting of long and short components of a portfolio
or discrepancies across advisers in their choices of which market
factors to report (as Form PF currently allows advisers to omit a
response to any market factor that they do not regularly consider in
formal risk management testing).\333\ As another example, the proposal
would provide for a new sub-asset class in investment exposure
reporting for ADRs, in line with how ADRs are reported on the CFTC's
Form CPO-PQR, potentially improving assessment of currency risk across
regulatory filings.\334\ As a final example, the proposal would revise
reporting for positions held physically, synthetically, or through
derivatives and indirect exposure, and would require reporting turnover
on a per fund basis instead of in the aggregate as well as providing
for more granular reporting of turnover.\335\ The SEC believes these
revisions, and others,\336\ would align Form PF data across filers,
thereby potentially improving the efficiency with which the SEC and
FSOC evaluate market risk and measure industry trends, thereby
increasing the efficiency with which regulatory responses are
developed, improving systemic risk assessment and regulatory programs
to protect investors.
---------------------------------------------------------------------------
\330\ See supra section II.C.2.
\331\ Id.
\332\ See supra section II.C.2.a; II.C.2.c.
\333\ Id. For example, higher quality data on short positions
could facilitate more accurate and timely identification of
significant market participants during periods of volatility related
to shorting activity, such as the January 2021 ``meme stock''
episodes. See, e.g., Staff Report on Equity and Options Market
Structure Conditions in Early 2021 (Oct. 14, 2021), available at
https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
\334\ See supra section II.C.2.a.
\335\ As discussed above, when monitoring funds' activities
during recent market events like the March 2020 COVID-19 turmoil,
the existing aggregation of U.S. treasury securities with related
derivatives did not reflect the role hedge funds played in the U.S.
treasury market. See supra section II.C.2.a, III.B.1. Also during
the COVID-19 market turmoil, FSOC sought to evaluate the role hedge
funds played in disruptions in the U.S. treasury market by unwinding
cash-futures basis trade positions and taking advantage of the near-
arbitrage between cash and futures prices of U.S. treasury
securities. Because the existing requirement regarding turnover
reporting on U.S. treasury securities is highly aggregated, the SEC
staff, during retrospective analyses on the March 2020 market
events, was unable to obtain a complete picture of activity relating
to long treasuries and treasury futures. See supra section II.C.2.d,
III.B.1.
\336\ Other proposed revisions that would provide this benefit
include the proposal revising reporting of reportable sub-asset
classes, including those for certain categories of listed equity
securities, repos, asset-backed securities and other structured
products, derivatives, and cash and commodities; revising reporting
of open and large position reporting; revising reporting of
counterparty exposures including reporting of significant
counterparties; revising currency reporting; requiring significant
country and industry exposure; requiring additional reporting on
fund portfolio risk profiles; requiring more granular reporting of
investment performance by strategy; amending reporting of portfolio
liquidity; and amending reporting of financing liquidity. See supra
section II.C.
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Second, the proposed changes would help Form PF provide greater
insight into newly emerging areas of risk, including increasing
exposures to new asset classes, changing exposures across different
categories of counterparties, and changing risk management practices
(such as changing practices around posting of collateral). The SEC
believes these proposed changes would help Form PF more completely and
accurately capture information relevant to ongoing trends in the
private fund industry. For example, in addition to the more general
investment strategy questions in section 1c described above,\337\
section 2b would define the term ``digital asset'' and would require
large advisers to qualifying hedge funds to report their total
exposures to digital assets.\338\ As another example, large advisers to
qualifying hedge funds would be required to report exposures to
additional commodity sub-asset classes (e.g., other (non-gold) precious
metals, agricultural commodities, and base metal commodities).\339\
They would also be required to report all other counterparties (by
name, LEI, and financial institution affiliation) to which a fund has
net mark-to-market exposure after collateral that equals or is greater
than either (1) five percent of a fund's net asset value or (2) $1
billion, facilitating regulators' abilities to understand the impact a
particular counterparty failure like those that occurred during the
2008 financial crisis and in the period since (e.g., the failure of MF
Global in 2011).\340\ Advisers would also be required to report certain
of their exposures to CCPs,\341\ and would be required to report each
CCP (or other third party) holding collateral in respect of cleared
exposures in excess of 5 percent of the fund's net asset value, or $1
billion.\342\ As discussed above, these (and other) new granular
reporting requirements would represent new possible sources of systemic
risk for the SEC and FSOC to evaluate, and also new areas of focus for
the SEC's regulatory outreach, examination, and investigation.\343\ The
SEC believes these revisions, and others,\344\ would improve the SEC's
and FSOC's efforts to assess developing systemic risks and FSOC's
efforts to assess broader financial stability, as well as potentially
improve the SEC's efforts to protect investors by identifying areas in
need of outreach, examination, or investigation.
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\337\ See supra section III.C.1.b.
\338\ See supra section II.C.2.a.
\339\ See supra section II.C.2.a.
\340\ See supra section II.C.2.a, footnote 198 and accompanying
text.
\341\ See supra section II.C.2.b.
\342\ See supra section II.C.2.d.
\343\ See supra section III.C.1.b. For example, the SEC believes
the addition of a base metal commodities sub-asset class would allow
for identification of large players in the base metals market (such
as those impacted by the March 2022 ``nickel squeeze,'' during which
the price of nickel rose unusually steeply and rapidly in response
to commodity price increases caused by Russia's invasion of
Ukraine). See supra footnote 176.
\344\ Other proposed revisions that would provide this benefit
include revising reporting for positions held physically,
synthetically, or through derivatives and indirect exposure;
revising reportable sub-asset classes, including those for certain
categories of listed equity securities, repos, asset-backed
securities and other structured products, derivatives, and other
cash and commodities; further revising reporting of counterparty
exposures including reporting of significant counterparties (in
addition to the revisions to CCP exposures); revising currency
reporting; requiring more granular reporting of turnover; requiring
significant country and industry exposure; requiring additional
reporting on fund portfolio risk profiles; requiring more granular
reporting of investment performance by strategy; requiring new
reporting on portfolio correlation; amending reporting of portfolio
liquidity; and amending reporting of financing liquidity. See supra
section II.C.
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Lastly, the proposal would remove certain questions where other
questions provide the same or superseding information, which the SEC
believes would streamline reporting and reduce reporting burden. For
example, the proposal would remove section 2a entirely, proposing that
the aggregated information in section 2a is redundant to information
required to be reported in other sections,\345\ and would remove the
requirement from Question 38 for advisers to report the percentage of
the
[[Page 53880]]
total amount of collateral and other credit support that a fund has
posted to counterparties that may be re-hypothecated.\346\ The SEC
believes that these revisions, and others,\347\ would directly lower
the costs and reduce the burden to advisers of completing Form PF
filings.
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\345\ See supra section II.C.1.
\346\ See supra section II.C.1.
