Document ID: SEC-2011-1759-0001
Agency: sec
Document Type: Rule
Title: Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators, etc.
Posted Date: 2011-11-16T05:00Z

[Federal Register Volume 76, Number 221 (Wednesday, November 16, 2011)]
[Rules and Regulations]
[Pages 71128-71239]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-28549]

[[Page 71127]]

Vol. 76

Wednesday,

No. 221

November 16, 2011

Part II

Commodities and Future Trading Commission

Securities and Exchange Commission

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17 CFR Parts 4, 275 and 279

 Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF; 
Final Rule

  Federal Register / Vol. 76 , No. 221 / Wednesday, November 16, 2011 / 
Rules and Regulations  

[[Page 71128]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3308; File No. S7-05-11]
RIN 3235-AK92

Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF

AGENCIES: Commodity Futures Trading Commission and Securities and 
Exchange Commission.

ACTION: Joint final rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the 
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or 
the ``Commissions'') are adopting new rules under the Commodity 
Exchange Act and the Investment Advisers Act of 1940 to implement 
provisions of Title IV of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act. The new SEC rule requires investment advisers 
registered with the SEC that advise one or more private funds and have 
at least $150 million in private fund assets under management to file 
Form PF with the SEC. The new CFTC rule requires commodity pool 
operators (``CPOs'') and commodity trading advisors (``CTAs'') 
registered with the CFTC to satisfy certain CFTC filing requirements 
with respect to private funds, should the CFTC adopt such requirements, 
by filing Form PF with the SEC, but only if those CPOs and CTAs are 
also registered with the SEC as investment advisers and are required to 
file Form PF under the Advisers Act. The new CFTC rule also allows such 
CPOs and CTAs to satisfy certain CFTC filing requirements with respect 
to commodity pools that are not private funds, should the CFTC adopt 
such requirements, by filing Form PF with the SEC. Advisers must file 
Form PF electronically, on a confidential basis. The information 
contained in Form PF is designed, among other things, to assist the 
Financial Stability Oversight Council in its assessment of systemic 
risk in the U.S. financial system.

DATES: The effective date for the addition of 17 CFR 4.27 (rule 4.27 
under the Commodity Exchange Act), 17 CFR 275.204(b)-1 (rule 204(b)-1 
under the Investment Advisers Act of 1940) and 17 CFR 279.9 (Form PF), 
as well as the revision to the authority citation for 17 CFR part 4, is 
March 31, 2012. See section III of this Release for compliance dates.

FOR FURTHER INFORMATION CONTACT: CFTC: Amanda L. Olear, Special 
Counsel, Telephone: (202) 418-5283, Email: aolear@cftc.gov, or Kevin P. 
Walek, Assistant Director, Telephone: (202) 418-5463, Email: 
kwalek@cftc.gov, Division of Clearing and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581; SEC: David P. Bartels, Senior 
Counsel, or Sarah G. ten Siethoff, Senior Special Counsel, at (202) 
551-6787 or IArules@sec.gov, Office of Investment Adviser Regulation, 
Division of Investment Management, U.S. Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The CFTC is adopting rule 4.27 [17 CFR 4.27] 
under the Commodity Exchange Act (``CEA'') \1\ and Form PF.\2\ The SEC 
is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] and Form PF [17 CFR 
279.9] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] 
(``Advisers Act'').\3\
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    \1\ 7 U.S.C. 1a.
    \2\ Form PF is a joint form between the SEC and the CFTC only 
with respect to sections 1 and 2 of the Form. Sections 3 and 4 of 
the Form are adopted solely by the SEC.
    \3\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the 
Advisers Act, or any paragraph of the Advisers Act, we are referring 
to 15 U.S.C. 80b of the United States Code, at which the Advisers 
Act is codified, and when we refer to Advisers Act rule 204(b)-1, or 
any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1 
of the Code of Federal Regulations in which this rule will be 
published. In addition, when we refer to the ``Investment Company 
Act,'' or any paragraph of the Investment Company Act, we are 
referring to 15 U.S.C. 80a of the United States Code, at which the 
Investment Company Act of 1940 is codified.

Table of Contents

I.Background
    A. The Dodd-Frank Act and the Financial Stability Oversight 
Council
    B. International Coordination
II. Discussion
    A. Who Must File Form PF
    1. ``Hedge Fund'' Definition
    2. ``Liquidity Fund'' Definition
    3. ``Private Equity Fund'' Definition
    4. Large Private Fund Adviser Thresholds
    5. Aggregation of Assets Under Management
    6. Reporting for Affiliated and Sub-Advised Funds
    7. Exempt Reporting Advisers
    B. Frequency of Reporting
    1. Annual and Quarterly Reporting
    2. Reporting Deadlines
    3. Initial Reports
    4. Transition Filings, Final Filings and Temporary Hardship 
Exemptions
    C. Information Required on Form PF
    1. Section 1 of Form PF
    2. Section 2 of Form PF
    3. Section 3 of Form PF
    4. Section 4 of Form PF
    5. Aggregation of Master-Feeder Arrangements, Parallel Fund 
Structures, and Parallel Managed Accounts
    D. Confidentiality of Form PF Data
    E. Filing Fees and Format for Reporting
III. Effective and Compliance Dates
IV. Paperwork Reduction Act
    A. Burden Estimates for Annual Reporting by Smaller Private Fund 
Advisers
    B. Burden Estimates for Large Hedge Fund Advisers
    C. Burden Estimates for Large Liquidity Fund Advisers
    D. Burden Estimates for Large Private Equity Advisers
    E. Burden Estimates for Transition Filings, Final Filings, and 
Temporary Hardship Exemption Requests
    F. Aggregate Hour Burden Estimates
    G. Cost Burden
V. Economic Analysis
    A. Benefits
    B. Costs
    C. CFTC Statutory Findings
    1. General Costs and Benefits
    2. Section 15(a) Determination
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the New Rule
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority
Text of Final Rules

I. Background

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

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\4\ 
One significant focus of this legislation is to ``promote the financial 
stability of the United States'' by, among other measures, establishing 
better monitoring of emerging risks using a system-wide perspective.\5\ 
To further this goal, the Act establishes the Financial Stability 
Oversight Council (``FSOC'') and directs it to monitor risks to the 
U.S. financial system. The Act also gives FSOC a number of tools to 
carry out this mission.\6\ For instance, FSOC may

[[Page 71129]]

determine that a nonbank financial company will be subject to the 
supervision of the Board of Governors of the Federal Reserve System 
(``FRB'') if the company may pose risks to U.S. financial stability as 
a result of its activities or in the event of its material financial 
distress.\7\ In addition, FSOC may issue recommendations to primary 
financial regulators, like the SEC and CFTC, for more stringent 
regulation of financial activities that FSOC determines may create or 
increase systemic risk.\8\
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    \4\ Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ S. Rep. No. 111-176, at 2-3 (2010) (``Senate Committee 
Report'').
    \6\ See Sections 113 and 120 of the Dodd-Frank Act. In a recent 
rulemaking release, FSOC explained that its response to any 
potential threat to financial stability will be based on an 
assessment of the circumstances. See Authority to Require 
Supervision and Regulation of Certain Nonbank Financial Companies, 
Financial Stability Oversight Counsel Release (Oct. 11, 2011) 
(``FSOC Second Notice'').
    \7\ Section 113 of the Dodd-Frank Act. The Dodd-Frank Act also 
directs FSOC to recommend to the FRB heightened prudential standards 
for designated nonbank financial companies. Section 112(a)(2) of the 
Dodd-Frank Act.
    \8\ Section 120 of the Dodd-Frank Act.
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    The Dodd-Frank Act anticipates that various regulatory agencies, 
including the Commissions, will support FSOC.\9\ To that end, the Dodd-
Frank Act amended section 204(b) of the Advisers Act to require that 
the SEC establish reporting and recordkeeping requirements for advisers 
to private funds,\10\ many of which must also register for the first 
time as a consequence of the Dodd-Frank Act.\11\ These new requirements 
may include maintaining records and filing reports containing such 
information as the SEC deems necessary and appropriate in the public 
interest and for investor protection or for the assessment of systemic 
risk by FSOC.\12\ The SEC and CFTC must jointly issue, after 
consultation with FSOC, rules establishing the form and content of any 
reports to be filed under this new authority.\13\
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    \9\ See, e.g., section 112(d)(1) of the Dodd-Frank Act, which 
authorizes FSOC to collect information from member agencies to 
support its functions. See also FSOC Second Notice, supra note 6 
(explaining that information reported on Form PF will be important 
to FSOC's policy-making in regard to the assessment of systemic risk 
among private fund advisers).
    \10\ Section 202(a)(29) of the Advisers Act defines the term 
``private fund'' as ``an issuer that would be an investment company, 
as defined in section 3 of the Investment Company Act, but for 
section 3(c)(1) or 3(c)(7) of that Act.'' Section 3(c)(1) of the 
Investment Company Act provides an exclusion from the definition of 
``investment company'' for any ``issuer whose outstanding securities 
(other than short-term paper) are beneficially owned by not more 
than one hundred persons and which is not making and does not 
presently propose to make a public offering of its securities.'' 
Section 3(c)(7) of the Investment Company Act provides an exclusion 
from the definition of ``investment company'' for any ``issuer, the 
outstanding securities of which are owned exclusively by persons 
who, at the time of acquisition of such securities, are qualified 
purchasers, and which is not making and does not at that time 
propose to make a public offering of such securities.'' The term 
``qualified purchaser'' is defined in section 2(a)(51) of the 
Investment Company Act.
    \11\ See sections 402, 403, 407 and 408 of the Dodd-Frank Act. 
The SEC recently adopted rule 203-1(e) providing a transition period 
for certain private advisers previously relying on the repealed 
exemption in section 203(b)(3) of the Advisers Act. The transition 
rule requires these advisers to register with the SEC by March 30, 
2012. See Rules Implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Release No. IA-3221 (June 22, 
2011), 76 FR 42950 (July 19, 2011) (``Implementing Adopting 
Release''). See also Exemptions for Advisers to Venture Capital 
Funds, Private Fund Advisers With Less Than $150 Million in Assets 
Under Management, and Foreign Private Advisers, Investment Advisers 
Act Release No. IA-3222 (June 22, 2011), 76 FR 39646 (July 6, 2011) 
(``Exemptions Adopting Release'').
    \12\ The Dodd-Frank Act does not identify specific information 
to be included in these reports, but section 204(b) of the Advisers 
Act does require that the records and reports required under that 
section cumulatively include a description of certain information 
about private funds, such as the amount of assets under management, 
use of leverage, counterparty credit risk exposure, and trading and 
investment positions for each private fund advised by the adviser. 
See Reporting by Investment Advisers to Private Funds and Certain 
Commodity Pool Operators and Commodity Trading Advisors on Form PF, 
Investment Advisers Act Release No. 3145 (January 26, 2011), 76 FR 
8068 (February 11, 2011) (``Proposing Release'') at n. 13 and 
accompanying text.
    \13\ See section 211(e) of the Advisers Act.
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    On January 26, 2011, in a joint release, the CFTC and SEC proposed 
new rules and a new reporting form intended to implement this statutory 
mandate.\14\ In the release, the SEC proposed new Advisers Act rule 
204(b)-1, which would require private fund advisers to file Form PF 
periodically with the SEC.\15\ In addition, the CFTC proposed new rule 
4.27,\16\ which would require private fund advisers that are also 
registered as CPOs or CTAs with the CFTC to satisfy certain proposed 
CFTC systemic risk reporting requirements, should the CFTC adopt such 
requirements, by filing Form PF.\17\ Today, we are adopting these 
proposed rules and Form PF with several changes from the proposal that 
are designed to respond to commenter concerns. Consistent with the 
proposal, advisers must report on Form PF certain information regarding 
the private funds they manage, and this information is intended to 
complement information the SEC collects on Form ADV and information the 
CFTC separately has proposed to collect from CPOs and CTAs.\18\ 
Collectively, these reporting forms will provide FSOC and the 
Commissions with important information about the basic operations and 
strategies of private funds and help establish a baseline picture of 
potential systemic risk in the private fund industry.
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    \14\ As discussed below, Form PF is a joint form between the SEC 
and the CFTC only with respect to sections 1 and 2 of the Form.
    \15\ Throughout this Release, we use the term ``private fund 
adviser'' to mean any investment adviser that (i) Is registered or 
required to register with the SEC (including any investment adviser 
that is also registered or required to register with the CFTC as a 
CPO or CTA) and (ii) advises one or more private funds. Advisers 
solely to venture capital funds or advisers solely to private funds 
that in the aggregate have less than $150 million in assets under 
management in the United States that rely on the exemption from 
registration under, respectively, section 203(l) or 203(m) of the 
Advisers Act (``exempt reporting advisers'') are not required to 
file Form PF. See infra section II.A.7 of this Release.
    \16\ Because the CFTC is not adopting the remainder of proposed 
CEA rule 4.27 at the same time as it is adopting this rule, the CFTC 
has modified the designation of CEA rule 4.27(d) to be the sole text 
of that section. See Commodity Pool Operators and Commodity Trading 
Advisors: Amendments to Compliance Obligations (Jan. 26, 2011), 76 
FR 7976 (Feb. 11, 2011) (``CFTC Proposing Release''). Additionally, 
the CFTC has made some revisions to the text of rule 4.27 to: (1) 
Clarify that the filing of Form PF with the SEC will be considered 
substitute compliance with certain CFTC reporting obligations (i.e., 
for Schedules B and C of Form CPO-PQR and Schedule B of Form CTA-PR 
as proposed) should the CFTC determine to adopt such requirements 
and (2) to allow CPOs and CTAs who are otherwise required to file 
Form PF the option of submitting on Form PF data regarding commodity 
pools that are not private funds as substitute compliance with 
certain CFTC reporting obligations (i.e., for Schedules B and C of 
Form CPO-PQR and Schedule B of Form CTA-PR as proposed) should the 
CFTC determine to adopt such requirements.
    \17\ For these private fund advisers, filing Form PF through the 
Form PF filing system would be a filing with both the SEC and CFTC. 
Irrespective of their filing a Form PF with the SEC, the CFTC has 
proposed that all private fund advisers that are also registered as 
CPOs and CTAs with the CFTC would be required to file Schedule A of 
Form CPO-PQR (for CPOs) or Schedule A of Form CTA-PR (for CTAs). See 
CFTC Proposing Release, supra note 16.
    \18\ See Proposing Release, supra note 12, at n. 16, comparing 
the purposes of Form ADV and Form PF. References in this Release to 
Form ADV or terms defined in Form ADV or its glossary are to the 
form and glossary as amended in the Implementing Adopting Release, 
supra note 11.
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    The SEC is adopting Advisers Act rule 204(b)-1 and Form PF to 
enable FSOC to obtain data that will facilitate monitoring of systemic 
risk in U.S. financial markets. Our understanding of the utility to 
FSOC of the data to be collected is based on our staffs' consultations 
with staff representing the members of FSOC. The design of Form PF is 
not intended to reflect a determination as to where systemic risk 
exists but rather to provide empirical data to FSOC with which it may 
make a determination about the extent to which the activities of 
private funds or their advisers pose such risk. The information made 
available to FSOC will be collected for FSOC's use by the Commissions 
in their role as the primary regulators of private fund advisers. The 
policy judgments implicit in the information required to be reported on 
Form PF reflect FSOC's role as the primary user of the reported

[[Page 71130]]

information for the purpose of monitoring systemic risk. The SEC would 
not necessarily have required the same scope of reporting if the 
information reported on Form PF were intended solely for the SEC's use.
    We expect the information collected on Form PF and provided to FSOC 
will be an important part of FSOC's systemic risk monitoring in the 
private fund industry.\19\ We note that, simultaneous with the 
consultations between our staffs and the staff representing FSOC's 
members, FSOC has been building out its standards for assessing 
systemic risk across different kinds of financial firms and has 
proposed guidance and standards for determining which nonbank financial 
companies should be designated as subject to FRB supervision.\20\ In 
its most recent release on this subject, FSOC confirmed that the 
information reported on Form PF is important not only to conducting an 
assessment of systemic risk among private fund advisers but also to 
determining how that assessment should be made.\21\
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    \19\ See section 204(b) of the Advisers Act. Today, regulators 
have little reliable data regarding this rapidly growing sector and 
frequently have to rely on data from other sources, which when 
available may be incomplete. See, e.g., FSOC 2011 Annual Report, 
http://www.treasury.gov/initiatives/fsoc/Pages/annual-report.aspx 
(``FSOC 2011 Annual Report'') at 69. The SEC recently adopted 
amendments to Form ADV that will require the reporting of important 
information regarding private funds, but this includes little or no 
information regarding, for instance, performance, leverage or the 
riskiness of a fund's financial activities. See Implementing 
Adopting Release, supra note 11. The data collected through Form PF 
will be more reliable than existing data regarding the industry and 
significantly extend the data available through the revised Form 
ADV.
    \20\ See, e.g., FSOC Second Notice, supra note 6; Authority to 
Require Supervision and Regulation of Certain Nonbank Financial 
Companies, Financial Stability Oversight Council Release (Jan. 18, 
2011), 76 FR 4555 (Jan. 26, 2011); Advance Notice of Proposed 
Rulemaking Regarding Authority to Require Supervision and Regulation 
of Certain Nonbank Financial Companies, Financial Stability 
Oversight Council Release (Oct. 1, 2010), 75 FR 61653 (Oct. 6, 
2010).
    \21\ See FSOC Second Notice, supra note 6 (``[FSOC] recognizes 
that the quantitative thresholds it has identified for application 
during [the initial stage of review] may not provide an appropriate 
means to identify a subset of nonbank financial companies for 
further review in all cases across all financial industries and 
firms. While [FSOC] will apply [such] thresholds to all nonbank 
financial companies, including * * * asset management companies, 
private equity firms, and hedge funds, these companies may pose 
risks that are not well-measured by the quantitative thresholds 
approach. * * * Using [Form PF] and other data, [FSOC] will consider 
whether to establish an additional set of metrics and thresholds 
tailored to evaluate hedge funds and private equity firms and their 
advisers.'').
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    The Commissions received more than 35 letters responding to the 
proposal, with trade associations, investment advisers and law firms 
accounting for most of the comments. Commenters representing investors 
were generally supportive of the proposal but thought it should have 
required more of private fund advisers.\22\ Some of these supporters 
argued, in particular, for more detailed and more frequent reporting 
than we proposed.\23\ In contrast, advisers and those writing on their 
behalf expressed concern regarding the scope, frequency and timing of 
the proposed reporting.\24\ A number of these commenters generally 
supported the systemic risk monitoring goals of the Dodd-Frank Act or 
the broad framework of the proposal but argued that specific aspects of 
the proposal were impractical or burdensome.\25\ We respond to these 
comments in section II of this Release.
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    \22\ See, e.g., comment letter of the American Federation of 
Labor and Congress of Industrial Organizations (Apr. 12, 2011) 
(``AFL-CIO Letter''); comment letter of the Council of Institutional 
Investors (Apr. 11, 2011) (``CII Letter'') (agreeing that ``the 
SEC's proposal will facilitate FSOC's ability to promote the 
soundness of the U.S. financial system'' but noting that the 
commenter's own working group report favored real-time reporting of 
position-level information).
    \23\ See AFL-CIO Letter (``We support the Proposed Rule, but 
believe it should be strengthened in a few key areas by requiring 
more frequent reporting, omitting the arbitrary distinction by 
investment strategy, and adding additional disclosure requirements 
necessary to protect investors and prevent systemic risks.''); 
comment letter of the Americans for Financial Reform (Apr. 12, 2011) 
(``AFR Letter'') (endorsing the AFL-CIO Letter).
    \24\ See, e.g., comment letter of the Alternative Investment 
Management Association (Apr. 12, 2011) (``AIMA General Letter''); 
comment letter of the Investment Adviser Association (Apr. 12, 2011) 
(``IAA Letter''); comment letter of the Managed Funds Association 
(Apr. 8, 2011) (``MFA Letter''); comment letter of the Private 
Equity Growth Capital Council (Apr. 12, 2011) (``PEGCC Letter''); 
comment letter of Seward & Kissel, LLP (Apr. 12, 2011) (``Seward 
Letter''); comment letter of the Securities Industry and Financial 
Markets Association, Asset Management Group (Apr. 12, 2011) (``SIFMA 
Letter'').
    \25\ See, e.g., comment letter of BlackRock Inc. (Apr. 12, 2011) 
(``BlackRock Letter''); IAA Letter (stating that they ``fully 
support the Commission's goal of enhancing transparency of private 
funds that may be deemed to present systemic risk to the U.S. 
financial markets'' but arguing that the proposal is too broad in 
scope); MFA Letter (supporting ``the approach proposed by the SEC 
and CFTC to collect information from registered private fund 
managers through periodic, confidential reports on Form PF'' and 
stating that the collection of data from market participants, 
including investment advisers and the funds they manage, ``is a 
critical component of effective systemic risk monitoring and 
regulation'').
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    This rulemaking is intended primarily to support FSOC, consistent 
with the mandate to adopt private fund reporting requirements under the 
Dodd-Frank Act. Determinations made with respect to the Form PF 
reporting requirements have been made in furtherance of this goal and 
to comply with this legislative mandate.

B. International Coordination

    The Dodd-Frank Act states that FSOC shall coordinate with foreign 
financial regulators in assessing systemic risk.\26\ In recognition of 
this, our proposal discussed the potential importance of international 
regulatory coordination in responding to future financial crises.\27\ A 
number of groups have continued to advance international efforts 
relating to the collection of systemic risk information. For example, 
recent reports from the Financial Stability Board (``FSB''), 
International Monetary Fund (``IMF'') and Bank for International 
Settlements (``BIS'') emphasize the importance of identifying and 
addressing gaps in the information available to systemic risk 
regulators.\28\ One goal of this coordination is to collect comparable 
information regarding private funds, which will aid in the assessment 
of systemic risk on a global basis.\29\ Several commenters agreed that 
international coordination in connection with private fund reporting is 
important and encouraged us to take an approach consistent with 
international precedents.\30\
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    \26\ See section 175(b) of the Dodd-Frank Act. See also 
Proposing Release, supra note 12, at nn. 19-22 and accompanying 
text.
    \27\ See Proposing Release, supra note 12, at section I.B.
    \28\ See, e.g., FSB, IMF and BIS, Macroprudential Policy Tools 
and Frameworks, Update to G20 Finance Ministers and Central Bank 
Governors (Feb. 14, 2011) (highlighting the need for ``[d]esign and 
collection of better information and data to support systemic risk 
identification and modelling [sic]''); FSB, Shadow Banking: Scoping 
the Issues, A Background Note of the Financial Stability Board (Apr. 
12, 2011) (``FSB Shadow Banking Report'') (``authorities should cast 
the net wide, looking at all non-bank credit intermediation to 
ensure that data gathering and surveillance cover all the activities 
within which shadow banking-related risks might arise''); FSB and 
IMF, The Financial Crisis and Information Gaps, Implementation 
Progress Report (June 2011) (``Report on Information Gaps'').
    \29\ See, e.g., Report on Information Gaps, supra note 28, at 5. 
The Commissions expect that they may share information reported on 
Form PF with various foreign financial regulators under information 
sharing agreements in which the foreign regulator agrees to keep the 
information confidential.
    \30\ See, e.g., comment letter of the American Bar Association, 
Federal Regulation of Securities Committee and Private Equity and 
Venture Capital Committee (Apr. 11, 2011) (``ABA Committees 
Letter''); AIMA General Letter; comment letter of the Committee on 
Capital Markets Regulation (Apr. 12, 2011) (``CCMR Letter'').
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    To this end, our staffs have consulted with the United Kingdom's 
Financial Services Authority (the ``FSA''), the European Securities and 
Markets Authority (``ESMA''), the International Organization of 
Securities Commissions (``IOSCO'') and Hong Kong's Securities and 
Futures Commission.\31\ The FSA

[[Page 71131]]

was the first to develop significant experience with hedge fund 
reporting, conducting a voluntary, semi-annual survey beginning in 
October 2009 by sampling large hedge fund groups based in the United 
Kingdom.\32\ IOSCO, in turn, used the guidelines established in the FSA 
Survey, together with its own report on hedge fund oversight, in 
coordinating a survey of hedge funds conducted by IOSCO's members 
(including the SEC and CFTC) as of the end of September 2010.
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    \31\ These consultations began prior to issuance of the Form PF 
proposal and have continued during the development of the final 
rules and Form. See also Proposing Release, supra note 12, at nn. 
24-32 and accompanying text.
    \32\ See, e.g., Financial Services Authority, Assessing the 
Possible Sources of Systemic Risk from Hedge Funds: A Report on the 
Findings of the Hedge Fund Survey and the Hedge Fund as Counterparty 
Survey (July 2011), available at http://www.fsa.gov.uk/pubs/other/hedge_fund_report_july2011.pdf (``FSA Survey''). See also 
Proposing Release, supra note 12, at nn. 27-30 and accompanying 
text.
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    Most recently, ESMA has proposed its own template for private fund 
reporting, which shares many common elements with the FSA Survey (as 
well as the IOSCO survey and Form PF).\33\ ESMA's proposed template 
will serve as the basis for mandatory private fund reporting in Europe 
under the European Union's Directive on alternative investment fund 
managers (``EU Directive'') and is expected eventually to supersede the 
FSA Survey in the United Kingdom. The proposed ESMA template is broader 
in scope than the FSA Survey, requiring information about a wide range 
of alternative investment funds, including private equity funds, 
venture capital funds and real estate funds.\34\ Form PF includes many 
of the types of information collected through the FSA Survey and 
proposed to be collected in the ESMA template, and a number of the 
changes we are making from the proposal further align Form PF with 
these international approaches to private fund reporting.\35\
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    \33\ See ESMA's draft technical advice to the European 
Commission on possible implementing measures of the Alternative 
Investment Fund Managers Directive, ESMA/2011/209 (July 2011), 
available at http://www.esma.europa.eu/index.php? 
page=consultation--details&id=185 (``ESMA Proposal''). See also 
Directive 2011/61/EU of the European Parliament and of the Council 
of 8 June 2011 on Alternative Investment Fund Managers and amending 
Directives 2003/41/EU and 2009/65/EC and Regulations (EC) No 1060/
2009 and (EU) No 1095/2010 (published July 1, 2011, in the Official 
Journal of the European Union).
    \34\ For additional discussion of international efforts relating 
to systemic risk monitoring in private equity funds, see Proposing 
Release, supra note 12, at nn. 33-35 and accompanying text.
    \35\ See, e.g., infra notes 227, 231, 244-246, 258, 279, 283 and 
297 and accompanying text.
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II. Discussion

    The SEC is adopting Form PF and rule 204(b)-1 under the Advisers 
Act with several changes from the proposal that are designed to respond 
to commenter concerns. Under the new rule, SEC-registered investment 
advisers must report systemic risk information to the SEC on Form PF if 
they advise one or more private funds.\36\ The final rule and changes 
from the proposal are discussed below.\37\
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    \36\ See Advisers Act rule 204(b)-1.
    \37\ As noted above, section 204(b) of the Advisers Act gives 
the SEC authority to establish both reporting and recordkeeping 
requirements for private fund advisers. See supra note 12 and 
accompanying text. One commenter asked why the SEC proposed 
reporting requirements before proposing recordkeeping requirements 
for private fund advisers, expressing concern that advisers would 
need to know what records to maintain in order to report on Form PF. 
See comment letter of Congressman Darrell E. Issa, Chairman of the 
House Committee on Oversight and Government Reform (Sept. 20, 2011) 
(``Issa Letter''). Recordkeeping requirements serve a number of 
important purposes, such as ensuring that advisers maintain adequate 
documentation relevant to the disposition of their clients' and 
investors' assets and that SEC examiners are able to effectively 
inspect advisers' operations. The SEC does not believe, however, 
that establishing recordkeeping requirements is a necessary 
prerequisite to establishing reporting requirements.
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    In addition, the CFTC is adopting rule 4.27 with minor 
revisions.\38\ This new rule provides that, for registered CPOs and 
CTAs that are also registered as investment advisers with the SEC and 
are required to file Form PF, filing Form PF serves as substitute 
compliance for certain of the CFTC's proposed systemic risk reporting 
requirements should the CFTC adopt such requirements.\39\ The CFTC has 
revised the new rule to allow CPOs and CTAs who are otherwise required 
to file Form PF the option of submitting on Form PF data regarding 
commodity pools that are not private funds as substitute compliance 
with certain of the CFTC's proposed systemic risk reporting 
requirements should the CFTC adopt such requirements.\40\ The CFTC 
believes that the revisions to the CEA rule adopted in this Release 
provide additional clarity with respect to the filing obligations of 
dually registered CPOs and CTAs. Because commodity pools that are 
reported or required to be reported on Form PF are categorized as hedge 
funds for purposes of Form PF, as discussed below, CPOs and CTAs filing 
Form PF need to complete only the sections applicable to hedge fund 
advisers.\41\
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    \38\ See supra note 16.
    \39\ See CEA rule 4.27. For purposes of this rule, it is the 
CFTC's position that any false or misleading statement of a material 
fact or material omission in the jointly adopted sections (sections 
1 and 2) of Form PF that is filed by these CPOs and CTAs shall 
constitute a violation of section 6(c)(2) of the CEA.
    \40\ Id.
    \41\ Form PF is a joint form between the SEC and the CFTC only 
with respect to sections 1 and 2 of the Form. Accordingly, private 
fund advisers that are also CPOs or CTAs would be obligated to 
complete only section 1 and, if they meet the applicable threshold, 
section 2 of Form PF.
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    As discussed above and in the Proposing Release, we have designed 
Form PF, in consultation with staff representing FSOC's members, to 
provide FSOC with information important to its understanding and 
monitoring of systemic risk in the private fund industry.\42\ Based on 
our staffs' consultations with staff representing FSOC's members, we 
expect that FSOC will use the information collected on Form PF, 
together with market data from other sources, to assist in determining 
whether and how to deploy its regulatory tools. This may include, for 
instance, identifying private funds that merit further analysis or 
deciding whether to recommend to a primary financial regulator, like 
the SEC or CFTC, more stringent regulation of the financial activities 
of the private fund industry.\43\
---------------------------------------------------------------------------

    \42\ See Proposing Release, supra note 12, at section II.A and 
at n. 49.
    \43\ See supra note 6.
---------------------------------------------------------------------------

    Although the Form we are adopting will provide information useful 
to FSOC's regulatory mission, the Form has not been designed to be 
FSOC's exclusive source of information regarding the private fund 
industry.\44\ FSOC's recently proposed guidance regarding its process 
for designating nonbank financial companies that may pose risks to U.S. 
financial stability for FRB supervision helps to illustrate how FSOC 
may use the Form PF data along with other data sources.\45\ This 
guidance would establish a three-stage process for determinations, at 
least in non-emergency situations. In the first and second stages, FSOC 
would screen firms using progressively more granular analyses of 
publicly available data and data that, like Form PF, are collected by 
other regulators. In the third stage, FSOC would work with the Office 
of Financial Research (``OFR'') to conduct an in-depth review of 
specific firms identified in the first two stages, and this would 
generally involve OFR collecting additional, targeted information 
directly from these firms.\46\

[[Page 71132]]

Similarly, in determining whether to exercise its other authorities for 
addressing potential systemic risks, we expect that FSOC would likely 
utilize data from other sources in addition to Form PF.
---------------------------------------------------------------------------

    \44\ See Proposing Release, supra note 12, at n. 50 and 
accompanying text.
    \45\ See FSOC Second Notice, supra note 6. See also section 113 
of the Dodd-Frank Act for a discussion of the matters that FSOC must 
consider when determining whether a U.S. nonbank financial company 
will be supervised by the FRB and subject to prudential standards.
    \46\ See sections 153 and 154 of the Dodd-Frank Act. One 
commenter expressed support for our approach, agreeing that, ``Form 
PF should be used to obtain enough information to make a preliminary 
assessment, which can be followed up with data requests and dialogue 
for those firms who may potentially pose systemic risks--Form PF 
should not be considered the `complete picture' of the private fund 
industry.'' AIMA General Letter.
---------------------------------------------------------------------------

    Form PF is primarily intended to assist FSOC in its monitoring 
obligations under the Dodd-Frank Act, but the Commissions may use 
information collected on Form PF in their regulatory programs, 
including examinations, investigations and investor protection efforts 
relating to private fund advisers. In section VI.A of this Release, we 
discuss some of the ways in which the SEC could use proposed Form PF 
data for its regulatory activities and investor protection efforts.
    As discussed in more detail below, the amount and type of 
information required on Form PF varies based on both the size of the 
adviser and the types of funds managed. For instance, Form PF requires 
more detailed information from advisers managing a large amount of 
hedge fund or liquidity fund assets than from advisers managing fewer 
assets or other types of funds. This scaled approach is intended to 
provide FSOC with a broad picture of the private fund industry while 
relieving smaller advisers from much of the detailed reporting.\47\ 
Based on our staffs' consultations with staff representing FSOC's 
members, we understand that obtaining this broad picture will help FSOC 
to contextualize its analysis and assess whether systemic risk may 
exist across the private fund industry and to identify areas where OFR 
may want to obtain additional information. This scaled approach is also 
designed to reflect the different implications for systemic risk that 
may be presented by different investment strategies.
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    \47\ In this Release, we refer to advisers that do not satisfy a 
Large Private Fund Adviser threshold as ``smaller private fund 
advisers.'' This is not intended to imply that these advisers are 
small, only that they fall under certain of the Form's reporting 
thresholds. See section VI of this Release for a discussion of 
entities that are regarded as small for purposes of the Advisers 
Act.
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A. Who Must File Form PF

    An investment adviser must file Form PF if it: (1) Is registered or 
required to register with the SEC; (2) advises one or more private 
funds; and (3) had at least $150 million in regulatory assets under 
management attributable to private funds as of the end of its most 
recently completed fiscal year.\48\ A CPO or CTA that is also 
registered or required to register with the SEC as an investment 
adviser and satisfies the other conditions described above must file 
Form PF with respect to any commodity pool it manages that is a 
``private fund'' and may file Form PF with respect to any commodity 
pool it manages that is not a ``private fund.'' \49\ By filing Form PF 
with respect to these commodity pools, a CPO will be deemed to have 
satisfied certain filing requirements for these pools under the CFTC's 
regulatory regime should the CFTC adopt such requirements.\50\
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    \48\ See Advisers Act rule 204(b)-1. This rule requires advisers 
to calculate the value of private fund assets under management 
pursuant to instructions in Form ADV, which provide a uniform method 
of calculating assets under management for regulatory purposes under 
the Advisers Act. See Implementing Adopting Release, supra note 11, 
at section II.A.3 (discussing the rationale underlying the new 
instructions for calculating assets under management for regulatory 
purposes).
    \49\ See supra note 10 for the definition of ``private fund.''
    \50\ See CEA rule 4.27. In the Proposing Release, the CFTC 
stated that a CPO registered with the CFTC that is also registered 
as a private fund adviser with the SEC will be deemed to have 
satisfied its filing requirements for Schedules B and C of Form CPO-
PQR by completing and filing the applicable portions of Form PF for 
each of its commodity pools that satisfy the definition of ``private 
fund'' in the Dodd-Frank Act.
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    We have modified the conditions under which an adviser must file 
Form PF by adding a minimum reporting threshold of $150 million in 
private fund assets under management.\51\ Under the proposal, all 
private fund advisers registered with the SEC would have been required 
to file Form PF. The Dodd-Frank Act modified the Advisers Act's minimum 
registration requirements so that most advisers with less than $100 
million in assets under management must register with one or more 
states rather than the SEC.\52\ In addition, the Dodd-Frank Act created 
exemptions from SEC registration for advisers solely to venture capital 
funds and for advisers solely to private funds that in the aggregate 
have less than $150 million in assets under management in the United 
States.\53\ As a result, under our proposed approach, most advisers 
with under $100 million in assets under management, and many advisers 
with less than $150 million in private fund assets under management, 
would not have reported on Form PF because they would not be registered 
with the SEC. However, some registered advisers with relatively few 
private fund assets would have been required to report on Form PF while 
exempt advisers with less than $150 million in private fund assets 
under management would not have been required to file Form PF.
---------------------------------------------------------------------------

    \51\ See Advisers Act rule 204(b)-1.
    \52\ See section 203A of the Advisers Act. See also Implementing 
Adopting Release, supra note 11, at section II.A.
    \53\ See sections 203(l) and 203(m) of the Advisers Act and 
rules 203(l)-1 and 203(m)-1 under the Advisers Act. See also 
Exemptions Adopting Release, supra note 11.
---------------------------------------------------------------------------

    Commenters argued that this outcome was not justified from a 
systemic risk perspective and recommended a minimum reporting threshold 
for advisers based on the amount of private fund assets under 
management.\54\ One commenter proposed setting the threshold at $150 
million to match the new private fund adviser exemption under section 
203(m) of the Advisers Act.\55\ From the perspective of systemic risk 
monitoring, it does not appear at this time that the value of gathering 
this information from registered advisers with less than $150 million 
in private fund assets under management justifies the burden to these 
advisers.
---------------------------------------------------------------------------

    \54\ See, e.g., IAA Letter; Seward Letter. Two commenters also 
supported a minimum reporting threshold based on the size of 
individual funds, suggesting an exclusion for funds ``with net asset 
values of less than $250 million and that are less than 5% of a 
manager's assets under management * * *.'' MFA Letter; see also 
BlackRock Letter. We do not believe that a threshold based on fund 
size would be appropriate because the aggregate amount of assets in 
smaller funds that an adviser controls may contribute significantly 
to the adviser's total ability to affect financial markets and the 
$150 million minimum reporting threshold that we are adopting, based 
on the adviser's private fund assets under management, will 
adequately differentiate between advisers with only smaller funds 
and those with significant fund assets.
    \55\ See IAA Letter.
---------------------------------------------------------------------------

    Most private fund advisers that are required to file Form PF will 
only need to complete section 1 of the Form. This section requires 
advisers to provide certain basic information regarding any private 
funds they advise in addition to information about their private fund 
assets under management and their funds' performance and use of 
leverage. We describe the information to be collected under section 1 
of Form PF in further detail in section II.C.1 of this Release.
    As discussed below, however, certain larger private fund advisers 
must complete additional sections of Form PF, which require more 
detailed information.\56\ Specifically, three types

[[Page 71133]]

of ``Large Private Fund Advisers'' would be required to complete 
certain additional sections of Form PF:
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    \56\ See Instruction 3 to Form PF. With this scaled approach, 
the reporting requirements we are adopting reflect the Dodd-Frank 
Act directive that, in formulating systemic risk reporting and 
recordkeeping for investment advisers to mid-sized private funds, 
the SEC take into account the size, governance, and investment 
strategy of such funds to determine whether they pose systemic risk. 
See section 203(n) of the Advisers Act. The Dodd-Frank Act also 
provides that the SEC may establish different reporting requirements 
for different classes of fund advisers, based on the type or size of 
private fund being advised. See section 204(b) of the Advisers Act.
---------------------------------------------------------------------------

     Any adviser having at least $1.5 billion in regulatory 
assets under management attributable to hedge funds as of the end of 
any month in the prior fiscal quarter; \57\
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    \57\ See Instruction 3 to Form PF. To determine whether an 
adviser must file a quarterly report at the end of the second 
quarter, it must look to its hedge fund assets under management as 
of the end of each month in the first quarter. See infra text 
accompanying note 112. We have modified the amount of this threshold 
from the proposal. For a discussion of this modification and the 
reasons for establishing the threshold at this amount, see below in 
section II.A.4.a of this Release (including notes 90-92 and 
accompanying text).
---------------------------------------------------------------------------

     Any adviser managing a liquidity fund and having at least 
$1 billion in combined regulatory assets under management attributable 
to liquidity funds and registered money market funds as of the end of 
any month in the prior fiscal quarter; \58\ and
---------------------------------------------------------------------------

    \58\ See supra note 57. For a discussion of the reasons for 
establishing the threshold at this amount, see below in section 
II.A.4.a of this Release.
---------------------------------------------------------------------------

     Any adviser having at least $2 billion in regulatory 
assets under management attributable to private equity funds as of the 
last day of the adviser's most recently completed fiscal year.\59\
---------------------------------------------------------------------------

    \59\ See Instruction 3 to Form PF. For a discussion of the 
reasons for establishing the threshold at this amount, see below in 
section II.A.4.a of this Release.
---------------------------------------------------------------------------

    These large advisers must complete additional sections of Form PF, 
with large hedge fund advisers completing section 2 and large liquidity 
fund and private equity fund advisers completing sections 3 and 4, 
respectively.\60\ The information each of these sections requires is 
tailored to the type of fund, focusing on relevant areas of financial 
activity that have the potential to raise systemic concerns. We discuss 
these areas of financial activity as they relate to hedge funds, 
liquidity funds and private equity funds in greater detail in the 
Proposing Release and below.\61\
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    \60\ As adopted, Form PF requires advisers to determine whether 
they meet the large adviser thresholds less frequently than was 
proposed (quarterly rather than daily for hedge fund and liquidity 
fund advisers and annually rather than quarterly for private equity 
advisers). We discuss this change in section II.A.4 of this Release.
    \61\ See sections II.A.1, II.A.2 and II.A.3 of the Proposing 
Release, supra note 12, and sections II.C.2, II.C.3 and II.C.4 of 
this Release.
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1. ``Hedge Fund'' Definition
    Registered advisers managing hedge funds must submit information on 
Form PF regarding the financing and activities of these funds in 
section 1 of the Form, and large hedge fund advisers are required to 
provide additional information in section 2 of the Form.\62\ Form PF 
defines ``hedge fund'' generally to include any private fund having any 
one of three common characteristics of a hedge fund: (a) A performance 
fee that takes into account market value (instead of only realized 
gains); (b) high leverage; or (c) short selling.\63\ Solely for 
purposes of Form PF, a commodity pool that is reported or required to 
be reported on Form PF is treated as a hedge fund.
---------------------------------------------------------------------------