\347\ Other proposed revisions that would provide this benefit
include the proposal consolidating Question 47 into Question 36;
removing the requirement from Question 38 for advisers to report the
percentage of the total amount of collateral and other credit
support that a fund has posted to counterparties that may be re-
hypothecated; and requiring reporting turnover on a per fund basis
instead of in the aggregate. See supra section II.C.
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2. Costs
The proposed amendments to Form PF would lead to certain additional
costs for private fund advisers. Any portion of these costs that is not
borne by advisers would ultimately be passed on to private funds'
investors. These costs would vary depending on the scope of the
required information, which is determined based on the size and types
of funds managed by the adviser as well as each fund's investment
strategies, including choices of asset classes and counterparties.
These costs are quantified, to the extent possible, by examination of
the analysis in section IV.A.3.
The SEC anticipates that the costs to advisers associated with Form
PF would be composed of both direct compliance costs and indirect
costs. Direct costs for advisers would consist of internal costs (for
compliance attorneys and other non-legal staff of an adviser, such as
computer programmers, to prepare and review the required disclosure)
and external costs (including filing fees as well as any costs
associated with outsourcing all or a portion of the Form PF reporting
responsibilities to a filing agent, software consultant, or other
third-party service provider).\348\
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\348\ See section IV.A.3 (for an analysis of the direct costs
associated with the new Form PF requirements for quarterly and
annual filings).
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The SEC believes that the direct costs associated with the proposed
amendments would be most significant for the first updated Form PF
report that a private fund adviser would be required to file because
the adviser would need to familiarize itself with the new reporting
form and may need to configure its systems to gather the required
information efficiently. 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. This is consistent with the results of a survey of private fund
advisers, finding that the majority of respondents identified the cost
of subsequent annual Form PF filings at about half of the initial
filing cost.\349\
---------------------------------------------------------------------------
\349\ See Wulf Kaal, Private Fund Disclosures Under the Dodd-
Frank Act, 9 Brooklyn Journal of Corporate, Financial, and
Commercial Law 428 (2015).
---------------------------------------------------------------------------
The SEC anticipates that the proposed amendments aimed at improving
data quality and comparability would impose limited direct costs on
advisers given that advisers already accommodate similar requirements
in their current Form PF reporting and can utilize their existing
capabilities for preparing and submitting an updated Form PF. The SEC
expects that most of the costs would arise from the proposed
requirements to report additional and more granular information on Form
PF. These direct costs would mainly include an initial cost to setup a
system for collecting, verifying additional more granular information,
and limited ongoing costs associated with periodic reporting of this
additional information.\350\ We believe that the proposed amendment to
rule 204(b)-1(f) under the Advisers Act would have minimal costs
associated with it, as the proposed amendment only makes it easier to
submit a temporary hardship exemption and assists advisers in
determining what constitutes a ``filed'' temporary hardship
exemption.\351\ As discussed in the benefits section, the SEC believes
that part of the costs to advisers arising from the proposed amendments
would be mitigated by the cost savings resulting from reduced
ambiguities and inefficiencies that currently exist in the reporting
requirements, as this may reduce the amount of time and effort required
for some advisers to prepare and submit Form PF information.\352\
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\350\ Based on the PRA analysis in section IV.A.3, initial costs
associated with filing the first updated Form PF report are
estimated to increase by $4,790 for smaller private fund advisers,
$15,557 for large hedge fund advisers, $8,780 for large liquidity
fund advisers, and $8,780 for large private equity advisers. These
figures are calculated as the cost of filing under the proposal
minus the cost of filing prior to the proposal for each category of
adviser. See Table 5. Direct internal compliance costs associated
with the proposal are estimated at $1,866.25 per quarterly filing or
$7,465 annually for smaller private fund advisers. Direct internal
compliance costs associated with the proposal are estimated at
$6,582.5 per quarterly filing or $26,330 annually for large hedge
fund advisers. Direct internal compliance costs associated with the
proposal are estimated at $3,172.5 per quarterly filing or $12,690
annually for large liquidity fund advisers. Direct internal
compliance costs associated with the proposal are estimated at
$3,885 per quarterly filing or $15,540 annually for large private
equity advisers. These figures are calculated as the cost of filing
under the proposal minus the cost of filing prior to the proposal
for each category of adviser, with an additional correction for
large liquidity fund advisers to incorporate the adjustment
explained in footnote 9 to Table 6 (yielding an estimate of costs
prior to the proposal of $29,216.25/105*70 = $19477.50). See Table
6. It is estimated that there will be no additional direct external
costs and no changes to filing fees associated with the proposed
amendments. See Table 8. The SEC anticipates that there may be
additional first-time filing costs for filers who do not currently
file on a calendar quarter basis, but that these costs are likely to
be small and not likely to impact subsequent filings beyond the
first. As discussed above, a 2018 industry survey of large hedge
fund advisers found filing costs that ranged from 35% to 72% higher
than SEC cost estimates. These industry cost estimates would
therefore suggest costs associated with the proposed changes to Form
PF that are potentially 35% to 72% higher than those estimated here.
See MFA Letter to Chairman Clayton, supra note 202, at 3. However, a
2015 survey of SEC-registered investment advisers to private funds
affirmed the SEC's cost estimates for smaller private fund advisers'
Form PF compliance costs, and found that the SEC overestimated Form
PF compliance costs for larger private fund advisers. These academic
literature cost estimates would therefore suggest that the costs
associated with the proposed changes to Form PF estimated here are
potentially conservatively large. See Wulf Kaal, Private Fund
Disclosures Under the Dodd-Frank Act, 9 Brooklyn Journal of
Corporate, Financial, and Commercial Law 428 (2015). See also supra
footnote 267.
\351\ See supra section II.E.
\352\ The proposal also seeks to limit unnecessary costs by
avoiding redundancies between new questions and existing questions.
For example, if the proposal is adopted, the SEC would remove
current Question 22, as it would be redundant in light of the
proposed expanded turnover reporting. See supra footnote 214.
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Indirect costs for advisers would include the costs associated with
additional actions that advisers may decide to undertake in light of
the additional reporting requirements on Form PF. Specifically, to the
extent that the proposed amendments provide an incentive for advisers
to improve internal controls and devote additional time and resources
to managing their risk exposures and enhancing investor protection,
this may result in additional expenses for advisers, some of which may
be passed on to the funds and their investors.
Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. However, the SEC anticipates that
these adverse effects would be mitigated by certain aspects of the Form
PF reporting requirements and controls and systems designed by the SEC
for handling the data. For example, because data on Form PF generally
could not, on its own, be used to identify individual investment
positions, the ability of a
[[Page 53881]]
competitor to use Form PF data to replicate a trading strategy or trade
against an adviser is limited. The SEC has controls and systems for the
use and handling of the proposed modified and new Form PF data in a
manner that reflects the sensitivity of the data and is consistent with
the maintenance of its confidentiality. The SEC has substantial
experience with the storage and use of nonpublic information reported
on Form PF as well as other nonpublic information that the SEC handles
in the course of business.
D. Reasonable Alternatives
1. Alternatives to Proposed Amendments to General Instructions,
Proposed Amendments To Enhance Data Quality, and Proposed Additional
Amendments
The SEC has considered alternatives to the proposed amendments to
general instructions, proposed amendments to enhance data quality, and
the proposed additional amendments considered in this proposal
(including the amendments to the process for requesting temporary
hardship exemptions, by way of an amendment to rule 204(b)-1(f) under
the Advisers Act). The alternatives considered have been in the form of
different choices of framing, level of additional detail requested by
Form PF, level of detail removed from Form PF, and precise information
targeted.
For example, in the general instructions, the SEC considered an
alternative that would require advisers to report only at the master
fund level or only at the feeder fund level. As another example, with
respect to trading vehicles, the proposal currently would require
advisers to report a trading vehicle as a separate reporting fund, the
adviser must report the trading vehicle as a hedge fund, qualifying
hedge fund, liquidity fund, private equity fund, or other type of fund,
if it meets certain requirements, but the SEC considered an alternative
that would only require advisers to report trading vehicles as
investments in another fund. As a final example, the SEC considered
requiring annual filers to file within 30 calendar days after the end
of their fiscal year, rather than 120 calendar days.
While many alternatives may be able to capture more detailed
information, or may be able to capture relevant information with a
smaller reporting burden for advisers, the SEC believes that each of
the amendments to general instructions, amendments to enhance data
quality, and additional amendments as proposed improve data quality and
enhance the usefulness of reported data without imposing undue
reporting burden. As discussed above we request suggestions and
comments on each proposed revision and addition.\353\
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\353\ See supra section II.A, II.D, II.E.
---------------------------------------------------------------------------
2. Alternatives to Proposed Amendments to Basic Information About the
Adviser and the Private Funds It Advises
The SEC has also considered alternatives to the proposed amendments
to basic information about advisers and the private funds they advise.
As above, these alternatives are in the form of different choices of
framing, level of additional detail requested by Form PF, level of
detail removed from Form PF, and precise information targeted.
For example, with respect to identifying information for private
funds in section 1a, the SEC considered an alternative that would
provide more granularity for advisers to list categories of funds, such
as differentiating between different types of funds of funds (for
example, differentiating between multi-manager funds of funds and
multi-asset funds of funds). As another example, with respect to basic
information reported for all private funds in section 1b, the SEC
considered alternatives that would limit reporting information about
withdrawal rights, redemption rights, and contributions to only funds
and advisers of a certain size. The SEC also considered various
alternatives with respect to reporting of digital assets, such as
distinguishing between digital assets that represent an ability to
convert or exchange the digital asset for fiat currency or another
asset, including another digital asset, and those that do not represent
such a right to convert or exchange; for digital assets that represent
a right to convert or exchange for fiat currency or another digital
asset, those where the redemption obligation is supported by an
unconditional guarantee of payment, such as some ``central bank digital
currencies,'' and those redeemable upon demand from the issuer, whether
or not collateralized by a pool of assets or a reserve; for digital
assets that do not represent any direct or indirect obligation of any
party to redeem; and for digital assets that represent an equity,
profit, or other interest in an entity. As a final example, with
respect to basic information reported for all hedge funds, the proposal
would currently require advisers to identify each creditor or other
counterparty (including CCPs) to which the reporting fund owes cash and
synthetic financing borrowing (before posted collateral) equal to or
greater than either (1) five percent of net asset value of the
reporting fund as of the data reporting date or (2) $1 billion, but the
SEC considered alternatives that would change the proposed thresholds,
either increasing or decreasing Form PF's definition of what
constitutes a significant counterparty.
The SEC believes that each of the amendments as proposed improve
data quality and enhance the usefulness of reported data without
imposing undue reporting burden, but as discussed above we request
suggestions and comments on each proposed revision and addition.\354\
---------------------------------------------------------------------------
\354\ See supra section II.B.
---------------------------------------------------------------------------
3. Alternatives to Proposed Amendments to Information About Hedge Funds
Advised by Large Private Fund Advisers
The SEC has considered alternatives to the proposed amendments to
information about hedge funds advised by large private fund advisers.
As above, these alternatives are in the form of different choices of
framing, level of additional detail requested by Form PF, level of
detail removed from Form PF, and precise information targeted.
For example, with respect to investment exposure reporting, the
proposal would continue to require reporting on qualifying hedge fund
exposures to different types of assets, but would revise the
instructions and format of this reporting. As an alternative, the SEC
considered a proposal that would require or permit large hedge fund
advisers to file portfolio position-level information for qualifying
hedge funds similar to what is required for large liquidity fund
advisers, and large hedge fund advisers who do so would be allowed to
forgo responding to certain specific investment exposure questions in
section 2, including Question 30. We believe that the questions as
currently proposed improve data quality and enhance the usefulness of
reported data without imposing undue reporting burden, but we request
comment on each proposed revision and addition.\355\
---------------------------------------------------------------------------
\355\ See supra section II.C.
---------------------------------------------------------------------------
As another example, the SEC considered alternative approaches for
instructing reporting advisers on how to net long and short positions
for each sub-asset class. One prong of the proposed instructions for
netting long and short positions relies on a newly defined term
``reference asset,'' with which we propose to define as ``a security or
other investment asset to which the reporting fund is exposed
[[Page 53882]]
through direct ownership, synthetically, or indirect ownership,'' \356\
and instructs advisers to net positions that have the same underlying
reference asset across instrument types. The SEC has considered instead
tailoring these instructions to different asset classes. For example,
the SEC considered instructing advisers to net repo exposures in
accordance with GAAP rules for balance sheet netting, or instructing
advisers with exposures whose underlying reference assets are treasury
securities to net within predefined maturity buckets. However, the SEC
believes that providing netting instructions through the proposed
single definition of ``reference asset'' improves data quality and
enhances the usefulness of report data without imposing undue
burden.\357\
---------------------------------------------------------------------------
\356\ See Proposed Form PF Glossary of Terms. The proposal would
also instruct advisers to net fixed income positions that fall
within certain predefined maturity buckets. See supra section II.C.
\357\ See supra section II.C.
---------------------------------------------------------------------------
As final example, the SEC also considered requiring advisers to
report DV01 instead of the 10-year zero coupon bond equivalent. We
understand that the 10-year zero coupon bond equivalent is the most
widely used duration measure currently applied in the industry, and
would require the fewest number of private funds to update their
calculations of duration to comply with the reporting requirement, but
as discussed above the SEC requests comment on whether DV01 would be a
more appropriate reporting requirement.\358\
---------------------------------------------------------------------------
\358\ See supra section II.C.
---------------------------------------------------------------------------
Broadly, the SEC believes that each of the amendments as proposed
improve data quality and enhance the usefulness of reported data
without imposing undue reporting burden, but as discussed above we
request suggestions and comments on each proposed revision and
addition.\359\
---------------------------------------------------------------------------
\359\ See supra section II.C.