    \62\ Several commenters debated whether the hedge fund industry 
generally, or any hedge fund in particular, could pose systemic 
risk. See, e.g., AFL-CIO Letter and CII Letter, identifying hedge 
fund activities that could have systemic consequences; and AIMA 
General Letter and MFA Letter, arguing that no hedge fund operating 
today is likely to be systemically significant. Even among skeptical 
commenters, however, there was recognition that ``there is no 
concrete data to draw conclusions either way, and that the exercise 
[of reporting] will be useful to allow the FSOC to make evidence-
based conclusions.'' AIMA General Letter; see also MFA Letter. As 
discussed in the Proposing Release, we believe that Congress 
expected hedge fund advisers would be required to report under Title 
IV of the Dodd-Frank Act and that information regarding certain 
activities of hedge funds may be important to FSOC's monitoring of 
systemic risk. See Proposing Release, supra note 11, at nn. 54-61 
and accompanying text.
    \63\ See Glossary of Terms to Form PF. We are defining the term 
``hedge fund'' in Form PF solely for purposes of determining what 
information an adviser is required to report on the Form. This 
definition does not apply with respect to any other form or 
regulation of either Commission unless otherwise specified. The SEC 
has recently adopted this same definition in amendments to Form ADV. 
See Implementing Adopting Release, supra note 11, at nn. 248-255 and 
accompanying text. The CFTC has not adopted any definition of 
``hedge fund'' beyond that adopted solely for purposes of Form PF.
---------------------------------------------------------------------------

    A number of commenters addressed the ``hedge fund'' definition. 
Some of these suggested that we eliminate the distinctions among fund 
types and instead require all advisers to complete the entire Form so 
that advisers could not use the definitions to avoid reporting 
requirements.\64\ Others, however, urged us to narrow the definition so 
that fewer funds would be classified as hedge funds.\65\ Form PF 
generally requires more information regarding hedge funds than other 
types of funds, and in most cases, an adviser must conclude that a fund 
is not a hedge fund in order to classify it as one of the six other 
types of private fund defined in Form PF.\66\ As a result, narrowing 
the ``hedge fund'' definition in Form PF could have a significant 
effect on reporting. Commenters persuaded us, however, that certain 
revisions to the proposed definition would result in a more accurate 
grouping of funds, thereby improving the quality of the data collected 
and, at the same time, reducing the reporting burdens on some 
advisers.\67\
---------------------------------------------------------------------------

    \64\ See, e.g., AFL-CIO Letter.
    \65\ See, e.g., ABA Committees Letter; AIMA General Letter; IAA 
Letter; PEGCC Letter; SIFMA Letter; comment letter of TCW Group, 
Inc. (Apr. 12, 2011) (``TCW Letter'').
    \66\ See Glossary of Terms to Form PF. Altogether, the seven 
types of private fund defined in Form PF are: (1) Hedge fund; (2) 
liquidity fund; (3) private equity fund; (4) real estate fund; (5) 
securitized asset fund; (6) venture capital fund; and (7) other 
private fund.
    \67\ The ``hedge fund'' definition, as well as the six other 
private fund definitions used in Form PF, are also included in the 
SEC's recent revisions to Form ADV. See Implementing Adopting 
Release, supra note 11, at section II.C.1. Although the SEC received 
no comments on these same definitions in the context of that 
rulemaking, the SEC believes that having consistent definitions in 
the two forms is important. As a result, the SEC considered in the 
context of that rulemaking the comments received on these 
definitions in Form PF and determined, when adopting revisions to 
Form ADV, to make several changes in that form. The changes we are 
making to these definitions as used in Form PF conform the two sets 
of definitions so that both forms use identical terms (with the 
exception that, for purposes of Form PF, all commodity pools about 
which an adviser is reporting are treated as hedge funds, while in 
Form ADV, only commodity pools that are private funds are treated as 
hedge funds). See Implementing Adopting Release, supra note 11, at 
nn 248-255. The CFTC has not adopted any definition of ``hedge 
fund'' beyond that adopted solely for purposes of Form PF.
---------------------------------------------------------------------------

    First, we have expressly excluded from the ``hedge fund'' 
definition in Form PF vehicles established for the purpose of issuing 
asset backed securities (``securitized asset funds'').\68\ One 
commenter noted that these funds could have been categorized as hedge 
funds under our proposal, which was not the intended result.\69\ 
Although the issuance of asset backed securities may have systemic risk 
implications, the questions on Form PF regarding hedge funds would not 
yield relevant data regarding securitized asset funds. As a result, 
including responses regarding securitized asset funds in the hedge fund 
data could distort the information FSOC obtains from questions directed 
at hedge funds.
---------------------------------------------------------------------------

    \68\ Specifically, the ``hedge fund'' definition in Form PF now 
refers to any private fund having one of the listed characteristics 
and excludes securitized asset funds. Under the proposal, a fund 
that satisfied the ``hedge fund'' definition would have been 
categorized as a hedge fund even if it otherwise would have 
satisfied the ``securitized asset fund'' definition. As adopted, 
Form PF defines ``securitized asset fund'' as any private fund 
``whose primary purpose is to issue asset backed securities and 
whose investors are primarily debt-holders.'' We have also modified 
this definition from the proposal so that it is no longer defined by 
reference to the ``hedge fund'' definition. See Glossary of Terms to 
Form PF.
    \69\ See TCW Letter.
---------------------------------------------------------------------------

    Second, we have modified clause (a) Of the ``hedge fund'' 
definition in Form PF, which classifies a fund as a hedge fund if it 
uses performance fees or allocations that are calculated by taking into 
account unrealized gains. One

[[Page 71134]]

commenter pointed out that even funds that do not allow for the payment 
of such fees or allocations, such as private equity funds, may be 
required to accrue or allocate these amounts in their financial 
statements to comply with applicable accounting principles.\70\ It was 
not intended for funds that accrue or allocate these fees or 
allocations solely for financial reporting purposes to be classified as 
hedge funds, so we have clarified that clause (a) relates only to fees 
or allocations that may be paid to an investment adviser (or its 
related persons).\71\
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    \70\ See TCW Letter.
    \71\ Some commenters objected to clause (a) of the ``hedge 
fund'' definition more generally, arguing that it is too broad 
because some traditional/long only funds use performance fees or 
allocations calculated by taking into account unrealized gains. See, 
e.g., AIMA General Letter; TCW Letter. However, based on our staffs' 
discussions with staff representing FSOC's members, we believe that 
funds using these types of fees are often active in markets that 
FSOC may desire to monitor for concentration risks. In addition, 
Form PF is intended to provide FSOC with a broad picture of the 
private fund industry so that it has context against which to assess 
systemic risk. An important part of this is gathering information 
about funds with similar characteristics, such as performance fees 
based on unrealized gains, so that industry-wide comparisons can be 
made. The inclusion of any particular fund in a reporting group, 
whether as a result of the private fund definitions or the reporting 
thresholds, does not represent a conclusion that the fund engages in 
activities that pose systemic risk.
---------------------------------------------------------------------------

    Third, we have addressed another commenter's concern that clause 
(a) could inadvertently capture certain private equity funds because, 
although these funds typically calculate currently payable performance 
fees and allocations based on realized amounts, they will sometimes 
reduce these fees and allocations by taking into account ``unrealized 
losses net of unrealized gains in the portfolio.'' \72\ Funds should 
not be classified as hedge funds for purposes of Form PF based solely 
on this practice, and we have clarified that clause (a) would not 
include performance fees or allocations the calculation of which may 
take into account unrealized gains solely for the purpose of reducing 
such fees or allocations to reflect net unrealized losses.
---------------------------------------------------------------------------

    \72\ See PEGCC Letter.
---------------------------------------------------------------------------

    Finally, several commenters asserted that clause (c) of the ``hedge 
fund'' definition, which looks to whether a fund may engage in short 
selling, should include an exception for a de minimis amount of short 
selling or exclude short selling intended to hedge the fund's 
exposures.\73\ However, short selling appears to be, for purposes of 
Form PF, a potentially important distinguishing feature of hedge funds, 
many of which may, as the name suggests, use short selling to hedge or 
manage risk of various types. On the other hand, we also understand 
that many funds pursuing traditional investment strategies use short 
positions to hedge foreign exchange risk and to manage the duration of 
interest rate exposure, and we are persuaded that including funds 
within the definition of ``hedge fund'' in Form PF solely because they 
use these particular techniques would dilute the meaningfulness of the 
category. Therefore, we have modified clause (c) to provide an 
exception for short selling that hedges currency exposure or manages 
duration.\74\
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    \73\ See IAA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.
    \74\ We have also made a change to clause (c) to clarify that 
this clause includes traditional short sales and any transaction 
resulting in a short exposure to a security or other asset (such as 
using a derivative instrument to take a short position). The purpose 
of this definition is to categorize funds that engage in certain 
types of market activity, and therefore, whether the definition 
applies should not depend on the form in which the fund engages in 
that activity.
---------------------------------------------------------------------------

    Commenters arguing that, instead of a definition, the Commissions 
should take an approach similar to that used in the FSA Survey, which 
outlined common hedge fund characteristics and allowed an adviser ``to 
make its own good faith judgment as to whether a particular fund is a 
hedge fund,'' were not persuasive.\75\ Such an approach could 
effectively defer to the adviser the determination of whether to report 
on Form PF information about hedge funds--an approach that might be 
appropriate for a voluntary survey, like the FSA's, but one that would 
significantly compromise the value of data collected for FSOC and thus 
would fail to achieve the purpose of this rulemaking.
---------------------------------------------------------------------------

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

    Two other commenters suggested instead that we eliminate all of the 
private fund definitions and require that every private fund adviser 
complete the entire Form.\76\ These commenters were concerned that any 
distinction among funds tied to the amount or type of information 
required would encourage advisers to change strategies in order to 
avoid reporting. Although we are sensitive to these concerns, we 
believe that distinguishing fund types is important for two reasons. 
First, by distinguishing among types of funds, we are able to limit the 
information collection burdens on advisers to funds for which the 
information is most relevant.\77\ Second, separating reported data by 
fund strategy allows extraneous information to be excluded, which we 
believe will improve its utility to FSOC and the Commissions.
---------------------------------------------------------------------------

    \76\ See AFL-CIO Letter; AFR Letter.
    \77\ For instance, one commenter, in agreeing that Form PF 
appropriately differentiates ``between the reporting requirements 
for hedge funds and private equity funds,'' pointed out that section 
2 of the Form, which would be completed by large hedge fund 
advisers, contains many questions that ``are not relevant to private 
equity funds.'' This commenter also explained that requiring 
response to ``questions that are not directly related to'' the 
operations of private equity advisers would impose burdens on both 
FSOC and the advisers. See comment letter of Lone Star U.S. 
Acquisitions (Apr. 12, 2011) (``Lone Star Letter'').
---------------------------------------------------------------------------

    Several commenters also expressed concern that clauses (b) and (c) 
of the ``hedge fund'' definition in Form PF are too broad because many 
funds have the capacity to borrow or incur derivative exposures in 
excess of the specified amounts or to engage in short selling but do 
not in fact engage, or intend to engage, in these practices.\78\ These 
commenters generally argued that clauses (b) and (c) should focus on 
actual or contemplated use of these practices rather than potential 
use. Changes to the ``hedge fund'' definition in response to these 
comments have not been made because clauses (b) and (c) properly focus 
on a fund's ability to engage in these practices. Even a fund for which 
leverage or short selling is an important part of its strategy may not 
engage in that practice during every reporting period. Thus, the 
suggested approach could result in incomplete data sets for hedge 
funds, a class of funds that may be systemically significant. However, 
a private fund would not be a ``hedge fund'' for purposes of Form PF 
solely because its organizational documents fail to prohibit the fund 
from borrowing or incurring derivative exposures in excess of the 
specified amounts or from engaging in short selling so long as the fund 
in fact does not engage in these practices (other than, in the case of 
clause (c), short selling for the purpose of hedging currency exposure 
or managing duration) and a reasonable investor would understand, based 
on the fund's offering documents, that the fund will not engage in 
these practices.
---------------------------------------------------------------------------

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

    Finally, some commenters recommended that a fund should not be 
classified as a ``hedge fund'' for purposes of Form PF unless it 
satisfies at least two of the prongs of the ``hedge fund'' definition 
(rather than any one prong).\79\ The definition is designed to identify 
funds that are an appropriate subject for the higher level of reporting 
to which hedge funds will be subject

[[Page 71135]]

under Form PF, and, based on our staffs' consultations with staff 
representing FSOC's members, we believe that any one of the identified 
characteristics is sufficient to appropriately distinguish a fund for 
this purpose. We have not, therefore, made the change these commenters 
suggested. The changes to the ``hedge fund'' definition discussed above 
are intended to more accurately group private funds for purposes of 
Form PF and, thereby, improve the quality of information reported.
---------------------------------------------------------------------------

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

2. ``Liquidity Fund'' Definition
    Registered advisers managing liquidity funds must submit 
information on Form PF regarding the financing and activities of these 
funds in section 1 of the Form, and large liquidity fund advisers are 
required to provide additional information in section 3 of the 
Form.\80\ For purposes of Form PF, a ``liquidity fund'' is any private 
fund that seeks to generate income by investing in a portfolio of short 
term obligations in order to maintain a stable net asset value per unit 
or minimize principal volatility for investors.\81\ Commenters did not 
address the ``liquidity fund'' definition, which the SEC is adopting as 
proposed.
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    \80\ Form PF is a joint form between the SEC and the CFTC only 
with respect to sections 1 and 2 of the Form. Section 3 of the Form, 
which requires more specific reporting regarding liquidity funds, is 
only required by the SEC.
    \81\ See Glossary of Terms to Form PF. As discussed in the 
Proposing Release, liquidity funds can resemble registered money 
market funds, certain features of which may make them susceptible to 
runs and thus create the potential for systemic risk. See Proposing 
Release, supra note 12, at section II.A.2.
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3. ``Private Equity Fund'' Definition
    Registered advisers managing private equity funds must submit 
information on Form PF regarding the financing and activities of these 
funds in section 1 of the Form, and large private equity advisers are 
required to provide additional information in section 4 of the 
Form.\82\ Consistent with the proposal, Form PF defines ``private 
equity fund'' as any private fund that is not a hedge fund, liquidity 
fund, real estate fund, securitized asset fund or venture capital fund 
and does not provide investors with redemption rights in the ordinary 
course.\83\ Two commenters advocated for a definition of ``private 
equity fund'' that would not depend on whether a fund is a hedge 
fund.\84\ This approach could, however, create gaps between the 
definitions and encourage advisers to structure around the reporting 
requirements.\85\ The changes we have made to the ``hedge fund'' 
definition substantially address the concerns of these commenters.\86\ 
Therefore, we believe that the proposed approach to defining ``private 
equity fund'' continues to be appropriate for the purposes of Form PF.
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    \82\ Form PF is a joint form between the SEC and the CFTC only 
with respect to sections 1 and 2 of the Form. Section 4 of the Form, 
which requires more specific reporting regarding private equity 
funds, is only required by the SEC.
    \83\ See Glossary of Terms to Form PF. The definitions of ``real 
estate fund'' and ``venture capital fund'' are being adopted as 
proposed, and changes to the definition of ``securitized asset 
fund'' are discussed above. See supra note 69. These definitions are 
primarily intended to exclude these types of funds from our 
definition of ``private equity fund'' to improve the quality of data 
reported on Form PF relating to private equity funds.
    \84\ See PEGCC Letter (proposing an alternative that largely 
inverts the proposed ``hedge fund'' definition but would allow for 
short selling and soften other distinctions); SIFMA Letter 
(suggesting an alternative that would define a ``private equity 
fund'' as a private fund having ``a large number of sophisticated, 
third-party institutional and high net worth investors'' and 
satisfying ten additional criteria, including that ``the fund and 
its investment activities are not subject to regulatory restrictions 
or limitations.'').
    \85\ Some commenters were concerned that creating any 
distinctions among funds would encourage advisers to change 
strategies in order to avoid reporting. See supra note 76 and 
accompanying text. The SEC believes, based on its staff's 
consultations with staff representing FSOC's members, that this risk 
is best addressed by tightly integrating the definitions.
    \86\ See supra notes 64-79 and accompanying text for a 
discussion of comments on the ``hedge fund'' definition and the 
changes we are making from the proposal. Some of these comments 
reflected concern that the breadth of the ``hedge fund'' definition 
would cause it to capture some private equity funds. Commenters 
arguing for an independent ``private equity fund'' definition 
expressed similar concerns. As discussed above, certain of the 
changes we are making to the ``hedge fund'' definition are designed 
to address these concerns.
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4. Large Private Fund Adviser Thresholds
a. Amounts
    As noted above, we are adopting a threshold of $1.5 billion in 
hedge fund assets under management for large hedge fund adviser 
reporting, $1 billion in combined liquidity fund and registered money 
market fund assets under management for large liquidity fund adviser 
reporting, and $2 billion in private equity fund assets under 
management for large private equity fund adviser reporting.\87\ These 
thresholds are designed so that the group of Large Private Fund 
Advisers filing Form PF will be relatively small in number but 
represent a substantial portion of the assets of their respective 
industries. For example, we estimate that approximately 230 U.S.-based 
advisers each managing at least $1.5 billion in hedge fund assets 
represent over 80 percent of the U.S. hedge fund industry based on 
assets under management.\88\ Similarly, SEC staff estimates that the 
approximately 155 U.S.-based advisers each managing over $2 billion in 
private equity fund assets represent approximately 75 percent of the 
U.S. private equity fund industry based on committed capital.\89\
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    \87\ As proposed, we are requiring that an adviser determine 
whether it meets a threshold and qualifies as a large hedge fund 
adviser, large liquidity fund adviser or large private equity 
adviser based solely on the assets under management attributable to 
the particular types of fund. Two commenters suggested that we 
instead require advisers to aggregate all of their assets under 
management, regardless of strategy, for purposes of the thresholds. 
See AFL-CIO Letter; AFR Letter. These commenters cautioned that our 
approach could allow advisers with substantial private fund assets 
under management to nevertheless avoid classification as a Large 
Private Fund Advisers. We are sensitive to these commenters' 
concerns, but we continue to believe that the hedge fund, liquidity 
fund and private equity fund business models are sufficiently 
distinct that for FSOC's purposes they are most appropriately 
analyzed on a separate basis.
    \88\ See Billion Dollar Club, HedgeFund Intelligence (``HFI'') 
(Oct. 3, 2011). We estimate that, in addition to the 230 U.S.-based 
hedge fund advisers that will exceed the threshold, approximately 23 
non-U.S. private fund advisers will also be classified as large 
hedge fund advisers, for a total of approximately 250 large hedge 
fund advisers. We have based this estimate of non-U.S. advisers on 
IARD data as of October 1, 2011, showing that, among currently 
registered private fund advisers, fewer than 10% are non-U.S. 
advisers. (We are not aware of any reason that recent changes in the 
exemptions available under the Advisers Act would affect the 
relative representation of U.S. and non-U.S. advisers.) One 
commenter suggested that estimates based on HFI data should be 
grossed up because the database is under-inclusive. See comment 
letter of the Alternative Investment Management Association (Jul. 
26, 2011) (``AIMA AUM Letter''). Although we acknowledge that this 
database is likely somewhat under-inclusive, we believe that the 
amount of assets under management not represented in the database is 
relatively small because the aggregate amount of assets reported to 
the database is consistent with other data sources estimating the 
total size of the hedge fund industry. In addition, we believe the 
uncounted assets are likely skewed toward the smaller advisers in 
the industry because the identity and size of the industry's largest 
advisers are relatively consistent across sources. As a result, 
although this database may under-represent the total amount of hedge 
fund industry assets under management, the count of large hedge fund 
advisers is likely to be relatively accurate. The changes to the 
``hedge fund'' definition discussed above will likely result in 
fewer funds being classified as hedge funds than under the proposed 
definition. However, these changes are intended to more accurately 
group private funds for purposes of Form PF and should more closely 
align the definition to the estimates discussed above.
    \89\ Preqin. The Preqin data relating to private equity fund 
committed capital is available in File No. S7-05-11. We estimate 
that, in addition to the 155 U.S.-based private equity advisers that 
will exceed the threshold, approximately 16 non-U.S. private fund 
advisers will also be classified as large private equity advisers, 
for an approximate total of 170 large private equity advisers. See 
supra note 88 for a discussion of the basis for this estimate.
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    The threshold we are adopting for large hedge fund advisers 
reflects an increase from the $1 billion threshold that we proposed. We 
do not expect,

[[Page 71136]]

however, that this increase will substantially change the group of 
advisers that were estimated in the proposal would be classified as 
large hedge fund advisers. Rather, the change is intended simply to 
adjust for a difference in how assets under management are measured in 
Form PF compared to how they are measured in the commercial databases 
that we consulted in proposing the $1 billion threshold amount. Form PF 
uses the definition of ``regulatory assets under management'' that the 
SEC recently adopted in connection with amendments to its Form ADV. 
This definition measures assets under management gross of outstanding 
indebtedness and other accrued but unpaid liabilities. One commenter 
pointed out, however, that the assets under management that advisers 
report to the currently available third-party databases are generally 
calculated on a net basis.\90\ In other words, without adjustment, our 
proposed threshold of $1 billion in gross assets would have captured 
advisers with less than $1 billion in net assets, expanding the group 
of advisers classified as large hedge fund advisers beyond what we 
intended.\91\ We believe this revised threshold strikes an appropriate 
balance between obtaining information regarding a significant portion 
of the hedge fund industry while minimizing the burden imposed on 
smaller advisers.\92\
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    \90\ See AIMA AUM Letter.
    \91\ We are not aware of any existing source with data regarding 
the gross assets under management of U.S. hedge fund managers. 
Therefore, based on our staffs' consultations with staff 
representing FSOC's members, we have established this threshold by 
multiplying the proposed threshold by an industry average leverage 
ratio of 1.5 times net assets. The commenter suggested that industry 
leverage ranges between 1.5 and 3 times net assets but noted that 
leverage ratios over the preceding 12 months had dropped to 1.1 
times investment capital. See AIMA AUM Letter; see also MFA Letter 
(citing leverage ratios from 3.0 to as low as 1.16); Andrew Ang, et 
al., Hedge Fund Leverage, National Bureau of Economic Research (Feb. 
2011). We have used a leverage ratio at the lower end of this range 
because, without data regarding the industry's gross assets, it 
cannot confidently be estimated that a higher threshold would 
capture a portion of the industry sufficient to allow FSOC to 
effectively perform systemic risk assessments. Also, although the 
definition of ``regulatory assets under management'' is measured 
gross of certain liabilities, it does not capture all forms of 
leverage that may be included in the sources cited in the AIMA AUM 
Letter, such as off-balance sheet leverage. As a result, the 
leverage implied by ``regulatory assets under management'' may be 
lower than the leverage estimated based on these sources. The AIMA 
AUM Letter also suggested that the average leverage ratio used 
should be asset-weighted because advisers with over $1 billion in 
net assets under management tend to use greater amounts of leverage. 
However, these larger advisers would exceed the threshold even if 
measured on a net basis. The adjustment to the threshold to account 
for leverage is most relevant for the middle group of advisers, not 
the large advisers, and the leverage ratio we have used is 
consistent with the leverage ratio this commenter estimates for 
advisers with $200 million to $1 billion in net assets under 
management.
    \92\ Similar adjustments to the thresholds applicable to 
liquidity fund advisers and private equity fund advisers have not 
been made because we understand these strategies typically involve 
little leverage at the fund level. See infra note 306 and 
accompanying text.
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    An adviser managing liquidity funds must combine liquidity fund and 
registered money market fund assets for purposes of determining whether 
it meets the threshold for more extensive reporting regarding its 
liquidity funds. Liquidity funds and registered money market funds 
often pursue similar strategies, invest in the same securities and 
present similar risks. An adviser is, however, only required to report 
information about unregistered liquidity funds on Form PF. This 
information will supplement data the SEC collects about registered 
money market funds on its Form N-MFP and provide FSOC a more complete 
picture of large liquidity pools and their management. The SEC expects 
this approach to the reporting threshold to capture approximately 80 of 
the most significant managers of liquidity funds.\93\ Commenters 
supported this approach, which we are adopting as proposed.\94\
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    \93\ See also Proposing Release, supra note 12, at n. 89. The 
estimate of the number of large liquidity fund advisers is based on 
the number of advisers with at least $1 billion in registered money 
market fund assets under management, as reported on Form N-MFP as of 
October 1, 2011.
    \94\ See AFL-CIO Letter; AFR Letter.
---------------------------------------------------------------------------

    Based on our staffs' consultations with staff representing FSOC's 
members, we believe that requiring basic information from all 
registered advisers over the minimum reporting threshold but more 
extensive and detailed information only from advisers meeting the 
higher thresholds is important to enabling FSOC to obtain a broad 
picture of the private fund industry. We understand that obtaining this 
broad picture will help FSOC to contextualize its analysis and assess 
whether systemic risk may exist across the private fund industry and to 
identify areas where OFR may want to obtain additional information. At 
the same time, requiring that only these Large Private Fund Advisers 
complete additional reporting requirements under Form PF will provide 
systemic risk information for a substantial majority of private fund 
assets while minimizing burdens on smaller private fund advisers that 
are less likely to pose systemic risk concerns.
    Although thresholds set at a higher amount could still yield 
information regarding much or a majority of the private fund industry's 
assets under management, such thresholds would potentially impede 
FSOC's ability to obtain a representative picture of the private fund 
industry. The activities of private fund advisers may differ 
significantly depending on size because, for instance, some strategies 
may be practical only at certain scales.\95\ As a result, obtaining 
information regarding, for instance, 50 percent or 60 percent of the 
industry's assets under management may not be sufficient to confidently 
draw conclusions regarding the remaining portion of the industry. 
However, because relatively few advisers manage most of the industry's 
assets under management, a substantial reduction in the potential 
burdens of reporting can be achieved without sacrificing the ability to 
obtain a more representative picture. For example, setting the 
threshold to cover, for instance, 80 percent of industry assets under 
management rather than 100 percent would relieve thousands of advisers 
from more detailed reporting while still obtaining a reasonably 
representative picture.\96\ There are, however, limits to the range 
within which this tradeoff can be effectively made. For example, 
setting the thresholds to cover, for instance, 60 percent of industry 
assets under management rather than 80 percent would relieve a 
relatively small segment of advisers from more detailed reporting but 
might not result in a picture broad enough to be representative. 
Accordingly, the thresholds have been established to balance FSOC's 
need for a broad, representative set of data regarding the private fund 
industry with the desire to limit the potential burdens of private fund 
systemic risk reporting.
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    \95\ For example, one commenter cited evidence suggesting that 
the use of leverage varies significantly with fund size, though they 
did not state whether this variation continues among advisers with 
over $1 billion in net assets under management. See AIMA AUM Letter. 
See also Ibbotson, Roger G., Peng Chen, and Kevin X. Zhu, 2011, The 
ABCs of Hedge Funds: Alphas, Betas, and Costs, Financial Analysts 
Journal 67 (1) (``Ibbotson, et al.'') at 17-18 (discussing possible 
explanations for observed differences in returns for larger and 
smaller hedge funds).
    \96\ In the PRA analysis below, the SEC estimates that the large 
adviser thresholds will result in approximately 500 advisers 
reporting additional information in section 2, 3 or 4 of Form PF 
while approximately 3,070 advisers will report information only in 
section 1 and another 700 will not report on Form PF at all because 
of the minimum reporting threshold. See infra section IV.A of this 
Release.
---------------------------------------------------------------------------

    Commenters expressed support for a tiered reporting system based on 
size.\97\

[[Page 71137]]

However, most commenters thought the proposed threshold of $1 billion 
was either too high or too low.\98\ Commenters arguing for a lower 
threshold expressed concern that, at $1 billion, regulators would 
receive insufficient information to monitor certain types of market 
behavior with potentially systemic consequences.\99\ In contrast, a 
number of commenters argued that even an adviser with $1 billion in 
assets under management could not pose systemic risk.\100\ Several of 
these commenters supported an increase to $5 billion, which they argued 
would still capture over half the hedge fund industry while ensuring 
that advisers have sufficient operational capabilities to complete the 
Form.\101\
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    \97\ See, e.g., comment letter of Coalition of Private 
Investment Companies (Mar. 31, 2011) (``CPIC Letter'') and MFA 
Letter.
    \98\ Compare AFL-CIO Letter and AFR Letter (supporting a lower 
threshold) to AIMA General Letter; IAA Letter; MFA Letter; PEGCC 
Letter; SIFMA Letter (supporting a higher threshold). See also 
comment letter of George Merkl (Feb. 22, 2011) (``Merkl February 
Letter'') (supporting the proposed thresholds).
    \99\ See AFL-CIO Letter (arguing that the proposal would not 
allow regulators to monitor ``herding'' behavior, which it defines 
as the tendency for market participants to trade together on one 
side of the market; also suggesting that, at a minimum, advisers 
with between $150 million and $1 billion in assets under management 
``should be required to complete all applicable sections of Form PF 
on a semi-annual basis.''); AFR Letter.
    \100\ See, e.g., AIMA General Letter (also questioning whether 
the SEC and FSOC have the capacity to analyze the data from all the 
advisers above the proposed threshold); IAA Letter; MFA Letter; 
comment letter of Olympus Partners (Apr. 1, 2011) (``Olympus 
Letter''); PEGCC Letter (preferring that there be no large adviser 
category for private equity fund advisers because, in their view, 
these advisers pose little systemic risk); Seward Letter; SIFMA 
Letter; comment letter of the United States Chamber of Commerce, 
Center for Capital Markets Competitiveness (Apr. 12, 2011) (``USCC 
Letter'').
    \101\ See, e.g., AIMA General Letter (asserting that a $5 
billion threshold ``still captures around 50-60% of the US hedge 
fund industry assets or just over 75 large hedge fund managers.''); 
MFA Letter (``Based on estimates, 77 hedge fund managers 
representing approximately 50-60% of hedge fund industry assets 
would exceed this [$5 billion] threshold.''); Seward Letter; USCC 
Letter (citing figures similar to those provided in the AIMA General 
Letter and the MFA Letter in support of a $5 billion threshold). 
Other commenters asserted that the thresholds should take into 
account measures of leverage or derivatives exposures rather than 
just assets under management. See, e.g., ABA Committees Letter; AIMA 
General Letter. As discussed above, measuring these thresholds using 
``regulatory assets under management,'' as defined in Form ADV, 
implies adjustment for some forms of leverage. Two commenters 
suggested that, instead of assets under management, the adviser's 
proprietary assets are the most appropriate measure of assets at 
risk. See PEGCC Letter; USCC Letter. However, private fund advisers 
exercise significant discretion over the assets they manage, which 
makes assets under management a more accurate measure of an 
adviser's ability to affect the U.S. financial system.
---------------------------------------------------------------------------

    We have carefully considered these comments in light of the 
information we understand FSOC desires and its intended use by FSOC. 
Based on this, the SEC has determined to adopt the proposed threshold 
for large liquidity fund advisers and to increase the threshold for 
large private equity fund advisers to $2 billion. We are adopting the 
threshold for large hedge fund advisers with the corrective change 
discussed above. Although we understand commenters' concerns that the 
proposed thresholds are too high and will not permit regulators to 
detect certain group behaviors among smaller private fund advisers, we 
believe at this time that the amount of additional information that 
would be required for this purpose would impose a significant burden on 
these smaller advisers and not significantly expand FSOC's ability to 
understand the industry.
    On the other hand, in light of the information we understand FSOC 
desires and its intended use by FSOC, we are also not persuaded that a 
larger increase in the thresholds would be appropriate. Commenters 
supporting an increase may be correct that an adviser just exceeding 
these thresholds could not be large enough to pose systemic risk. 
However, the thresholds are not intended to establish a cutoff 
separating the risky from the safe but rather to provide FSOC with 
sufficient context for the assessment of systemic risk while minimizing 
the burden imposed on smaller advisers.\102\ We understand based on our 
staffs' consultation with staff representing FSOC's members that, in 
order to assess potential systemic risk posed by the activities of 
certain funds, FSOC would benefit from access to data about funds that, 
on an individual basis, may not be a source of systemic risk. As 
discussed above, the increase that some commenters supported would 
result in coverage of a substantially smaller part of the industry, 
potentially impeding FSOC's ability to obtain a broad picture of the 
private fund industry.\103\
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    \102\ See supra text accompanying notes 94-96. As noted above, 
the FSOC Second Notice highlights that even establishing guidelines 
for evaluating private fund advisers may require the context that 
Form PF will provide. See supra note 21.
    \103\ In particular, the activities of private fund advisers may 
differ significantly depending on size and that the portion of 
industry assets represented by advisers with over $5 billion in 
private fund assets under management may look substantially 
different from the portion of industry assets represented by 
advisers with between, for instance, $1 billion and $5 billion.
---------------------------------------------------------------------------

    The SEC is, however, persuaded that an increase in the threshold 
for large private equity advisers that is smaller than some commenters 
advocated can be made without sacrificing the ability to obtain a broad 
picture of the private equity industry. SEC staff estimates that an 
increase in this threshold to $2 billion from the proposed $1 billion 
will reduce the portion of U.S. private equity industry assets covered 
by the more detailed reporting in section 4 of the Form from 
approximately 85 percent to approximately 75 percent.\104\ At the same 
time, it reduces the number of U.S.-based advisers SEC staff estimates 
will be categorized as large private equity advisers from approximately 
270 to approximately 155.\105\ This will significantly mitigate the 
number of advisers subject to the more detailed reporting while still 
covering a substantial majority of industry assets. As a result of this 
change, section 4 of Form PF will cover a smaller portion of U.S. 
private equity industry assets than section 2 covers of U.S. hedge fund 
industry assets. However, the SEC believes this result is appropriate 
because private equity funds tend to pursue a narrower range of 
strategies than hedge funds, reducing concerns regarding the level of 
representativeness.
---------------------------------------------------------------------------

    \104\ See supra note 89.
    \105\ See supra note 89.
---------------------------------------------------------------------------

b. Frequency of Testing
    The proposal would have required hedge fund and liquidity fund 
advisers to measure whether they had crossed these thresholds on a 
daily basis and private equity advisers to measure them on a quarterly 
basis. The proposed approach was based on our understanding that, as a 
matter of ordinary business practice, advisers are aware of hedge fund 
and liquidity fund assets under management on a daily basis, but are 
likely to be aware of private equity fund assets under management only 
on a quarterly basis.
    However, several commenters argued that advisers would have 
difficulty monitoring on a daily basis the value of private funds 
holding complex or illiquid investments.\106\ One commenter also noted 
that, in any given quarter, an adviser could experience significant 
spikes in the value of its assets under management.\107\ These 
commenters suggested a variety of alternatives, such as testing at the 
end of the prior reporting period,\108\ using an average over the 
period (possibly based on values at the end of each month in the 
quarter),\109\ or testing at the end of each month.\110\ We are 
persuaded that requiring daily testing of complex or illiquid 
investments could impose a substantial burden on some advisers,

[[Page 71138]]

and we have, accordingly, modified the Form so that advisers need only 
test whether their hedge fund or liquidity fund assets meet the 
relevant threshold as of the end of each month.\111\ In addition, as 
some commenters suggested, the test will look back one quarter so that 
these advisers know at the start of each reporting period whether they 
will be required to complete the more detailed reporting required of 
large hedge fund advisers and large liquidity fund advisers.\112\ We 
did not adopt an approach using an average because it would add 
unnecessary complexity and potentially allow an adviser whose assets 
under management have grown significantly during a quarter to delay 
more detailed reporting for an additional quarter.
---------------------------------------------------------------------------

    \106\ See, e.g., ABA Committees Letter; BlackRock Letter; MFA 
Letter; Seward Letter.
    \107\ See ABA Committees Letter.
    \108\ See BlackRock Letter; MFA Letter.
    \109\ See ABA Committees Letter; AIMA General Letter; IAA 
Letter.
    \110\ See Seward Letter.
    \111\ See Instruction 3 to Form PF.
    \112\ Id. See also supra note 108.
---------------------------------------------------------------------------

    Commenters also objected to the proposed quarterly testing with 
respect to private equity advisers, suggesting that even such 
infrequent testing may be difficult for some advisers.\113\ As we 
discuss in further detail below, large private equity fund advisers 
will be required to report information regarding their private equity 
funds only on an annual (rather than quarterly) basis, with the result 
that quarterly testing of the threshold is unnecessary.\114\ 
Accordingly, advisers need only test whether their private equity fund 
assets meet the relevant threshold at the end of each fiscal year.\115\
---------------------------------------------------------------------------

    \113\ See Merkl February Letter (noting that some private equity 
funds do not provide first and third quarter financial statements to 
investors); PEGCC Letter (suggesting annual testing and asserting 
that the less volatile nature of private equity investments would 
not justify the cost of quarterly valuation).
    \114\ See section II.B of this Release.
    \115\ See Instruction 3 to Form PF.
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5. Aggregation of Assets Under Management
    For purposes of determining whether an adviser meets the $150 
million minimum reporting threshold or is a Large Private Fund Adviser 
for purposes of Form PF, the adviser must aggregate together:
     Assets of managed accounts advised by the firm that pursue 
substantially the same investment objective and strategy and invest in 
substantially the same positions as private funds advised by the firm 
(``parallel managed accounts'') unless the value of those accounts 
exceeds the value of the private funds with which they are managed; 
\116\ and
---------------------------------------------------------------------------

    \116\ See Instructions 1, 3, 5, and 6 to Form PF; and Glossary 
of Terms to Form PF. See also definitions of ``dependent parallel 
management account,'' ``hedge fund assets under management,'' 
``liquidity fund assets under management,'' and ``private equity 
fund assets under management'' in the Glossary of Terms to Form PF.
---------------------------------------------------------------------------

     Assets of private funds advised by any of the adviser's 
``related persons'' other than related persons that are separately 
operated.\117\
---------------------------------------------------------------------------

    \117\ See Instructions 3 and 5 to Form PF. ``Related person'' is 
defined generally as: (1) All of the adviser's officers, partners, 
or directors (or any person performing similar functions); (2) all 
persons directly or indirectly controlling, controlled by, or under 
common control with the adviser; and (3) all of the adviser's 
employees (other than employees performing only clerical, 
administrative, support or similar functions). For purposes of Form 
PF, a related person is ``separately operated'' if the advisers is 
not required to complete section 7.A. of Schedule D to Form ADV with 
respect to that related person. See Glossary of Terms to Form PF and 
Glossary of Terms to Form ADV. In addition, an adviser may, but is 
not required to, file one consolidated Form PF for itself and its 
related persons. See infra section II.A.6 of this Release.
---------------------------------------------------------------------------

    These aggregation requirements are designed to prevent an adviser 
from avoiding Form PF reporting requirements by re-structuring how it 
provides advice.
    We have modified these aggregation requirements from the proposal. 
As adopted, an adviser may exclude parallel managed accounts if the 
value of those accounts is greater than the value of the private funds 
with which they are managed.\118\ This change recognizes that, as some 
commenters noted, an adviser managing a relatively small amount of 
private fund assets could end up crossing a reporting threshold simply 
because it has a significant separate account business using a similar 
strategy.\119\ We believe this approach is consistent with section 
204(b) of the Advisers Act, the focus of which is private fund 
reporting.\120\ We remain concerned, however, that advisers focusing on 
private funds may increasingly structure investments as separate 
accounts to avoid Form PF reporting requirements, which could diminish 
the utility to FSOC of the information collected on Form PF.\121\ 
Accordingly, an adviser must still include the value of parallel 
managed accounts in determining whether it meets a reporting threshold 
if the value of those accounts is less than the value of the private 
funds managed using substantially the same strategy.\122\
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    \118\ See supra note 116.
    \119\ See IAA Letter; TCW Letter.
    \120\ An adviser managing primarily separate accounts would, of 
course, still be subject to the applicable Form PF reporting 
requirements if its private fund assets, taken alone, would cause it 
to exceed one or more reporting thresholds.
    \121\ Commenters disagreed over whether such evasion was likely. 
One commenter supported the proposed aggregation rules, agreeing 
that they ``will prevent [an adviser from splitting itself] into 
smaller components to avoid reporting requirements that are 
triggered by the amount of assets that are managed by an investment 
adviser.'' Merkl February Letter. Another commenter, however, was 
skeptical that advisers would re-structure to avoid reporting 
because clients typically determine the structure of their 
investments. See IAA Letter. Although clients may in many cases 
dictate the form of investment, we believe that advisers are not 
without influence in such structuring decisions and may prefer to 
avoid reporting on Form PF. (We note that advisers, as fiduciaries, 
may not subordinate clients' interests to their own such as by 
altering the structure of investments in a way that is not in the 
client's best interest in an attempt to remain under the reporting 
thresholds.)
    \122\ See supra note 116. Some commenters also encouraged us to 
narrow the definition of ``parallel managed account'' so that fewer 
accounts or fewer types of accounts would be covered. See, e.g., 
AIMA General Letter; IAA Letter (suggesting that we replace 
``substantially the same'' with the ``same''); comment letter of the 
Investment Company Institute (Apr. 12, 2011); TCW Letter (suggesting 
we exclude registered investment companies, undertakings for 
collective investment in transferable securities (UCITS) and 
SICAVs). We have, however, determined to adopt this definition as 
proposed because we believe that it appropriately reflects the total 
amount of assets that an adviser is managing using a particular 
strategy. In addition, the changes we are making with respect to how 
these account assets are treated for purposes of the reporting 
thresholds, as well as changes discussed below that allow advisers 
not to aggregate these account assets with their private funds for 
reporting purposes, substantially address the concerns of these 
commenters. See infra note 335 and accompanying text.
---------------------------------------------------------------------------