---------------------------------------------------------------------------
4. Alternatives to the Definition of the Term ``Hedge Fund''
The SEC has also considered amending the definition of ``hedge
fund'' which is defined in the Glossary of Terms as any private fund
(other than a securitized asset fund) (a) with respect to which one or
more investment advisers (or related persons of investment advisers)
may be paid a performance fee or allocation calculated by taking into
account unrealized gains (other than a fee or allocation the
calculation of which may take into account unrealized gains solely for
the purpose of reducing such fee or allocation to reflect net
unrealized losses); (b) that 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 (c) that may sell securities or
other assets short or enter into similar transactions (other than for
the purpose of hedging currency exposure or managing duration).\360\ As
noted above, the current definition of ``hedge fund'' is designed to
include any private fund having any one of three common characteristics
of a hedge fund: (1) a performance fee, (2) leverage, or (3) short
selling. In particular, this existing definition in Form PF of ``hedge
fund'' focuses on a reporting fund's ability to engage in certain
borrowing and short selling, rather than actual or intended borrowing
and short selling. Some reporting funds may consider themselves
``private equity funds,'' but advisers report them as hedge funds,
because the reporting fund's governing documents permit the fund to
engage in certain borrowing and short selling (even though it did not
do so at any time in the past 12 months).
---------------------------------------------------------------------------
\360\ See supra section II.C.
---------------------------------------------------------------------------
As discussed above, hedge funds and private equity funds are two
separate categories of private funds, and typically differ in their
characteristics, such as a hedge fund being more likely to engage in
extensive use of (non-subscription lines of credit) leverage,
derivatives, complex structured products, and short selling, and a
private equity fund being more likely to focus on long-term returns and
engage actively in the management and direction of the companies it
invests in.\361\ Under the existing definition, an adviser to a fund
that holds itself out as a private equity fund and is permitted in its
fund governing documents to engage in certain short-selling, but has
not done so in the past 12 months, would be reported in Form PF data as
a hedge fund with zero short exposure. Depending on how widespread this
definitional mismatch is, it could have an impact on data quality.\362\
---------------------------------------------------------------------------
\361\ See supra section III.B.2.
\362\ The SEC does not have data on how many reporting funds
would be considered deemed hedge funds, but the SEC estimates that
up to 30 percent of qualifying hedge funds could be deemed hedge
funds that advisers should report as private equity funds. See Form
PF data from current Question 49(a), as of the third quarter of
2021.
---------------------------------------------------------------------------
Accordingly, the SEC is requesting additional information on the
issue.\363\ In doing so, the SEC is requesting comment on a potential
alternative definition of ``hedge fund,'' under which, to qualify as a
hedge fund under the leverage prong of the potential alternative
definition, a fund would have to satisfy subsection (b) of the
definition (the leverage prong), as it does today, but also must have
actually borrowed or used any leverage during the past 12 months,
excluding any borrowings secured by unfunded commitments (i.e.,
subscription lines of credit). Additionally, to qualify as a hedge fund
under the short selling prong of the potential alternative definition
(the short selling prong), the fund must have actually engaged in
certain short selling during the past 12 months. The SEC also
considered alternative definitions requiring, for example, longer or
shorter time periods, different time periods for borrowing versus short
selling, or requirements for the reporting fund to provide redemption
rights in the ordinary course.
---------------------------------------------------------------------------
\363\ See supra section II.C.
---------------------------------------------------------------------------
A revised definition could better ensure advisers report
information in closer accordance with their characteristics.\364\ For
example, an adviser to a private fund that has actually engaged in
short selling in the preceding 12 months would meet this alternative
definition of hedge fund and thus report the value of its short
positions as part of section 2, Item B.\365\ Meanwhile, for example, an
adviser to a private fund that holds itself out as a private equity
fund, has not borrowed or used any leverage during the preceding 12
months (excluding subscription lines of credit), and has not sold
securities or other assets short (or entered into similar transactions)
would not meet this alternative definition of a hedge fund, and would
report information more relevant for a private equity fund such as,
among other items, the average debt-to-equity ratio of its portfolio
investments.\366\ The SEC also believes an alternative definition would
reduce the unnecessary reporting burden faced by advisers to deemed
hedge funds that
[[Page 53883]]
hold themselves out as private equity funds but currently comply with
instructions to report information on Form PF section 2; however, this
benefit would be partially mitigated by the impacted private fund
advisers who would now need to report on necessary Form PF sections for
private equity fund advisers.\367\
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\364\ This benefit may be mitigated to the extent that any
private fund advisers deliberately seek to fill hedge fund reporting
requirements because they believe their burden of reporting the
hedge fund sections of Form PF is lower than the burden they would
face from reporting the private equity sections of Form PF. Any such
private fund advisers could, under the proposed definition, have
their funds take on de minimis leverage or short selling, and
therefore still be instructed to report as a hedge fund. However, we
estimate that Form PF filing is on average more burdensome for large
hedge fund advisers than for large private equity advisers, and so
there may be very few, if any, private fund advisers deliberately
filing as a hedge fund adviser instead of as a private equity
adviser. See infra section IV.A.3
\365\ See supra section II.C.2.
\366\ See supra section II.C.2; see also Form PF, section 4.
\367\ See supra section II.C.2; III.C.2; see also infra section
IV.A.3. We estimate that for advisers who would be required to file
an initial filing as a large private equity adviser instead of a
large hedge fund adviser because of the potential alternative
definition of ``hedge fund,'' the impact on their filing costs would
be the difference in the proposed new cost of filing for large
private equity advisers minus the current cost of filing for large
hedge fund advisers. We estimate this figure would be negative,
reflecting a cost savings. Thus, the potential alternative
definition would reduce the costs for initial filers who would be
impacted by the definition of ``hedge fund'' by approximately
$30,883. See infra section IV.A.3, Table 5. We estimate that for the
advisers who would be impacted by the potential alternative
definition of ``hedge fund'' and would have to make ongoing annual
filings as a large private equity adviser instead of ongoing
quarterly filings as a large hedge fund adviser, the impact of the
alternative definition on their filing costs would be the difference
in the proposed new cost of filing for large private equity advisers
minus four times the cost of filing prior to the proposal for large
hedge fund advisers. We again estimate this figure to be negative,
and estimate an ongoing annual cost savings to these advisers of
$135,240. See infra section IV.A.3, Table 6. Because Form PF defines
large hedge fund advisers by considering a threshold of $1.5 billion
in assets under management but defines large private equity advisers
by considering a threshold of $2 billion in assets under management,
there may be private fund advisers who, under the potential
alternative definition, would no longer be required to file as a
large hedge fund adviser, and would also not be required to instead
report as a large private equity adviser.
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A potential unintended consequence of the existing reporting
approach for hedge funds could be incomplete data sets for private
equity funds, as well as less accurate reporting about hedge funds.
However, a revised definition that focuses on actual or contemplated
use may also result in incomplete data sets for hedge funds, which are
a class of funds that may be systemically significant. In particular,
when first adopting the definition, the Commissions reasoned that even
a reporting fund for which leverage or short selling is an important
part of its strategy may not engage in that practice during every
reporting period.\368\ Because a reporting fund may vary from year to
year in its use of leverage or short selling, a revised definition that
focuses on actual or contemplated use would also cause fluctuations in
the data from year to year, depending on which funds use leverage or
short selling in a particular year, potentially impacting the quality
or usefulness of resulting data. The potential costs of this
alternative definition also include transition filing costs for
advisers impacted by the definition, who would be required to update
their reporting methods to capture information from their funds
relevant for reporting on Form PF as a private equity fund instead of
as a hedge fund, and completing corresponding sections of the form
targeted at each category.\369\
---------------------------------------------------------------------------
\368\ See supra footnote 3; see also 2011 Form PF Adopting
Release, at text accompanying footnote 78.
\369\ We estimate that the average cost of a transition filing
is $19.25. See Table 7.
---------------------------------------------------------------------------
The SEC has also considered conforming changes to the definition of
``hedge fund'' for the purposes of Form ADV.\370\ Form ADV relies on a
definition of ``hedge fund'' for the purposes of only one question,
which requires advisers to identify the type of private fund they
advise by selecting from a list of funds, including hedge funds.\371\
As a result, we do not believe there would be any substantial
additional economic effects of making conforming changes to Form ADV.
By amending the definition in Form ADV so that it would be consistent
with how the proposal would define it in Form PF, this alternative
would maintain the baseline consistency of information between Form PF
and Form ADV. The SEC anticipates that the costs associated with a
potential alternative definition of ``hedge fund'' on Form ADV would be
de minimis, as private fund advisers would not be required to complete
any more or fewer questions on Form ADV, at any more or fewer
intervals.
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\370\ See supra section II.C. Form ADV filers include advisers
registered with the SEC and those applying for registration with the
SEC, as well as exempt reporting advisers. Some private fund
advisers that are required to report on Form ADV are not required to
file Form PF (for example, exempt reporting advisers and advisers
with less than $150 million in private fund assets under
management). Other advisers are required to file Form PF and are not
required to file Form ADV (for example, advisers to commodity pools
that are not private funds). Based on the staff review of Form ADV
filings and the Private Fund Statistics, less than 10 percent of
funds reported on Form ADV but not on Form PF in 2020.
\371\ See Form ADV: Instructions for Part 1A, Instruction 6 and
Form ADV Part 1A, Schedule D, section 7.B.(1), Question 10
(``Question 10'') (defining the term ``hedge fund,'' and specifying
that the definition applies for purposes of Question 10). Form ADV
also uses the term ``hedge fund'' in Part 2A, but does not refer to
the definition provided for Question 10.
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E. Request for Comment
The SEC requests comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the amendments, if the SEC were
to adopt them, would promote efficiency, competition, and capital
formation. In addition, the SEC requests comments on our selection of
data sources, empirical methodology, and the assumptions the SEC has
made throughout the analysis. Commenters are requested to provide
empirical data, estimation methodologies, and other factual support for
their views, in particular, on costs and benefits estimates. In
addition, the SEC requests comment on:
214. Whether there are any additional costs and benefits associated
with the proposed amendments to Form PF that we should include in our
analysis? What additional materials and data should the SEC consider
for estimating these costs and benefits?
215. Whether our assumptions about costs associated with the
proposal are accurate? For example, is it accurate to assume that
certain costs may be mitigated given that advisers already accommodate
similar requirements in their current Form PF and Form ADV reporting
and can utilize their existing capabilities for preparing and
submitting an updated Form PF?
216. Whether there are any additional benefits or costs that should
be included associated with the reasonable alternatives considered?
IV. Paperwork Reduction Act
CFTC:
The information collection titled ``Form PF and Rule 204(b)-1''
(OMB Control No. 3235-0679) was issued to the SEC and implements
sections 404 and 406 of the Dodd-Frank Act by requiring private fund
advisers that have at least $150 million in private fund assets under
management to report certain information regarding the private funds
they advise on Form PF. The SEC makes information on Form PF available
to the CFTC, subject to the confidentiality provisions of the Dodd-
Frank Act, and the CFTC may use information collected on Form PF in its
regulatory programs, including examinations, investigations and
investor protection efforts relating to private fund advisers.
CFTC rule 4.27 \372\ does not impose any additional burden upon
registered CPOs and CTAs that are dually registered as investment
advisers with the SEC (``dual registrants''). There is no requirement
to file Form PF with the CFTC, and any filings made by dual registrants
with the SEC are made pursuant to the Advisers Act. While
[[Page 53884]]
CFTC rule 4.27(d) states that dually registered CPOs and CTAs that file
Form PF with the SEC will be deemed to have filed Form PF with the CFTC
for purposes of any enforcement action regarding any false or
misleading statement of material fact in Form PF, the CFTC is not
imposing any additional burdens herein. Therefore, any burden imposed
by Form PF on entities registered with both the CFTC and the SEC has
been fully accounted for within the SEC's calculations regarding the
impact of this collection of information under the PRA, as set forth
below.\373\
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\372\ CFTC rule 4.27, 17 CFR 4.27, was adopted pursuant to the
CFTC's authority set forth in section 4n of the Commodity Exchange
Act (``CEA''), 7 U.S.C. 6n. CFTC regulations are found at Title 17
Chapter I of the Code of Federal Regulations (``CFR'').
\373\ 44 U.S.C. 3501-3521.
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SEC:
The proposal would revise an existing ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\374\ The SEC is submitting the collection of information to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\375\ The title for the collection of information is
``Form PF and Rule 204(b)-1'' (OMB Control Number 3235-0679), and
includes both Form PF and rule 204(b)-1 (``the rules'').\376\ 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 OMB
control number.
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\374\ 44 U.S.C. 3501 through 3521.
\375\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
\376\ The SEC also submitted the collection of information to
OMB in connection with the 2022 SEC Form PF Proposal (ICR Reference
No. 202202-3235-026) (conclusion date May 17, 2022) available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202202-3235-026; 2022 SEC Form PF Proposal, supra footnote 3.
---------------------------------------------------------------------------
A. Form PF
Compliance with the information collection titled ``Form PF and
Rule 204(b)-1'' is mandatory. The respondents are investment advisers
that (1) are registered or required to be registered under Advisers Act
section 203, (2) advise one or more private funds, and (3) managed
private fund assets of at least $150 million at the end of their most
recently completed fiscal year (collectively, with their related
persons).\377\ Form PF divides respondents into groups based on their
size and types of private funds they manage, requiring some groups to
file more information more frequently than others. The types of
respondents are (1) smaller private fund advisers, that report annually
(i.e., private fund advisers that do not qualify as large private fund
advisers), (2) large hedge fund advisers, that report more information
quarterly (i.e., advisers with at least $1.5 billion in hedge fund
assets under management), (3) large liquidity fund advisers, that
report more information quarterly (i.e., advisers that manage liquidity
funds and have at least $1 billion in combined money market and
liquidity fund assets under management), and (4) large private equity
advisers, that report more information annually (i.e., advisers with at
least $2 billion in private equity fund assets under management). As
discussed more fully in section II above and as summarized in sections
IV.A.1 and IV.A.3.a below, the proposal would revise how all types of
respondents report certain information on Form PF.