    We have also modified these aggregation requirements from the 
proposal so that advisers may exclude the assets under management of 
related persons that are separately operated.\123\ There was general 
support for the proposed aggregation of related persons.\124\ However, 
commenters argued that ``[r]equiring aggregation of funds managed by 
`any related person' is not possible for many large institutions such 
as a large firm which operates under separate business units with 
independent asset management functions and decision making by 
affiliated entities.'' \125\
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    \123\ See supra note 117. See also Proposing Release, supra note 
12, for the proposed version of Instructions 3, 5 and 6 to Form PF.
    \124\ See, e.g., Merkl February Letter.
    \125\ TCW Letter. See also IAA Letter.
---------------------------------------------------------------------------

    We are persuaded that advisers may have difficulty gathering the 
information necessary to aggregate the assets of related persons whose 
operations are genuinely independent of their own and that, with an 
appropriate standard of separateness, the risk of evasion is 
substantially mitigated. Having considered several existing SEC 
standards of separateness, we believe that the most appropriate for 
this purpose is the standard the SEC recently adopted in Item 7.A of 
Form ADV for determining whether an adviser must complete section 7.A 
of Schedule D to that form with respect to a related

[[Page 71139]]

person.\126\ Although the Item 7.A standard was adopted for a somewhat 
different regulatory purpose, we believe it suits this role as well. In 
addition, every adviser filing Form PF will have already considered 
this standard with respect to its related persons, which means that 
applying the standard in the context of Form PF will impose little or 
no incremental burden on advisers. Accordingly, for purposes of 
determining whether an adviser meets one or more of the reporting 
thresholds, the adviser need only aggregate its private fund assets 
with those of its related persons for which it is required to complete 
section 7.A of Schedule D to Form ADV.\127\
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    \126\ One commenter suggested that we use the standard under 
section 13 of the Securities Exchange Act of 1934 (``Exchange Act'') 
or look to whether the related persons ``share information about 
investment decisions on a real time basis.'' TCW Letter. We are 
concerned that using the standard under sections 13(d) and 13(g) of 
the Exchange Act would impose additional burdens on advisers as 
compared to the Item 7.A standard because advisers will not 
necessarily have considered the former in the ordinary course of 
business, and we believe the alternative proposed by this commenter 
would make it too easy to conclude that a related person is 
separately operated.
    \127\ See supra note 117. The relevant instruction to Item 7.A 
of Form ADV reads as follows: ``You do not need to complete Section 
7.A. of Schedule D for any related person if: (1) You have no 
business dealings with the related person in connection with 
advisory services you provide to your clients; (2) you do not 
conduct shared operations with the related person; (3) you do not 
refer clients or business to the related person, and the related 
person does not refer prospective clients or business to you; (4) 
you do not share supervised persons or premises with the related 
person; and (5) you have no reason to believe that your relationship 
with the related person otherwise creates a conflict of interest 
with your clients.''
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    For purposes of both the reporting thresholds and responding to 
questions on Form PF, an adviser may exclude any assets invested in the 
equity of other private funds.\128\ In addition, if any of the 
adviser's private funds invests substantially all of its assets in the 
equity of other private funds and, aside from those investments, holds 
only cash, cash equivalents and instruments intended to hedge currency 
risk, the adviser may complete only section 1b with respect to that 
fund and otherwise disregard that fund.\129\ These instructions are 
intended to avoid duplicative reporting, which reduces the burden of 
reporting for advisers and improves the quality of the data reported.
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    \128\ See Instruction 7 to Form PF. The adviser must, however, 
treat these assets consistently for purposes of Form PF. For 
example, an adviser may not count these assets when determining 
whether the fund's borrowing may exceed half its net asset value and 
then disregard these assets for purposes of the reporting 
thresholds. Although this instruction allows an adviser to disregard 
these investments in other private funds, it would not allow an 
adviser to disregard any liabilities of the private fund, even if 
incurred in connection with an investment in other private funds.
    \129\ See Instruction 7 to Form PF. Solely for purposes of this 
instruction, an adviser is also permitted to treat as a private fund 
any non-U.S. fund that would be a private fund had it used U.S. 
jurisdictional means in offering its securities. A non-U.S. fund 
that has never used U.S. jurisdictional means in the offering of the 
securities it issues would not be a private fund. See infra note 
134; Exemptions Adopting Release, supra note 11, at n.294 and 
accompanying text.
---------------------------------------------------------------------------

    Based on our staffs' consultation with staff representing FSOC's 
members, we have expanded from the proposal the scope of assets that 
may be disregarded under this instruction. The proposed instruction 
would have allowed advisers to disregard only fund of funds that invest 
exclusively in other private funds.\130\ Commenters expressed concern 
that the proposed instruction would prove too narrow to accommodate 
many funds of funds, noting that these funds often hold cash or some 
amount of direct investments.\131\ These commenters generally sought a 
broader exclusion for funds of funds, suggesting alternatives that 
would allow these funds to hold essentially unlimited dollar amounts of 
direct investments while not reporting on Form PF.\132\ In light of the 
purpose for which information is collected on Form PF, we are not 
convinced that an adviser should not have to report on a fund's direct 
investments simply because it primarily holds investments in other 
private funds. However, we are persuaded that our proposed exception 
for funds of funds was too narrow in that it did not allow for a de 
minimis amount of cash, cash equivalents and currency hedges. These 
limited non-private fund holdings appear unlikely, on their own, to 
raise systemic concerns. We are also persuaded that, even where a fund 
is not necessarily a ``fund of funds'' but holds investments in other 
private funds, reporting on those investments is unnecessary because 
information regarding the other private funds will, in most cases, be 
reported separately on Form PF, and we have modified the instructions 
accordingly.\133\
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    \130\ See the Proposing Release, supra note 12, for the proposed 
version of Instruction 7 to Form PF. We have also added a new 
Instruction 8, which clarifies that, except as provided in 
Instruction 7, all investments in other funds should be included for 
all purposes under Form PF but that advisers are not required to 
``look through'' the other funds to the underlying assets (unless 
the other fund's purpose is to act as a holding company for the 
private fund's investments).
    \131\ See, e.g., ABA Committees Letter; comment letter of Akina 
Limited (Feb. 25, 2011) (``Akina Letter''); MFA Letter; PEGCC 
Letter; comment letter of Sidley Austin, LLP (submitted to the CFTC) 
(Apr. 12, 2011) (``Sidley Letter''); SIFMA Letter.
    \132\ Id. Some commenters also suggested that advisers should 
not report even the limited information required in section 1b with 
respect to funds of funds. See, e.g., ABA Committees Letter; Sidley 
Letter; SIFMA Letter. However, as one commenter pointed out, these 
funds may be employing leverage at the fund of funds level, which 
would not be reported if these funds did not complete this section. 
See Merkl February Letter. In addition, information collected in 
section 1b will provide regulators with information regarding the 
extent of these funds' investments in other private funds, and 
certain of the information collected in this section may be 
important to our investor protection mission. See infra notes 133 
and 197.
    \133\ See Instruction 7 to Form PF. We have, however, added a 
new question 10 to Form PF, which requires the adviser to disclose 
the amount that each private fund has invested in other private 
funds. This will allow regulators to understand the extent to which 
these investments occur and are otherwise being disregarded on Form 
PF. See infra note 197.
---------------------------------------------------------------------------

    If an adviser's principal office and place of business is outside 
the United States, the adviser may exclude any private fund that, 
during the adviser's last fiscal year, was not a United States person, 
was not offered in the United States, and was not beneficially owned by 
any United States person.\134\ This approach is designed to reduce the 
duplication of reporting requirements that foreign regulators may 
impose and to allow an adviser to report with respect to only those 
private funds that are more likely to implicate U.S. regulatory 
interests.
---------------------------------------------------------------------------

    \134\ See Instruction 1 to Form PF. This portion of Instruction 
1 is only necessary for those funds that fall within the definition 
of ``private fund.'' A non-U.S. fund that has never used U.S. 
jurisdictional means in the offering of the securities it issues 
would not be a private fund. See Exemptions Adopting Release, supra 
note 11, at n.294 and accompanying text. We have modified this 
instruction from the proposal to more closely follow the 
requirements of Regulation S; the instruction now looks to whether 
the offering was made ``in the United States'' rather than ``to * * 
* any United States person.'' See also Glossary of Terms to Form PF. 
``United States person'' is defined for purposes of Form PF by 
reference to the definition in rule 203(m)-1, which tracks the 
definition of a ``U.S. person'' under Regulation S but contains a 
special rule for discretionary accounts maintained for the benefit 
of United States persons. See Exemptions Adopting Release, supra 
note 11, at section II.B.4.
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Reporting for Affiliated and Sub-advised Funds
    An adviser may, but is not required to, report the private fund 
assets that it manages and the private fund assets that its related 
persons manage on a single Form PF.\135\ This is intended to provide 
private fund advisers with reporting flexibility and convenience, 
allowing affiliated entities that share reporting and risk management 
systems to report jointly while also permitting affiliated entities 
that operate separately to report separately. Commenters did not 
address

[[Page 71140]]

this aspect of the proposal, which we are adopting as proposed.
---------------------------------------------------------------------------

    \135\ See Instruction 2 to Form PF. See supra note 117 for the 
definition of ``related person.''
---------------------------------------------------------------------------

    With respect to sub-advised funds, to prevent duplicative 
reporting, only one adviser should report information on Form PF with 
respect to that fund.\136\ For reporting efficiency and to prevent 
duplicative reporting, if the adviser that completes information in 
section 7.B.1. of Schedule D to Form ADV with respect to any private 
fund is also required to file Form PF, the same adviser is responsible 
for reporting on Form PF with respect to that fund.\137\ However, if 
the adviser that completes information on Schedule D to Form ADV with 
respect to the private fund is not required to file Form PF (such as in 
the case of an exempt reporting adviser), then another adviser must 
report on that fund on Form PF.\138\ If none of the advisers to a fund 
is required to file Form PF because they are all exempt reporting 
advisers or do not exceed the minimum reporting threshold, Instruction 
4 to Form PF would not require any adviser to file the Form with 
respect to that fund. Commenters did not address this aspect of the 
proposal.
---------------------------------------------------------------------------

    \136\ Each adviser that meets the criteria for reporting on Form 
PF has an independent obligation to file the Form with respect to 
every fund it advises. See Advisers Act rule 204(b)-1(a); 
Instructions 1 and 3 to Form PF. However, when one adviser files 
Form PF with respect to a fund for a given reporting period, the 
other advisers are relieved of their obligation to file for that 
fund.
    \137\ See Instruction 4 to Form PF. We have modified this 
instruction from the proposal to clarify who would report in the 
case that the adviser completing section 7.B.1 of Schedule D to Form 
ADV with respect to a particular private fund is an exempt reporting 
adviser or does not meet the new minimum reporting threshold of $150 
million in private fund assets under management.
    \138\ See Instruction 4 to Form PF. See supra note 48 and 
accompanying text.
---------------------------------------------------------------------------

7. Exempt Reporting Advisers
    Only private fund advisers registered with the SEC (including those 
that are also registered with the CFTC as CPOs or CTAs) must file Form 
PF.\139\ As noted above, the Dodd-Frank Act created exemptions from SEC 
registration under the Advisers Act for advisers solely to venture 
capital funds and for advisers solely to private funds that in the 
aggregate have less than $150 million in assets under management in the 
United States.\140\ We believe that Congress' determination to exempt 
these advisers from SEC registration indicates Congress' belief that 
regular reporting of detailed systemic risk information may not be 
necessary because they are sufficiently unlikely to pose this kind of 
risk.\141\ After consultation with staff representing FSOC's members 
and in light of the basic information that the SEC obtains from exempt 
reporting advisers on Form ADV, the SEC did not propose to extend Form 
PF reporting to these advisers.\142\ Commenters that addressed this 
aspect of the proposal agreed that exempt reporting advisers should not 
be required to file Form PF, and we have adopted this approach as 
proposed.\143\
---------------------------------------------------------------------------

    \139\ See Advisers Act rule 204(b)-1.
    \140\ See supra note 53 and accompanying text.
    \141\ See Senate Committee Report, supra note 5, at 74 (``The 
Committee believes that venture capital funds * * * do not present 
the same risks as the large private funds whose advisers are 
required to register with the SEC under this title. Their activities 
are not interconnected with the global financial system, and they 
generally rely on equity funding, so that losses that may occur do 
not ripple throughout world markets but are borne by fund investors 
alone.''). See also Exemptions Adopting Release, supra note 11.
    \142\ See Implementing Adopting Release, supra note 11, for a 
discussion of the information exempt reporting advisers are required 
to provide on Form ADV.
    \143\ See AIMA General Letter; Lone Star Letter. To the extent 
an exempt reporting adviser is registered with the CFTC as a CPO or 
CTA, the CFTC has proposed that the adviser would be obligated to 
file either Form CPO-PQR or CTA-PR, respectively.
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B. Frequency of Reporting

1. Annual and Quarterly Reporting
    Most private fund advisers, including large private equity advisers 
and smaller private fund advisers, are required to complete and file 
Form PF only once per fiscal year.\144\ Large hedge fund advisers and 
large liquidity fund advisers, on the other hand, must update 
information relating to their hedge funds or liquidity funds, 
respectively, each fiscal quarter.\145\ Periodic reporting will permit 
FSOC to monitor periodically certain key information relevant to 
assessing systemic risk posed by these private funds on both an 
individual and aggregate basis. More frequent, quarterly reporting for 
large hedge fund and large liquidity fund advisers is necessary in 
order to provide FSOC with timely data to identify emerging trends in 
systemic risk.\146\
---------------------------------------------------------------------------

    \144\ See Instruction 9 to Form PF.
    \145\ Even these advisers, however, need only update information 
regarding other types of funds they manage on an annual basis. For 
example, a large hedge fund adviser that also manages a small amount 
of liquidity fund and private equity fund assets must update 
information relating to its hedge funds each quarter but only needs 
to update information relating to its liquidity funds and private 
equity funds when it submits its fourth quarter filing. An adviser 
that is both a large hedge fund adviser and a large liquidity fund 
adviser must file quarterly updates regarding both its liquidity 
funds and hedge funds. See Instruction 9 to Form PF.
    \146\ See Proposing Release, supra note 12, at section II.C. We 
also noted in the Proposing Release that we understood hedge fund 
advisers already collect and calculate on a quarterly basis much of 
the information that Form PF requires relating to hedge funds. One 
commenter argued that this is only true with respect to the 
information required in sections 1a and 1b of Form PF. See comment 
letter of Fidelity Investments (Apr. 12, 2011) (``Fidelity 
Letter''); see also MFA Letter. We have taken these comments into 
account in determining to extend the reporting deadlines for hedge 
fund advisers, as discussed below in section II.B.2 of this Release. 
We note, however, that another commenter also stated that ``Form PF 
for the most part * * * [requests] information that is part of, or 
should be part of, the existing risk management processes at the 
responding institutions,'' and as such ``this information will 
either be something the adviser produces already, or arguably 
should.'' Comment letter of MSCI Inc. (submitted to the CFTC) (Apr. 
11, 2011) (``MSCI Letter''). Commenters did not address the ability 
of liquidity funds to prepare and submit quarterly filings, and we 
continue to believe, as discussed in the Proposing Release, that 
most liquidity fund advisers collect on a monthly basis much of the 
information that we are requiring in section 3 of Form PF and that 
quarterly reporting should, as a result, be relatively efficient for 
these advisers.
---------------------------------------------------------------------------

    The filing requirements we are adopting differ from the proposal in 
two principal respects. First, the proposal would have required large 
private equity advisers to report on a quarterly, rather than annual, 
basis. Second, under the proposal, once an adviser became subject to 
quarterly reporting, it would have been required to update information 
with respect to all of its private funds each quarter (not just for the 
type of private fund that caused it to exceed the large adviser 
threshold).\147\
---------------------------------------------------------------------------

    \147\ The proposal also would have required reporting based on 
calendar quarters rather than the adviser's fiscal quarters. We have 
made this change because some advisers with quarterly updating 
obligations will now only need to update information about certain 
funds on an annual basis. The annual reporting is intended to align 
with typical end of fiscal year reporting activities, and requiring 
advisers to file separate annual and fourth quarter reports would 
impose additional burdens. We believe this change will, in practice, 
have little effect on the reporting (based on IARD data as of 
October 1, 2011, only about 2% of all registered advisers report a 
fiscal year ending in a month other than March, June, September or 
December, though the total may be slightly higher because IARD does 
not distinguish among, for instance, mid-month and end-of-month 
fiscal year ends).
---------------------------------------------------------------------------

    A number of commenters responded to our proposal regarding the 
frequency of reporting. One agreed that quarterly reporting would be 
appropriate, and two others argued that advisers should report even 
more frequently because market conditions and portfolios can change 
rapidly.\148\ On the other hand, a number of commenters disagreed with 
the proposal, suggesting instead that Large Private Fund Advisers 
should report no more than semi-annually.\149\ These commenters argued 
that semi-

[[Page 71141]]

annual reporting would reduce the burden to advisers while also giving 
regulators more time to analyze the data, and several compared Form PF 
to the FSA Survey, which has been conducted on a voluntary, semi-annual 
basis.\150\ Another commenter stated that the generally illiquid 
portfolios of private equity funds fluctuate little in value throughout 
the year, in its view, making quarterly reporting unnecessary.\151\
---------------------------------------------------------------------------

    \148\ See CPIC Letter (supporting the proposal with respect to 
large private funds advisers); AFL-CIO Letter and AFR Letter 
(arguing for more frequent reporting).
    \149\ See, e.g., ABA Committees Letter; BlackRock Letter; 
Fidelity Letter; comment letter of Kleinberg, Kaplan, Wolff & Cohen, 
P.C. (submitted to the SEC) (Apr. 12, 2011) (``Kleinberg General 
Letter''); MFA Letter; SIFMA Letter; USCC Letter.
    \150\ See, e.g., ABA Committees Letter; Kleinberg General 
Letter.
    \151\ See PEGCC Letter.
---------------------------------------------------------------------------

    After consultation with staff representing FSOC's members, we 
continue to believe that quarterly reporting is important to provide 
FSOC with meaningfully current information with respect to the hedge 
fund and liquidity fund industries and to allow FSOC to identify 
rapidly emerging trends among these types of funds.\152\ Although some 
commenters suggested that the speed with which markets and portfolios 
change may warrant even more frequent reporting, we believe at this 
time that the additional benefit to FSOC from reporting more often than 
once a quarter would not justify the additional burdens imposed on 
advisers.\153\ On the other hand, we are also not convinced that less 
frequent (e.g., semi-annual) reporting would provide sufficient, or 
sufficiently timely, information to enable FSOC to identify and respond 
to rapidly emerging trends. In addition, we believe that international 
approaches to private fund reporting may be shifting in favor of 
quarterly, rather than semi-annual, reporting.\154\
---------------------------------------------------------------------------

    \152\ Moreover, we believe that quarterly reporting helps to 
discourage ``window-dressing'' around the reporting dates. See infra 
notes 285-292 and accompanying text.
    \153\ See supra note 148. We also note that FSOC has the 
authority to direct OFR to gather additional data where systemic 
risk concerns merit the reporting. See, e.g., sections 153 and 154 
of the Dodd-Frank Act.
    \154\ ESMA's proposed reporting template would impose quarterly 
reporting requirements on private fund advisers. See ESMA Proposal, 
supra note 33.
---------------------------------------------------------------------------

    With respect to large private equity advisers, however, the SEC is 
persuaded that the generally illiquid nature of private equity fund 
portfolios means that trends emerge more slowly in that sector.\155\ As 
a result, the proposal has been modified so that large private equity 
advisers are required to report information regarding private equity 
funds on an annual basis only.\156\
---------------------------------------------------------------------------

    \155\ See supra note 151.
    \156\ See Instruction 9 to Form PF.
---------------------------------------------------------------------------

    Fewer commenters addressed the frequency of reporting for smaller 
advisers. One commenter agreed that annual reporting would be 
appropriate for these advisers,\157\ and several others argued that 
smaller advisers should report more frequently, proposing at least 
semi-annual filings.\158\ Again, although we acknowledge the potential 
value of more frequent reporting from smaller private fund advisers, we 
are concerned about the burden this would impose. At this time, we are 
not convinced that more frequent reporting from smaller private fund 
advisers would, from a systemic risk monitoring perspective, be 
justified by the value of the additional data.
---------------------------------------------------------------------------

    \157\ See AIMA General Letter.
    \158\ See AFL-CIO Letter; AFR Letter. See also MFA Letter 
(arguing that all advisers, large and small, should report on a 
semi-annual basis).
---------------------------------------------------------------------------

    As noted above, the requirements we are adopting also differ from 
the proposal in that even those advisers who must report on a quarterly 
basis are only required to do so with respect to the type of fund that 
caused them to exceed the reporting threshold. We are adopting this 
approach in part because these other funds will include private equity 
funds, venture capital funds and real estate funds, all of which are 
likely to have generally illiquid portfolios and for which we believe 
annual reporting is appropriate, as explained above. This approach also 
reflects the different implications for systemic risk that may be 
presented by different investment strategies.
Reporting Deadlines
    Large private equity advisers and smaller private fund advisers 
have 120 days from the end of their fiscal years to file Form PF.\159\ 
In contrast, large hedge fund advisers have 60 days from the end of 
each fiscal quarter, and large liquidity fund advisers have 15 
days.\160\ The deadlines we are adopting for large hedge fund advisers, 
large private equity advisers and smaller advisers are longer than the 
deadlines we proposed. In particular, we have extended the deadline for 
large hedge fund advisers from 15 days to 60 days, the deadline for 
large private equity fund advisers from 15 days to 120 days and the 
deadline for smaller private fund advisers from 90 days to 120 
days.\161\
---------------------------------------------------------------------------

    \159\ See Instruction 9 to Form PF; Advisers Act rule 204(b)-
1(a).
    \160\ See Instruction 9 to Form PF. As discussed above, a large 
hedge fund adviser (or large liquidity fund adviser) that also 
manages other types of funds must file quarterly updates with 
respect to its hedge funds (or liquidity funds, as applicable) but 
only needs to update information regarding its other funds when it 
files its fourth quarter update. Such an adviser may comply with its 
filing obligations by initially filing a fourth quarter update that 
includes only information about its hedge funds (or liquidity funds, 
as applicable) within 60 days (or 15 days, as applicable) and then 
amending its filing within 120 days after the end of the quarter to 
include information about its other funds.
    \161\ We noted in the Proposing Release that the proposed 90 day 
deadline would allow these advisers to file amendments at the same 
time as they file their Form ADV annual updating amendment, which 
may make certain aspects of the reporting more efficient, such as 
reporting assets under management. Proposing Release, supra note 12, 
at section II.C. We believe these efficiencies will still be 
realized because the reporting continues to be ``as of'' the same 
date as the annual reports on Form ADV and an adviser may still file 
on or after the date on which it files Form ADV.
---------------------------------------------------------------------------

    The proposed deadline of 15 days for large hedge fund and private 
equity fund advisers attracted significant opposition. Commenters 
offered a number of reasons to extend the deadline, including that: (1) 
15 days is not enough time to prepare and submit a report with reliably 
accurate data, particularly where the adviser must value illiquid fund 
assets; \162\ (2) other SEC reporting requirements allow more time; 
\163\ (3) the FSA Survey has allowed more time (approximately 30 to 45 
days in the most recent surveys) and required less detail; \164\ (4) 
the same personnel will be closing the books at the end of the quarter 
and completing Form PF; \165\ and (5) the more current the information 
reported, the greater the consequences should it become public.\166\ 
These commenters suggested alternatives that ranged from 45 to 120 
days.\167\ We understand from the comments, however, that the proposed 
reporting deadlines would be more problematic for some types of 
advisers than for

[[Page 71142]]

others. For instance, commenters focusing on private equity advisers 
generally suggested longer deadlines than commenters focusing on hedge 
fund advisers, and the valuation of illiquid portfolios is likely to be 
a more common problem for private equity advisers.\168\ Also, although 
a number of commenters addressed hedge fund advisers and private equity 
advisers, none commented specifically on whether liquidity fund 
advisers could meet the proposed deadline.
---------------------------------------------------------------------------

    \162\ See, e.g., ABA Committees Letter; AIMA General Letter; 
BlackRock Letter; IAA Letter; MFA Letter; USCC Letter.
    \163\ See, e.g., ABA Committees Letter (noting that Forms N-SAR 
and N-Q, used by registered investment companies, allow 60 days); 
AIMA General Letter (pointing to Form 13F (allowing 45 days), Form 
10-K (allowing at least 60 days), and Form 10-Q (allowing at least 
40 days)); Fidelity Letter; Kleinberg General Letter; MFA Letter 
(pointing to the 120 days allowed for audited financial statements 
under the Advisers Act custody rule); TCW Letter.
    \164\ See, e.g., AIMA General Letter; IAA Letter.
    \165\ See, e.g., Kleinberg General Letter.
    \166\ See, e.g., AIMA General Letter; Kleinberg General Letter. 
Some commenters also pointed to the Form's proposed signature page, 
which would have required advisers to certify that the information 
provided is ``true and correct,'' arguing that this standard would 
be difficult to satisfy in 15 days. See, e.g., AIMA General Letter. 
As discussed below, we are not adopting the proposed certification 
requirement. See infra notes 183-185 and accompanying text.
    \167\ See, e.g., AIMA General Letter (45 days); Akina Letter 
(120 days for private equity fund data); BlackRock Letter (120 
days); CPIC Letter (45 days, at least initially); Fidelity Letter 
(preferably 90 days, but no less than 45 days); IAA Letter (90 
days); Kleinberg General Letter (60 days); Lone Star Letter (60 days 
for private equity fund data); Merkl February Letter (four months 
for private equity fund data); MFA Letter (120 days); PEGCC Letter 
(at least 90 days for private equity fund data); Seward Letter (120 
days); SIFMA Letter (120 days); TCW Letter (60 days); USCC Letter 
(120 days).
    \168\ Id.
---------------------------------------------------------------------------

    We are persuaded that longer deadlines are appropriate for large 
hedge fund advisers and large private equity fund advisers and that, 
with respect to large private equity fund advisers in particular, the 
work required to value the generally illiquid portfolios of private 
equity funds favors a substantially longer reporting deadline than was 
proposed.\169\ A few commenters favored a deadline for large hedge fund 
advisers longer than the one we are adopting, but several commenters 
indicated that a deadline shorter than the one we are adopting would be 
adequate.\170\ We believe that our revised approach strikes an 
appropriate balance between the need to provide FSOC with timely data 
and the ability of these advisers to prepare and submit Form PF. We 
also believe it will reduce the burden of reporting for these advisers.
---------------------------------------------------------------------------

    \169\ We note that many of the questions in section 4, which 
large private equity fund advisers must file, relate to information 
that should be available on the financial statements of their 
portfolio companies. By extending the deadline to 120 days for these 
advisers, we anticipate that the burden of reporting will be reduced 
because, in many cases, they will now be able to delay reporting 
until after receiving financial statements from their portfolio 
companies.
    \170\ See supra note 167.
---------------------------------------------------------------------------

    Fewer commenters addressed the proposed reporting deadline of 90 
days for smaller advisers. One commenter supported the proposal,\171\ 
but several argued that smaller advisers should have more than 90 days 
to prepare and submit their filings.\172\ Several commenters noted that 
the Advisers Act custody rule allows advisers up to 120 days to 
distribute audited financial statements to investors when relying on 
the annual audit provision under that rule.\173\ We believe that our 
revised deadline of 120 days will enable these advisers to benefit from 
the availability of financial statements and also help to avoid 
crowding advisers' calendars with end of year reporting obligations 
while at the same time providing FSOC with reasonably timely data.
---------------------------------------------------------------------------

    \171\ See AIMA General Letter.
    \172\ See, e.g., BlackRock Letter (120 days); MFA Letter (120 
days); PEGCC Letter (150 days for private equity fund data).
    \173\ See, e.g., BlackRock Letter; MFA Letter; USCC Letter. See 
also Advisers Act rule 206(4)-2(b)(4).
---------------------------------------------------------------------------

3. Initial Reports
    Newly registering private fund advisers are subject to the same 
Form PF reporting deadlines as currently registered advisers.\174\ 
Advisers are not, however, required to file Form PF with respect to any 
period that ended prior to the effective date of their registrations. 
Accordingly, a smaller private fund adviser that registers during its 
2013 fiscal year must file Form PF within 120 days following the end of 
its 2013 fiscal year. It would not, however, need to file Form PF for 
its 2012 fiscal year. Similarly, a large hedge fund adviser that 
registers during its third fiscal quarter must file Form PF within 60 
days following the end of that quarter but need not file for the 
preceding fiscal quarter.\175\
---------------------------------------------------------------------------

    \174\ See Advisers Act rule 204(b)-1(a); supra section II.B.2 of 
this Release.
    \175\ Whether an adviser is a large hedge fund or large 
liquidity fund adviser would be determined as of the date specified 
in Form PF, not the date of registration. When filing an initial 
Form PF, a large hedge fund or large liquidity fund adviser that 
also manages other types of private fund may rely on the 
instructions in the Form allowing it to delay updating information 
regarding these other fund types when filing an update.
---------------------------------------------------------------------------

    We have extended the deadlines for initial filings from the 15 days 
that we proposed. One commenter argued that the proposed deadline would 
be too short and suggested 90 days instead.\176\ We believe the revised 
initial filing deadlines are more consistent with the deadlines for 
updating Form PF discussed above in section II.B.2 of this Release.
---------------------------------------------------------------------------

    \176\ See AIMA General Letter.
---------------------------------------------------------------------------

4. Transition Filings, Final Filings and Temporary Hardship Exemptions
    An adviser must file Form PF to report that it is transitioning to 
only filing Form PF annually with the Commissions or to report that it 
no longer meets the requirements for filing Form PF no later than the 
last day on which the adviser's next Form PF update would be 
timely.\177\ This allows us to determine promptly whether an adviser's 
discontinuance in reporting is due to it no longer meeting the form's 
reporting thresholds as opposed to a lack of attention to its filing 
obligations. Advisers may also avail themselves of a temporary hardship 
exemption in a similar manner as with other SEC filings if they are 
unable to file Form PF electronically in a timely manner due to 
unanticipated technical difficulties.\178\ No commenters addressed the 
proposed transition filings, final filings or temporary hardship 
exemption, and we are adopting them as proposed.
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    \177\ See Instruction 9 to Form PF.
    \178\ See Advisers Act rule 204(b)-1(f); Instruction 14 to Form 
PF. The adviser would complete and file on paper Item A of section 
1a and section 5 of Form PF, checking the box in section 1a 
indicating that it is requesting a temporary hardship exemption. The 
adviser must file any request for a temporary hardship exemption no 
later than one business day after the electronic Form PF filing was 
due. The adviser must then submit the filing that is the subject of 
the Form PF paper filing in electronic format with the Form PF 
filing system no later than seven business days after the filing was 
due.
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C. Information Required on Form PF

    The questions contained in Form PF reflect relevant requirements 
and considerations under the Dodd-Frank Act, consultations with staff 
representing FSOC's members, and the Commissions' experience in 
regulating those private fund advisers that are already registered with 
the Commissions. As discussed above, with respect to hedge fund 
advisers in particular, the information collected on Form PF is also 
broadly based on the guidelines initially developed in the FSA Survey 
and the IOSCO report on hedge fund oversight, and many of the more 
detailed items are similar to questions proposed to be included in 
ESMA's reporting template.\179\ Form PF has been designed to collect 
information to assist FSOC in monitoring and assessing systemic risks 
that private funds may pose, as discussed in section II.A above.
---------------------------------------------------------------------------

    \179\ See supra section I.B of this Release.
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    Commenters' reactions to the scope of Form PF varied, with some 
proposing further enhancements and others arguing that the proposed 
reporting is excessive. Commenters arguing for expanded reporting 
recommended additional questions about counterparty exposures and short 
selling or suggested having all advisers complete the entire form.\180\ 
In contrast, critics of the proposal argued that information required 
on Form PF would be unduly burdensome to provide or is available to 
regulators from other sources.\181\ A few commenters who objected to 
other aspects of the proposal recommended adding several questions that 
were originally proposed on Form ADV.\182\ Although this would expand 
the Form, these commenters believed that these

[[Page 71143]]

questions, which relate to valuation, beneficial ownership and the 
identity of service providers, would require competitively sensitive or 
proprietary information and would be more appropriately reported 
confidentially on Form PF.
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    \180\ See, e.g., AFL-CIO Letter; AFR Letter; Merkl February 
Letter; MSCI Letter; comment letter of Plexus Consulting Group (Feb. 
28, 2011). See also supra note 76 and accompanying text.
    \181\ See, e.g., AIMA General Letter; IAA Letter; Olympus 
Letter; PEGCC Letter. See infra note 309 and accompanying text.
    \182\ See IAA Letter; MFA Letter; Seward Letter.
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    As discussed in greater detail below, Form PF, as adopted, 
addresses the concerns of many commenters with changes from the 
proposal that we believe will significantly reduce the burden of 
reporting and clarify how commenters are expected to respond. At the 
same time, the final Form preserves much of the information that the 
proposal would require. Our revised approach is intended to respond to 
industry concerns while still providing FSOC the information it needs 
to monitor systemic risk across the private fund industry.
    Two of the changes we are making, in particular, illustrate this 
revised approach. The first is the removal of the proposed 
certification language. This would have required an authorized 
individual to affirm ``under penalty of perjury'' that the statements 
made in Form PF are ``true and correct.'' \183\ This certification was 
borrowed from the SEC's existing Advisers Act reporting form, Form ADV. 
However, a number of commenters expressed concern that such a standard 
would be inappropriate for Form PF because the Form requires advisers 
to provide estimates and exercise significant judgment in preparing 
responses.\184\ In consideration of the nature of the information 
required on Form PF, we are persuaded that a certification is 
unnecessary and that a signature confirming that the Form is filed with 
proper authority is sufficient.\185\
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    \183\ See Question 2 and Instruction 11 to Form PF. If the 
adviser is also registered with the CFTC as CPO or CTA, the 
signature page also requires the signatory to acknowledge that 
misstatements or omissions of material fact on Form PF constitute a 
violation of the CEA. This acknowledgement is included simply to 
remove any doubt created by the filing of the Form through the SEC 
rather than directly with the CFTC, which is merely a matter of 
convenience for advisers.
    \184\ See, e.g., ABA Committees Letter; AIMA General Letter; 
Kleinberg General Letter; MFA Letter; PEGCC Letter. Some of these 
commenters also saw the certification standard and the reporting 
deadlines as related issues, arguing that the more quickly advisers 
are required to report, the less confidence they will have in their 
estimates. See, e.g., BlackRock Letter; Fidelity Letter; PEGCC 
Letter; SIFMA Letter; USCC Letter. As discussed above in section 
II.B.2 of this Release, we have also extended the proposed filing 
deadlines. Several commenters compared Form PF to other SEC forms 
and suggested that we either require just a signature without a 
certification or that we use a less stringent standard, such as good 
faith. See MFA Letter (pointing to the certification in the SEC's 
Schedule 13G). See also ABA Committees Letter (comparing Form PF to 
other SEC forms, including Form N-SAR, Form N-Q, Schedule 13D and 
Schedule 13G); AIMA General Letter (pointing to Schedule 13G); 
BlackRock Letter; Kleinberg General Letter.
    \185\ We note, however, that even absent the certification, a 
willful misstatement or omission of a material fact in any report 
filed with the SEC under the Advisers Act is unlawful. See section 
207 of the Advisers Act. We have also added an instruction to the 
Form that clarifies when an adviser is required to amend its filing 
to correct an error. In particular, Instruction 16 to Form PF 
explains that an adviser is not required to update information that 
it believes in good faith properly responded to Form PF on the date 
of filing even if that information is subsequently revised for 
purposes of the adviser's recordkeeping, risk management or investor 
reporting (such as estimates that are refined after completion of a 
subsequent audit). The instruction also explains that large hedge 
fund advisers and large liquidity fund advisers that comply with 
their fourth quarter filing obligations by submitting an initial 
filing followed by an amendment in accordance with Instruction 8 to 
Form PF will not be viewed as affirming responses regarding one fund 
solely by providing updated information regarding another fund at a 
later date.
---------------------------------------------------------------------------

    The second change is to increase the ability of advisers to rely on 
their internal methodologies when reporting on Form PF.\186\ A number 
of commenters encouraged this approach, recommending ``that the 
instructions to the Form be modified to confirm that advisers be able 
to rely on the same internal reporting procedures and practices when 
reporting on the Form that they would use when reporting to advisory 
clients, unless directly contradicted by the instructions.'' \187\ The 
revised approach strikes an appropriate balance between easing the 
burden on advisers by allowing them to rely on their existing practices 
and ensuring that FSOC receives comparable data across the industry. 
This change is intended, together with the removal of the 
certification, to clarify that Form PF does not require the time or 
expense involved in, for instance, an audit of the information included 
on Form PF, and we anticipate that these changes will reduce the burden 
that many advisers incur in completing the Form.\188\
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    \186\ See Instruction 15 to Form PF. As noted in the 
instruction, we would expect reporting on Form PF to be consistent 
with information the adviser uses for internal and investor 
reporting purposes. Methodologies also must be consistently applied, 
and to the extent we have indicated how an adviser should respond to 
a question, the answer should be consistent with our instructions. 
In addition to this general instruction, we have increased the 
ability of advisers to rely on their own methodologies with a number 
of specific changes throughout the Form, including permitting 
advisers to report performance using their existing practices, 
allowing flexibility in reporting interest rate sensitivities and 
changing the frequency and substance of reporting for large private 
equity advisers. See, e.g., infra notes 202, 241-242, 247-248 and 
258-260 and accompanying text and section II.C.4.
    \187\ BlackRock Letter. See also IAA Letter; MFA Letter; PEGCC 
Letter; SIFMA Letter; TCW Letter.
    \188\ If audited information is available at the time an adviser 
files Form PF, we would of course expect responses to Form PF to be 
consistent with that audited information.
---------------------------------------------------------------------------

    The information that Form PF requires and the changes made from the 
proposal are discussed in detail below.
1. Section 1 of Form PF
    Each adviser required to file Form PF must complete all or part of 
section 1. This section of the Form is divided into three parts: 
section 1a requires information regarding the adviser's identity and 
assets under management, section 1b requires limited information 
regarding the size, leverage and performance of all private funds 
subject to the reporting requirements, and section 1c requires 
additional basic information regarding hedge funds. We are adopting 
Form PF with several changes to the information that advisers are 
required to report in section 1. These changes, which are discussed in 
detail below, are intended to respond to industry concerns while still 
providing FSOC the information it needs to monitor systemic risk across 
the private fund industry. In general, we expect that these changes 
will reduce the burden of responding to the Form and more closely align 
the Form with ESMA's proposed reporting template.
a. Section 1a of Form PF
    Item A of section 1a seeks identifying information about the 
adviser, such as its name and the name of any of its related persons 
whose information is also reported on the adviser's Form PF. The 
adviser will also be required to provide its large trader 
identification number, if any.\189\ The addition of the large trader 
identification number will enhance the value of Form PF information by 
allowing it to be quickly and accurately linked to other information 
that may be available to the SEC while imposing little additional 
burden. Section 1a also requires basic aggregate information about the 
private funds managed by the adviser, such as the portion of gross 
(i.e., regulatory) and net assets under management attributable to 
certain types of private funds.\190\ This identifying information

[[Page 71144]]

will assist us and FSOC in monitoring the amount of assets managed by 
private fund advisers and the general distribution of those assets 
among various types of private funds.\191\ This information also 
provides data about the size of the adviser, the nature of the 
adviser's activities and the extent to which assets are managed rather 
than owned, which are factors that FSOC must consider in making a 
determination to designate a nonbank financial company for FRB 
supervision under the Dodd-Frank Act.\192\
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    \189\ See Question 1 on Form PF.
    \190\ See Question 3 on Form PF. This question requires the 
adviser to report the portion of its assets under management that 
are attributable to hedge funds, liquidity funds, private equity 
funds, real estate funds, securitized asset funds, venture capital 
funds, other private funds, and funds and accounts other than 
private funds. We have modified the instructions to Question 3 to 
improve their consistency and to respond to a commenter's request 
for clarification regarding the meaning of ``funds and accounts 
other than private funds.'' See MFA Letter. We have also determined 
not to adopt a proposed question that would have required advisers 
to report their aggregate gross and net regulatory assets under 
management because this information can be derived from the data 
reported in Question 3. See the Proposing Release, supra note 12, 
for the proposed Question 3 on Form PF.
    \191\ Question 4 in section 1a of Form PF also permits an 
adviser to explain any assumptions it made in responding to Form PF. 
This question is optional. One commenter expressed support for 
``providing space for managers to describe any assumptions they make 
in responding to a question,'' and we are adopting this question 
substantially as proposed. See MFA Letter.
    \192\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
---------------------------------------------------------------------------

b. Section 1b of Form PF
    Section 1b of Form PF elicits certain identifying and other basic 
information about each private fund the adviser manages. The adviser 
generally must complete a separate section 1b for each private 
fund.\193\ This section of the Form requires reporting of each private 
fund's gross and net assets and the aggregate notional value of its 
derivative positions.\194\ It also requires basic information about the 
fund's borrowings, including a breakdown showing whether the creditor 
is based in the United States and whether it is a financial 
institution.\195\ Advisers must also report the percentage of the 
fund's equity held by the five largest equity holders, which provides 
information about the concentration of the fund's investor base.\196\ 
Two new questions, which we have added in connection with other changes 
to the Form, also require the value of the fund's investments in other 
private funds and of the parallel managed accounts managed alongside 
the fund.\197\
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    \193\ However, if the adviser elects to report on an aggregated 
basis regarding the funds comprising a master-feeder arrangement or 
a parallel fund structure, it would only file a single section 1b 
for the master fund in the master-feeder arrangement or for the 
largest fund in the parallel fund structure. We have modified the 
approach to aggregation of master-feeder arrangements and parallel 
fund structures to allow advisers more flexibility in determining 
how to report. See Instruction 5 to Form PF. This change is 
discussed in greater detail below in section II.C.5 of this Release.
    \194\ See Questions 8, 9 and 13 on Form PF. With respect to 
Question 13 and similar questions regarding the value of 
derivatives, the Form requires the adviser to report the gross 
notional value of its funds' derivative positions, except that 
options must be reported using their delta adjusted notional value. 
See Instruction 15 to Form PF. In contrast, Questions 8 and 9, and 
similar questions that refer to gross asset value or net asset 
value, require valuations based on the instruction in Form ADV for 
calculating regulatory assets under management. See definitions of 
``gross asset value'' and ``net asset value'' in the Glossary to 
Form PF.
    \195\ See Question 12 on Form PF. One commenter suggested that 
the amount of borrowings should be netted where a private fund is 
both a lender to and a creditor of a counterparty. See MFA Letter. 
The commenter's approach would, however, obscure the total amount of 
leverage the fund has incurred, and we have clarified that such 
amounts should not be netted. Also, in response to this commenter, 
we have modified the instructions to clarify that collateral should 
not be netted against borrowings. We have also modified this 
question, and other questions on the Form requiring a breakdown of 
creditor types, to split the non-financial institution category into 
U.S. and non-U.S. creditors. This change is intended to increase the 
usefulness of this data for the FRB's flow of funds report, which is 
an important tool for evaluating trends in and risks to the U.S. 
financial system. See infra note 475.
    We proposed that advisers completing section 1b also report the 
identity of, and amount owed to, each creditor to which the fund 
owed an amount equal to or greater than 5 percent of the fund's net 
asset value as of the reporting date. See the Proposing Release, 
supra note 12, for the proposed Question 10 on Form PF. This 
question has been moved to section 2b of the Form so that only large 
hedge fund advisers must provide this information. This change is 
intended to respond to commenter concerns that completing this 
question will be burdensome but also preserve information regarding 
interconnectedness that may be important to FSOC's monitoring of 
systemic risk among large hedge funds. See, e.g., PEGCC Letter.
    \196\ See Question 15 on Form PF. For purposes of this question 
and Question 16 on Form PF, beneficial owners are persons who would 
be counted as beneficial owners under section 3(c)(1) of the 
Investment Company Act or who would be included in determining 
whether the owners of the fund are qualified purchasers under 
section 3(c)(7) of that Act. (15 U.S.C. 80a-3(c)(1) or (7)). The 
proposal would have required that advisers report the number of 
beneficial owners of the fund. However, we are not adopting this 
question because, as a result of our revised approach to reporting 
on parallel managed accounts, this information will largely 
duplicate information collected on Form ADV, and we do not believe 
that receiving updated responses on a quarterly basis from large 
hedge fund advisers and large liquidity fund advisers is necessary 
with respect to this information. See infra section II.C.5 of this 
Release. See also the Proposing Release, supra note 12, for the 
proposed Question 12(a) on Form PF; Question 13 of section 7.B.1. of 
Schedule D to Form ADV.
    \197\ See Questions 10 and 11 on Form PF. Question 10, which 
asks for the value of the fund's investments in other private funds, 
has been added because our expanded Instruction 7 otherwise allows 
these investments to be disregarded on Form PF and it is important 
that FSOC have a basic measure of the extent of assets not otherwise 
reflected on the Form. This will also serve as a measure of 
interconnectedness among private funds. See supra notes 128 and 131 
and accompanying text for a discussion of Instruction 7. Question 
11, relating to the value of parallel managed accounts, has been 
added for similar reasons. See infra section II.C.5 of this Release 
for a discussion of our revised approach to reporting on parallel 
managed accounts.
---------------------------------------------------------------------------

    Section 1b also requires that advisers report in response to 
Question 17 the performance of each fund, both on a gross basis and net 
of management fees and incentive fees and allocations. Advisers must 
provide performance information that is consistent with the performance 
results they report to investors (or use internally, if not reported to 
investors). Advisers are required, at a minimum, to report annual 
performance results for the fund's most recently completed fiscal year 
but only need to report monthly and quarterly performance information 
if that information is already being calculated for the fund.
    Question 17 has been modified from the proposal in response to 
commenter concerns regarding the burden of providing performance 
results in the form proposed.\198\ In particular, it omits the 
requirement to report the change in net asset value, allows advisers to 
report performance gross and net of management fees and incentive fees 
and allocations (rather than gross and net of incentive fees and 
allocations only) and makes reporting of monthly and quarterly 
performance mandatory only for those funds for which advisers are 
already calculating performance results with that frequency. Commenters 
were concerned primarily that the proposed instructions to this 
question would require advisers to calculate performance in a manner 
different from that used for investor reporting purposes or more 
frequently than is their current practice.\199\ A number of commenters 
explained that funds with illiquid portfolios, such as private equity 
funds, typically do not calculate performance on a monthly (and in many 
cases, even quarterly) basis and that calculating performance more 
frequently would impose a significant burden on these advisers.\200\ As 
discussed above, we are persuaded that trends emerge more slowly in 
private funds having illiquid portfolios, meaning that developments in 
these funds may be tracked using information reported on a less 
frequent basis.\201\ We believe that the revised approach, which allows 
advisers to rely on their existing procedures for calculating and 
reporting fund performance, significantly reduces the burden of 
responding to this question but will nonetheless yield valuable 
information for FSOC.\202\
---------------------------------------------------------------------------

    \198\ See infra notes 199 and 200.
    \199\ See, e.g., ABA Committees Letter; MFA Letter (recommending 
that ``the Form be revised to request (i) Gross performance and (ii) 
performance net of all fees'' and suggesting that advisers be 
permitted to report what they report to private fund investors).
    \200\ See, e.g., ABA Committees Letter; IAA Letter; Merkl 
February Letter; MFA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.
    \201\ See supra text accompanying note 156.
    \202\ See Question 17 on Form PF. See also Proposing Release, 
supra note 12, at text accompanying n. 115 for a discussion of 
potential uses for this data.