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\377\ See 17 CFR 275.204(b)-1.
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1. Purpose and Use of the Information Collection
The rules implement provisions of Title IV of the Dodd-Frank Act,
which amended the Advisers Act to require the SEC to, among other
things, establish reporting requirements for advisers to private
funds.\378\ The information collected on Form PF is designed to
facilitate FSOC's monitoring of systemic risk in the private fund
industry and assist FSOC in determining whether and how to deploy its
regulatory tools with respect to nonbank financial companies.\379\ The
SEC also may use information collected on Form PF in its regulatory
programs, including examinations, investigations, and investor
protection efforts relating to private fund advisers.\380\
---------------------------------------------------------------------------
\378\ See 15 U.S.C. 80b-4(b) and 15 U.S.C. 80b-11(e).
\379\ See Form PF.
\380\ Id.
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The proposed amendments are designed to enhance FSOC's ability to
monitor systemic risk as well as bolster the SEC's regulatory oversight
of private fund advisers and investor protection efforts. The proposal
would amend the form's general instructions, as well as section 1 of
Form PF, which would apply to all Form PF filers. The proposal also
would amend section 2 of Form PF, which would apply to large hedge fund
advisers that advise qualifying hedge funds (i.e., hedge funds with a
net asset value of at least $500 million).
2. Confidentiality
Responses to the information collection will be kept confidential
to the extent permitted by law.\381\ Form PF elicits non-public
information about private funds and their trading strategies, the
public disclosure of which could adversely affect the funds and their
investors. The SEC does not intend to make public Form PF information
that is identifiable to any particular adviser or private fund,
although the SEC may use Form PF information in an enforcement action
and FSOC may use it to assess potential systemic risk.\382\ SEC staff
issues certain publications designed to inform the public of the
private funds industry, all of which use only aggregated or masked
information to avoid potentially disclosing any proprietary
information.\383\ The Advisers Act precludes the SEC from being
compelled to reveal Form PF information except (1) to Congress, upon an
agreement of confidentiality, (2) to comply with a request for
information from any other Federal department or agency or self-
regulatory organization for purposes within the scope of its
jurisdiction, or (3) to comply with an order of a court of the United
States in an action brought by the United States or the SEC.\384\ Any
department, agency, or self-regulatory organization that receives Form
PF information must maintain its confidentiality consistent with the
level of confidentiality established for the SEC.\385\ The Advisers Act
requires the SEC to make Form PF information available to FSOC.\386\
For advisers that are also commodity pool operators or commodity
trading advisers, filing Form PF through the Form PF filing system is
filing with both the SEC and CFTC.\387\ Therefore, the SEC makes Form
PF information available to FSOC and the CFTC, pursuant to Advisers Act
section 204(b), making the information subject to the confidentiality
protections applicable to information required to be filed under that
section. Before sharing any Form PF information, the SEC requires that
any such department, agency, or self-regulatory organization represent
to the SEC that it has in place controls designed to ensure the use and
handling of Form PF information in a manner consistent with the
protections required by the Advisers Act. The SEC has instituted
procedures to protect the confidentiality of Form PF information in a
manner consistent with the protections required in the Advisers
Act.\388\
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\381\ See 5 CFR 1320.5(d)(2)(vii) and (viii).
\382\ See 15 U.S.C. 80b-10(c) and 15 U.S.C. 80b-4(b).
\383\ See e.g., Private Funds Statistics, issued by staff of the
SEC Division of Investment Management's Analytics Office, which we
have used in this PRA as a data source, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
\384\ See 15 U.S.C. 80b-4(b)(8).
\385\ See 15 U.S.C. 80b-4(b)(9).
\386\ See 15 U.S.C. 80b-4(b)(7).
\387\ See 2011 Form PF Adopting Release, supra footnote 3 at
n.17.
\388\ See 5 CFR 1320.5(d)(2)(viii).
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[[Page 53885]]
3. Burden Estimates
We are revising our total burden estimates to reflect the proposed
amendments, updated data, and new methodology for certain
estimates.\389\ The tables below map out the Form PF requirements as
they apply to each group of respondents and detail our burden
estimates.
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\389\ For the previously approved estimates, see ICR Reference
No. 202011-3235-019 (conclusion date Apr. 1, 2021), available at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202011-3235-019.
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a. Proposed Form PF Requirements by Respondent
BILLING CODE 8011-01-P
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b. Annual Hour Burden Estimates
Below are tables with annual hour burden estimates for (1) initial
filings, (2) ongoing annual and quarterly filings, and (3) transition
filings, final filings, and temporary hardship requests.
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c. Annual Monetized Time Burden Estimates
Below are tables with annual monetized time burden estimates for
(1) initial filings, (2) ongoing annual and quarterly filings, and (3)
transition filings, final filings, and temporary hardship
requests.\390\
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\390\ The hourly wage rates are based on (1) SIFMA's Management
& Professional Earnings in the Securities Industry 2013, modified by
SEC staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead; and (2) SIFMA's Office Salaries in the
Securities Industry 2013, modified by SEC staff to account for an
1,800-hour work-year and inflation, and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead.
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d. Annual External Cost Burden Estimates
Below is a table with annual external cost burden estimates for
initial filings as well as ongoing annual and quarterly filings. There
are no filing fees for transition filings, final filings, or temporary
hardship requests and we continue to estimate there would be no
external costs for those filings, as previously approved.
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e. Summary of Estimates and Change in Burden
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BILLING CODE 8011-01-C
B. Request for Comments
We request comment on whether our estimates for burden hours and
external costs as described above are reasonable. Pursuant to 44 U.S.C.
3506(c)(2)(B), the SEC solicits comments in order to (1) evaluate
whether the proposed collection of information is necessary for the
proper performance of the functions of the SEC, including whether the
information will have practical utility; (2) evaluate the accuracy of
the SEC's estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) 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.
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
[email protected], and should send a copy to
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-22-22. 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. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
22-22, and be submitted to the Securities and Exchange Commission,
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736.
V. Regulatory Flexibility Act Certification
CFTC:
The Regulatory Flexibility Act (the ``RFA'') \391\ requires that
Federal agencies consider whether the rules they propose will have a
significant economic impact on a substantial
[[Page 53899]]
number of ``small entities'' \392\ whenever an agency publishes a
general notice of proposed rulemaking for any rule, pursuant to the
notice-and-comment provisions of the Administrative Procedure Act.\393\
---------------------------------------------------------------------------
\391\ 5 U.S.C. 601, et. seq.
\392\ See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
\393\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 551 et seq.
---------------------------------------------------------------------------
Registered CPOs and CTAs that are dually registered as investment
advisers with the SEC are only required to file Form PF with the SEC
pursuant to the Advisers Act. CFTC rule 4.27(d) provides that dually
registered CPOs and CTAs that file Form PF with the SEC will be deemed
to have filed Form PF with the CFTC, for purposes of any enforcement
action regarding any false or misleading statement of material fact in
Form PF. The CFTC is not imposing any additional obligation herein
beyond what is already required of these entities when filing Form PF
with the SEC.
Entities impacted by the Form PF are the SEC's regulated entities
and no small entity on its own would meet the Form PF's minimum
reporting threshold of $150 million in regulatory assets under
management attributable to private funds. Also, any economic impact
imposed by Form PF on small entities registered with both the CFTC and
the SEC has been accounted for within the SEC's initial regulatory
flexibility analysis regarding the impact of this collection of
information under the RFA. 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 economic impact on a substantial
number of small entities.
SEC:
The Regulatory Flexibility Act of 1980 (``Regulatory Flexibility
Act'') \394\ requires the SEC to prepare and make available for public
comment an initial regulatory flexibility analysis of the impact of the
proposed rule amendments on small entities, unless the SEC certifies
that the rules, if adopted would not have a significant economic impact
on a substantial number of small entities.\395\ For the purposes of the
Advisers Act and the Regulatory Flexibility Act, an investment adviser
generally is a small entity if it (1) has assets under management
having a total value of less than $25 million, (2) did not have total
assets of $5 million or more on the last day of the most recent fiscal
year, and (3) 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.\396\
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\394\ 5 U.S.C. 601, et. seq.
\395\ See 5 U.S.C. 603(a) and 5 U.S.C. 605(b).
\396\ 17 CFR 275.0-7.
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Pursuant to section 605(b) of the Regulatory Flexibility Act, the
SEC hereby certifies that the proposed amendments to Advisers Act rule
204(b)-1 and Form PF would not, if adopted, have a significant economic
impact on a substantial number of small entities. By definition, no
small entity on its own would meet rule 204(b)-1 and Form PF's minimum
reporting threshold of $150 million in regulatory assets under
management attributable to private funds. Based on Form PF and Form ADV
data as of December 2021, the SEC estimates that no small entity
advisers are required to file Form PF. The SEC does not have evidence
to suggest that any small entities are required to file Form PF but are
not filing Form PF. Therefore, there would be no significant economic
impact on a substantial number of small entities. The SEC encourages
written comments on the certifications. Commentators are asked to
describe the nature of any impact on small entities and provide
empirical data to support the extent of the impact.
VI. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\397\ 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 the following:
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\397\ 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).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
The SEC requests comment on whether the proposal would be a ``major
rule'' for purposes of SBREFA. The SEC solicits comment and empirical
data on the following:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
VII. Statutory Authority
CFTC:
The CFTC is not proposing any amendments to its rules in this
rulemaking.
SEC:
The SEC is proposing amendment to rule 204(b)-1 [17 CFR 275.204(b)-
1] pursuant to its authority set forth in sections 204(b) and 211(e) of
the Advisers Act [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
The SEC is proposing amendments to rule 279.9 pursuant to its
authority set forth in sections 204(b) and 211(e) of the Advisers Act
[15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements, Securities.
For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for part 275 continues to read as
follows.
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
0
2. Amend Sec. 275.204(b)-1 by:
0
a. Revising paragraph (f)(2)(i) to remove the phrases ``in paper
format,'' and ``, 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'';
0
b. Redesignating paragraph (f)(4) as paragraph (f)(5); and
0
c. Adding new paragraph (f)(4).
The addition reads as follows:
Sec. 275.204(b)-1 Reporting by investment advisers to private funds.
* * * * *
(f) * * *
(4) A request for a temporary hardship exemption is considered
filed upon the earlier of the date the request is postmarked or the
date it is received by the Commission.
* * * * *
[[Page 53900]]
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
3. The authority citation for part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq., Pub. L. 111-203, 124 Stat. 1376.
0
4. Sec. 279.9 Form, PF, reporting by investment bankers to private
funds. Form PF [referenced in Sec. 279.9] is revised to read as
follows. The revised version of Form PF is attached as Appendix A.
Note: The text of Form PF does not, and the amendments will not,
appear in the Code of Federal Regulations.
By the Commissions.
Dated: August 10, 2022.
Christopher Kirkpatrick,
Secretary, Commodity Futures Trading Commission.
Vanessa A. Countryman,
Secretary, Securities and Exchange Commission.
BILLING CODE 8011-01-P
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BILLING CODE 8011-01-C
Note: The following Commodity Futures Trading Commission (CFTC)
appendices will not appear in the Code of Federal Regulations.
CFTC Appendices to Amendments to Form PF To Amend Reporting
Requirements for All Filers and Large Hedge Fund Advisers--CFTC Voting
Summary and Commissioners' Statements
CFTC Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson and
Goldsmith Romero voted in the affirmative. Commissioners Mersinger
and Pham voted in the negative.
CFTC Appendix 2--Statement of Chairman Rostin Behnam
I appreciate all of the hard work of the staff in the Commodity
Futures Trading Commission's Market Participants Division as well as
the staff at the Securities and Exchange Commission, the Department
of the Treasury, the Federal Reserve Board, and the Financial
Stability Oversight Council for their work on this proposal. I look
forward to the public's thoughtful comments on the proposal to
improve the usefulness of Form PF.
CFTC Appendix 3--Statement of Commissioner Kristin N. Johnson
Transparency is an integral component of the regulatory
framework that ensures the safety and soundness and enduring
preeminence our financial markets.
Working in collaboration with our colleagues at the Securities
and Exchange Commission (SEC) to enhance oversight and improve
visibility through thoughtfully designed and well-calibrated
collection approaches is consistent with our mission and statutory
mandate--to ``insure the financial integrity of all transactions
subject to this Act and the avoidance of systemic risk.'' \398\
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\398\ Section 3(b) of the Commodity Exchange Act, 7 U.S.C. 5(b).
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) \399\ incorporated innovative regulatory features
for promoting the stability of the US financial system, including
establishing the Financial Stability Oversight Council (FSOC) to
monitor for emerging systemic risks that could significantly impact
our financial markets and American consumers.\400\
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\399\ Public Law 111-203, 124 Stat. 1376 (2010).
\400\ See Sections 111 and 120 of the Dodd-Frank Act.
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Today's proposal seeks to further our commitment to achieving
these values. Consequently, I support issuing for comment the
proposal to amend Form PF, and look forward to the thoughtful,
substantive contributions that the proposed amendments will
engender.
Congress in drafting the Dodd-Frank Act recognized that risks
with systemic import are best monitored through collaboration
amongst the US financial regulators, each with distinct regulatory
mandates, and leveraging their resources and expertise to support
FSOC's overarching responsibilities. Form PF reflects these
statutory qualities. As directed by the Dodd-Frank Act, the
Commission and SEC in 2011 jointly issued rules to provide FSOC with
important information about private fund operations and strategies
through Form PF.\401\
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\401\ Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128, 71129 (Nov. 16, 2011).