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[[Page 71145]]

    We have also added to section 1b two questions that the SEC 
originally proposed as part of the expanded private fund reporting in 
Form ADV.\203\ The first, Question 14, requires that advisers report 
the assets and liabilities of each fund broken down using categories 
that are based on the fair value hierarchy established under U.S. 
generally accepted accounting principles (``GAAP'').\204\ The second, 
Question 16, requires that advisers provide the approximate percentage 
of each fund beneficially owned by certain types of investors.\205\ As 
discussed in the Implementing Adopting Release, the SEC determined not 
to adopt these questions on Form ADV in response to commenter concerns 
that they would result in the public disclosure of competitively 
sensitive or proprietary information.\206\ We have added these 
questions to Form PF (with the modifications discussed below) because, 
as the SEC explained in the Implementing Adopting Release, this 
information may be important to FSOC's systemic risk monitoring 
activities and to our investor protection mission.\207\
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    \203\ See Questions 14 and 16 on Form PF.
    \204\ Advisers must report this information annually (or on 
their fourth quarter updates, in the case of large hedge fund and 
large liquidity fund advisers). This question will provide 
information indicating the illiquidity and complexity of a fund's 
portfolio and the extent to which the fund's value is determined 
using metrics other than market mechanisms. In a recent rulemaking 
release, FSOC identified this fair value categorization as the type 
of information that may be important for assessing liquidity risk 
and maturity mismatch, one factor in determining whether a nonbank 
financial company may pose systemic risk. See FSOC Second Notice, 
supra note 6. See also Rules Implementing Amendments to the 
Investment Advisers Act of 1940, Investment Advisers Act Release No. 
3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (``Implementing 
Proposing Release'') for the proposed version of Form ADV, Part 1A, 
section 7.B.(1)A. of Schedule D, question 12. See also FASB ASC 820-
10-50-2b.
    We have modified this question from the proposal to expressly 
include definitions for Levels 1, 2 and 3 of the hierarchy. This 
change is intended to minimize ambiguity for advisers that do not 
utilize GAAP or another international accounting standard that 
requires the contemplated breakdown of assets and liabilities. 
Advisers that already prepare this breakdown for financial reporting 
purposes should respond to this question using the fair value 
hierarchy established under the applicable accounting standard.
    \205\ See the Implementing Proposing Release for the proposed 
version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D, 
question 17.
    \206\ See Implementing Adopting Release, supra note 11, at nn. 
246-247. Information filed on Form ADV is made available to the 
public through the Investment Adviser Public Disclosure (IAPD) Web 
site. In contrast, information filed on Form PF will generally 
remain confidential. See infra section II.D of this Release.
    \207\ Id. Several commenters responding to the Proposing Release 
also encouraged us to move these questions from Form ADV to Form PF. 
See IAA; MFA Letter; Seward Letter.
---------------------------------------------------------------------------

    Commenters responding to these questions as proposed on Form ADV 
argued that they would be difficult or burdensome to complete. With 
respect to Question 14, commenters argued that some private funds--
especially non-U.S. funds--do not use generally accepted accounting 
principles (whether U.S. or international) or obtain audited financial 
statements, making the requirement to report a breakdown of fair values 
potentially costly.\208\ We understand, however, that the group of 
funds not using some form of generally accepted accounting standard is 
relatively small and that most private funds already utilize GAAP or 
other international accounting standards that require the contemplated 
breakdown of assets and liabilities.\209\ In addition, funds are not 
required to adopt GAAP for these purposes, and Question 14 does not 
require that the valuations within the breakdown of assets and 
liabilities be audited, or even determined in accordance with GAAP. For 
instance, an adviser could rely on the procedure for calculating fair 
value that is specified in a private fund's governing documents.\210\ 
As a result, we are not convinced that the aggregate burden 
attributable to this reporting is unreasonable or even as significant 
as some commenters contend. The question has, however, been modified 
from the proposal to require a breakdown only by category and not by 
class.\211\ For advisers that do not already prepare this breakdown for 
financial reporting purposes, this revised approach will significantly 
reduce the work required to respond to this question.\212\ Such 
advisers may, nevertheless, incur additional costs to complete this 
question, and we are sensitive to these costs. We believe, however, 
that this question will provide valuable information for FSOC's 
systemic risk monitoring activities and our investor protection mission 
and that the associated burden is warranted.\213\
---------------------------------------------------------------------------

    \208\ Comment letter of the American Bar Association, Federal 
Regulation of Securities Committee and Private Equity and Venture 
Capital Committee (Jan. 31, 2011) (commenting on the Implementing 
Proposing Release, supra note 204) (``ABA Committees Implementing 
Proposal Letter''); comment letter of the Alternative Investment 
Management Association (Jan. 24, 2011) (commenting on the 
Implementing Proposing Release, supra note 204) (``AIMA Implementing 
Proposal Letter''); comment letter of Dechert LLP (Jan. 24, 2011) 
(commenting on the Implementing Proposing Release, supra note 204); 
comment letter of the Investment Adviser Association (Jan. 24, 2011) 
(commenting on the Implementing Proposing Release, supra note 204) 
(``IAA General Implementing Proposal Letter''); comment letter of 
Katten, Muchin, Rosenman, LLP (Jan. 24, 2011) (commenting on the 
Implementing Proposing Release, supra note 204); comment letter of 
George Merkl (Jan. 25, 2011) (commenting on the Implementing 
Proposing Release, supra note 204); comment letter of the National 
Venture Capital Association (Jan. 24, 2011) (commenting on the 
Implementing Proposing Release, supra note 204). Some of these 
commenters further contended that investors would bear any new audit 
costs or that advisers would not necessarily have audited numbers 
within 90 days after fiscal year end, when Form ADV is due. See, 
e.g., ABA Committees Implementing Proposal Letter; AIMA Implementing 
Proposal Letter; IAA General Implementing Proposal Letter.
    \209\ See, e.g., Implementing Proposing Release, supra note 204, 
at n. 56. Indeed, even in the context of this rulemaking, the 
Managed Funds Association suggested that we use a GAAP standard to 
measure advisers' assets, asserting that ``GAAP information is 
regularly reported across the industry and is a data point that most 
managers track in the ordinary course * * *'' MFA Letter. Others 
advisers may use international accounting standards requiring 
substantially similar information. In the Implementing Adopting 
Release, the SEC estimated that only about 3% of registered advisers 
have at least one private fund client that may not be audited. See 
Implementing Adopting Release, supra note 11, at nn. 634-636 and 
accompanying text.
    \210\ The fair valuation process need not be the result of a 
particular mandated procedure and the procedure need not involve the 
use of a third-party pricing service, appraiser or similar outside 
expert. The fund's governing documents may provide, for example, 
that the fund's general partner determines the fair value of the 
fund's assets. We would, however, expect that an adviser that 
calculates fair value in accordance with GAAP or another basis of 
accounting for financial reporting purposes will also use that same 
basis for purposes of determining the fair value of its assets and 
liabilities for this purpose.
    This question has been modified from the proposal to include a 
column titled ``cost-based'' for those assets and liabilities valued 
on the fund's financial statements using a measurement attribute 
other than fair value. This change recognizes that, even among 
advisers that already prepare a similar fair value breakdown for 
financial reporting purposes in accordance with GAAP, some assets 
and liabilities are not accounted for at fair value and, therefore, 
would not be included in the fair value hierarchy disclosures.
    \211\ In other words, although an adviser will need to provide 
the fund's aggregate assets and liabilities categorized as Level 1, 
2 or 3, it will not need to indicate the types of assets and 
liabilities in each of those categories.
    \212\ In addition, for advisers that already prepare this 
breakdown for financial reporting purposes, this revised approach 
will reduce the amount of information that needs to be re-entered on 
Form PF.
    \213\ See supra note 204 for a discussion of potential uses for 
this data.
---------------------------------------------------------------------------

    Commenters also expressed concern regarding the burden of reporting 
the types of beneficial owners investing in each fund, as required in 
Question 16.\214\ One of these commenters noted,

[[Page 71146]]

for instance, that many advisers either do not have this information or 
keep this information on a basis different from that set out in the 
Form.\215\ We believe, however, that many advisers to private funds are 
already collecting some of this beneficial ownership data as part of 
their processes for analyzing compliance with exemptions under the 
Investment Company Act and the Securities Act of 1933.\216\ To the 
extent this information is not currently collected, we do not 
anticipate that adding this to the information advisers already 
routinely collect from fund investors will impose a significant burden. 
We acknowledge, however, that advisers managing funds with securities 
outstanding prior to the adoption of Form PF would have to take 
additional steps in order to obtain this information because the 
investor diligence process will already have been completed. As a 
result, with respect to beneficial interests outstanding prior to March 
31, 2012, that have not been transferred on or after that date, 
advisers may respond to Question 16 using good faith estimates based on 
data available to them without making additional inquiries of 
investors.
---------------------------------------------------------------------------

    \214\ Comment letter of Debevoise & Plimpton, LLP (Jan. 24, 
2011) (commenting on the Implementing Proposing Release, supra note 
204) (``Debevoise Implementing Proposal Letter''); IAA General 
Implementing Proposal Letter; comment letter of Shearman & Sterling, 
LLP (Jan. 24, 2011) (commenting on the Implementing Proposing 
Release, supra note 204) (``Shearman Implementing Proposal 
Letter''). These commenters argued that advisers may have difficulty 
obtaining the required information for certain types of funds, 
particularly for funds established before the adoption of the 
reporting requirement.
    \215\ See IAA General Implementing Proposal Letter (stating that 
the reporting would require ``significant system enhancements'').
    \216\ 15 U.S.C. 77a.
---------------------------------------------------------------------------

    Question 16 has also been modified by adding a row for non-U.S. 
investors about which the adviser does not have and cannot reasonably 
obtain beneficial ownership information.\217\ This change acknowledges 
that obtaining beneficial ownership information about certain non-U.S. 
investors may be difficult for some advisers and ameliorates that 
burden by allowing advisers to report only the size of the ownership 
interest about which data is not available. We have also modified from 
the proposal some of the other categories in this question based on our 
consultations with staff representing FSOC's members. In particular, we 
have split out categories regarding individuals and pension plans to 
obtain a slightly more granular breakdown and added a category for 
sovereign wealth funds and foreign official institutions. We intend 
these changes to increase the usefulness of this data for the FRB's 
flow of funds report, a tool that is used for evaluating trends in and 
risks to the U.S. financial system.\218\
---------------------------------------------------------------------------

    \217\ An adviser may only report in this category beneficial 
ownership interests that are held through a chain involving one or 
more third-party intermediaries. If the beneficial owner has, for 
instance, simply interposed a wholly-owned holding company or trust 
as the legal owner, the interest would need to be reported in one of 
the other categories of beneficial owner.
    \218\ See infra note 475. See also Flow of Funds Accounts of the 
United States, available at http://www.federalreserve.gov/releases/z1/.
---------------------------------------------------------------------------

    The information that section 1b requires is designed to allow FSOC 
to monitor certain systemic trends for the broader private fund 
industry, such as how certain kinds of private funds perform and 
exhibit correlated performance behavior under different economic and 
market conditions and whether certain funds are taking significant 
risks that may have systemic implications. It is also intended to allow 
FSOC to monitor borrowing practices across the private fund industry, 
which may have interconnected impacts on banks and thus the broader 
financial system. Question 14, which requires that advisers report the 
assets and liabilities of each fund broken down using categories that 
are based on the fair value hierarchy established under GAAP, will 
provide information indicating the illiquidity and complexity of a 
fund's portfolio and the extent to which the fund's value is determined 
using metrics other than market mechanisms. In a recent rulemaking 
release, FSOC identified this fair value categorization as the type of 
information that may be important for assessing liquidity risk and 
maturity mismatch, one factor in determining whether a nonbank 
financial company may pose systemic risk.\219\ Finally, as noted above, 
certain of the information that section 1b requires is designed for use 
in the FRB's flow of funds report, a tool that is used for evaluating 
trends in and risks to the U.S. financial system.\220\
---------------------------------------------------------------------------

    \219\ See supra note 204.
    \220\ See supra note 218 and accompanying text.
---------------------------------------------------------------------------

c. Section 1c of Form PF
    Section 1c is the final part of section 1 and requires advisers to 
report information regarding the hedge funds they manage, if any. This 
information includes each fund's investment strategies \221\ and the 
percentage of the fund's assets managed using high-frequency trading 
strategies.\222\ Advisers must also report each hedge fund's 
significant counterparty exposures (including identity of 
counterparties).\223\ In response to comments, we have modified the 
questions regarding counterparty exposures to clarify instructions and 
to reduce the reporting burden by more closely aligning the 
requirements with information already determined in connection with 
many contractual trading arrangements.\224\
---------------------------------------------------------------------------

    \221\ See Questions 19 and 20 on Form PF. One commenter, 
although advising caution in using strategy data to analyze industry 
trends, asserted that the reporting could provide valuable 
information about emerging systemic risk. See MSCI Letter (``a 
buildup of assets in one or a set of related strategies should cause 
the FSOC to question the market's capacity to support such a 
strategy * * *'' and create ``conditions where crowded trades could 
be unwound quickly, with a systemic impact.''). Another commenter 
suggested that we revise the question to allow reporting as of the 
end of the reporting period rather than over the course of the 
period and to permit advisers to report based on capital allocation 
rather than net asset value. See MFA Letter. We have revised the 
instructions to permit both these options. We have, however, also 
retained the requirement to report based on percentage of net asset 
value because we believe this will provide valuable information 
regarding leverage.
    \222\ See Question 21 on Form PF. Some commenters suggested 
removing this question because, in their view, it would not provide 
information relevant to systemic risk assessment. See, e.g., AIMA 
General Letter; MFA Letter. This information may, however, be 
important to understanding how hedge funds interact with the markets 
and their role in providing trading liquidity. We have modified the 
instructions to this question to make it easier for advisers to 
determine whether a particular fund is using a relevant strategy.
    \223\ See Questions 22 and 23 on Form PF.
    \224\ See MFA Letter. Specifically, these questions have been 
modified to (i) Clarify that exposure should be mark-to-market 
exposure (rather than potential exposure), (ii) narrow the 
conditions under which affiliates are treated as a single 
counterparty group in order to track legal and contractual 
arrangements among the parties, (iii) focus on counterparties 
generally (rather than just trading counterparties), (iv) reference 
exposures before taking into account collateral postings and (v) be 
less prescriptive regarding the treatment of assets in custody and 
unsettled trades.
---------------------------------------------------------------------------

    Finally, section 1c requires information regarding each hedge 
fund's trading and clearing practices in Question 24 and activities 
conducted outside the securities and derivatives markets in Question 
25. Some commenters supported the reporting required in Question 
24.\225\ However, one commenter expressed concern that the question as 
proposed would require burdensome manual aggregation.\226\ In response, 
we have simplified this question by requiring a less detailed 
breakdown, removing the sub-classes of securities and derivatives 
included in the proposal. We expect that, by requiring less refinement 
in the categories of investments, these changes will reduce the burden 
of responding to this question. The revisions also align this question 
with the similar questions in the FSA Survey and ESMA's proposed 
reporting template.\227\
---------------------------------------------------------------------------

    \225\ See AFL-CIO Letter; AFR Letter.
    \226\ See MFA Letter.
    \227\ See ESMA Proposal, supra note 33.
---------------------------------------------------------------------------

    The information required in section 1c is designed to enable FSOC 
to monitor systemic risk that could be transmitted through counterparty 
exposure, track how different strategies are affected by and correlated 
with different market stresses, and follow the

[[Page 71147]]

extent of private fund activities conducted away from regulated 
exchanges and clearing systems. This information could be important to 
understanding interconnectedness, which relates to the factors that 
FSOC must consider in making a determination to designate a nonbank 
financial company for FRB supervision under the Dodd-Frank Act.\228\
---------------------------------------------------------------------------

    \228\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
---------------------------------------------------------------------------

    Several commenters agreed that some or all of the information 
required in section 1c would be valuable.\229\ For instance, one 
commenter, referring to the counterparty information, argued that 
``[f]rom a systemic risk perspective, this is the most relevant 
information on the form, as it goes to the heart of the issue of 
connectivity.'' \230\ Some of these questions, including those about 
significant trading counterparty exposures and trading and clearing 
practices, are based on the FSA Survey, and some of the changes from 
the proposal discussed above more closely align this section with the 
FSA Survey and ESMA's proposed reporting template, which will promote 
international consistency in hedge fund reporting.\231\
---------------------------------------------------------------------------

    \229\ See AFL-CIO Letter; AFR Letter; MSCI Letter.
    \230\ See MSCI Letter; infra note 274.
    \231\ For example, ESMA's proposed reporting template would ask 
for identification of the hedge fund's top five counterparties in 
terms of net credit exposure. It would also ask for estimates of the 
percentage of the fund's securities or derivatives traded on a 
regulated exchange versus over the counter and the percentage of the 
fund's derivatives and repos cleared by a central clearing 
counterparty versus bilaterally. In addition, the template would 
require advisers to identify a predominant trading strategy using 
categories similar to those on Form PF. See ESMA Proposal, supra 
note 33.
---------------------------------------------------------------------------

2. Section 2 of Form PF
    A private fund adviser must complete section 2 of Form PF if it had 
at least $1.5 billion in hedge fund assets under management as of the 
end of any month in the prior fiscal quarter.\232\ This section of the 
Form requires additional information regarding the hedge funds these 
advisers manage, which we have tailored to focus on relevant areas of 
financial activity that have the potential to raise systemic concerns. 
This information corresponds to areas of potential concern that were 
identified in the Proposing Release and is designed to assist FSOC in 
monitoring and assessing the extent to which stresses at hedge funds 
could have systemic implications.
---------------------------------------------------------------------------

    \232\ See Instruction 3 to Form PF; supra section II.A.4 of this 
Release.
---------------------------------------------------------------------------

    We are adopting Form PF with several changes to the information 
that advisers are required to report in section 2. These changes, which 
are discussed in detail below, are intended to respond to industry 
concerns while still providing FSOC the information it needs to monitor 
systemic risk across the hedge fund industry. In general, we expect 
that these changes will reduce the burden of responding to the Form and 
more closely align the Form with ESMA's proposed reporting template.
a. Section 2a of Form PF
    Section 2a requires certain aggregate information about the hedge 
funds the adviser manages. For example, Question 26 requires the 
adviser to report the value of assets invested (on a short and long 
basis) in different types of securities and commodities (e.g., 
different types of equities, fixed income securities, derivatives, and 
structured products). One commenter acknowledged the importance of 
collecting this information, agreeing that it ``could feed a variety of 
possible systemic risk indices.'' \233\ Some commenters, however, 
expressed concern regarding the amount of detail required in this 
question,\234\ and the commenter who generally supported this question 
nonetheless thought the asset classes placed too much emphasis on asset 
backed securities when compared with other asset classes.\235\ In 
response, the amount of detail regarding asset backed securities has 
been reduced so that the adviser need only provide a breakdown of 
mortgage backed securities, asset backed commercial paper, 
collateralized debt and loan obligations, other asset backed securities 
and other structured products.\236\ We continue to believe, however, 
that the remaining detail in this question is justified by the 
potential value of this information to FSOC's systemic risk monitoring 
activities.\237\ One commenter suggested that, instead of the proposed 
categories of assets, we allow advisers to report based on GAAP 
classifications under FAS 157.\238\ We do not believe this is a 
workable alternative because FAS 157 does not employ a standard set of 
asset classes, and the value of this information depends in part on the 
ability of regulators to make comparisons across funds.\239\ We also 
believe that our approach is more consistent with international hedge 
fund reporting standards.\240\
---------------------------------------------------------------------------

    \233\ MSCI Letter.
    \234\ See, e.g., ABA Committees Letter; MFA Letter.
    \235\ See MSCI Letter.
    \236\ This question has also been modified to separate foreign 
exchange derivatives used for investment from those used for hedging 
in response to a comment arguing that the proposed category should 
exclude foreign currency hedges. See MFA Letter. We have also added 
a category for physical real estate, which was not included in the 
FSA Survey but has been added in ESMA's proposed reporting template, 
in order to increase international consistency. See ESMA Proposal, 
supra note 33; see also supra note 31. In addition, following 
consultation with staff representing FSOC's members, we have 
separated investments in money market funds from other types of cash 
management funds and deposits from other types of cash equivalents. 
These changes are intended to provide additional detail regarding 
how cash equivalents are held because, at times of economic stress, 
these forms of holdings may have different implications for systemic 
risk.
    \237\ See Proposing Release, supra note 12, at text accompanying 
n. 120 for a discussion of potential uses for this data.
    \238\ See MFA Letter (this comment letter refers only to GAAP 
categories, but the commenter clarified on a call with staff that it 
was referring to the classifications under FAS 157).
    \239\ We note that nothing would prevent an adviser from relying 
on its classifications of assets for financial reporting purposes 
when completing Form PF to the extent that asset classes overlap.
    \240\ See FSA Survey; ESMA Proposal, supra note 33.
---------------------------------------------------------------------------

    Question 26 also requires the adviser to report the duration, 
weighted average tenor or 10-year bond equivalent of fixed income 
portfolio holdings (including asset backed securities). This differs 
from the proposal, which would have required all advisers to report 
duration. We are giving advisers the option of instead reporting 
weighted average tenor or 10-year bond equivalents because we 
understand from comments received that advisers use a wide range of 
metrics to measure interest rate sensitivity.\241\ We expect that this 
revised approach will reduce the burden of reporting because advisers 
will generally be able to rely on their existing practices when 
providing this information. This approach may limit the ability of 
regulators to make comparisons across advisers but will still yield 
valuable information about sensitivities to interest rate changes.\242\
---------------------------------------------------------------------------

    \241\ See ABA Committees Letter; MFA Letter.
    \242\ See MSCI Letter (arguing that duration information may not 
be valuable for making comparisons across the industry because there 
are many ways in which it may be calculated).
---------------------------------------------------------------------------

    Question 27 requires the adviser to report the value of turnover in 
certain assets classes (including listed equities, corporate bonds, 
sovereign bonds and futures) in the hedge funds' portfolios during the 
reporting period. This is intended to provide an indication of the 
adviser's frequency of trading in those markets and the amount of 
liquidity hedge funds contribute to those markets. The proposal would 
have required the adviser to calculate a single turnover rate for its 
entire hedge fund portfolio. However, commenters warned that this would 
prove difficult to calculate if an adviser trades in many different 
instrument types and, in particular, that the value of certain types of 
derivatives would overwhelm the influence of other instruments on the 
aggregate turnover

[[Page 71148]]

number.\243\ These commenters suggested instead that we ask for 
turnover by asset class, as was done in the FSA Survey (and, more 
recently, ESMA's proposed reporting template).\244\ We found these 
comments persuasive and have revised the question to request turnover 
in targeted asset classes.\245\
---------------------------------------------------------------------------

    \243\ See ABA Committees Letter; MFA Letter. Some commenters 
also argued that this question would not provide information 
valuable to monitoring systemic risk. See, e.g., ABA Committees 
Letter; Fidelity Letter; SIFMA Letter. However, based on our 
consultation with staff representing FSOC's members, we believe that 
turnover will provide important insight into the role of hedge funds 
in providing trading liquidity in certain markets.
    \244\ See FSA Survey, supra note 32; ESMA Proposal, supra note 
33.
    \245\ This is generally consistent with the international 
standards, though, unlike the FSA Survey and ESMA's proposed 
reporting template, we do not include derivatives (other than 
futures) because we have focused on assets classes where we believe 
turnover is currently most likely to occur at rates that raise 
systemic concerns.
---------------------------------------------------------------------------

    Question 27 has also been revised to request turnover data 
expressed as the value of transactions during the period rather than as 
a rate. This change has been made in order to make the data easier to 
compare to broader market data and to improve the comparability of the 
data with data that is or would be collected on the FSA survey and 
ESMA's proposed reporting template. In addition, we believe that the 
revised approach will be less burdensome for advisers than calculating 
the proposed portfolio turnover rate because advisers would have been 
required to determine the value of purchases and sales during the 
period as an intermediate step in calculating the portfolio turnover 
rate.\246\
---------------------------------------------------------------------------

    \246\ See the Proposing Release, supra note 12, for the proposed 
definition of ``turnover rate'' in the Glossary of Terms to Form PF.
---------------------------------------------------------------------------

    Finally, in response to Question 28, the adviser must report a 
geographical breakdown of investments held by the hedge funds it 
advises.\247\ This question has been modified from the proposal to 
require a less detailed breakdown (focusing on regions rather than 
countries) with additional, separate disclosure regarding investment in 
particular countries of interest. These changes are intended to respond 
to comments we received suggesting that advisers do not track this 
information in a manner consistent with our proposed, more granular 
geographical breakdown.\248\ We anticipate that the revised approach 
will reduce the burden of responding to this question because the less 
granular categories should allow more advisers to rely on their 
existing classifications.
---------------------------------------------------------------------------

    \247\ See Question 28 on Form PF.
    \248\ See ABA Committees Letter; MFA Letter. We have not, as one 
commenter suggested, used any particular service provider's 
methodology of categorizing geographical exposures because our staff 
understands, based on conversations with industry representatives, 
that there is no single methodology that hedge fund advisers employ. 
See MFA Letter (suggesting that we use ``Bloomberg's country of risk 
methodology''). In response to commenter concerns, we have removed 
some of the instructions regarding how the location of investments 
should be determined and expanded Instruction 15 to explain that the 
numerator should be calculated in the same manner as gross asset 
value. See MFA Letter. These changes allow advisers to rely on their 
internal methodologies and service provider reports in determining 
where to report investments and, by using gross asset value, rather 
than the more general value definition set out in Instruction 15, 
avoid the possibility that the reported value of certain derivative 
instruments would overwhelm the influence of other instruments. We 
have also added a ``supranational'' region, which is intended to 
capture investments that, because of their multinational scope, 
cannot meaningfully be placed in a single region.
---------------------------------------------------------------------------

    The information required in section 2a is designed to assist FSOC 
in monitoring asset classes in which hedge funds may be significant 
investors and trends in hedge funds' exposures. In particular, it is 
intended to allow FSOC to identify concentrations in particular asset 
classes (or in particular geographic regions) that are building or 
transitioning over time. It will also aid FSOC in examining large hedge 
fund advisers' role as a source of liquidity in different asset 
classes. In some cases, section 2a requires that the information be 
broken down into categories that are designed to facilitate use in the 
FRB's flow of funds report, a tool that is used for evaluating trends 
in and risks to the U.S. financial system.\249\ This information also 
is designed to address requirements under section 204(b)(3) of the 
Advisers Act specifying certain mandatory contents for records and 
reports that must be maintained and filed by advisers to private funds. 
For example, it will provide information about the types of assets held 
and trading practices.
---------------------------------------------------------------------------

    \249\ See supra note 218 and infra note 475. For example, in 
some cases the data is required to be broken down between issuers 
that are financial institutions and those that are not. The FRB 
publishes flow of funds data on a quarterly basis.
---------------------------------------------------------------------------

    One commenter expressed concern that advisers do not collect or 
calculate the exposure or turnover information that section 2a requires 
on a monthly basis or track geographical concentrations.\250\ As 
discussed above, we are adopting section 2a with several changes that 
are designed to address commenters' concerns and reduce the reporting 
burden, though we continue to believe that monthly exposure and 
turnover values will be important to allow FSOC to track trends in the 
industry and to discourage ``window dressing.'' \251\ We acknowledge 
that advisers may incur additional burdens in responding to these 
questions, and we have taken this into account in considering the costs 
and benefits of this rulemaking.\252\ The revised approach to the 
information required in section 2a strikes an appropriate balance 
between the burden imposed and need for the information.
---------------------------------------------------------------------------

    \250\ See ABA Committees Letter.
    \251\ See infra notes 285-292 and accompanying text. See also 
Proposing Release, supra note 12, at text accompanying n. 120 for a 
discussion of potential uses for this data.
    \252\ See infra sections IV.B and V of this Release (discussing 
increases in our burden and cost estimates in response to comments 
received).
---------------------------------------------------------------------------

b. Section 2b of Form PF
    Consistent with our proposal, section 2b of Form PF requires a 
large hedge fund adviser to report certain additional information about 
any hedge fund it advises that has a net asset value of at least $500 
million as of the end of any month in the prior fiscal quarter (a 
``qualifying hedge fund'').\253\ Two commenters disagreed with limiting 
reporting on section 2b to hedge funds with net assets of $500 million 
or more, arguing that information regarding smaller funds is important 
to monitoring certain group behaviors relevant to systemic risk and 
that smaller funds are equally likely to engage in improper activities, 
such as insider trading.\254\ Two other commenters argued for a higher 
threshold, suggesting that no fund of this size could be systemically 
important.\255\ We are adopting the

[[Page 71149]]

threshold as proposed because we believe it balances the needs of FSOC 
for information regarding relatively large hedge funds and the burdens 
of the more detailed reporting that section 2b requires.\256\
---------------------------------------------------------------------------

    \253\ See Instruction 3 to Form PF. An adviser is not required 
to complete section 2 with respect to a fund of hedge funds that 
satisfies the requirements described in Instruction 7 to Form PF. 
For purposes of determining whether a private fund is a qualifying 
hedge fund, the adviser must aggregate any parallel funds and funds 
that are part of the same master-feeder arrangement and, to the 
extent discussed above in section II.A.5 of this Release, any 
parallel managed accounts and relevant funds of related persons. See 
Instructions 5 and 6 to Form PF and the definition of ``qualifying 
hedge fund'' in the Glossary of Terms to Form PF. See also infra 
section II.C.5 of this Release for a discussion of parallel funds, 
master-feeder arrangements and aggregation for reporting purposes. 
This aggregation is intended to prevent an adviser from structuring 
its activities to avoid the reporting requirements.
    \254\ See AFL-CIO Letter; AFR Letter.
    \255\ See Fidelity Letter (arguing that the FSA threshold of 
$500 million, upon which the qualifying hedge fund threshold used in 
the Form PF is based, should be scaled to $2.4 billion based on the 
relative size of equity markets in the United States and the United 
Kingdom); SIFMA Letter. As discussed above, these comments appear to 
be based on the mistaken premise that the thresholds are intended to 
establish a cutoff separating the risky from the safe. To the 
contrary, the reporting thresholds are intended only to ensure that 
FSOC has sufficient context for its analysis while minimizing the 
burden imposed on advisers. We understand based on our staffs' 
consultation with staff representing FSOC's members that, in order 
to assess potential systemic risk posed by the activities of certain 
funds, FSOC would benefit from access to data about funds that, on 
an individual basis, may not be a source of systemic risk.
    \256\ In addition, certain of the information that would be 
obtained with respect to smaller hedge funds will already have been 
captured on an aggregate basis in section 2a.
---------------------------------------------------------------------------

    Also consistent with our proposal, Question 30 in section 2b 
requires reporting of the same information as that requested in section 
2a regarding exposure to different types of assets except, in this 
case, the information is reported for each qualifying hedge fund, 
rather than on an aggregate basis. This question has been modified from 
the proposal in the same manner as Question 26.\257\
---------------------------------------------------------------------------

    \257\ See supra notes 233-242 and accompanying text for a 
discussion of those changes.
---------------------------------------------------------------------------

    Section 2b also requires, on a per fund basis, data not requested 
in section 2a. For instance, the adviser must report information 
regarding the qualifying hedge fund's portfolio liquidity,\258\ 
holdings of unencumbered cash \259\ and concentration of 
positions.\260\ These questions have been modified from the proposal to 
allow advisers to rely more on their own methodologies in responding, 
consistent with our changes to Instruction 15 to the Form, and to align 
the Form more closely with ESMA's proposed reporting template. A new 
Question 31 has been added, which requires the adviser to identify the 
reporting fund's base currency because this information is necessary to 
interpret responses to questions regarding foreign exchange exposures 
and the effect of changes in currency rates on the reporting fund's 
portfolio.\261\
---------------------------------------------------------------------------

    \258\ See Question 32 on Form PF. This question requires 
reporting of the percentage of the fund's portfolio capable of being 
liquidated within different time periods. See Proposing Release, 
supra note 12, at text accompanying n. 124 for a discussion of 
potential uses for this data. We have modified the instructions to 
this question to address commenter concerns by allowing advisers to 
rely more on their own methodologies in responding. See CCMR Letter; 
MFA Letter. We have also conformed the liquidity periods to those 
included in ESMA's proposed reporting template. See ESMA Proposal, 
supra note 33. One commenter objected to the question more 
generally, saying that the data is not currently tracked in the 
manner required and many firms would need to ``devote significant 
time and resources'' to building models and systems. TCW Letter. 
Another commenter, however, supported this question, noting that 
``[t]his [information] is increasingly a request of hedge fund 
investors, particularly for comingled funds, where a given investor 
can be adversely impacted by a sudden large redemption by another 
party.'' MSCI Letter. We have taken into account both of these 
comments in considering the costs and benefits of this rulemaking 
and believe that the value of the information to FSOC warrants the 
potential burden imposed. See infra sections IV.B and V of this 
Release (discussing increases in our burden and cost estimates in 
response to comments received).
    \259\ See Question 33 on Form PF. In response to a comment we 
received, we have modified the definition of ``unencumbered cash'' 
to include the value of ``overnight repos'' used for liquidity 
management (so long as the assets purchased are U.S. treasury 
securities or agency securities) because we are satisfied that, for 
this purpose, the liquidity of these positions is sufficiently cash-
like. See MFA Letter.
    \260\ See Questions 34 and 35 on Form PF. Question 34 requires 
the total number of open positions held by the fund, and Question 35 
requires reporting, for each position that represents 5% or more of 
the fund's net asset value, of the position's portion of the fund's 
net asset value and sub-asset class. One commenter asked for 
clarification regarding the meaning of ``position,'' as used in 
these questions and elsewhere in the Form. See MFA Letter. In 
response, we have added an instruction to the Form explaining that 
advisers should determine whether a set of legal and contractual 
rights constitutes a ``position'' in a manner consistent with their 
internal recordkeeping and risk management procedures. See 
Instruction 15 to Form PF. This general instruction also supplants 
the detailed instructions proposed in Question 35, which have, 
accordingly, been removed.
    \261\ See also Question 30, regarding reporting fund exposures, 
and Question 42, regarding the effect of changes in certain market 
factors on the fund's portfolio.
---------------------------------------------------------------------------

    In Questions 36 through 38, the adviser must also provide 
information regarding the fund's collateral practices with 
counterparties.\262\ These questions have been significantly modified 
from the proposal in order to reduce the amount of detail required, 
including by removing the breakdown of collateral into initial and 
variation margin. These changes were made because a commenter persuaded 
us that ``[w]hile some of this information is potentially illuminating 
in the context of systemic risk * * * this section [as proposed] is 
more burdensome than it need be for its purpose.'' \263\ We have also 
modified these questions by requiring information regarding 
rehypothecation only with respect to the fund's aggregate collateral 
(rather than on a counterparty-by-counterparty basis). Commenters 
persuaded us that, because collateral is often fungible, this question 
would have been difficult to answer as proposed and that the additional 
detail is unnecessary.\264\ We anticipate that these changes will 
reduce the burden of responding to these questions.
---------------------------------------------------------------------------

    \262\ Questions 36 and 37 focus on collateral practices with the 
fund's top five counterparties, and Question 38 focuses on 
rehypothecation of the fund's aggregate collateral.
    \263\ MSCI Letter.
    \264\ See MFA Letter; MSCI Letter.
---------------------------------------------------------------------------

    Question 39 in section 2b also requires the adviser to report 
whether the hedge fund cleared any trades directly through a central 
clearing counterparty (``CCP'') during the reporting period. The 
proposal would have required the adviser to identify the three CCPs to 
which the fund has the greatest net counterparty credit exposure and 
provide the amount of that exposure. The information this question 
requires has been significantly reduced because commenters argued 
persuasively that the fund's relationship is typically with a swap 
dealer, futures commission merchant or direct clearing member who then 
interacts with the CCP rather than directly with a CCP and that, as a 
result, advisers ``may not have easy access to the data requested by 
this question.'' \265\ If responses to the revised question indicate 
that many reporting funds clear transactions directly through CCPs, the 
Commissions may consider in the future whether a question like the one 
proposed should be added to the Form. The change to Question 39 will 
reduce the burden of responding to the Form.
---------------------------------------------------------------------------

    \265\ MFA Letter; see also AIMA General Letter.
---------------------------------------------------------------------------

    The information that Questions 30 through 35 require is designed to 
assist FSOC in monitoring the composition of hedge fund exposures over 
time as well as the liquidity of those exposures. In addition, 
information reported in response to Questions 36 through 38 is intended 
to aid FSOC in its monitoring of credit counterparties' unsecured 
exposure to hedge funds as well as the hedge fund's exposure and 
ability to respond to market stresses. Finally, Question 39 is intended 
to assist FSOC in monitoring whether hedge funds and CCPs become 
increasingly interconnected over time. This information could be 
important to understanding, for instance, concentrations in the hedge 
fund industry and interconnectedness, which relate to the factors that 
FSOC must consider in making a determination to designate a nonbank 
financial company for FRB supervision under the Dodd-Frank Act.\266\
---------------------------------------------------------------------------

    \266\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
---------------------------------------------------------------------------

    Section 2b also requires for each qualifying hedge fund data 
regarding certain hedge fund risk metrics. For instance, Question 40 
requires the adviser to report value at risk (``VaR'') for each month 
of the reporting period if, during the reporting period, the adviser 
regularly calculated a VaR metric for the qualifying hedge fund. One 
commenter confirmed that, ``[f]or all but the most illiquid strategies, 
hedge fund managers utilize these statistical measures [VaR and similar 
measures] for internal management and

[[Page 71150]]

for investor reporting.'' \267\ We are adopting this question 
substantially as proposed but with several clarifying changes.\268\
---------------------------------------------------------------------------

    \267\ See MSCI Letter. This commenter, however, cautioned that 
variability in the calculation of VaR will make meaningful 
aggregation of this information difficult and suggested removing the 
question. As proposed, in order to minimize the reporting burden 
associated with this question, we are not requiring that all 
advisers calculate VaR using a standardized set of assumptions. 
Although this approach may, as the commenter suggested, reduce the 
ability of regulators to make comparisons across hedge funds using 
this data, we believe that it will also provide valuable risk 
information with respect to individual funds.
    \268\ For instance, we have specified the units for reporting 
the confidence interval and weighting factor, combined the ``none'' 
and ``equal'' weighting options and clarified that the monthly 
reporting should be at the end of each month and not for the span of 
the month.
---------------------------------------------------------------------------

    In Question 41, the adviser must also indicate whether there are 
risk metrics other than, or in addition to, VaR that it considers 
important to managing the fund's risks. Several commenters, noting that 
some advisers do not use VaR, expressed concern that a negative 
response regarding the use of VaR would create a presumption that the 
adviser is not prudently managing risk.\269\ This new question will 
give advisers an opportunity to indicate that they are using risk 
metrics other than VaR, and it will also provide valuable information 
regarding industry practice that may inform FSOC's understanding of 
risk management and future rulemakings.
---------------------------------------------------------------------------

    \269\ See IAA Letter; MFA Letter.
---------------------------------------------------------------------------

    In addition, Question 42 requires the adviser to report the impact 
on the fund's portfolio from specified changes to certain identified 
market factors, if regularly considered in formal testing in the fund's 
risk management, broken down by the long and short components of the 
qualifying hedge fund's portfolio. We are adopting this question with 
several changes from the proposal.\270\ Most of the changes clarify the 
instructions, but the question has also been modified so that an 
adviser may omit a response to any market factor that it did not 
regularly consider in formal testing even if the factor could have an 
impact on the fund's portfolio or the adviser considered it 
qualitatively.\271\ Under the proposal, an adviser would have been 
permitted to omit a response with respect to a market factor only if it 
did not regularly consider that factor in the reporting fund's risk 
management, whether in formal testing or otherwise. This change has 
been made in response to commenter concerns regarding the potential 
burden of responding to this question.\272\ We believe it will reduce 
that burden in the aggregate because fewer advisers will need to 
provide detailed responses and for individual advisers because those 
without existing quantitative models will not be required to build or 
acquire them in order to respond to the question.
---------------------------------------------------------------------------

    \270\ These include changes intended to clarify (1) How the 
fund's portfolio should be separated into long and short components, 
(2) the period over which the changes should be deemed to occur and 
(3) how to address factors that would otherwise become negative when 
a given change is applied. We have also modified the magnitude of 
some of the market factor changes that advisers must test in order 
to reflect recent data on the frequency with which such changes may 
occur.
    \271\ For this purpose, ``formal testing'' means that the 
adviser has models or other systems capable of simulating the effect 
of a market factor on the fund's portfolio, not that the specific 
assumptions outlined in the question were used in testing. If the 
factor is relevant but not tested, the adviser would need to check a 
box to that effect but would not report a numerical response.
    \272\ See, e.g., TCW Letter. This commenter wrote that ``[a]n 
analyst at the firm estimated that it would take one to two days for 
the firm's systems to compute and verify the data for one fund's 
response to [this question].'' Based on a discussion with this 
commenter, our staff understands that this estimate assumes that the 
fund holds securities that are very complex to model (such as non-
agency mortgage backed securities) and that the modeling is intended 
to achieve a high level of confidence. Our staff further understands 
that for many other asset classes, this modeling would require 
minutes or hours rather than days and that, even for complex 
securities, advisers are able to obtain approximations about which 
they are reasonably confident in significantly less time. As a 
result, we believe that this commenter's estimate represents an 
effort significantly beyond the likely average burden this question 
requires. We also understand that the majority of the estimated one 
to two days represents time spent allowing the adviser's systems to 
calculate the responses and not employee hours. We note, finally, 
that we have significantly extended the filing deadline for large 
hedge fund advisers, reducing the likelihood that this task will 
compete with other tasks for the firm's computing resources and, 
consequently, the potential systems costs associated with this 
question. See supra section II.B.2 of this Release. Nonetheless, we 
have taken this comment into account in considering the costs and 
benefits of this rulemaking. See infra sections IV.B and V of this 
Release (discussing increases in our burden and cost estimates in 
response to comments received).
---------------------------------------------------------------------------

    Some commenters would have preferred removal of Question 42 
entirely, arguing that it would not yield information valuable to 
systemic risk monitoring because the variability in responses would 
hinder the ability of regulators to make comparisons across funds.\273\ 
However, although variability in the assumptions used to complete the 
question may limit certain types of industry-wide comparisons, the 
variability itself, when taken together with other information 
collected on the Form, may provide important comparative information. 
Based on our staffs' consultations with staff representing FSOC's 
members, we believe this question will also provide valuable risk 
information with respect to individual funds.\274\
---------------------------------------------------------------------------

    \273\ See IAA Letter; TCW Letter.
    \274\ See Proposing Release, supra note 12, at text accompanying 
n. 127 (discussing potential uses for this data). One commenter 
suggested removing this question in favor of expanding the questions 
regarding counterparty exposures so that an adviser would complete 
those questions using multiple stress scenarios to probe for 
contingent exposures. See MSCI Letter; see also supra note 230. We 
believe at this time that the question we are adopting strikes a 
more appropriate balance between the value of the information 
collected and the burden of reporting.
---------------------------------------------------------------------------

    Item D of section 2b also requires reporting of certain financing 
information for each qualifying hedge fund in Question 43. This 
question includes a monthly breakdown of the fund's secured and 
unsecured borrowing, the value of the collateral and other credit 
support posted in respect of the secured borrowing and the types of 
creditors. Question 43 has been modified from the proposal to clarify 
instructions and remove some of the detail regarding collateral 
postings (including information regarding rehypothecation of 
collateral, which is now covered on an aggregate basis elsewhere in 
section 2b).\275\ We anticipate that these changes will reduce the 
burden of responding to this question. One commenter argued that 
advisers would have difficulty responding to the parts of Question 43 
relating to the fund's borrowings via prime brokerage because they lack 
transparency into the prime brokerage relationship.\276\ This comment 
suggests, however, that prime brokers do not currently report this 
information to advisers, not that advisers are unable to obtain this 
information on request. It should be noted that advisers have 
successfully completed the FSA Survey, which includes a similar 
breakdown of borrowings (though not the collateral information), and 
that the revisions we have made to this question simplify the 
collateral reporting requirements.
---------------------------------------------------------------------------

    \275\ See supra note 264 and accompanying text.
    \276\ See MFA Letter.
---------------------------------------------------------------------------

    An adviser must also report in Questions 44 and 45 the fund's total 
notional derivatives exposures as well as the net mark-to-market value 
of its uncleared derivatives positions and the value of the collateral 
and other credit support posted in respect of those uncleared 
positions. Under the proposal, advisers would have reported only the 
notional value of the fund's derivatives positions and the value of 
collateral posted in respect of those positions. One commenter pointed 
out, however, that the ``absolute value of notional values cannot 
meaningfully be compared to variation margin amounts'' because margin 
is posted based on net

[[Page 71151]]

market values rather than notional amounts.\277\ At this commenter's 
suggestion, this question has been revised to request both notional 
value and net market value. We have, however, narrowed the scope of 
transactions about which collateral information is requested. 
Specifically, an adviser is required to report market values and 
collateral values only for transactions that are not cleared by a CCP. 
We have taken this approach because we believe margining practices 
associated with cleared derivatives make obtaining information 
regarding collateral practices in connection with those transactions 
unnecessary. For the same reasons discussed above in connection with 
changes made to Questions 36 and 37, this question has been revised to 
reduce the amount of detail required regarding the posting of 
collateral.\278\ We anticipate that these changes will, on net, reduce 
the burden of responding to Questions 44 and 45 and, by allowing 
comparisons of collateral practices to net exposures, provide more 
valuable information for FSOC.
---------------------------------------------------------------------------

    \277\ See MFA Letter.
    \278\ See supra notes 262-264 and accompanying text.
---------------------------------------------------------------------------

    In response to Questions 46 and 47, the adviser must provide a 
breakdown of the term of the fund's available financing and the 
identity of, and amount owed to, each creditor to which the fund owed 
an amount equal to or greater than 5 percent of the fund's net asset 
value as of the reporting date.\279\ One commenter argued that the 
breakdown of available financing should not include uncommitted lines 
of credit because the lender may not provide them on request.\280\ 
However, the extent to which financing may become rapidly unavailable 
is precisely the information this question is designed to elicit. We 
are adopting Questions 46 and 47 substantially in the form 
proposed.\281\
---------------------------------------------------------------------------

    \279\ To improve international consistency, we have conformed 
the liquidity periods in Question 46 to those included in ESMA's 
proposed reporting template. See ESMA Proposal, supra note 33. As 
explained above, we have moved Question 47 from section 1b to 
section 2b. See supra note 195.
    \280\ See MFA Letter.
    \281\ But see, supra note 279. We have also added an instruction 
to Question 47 clarifying that the precise legal name of the 
creditor is not required.
---------------------------------------------------------------------------

    The information that Item D of section 2b requires is designed to 
assist FSOC in monitoring, among other things, the qualifying hedge 
fund's leverage, the unsecured exposure of credit counterparties to the 
fund, and the committed term of that leverage, which may be important 
to monitor if the fund comes under stress. This information is also 
relevant to the fund's interconnectedness and leverage, which relate to 
factors that FSOC must consider in making a determination to designate 
a nonbank financial company for FRB supervision under the Dodd-Frank 
Act.\282\
---------------------------------------------------------------------------

    \282\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
---------------------------------------------------------------------------

    Item E of section 2b requires the adviser to report information 
about each qualifying hedge fund's investor composition and liquidity. 
Questions 48 and 49, for example, require information regarding the 
fund's side-pocket and gating arrangements. These questions have been 
modified to increase their clarity and to require numerical responses 
regarding gating arrangements only if investors have withdrawal or 
redemption rights in the ordinary course, potentially reducing the 
number of advisers that need to respond to all elements of Question 49. 
Question 48 has also been expanded so that the adviser must check a box 
indicating whether additional assets have been placed in a side-pocket 
since the end of the prior reporting period. Without this additional 
information, FSOC would not be able to distinguish between advisers 
frequently using side-pockets and those who have simply had a side-
pocket in place for an extended period. We believe, therefore, that 
this additional information will be important to interpreting the 
information proposed to be collected. We do not anticipate that this 
addition will significantly increase the burden of responding to this 
question because we believe that advisers already track assets held in 
side-pockets and the response only requires checking a box.
    Finally, the adviser must provide, in Question 50, a breakdown of 
the percentage of the fund's net asset value that is locked in for 
different periods of time. This question has been modified from the 
proposal to clarify instructions and to improve international 
consistency by conforming the liquidity periods to those included in 
ESMA's proposed reporting template.\283\
---------------------------------------------------------------------------

    \283\ See ESMA Proposal, supra note 33.
---------------------------------------------------------------------------

    The information that Item E of section 2b requires is designed to 
allow FSOC to monitor the hedge fund's susceptibility to failure 
through investor redemptions in the event the fund experiences stress 
due to market or other factors. For instance, this information, 
together with information collected in Questions 32 and 46 and 
elsewhere on the Form, is intended to assist FSOC in determining 
whether the fund may have a mismatch in the maturity or liquidity of 
its assets and liabilities, which relate to factors that FSOC must 
consider in making a determination to designate a nonbank financial 
company for FRB supervision under the Dodd-Frank Act.\284\
---------------------------------------------------------------------------

    \284\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
---------------------------------------------------------------------------

    Certain data in the Form, while filed with the Commissions on an 
annual or quarterly basis, must be reported on a monthly basis to 
provide sufficiently granular data to allow FSOC to better identify 
trends and to mitigate ``window dressing.'' \285\ Nearly all of these 
requirements appear in section 2 of the Form, which only large hedge 
fund advisers complete. Although no commenters expressly supported the 
monthly data requirements within the Form, some commenters recommended 
that large advisers be required to file more often than quarterly, 
which could impose a greater burden than monthly reporting on a 
quarterly filing.\286\ Several commenters, however, suggested that 
advisers should only report data as of the end of the quarterly 
reporting period.\287\ One commenter, while conceding that some funds 
already report certain data to investors on a monthly basis, asserted 
that such monthly reporting involves significantly less data and is 
based on internal valuation estimates only.\288\ Other commenters 
doubted that advisers would engage in ``window dressing'' and argued 
that the increased costs to advisers would outweigh the benefits.\289\
---------------------------------------------------------------------------

    \285\ See, e.g., Questions 27, 28, 31, 33, 34, 43, 44, 45, and 
56 on Form PF.
    \286\ See AFL-CIO Letter; AFR Letter. See also CII Letter.
    \287\ See, e.g., BlackRock Letter (arguing that data should be 
provided, at most, on a quarterly basis); Fidelity Letter; MFA 
Letter; SIFMA Letter (proposing that reporting be no more frequent 
than quarterly, at least for private equity fund advisers).
    \288\ See BlackRock Letter.
    \289\ See, e.g., Fidelity Letter; MFA Letter.
---------------------------------------------------------------------------

    Based on our staffs' consultations with staff representing FSOC's 
members, we agree with commenters who argued that rapidly changing 
markets and portfolios merit collecting certain information more often 
than on a quarterly basis, and we are not persuaded that the large 
hedge fund and large liquidity fund advisers required to respond to 
these questions will be overwhelmed by this reporting. Also, as 
discussed above, we have made several changes that increase the ability 
of advisers to rely on their own internal methodologies in responding 
to the Form, which is expected to ease the burden of reporting monthly 
information by clarifying that advisers need not incur substantial 
additional

[[Page 71152]]

burdens in verifying the data.\290\ Finally, the monthly data about 
which commenters were most concerned were the monthly performance data 
proposed to be collected in section 1b of the Form.\291\ Question 17 
has, however, been modified to require monthly data only in the case 
that the adviser is already calculating it, making the reporting burden 
essentially one of copying information onto the Form.\292\ Accordingly, 
except as discussed above, we are adopting the requirements to report 
monthly information as proposed.
---------------------------------------------------------------------------

    \290\ See supra note 188 and text accompanying.
    \291\ See Question 17 on Form PF; supra section II.C.1.b of this 
Release.
    \292\ See supra nn. 198-202 and accompanying text.
---------------------------------------------------------------------------

3. Section 3 of Form PF
    A private fund adviser must complete section 3 of Form PF if it 
manages one or more liquidity funds and had at least $1 billion in 
combined liquidity fund and registered money market fund assets under 
management as of the end of any month in the prior fiscal quarter.\293\ 
Section 3 requires that the adviser report certain information for each 
liquidity fund it manages. The adviser must provide information 
regarding the fund's portfolio valuation and its valuation methodology, 
as well as the liquidity of the fund's holdings.\294\ This section also 
requires information regarding whether the fund, as a matter of policy, 
is managed in compliance with certain provisions of rule 2a-7 under the 
Investment Company Act, which is the principal rule through which the 
SEC regulates registered money market funds.\295\ Items B and C of 
section 3 require the adviser to report the amount of the fund's assets 
invested in different types of instruments, information for each open 
position of the fund that represents 5 percent or more of the fund's 
net asset value and information regarding the fund's borrowings.\296\ 
Finally, Item D of section 3 asks for certain information regarding the 
fund's investors, including the concentration of the fund's investor 
base and the liquidity of its ownership interests.\297\
---------------------------------------------------------------------------

    \293\ See sections II.A.2 and II.B.4 of this Release for the 
definition of ``liquidity fund'' and a discussion of this reporting 
threshold. See also Instructions 3, 5, and 6 to Form PF. Form PF is 
a joint form between the SEC and the CFTC only with respect to 
sections 1 and 2 of the form. Section 3 of the form, which requires 
more specific reporting regarding liquidity funds, is only required 
by the SEC.
    \294\ See Questions 52, 53, and 55 on Form PF. The SEC has 
modified the instructions to Question 55 to clarify the units in 
which responses are to be reported and to clarify that the net asset 
value requested in parts (a) and (b) of Question 55 is the net asset 
value reported to current and prospective investors, which may or 
may not be the same as the net asset value reported in Questions 9 
and 55(c), which are based on fair value.
    \295\ See Question 54 of Form PF. The restrictions in rule 2a-7 
are designed to ensure, among other things, that money market funds' 
investing remains consistent with the objective of maintaining a 
stable net asset value. Many liquidity funds state in investor 
offering documents that the fund is managed in compliance with 
Investment Company Act rule 2a-7 even though that rule does not 
apply to liquidity funds.
    \296\ See Questions 56-59 on Form PF. The SEC has modified these 
questions from the proposal by removing instructions that have been 
supplanted by general instructions. See Instruction 15 to Form PF.
    \297\ See Questions 60-64 on Form PF. For purposes of these 
questions, beneficial owners are persons who would be counted as 
beneficial owners under section 3(c)(1) of the Investment Company 
Act or who would be included in determining whether the owners of 
the fund are qualified purchasers under section 3(c)(7) of that Act. 
(15 U.S.C. 80a-3(c)(1) or (7)). The SEC has made clarifying changes 
to the instructions to Question 64. To improve international 
consistency, the SEC has also conformed the liquidity periods in 
Question 64 to those included in ESMA's proposed reporting template. 
See ESMA Proposal, supra note 33.
---------------------------------------------------------------------------

    The information that section 3 requires is designed to assist FSOC 
in assessing the risks undertaken by liquidity funds, their 
susceptibility to runs, and how their investments might pose systemic 
risks either among liquidity funds or through contagion to registered 
money market funds. In addition, this information is intended to aid 
FSOC in monitoring leverage practices among liquidity funds and their 
interconnectedness to securities lending programs, which relate to 
factors that FSOC must consider in making a determination to designate 
a nonbank financial company for FRB supervision under the Dodd-Frank 
Act.\298\ Finally, this information will assist FSOC in assessing the 
extent to which the liquidity fund is being managed consistent with 
restrictions imposed on registered money market funds that might 
mitigate their likelihood of posing systemic risk. Commenters generally 
did not address the requirements of section 3, and the SEC is, 
therefore, adopting this section of the Form substantially as 
proposed.\299\
---------------------------------------------------------------------------

    \298\ See section 113(a) of the Dodd-Frank Act; FSOC Second 
Notice, supra note 6.
    \299\ The SEC received only one comment specifically addressing 
the requirements of section 3, which questioned whether requiring 
information regarding investor liquidity is appropriate considering 
the focus of liquidity funds on short-term investments. See MFA 
Letter. The SEC continues to believe that this information is 
important to understanding whether a fund may suffer a mismatch 
between the maturity of its obligations and the maturity of its 
investments and is, therefore, adopting this question substantially 
as proposed. But see, supra note 297.
---------------------------------------------------------------------------

4. Section 4 of Form PF
    A private fund adviser must complete section 4 of Form PF if it had 
at least $2 billion in private equity fund assets under management as 
of the end of its most recently completed fiscal year.\300\ This 
section of the Form requires additional information regarding the 
private equity funds these advisers manage, which has been tailored to 
focus on relevant areas of financial activity that have the potential 
to raise systemic concerns. As discussed in the Proposing Release, 
information regarding the activities of private equity funds, certain 
of their portfolio companies and the creditors involved in financing 
private equity transactions may be important to the assessment of 
systemic risk.\301\ The Proposing Release identified two practices of 
private equity funds, in particular, that could result in systemic 
risk: (1) The potential shift of market risk to lending institutions 
when bridge loans cannot be syndicated or refinanced; \302\ and (2) the 
imposition of substantial leverage on portfolio companies that may 
themselves be systemically significant.\303\
---------------------------------------------------------------------------

    \300\ See Instruction 3 to Form PF. See also sections II.A.3 and 
II.B.4 of this Release for the definition of ``private equity fund'' 
and a discussion of this reporting threshold. Form PF is a joint 
form between the SEC and the CFTC only with respect to sections 1 
and 2 of the form. Section 4 of the form, which requires more 
specific reporting regarding private equity funds, is only required 
by the SEC.
    \301\ See Proposing Release, supra note 12, at section II.A.3.
    \302\ See Proposing Release, supra note 12, at nn. 71-73 and 
accompanying text.
    \303\ See Proposing Release, supra note 12, at nn. 74-75 and 
accompanying text.
---------------------------------------------------------------------------

    Several commenters agreed that the activities identified in the 
Proposing Release are important areas of concern for monitoring 
systemic risk with respect to private equity funds.\304\ Other 
commenters, however, disagreed with the analysis, arguing that private 
equity funds and their advisers do not have the potential to pose 
systemic risk.\305\ These commenters affirmed that certain 
characteristics identified in the

[[Page 71153]]

Proposing Release, including limitations on investor redemption rights 
and an absence of significant leverage at the fund level, are common to 
private equity funds and tend to mitigate their potential for systemic 
risk.\306\
---------------------------------------------------------------------------

    \304\ See, e.g., AFL-CIO Letter (pointing to evidence that the 
use of so-called ``covenant-lite'' loans is again expanding); CPIC 
Letter (noting the importance of gathering information about all 
types of entities using leverage and asserting that, ``the 
Commission should not be pressured to scale back further or provide 
broad exemptions for private equity funds.''); Merkl February 
Letter. See also Proposing Release, supra note 12, at n. 73 and 
accompanying text (discussing risks associated with ``covenant-
lite'' loans).
    \305\ See, e.g., Olympus Letter; PEGCC Letter (contending that 
private equity funds are like any other shareholders and that they 
should not be singled out for ``a discriminatory and onerous 
reporting regime designed to monitor how their portfolio companies 
use leverage.''); SIFMA Letter.
    \306\ See, e.g., Olympus Letter; PEGCC Letter; SIFMA Letter. 
These commenters also noted that these funds typically focus on 
long-term investments and are legally isolated from the financial 
obligations of portfolio companies and other funds. They also 
asserted that private equity funds and their investments tend to be 
relatively small and are not interconnected. See also Proposing 
Release, supra note 12, at n. 77 and accompanying text.
---------------------------------------------------------------------------

    The SEC acknowledges that several potentially mitigating factors 
suggest that private equity funds may have less potential to pose 
systemic risk than some other types of private funds, and this has been 
taken into account in requiring substantially less information with 
respect to private equity funds than with respect to hedge funds or 
liquidity funds. The design of Form PF, however, is not intended to 
reflect a determination as to where systemic risk exists but rather to 
provide empirical data to FSOC with which it may make a determination 
about the extent to which the activities of private equity funds or 
their advisers pose such risk.\307\ Based on SEC staff's consultation 
with staff representing FSOC's members, the SEC continues to believe 
that targeted information regarding private equity leverage practices 
may be important to FSOC's monitoring of systemic risk.\308\
---------------------------------------------------------------------------

    \307\ One industry observer has explained the importance of 
transparency in allowing regulators to examine where risks may exist 
in the alternative investment industry, arguing that, ``[r]egulation 
has to aim at trying to prevent the next crisis, not simply cleaning 
up the mess from the previous one. It may indeed be the case that 
the alternative investment industry is too small and/or is leveraged 
at too low a level, at least relative to average bank sector 
leverage, to be a likely source of future systemic harm but the 
opacity issue, which has for a long time hampered supervisors' 
efforts to understand the industry's significance, makes this hard 
to tell. Requiring the industry to submit at least to disclosure and 
transparency obligations that help regulators and central banks do a 
better job of identifying systemic risk concentrations in the system 
is a reasonable step forward. Resistance to the imposition of 
obligations of this sort would merely serve to suggest that there is 
something to hide.'' Eilis Ferran, The Regulation of Hedge Funds and 
Private Equity: A Case Study in the Development of the EU's 
Regulatory Response to the Financial Crisis, University of Cambridge 
and European Corporate Governance Institute (Feb. 2011).
    \308\ See Proposing Release, supra note 12, at section II.A.3.
---------------------------------------------------------------------------

    One commenter argued that, if the SEC is concerned only with the 
use of leverage, the information could be gathered more effectively 
from the financial institutions that lend the money or, in the case of 
leveraged portfolio companies that are themselves financial 
institutions, incur the debt.\309\ Staff representing FSOC's members 
has explained to the SEC's staff, however, that collecting leverage 
data from private equity advisers has several potential advantages. 
First, it provides a more complete accounting than other data sources 
of the leverage that may have been imposed on portfolio companies. 
Although portfolio companies may take on leverage through financial 
institutions regulated in the United States, they may also incur 
leverage from other sources, including hedge funds and foreign 
financial institutions. As a result, portfolio company leverage 
information collected through U.S. bank regulators would likely provide 
an incomplete picture and may fail to capture trends with potential 
systemic importance, such as greater reliance on leverage obtained from 
outside the regulated financial sectors or from foreign sources. Even 
if regulators are only concerned about the risks that a portfolio 
company's debt may impose on financial institutions, those risks cannot 
be fully understood without information regarding the company's entire 
balance sheet, including debt from other sources.
---------------------------------------------------------------------------

    \309\ See PEGCC Letter.
---------------------------------------------------------------------------

    Second, because the SEC understands that private equity advisers 
routinely track the leverage of their portfolio companies, collecting 
data directly from these advisers is likely to be the most efficient 
means of monitoring portfolio company leverage. In contrast, obtaining 
portfolio company leverage information through bank regulators could be 
less efficient because (1) Banks are less likely to be actively 
tracking leverage information specifically attributable to portfolio 
companies, (2) bank regulators do not have a single collection 
mechanism for this data and (3) data may need to be aggregated across 
several different bank regulators.
    Third, collecting leverage data from private equity advisers would 
fill gaps in the data that could appear if FSOC were to attempt 
aggregating information from many different U.S. bank regulators. It 
also provides a check on any data that may be collected from other 
sources. Indeed, other types of information that the SEC collects from 
investment advisers has already proven valuable in cross-checking data 
that bank regulators collect.\310\
---------------------------------------------------------------------------

    \310\ The SEC's Form N-MFP, for instance, has provided a 
valuable check against information that banking regulators collect 
with respect to portfolio holdings of registered money market funds.
---------------------------------------------------------------------------

    Fourth, FSOC has stated that it is concerned that leveraged lending 
practices can raise systemic risk concerns.\311\ Private equity 
advisers are repeat participants in the leveraged loan market (often 
more so than other types of companies that access credit through these 
markets), and tracking their portfolio company leverage practices can 
signal trends in emerging risks in those markets. Indeed a recent study 
found that the private equity fund sponsors' bank relationships were an 
important factor in explaining the favorable loan terms obtained by 
private equity portfolio companies, both as a result of the private 
equity sponsor's repeat interactions reducing information asymmetries 
and the competition among banks to cross-sell other business to the 
private equity sponsor.\312\ This empirical data suggests that 
collecting data on private equity portfolio company leverage trends in 
fact may be the most efficient way to collect systemic risk trend data 
for the broader leveraged loan market because private equity portfolio 
companies' practices in this area may be a bellwether due to their 
sponsors' repeat player status. In addition, this approach appears 
consistent with an emerging international approach favoring broad 
monitoring of credit intermediation across the economy.\313\
---------------------------------------------------------------------------

    \311\ See FSOC 2011 Annual Report, supra note 19, at 12 
(``Although it is difficult to make definitive determinations 
regarding the appropriateness of risk pricing, there have been some 
indicators that credit underwriting standards might have overly 
eased in certain products, such as leveraged loans, reflecting the 
dynamics of competition among arranging bankers. * * * Sound 
underwriting standards, which were abandoned in the run-up to the 
crisis, will encourage greater investor confidence and stability in 
the market'').
    \312\ See Victoria Ivashina & Anna Kovner, The Private Equity 
Advantage: Leveraged Buyout Firms and Relationship Banking, 24 Rev. 
of Fin. Studies 7 (July 2011).
    \313\ See FSB Shadow Banking Report, supra note 28; ESMA 
Proposal, supra note 33; Proposing Release, supra note 12, at n. 33. 
See also CPIC Letter (affirming the importance of gathering 
information about all types of entities using leverage).
---------------------------------------------------------------------------

    The SEC is, however, adopting Form PF with several significant 
changes that reduce the frequency of reporting with respect to private 
equity funds, as discussed above, and more closely align the required 
reporting with information available on portfolio company financial 
statements. These changes, which are discussed in detail below and in 
section II.B of this Release, are intended to respond to industry 
concerns while still providing FSOC the information it needs to monitor 
the potential for systemic risk across the private fund industry. In 
general, we expect that these changes will reduce the burden of 
responding to the Form.

[[Page 71154]]

    Section 4 requires that large private equity advisers report 
certain information for each private equity fund they manage, including 
certain information about guarantees of portfolio company obligations 
and the leverage of the portfolio companies that the fund controls. 
Specifically, Question 66 requires information about the amount of 
guarantees that the adviser, the reporting fund or any other related 
person of the adviser issues in respect of a portfolio company's 
obligations.\314\ Questions 67 through 70 require the adviser to 
report: (1) The weighted average debt-to-equity ratio of controlled 
portfolio companies in which the fund invests, (2) the range of that 
debt-to-equity ratio among these portfolio companies and (3) the 
aggregate gross asset value of these portfolio companies.\315\
---------------------------------------------------------------------------

    \314\ Following consultation with staff representing FSOC's 
members, we have broadened the scope of this question to capture 
guarantees from the adviser and its related persons rather than just 
those from the reporting fund. This change is intended to allow FSOC 
and other regulators to confirm broadly whether the adviser or the 
reporting fund has direct or indirect exposure to the liabilities of 
portfolio companies in excess of the amounts of their investments. 
In addition to Question 66, the proposal included a separate 
question regarding the fund's borrowings, but a commenter pointed 
out that this substantially duplicated the information requested in 
Question 13 on Form PF, so the proposed question is not being 
adopted. See comment letter of George Merkl (Mar. 23, 2011). See 
also the Proposing Release, supra note 12, for the proposed version 
of Question 57 on Form PF.
    \315\ A ``controlled portfolio company'' is defined as a 
portfolio company that is controlled by the private equity fund, 
either alone or together with the private equity fund's affiliates 
or other persons that are, as of the reporting date, part of a club 
or consortium investing in the portfolio company. ``Control'' has 
the same meaning as used in Form ADV and generally means the power, 
directly or indirectly, to direct the management or policies of a 
person, whether through ownership of securities, by contract, or 
otherwise. See Glossary of Terms to Form PF; Glossary of Terms to 
Form ADV. One commenter suggested the average ratio required in 
Question 68 would be unreliable because it depends on accounting 
methodologies, which may vary. See PEGCC Letter. While this measure 
may have its limitations, the SEC believes, based on its staff's 
consultations with staff representing FSOC's members, that this 
question will provide an important indication of portfolio company 
leverage and is not aware of an alternative that would yield more 
reliable information without imposing additional burdens on 
advisers. Question 70, regarding the aggregate gross asset value of 
the reporting fund's controlled portfolio companies, has been added 
to provide a measure of scale as context for interpreting the 
average leverage ratio. An adviser must already know this 
information in order to calculate the average leverage ratio, so the 
SEC does not expect this addition to meaningfully increase the 
reporting burden.
---------------------------------------------------------------------------

    In addition, Questions 71 and 72 ask for the total amount of 
borrowings categorized as current liabilities and as long-term 
liabilities on the most recent balance sheets of the fund's controlled 
portfolio companies. These questions replace the question that the SEC 
proposed, which would have required advisers to report the maturity 
profile of the debt of its private equity funds' controlled portfolio 
companies.\316\ This change has been made in response to commenter 
concerns regarding the burden of gathering the data that would have 
been required to respond to the question as proposed.\317\ The SEC 
anticipates that these changes will reduce the burden of responding to 
these questions because less information is required and the 
information will be readily available on the financial statements of 
the fund's controlled portfolio companies.
---------------------------------------------------------------------------

    \316\ See the Proposing Release, supra note 12, (discussing the 
proposed version of Question 62 on Form PF).
    \317\ See IAA Letter.
---------------------------------------------------------------------------

    In response to Questions 73 and 74, the adviser must report the 
portion of the controlled portfolio companies' borrowings that is 
payment-in-kind or zero coupon,\318\ and whether the fund or any of its 
controlled portfolio companies experienced an event of default on any 
of its debt during the reporting period.\319\ In addition, Question 75 
requires the adviser to provide the identity of the institutions 
providing bridge financing to the adviser's controlled portfolio 
companies and the amount of that financing. Question 76 requires 
certain information if the fund controls any financial industry 
portfolio company, such as the portfolio company's name, its debt-to-
equity ratio, and the percentage of the portfolio company beneficially 
owned by the fund.\320\ Question 79 requires the adviser to report 
whether any of its related persons co-invest in any of the fund's 
portfolio companies.
---------------------------------------------------------------------------

    \318\ See Question 73 on Form PF. One commenter argued that the 
SEC should not include this question because it has not identified 
any systemic risk associated with this type of indebtedness. See 
PEGCC Letter. The indebtedness in question, however, allows the 
borrower to increase its leverage by deferring interest payments 
(all at a time subsequent to the creditors making their credit 
determinations) and may result in additional risk being shifted to 
systemically important financial institutions or other holders of 
the debt.
    \319\ See Question 74 on Form PF. One commenter suggested this 
question should cover only controlled portfolio companies rather 
than all of the fund's portfolio companies, and the SEC has made 
this change. See ABA Committees Letter; see also infra discussion 
accompanying notes 324-327. This commenter also suggested that 
potential events of default that have not ripened into events of 
default should not require an affirmative response, and the SEC has 
modified the instructions to this address this comment.
    \320\ A ``financial industry portfolio company'' generally is 
defined as a nonbank financial company, as defined in the Dodd-Frank 
Act, or a bank, savings association, bank holding company, financial 
holding company, savings and loan holding company, credit union, or 
other similar company regulated by a federal, state or foreign 
banking regulator. See Glossary of Terms to Form PF. One commenter 
suggested this question should cover only controlled portfolio 
companies rather than all of the fund's portfolio companies, and the 
SEC has made this change. See ABA Committees Letter; see also IAA 
Letter; see also infra discussion accompanying notes 324-327. The 
SEC has added a requirement to report the gross asset value of each 
financial industry portfolio company to provide a measure of scale 
as context for interpreting the leverage ratio. This information 
should be readily available on portfolio company financial 
statements, so the SEC does not expect this addition to meaningfully 
increase the reporting burden.
---------------------------------------------------------------------------

    The information that Question 66 requires is intended to provide 
FSOC information regarding the exposure of large private equity 
advisers and their funds to the risks of their portfolio companies. The 
information that Questions 67 through 76 require is designed to allow 
FSOC to assess the potential exposure of banks and other lenders to the 
portfolio companies of funds managed by large private equity advisers 
and to monitor whether trends in those areas could have systemic 
implications. Information reported in response to Question 76 is also 
intended to allow FSOC to monitor investments by the funds of large 
private equity advisers in companies in the financial industry that may 
be particularly important to the stability of the financial system.
    Finally, Questions 77 and 78 require a breakdown of the fund's 
investments by industry and by geography.\321\ Two commenters suggested 
removing these questions, arguing that the value of the information 
would not exceed the burden of reporting it.\322\ Regulators, however, 
will be able to use this information to monitor global and industry 
concentrations among private equity funds, and concentration is one of 
the factors that FSOC must consider in making a determination to 
designate a nonbank financial company for FRB supervision under the 
Dodd-Frank Act.\323\ In addition, the information required is largely 
based on the financial statements of the controlled portfolio companies 
and, therefore, should be readily available to the adviser.
---------------------------------------------------------------------------

    \321\ The SEC has modified the instructions to these questions 
to reflect clarifications suggested by a commenter. See Merkl 
February Letter. Question 78, which requires a geographical 
breakdown of investments in portfolio companies, has also been 
modified for reasons discussed above. See supra note 247 and 
accompanying text.
    \322\ See Merkl February Letter; PEGCC Letter.
    \323\ See section 113(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Most of the reporting in section 4 relates to portfolio companies 
because the SEC understands that leverage in private equity structures 
is generally incurred at the portfolio company level.