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The private fund industry has only grown in size and importance
since 2011. In the third quarter of 2021, private funds reported a
staggering $12 trillion of assets on Form PF.\402\ The sheer
aggregate size of private funds signifies the potential for events
in this industry to produce reverberating effects on the integrity
of our financial markets and, in turn, remarkably influence the
welfare of American consumers. Form PF over the last decade has
provided financial regulators with needed transparency into this
potentially systemically significant sector of the financial
system.\403\
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\402\ Amendments to Form PF to Amend Reporting Requirements for
All Filers and Large Hedge Fund Advisers (Voting Copy--As approved
by the Commodity Futures Trading Commission on 8/10/2022) (Proposed
Rules) at 8 n.7, https://www.cftc.gov/media/7536/votingdraft081022Parts275and279/download.
\403\ See Proposed Rules at 150.
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I support the Commissions' endeavor to build on data collection
points that need clarity and to propose revisions in response to
changes in financial markets as well as market participants and
regulators' experience with Form PF as a tool for gathering
information. Over the last decade, private funds have adopted new
practices, investment strategies and an appetite for investing in
non-traditional assets.\404\ The proposed revisions to Form PF aim
to adapt to these developments as informed by experience in
administering Form PF.
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\404\ Proposed Rules at 7-8.
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Notwithstanding these important gains, I note that it will be
important to hear from and consider the concerns raised by all
stakeholders, including for example, concerns regarding the costs
and challenges of reporting, particularly for smaller entities. I
anticipate the proposal to amend Form PF will engender important
substantive contributions that will refine our understanding of the
benefits of data collection, enhance transparency, and improve our
ability to preserve the integrity of our markets.
CFTC Appendix 4--Statement of Commissioner Christy Goldsmith Romero
As a U.S. financial markets regulator and a member of the
Financial Stability Oversight Council (``FSOC''), the Commission has
a
[[Page 53985]]
critical responsibility to monitor, identify, and respond to
systemic risks and emerging threats to U.S. financial stability. I
support the proposed amendments to Form PF because they will enhance
one of the Commission's tools to fulfill that critical
responsibility and facilitate our regulatory oversight of private
funds.\1\
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\1\ The data collected also supports the CFTC's supervision,
examinations, enforcement investigations, and customer protections.
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One lesson from the financial crisis was the risk of contagion
to U.S. financial markets from private-fund activities, strategies,
and exposures, including those related to novel or complex
derivatives. This was evident with the failure of Bear Stearns'
structured credit funds in the lead-up to the financial crisis, and
more recently, with the failure of Archegos Capital Management.
These examples, and others, highlight the necessity for U.S.
financial regulators to have visibility into funds' activities and
exposures to fulfill their regulatory responsibilities and
ultimately, to prevent or mitigate the buildup of systemic risk in
the U.S. financial system.
This proposal marks important coordination with the Securities
and Exchange Commission (``SEC'') to enhance joint reporting
requirements and guard against hidden risks in the U.S. financial
system.
The CFTC and SEC embark on this proposed rulemaking after nearly
a decade of experience of private fund reporting.\2\ It is
particularly appropriate to revisit our reporting framework given
that, as U.S. financial markets have evolved over the past decade,
the private fund space has grown and evolved in tandem. This is why
we seek public comment on new or revised areas of data--including
those intended to provide further insight into complex structures,
new types of instruments, identification data, redemption and
withdrawal rights, ownership, and counterparty exposures, among
other subjects. It is also important that we collect information on
fund exposure to digital assets in order to understand evolving
market risk.
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\2\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, section 112, Public Law 111-203, 124 Stat. 1376 (2010) (the
``Dodd-Frank Act''), required the SEC and CFTC to establish joint
rules in furtherance of the FSOC's critical mission to monitor
systemic risk through the creation of Form PF. See Section 406 of
the Dodd-Frank Act. Since 2012, private fund advisers, including
certain commodity pool operators and commodity trading advisors that
are dually-registered with both the CFTC and SEC, have been required
to file reports regarding their operations and holdings through Form
PF. See also Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, 76 FR 71128 (Nov. 16, 2011).
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Our objective is to increase the usefulness of the data
collected; to ensure that it is actually used as Congress intended
to bring transparency to risk previously hidden. I look forward to
reviewing public comment on whether the proposal would meet our
objective.
Thank you to Commission staff for working with my office to
improve the proposal to facilitate effective oversight by the CFTC.
I commend staff from both agencies on this proposal, and on future
information sharing, that will promote the financial stability of
U.S. financial markets.
CFTC Appendix 5--Dissenting Statement of Commissioner Summer K.
Mersinger
I am respectfully voting to dissent on the joint SEC/CFTC
proposed rulemaking to amend Form PF, the confidential reporting
form for certain SEC-registered investment advisers to private
funds. The class of registered investment advisers required to
submit Form PF includes those that also are registered with the CFTC
as commodity pool operators or commodity trading advisors.
As I previously stated in my concurrence to the CFTC's recent
Request for Information on Climate-Related Financial Risk (``Climate
RFI''),\1\ I support efforts to engage market participants,
industry, and the general public in our policy-making process. And I
agree that after a decade of experience with Form PF, it is
appropriate to evaluate possible amendments. If improvements can be
made that would enable us to collect more efficiently data that we
truly need to fulfill our responsibilities, while reducing
unnecessary burdens on those required to supply that data, we should
consider them.
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\1\ See Concurring Statement of Commissioner Summer K. Mersinger
Regarding Request for Information on Climate-Related Financial Risk
(June 2, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement060222.
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However, I do not support this particular proposal. Data and
information that federal regulators request from market participants
should be narrowly tailored to the purpose intended under our
governing statutes, and unfortunately, that does not appear to be
the overall approach in this proposal. I am even more concerned that
constructive input the agencies already have received over the years
from market participants that actually complete Form PF receives
little attention in the proposal.
I look forward to receiving the public's comments, which I hope
will inform the Commissions' consideration of final amendments to
Form PF that provide for the collection of necessary data as
efficiently as possible.
CFTC Appendix 6--Dissenting Statement of Commissioner Caroline D. Pham
I respectfully dissent from the proposed amendments to the
Reporting Form for Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors (Form PF).
The proposed joint amendments, an action of the CFTC as well as the
SEC, seem to impose overly broad obligations that would be
unnecessarily burdensome and would present potentially significant
operational challenges and costs without a persuasive cost-benefit
analysis under the Commodity Exchange Act (CEA).\1\ In a time of
economic challenges, including rising inflation, we must be careful
when considering proposals that could inhibit positive economic
activity that supports American businesses and jobs. I look forward
to hearing from commenters as to the proposed amendments, including
practical implementation issues and the relative costs and benefits
of the proposal.
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\1\ 7 U.S.C. 19.
[FR Doc. 2022-17724 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P 6351-01-P