[[Page 71155]]

This reporting is limited to controlled portfolio companies, rather 
than portfolio companies generally, to ensure that advisers are able to 
obtain the relevant information without incurring potentially 
substantial additional burdens. Several commenters suggested, however, 
that the proposed standard of ``control'' was too low, leaving advisers 
responsible for reporting information they may not be entitled to 
access.\324\ The SEC is not persuaded that advisers are likely to have 
such difficulty obtaining the information required concerning 
controlled portfolio companies because the majority of this information 
is available from the financial statements of the portfolio companies 
or relates to the fund's own investments in the portfolio 
companies.\325\ In addition, modifications from the proposal have 
replaced a requirement for information that may not have been available 
on portfolio company financial statements with a requirement for 
information that will appear on any audited portfolio company's 
financial statements.\326\ Accordingly, the SEC is adopting the 
definition of ``controlled portfolio company'' substantially as 
proposed.\327\
---------------------------------------------------------------------------

    \324\ See, e.g., ABA Committees Letter (suggesting instead ``a 
standard of majority voting control''); IAA Letter (asserting that 
an adviser may not have access to some of the required data ``even 
if the fund owns 50% or more of such portfolio company''); PEGCC 
Letter. See supra note 315 (discussing the definition of 
``control.)''
    \325\ Advisers may not know the North American Industry 
Classification System, or NAICS, codes for its controlled portfolio 
companies, but this information should be readily obtainable from 
the company. The details regarding bridge loans required in Question 
75 on the Form may not be available directly from a controlled 
portfolio company's financial statements, but it is likely either 
that the adviser was involved in arranging or consenting to the 
loans (because the loans were an important part of the fund's 
investment in the company or because they were incurred after the 
fund obtained a controlling interest in the company) or were the 
subject of the fund's due diligence prior to investing in the 
company.
    \326\ See supra note 317 and accompanying text.
    \327\ The SEC has, however, made one change to this definition, 
which clarifies that whether a group is a club or consortium for 
this purpose should be determined as of the reporting date. In other 
words, the adviser need not aggregate the control rights of another 
fund with those of its own solely because, at some point prior to 
the reporting date, such as the date of acquisition, they formed a 
club or consortium.
---------------------------------------------------------------------------

    Two commenters supported collecting the information proposed to be 
required in section 4.\328\ However, they also argued that the required 
reporting should not be restricted to controlled portfolio companies 
but should extend to all of the fund's portfolio companies. In their 
view, the largest portfolio companies are the least likely to have a 
controlling shareholder and the most likely to pose systemic risk. The 
SEC is sensitive to this concern but believes at this time that 
requesting information regarding all portfolio companies would increase 
the difficulty of responding to section 4 without a sufficiently large 
corresponding increase in the value of the data collected.
---------------------------------------------------------------------------

    \328\ See AFL-CIO Letter; AFR Letter.
---------------------------------------------------------------------------

5. Aggregation of Master-Feeder Arrangements, Parallel Fund Structures 
and Parallel Managed Accounts
    For purposes of reporting information on Form PF, an adviser may 
provide information regarding master-feeder arrangements and parallel 
fund structures in the aggregate or separately, provided that it does 
so consistently throughout the Form.\329\ For example, an adviser may 
complete either a single section 1b for all of the funds in a master-
feeder arrangement or a separate section 1b for each fund in the 
arrangement. Any adviser choosing to aggregate funds in the reporting 
must check the ``yes'' box in Question 6 or Question 7, as applicable, 
and, in the case of Question 7, provide the additional information 
required with respect to the other funds in the parallel fund 
structure.\330\ Advisers are not required to report information 
regarding parallel managed accounts other than to complete Question 11 
in section 1b of the Form.\331\
---------------------------------------------------------------------------

    \329\ See Instructions 5 and 6 to Form PF. The aggregation 
requirements for reporting purposes differ from the aggregation 
requirements for determining whether the adviser or any fund meets a 
reporting threshold. See supra section II.A.5. A ``parallel fund 
structure'' is a structure in which one or more private funds 
pursues substantially the same investment objective and strategy and 
invests side by side in substantially the same positions as another 
private fund. See Glossary of Terms to Form PF. A ``master-feeder 
arrangement'' is an arrangement in which one or more funds (``feeder 
funds'') invest all or substantially all of their assets in a single 
private fund (``master fund'').
    \330\ See also supra note 193 and accompanying text.
    \331\ See Instructions 5 and 6 to Form PF. See also supra note 
197.
---------------------------------------------------------------------------

    These aggregation requirements have been modified from the 
proposal, which would have required advisers to report aggregated 
information regarding master-feeder arrangements and parallel managed 
accounts but separate information regarding parallel funds. One 
commenter recommended that ``the Commissions instead provide managers 
with flexibility to provide information about private funds in a manner 
that best represents the activities of their funds and is consistent 
with their internal reporting procedures, while providing complete 
information to regulators.'' \332\ We are persuaded that requiring 
advisers to aggregate or disaggregate funds in a manner inconsistent 
with their internal recordkeeping and reporting may impose additional 
burdens and that, so long as the structure of those arrangements is 
adequately disclosed, a prescriptive approach to aggregation is not 
necessary.
---------------------------------------------------------------------------

    \332\ MFA Letter.
---------------------------------------------------------------------------

    With respect to parallel managed accounts, commenters encouraged us 
not to require aggregation for reporting purposes or at least limit the 
questions that require advisers to aggregate parallel managed accounts 
for reporting purposes.\333\ In particular, these commenters argued 
that aggregating these funds for reporting purposes would be difficult 
and ``result in inconsistent and misleading data'' because their 
characteristics are often somewhat different from the funds with which 
they are managed.\334\ We are persuaded that including parallel managed 
accounts in the reporting may reduce the quality of data while imposing 
additional burdens on advisers. As a result, the instructions have been 
revised so that advisers are not required to aggregate parallel managed 
accounts with their private funds for reporting purposes.\335\ A 
question has, however, been added to the Form requiring advisers to 
report the total amount of parallel managed accounts related to each 
reporting fund.\336\ This will allow FSOC to take into account the 
greater amount of assets an adviser may be managing using a given 
strategy for purposes of analyzing the data reported on Form PF.
---------------------------------------------------------------------------

    \333\ See, e.g., IAA Letter; TCW Letter. One commenter agreed 
that the proposal appropriately required reporting on parallel 
managed accounts. See AIMA General Letter. For the reasons discussed 
below, however, we are persuaded that the better approach is not to 
require aggregation of these accounts for reporting purposes.
    \334\ IAA Letter. See also MFA Letter.
    \335\ See Instructions 5 and 6 to Form PF. The approach we are 
adopting is also similar to the approach used in the FSA Survey, 
which asks for only limited information regarding ``strategy 
assets.'' See IAA Letter.
    \336\ See question 12 of Form PF.
---------------------------------------------------------------------------

D. Confidentiality of Form PF Data

    Form PF elicits non-public information about private funds and 
their trading strategies, the public disclosure of which could 
adversely affect the funds and their investors. The SEC does not intend 
to make public Form PF information identifiable to any particular 
adviser or private fund, although the SEC may use Form PF information 
in an enforcement action. The Dodd-Frank Act amends the Advisers Act to 
preclude the SEC from being compelled to reveal this information except 
in very limited

[[Page 71156]]

circumstances.\337\ Similarly, the Dodd-Frank Act exempts the CFTC from 
being compelled under FOIA to disclose to the public any information 
collected through Form PF and requires that the CFTC maintain the 
confidentiality of that information consistent with the level of 
confidentiality established for the SEC in section 204(b) of the 
Advisers Act.\338\ The Commissions will make information collected 
through Form PF available to FSOC, as the Dodd-Frank Act requires, 
subject to the confidentiality provisions of the Dodd-Frank Act.\339\
---------------------------------------------------------------------------

    \337\ See Proposing Release, supra note 12, at n.39.
    \338\ Form PF data is filed with the SEC, and made available to 
the CFTC, pursuant to section 204(b) of the Advisers Act, making 
this data subject to the confidentiality protections applicable to 
data required to be filed under that section.
    \339\ See section 204(b) of the Advisers Act.
---------------------------------------------------------------------------

    The Dodd-Frank Act contemplates that Form PF data may also be 
shared with other Federal departments or agencies or with self-
regulatory organizations, in addition to the CFTC and FSOC, for 
purposes within the scope of their jurisdiction.\340\ In each case, any 
such department, agency or self-regulatory organization would be exempt 
from being compelled under FOIA to disclose to the public any 
information collected through Form PF and must maintain the 
confidentiality of that information consistent with the level of 
confidentiality established for the SEC in section 204(b) of the 
Advisers Act.\341\ Prior to sharing any Form PF data, the SEC also 
intends to require that any such department, agency or self-regulatory 
organization represent to us that it has in place controls designed to 
ensure the use and handling of Form PF data in a manner consistent with 
the protections established in the Dodd-Frank Act.\342\
---------------------------------------------------------------------------

    \340\ See section 204(b)(8)(B)(i) of the Advisers Act.
    \341\ See sections 204(b)(9) and (10) of the Advisers Act.
    \342\ This would be consistent with the SEC's current practice 
of requiring that it receive, prior to sharing nonpublic information 
with other regulators, ``such assurances of confidentiality as the 
[SEC] deems appropriate.'' See section 24(c) of the Exchange Act and 
rule 24c-1 thereunder.
---------------------------------------------------------------------------

    Certain aspects of the Form PF reporting requirements also help to 
mitigate the potential risk of inadvertent or improper disclosure. For 
instance, because data on Form PF generally could not, on its own, be 
used to identify individual investment positions, the ability of a 
competitor to use Form PF data to replicate a trading strategy or trade 
against an adviser is limited.\343\ In addition, the deadlines for 
filing Form PF have, in most cases, been significantly extended from 
the proposal.\344\ Some commenters supported these extensions in part 
because filings will, as a result, generally contain less current, and 
therefore less sensitive, data.\345\
---------------------------------------------------------------------------

    \343\ Questions 26, 30, 35 and 57 on Form PF ask about exposures 
of the reporting fund but require only that the adviser identify the 
exposure within broad asset classes, not the individual investment 
position. Large private equity advisers must identify any financial 
industry portfolio companies in which the reporting fund has a 
controlling interest, but these investments are likely to be in 
private companies whose securities are not widely traded (and, 
therefore, do not raise the same trading concerns) or in public 
companies about which information regarding significant beneficial 
owners is already made public under sections 13(d) and 13(g) of the 
Exchange Act.
    \344\ See supra section II.B.2 of this Release (discussing 
filing deadlines).
    \345\ See infra note 351 and accompanying text.
---------------------------------------------------------------------------

    In addition, our staff is working to design controls and systems 
for the use and handling of Form PF data in a manner that reflects the 
sensitivity of this data and is consistent with the confidentiality 
protections established in the Dodd-Frank Act. As discussed below, this 
will include programming the Form PF filing system with appropriate 
confidentiality protections.\346\ For instance, SEC staff is studying 
whether multiple access levels can be established so that SEC employees 
are allowed only as much access as is reasonably needed in connection 
with their duties.
---------------------------------------------------------------------------

    \346\ See infra section II.E of this Release.
---------------------------------------------------------------------------

    Several commenters confirmed that the information collected on Form 
PF is competitively sensitive or proprietary and emphasized the 
importance of controls for safekeeping.\347\ These commenters also made 
several recommendations for protecting the data, including: (1) Storing 
identifying information using a code; \348\ (2) limiting the ability to 
transfer Form PF data by email or portable media; \349\ (3) limiting 
access to personnel who ``need to know''; \350\ (4) extending filing 
deadlines so the data contains less current information; \351\ and (5) 
sharing the data with other regulators only in aggregated and anonymous 
form.\352\ As discussed above, the deadlines for filing Form PF have, 
in most cases, been significantly extended from the proposal.\353\ SEC 
staff is also carefully considering the other recommendations of 
commenters in designing controls and systems for Form PF.
---------------------------------------------------------------------------

    \347\ See, e.g., ABA Committees Letter; AIMA General Letter; 
CPIC Letter; MFA Letter; SIFMA Letter.
    \348\ ABA Committees Letter; Kleinberg General Letter; Seward 
Letter.
    \349\ ABA Committees Letter.
    \350\ Id.
    \351\ AIMA General Letter; Kleinberg General Letter.
    \352\ AIMA General Letter; Seward Letter.
    \353\ See supra notes 344-345 and accompanying text.
---------------------------------------------------------------------------

    In advance of the compliance date for Form PF, SEC staff will 
review the controls and systems in place for the use and handling of 
Form PF data.\354\ Depending on the progress at that time toward the 
development and deployment of these controls and systems, the SEC will 
consider whether to delay the compliance date for Form PF.
---------------------------------------------------------------------------

    \354\ See infra section III of this Release (discussing the 
compliance date for Form PF).
---------------------------------------------------------------------------

E. Filing Fees and Format for Reporting

    Under Advisers Act rule 204(b)-1(b), Form PF must be filed through 
an electronic system designated by the SEC for this purpose. On 
September 30, 2011, the SEC issued notice of its determination that the 
Financial Industry Regulatory Authority (``FINRA'') will develop and 
maintain the filing system for Form PF as an extension of the existing 
Investment Adviser Registration Depository (``IARD'').\355\ This filing 
system will have certain features, including being programmed to 
reflect the heightened confidentiality protections created for Form PF 
filing information under the Dodd-Frank Act and allow for secure access 
by FSOC and other regulators as permitted under the Dodd-Frank Act.
---------------------------------------------------------------------------

    \355\ See Approval of Filing Fees for Exempt Reporting Advisers 
and Private Fund Advisers, Investment Advisers Act Release No. IA-
3297 (Sept. 30, 2011), 76 FR 62100 (Oct. 6, 2011).
---------------------------------------------------------------------------

    Under the Advisers Act rule 204(b)-1, advisers required to file 
Form PF must pay to the operator of the Form PF filing system fees that 
the SEC has approved.\356\ The SEC in a separate order has approved 
filing fees that reflect the costs reasonably associated with these 
filings and the development and maintenance of the filing system.\357\
---------------------------------------------------------------------------

    \356\ See Advisers Act rule 204(b)-1(d); section 204(c) of the 
Advisers Act.
    \357\ See Order Approving Filing Fees for Exempt Reporting 
Advisers and Private Fund Advisers, Investment Advisers Act Release 
No. IA-3305 (Oct. 24, 2011).
---------------------------------------------------------------------------

    We are working with FINRA to allow advisers to file Form PF either 
through a fillable form on the system Web site or through a batch 
filing process utilizing the eXtensible Markup Language (``XML'') 
tagged data format. In connection with the batch filing process, we 
anticipate publishing a taxonomy of XML data tags in advance of the 
compliance date for Form PF. We believe that certain advisers may 
prefer to report in XML format because it allows them to automate 
aspects of their reporting and thus minimize burdens and generate 
efficiencies for the adviser.

[[Page 71157]]

    Commenters who addressed this aspect of the proposal supported 
having FINRA develop the reporting system as an extension of the IARD 
platform.\358\ Commenters also supported a batch filing capability, 
with one specifically agreeing that ``[a]utomated submission of 
information via the IARD or other electronic system to [utilize] the 
eXtensible Markup Language (XML) tagged data format or similar format 
is likely to be an important time saver for a large number of firms.'' 
\359\
---------------------------------------------------------------------------

    \358\ See AIMA General Letter (agreeing that using the IARD and 
FINRA is a ``sensible solution.''); MFA Letter. We explained in the 
Form PF Proposing Release that the filing system would need to be 
programmed with special confidentiality protections designed to 
ensure the heightened confidentiality protections created for Form 
PF filing information under the Dodd-Frank Act. See Proposing 
Release, supra note 12, at n. 9 and accompanying text and section 
II.E. These commenters expressed the view that maintaining the 
confidentiality of Form PF data is an important consideration in 
developing the filing system. Our staffs are working closely with 
FINRA in designing controls and systems to ensure that Form PF data 
is handled and used in a manner consistent with the protections 
established in the Dodd-Frank Act, and as noted above, we are 
carefully considering recommendations from commenters in designing 
controls and systems for the use and handling of Form PF data.
    \359\ AIMA General Letter. See also Kleinberg General Letter.
---------------------------------------------------------------------------

III. Effective and Compliance Dates

    The effective date for CEA rule 4.27, Advisers Act rule 204(b)-1 
and Form PF is March 31, 2012.
    The Commissions are adopting a two-stage phase-in period for 
compliance with Form PF filing requirements. For the following 
advisers, the compliance date for CEA rule 4.27 and Advisers Act rule 
204(b)-1 is June 15, 2012:
     Any adviser having at least $5 billion in assets under 
management attributable to hedge funds as of the last day of the fiscal 
quarter most recently completed prior to June 15, 2012; \360\
---------------------------------------------------------------------------

    \360\ For this purpose, advisers must calculate the value of 
assets under management pursuant to the instructions in Form ADV and 
aggregate assets under management in the same manner as they would 
when determining whether they satisfy reporting thresholds under 
Form PF. See supra section II.A.5 of this Release.
---------------------------------------------------------------------------

     Any adviser managing a liquidity fund and having at least 
$5 billion in combined assets under management attributable to 
liquidity funds and registered money market funds as of the last day of 
the fiscal quarter most recently completed prior to June 15, 2012; 
\361\ and
---------------------------------------------------------------------------

    \361\ Id.
---------------------------------------------------------------------------

     Any adviser having at least $5 billion in assets under 
management attributable to private equity funds as of the last day of 
its first fiscal year to end on or after June 15, 2012.\362\
---------------------------------------------------------------------------

    \362\ Id.
---------------------------------------------------------------------------

    For instance, an adviser with $5 billion in hedge fund assets under 
management as of March 31, 2012, must file its first Form PF within 60 
days following June 30, 2012.\363\ In addition, an adviser having a 
June 30 fiscal year end and $5 billion in private equity fund assets 
under management as of June 30, 2012, must file its first Form PF 
within 120 days following June 30, 2012.\364\
---------------------------------------------------------------------------

    \363\ This assumes the adviser's fiscal quarters are based on 
calendar quarters. Of course, if the adviser also exceeds the 
threshold for liquidity fund advisers, its filing would be due 
within 15 days.
    \364\ This assumes the adviser does not also exceed the $5 
billion threshold for hedge fund or liquidity fund advisers.
---------------------------------------------------------------------------

    For all other advisers, the compliance date for CEA rule 4.27 and 
Advisers Act rule 204(b)-1 is December 15, 2012. As a result, most 
advisers must file their first Form PF based on information as of 
December 31, 2012.
    This timing provides most private fund advisers with a significant 
amount of time to prepare for filing, requiring only the largest 
advisers, whose resources and systems should better position them to 
begin reporting, to report in less than a year following adoption of 
Form PF. This approach is designed to balance the need for regulators 
to begin collecting and analyzing data regarding the private fund 
industry with the ability of advisers to efficiently prepare for 
filing. We currently anticipate that this timeframe will also give the 
SEC sufficient time to create and program a system to accept filings of 
Form PF.\365\
---------------------------------------------------------------------------

    \365\ The SEC is working closely with FINRA to create and 
program a system for Form PF filings, and FINRA expects to be able 
to accept Form PF filings in this timeframe.
---------------------------------------------------------------------------

    We are adopting compliance dates that significantly extend the 
proposed compliance date of December 15, 2011. We are taking this 
approach, in part, because we are adopting these rules later than 
originally expected. The revised approach is also intended to respond 
to commenters who recommended a later compliance date. These commenters 
argued that the proposed compliance date would have provided advisers 
insufficient ``time to identify the information to be included, 
establish automated systems and procedures to collect and calculate the 
information, and develop procedures to review, complete and verify the 
Form.'' \366\ A majority of these commenters suggested extending 
compliance to at least nine months after publication of the final Form, 
though some argued for a year or more.\367\ In support of an extended 
compliance date, commenters emphasized that, without sufficient time to 
prepare for the initial filing, the reporting process will be manually 
intensive or require costly system enhancements.\368\ As explained 
above, our revised approach is designed to provide the largest 
advisers, whose resources and systems should better position them to 
begin reporting, at least eight months before they start filing Form 
PF, and the vast majority of advisers will have over a year before 
their first Form PF is due.
---------------------------------------------------------------------------

    \366\ MFA Letter. See also infra note 367.
    \367\ See, e.g., AIMA General Letter (nine months); BlackRock 
Letter (nine months); CPIC Letter (one year); Fidelity Letter (one 
year); IAA Letter (nine months); Kleinberg General Letter (one 
year); MFA Letter (nine months); PEGCC Letter (one year); TCW Letter 
(nine months); Seward Letter (two years); SIFMA Letter (nine 
months); USCC Letter (270 days).
    \368\ See AIMA General Letter; Kleinberg General Letter.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    SEC:
    Section 204(b) of the Advisers Act directs the SEC to require 
private fund advisers to file reports containing such information as 
the SEC deems necessary and appropriate in the public interest and for 
investor protection or for the assessment of systemic risk. Rule 
204(b)-1 and Form PF under the Advisers Act implement this requirement. 
Form PF contains a new ``collection of information'' within the meaning 
of the Paperwork Reduction Act (``PRA'').\369\ The title for the new 
collection of information is: ``Form PF under the Investment Advisers 
Act of 1940, reporting by investment advisers to private funds.'' For 
purposes of this PRA analysis, the paperwork burden associated with the 
requirements of rule 204(b)-1 is included in the collection of 
information burden associated with Form PF and thus does not entail a 
separate collection of information. The SEC is submitting this 
collection of information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \369\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    Form PF is intended to provide FSOC with information that will 
assist it in fulfilling its obligations under the Dodd-Frank Act 
relating to nonbank financial companies and systemic risk 
monitoring.\370\ The SEC may also use the information in connection 
with its regulatory and examination programs.

[[Page 71158]]

The respondents to Form PF are private fund advisers.\371\ Compliance 
with Form PF is mandatory for any private fund adviser that had at 
least $150 million in regulatory assets under management attributable 
to private funds as of the end of its most recently completed fiscal 
year.
---------------------------------------------------------------------------

    \370\ See supra section I.A of this Release; see also of the 
Proposing Release, supra note 12, at section II.A.
    \371\ The requirement to file the Form applies to any investment 
adviser registered, or required to register, with the SEC that 
advises one or more private funds and had at least $150 million in 
regulatory assets under management attributable to private funds as 
of the end of its most recently completed fiscal year. See Advisers 
Act rule 204(b)-1(a). It does not apply to state-registered 
investment advisers or exempt reporting advisers.
---------------------------------------------------------------------------

    Specifically, smaller private fund advisers must report annually 
and provide only basic information regarding their operations and the 
private funds they advise. Large private equity advisers also must 
report on an annual basis but are required to provide additional 
information with respect to the private equity funds they manage. 
Finally, large hedge fund advisers and large liquidity fund advisers 
must report on a quarterly basis and provide more information than 
other private fund advisers.\372\ The PRA analysis set forth below 
takes into account the difference in filing frequencies among different 
categories of private fund adviser. It also reflects the fact that the 
additional information Form PF requires large hedge fund advisers to 
report is more extensive than the additional information required from 
large liquidity fund advisers, which in turn is more extensive than 
that required from large private equity advisers.
---------------------------------------------------------------------------

    \372\ See section II.A of this Release (describing who must file 
Form PF), section II.B of this Release (discussing the frequency 
with which private fund advisers must file Form PF), section II.C.2 
of this Release (describing the information that large hedge fund 
advisers must report on Form PF), and sections II.C.3 and II.C.4 of 
this Release (describing the information that large liquidity and 
private equity fund advisers must report on Form PF). See also 
Instruction 9 to Form PF (discussing the frequency with which 
private fund advisers must file Form PF).
---------------------------------------------------------------------------

    As discussed in section II of this Release, the SEC has sought to 
minimize the reporting burden on private fund advisers to the extent 
appropriate. In particular, the SEC has taken into account an adviser's 
size and the types of private funds it manages in designing scaled 
reporting requirements. In addition, where practical, the SEC has 
permitted advisers to rely on their existing practices and 
methodologies to report information on Form PF.\373\
---------------------------------------------------------------------------

    \373\ The SEC also believes that private fund advisers already 
collect or calculate some of the information required on the Form at 
least as often as they must file the Form. See supra note 146.
---------------------------------------------------------------------------

    Advisers must file Form PF through the Form PF filing system on the 
IARD.\374\ Responses to the information collections will be kept 
confidential to the extent permitted by law.\375\
---------------------------------------------------------------------------

    \374\ See section II.E of this Release.
    \375\ See section II.D. of this Release.
---------------------------------------------------------------------------

A. Burden Estimates for Annual Reporting by Smaller Private Fund 
Advisers

    In the Implementing Adopting Release, the SEC estimated that there 
will be approximately 4,270 SEC-registered advisers managing private 
funds after taking into account recent changes to the Advisers Act and 
a year of normal growth in the population of registered advisers.\376\ 
The SEC estimates that approximately 700 of these advisers will not be 
required to file Form PF because they have less than $150 million in 
private fund assets under management.\377\ Accordingly, the SEC 
anticipates that, when advisers begin reporting on Form PF, a total of 
approximately 3,570 advisers will be required to file all or part of 
the Form.\378\ Out of this total number, the SEC estimates that 
approximately 3,070 will be smaller private fund advisers, not meeting 
the thresholds as Large Private Fund Advisers.\379\ Commenters did not 
address the SEC's estimates of the total number of respondents or the 
number of smaller private fund advisers.\380\
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    \376\ Specifically, the SEC estimated that (1) 3,320 private 
fund advisers that are currently registered with the SEC will remain 
registered after certain advisers make the switch to state 
registration prompted by the Dodd-Frank Act's amendments to section 
203A of the Advisers Act, (2) 750 advisers to private funds will 
register with the Commission as a result of the Dodd-Frank Act's 
elimination of the private adviser exemption and (3) 200 additional 
advisers to private funds will register in the next year. See 
Implementing Adopting Release, supra note 11, at n.637 and 
accompanying text. Estimates of registered private fund advisers are 
based in part on the number of advisers that reported a fund in 
Section 7.B of Schedule D to the version of Form ADV in use prior to 
the date of this release. Because these responses included funds 
that the adviser's related persons manage as well as those the 
adviser itself manages, these data may over-estimate the total 
number of private fund advisers.
    \377\ Based on IARD data as of October 1, 2011. See supra 
section II.A of this Release for a discussion of the minimum 
reporting threshold.
    \378\ 4,270 total private fund advisers - 700 with less than 
$150 million in private fund assets under management = 3,570 
advisers. The SEC notes, however, that if a private fund is advised 
by both an adviser and one or more subadvisers, only one of these 
advisers is required to complete Form PF. See section II.A.6 of this 
Release. As a result, it is likely that some portion of these 
advisers either will not be required to file Form PF or will be 
subject to a reporting burden lower than is estimated for purposes 
of this PRA analysis. The SEC has not attempted to adjust the burden 
estimates downward for this purpose because the SEC does not 
currently have reliable data with which to estimate the number of 
funds that have subadvisers.
    \379\ Based on the estimated total number of registered private 
fund advisers that would not meet the thresholds to be considered 
Large Private Fund Advisers. (3,570 estimated registered private 
fund advisers - 250 large hedge fund advisers - 80 large liquidity 
fund advisers - 170 large private equity fund advisers = 3,070 
smaller private fund advisers.)
    \380\ The SEC has updated these estimates to reflect: (1) 
Updated data from IARD, (2) the addition of a minimum reporting 
threshold of $150 million in private fund assets, which reduces the 
number of advisers subject to the reporting requirements, and (3) 
the revised estimates of large hedge fund advisers and large private 
equity advisers discussed in section II.A.4 of this Release. See 
supra section II.A of this Release and notes 88 and 89.
---------------------------------------------------------------------------

    Smaller private fund advisers must complete all or portions of 
section 1 of Form PF and file on an annual basis. As discussed in 
greater detail above, section 1 requires basic data regarding the 
reporting adviser's identity and certain information about the private 
funds it manages, such as performance, leverage and investor data.\381\ 
If the reporting adviser manages any hedge funds, section 1 also 
requires basic information regarding those funds, including their 
investment strategies, counterparty exposures and trading and clearing 
practices.
---------------------------------------------------------------------------

    \381\ See supra section II.C.1.
---------------------------------------------------------------------------

    The SEC estimates that smaller private fund advisers will require 
an average of approximately 40 burden hours to compile, review and 
electronically file the required information in section 1 of Form PF 
for the initial filing and an average of approximately 15 burden hours 
for subsequent filings.\382\ These estimates reflect an increase 
compared to the proposal from 10 to 40 hours for the initial filing and 
from 3 to 15 hours for subsequent filings.
---------------------------------------------------------------------------

    \382\ These estimates are based, in part, on the SEC's 
understanding that much of the information in sections 1a and 1b of 
Form PF is currently maintained by most private fund advisers in the 
ordinary course of business. See supra note 146. In addition, the 
SEC expects the time required to determine the amount of the 
adviser's assets under management that relate to private funds of 
various types to be largely included in the approved burden 
associated with the SEC's Form ADV. As a result, responding to 
questions on Form PF that relate to assets under management and 
determining whether an adviser is a Large Private Fund Adviser 
should impose little or no additional burden on private fund 
advisers. Of course, not all questions on Form PF impose the same 
burden, and the burden of responding to questions may vary 
substantially from adviser to adviser. These estimates are intended 
to reflect averages for compiling, reviewing and filing the Form, do 
not indicate the time that may be spent on specific questions and 
may not reflect the time spent by an individual adviser.
---------------------------------------------------------------------------

    The SEC has increased these estimates to reflect comments 
suggesting that the estimates included in the proposal were too 
low.\383\ Commenters did not provide alternative estimates for these 
burdens. However, commenters addressing the

[[Page 71159]]

large hedge fund adviser burdens did provide alternative 
estimates.\384\ As discussed below, the SEC is also increasing its hour 
burden estimates with respect to large hedge fund advisers based on, 
among other things, the estimates these commenters provided.\385\ In 
the absence of specific commenter estimates for the smaller adviser 
reporting burden, the SEC has, therefore, scaled these estimates in 
proportion to the increases it is making to its burden hour estimates 
for large hedge fund advisers.
---------------------------------------------------------------------------

    \383\ See, e.g., AIMA General Letter; IAA Letter; SIFMA Letter.
    \384\ See, e.g., MFA Letter.
    \385\ See infra section IV.B of this Release.
---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken 
into account changes from the proposal that it expects, on the whole, 
to mitigate the burden of reporting the information required in section 
1. For instance, we have modified the requirement to report performance 
by allowing advisers to report monthly and quarterly results only if 
such results are already calculated for the fund.\386\ In addition, we 
have removed from section 1b a question requiring identification of 
significant creditors and substantially reduced the amount of 
information required with respect to trading and clearing practices in 
section 1c.\387\ We have also made several global changes to the Form 
that we anticipate will reduce the burden of reporting. These include 
the removal of the certification, the increased ability of advisers to 
rely on their existing methodologies and recordkeeping practices and 
allowing advisers to omit information regarding parallel managed 
accounts from their responses to the Form.\388\ We have also added four 
new questions in section 1b that will increase the burden of completing 
that portion of the Form, but the SEC expects the other changes 
described above to result in a net reduction in the burden of 
completing the Form relative to the proposal.\389\
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    \386\ Several commenters argued that carrying out valuations to 
report monthly and quarterly performance for private equity funds 
would result in significant cost burdens and require significantly 
more time than was estimated. See, e.g., comment letter of Atlas 
Holdings (March 9, 2011) (``Atlas Letter''); PEGCC Letter. We have, 
however, modified the reporting requirements so that advisers only 
need to provide monthly and quarterly performance results to the 
extent already calculated. See supra notes 198-202 and accompanying 
text. In other words, because advisers will have always already 
calculated the required performance data for purposes other than 
reporting on Form PF, the burden of reporting it on the Form is 
essentially one of data entry.
    \387\ One commenter suggested the question we removed would have 
been ``very burdensome.'' See PEGCC Letter.
    \388\ See, e.g., supra section II.C.5 of this Release and notes 
183-188 and accompanying text.
    \389\ See supra section II.C.1 of this Release. The SEC 
originally proposed one of the new questions on Form ADV, and it 
requires that advisers report the assets and liabilities of each 
fund broken down using categories that are based on the fair value 
hierarchy established under GAAP. For advisers obtaining fund audits 
in accordance with GAAP or a similar international accounting 
standard, the burden of this question is simply that of entering the 
data on the Form. In the Implementing Adopting Release, the SEC 
estimated that approximately 3% of registered advisers have at least 
one private fund client that may not be audited. See Implementing 
Adopting Release, supra note 11, at nn. 634-636 and accompanying 
text. For this sub-group of advisers, the cost and hour burdens of 
determining fair values for the funds' assets have already been 
accounted for in connection with Form ADV because advisers are 
required to report regulatory assets under management in that form 
using the fair value of private fund assets. See Implementing 
Adopting Release, supra note 11, at section VI and nn. 632-641 and 
723 and accompanying text. The question does not require advisers to 
determine the fair value of liabilities for which they do not 
already make such determination, so this sub-group of advisers would 
not incur an incremental cost to fair value liabilities in order to 
respond to this question. This sub-group of advisers may incur an 
additional hours burden to determine the categories applicable to 
the fund's assets and liabilities, and in determining to increase 
its average hour burden estimates for both smaller private fund 
advisers and Large Private Fund Advisers, the SEC has taken into 
account the contribution of this additional hours burden.
---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized 
average annual burden of periodic filings will be 23 hours per smaller 
private fund adviser for each of the first three years,\390\ and the 
amortized aggregate annual burden of periodic filings for smaller 
private fund advisers will be 70,600 hours for each of the first three 
years.\391\
---------------------------------------------------------------------------

    \390\ The SEC estimates that a smaller private fund adviser will 
make 3 annual filings in three years, for an amortized average 
annual burden of 23 hours (1 initial filing x 40 hours + 2 
subsequent filings x 15 hours = 70 hours; and 70 hours / 3 years = 
approximately 23 hours). After the first three years, filers 
generally will not incur the start-up burdens applicable to the 
first filing.
    \391\ 23 burden hours on average per year x 3,070 smaller 
private fund advisers = 70,600 burden hours per year.
---------------------------------------------------------------------------

B. Burden Estimates for Large Hedge Fund Advisers

    The SEC estimates that 250 advisers will be classified as large 
hedge fund advisers.\392\ As discussed above, large hedge fund advisers 
must complete section 1 of the Form and provide additional information 
regarding the hedge funds they manage in section 2 of the Form. These 
advisers must report information regarding the hedge funds they manage 
on a quarterly basis.
---------------------------------------------------------------------------

    \392\ See supra note 88.
---------------------------------------------------------------------------

    Because large hedge fund advisers generally must report more 
information on Form PF than other private fund advisers, the SEC 
estimates that these advisers will require, on average, more hours than 
other Large Private Fund Advisers to configure systems and to compile, 
review and electronically file the required information. Accordingly, 
the SEC estimates that large hedge fund advisers will require an 
average of approximately 300 burden hours for an initial filing and 140 
burden hours for each subsequent filing.\393\
---------------------------------------------------------------------------

    \393\ The estimates of hour burdens and costs for large hedge 
fund advisers provided in the Paperwork Reduction Act and cost-
benefit analyses are based, in part, on burden data that advisers 
provided in response to the FSA Survey and on the experience of SEC 
staff. These estimates also assume that some Large Private Fund 
Advisers will find it efficient to automate some portion of the 
reporting process, which will increase the burden of the initial 
filing but reduce the burden of subsequent filings. This efficiency 
gain is reflected in our burden estimates, which are higher for the 
first report than subsequent reports, and certain of the anticipated 
automation costs are accounted for in our cost estimates. See infra 
note 435 and accompanying text. Of course, not all questions on Form 
PF impose the same burden, and the burden of responding to questions 
may vary substantially from adviser to adviser. These estimates are 
intended to reflect averages for compiling, reviewing and filing the 
Form, do not indicate the time that may be spent on specific 
questions and may not reflect the time spent by an individual 
adviser.
---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from 
75 to 300 hours for the initial filing and from 35 to 140 hours for 
subsequent filings. The SEC has increased these estimates to reflect 
comments suggesting that the estimates included in the proposal were 
too low.\394\ One industry group reported that some members attempted 
to complete the proposed version of Form PF for one or more funds and, 
``[b]ased on their experience, and recognizing that efficiencies will 
develop over time, [this group estimated] that large managers on 
average will expend 150-300 hours to submit the initial Form.'' \395\ 
The SEC has revised its

[[Page 71160]]

estimates in this PRA analysis based on the top end of this range, 
which represents a conservative interpretation of this commenter's 
estimate. This approach appears justified in this case based on other 
comments suggesting that the hours burden imposed on these advisers 
could be significantly higher than the SEC estimated in the Proposing 
Release.\396\
---------------------------------------------------------------------------

    \394\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General 
Letter; MFA Letter; TCW Letter.
    \395\ MFA Letter. This commenter referred to ``large managers'' 
generally, but based on the context, this comment appears to relate 
to large hedge fund advisers specifically. This commenter went on to 
state that ``managers with more complex strategies will expend 
considerably more time.'' Other commenters addressing these 
estimates did not provide alternative estimates, though one 
indicated that some clients had already exceeded the Proposing 
Release's estimates in preparing to report on the proposed Form and 
another commenter, itself one of the largest private fund advisers 
in the United States, argued that the estimates were understated by 
``orders of magnitude.'' See BlackRock Letter; see also Kleinberg 
General Letter. In addition, advisers that manage many funds may 
incur higher costs than advisers that manage fewer funds even if 
they manage similar amounts of assets. The SEC's estimates are 
intended to reflect average burdens, and it recognizes that 
particular advisers may, based on their circumstances, incur burdens 
substantially greater than or less than the estimated averages. In 
addition, we have based our estimates in part on data that advisers 
provided in response to the FSA Survey regarding the time required 
to complete that survey. Although Form PF generally requires more 
information regarding hedge funds than the FSA Survey, the SEC 
believes, based on this data and based on the MFA comment letter, 
that the average burden of completing Form PF is very unlikely to be 
in the thousands or tens of thousands of hours.
    \396\ See supra note 394 and accompanying text.
---------------------------------------------------------------------------

    The SEC notes, however, that this commenter's estimates were based 
on the Form as proposed and we have made a number of changes from the 
proposal that we expect, on the whole, to mitigate significantly the 
reporting burden. For example, we have modified a number of questions 
to reduce the amount of detail required or to allow advisers to rely 
more on their existing methodologies or recordkeeping practices, 
including questions regarding trading and clearing practices, interest 
rate sensitivities, geographical concentrations, turnover, collateral 
practices, CCP exposures and sensitivities to changes in specified 
market factors.\397\ We have also made several global changes to the 
Form that we anticipate will reduce the burden of reporting. These 
include allowing large hedge fund advisers to report only annually on 
funds that are not hedge funds, the removal of the certification, 
expanding the ability to disregard funds of funds and allowing advisers 
to omit information regarding parallel managed accounts from their 
responses to the Form.\398\ We have also added four new questions in 
section 1b, which will increase the burden of completing that portion 
of the Form.\399\ The SEC believes, however, that the increased burden 
attributable to these new questions is less than the reduced burden 
attributable to other changes to the Form because the new questions 
require limited information that, in many cases, will be readily 
available to advisers while some of the SEC's modifications to reduce 
the reporting burdens are intended to address areas of the Form that 
commenters identified as particularly burdensome. In light of these 
changes, the SEC believes that the commenter estimates, which were 
based on the proposed Form, likely represent an upper bound of the 
average burden to large hedge fund advisers.
---------------------------------------------------------------------------

    \397\ See supra section II.C.1 and II.C.2 of this Release.
    \398\ See, e.g., supra sections II.B.1 and II.C.5 of this 
Release and notes 129 and 183-188 and accompanying text.
    \399\ See supra section II.C.1.
---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized 
average annual burden of periodic filings will be 610 hours per large 
hedge fund adviser for each of the first three years.\400\ In the 
aggregate, the amortized annual burden of periodic filings will then be 
153,000 hours for large hedge fund advisers for each of the first three 
years.\401\
---------------------------------------------------------------------------

    \400\ The SEC estimates that a large hedge fund adviser will 
make 12 quarterly filings in three years, for an amortized average 
annual burden of 610 hours (1 initial filing x 300 hours + 11 
subsequent filings x 140 hours = 1,840 hours; and 1,840 hours / 3 
years = approximately 610 hours). After the first three years, 
filers generally will not incur the start-up burdens applicable to 
the first filing.
    \401\ 610 burden hours on average per year x 250 large hedge 
fund advisers = 153,000 hours.
---------------------------------------------------------------------------

C. Burden Estimates for Large Liquidity Fund Advisers

    The SEC estimates that 80 advisers will be classified as large 
liquidity fund advisers.\402\ Commenters did not address this estimate. 
As discussed above, large liquidity fund advisers must complete section 
1 of the Form and provide additional information regarding the 
liquidity funds they manage in section 3 of the Form. In addition, 
these advisers must report information regarding the liquidity funds 
they manage on a quarterly basis.
---------------------------------------------------------------------------

    \402\ See supra note 88.
---------------------------------------------------------------------------

    Large liquidity fund advisers generally must report less 
information on Form PF than large hedge fund advisers but more 
information than large private equity advisers and smaller private fund 
advisers. Accordingly, the SEC estimates that large liquidity fund 
advisers will require, on average, fewer hours than large hedge fund 
advisers but more hours than other advisers to configure systems and to 
compile, review and electronically file the required information. 
Specifically, the SEC estimates these advisers will require an average 
of approximately 140 burden hours for an initial filing and 65 burden 
hours for each subsequent filing.\403\
---------------------------------------------------------------------------

    \403\ The estimates of hour burdens and costs for large 
liquidity fund advisers provided in the Paperwork Reduction Act and 
cost-benefit analyses are based, in part, on a comparison to the 
requirements and estimated burden for large hedge fund advisers 
(which estimates, in turn, are based in part on burden data that 
advisers provided in response to the FSA Survey) and on the 
experience of SEC staff. These estimates also assume that some Large 
Private Fund Advisers will find it efficient to automate some 
portion of the reporting process, which will increase the burden of 
the initial filing but reduce the burden of subsequent filings. This 
efficiency gain is reflected in our burden estimates, which are 
higher for the first report than subsequent reports, and certain of 
the anticipated automation costs are accounted for in our cost 
estimates. See infra note 435 and accompanying text. Of course, not 
all questions on Form PF impose the same burden, and the burden of 
responding to questions may vary substantially from adviser to 
adviser. These estimates are intended to reflect averages for 
compiling, reviewing and filing the Form, do not indicate the time 
that may be spent on specific questions and may not reflect the time 
spent by an individual adviser.
---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from 
35 to 140 hours for the initial filing and from 16 to 65 hours for 
subsequent filings. The SEC has increased these estimates to reflect 
comments suggesting that the estimates included in the proposal were 
too low.\404\ Commenters did not provide alternative estimates for 
these burdens. However, commenters addressing the large hedge fund 
adviser burdens did provide alternative estimates.\405\ As discussed 
above, the SEC is also increasing its hour burden estimates with 
respect to large hedge fund advisers based on, among other things, the 
estimates these commenters provided.\406\ In the absence of specific 
commenter estimates for the large liquidity fund adviser reporting 
burden, the SEC has, therefore, scaled these estimates in proportion to 
the increases it is making to its burden hour estimates for large hedge 
fund advisers.
---------------------------------------------------------------------------

    \404\ See, e.g., AIMA Letter; IAA Letter; BlackRock Letter. No 
commenters specifically addressed the burden estimates for liquidity 
fund advisers, though several commented on the burden estimates 
generally.
    \405\ See, e.g., MFA Letter.
    \406\ See supra section IV.B of this Release.
---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken 
into account changes from the proposal that it expects, on the whole, 
to mitigate the burden of reporting for large liquidity fund advisers. 
For instance, we have eliminated from section 1b a question requiring 
identification of significant creditors.\407\ We have also made several 
global changes that we anticipate will reduce the burden of reporting. 
These include allowing large liquidity fund advisers to report only 
annually on funds that are not liquidity funds, removing the 
certification, expanding the ability to disregard funds of funds, the 
increased ability of advisers to rely on their existing methodologies 
and recordkeeping practices and allowing advisers to omit information 
regarding parallel managed accounts from their responses to the 
Form.\408\ We have also

[[Page 71161]]

added four new questions in section 1b that will increase the burden of 
completing that portion of the Form, but the SEC expects the other 
changes described above to result in a net reduction in the burden of 
completing the Form relative to the proposal.\409\
---------------------------------------------------------------------------

    \407\ See supra section II.C.1 of this Release. One commenter 
suggested the question we removed would have been ``very 
burdensome.'' See PEGCC Letter.
    \408\ See, e.g., supra sections II.B.1 and II.C.5 of this 
Release and notes 129 and 183-188 and accompanying text.
    \409\ See supra section II.C.1 of this Release.
---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized 
average annual burden of periodic filings will be 290 hours per large 
liquidity fund adviser for each of the first three years.\410\ In the 
aggregate, the amortized annual burden of periodic filings will then be 
23,200 hours for large liquidity fund advisers for each of the first 
three years.\411\
---------------------------------------------------------------------------

    \410\ The SEC estimates that a large liquidity fund adviser will 
make 12 quarterly filings in three years, for an amortized average 
annual burden of 290 hours (1 initial filing x 140 hours + 11 
subsequent filings x 65 hours = 855 hours; and 855 hours / 3 years = 
approximately 290 hours). After the first three years, filers 
generally will not incur the start-up burdens applicable to the 
first filing.
    \411\ 290 burden hours on average per year x 80 large hedge fund 
advisers = 23,200 hours.
---------------------------------------------------------------------------

D. Burden Estimates for Large Private Equity Advisers

    The SEC estimates that 170 advisers will be classified as large 
private equity advisers.\412\ As discussed above, large private equity 
advisers must complete section 1 of the Form and provide additional 
information regarding the private equity funds they manage in section 4 
of the Form. These advisers are only required to report on an annual 
basis.
---------------------------------------------------------------------------

    \412\ See supra note 89.
---------------------------------------------------------------------------

    Large private equity advisers generally must report less 
information on Form PF than other Large Private Fund Advisers but more 
information than smaller private fund advisers. Accordingly, the SEC 
estimates that large private equity advisers will require, on average, 
fewer hours than large hedge fund advisers and large liquidity fund 
advisers but more hours than other advisers to configure systems and to 
compile, review and electronically file the required information. 
Specifically, the SEC estimates these advisers will require an average 
of approximately 100 burden hours for an initial filing and 50 burden 
hours for each subsequent filing.\413\
---------------------------------------------------------------------------

    \413\ The estimates of hour burdens and costs for large private 
equity advisers provided in the Paperwork Reduction Act and cost-
benefit analyses are based, in part, on a comparison to the 
requirements and estimated burden for large hedge fund advisers 
(which estimates, in turn, are based in part on burden data that 
advisers provided in response to the FSA Survey) and on the 
experience of SEC staff. These estimates also assume that some Large 
Private Fund Advisers will find it efficient to automate some 
portion of the reporting process, which will increase the burden of 
the initial filing but reduce the burden of subsequent filings. This 
efficiency gain is reflected in our burden estimates, which are 
higher for the first report than subsequent reports, and certain of 
the anticipated automation costs are accounted for in our cost 
estimates. See infra note 435 and accompanying text. Of course, not 
all questions on Form PF impose the same burden, and the burden of 
responding to questions may vary substantially from adviser to 
adviser. These estimates are intended to reflect averages for 
compiling, reviewing and filing the Form, do not indicate the time 
that may be spent on specific questions and may not reflect the time 
spent by an individual adviser.
---------------------------------------------------------------------------

    These estimates reflect an increase compared to the proposal from 
25 to 100 hours for the initial filing and from 12 to 50 hours for 
subsequent filings. The SEC has increased these estimates to reflect 
comments suggesting that the estimates included in the proposal were 
too low.\414\ Commenters did not provide alternative estimates for 
these burdens. However, commenters addressing the large hedge fund 
adviser burdens did provide alternative estimates.\415\ As discussed 
above, the SEC is also increasing its hour burden estimates with 
respect to large hedge fund advisers based on, among other things, the 
estimates these commenters provided.\416\ In the absence of specific 
commenter estimates for the large private equity adviser reporting 
burden, the SEC has, therefore, scaled these estimates in proportion to 
the increases it is making to its burden hour estimates for large hedge 
fund advisers.
---------------------------------------------------------------------------

    \414\ See, e.g., Atlas Letter; PEGCC Letter; USCC Letter.
    \415\ See, e.g., MFA Letter.
    \416\ See supra section IV.B of this Release.
---------------------------------------------------------------------------

    Although the SEC has increased these estimates, it has also taken 
into account changes from the proposal that it expects, on the whole, 
to mitigate the burden of reporting for large private equity advisers. 
For instance, we have modified the requirement to report performance by 
allowing advisers to report monthly and quarterly results only if such 
results are already calculated for the fund.\417\ In addition, we have 
eliminated from section 1b a question requiring identification of 
significant creditors and have revised questions in section 4 requiring 
information regarding portfolio company leverage to align the 
information required more closely with information available on the 
balance sheets of those companies.\418\ We have also made several 
global changes to the Form that we anticipate will reduce the burden of 
reporting. These include requiring only annual (rather than quarterly) 
reporting, removing the certification, expanding the ability to 
disregard funds of funds, increasing the ability of advisers to rely on 
their existing methodologies and recordkeeping practices and allowing 
advisers to omit information regarding parallel managed accounts from 
their responses to the Form.\419\ We have also added four new questions 
in section 1b that will increase the burden of completing that portion 
of the Form, but the SEC expects the other changes described above to 
result in a net reduction in the burden of completing the Form relative 
to the proposal.\420\
---------------------------------------------------------------------------

    \417\ See supra note 386.
    \418\ See supra sections II.C.1 and II.C.4 of this Release. One 
commenter suggested the question we removed would have been ``very 
burdensome.'' See PEGCC Letter.
    \419\ See, e.g., supra sections II.B.1 and II.C.5 of this 
Release and notes 129 and 183-188 and accompanying text.
    \420\ See supra section II.C.1 of this Release.
---------------------------------------------------------------------------

    Based on the foregoing, the SEC estimates that the amortized 
average annual burden of periodic filings will be 67 hours per large 
private equity adviser for each of the first three years.\421\ In the 
aggregate, the amortized annual burden of periodic filings will then be 
11,400 hours for large private equity advisers for each of the first 
three years.\422\
---------------------------------------------------------------------------

    \421\ The SEC estimates that a large private equity adviser will 
make 3 annual filings in three years, for an amortized average 
annual burden of 67 hours (1 initial filing x 100 hours + 2 
subsequent filings x 50 hours = 200 hours; and 200 hours / 3 years = 
approximately 67 hours). After the first three years, filers 
generally will not incur the start-up burdens applicable to the 
first filing.
    \422\ 67 burden hours on average per year x 170 large private 
equity advisers = 11,400 hours.
---------------------------------------------------------------------------

E. Burden Estimates for Transition Filings, Final Filings and Temporary 
Hardship Exemption Requests

    In addition to periodic filings, a private fund adviser must file 
very limited information on Form PF in three situations.
    First, any adviser that transitions from quarterly to annual filing 
because it has ceased to be a large hedge fund or large liquidity fund 
adviser must file a Form PF indicating that it is no longer obligated 
to report on a quarterly basis. The SEC estimates that approximately 9 
percent of quarterly filers will need to make a transition filing each 
year with a burden of 0.25 hours, or a total of 7 burden hours per year 
for all private fund advisers.\423\ No commenters addressed these 
estimates. The SEC has not changed its estimates of the rate of 
transition filings and the burden hours per filing from the proposal, 
but it has reduced its estimate of the total burden hours per year 
because fewer filers will

[[Page 71162]]

be required to report on a quarterly basis.\424\
---------------------------------------------------------------------------

    \423\ This estimate is based on IARD data on the frequency of 
advisers to one or more private funds ceasing to have assets under 
management sufficient to cause them to be large hedge fund or large 
liquidity fund advisers. ((80 large liquidity fund advisers + 250 
large hedge fund advisers) x 0.09 x 0.25 hours = 7 hours.)
    \424\ Under the proposal, large private equity advisers would 
also have been required to file on a quarterly basis. See supra 
section II.B.1 of this Release.
---------------------------------------------------------------------------

    Second, filers who are no longer subject to Form PF's periodic 
reporting requirements must file a final report indicating that fact. 
The SEC estimates that approximately 8 percent of the advisers required 
to file Form PF will have to file such a report each year with a burden 
of 0.25 of an hour, or a total of 71 burden hours per year for all 
private fund advisers.\425\ No commenters addressed these estimates. 
The SEC has not changed its estimates of the rate of final filings and 
the burden hours per filing from the proposal, but it has reduced its 
estimate of the total burden hours per year because the addition of a 
minimum reporting threshold will result in fewer filers reporting on 
Form PF.\426\
---------------------------------------------------------------------------

    \425\ Estimate is based on IARD data on the frequency of 
advisers to one or more private funds withdrawing from SEC 
registration. (3,570 private fund advisers x 0.08 x 0.25 hours = 71 
hours.)
    \426\ See supra section II.A of this Release.
---------------------------------------------------------------------------

    Finally, an adviser experiencing technical difficulties in 
submitting Form PF may request a temporary hardship exemption by filing 
portions of Form PF in paper format.\427\ The information that must be 
filed is comparable to the information that Form ADV filers provide on 
Form ADV-H when requesting a temporary hardship exemption relating to 
that form. In the case of Form ADV-H, the SEC has estimated that the 
average burden of filing is 1 hour and that approximately 1 in every 
1,000 advisers will file annually.\428\ Assuming that Form PF filers 
request hardship exemptions at the same rate and that the applications 
impose the same burden per filing, the SEC expects approximately 4 
filers to request a temporary hardship exemption each year \429\ for a 
total of 4 burden hours.\430\ No commenters addressed these estimates, 
and they remain unchanged from the proposal.
---------------------------------------------------------------------------

    \427\ See Advisers Act rule 204(b)-1(f). The rule requires that 
the adviser complete and file Item A of Section 1a and Section 5 of 
Form PF, checking the box in Section 1a indicating that the filing 
is a request for a temporary hardship exemption.
    \428\ See Implementing Adopting Release, supra note 11, at 
section VI.F.
    \429\ 3,570 private fund advisers x 1 request per 1,000 advisers 
= approximately 4 advisers.
    \430\ 4 advisers x 1 hour per response = 4 hours.
---------------------------------------------------------------------------

F. Aggregate Hour Burden Estimates

    Based on the foregoing, the SEC estimates that Form PF would result 
in an aggregate of 258,000 burden hours per year for all private fund 
advisers for each of the first three years, or 72 burden hours per year 
on average for each private fund adviser over the same period.\431\
---------------------------------------------------------------------------

    \431\ 70,600 hours for periodic filings by smaller advisers + 
153,000 hours for periodic filings by large hedge fund advisers + 
23,200 hours for periodic filings by large liquidity fund advisers + 
11,400 hours for periodic filings by large private equity fund 
advisers + 7 hours per year for transition filings + 71 hours per 
year for final filings + 4 hours per year for temporary hardship 
requests = approximately 258,000 hours per year. 258,000 hours per 
year / 3,570 total advisers = 72 hours per year on average.
---------------------------------------------------------------------------

G. Cost Burden

    In addition to the hour burdens identified above, advisers subject 
to the Form PF reporting requirements will incur cost burdens. Firms 
required to file Form PF must also pay filing fees. In a separate 
order, the SEC has established filing fees for the Form PF filing 
system of $150 per annual filing and $150 per quarterly filing.\432\ We 
estimate that this will result in advisers paying aggregate filing fees 
of approximately $684,000 per year.\433\
---------------------------------------------------------------------------

    \432\ See supra section II.E of this Release.
    \433\ ((3,070 smaller private fund advisers + 170 large private 
equity advisers) x $150 per annual filing) + ((250 large hedge fund 
advisers + 80 large private equity advisers) x $150 per quarterly 
filing x 4 quarterly filings per year) = $684,000 per year.
---------------------------------------------------------------------------

    Several commenters suggested that advisers would also need to 
modify existing systems or deploy new systems to support Form PF 
reporting.\434\ As discussed in the Proposing Release and below, the 
SEC acknowledges that advisers may incur costs to develop systems and 
expects that Large Private Fund Advisers, in particular, may find it 
efficient to automate some portion of the reporting process, which will 
increase the burden of the initial filing but reduce the burden of 
subsequent filings.\435\ The SEC has assumed that some of the hours 
that it estimates advisers will spend on preparing their initial 
filings on Form PF will be attributable to programmers preparing 
systems for the reporting.\436\ The SEC understands that some advisers 
may outsource all or a portion of these systems requirements to 
software consultants, vendors, filing agents or other third-party 
service providers and believes that the emergence of such service 
providers may serve to make filing on Form PF more efficient than is 
reflected in its estimates.\437\
---------------------------------------------------------------------------

    \434\ See, e.g., BlackRock Letter; IAA Letter; Kleinberg General 
Letter; PEGCC Letter; SIFMA Letter.
    \435\ See infra section V.B of this Release, especially nn. 511-
515; Proposing Release, supra note 11, at section V.B.
    \436\ See infra notes 511, 513 and 515.
    \437\ The SEC has based its estimates on the use of internal 
resources, for which some cost data is available, because it 
believes that an adviser would engage third-party service providers 
only if the external costs were comparable, or less than, the 
estimated internal costs of compiling, reviewing and filing the Form 
PF. As a result, the SEC's estimates of hour and cost burdens in 
this PRA analysis, and of costs in section V.B of this Release, may 
overstate the actual burdens and costs that will be incurred once 
third-party services become available.
---------------------------------------------------------------------------

    Advisers may also incur costs associated with the acquisition or 
use of hardware needed to perform computations or otherwise process the 
data required on Form PF.\438\ Smaller private fund advisers are 
unlikely to bear these costs because the information they are required 
to provide is limited and will, in many cases, already be maintained in 
the ordinary course of business.\439\ Even among Large Private Fund 
Advisers, these costs are likely to vary significantly. For instance, 
the cost to any Large Private Fund Adviser may depend on how many funds 
or the types of funds it manages, the state of its existing systems and 
the complexity of its business. In addition, large hedge fund and large 
liquidity fund advisers must file Form PF more frequently, on shorter 
deadlines and generally with more information than large private equity 
advisers, increasing the likelihood that filings will compete with 
other demands for computing resources and that additional resources 
will be required.
---------------------------------------------------------------------------

    \438\ See supra note 272.
    \439\ See supra note 382.
---------------------------------------------------------------------------

    Commenters did not provide estimates for the costs of acquiring or 
using hardware for purposes of Form PF. SEC staff contacted several 
organizations, including self-regulatory organizations, prime brokers 
and fund service providers, to help develop an estimate for these 
costs. Although these organizations generally were not able to provide 
such estimates, some expressed the view that the hardware costs would 
be small relative to the human capital costs and, for Large Private 
Fund Advisers, software development costs that Form PF imposes.\440\ 
The SEC estimates, based in part on these conversations and the factors 
discussed above, that these costs will fall across a broad range for 
Large Private Fund Advisers. Those who are required to file less 
information, less frequently and on longer deadlines, who have excess 
capacity in their existing systems or whose business is relatively 
simple, may incur no incremental hardware costs. On the other hand, 
some Large Private Fund Advisers may need to acquire (or obtain the use 
of) computing resources equivalent to an additional server, which the 
SEC estimates would

[[Page 71163]]

cost approximately $50,000 fully deployed. This suggests an aggregate 
incremental cost in the first year of reporting between $0 and 
$25,000,000, though the actual cost is likely to fall in between these 
two end-points.\441\
---------------------------------------------------------------------------

    \440\ See supra notes 435-436 and accompanying text.
    \441\ $50,000 x 500 Large Private Fund Advisers = $25,000,000.
---------------------------------------------------------------------------

    CFTC:
    As adopted, CEA rule 4.27 does not impose any additional burden 
upon registered CPOs and CTAs that are dually registered as investment 
advisers with the SEC. By filing the Form PF with the SEC, these dual 
registrants would be deemed to have satisfied certain of their filing 
obligations with the CFTC should the CFTC adopt such requirements, and 
the CFTC is not imposing any additional burdens herein. Therefore, any 
burden imposed by Form PF through CEA rule 4.27 on entities registered 
with both the CFTC and the SEC has been accounted for within the SEC's 
calculations regarding the impact of this collection of information 
under the PRA or, to the extent the reporting may relate to commodity 
pools that are not private funds, the CFTC anticipates that it would 
account for this burden should it adopt a future rulemaking 
establishing reporting requirements with respect to those commodity 
pools.\442\
---------------------------------------------------------------------------

    \442\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

V. Economic Analysis

    As discussed above, the Dodd-Frank Act amended the Advisers Act to, 
among other things, authorize the SEC to promulgate reporting 
requirements for private fund advisers. The Dodd-Frank Act also directs 
the SEC and CFTC to jointly issue, after consultation with FSOC, rules 
establishing the form and content of any reports to be filed under this 
new authority.\443\ In enacting Sections 404 and 406 of the Dodd-Frank 
Act, Congress determined to require that private fund advisers file 
reports with the SEC and specified certain types of information that 
should be subject to reporting and/or recordkeeping requirements, but 
Congress left to the SEC the determination of the specific information 
to be maintained or reported. When determining the form and content of 
such reports, the Dodd-Frank Act authorizes the SEC to require that 
private fund advisers file such information ``as necessary and 
appropriate in the public interest and for the protection of investors, 
or for the assessment of system risk by [FSOC].'' \444\
---------------------------------------------------------------------------

    \443\ See section 211(e) of the Advisers Act.
    \444\ See section 204(b)(1)(A) of the Advisers Act.
---------------------------------------------------------------------------

    The SEC is adopting Advisers Act rule 204(b)-1 and Form PF, and the 
CFTC is adopting CEA rule 4.27 and sections 1 and 2 of Form PF, to 
implement the private fund adviser reporting requirements that the 
Dodd-Frank Act directs the Commissions to promulgate. Under these new 
rules, private fund advisers having at least $150 million in private 
fund assets under management must file with the SEC information 
responsive to all or portions of Form PF on a periodic basis. The scope 
of the required information and the frequency of the reporting is 
related to the amount of private fund assets that each private fund 
adviser manages and the types of private fund to which those assets 
relate.\445\ Specifically, smaller private fund advisers must report 
annually and provide only basic information regarding their operations 
and the private funds they advise. Large private equity advisers also 
must report on an annual basis but are required to provide additional 
information with respect to the private equity funds they manage. 
Finally, large hedge fund advisers and large liquidity fund advisers 
must report on a quarterly basis and provide more information than 
other private fund advisers.
---------------------------------------------------------------------------

    \445\ See section II.A of this Release (describing who must file 
Form PF); see also section II.B of this Release (discussing the 
frequency with which private fund advisers must file Form PF); 
section II.C of this Release (describing the information that 
private fund advisers must report on Form PF). See also proposed 
Instruction 9 to Form PF for information regarding the frequency 
with which private fund advisers must file Form PF.
---------------------------------------------------------------------------

    The Advisers Act directs the SEC, when engaging in rulemaking that 
requires it to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation.\446\ The Commissions are sensitive 
to the costs and benefits of their respective rules and have carefully 
considered the costs and benefits of this rulemaking. The SEC's 
consideration of the costs and benefits of this rulemaking has included 
whether this rulemaking will promote efficiency, competition and 
capital formation. In the proposal, the Commissions identified certain 
costs and benefits of Advisers Act rule 204(b)-1, CEA rule 4.27 and 
Form PF and requested comment on all aspects of their cost-benefit 
analyses. The comments the Commissions received on those analyses are 
discussed below.
---------------------------------------------------------------------------

    \446\ See section 202(c) of the Advisers Act.
---------------------------------------------------------------------------

    In considering the benefits and costs of this rulemaking, we have 
also considered alternatives to the requirements we are adopting. All 
of these alternatives would require at least some registered private 
fund advisers to report at least some information because Congress 
directed the SEC to adopt such reporting requirements. Among the 
alternatives that we considered were requirements that varied along the 
following five dimensions: (1) Requiring more or less information; (2) 
requiring more or fewer advisers to complete the Form; (3) allowing 
advisers to rely more on their existing methodologies and recordkeeping 
practices in completing the Form (or, alternatively, requiring more 
standardized responses); (4) requiring more or less frequent reporting; 
and (5) allowing advisers more or less time to complete and file the 
Form.
    Alternatives along each of these dimensions have advantages and 
disadvantages. Obtaining more standardized information from more 
advisers more often and more quickly would likely improve the value of 
the Form PF data to FSOC and other regulators, and several commenters 
supported alternatives along one or more of these dimensions.\447\ The 
Commissions are concerned, however, that the costs of such changes may, 
in general, increase more quickly than the benefits.\448\ On the other 
hand, the Commissions have considered, and are adopting changes from 
the proposal, that allow advisers more time to file the Form,\449\ 
permit large private equity advisers to file less frequently,\450\ 
generally reduce the amount of information required,\451\ reduce the 
number of advisers required to file the Form\452\ and allow advisers to 
rely more on their existing methodologies and recordkeeping 
practices.\453\ A number of commenters supported these changes and, in 
some cases, would have preferred that we further reduce the reporting 
burdens.\454\ We believe, however, that the approach we are adopting 
strikes an appropriate balance between the benefits of the information 
to be collected and the costs to advisers

[[Page 71164]]

of providing it. These benefits and costs are discussed in greater 
detail below.
---------------------------------------------------------------------------

    \447\ See, e.g., AFL-CIO Letter; AFR Letter. See also CII 
Letter; MSCI Letter.
    \448\ See, e.g., supra discussion following notes 101 and 158 
and text accompanying note 256. We believe, however, that there are 
some exceptions, such as the additional information it has 
determined to request in section 1b of the Form. See supra section 
II.C.1 of this Release.
    \449\ See supra section II.B.2 of this Release.
    \450\ See supra section II.B.1 of this Release.
    \451\ See supra section II.C of this Release.
    \452\ See supra section II.A of this Release.
    \453\ See supra section II.C of this Release.
    \454\ See, e.g., IAA Letter; MFA Letter; PEGCC Letter; SIFMA 
Letter.
---------------------------------------------------------------------------

A. Benefits

    We believe that Form PF will create two principal classes of 
benefits. First, the information collected will facilitate FSOC's 
understanding and monitoring of systemic risk in the private fund 
industry and assist FSOC in determining whether and how to deploy its 
regulatory tools with respect to nonbank financial companies. Second, 
we expect this information to enhance the Commissions' ability to 
evaluate and develop regulatory policies and improve the efficiency and 
effectiveness of our efforts to protect investors and maintain fair, 
orderly and efficient markets.
    Congress passed the Dodd-Frank Act in the wake of what some have 
called ``the greatest financial crisis since the Great Depression.'' 
\455\ The crisis imposed immense costs on individuals and businesses, 
with millions of jobs disappearing from the U.S. economy, large numbers 
of families losing their homes to foreclosure, nearly $11 trillion in 
household wealth lost, including retirement accounts and life savings, 
and many businesses, large and small, facing serious challenges.\456\ 
Congress responded to the crisis, in part, by establishing FSOC as the 
center of a framework intended ``to prevent a recurrence or mitigate 
the impact of financial crises that could cripple financial markets and 
damage the economy.'' \457\ The goal of this framework, in other words, 
is the avoidance of significant harm to the U.S. economy from future 
financial crises.
---------------------------------------------------------------------------

    \455\ The Financial Crisis Inquiry Report: Final Report of the 
National Commission on the Causes of the Financial and Economic 
Crisis in the United States, Financial Crisis Inquiry Commission 
(Jan. 2011) (``Financial Crisis Inquiry Report'') at xv.
    \456\ See id., at xv-xvi. See also Senate Committee Report, 
supra note 5, at 39.
    \457\ Id.
---------------------------------------------------------------------------

    Under the Dodd-Frank Act, FSOC must ``monitor emerging risks to 
U.S. financial stability'' and employ its regulatory tools to address 
those risks.\458\ For this purpose, the Dodd-Frank Act granted FSOC the 
ability to determine that a nonbank financial company will be subject 
to the supervision of the FRB if the company may pose risks to U.S. 
financial stability as a result of its activities or in the event of 
its material financial distress. FSOC may also recommend to the FRB 
heightened prudential standards for designated nonbank financial 
companies.\459\ In addition, the Dodd-Frank Act authorizes FSOC to 
issue recommendations to primary financial regulators for more 
stringent regulation of financial activities that it determines may 
create or increase systemic risk.\460\
---------------------------------------------------------------------------

    \458\ See id., at 2. See also supra note 6 and accompanying 
text.
    \459\ See supra note 7 and accompanying text.
    \460\ See supra note 8 and accompanying text.
---------------------------------------------------------------------------

    Congress recognized that FSOC would need information from private 
fund advisers to carry out its duties and to determine whether and how 
to exercise these regulatory authorities. For instance, a Senate 
committee report noted that ``no precise data regarding the size and 
scope of hedge fund activities are available[, and while] hedge funds 
are generally not thought to have caused the current financial crisis, 
information regarding their size, strategies, and positions could be 
crucial to regulatory attempts to deal with a future crisis.'' \461\ To 
that end, Congress mandated that the Commissions, as the primary 
regulators of private fund advisers, gather information from these 
advisers for FSOC's use. The Commissions have designed Form PF, in 
consultation with staff representing FSOC's members, to implement this 
mandate.\462\
---------------------------------------------------------------------------

    \461\ See Senate Committee Report, supra note 5, at 38.
    \462\ See section II.C of this Release (describing the 
information that private fund advisers must report on Form PF).
---------------------------------------------------------------------------

    Recent releases from FSOC illuminate how Form PF will serve an 
essential role in FSOC's monitoring of, and exercise of regulatory 
authority over, the private fund industry. For instance, in one 
release, FSOC confirmed that the information reported on Form PF is 
important not only to conducting an assessment of systemic risk among 
private fund advisers but also to determining how that assessment 
should be made.\463\ Guidance in this FSOC release also suggests the 
role Form PF data will play in the process of determining whether a 
private fund adviser or the funds it manages will be subject to FRB 
supervision.\464\ More specifically, the Dodd-Frank Act identifies 
certain factors that FSOC must consider in making a determination to 
designate a nonbank financial company for FRB supervision, and FSOC's 
recent guidance organizes those factors into categories, including 
size, interconnectedness, use of leverage, liquidity risk and maturity 
mismatch and concentration.\465\ As discussed in detail throughout 
section II.C of this Release, the information reported on Form PF is 
designed, in part, to provide FSOC with data to assess these factors in 
a manner that is relevant to the particular type of fund about which 
the adviser is reporting.\466\ Finally, we expect that FSOC will use 
Form PF data to supplement the data that it collects regarding other 
financial market participants and gain a broader view of the financial 
system than is currently available to regulators.\467\ In this manner, 
we believe that the information collected through Form PF could play an 
important role in FSOC's monitoring of systemic risk, both in the 
private fund industry and in the financial markets more broadly.
---------------------------------------------------------------------------

    \463\ See supra note 21 and accompanying text.
    \464\ In the proposed three-stage process for making such 
determinations, the first and second stages would utilize publicly 
available data and data that, like Form PF, is collected by other 
regulators. A third stage of screening would generally involve OFR 
collecting additional, targeted information directly from these 
firms, which FSOC would analyze along with Form PF data and other 
data used in the first two stages. See supra notes 45-46 and 
accompanying text.
    \465\ See FSOC Second Notice, supra note 6.
    \466\ See, e.g., supra notes 192, 228, 266, 282, 284, 298 and 
323 and accompanying text.
    \467\ See, e.g., Proposing Release, supra note 12, at n. 120 and 
accompanying text.
---------------------------------------------------------------------------

    In addition to the content of the Form, the reporting frequency, 
filing deadlines and reporting thresholds have been designed to provide 
FSOC the information it needs to monitor systemic risk across the 
private fund industry while balancing the burdens these reporting 
requirements will impose on advisers. For instance, although most 
advisers will only report annually on Form PF, large hedge fund and 
large liquidity fund advisers will report quarterly because we 
understand, based on our staffs' consultations with staff representing 
FSOC's members, that this will provide FSOC with timely data that it 
may use to identify emerging trends in systemic risk.\468\ The filing 
deadlines are, similarly, designed to provide FSOC with timely data so 
that it may understand and monitor systemic risk on a reasonably 
current basis.\469\ Moreover, as discussed above, the reporting 
thresholds are designed to provide FSOC with a broad picture of the 
private fund industry while relieving smaller advisers from much of the 
costs associated with the more detailed reporting.\470\ We understand 
that obtaining this broad picture will help FSOC to contextualize its 
analysis and assess whether systemic risk may exist across the private 
fund industry and to identify areas where OFR may

[[Page 71165]]

want to obtain additional information.\471\
---------------------------------------------------------------------------

    \468\ See supra section II.B.1 of this Release (discussing 
reporting frequency and comments on the proposed reporting 
frequency).
    \469\ See supra section II.B.2 of this Release (discussing 
reporting deadlines and comments on the proposed deadlines).
    \470\ See supra section II.A.4.a of this Release (discussing 
large adviser thresholds and comments on the proposed thresholds). 
See also section II.A of this Release (discussing the minimum 
reporting thresholds).
    \471\ Id.
---------------------------------------------------------------------------

    Certain publications from international groups and researchers have 
suggested that data like that collected on Form PF will be valuable to 
the regulation of systemic risk. For instance, as discussed above, 
several international groups have continued working to close 
information gaps by increasing the disclosures provided to 
regulators.\472\ These groups have emphasized the importance, in their 
view, of designing and collecting better information to support the 
identification and modeling of systemic risk.\473\ In addition, 
research papers have suggested that information regarding private funds 
should play an important role in monitoring systemic risk, and one 
study argues that more direct measures of systemic risk would be 
possible with information from the majority of funds in the 
industry.\474\ Another recent research paper argues that expanding the 
FRB's flow of funds data to include more detailed quarterly information 
regarding the holding and transfer of financial instruments, including 
information regarding the portfolios of hedge funds, ``would have been 
of material value to U.S. regulators in ameliorating the recent 
financial crisis and could be of aid in understanding the potential 
vulnerabilities of an innovative financial system in the future.'' 
\475\ Others have commented on hedge fund reporting specifically, 
stating that ``[t]ransparency to regulators can help them measure and 
manage possible systemic risk and is relatively costless.'' \476\
---------------------------------------------------------------------------

    \472\ See supra notes 28-29 and accompanying text.
    \473\ Id.
    \474\ See, e.g., Nicholas Chan, Mila Getmansky, Shane Haas and 
Andrew Lo, Systemic Risk and Hedge Funds, in The Risks of Financial 
Institutions (Mark Carey and Rene Stulz, eds., 2007) at 238; Monica 
Billio, Mila Getmansky, Andrew Lo and Loriana Pelizzon, Econometric 
Measures of Systemic Risk in the Finance and Insurance Sectors, 
National Bureau of Economic Research (July 2010).
    \475\ Leonard Nakamura, Durable Financial Regulation: Monitoring 
Financial Instruments as a Counterpart to Regulating Financial 
Institutions, National Bureau of Economic Research (May 2011) at 1.
    \476\ Stephen Brown, et al., Hedge Funds, Mutual Funds, and 
ETFs, in Regulating Wall Street: The Dodd-Frank Act and the New 
Architecture of Global Finance 360 (Viral V. Acharya, et al., eds., 
2011) (supporting ``regular and timely'' reporting of asset 
positions and leverage levels). See also Ferran, supra note 307, at 
28.
---------------------------------------------------------------------------

    Other academics and economists, while supporting regulatory efforts 
to assess and mitigate systemic risk, have cautioned that achieving the 
goal of substantially reducing systemic risk may prove difficult. For 
example, while the authors of one recent work support establishing 
``early warning indicators'' for financial crises, they argue that the 
most significant challenge is not the design of a framework for 
systemic risk analysis but rather:

    the well-entrenched tendency of policy makers and market 
participants to treat the signals as irrelevant archaic residuals of 
an outdated framework, assuming that old rules of valuation no 
longer apply. If the past * * * is any guide, these signals will be 
dismissed more often than not.\477\
---------------------------------------------------------------------------

    \477\ Carmen M. Reinhart and Kenneth S. Rogoff, This Time is 
Different: Eight Centuries of Financial Folly (2009) (``Reinhart and 
Rogoff'') at 277, 280 and 281 (after observing this tendency to 
disregard signals of systemic risk, the authors conclude that this 
``is why we also need to think about improving institutions,'' which 
may be important to reducing this risk).

    Accordingly, although collecting information on Form PF will 
increase the transparency of the private fund industry to regulators 
(an important prerequisite to understanding and monitoring systemic 
risk), transparency alone may not be sufficient to address systemic 
risk.\478\
---------------------------------------------------------------------------

    \478\ See also FSOC 2011 Annual Report, supra note 19, at ii 
(explaining that identifying and mitigating potential threats to 
financial stability ``is an inherently difficult exercise. No 
financial crisis emerges in exactly the same way as its 
predecessors, and the most significant future threats will often be 
the ones that are hardest to diagnose and preempt'' but going on to 
state that, ``[n]onetheless, there is a strong case for improving 
the quality of information available to the public, supervisors, and 
regulators about risks in financial institutions and markets.'')
---------------------------------------------------------------------------

    Some commenters agreed that Form PF data will ``facilitate FSOC's 
ability to promote the soundness of the U.S. financial system.'' \479\ 
One commenter characterized Form PF as determining the extent to which 
FSOC and the SEC have access to ``data essential to monitoring systemic 
risks that, as we saw in 2007 and 2008, cause substantial damage to the 
financial markets and the broader economy when they go unchecked.'' 
\480\ Another commenter stated that Form PF data could aid in the 
assessment of ``systemic risks due to connectivity and contagion.'' 
\481\ One commenter who expressed reservations regarding specific 
aspects of the proposal nonetheless supported ``the approach proposed 
by the SEC and CFTC to collect information from registered private fund 
managers through periodic, confidential reports on Form PF'' and agreed 
that gathering data ``from different types of market participants, 
including investment advisers and the funds they manage, * * *is a 
critical component of effective systemic risk monitoring and 
regulation.'' \482\
---------------------------------------------------------------------------

    \479\ CII Letter. See also, e.g., AFL-CIO Letter; AFR Letter.
    \480\ AFL-CIO Letter.
    \481\ MSCI Letter (though also noting that they ``see less 
potential benefit from this exercise to track the formation of asset 
class bubbles'' and that certain of the requested information would 
be difficult to aggregate for purposes of industry-wide analysis; 
see section II.C for a discussion of some of this commenter's 
observations regarding use of particular data collected on Form PF).
    \482\ MFA Letter.
---------------------------------------------------------------------------

    Some commenters, however, doubted that Form PF would be beneficial 
for monitoring systemic risk.\483\ One commenter, for instance, argued 
that ``Form PF requires firms to calculate and disclose information 
with uncertain benefits to regulators, and the broad scope of private 
funds subject to this burden has not been justified.'' \484\ Others 
argued that particular types of funds, such as private equity funds, 
should be excluded from the reporting because they do not, in their 
view, have the potential to pose systemic risk or that certain of the 
proposed questions on Form PF would not prove beneficial for systemic 
risk analysis.\485\ As discussed above, based on SEC staff's 
consultation with staff representing FSOC's members, we continue to 
believe that targeted information regarding the leverage practices of 
private equity funds will provide information that FSOC may use to 
monitor activities and trends in this industry that are of potential 
systemic importance.\486\ In addition, we have made a number of changes 
from the proposal intended to address the specific concerns of these 
commenters and believe that Form PF, as adopted, will be an important 
source of information for FSOC as it carries out its duties as they 
relate to the private fund industry.\487\
---------------------------------------------------------------------------

    \483\ See, e.g., Fidelity Letter; PEGCC Letter; TCW Letter; USCC 
Letter.
    \484\ CCMR Letter; see also USCC Letter (acknowledging, however, 
that ``greater access to comprehensive market and industry 
information will assist [FSOC] in identifying emerging threats to 
the stability of the U.S. financial system.''); BlackRock Letter; 
SIFMA Letter.
    \485\ See, e.g., PEGCC Letter. See also supra section II.C of 
this Release.
    \486\ See supra notes 307-308 and accompanying text.
    \487\ See supra section II of this Release (discussing changes 
from the proposal).
---------------------------------------------------------------------------

    We cannot predict today what the scope of the next financial crisis 
will be, and Form PF is only one part of a broader framework 
established under the Dodd-Frank Act to monitor and address systemic 
risk.\488\ Other measures contemplated by the Dodd-Frank Act, including 
the so-called ``Volcker rule,'' enhanced regulation of swaps and the 
FRB's oversight of systemically important financial

[[Page 71166]]

institutions may be critical to identifying and mitigating the next 
financial crisis. We anticipate, however, that Form PF will improve the 
information available to regulators as they seek to prevent or mitigate 
the effects of future financial crises, and if this information helps 
to avoid even a small portion of the costs of a financial crisis like 
the most recent one, the benefits of Form PF will be very significant.
---------------------------------------------------------------------------

    \488\ See supra note 457 and accompanying text.
---------------------------------------------------------------------------

    Reporting on Form PF will also benefit investors and other market 
participants by improving the information available to the Commissions 
regarding the private fund industry and how it interacts with markets. 
Today, regulators have little reliable data regarding this rapidly 
growing sector and frequently have to rely on data from other sources, 
which when available may be incomplete. The SEC recently adopted 
amendments to Form ADV that will require the reporting of important 
information regarding private funds, but this includes little or no 
information regarding, for instance, performance, leverage or the 
riskiness of a fund's financial activities.\489\ As discussed above, 
the data collected through Form PF, which will be more reliable than 
existing data regarding the industry and significantly extend the data 
available through the revised Form ADV, will assist FSOC in identifying 
and addressing risks to U.S. financial stability. This may, in turn, 
protect investors and other market participants from significant 
losses.
---------------------------------------------------------------------------

    \489\ See Implementing Adopting Release, supra note 11. 
Information reported on Form ADV is made available to the public, 
while Form PF data generally will not be. See supra section II.D 
(discussing confidentiality of Form PF data). This has informed the 
SEC's determination to require certain private fund information on 
Form ADV and other private fund information on Form PF.
---------------------------------------------------------------------------

    In addition, this data will provide the Commissions with a more 
complete view of the financial markets in general and the private fund 
industry in particular. This broader perspective and more reliable data 
may enhance the Commissions' ability to develop and frame regulatory 
policies regarding the private fund industry, its advisers and the 
markets in which they participate, and to more effectively evaluate the 
outcomes of regulatory policies and programs directed at this sector, 
including for the protection of private fund investors. For instance, 
Form PF data may help the Commissions to discern relationships between 
regulatory actions and private fund results or activities.
    We also expect the Form PF data to improve the efficiency and 
effectiveness of the Commissions' oversight of private fund advisers by 
enabling staff to manage and analyze information related to the risks 
that private funds pose more quickly, more effectively and at a lower 
cost than is currently possible. This will allow the Commissions to 
more efficiently and effectively target their examination programs. The 
Commissions will be able to use Form PF information to generate reports 
on the industry, its characteristics and trends. We expect that these 
reports will help the Commissions to anticipate regulatory problems, 
allocate and reallocate resources, and more fully evaluate and 
anticipate the implications of various regulatory actions the 
Commissions may consider taking. This will increase both the efficiency 
and effectiveness of the Commissions' programs and, thereby, increase 
investor protection. Form PF data will also help the Commissions better 
understand the investment activities of private funds and the scope of 
their potential effect on investors and the markets that the 
Commissions regulate.
    Commenters generally focused on the benefits of Form PF as they 
relate to systemic risk rather than investor protection. However, one 
supporter, who represents twelve million workers and sponsors pension 
and employee benefit plans holding almost half a trillion dollars in 
assets, agreed that ``[c]omprehensive disclosure requirements for 
private funds will provide important protections for [its] members' 
retirement savings.'' \490\ On the other hand, some commenters who 
questioned Form PF's merits expressed skepticism regarding the Form's 
benefits generally, not just with respect to the monitoring of systemic 
risk.\491\ As discussed in detail above, we have made a number of 
changes from the proposal designed to address commenter concerns 
regarding certain aspects of the proposed reporting requirements.\492\ 
However, we continue to believe that Form PF, as adopted, will increase 
the amount and quality of information available regarding a previously 
opaque area of investment activity and, thereby, enhance the ability of 
regulators to protect investors and maintain fair, orderly and 
efficient markets.
---------------------------------------------------------------------------

    \490\ AFL-CIO Letter. See also AFR Letter.
    \491\ See, e.g., supra note 484.
    \492\ See supra section II of this Release (discussing changes 
from the proposal).
---------------------------------------------------------------------------

    The Commissions believe that private fund advisers, investors in 
private funds and the companies in which private funds may invest will 
also enjoy certain benefits related to Form PF. For example, we 
identified above two principal classes of benefits--assistance to FSOC 
in carrying out its mission and improvements to the ability of 
regulators to protect investors and oversee markets--in which these 
groups will share, including indirectly as participants in the U.S. 
financial system. With respect to hedge fund advisers, for instance, 
data indicate that the number of funds shut down each year increased 
significantly during the recent financial crisis, suggesting that these 
advisers may benefit if a future financial crisis is averted or 
mitigated.\493\ Private fund investors and private fund advisers will 
also benefit if reporting on Form PF, by requiring advisers to review 
their fund's portfolios, trading practices and risk profiles, causes 
advisers to improve their risk management practices or internal 
controls.
---------------------------------------------------------------------------

    \493\ See HedgeFund Intelligence Global Review 2011, HFI (Spring 
2011) (``HFI 2011 Global Review'').
---------------------------------------------------------------------------

    Reporting on Form PF may also result in a positive effect on 
capital formation. Although Form PF data generally will be non-public, 
Form PF will increase transparency to regulators.\494\ The SEC believes 
that private fund advisers may, as a result, assess more carefully the 
risks associated with particular investments and, in the aggregate, 
allocate capital to investments with a higher value to the economy as a 
whole. To the extent that changes in investment allocations lead to 
improved economic outcomes in the aggregate, Form PF reporting may 
result in a positive effect on capital available for investment.
---------------------------------------------------------------------------

    \494\ See supra section II.D (discussing confidentiality of Form 
PF data).
---------------------------------------------------------------------------

    Should the CFTC adopt certain of its proposed systemic risk 
reporting requirements, the coordination between the CFTC and SEC on 
this rulemaking would result in significant efficiencies for any 
private fund adviser that is also registered as a CPO or CTA with the 
CFTC. This is because, under CEA rule 4.27, filing Form PF would 
satisfy both SEC and CFTC reporting obligations with respect to 
commodity pools that are ``private funds'' and CPOs and CTAs would have 
the option of reporting on Form PF regarding commodity pools that are 
not private funds to satisfy certain other CFTC reporting obligations, 
in each case should the CFTC adopt such reporting obligations.
    As discussed in section I.B of this Release, we have also 
coordinated with foreign financial regulators regarding the reporting 
of systemic risk information regarding private funds and

[[Page 71167]]

anticipate that this coordination, as reflected in Form PF, will result 
in greater efficiencies in private fund reporting, as well as 
information sharing and private fund monitoring among foreign financial 
regulators. Ongoing work among various international organizations has 
emphasized the importance of filling gaps in the data regarding 
financial market participants, and one goal of this coordination is to 
collect comparable information regarding private funds, which will aid 
in the assessment of systemic risk on a global basis.\495\ Several 
commenters agreed that international coordination in connection with 
private fund reporting is important and encouraged us to take an 
approach consistent with international precedents.\496\ We have made 
several changes from the proposal intended to more closely align Form 
PF with international precedent.\497\
---------------------------------------------------------------------------

    \495\ See supra note 29 and accompanying text.
    \496\ See supra note 30 and accompanying text.
    \497\ See supra note 35 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we also believe that private fund advisers 
already collect or calculate some of the information required on the 
Form at least as often as they must file the Form, creating 
efficiencies for, and benefiting, advisers in satisfying their 
reporting requirements.\498\
---------------------------------------------------------------------------

    \498\ See supra note 382; Proposing Release, supra note 12, at 
n.105; but see supra note 146.
---------------------------------------------------------------------------

B. Costs

    Reporting on Form PF will also impose certain costs on private fund 
advisers and, potentially, other market participants. For the most 
part, these are the same costs discussed in the PRA analysis above 
because that analysis must account for the burdens of responding to the 
Commissions' reporting requirements. In order to minimize these direct 
costs, the reporting requirements are scaled to the adviser's size, the 
size of funds and the types of private funds each adviser manages. For 
instance, smaller private fund advisers and large private equity 
advisers generally must report less information and less frequently 
than large hedge fund advisers and large liquidity fund advisers.\499\ 
This scaled approach is intended to provide FSOC with a broad picture 
of the private fund industry while relieving smaller advisers from much 
of the costs associated with the more detailed reporting. It is also 
designed to reflect the different implications for systemic risk that 
may be presented by different investment strategies, and thus seeks to 
adjust the costs of the reporting in proportion to the differing 
potential benefits of the information reported with respect to these 
strategies.
---------------------------------------------------------------------------

    \499\ See section II.A of this Release (describing who must file 
Form PF); section II.B of this Release (discussing the frequency 
with which private fund advisers must file Form PF); section II.C of 
this Release (describing the information that private fund advisers 
must report on Form PF). See also Instruction 9 to Form PF 
(discussing information regarding the frequency with which private 
fund advisers must file Form PF).
---------------------------------------------------------------------------

    We expect that the costs Form PF imposes will be most significant 
for the first report that a private fund adviser is required to file 
because the adviser will need to familiarize itself with the new 
reporting form and may need to configure its systems in order to 
efficiently gather the required information. We also anticipate that 
the initial report will require more attention from senior personnel, 
including compliance managers and senior risk management specialists, 
than will subsequent reports. In addition, we expect that some Large 
Private Fund Advisers will find it efficient to automate some portion 
of the reporting process, which will increase the burden of the initial 
filing but reduce the burden of subsequent filings.
    Several commenters addressed the cost estimates included in the 
Proposing Release. These commenters generally viewed these estimates as 
understated and, in several cases, argued that the costs of the initial 
report, in particular, would be greater than assumed.\500\ These 
commenters offered two common explanations for the higher than 
estimated costs: (1) ``[m]any of the requested items on Form PF are not 
tracked by advisory firms on the frequency, by the category or on a 
fund-by-fund basis in the manner requested by the proposed Form,'' 
meaning that advisers would need to develop systems for the reporting 
or engage in a manual process of gathering and compiling data; \501\ 
and (2) completing the Form will require gathering information from 
many different internal and external parties and systems.\502\
---------------------------------------------------------------------------

    \500\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General 
Letter; MFA Letter; PEGCC Letter; Seward Letter.
    \501\ TCW Letter; but see also supra note 146.
    \502\ See, e.g., Kleinberg General Letter; MFA Letter; PEGCC 
Letter.
---------------------------------------------------------------------------

    We have carefully considered comments suggesting that the reporting 
requirements would be more burdensome than estimated in the Proposing 
Release, and the SEC has substantially increased its estimates of the 
hour burdens included in this PRA analysis, which flow through to these 
estimates of costs.\503\ We have, however, also taken these comments 
into consideration in making a number of changes from the proposal that 
are intended to reduce the burdens of reporting on Form PF. These 
include global changes to the Form, such as allowing most advisers more 
time to file following the end of a fiscal period (reducing the 
likelihood that Form PF will compete with other priorities for 
advisers' resources or require employment of additional personnel), 
extending the compliance date, allowing large private equity advisers 
to report annually rather than quarterly, increasing the threshold for 
large private equity advisers and permitting greater reliance on 
advisers' existing methodologies and recordkeeping practices. We have 
also modified specific questions in response to comments so that 
responding to the Form is less burdensome.\504\ We expect, on the 
whole, that these changes will mitigate the cost of reporting.\505\ In 
addition, we have added a minimum reporting threshold, which will not 
reduce the burden to any particular filer of reporting but will reduce 
the aggregate burden that Form PF imposes because fewer advisers will 
be required to report.
---------------------------------------------------------------------------

    \503\ See supra notes 383, 394-395, 404 and 414 and accompanying 
text.
    \504\ See supra section II.C of this Release.
    \505\ See supra notes 388-389, 397-398, 407-409 and 418-420 and 
accompanying text. We also note that the original cost estimates, as 
well as the revised estimates included in this Release, include 
allocations for systems development among Large Private Fund 
Advisers (who are most likely to find automation cost effective) and 
assume that information would need to be gathered from many sources, 
both internal and external. See supra note 435 and accompanying 
text.
---------------------------------------------------------------------------

    After filing their initial reports, we anticipate that advisers 
will incur significantly lower costs because much of the work involved 
in the initial report is non-recurring and because of efficiencies 
realized from system configuration and reporting automation efforts 
accounted for in the initial reporting period. In addition, we estimate 
that senior personnel will bear less of the reporting burden in 
subsequent reporting periods, reducing costs though not necessarily 
reducing the burden hours.
    One commenter agreed that efficiencies will be realized over 
time,\506\ but another stated that, at least for private real estate 
funds, they would not.\507\ Having considered these comments, we 
continue to believe that, for the average adviser (and particularly for 
those with more liquid portfolios and greater systems capabilities), 
efficiencies will be realized over time.

[[Page 71168]]

We have, however, also increased the cost estimates for subsequent 
filings in recognition of concerns regarding the overall burden of the 
reporting and the possibility that efficiencies are not the same for 
all types of private fund adviser.
---------------------------------------------------------------------------

    \506\ See MFA Letter.
    \507\ See comment letter of The National Association of Real 
Estate Investment Managers (Mar. 24, 2011).
---------------------------------------------------------------------------

    Based on the foregoing, we estimate \508\ that the periodic filing 
requirements under Form PF (including configuring systems and 
compiling, automating, reviewing and electronically filing the report) 
will impose:
---------------------------------------------------------------------------

    \508\ We understand that some advisers may outsource all or a 
portion of their Form PF reporting responsibilities to software 
consultants, vendors, filing agents or other third-party service 
providers. We have based our estimates on the use of internal 
resources, for which some cost data is available, because we believe 
that an adviser would engage third-party service providers only if 
the external costs were comparable, or less than, the estimated 
internal costs of compiling, reviewing and filing the Form PF. The 
hourly wage data used in this Economic Analysis section of the 
Release is based on the Securities Industry and Financial Markets 
Association's Report on Management & Professional Earnings in the 
Securities Industry 2010 and Office Salaries in the Securities 
Industry 2010 (``SIFMA Earnings Reports''). This data has been 
modified to account for an 1,800-hour work-year and multiplied by 
5.35 for management and professional employees and by 2.93 for 
general and compliance clerks to account for bonuses, firm size, 
employee benefits and overhead.
---------------------------------------------------------------------------

    (1) 40 burden hours at a cost of $13,600 \509\ per smaller private 
fund adviser for the initial annual report;
---------------------------------------------------------------------------

    \509\ We expect that for the initial report these activities 
will most likely be performed equally by a compliance manager at a 
cost of $273 per hour and a senior risk management specialist at a 
cost of $409 per hour and that, because of the limited scope of 
information required from smaller private fund advisers, these 
advisers generally would not realize significant benefits from or 
incur significant costs for system configuration or automation. 
($273/hour x 0.5 + $409/hour x 0.5) x 40 hours = approximately 
$13,600.
---------------------------------------------------------------------------

    (2) 15 burden hours at a cost of $4,200 \510\ per smaller private 
fund adviser for each subsequent annual report;
---------------------------------------------------------------------------

    \510\ We expect that for subsequent reports senior personnel 
will bear less of the reporting burden. As a result, we estimate 
that these activities will most likely be performed equally by a 
compliance manager at a cost of $273 per hour, a senior compliance 
examiner at a cost of $235 per hour, a senior risk management 
specialist at a cost of $409 per hour and a risk management 
specialist at a cost of $192 per hour. ($273/hour x 0.25 + $235/hour 
x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 15 hours = 
approximately $4,200.
---------------------------------------------------------------------------

    (3) 100 burden hours at a cost of $31,000 \511\ per large private 
equity fund adviser for the initial annual report;
---------------------------------------------------------------------------

    \511\ The SEC expects that for the initial report, of a total 
estimated burden of 100 hours, approximately 60 hours will most 
likely be performed by compliance professionals and 40 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, the SEC anticipates that it will be 
performed equally by a compliance manager at a cost of $273 per hour 
and a senior risk management specialist at a cost of $409 per hour. 
Of the work performed by programmers, the SEC anticipates that it 
will be performed equally by a senior programmer at a cost of $304 
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 60 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 40 hours = approximately $31,000.
---------------------------------------------------------------------------

    (4) 50 burden hours at a cost of $13,900 \512\ per large private 
equity fund adviser for each subsequent annual report;
---------------------------------------------------------------------------

    \512\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden and that 
significant system configuration and reporting automation costs will 
not be incurred. As a result, the SEC estimates that these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour, a senior compliance examiner at 
a cost of $235 per hour, a senior risk management specialist at a 
cost of $409 per hour and a risk management specialist at a cost of 
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x 
0.25 + $192/hour x 0.25) x 50 hours = approximately $13,900.
---------------------------------------------------------------------------

    (5) 300 burden hours at a cost of $93,100 \513\ per large hedge 
fund adviser for the initial quarterly report;
---------------------------------------------------------------------------

    \513\ We expect that for the initial report, of a total 
estimated burden of 300 hours, approximately 180 hours will most 
likely be performed by compliance professionals and 120 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, we anticipate that it will be performed 
equally by a compliance manager at a cost of $273 per hour and a 
senior risk management specialist at a cost of $409 per hour. Of the 
work performed by programmers, we anticipate that it will be 
performed equally by a senior programmer at a cost of $304 per hour 
and a programmer analyst at a cost of $224 per hour. ($273/hour x 
0.5 + $409/hour x 0.5) x 180 hours + ($304/hour x 0.5 + $224/hour x 
0.5) x 120 hours = approximately $93,100.
---------------------------------------------------------------------------

    (6) 140 burden hours at a cost of $38,800 \514\ per large hedge 
fund adviser for each subsequent quarterly report;
---------------------------------------------------------------------------

    \514\ We expect that for subsequent reports senior personnel 
will bear less of the reporting burden and that significant system 
configuration and reporting automation costs will not be incurred. 
As a result, we estimate that these activities will most likely be 
performed equally by a compliance manager at a cost of $273 per 
hour, a senior compliance examiner at a cost of $235 per hour, a 
senior risk management specialist at a cost of $409 per hour and a 
risk management specialist at a cost of $192 per hour. ($273/hour x 
0.25 + $235/hour x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 140 
hours = approximately $38,800.
---------------------------------------------------------------------------

    (7) 140 burden hours at a cost of $43,500 \515\ per large liquidity 
fund adviser for the initial quarterly report; and
---------------------------------------------------------------------------

    \515\ The SEC expects that for the initial report, of a total 
estimated burden of 140 hours, approximately 85 hours will most 
likely be performed by compliance professionals and 55 hours will 
most likely be performed by programmers working on system 
configuration and reporting automation. Of the work performed by 
compliance professionals, the SEC anticipates that it will be 
performed equally by a compliance manager at a cost of $273 per hour 
and a senior risk management specialist at a cost of $409 per hour. 
Of the work performed by programmers, the SEC anticipates that it 
will be performed equally by a senior programmer at a cost of $304 
per hour and a programmer analyst at a cost of $224 per hour. ($273/
hour x 0.5 + $409/hour x 0.5) x 85 hours + ($304/hour x 0.5 + $224/
hour x 0.5) x 55 hours = approximately $43,500.
---------------------------------------------------------------------------

    (8) 65 burden hours at a cost of $18,000 \516\ per large liquidity 
fund adviser for each subsequent quarterly report.
---------------------------------------------------------------------------

    \516\ The SEC expects that for subsequent reports senior 
personnel will bear less of the reporting burden and that 
significant system configuration and reporting automation costs will 
not be incurred. As a result, the SEC estimates that these 
activities will most likely be performed equally by a compliance 
manager at a cost of $273 per hour, a senior compliance examiner at 
a cost of $235 per hour, a senior risk management specialist at a 
cost of $409 per hour and a risk management specialist at a cost of 
$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x 
0.25 + $192/hour x 0.25) x 65 hours = approximately $18,000.
---------------------------------------------------------------------------

    Assuming that there are 3,070 smaller private fund advisers, 250 
large hedge fund advisers, 80 large liquidity fund advisers, and 170 
large private equity fund advisers, the foregoing estimates suggest an 
annual cost of $107,000,000 \517\ for all private fund advisers in the 
first year of reporting and an annual cost of $59,800,000 in subsequent 
years.\518\
---------------------------------------------------------------------------

    \517\ (3,070 smaller private fund advisers x $13,600 per initial 
annual report) + (170 large private equity fund advisers x $31,000 
per initial annual report) + (250 large hedge fund advisers x 
$93,100 per initial quarterly report) + (250 large hedge fund 
advisers x 3 quarterly reports x $38,800 per subsequent quarterly 
report) + (80 large liquidity fund advisers x $43,500 per initial 
quarterly report) + (80 large liquidity fund advisers x 3 quarterly 
reports x $18,000 per subsequent quarterly report) = approximately 
$107,000,000.
    \518\ (3,070 smaller private fund advisers x $4,200 per 
subsequent annual report) + (170 large private equity fund advisers 
x $13,900 per subsequent annual report) + (250 large hedge fund 
advisers x 4 quarterly reports x $38,800 per subsequent quarterly 
report) + (80 large liquidity fund advisers x 4 quarterly reports x 
$18,000 per subsequent quarterly report) = approximately 
$59,800,000.
---------------------------------------------------------------------------

    The cost estimates above assume that risk and compliance personnel 
(and, in the case of Large Private Fund Advisers filing an initial 
report, programmers) will carry out the work of reporting on Form PF. 
Some commenters suggested that employees in portfolio management as 
well as legal, controller and other back office functions may also be 
involved in compiling, reviewing and filing Form PF.\519\ These 
commenters did not provide estimates for how the reporting burdens 
would be allocated among these groups of employees, and we believe the 
allocation is likely to vary significantly among advisers depending on 
the size and complexity of their operations. Based on available wage 
data, we do not believe that variations in the allocation of these 
responsibilities among the functions that we and commenters identified

[[Page 71169]]

would result in significantly different aggregate cost estimates.\520\
---------------------------------------------------------------------------

    \519\ See, e.g., Kleinberg General Letter; MFA Letter.
    \520\ For example, our estimates assume that the work is 
performed by compliance managers at $273 per hour, senior compliance 
examiners at $235 per hour, senior risk management specialists at 
$409 per hour, risk management specialists at $192 per hour and, in 
the case of Large Private Fund Advisers filing an initial report, 
programmers ranging from $304 to $224 per hour. Based on the SIFMA 
Earnings Reports, indicative costs in the other functions that 
commenters identified are: $287 per hour for a senior portfolio 
manager; $211 per hour for an intermediate portfolio manager; $430 
per hour for an assistant general counsel; $165 per hour for a fund 
senior accountant; $194 per hour for an intermediate business 
analyst; and $154 per hour for an operations specialist. An 
adviser's chief compliance officer (at a cost of $423 per hour) or 
controller (at a cost of $433 per hour) may also review the filing, 
though we would expect that in most cases their involvement would be 
more limited than that of more junior employees.
---------------------------------------------------------------------------

    In addition, as discussed above, a private fund adviser must file 
very limited information on Form PF if it needs to transition from 
quarterly to annual filing, if it is no longer subject to the reporting 
requirements of Form PF or if it requires a temporary hardship 
exemption under rule 204(b)-1(f). We estimate that transition and final 
filings will, collectively, cost private fund advisers as a whole 
approximately $5,200 per year.\521\ We further estimate that hardship 
exemption requests will cost private fund advisers as a whole 
approximately $760 per year.\522\ No commenters addressed these 
estimates. The estimate with respect to hardship exemptions is 
unchanged from the proposal. The estimate with respect to transition 
and final filings have been reduced because fewer filers will be 
required to report on a quarterly basis and the addition of a minimum 
reporting threshold means that fewer advisers will report in 
total.\523\
---------------------------------------------------------------------------

    \521\ The SEC estimates that, for the purposes of the PRA, 
transition filings will impose 7 burden hours per year on private 
fund advisers in the aggregate and that final filings will impose 71 
burden hours per year on private fund advisers in the aggregate. The 
SEC anticipates that this work will most likely be performed by a 
compliance clerk at a cost of $67 per hour. (7 burden hours + 71 
burden hours) x $67/hour = approximately $5,200.
    \522\ The SEC estimates that, for the purposes of the PRA, 
requests for temporary hardship exemptions will impose 4 burden 
hours per year on private fund advisers in the aggregate. The SEC 
anticipants that five-eighths of this work will most likely be 
performed by a compliance manager at a cost of $273 per hour and 
that three-eighths of this work will most likely be performed by a 
general clerk at a cost of $50 per hour. (($273 per hour x \5/8\ of 
an hour) + ($50 per hour x \3/8\ of an hour)) x 4 hours = 
approximately $760.
    \523\ See supra note 424.
---------------------------------------------------------------------------

    Advisers may also incur costs related to the modification or 
deployment of systems to support their reporting obligations under Form 
PF.\524\ As discussed above, certain of the anticipated costs to Large 
Private Fund Advisers of automating Form PF reporting are accounted for 
in our cost estimates.\525\ In addition, Large Private Fund Advisers 
may incur costs associated with the acquisition or use of hardware 
needed to perform computations or otherwise process the data required 
on Form PF.\526\ Commenters did not provide estimates for these costs. 
However, as discussed above, we estimate that these costs, which are 
likely to vary significantly among advisers, will range from $0 to 
$25,000,000 in the aggregate for the first year of reporting, with the 
actual costs likely to fall in between these two end-points.\527\
---------------------------------------------------------------------------

    \524\ See supra section IV.G of this Release.
    \525\ See supra note 438 and accompanying text.
    \526\ See supra notes 434-441 and accompanying text.
    \527\ Id.
---------------------------------------------------------------------------

    Based on the foregoing estimates, we estimate that the aggregate 
annual costs of Form PF, other than for hardware costs, are 
approximately $108,000,000 in the first year and $60,500,000 in 
subsequent years.\528\ In addition, we estimate that hardware costs 
will add between $0 and $25,000,000 in the first year.\529\
---------------------------------------------------------------------------

    \528\ $107,000,000 (for periodic reporting in the first year) + 
$5,200 (for transition and final filings) + $760 (for hardship 
requests) + $684,000 (for filing fees) = approximately $108,000,000. 
$59,800,000 (for periodic reporting in subsequent years) + $5,200 
(for transition and final filings) + $760 (for hardship requests) + 
$684,000 (for filing fees) = approximately $60,500,000.
    \529\ See supra notes 440-441 and accompanying text.
---------------------------------------------------------------------------

    Reporting requirements can also impose costs beyond the direct 
costs associated with compiling and submitting data, and advisers 
subject to the Form PF reporting requirements may incur costs that are 
more difficult to quantify. One commenter, for instance, suggested an 
adviser may incur indirect ``costs associated with the risk of 
disclosure of highly sensitive proprietary information.'' \530\ As 
discussed above, Form PF elicits non-public information about private 
funds and their trading strategies, the public disclosure of which 
could adversely affect the funds and their investors.\531\ We are, 
however, working to establish controls designed to protect this 
sensitive information from improper or inadvertent disclosure and 
believe that the risk of such disclosure is low.\532\ If an adviser's 
Form PF data were disclosed despite the controls intended to maintain 
its confidentiality, there is some risk that a competitor may be able 
to use an adviser's data to replicate the adviser's trading strategy or 
trade against the adviser, thereby potentially harming the 
profitability of the strategy to that adviser. However, because data on 
Form PF generally could not, on its own, be used to identify individual 
investment positions, the ability of a competitor to use Form PF data 
in this manner is limited.\533\ In addition, the deadlines for filing 
Form PF have, in most cases, been significantly extended from the 
proposal, meaning that the filings will generally contain less current, 
and therefore less sensitive, data.\534\ In the very unlikely event 
that improper or inadvertent disclosures of Form PF data occurred 
frequently, the disclosures could discourage advisers from investing 
the time and other resources required to develop novel strategies, 
potentially reducing the range of options available to investors and 
inhibiting financial innovation.
---------------------------------------------------------------------------

    \530\ CCMR Letter.
    \531\ See supra section II.D of this Release.
    \532\ See supra sections II.D and II.E of this Release.
    \533\ See supra note 343.
    \534\ See supra notes 351 and 344 and accompanying text.
---------------------------------------------------------------------------

    We do not expect this rulemaking to have a significant negative 
effect on competition because the information generally will be non-
public and similar types of SEC-registered advisers will have 
comparable burdens under the Form.\535\ In addition, the SEC does not 
expect this rulemaking to have a significant negative effect on capital 
formation, again because the information collected generally will be 
non-public and, therefore, should not affect private fund advisers' 
ability to raise capital.
---------------------------------------------------------------------------

    \535\ See supra section II.D of this Release for a discussion of 
confidentiality of Form PF data.
---------------------------------------------------------------------------

    Although Form PF data generally will be non-public, Form PF will 
increase transparency to regulators.\536\ As discussed above, this may 
result in a positive effect on capital formation because advisers may, 
as a result, assess more carefully the risks associated with particular 
investments and, in the aggregate, allocate capital to investments with 
a higher value to the economy as a whole.\537\ However, this increased 
transparency could also have a negative effect on capital formation if 
it increases advisers' aversion to risk and, as a result, reduces 
investment in projects that may be risky but beneficial to the economy 
as a whole. To the extent that changes in investment allocations lead 
to reduced economic outcomes in the aggregate, Form PF reporting may 
result in a negative effect on capital available for investment.
---------------------------------------------------------------------------

    \536\ See supra section II.D of this Release for a discussion of 
confidentiality of Form PF data.
    \537\ See supra note 494 and accompanying text.
---------------------------------------------------------------------------

    The SEC also recognizes that the direct costs of completing and 
filing Form PF may reduce the amount of

[[Page 71170]]

capital that funds have available for investment or, if the costs are 
passed on to fund investors, reduce the amount of capital investors 
have available for investment. This could, in turn, affect capital 
formation.\538\ However, the direct costs of reporting on Form PF will, 
to some extent, only transfer capital from private fund advisers to 
other market participants, such as employees or service providers paid 
to complete the Form. Because private fund advisers may have different 
investment opportunities than these other market participants, this 
transfer may negatively affect aggregate economic outcomes. However, 
some of this transferred capital will be invested or spent and will not 
represent an aggregate loss to the economy. In addition, the direct 
costs of Form PF are, on average, small compared to other economic 
incentives that motivate private funds and their advisers to invest and 
grow.\539\
---------------------------------------------------------------------------

    \538\ One commenter expressed concern regarding the possible 
effects of Form PF reporting on economic growth, investors, 
investment opportunities, companies, markets, market liquidity and 
tax revenue as well as ``the cost in terms of jobs and capital.'' 
Issa Letter. This commenter suggested that these potential negative 
effects could flow from several sources, including: (1) The 
possibility that advisers will locate funds outside the United 
States as a result of, or to avoid, Form PF compliance costs or that 
these costs will be passed on to investors, causing them to seek 
investment opportunities outside the United States; and (2) the 
possibility that advisers will form fewer funds, slow the growth of 
their funds or shut down existing funds as a result of, or to avoid, 
Form PF compliance costs. We address these possible sources of 
indirect costs below.
    \539\ See infra notes 545 and 548 and accompanying text.
---------------------------------------------------------------------------

    One commenter expressed concern that this rulemaking could cause 
advisers, private funds or investors to seek investment opportunities 
outside the U.S. as a result of, for instance, increased costs.\540\ 
This rulemaking could impose costs on U.S. private fund advisers that 
non-U.S. private fund advisers would not bear unless they are subject 
to the Advisers Act and the Form PF reporting requirements. However, 
advisers generally would not be able to avoid these reporting 
obligations by simply organizing the fund in a third country because 
regulatory jurisdiction for Form PF does not depend solely on where the 
fund is formed.\541\ In addition, as noted above, ESMA has proposed a 
reporting regime similar to Form PF for alternative investment fund 
managers subject to the EU Directive. If that regime is adopted, we 
understand most such alternative investment managers would bear 
reporting costs similar to those that Form PF imposes. Accordingly, we 
believe the competitive impact of this difference in operating costs 
will be limited. We also do not expect that private funds will, to any 
significant extent, seek to avoid these regulatory burdens by foregoing 
participation in the U.S. capital markets because of the depth and 
liquidity of these markets and the stability afforded by the legal 
structures in the U.S.
---------------------------------------------------------------------------

    \540\ See Issa Letter.
    \541\ See supra note 134 and accompanying text.
---------------------------------------------------------------------------

    This commenter also suggested that some fund advisers may determine 
not to form a new private fund if the costs of Form PF outweigh the 
marginal benefits the adviser expects to obtain by forming the 
fund.\542\ Reduced fund formation could diminish competition and the 
number of choices available to investors. The SEC does not, however, 
believe the cost of reporting on Form PF will have a substantial 
negative effect on fund formation. An adviser with no existing private 
funds considering whether to form its first fund is likely to face 
little or no costs as a result of Form PF because it is unlikely to 
leap past a Large Private Fund Adviser Threshold and may not even 
exceed the minimum reporting threshold of $150 million in private fund 
assets under management.\543\ For an existing private fund adviser, 
forming a new private fund would increase the cost of reporting on Form 
PF, but the adviser would be able to leverage its experience and 
existing systems, making the incremental reporting more efficient than 
for an adviser first becoming subject to Form PF reporting 
requirements.\544\ In the case of either an adviser newly managing 
private funds or an adviser with existing private funds, the SEC 
believes that Form PF reporting costs are unlikely to discourage the 
formation of many funds because the costs of either becoming subject to 
Form PF as a smaller private fund adviser or reporting incrementally 
more information on Form PF are small when compared to possible 
management and performance fees. For example, the SEC estimates that 
the cost to smaller private fund advisers of completing and filing Form 
PF will average less than $14,000 per initial annual filing and $5,000 
per subsequent annual filing--or less than 0.01% of assets under 
management for the smallest adviser subject to Form PF reporting 
requirements--compared to annual management and performance fees that, 
at least among hedge fund advisers, average approximately 1.5% of 
assets under management and 20% of excess returns, respectively.\545\
---------------------------------------------------------------------------

    \542\ See Issa Letter.
    \543\ According to HFI data, even among the top 25 hedge fund 
launches reported in 2010, the average fund size was approximately 
$750 million, and existing advisers launched the majority of those 
funds in any case. This data also shows that, out of 135 total hedge 
fund launches reported in 2010 exceeding $50 million, at least 110 
of them raised under $300 million. HFI does not report in their 
annual global review hedge fund launches under $50 million. See HFI 
2011 Global Review, supra note 493. See also supra sections IV.A and 
IV.G of this Release (discussing estimates of Form PF reporting 
costs for smaller private fund advisers).
    \544\ In addition, in the case of large hedge fund advisers, the 
more detailed information they must file in section 2b of the Form 
only applies to qualifying hedge funds that have at least $500 
million in net assets.
    \545\ See Ibbotson, et al., supra note 95, at 15 (finding a 
management fee of 1.5% of assets under management and a 20% 
performance fee to be the median fee structure in the TASS hedge 
fund database). $14,000/$150,000,000 = approximately 0.009%.
---------------------------------------------------------------------------

    In addition, this commenter expressed concern that the Large 
Private Fund Adviser thresholds may encourage some private fund 
advisers with assets under management near but below the thresholds to 
attempt to staunch growth in their funds, either by refusing to admit 
new investors or by managing the investments of the funds, to remain 
below the thresholds.\546\ Similarly, this commenter suggested that 
some funds may even shut down to avoid Form PF reporting costs.\547\ 
The SEC believes, however, that substantial economic incentives will 
likely counter such behavior, including private fund performance fees 
that incentivize the private fund adviser to continue advising its 
funds and maximize fund appreciation and return. For example, a hedge 
fund with an initial value of $1.5 billion that experiences a 1% excess 
return will net $3 million in performance fees, and a 1% growth in 
assets under management will net an additional $225,000 per year in 
management fees, compared to an estimated cost of between $210,000 and 
$260,000 in the first year of reporting.\548\ In addition, we believe 
the cost to an adviser of reporting will decline over time as the 
adviser becomes more familiar with the Form and realizes efficiencies 
while, at the same time, the adviser will continue to charge management 
fee and potentially collect performance fees each year. With

[[Page 71171]]

respect to the large adviser threshold specifically, we anticipate that 
business relations with investors that may be damaged if the adviser 
turns away investor assets may also motivate advisers to continue to 
permit the size of their funds to increase as a result of new 
investment.
---------------------------------------------------------------------------

    \546\ See Issa Letter.
    \547\ Id.
    \548\ The calculations assume a management fee of 1.5% of assets 
under management and a 20% performance fee. See supra note 545. 
$93,100 for the initial quarterly report + $38,800 for each 
subsequent quarterly reporting x 3 quarterly reports = approximately 
$210,000 for the first year of reporting. See supra notes 513-514. 
In addition, the SEC has estimated that a Large Private Fund Adviser 
may incur between $0 and $50,000 in costs for the acquisition or use 
of hardware in the first year of reporting. See supra note 441 and 
accompanying text.
---------------------------------------------------------------------------

    As discussed above, we believe that private fund advisers, 
investors in private funds and the companies in which private funds may 
invest will enjoy certain benefits related to Form PF.\549\ We 
recognize, however, that many of Form PF's benefits will be widely 
distributed across the financial system while its costs will be 
concentrated. Private fund advisers will bear most of these costs, 
though they may also pass some of these costs on to fund investors, and 
to the extent that capital available for investment is reduced, the 
companies in which private funds would otherwise invest may also bear 
costs. In addition, the costs of Form PF to an individual adviser will 
vary depending on factors such as the state of its existing systems and 
the complexity of its business. As a result, the costs and benefits of 
Form PF to particular advisers, particular investors, particular 
companies and individual American citizens will not be evenly 
distributed. For certain individuals and entities, the costs of Form PF 
may even exceed the benefits to them. However, we believe that the 
aggregate benefits of this rulemaking will be substantial. Moreover, 
the uneven distribution of the benefits and costs of Form PF reflects 
the potential for an uneven distribution of the costs and benefits of 
engaging in risky financial activities that may impose negative 
externalities.\550\
---------------------------------------------------------------------------

    \549\ See supra section V.A of this Release.
    \550\ See, e.g., Iman Anabtawi and Steven L. Schwarcz, 
Regulating Systemic Risk: Towards an Analytical Framework, 86 Notre 
Dame L. Rev. 4, 27 (2011) (arguing that financial market 
participants will not expend sufficient effort to identify and avoid 
conditions giving rise to systemic risk and explaining that one 
factor contributing to this behavior is that ``the benefits of 
exploiting finite capital resources accrue to individual market 
participants, each of whom is motivated to maximize use of the 
resource, whereas the costs of exploitation are distributed more 
widely.* * * The root of the commons problem in financial markets is 
the asymmetry in the distribution of gains and losses associated 
with investment decisions.* * * In the case of a positive outcome, 
the firm captures the full benefits of the investment's success. In 
the case of a negative outcome, however, the firm may not suffer the 
full consequences of the poor investment. Rather, if the firm fails 
or merely defaults, those consequences will impact financial market 
participants that rely on the soundness of the firm's financial 
condition. Furthermore, if the firm is deemed too systemically 
significant to fail, its loss may be absorbed by government as a 
lender of last resort. In either case, the uninternalized costs 
associated with risk-taking by financial firms leads them to 
overexploit scarce capital resources in the form of socially 
excessive risk-taking.'').
---------------------------------------------------------------------------

C. CFTC Statutory Findings

    Rule 4.27, as finalized, would deem a CPO registered with the CFTC 
that is dually registered as a private fund adviser with the SEC to 
have satisfied certain reporting requirements that the CFTC may adopt 
by filing Form PF with the SEC. The CPOs and CTAs that are dually 
registered as private fund advisers would be required to provide 
annually a limited amount of basic information on Form PF about the 
operations of their private funds. Only large CPOs and CTAs that are 
also registered as private fund advisers with the SEC would have to 
submit on a quarterly basis the full complement of systemic risk 
related information required by Form PF.\551\ As noted above, the Dodd-
Frank Act tasks FSOC with monitoring the financial services marketplace 
in order to identify potential threats to the financial stability of 
the United States.\552\ The Dodd-Frank Act also requires FSOC to 
collect information from member agencies--like the SEC and the CFTC--to 
support its functions.\553\ The CFTC and the SEC are jointly adopting 
sections 1 and 2 of Form PF as a means to collect the information 
necessary to permit FSOC to fulfill its obligation to monitor private 
funds, and in order to identify any potential systemic threats arising 
from their activities. The CFTC and the SEC do not currently collect 
the information that is covered in proposed sections 1 and 2 of Form 
PF.
---------------------------------------------------------------------------

    \551\ See 5 U.S.C. 801(a)(1)(B)(i).
    \552\ See section 112(a)(2)(C) of the Dodd-Frank Act.
    \553\ See section 112(d)(1) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Section 15(a) of the CEA requires that the CFTC, before 
promulgating a regulation under the Act or issuing an order, consider 
the costs and benefits of its action. By its terms, CEA Section 15(a) 
does not require the CFTC to quantify the costs and benefits of a new 
regulation or determine whether the benefits of the regulation outweigh 
its costs. Rather, CEA section 15(a) simply requires the CFTC to 
``consider the costs and benefits'' of its action. CEA section 15(a)(2) 
specifies that costs and benefits shall be evaluated in light of the 
following considerations: (1) Protection of market participants and the 
public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations.\554\ 
Accordingly, the CFTC could, in its discretion, give greater weight to 
any of the five considerations and could, in its discretion, determine 
that, notwithstanding its costs, a particular regulation was necessary 
or appropriate to protect the public interest or to effectuate any of 
the provisions or to accomplish any of the purposes of the Act.
---------------------------------------------------------------------------

    \554\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Before promulgating these final rules, the CFTC sought public 
comment on the rules themselves, including the cost-benefit 
considerations of section 1 and 2 of Form PF.\555\ The CFTC also 
specifically invited commenters to submit ``any data or other 
information that they may have quantifying or qualifying the perceived 
costs and benefits of this proposed rule with their comment 
letters.''\556\ As noted above, the CFTC and the SEC received comments 
on the cost and benefits of the proposed regulations and the estimates 
of costs included in the Proposing Release, and they have carefully 
considered those comments. CEA Rule 4.27 does not impose any additional 
burdens or costs upon registered CPOs and CTAs that are dually 
registered as investment advisers with the SEC. By filing Form PF with 
the SEC, these dual registrants would be deemed to have satisfied 
certain reporting obligations with the CFTC, should the CFTC adopt such 
requirements.
---------------------------------------------------------------------------

    \555\ See generally, CFTC Proposing Release, supra note 16, at 
76 FR 8068, 8087 (for CFTC's request for comment on the cost-benefit 
considerations).
    \556\ See generally, CFTC Proposing Release, supra note 16, at 
76 FR 8068, 8087.
---------------------------------------------------------------------------

1. General Costs and Benefits
    With respect to costs, the CFTC has determined that: (1) Without 
the reporting requirements imposed by this rulemaking, FSOC will not 
have sufficient information to identify and address potential threats 
to the financial stability of the United States (such as the near 
collapse of Long Term Capital Management); (2) the reporting 
requirements, once finalized, will provide the CFTC with better 
information regarding the business operations, creditworthiness, use of 
leverage, and other material information of certain registered CPOs and 
CTAs that are also registered as investment advisers with the SEC; and 
(3) while they are necessary to U.S. financial stability, the reporting 
requirements will create additional compliance costs for these 
registrants, as discussed in the foregoing portions of the Economic 
Analysis as well as in the PRA section of this Release.
    The CFTC has determined that the proposed reporting requirements 
will provide a benefit to all investors and

[[Page 71172]]

market participants by providing the CFTC and other policy makers with 
more complete information about these registrants and the potential 
risk their activities may pose to the U.S. financial system. In turn, 
this information will enhance the CFTC's ability to appropriately 
tailor its regulatory policies to the commodity pool industry and its 
operators and advisors. As mentioned above, the CFTC and the SEC do not 
have access to this information today and have instead been made to use 
information from other, less reliable sources.
2. Section 15(a) Determination
    As stated above, section 15(a) of the CEA requires the CFTC to 
consider the costs and benefits of its actions in light of five broad 
areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations.
a. Protection of Market Participants and the Public
    Should the CFTC adopt certain of its proposed systemic risk 
reporting requirements, the coordination between the CFTC and SEC on 
this rulemaking would result in significant efficiencies for any 
private fund adviser that is also registered as a CPO or CTA with the 
CFTC. This is because, under CEA rule 4.27, filling Form PF would 
satisfy both SEC and CFTC reporting obligations with respect to 
commodity pools that are ``private funds'' and may satisfy CFTC 
reporting obligations with respect to commodity pools that are not 
``private funds,'' in each case should the CFTC adopt such reporting 
obligations. As noted above, the CFTC has determined that this 
coordination will protect such participants from duplicative reporting 
while still providing FSOC with needed information to fulfill its 
mission to protect the public from potential threats to the financial 
stability of the United States.
    Commodity pools that fall within the definition of private funds 
and will be filing Form PF represent a sector of collective investment 
vehicles that have experienced a substantial growth and have been the 
subject of international concern regarding their size in juxtaposition 
with the markets as a whole. This concern has led to several countries 
instituting similar data collection efforts and it is well recognized 
that the U.S. contingent of these funds represents a sizable portion of 
all trading by this type of entity. Thus, this combined SEC/CFTC effort 
will contribute substantially to a better understanding of the impact 
of private investment vehicles on both the U.S. and international 
markets and provide the information necessary to intelligently develop 
regulatory efforts and oversight programs to provide adequate 
protection of market participants and the public at large.
    Finally, the CFTC agrees with the SEC that Form PF, as adopted, 
will increase the amount and quality of information available regarding 
a previously opaque area of investment activity and, thereby, enhance 
the ability of regulators to protect investors and oversee the markets 
that they regulate.
b. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Although the CFTC does not believe this rule relates directly to 
the efficiency or competitiveness of futures markets, the CFTC does 
recognize that the interconnectedness of the United States financial 
system is such that the integrity of futures markets depends on the 
financial stability of the entire financial system. To the extent that 
the information collected by Form PF assists the Commissions and FSOC 
to identify threats that may damage the United States financial system, 
the regulations herein indirectly protect the integrity of futures 
markets.
c. Price Discovery
    The CFTC has not identified a specific effect on price discovery as 
a result of Form PF or related regulations.
d. Sound Risk Management
    The Dodd-Frank Act tasks FSOC and its member agencies (including 
both the SEC and the CFTC) with mitigating risks to the financial 
stability the United States. The CFTC believes these regulations are 
necessary to fulfill that obligation. Risk management is provided by 
these regulations in two main ways: (1) Assisting FSOC in fulfilling 
its mission of protecting the systemic financial stability of the 
United States; and (2) improving the ability of regulators to oversee 
markets. These benefits are shared by market participants, at least 
indirectly, as a part of the United States financial system. In 
addition, CPOs and CTAs that are dually registered as investment 
advisers will benefit from these regulations to the extent that 
reporting on Form PF requires such entities to review their firms' 
portfolios, trading practices, and risk profiles; thus, the CFTC 
believes that these regulations may improve the sound risk management 
practices within their internal risk management systems.
e. Other Public Interest Considerations
    The CFTC has not identified other public interest considerations 
related to the costs and benefits of these regulations.

VI. Final Regulatory Flexibility Analysis

    SEC:
    The SEC has prepared the following Final Regulatory Flexibility 
Analysis (``FRFA'') regarding Advisers Act rule 204(b)-1 in accordance 
with section 4(a) of the Regulatory Flexibility Act (``RFA'').\557\ The 
SEC prepared the Initial Regulatory Flexibility Analysis (``IRFA'') in 
conjunction with the Proposing Release in January 2011.\558\
---------------------------------------------------------------------------

    \557\ 5 U.S.C. 603(a).
    \558\ See Proposing Release, supra note 12, at section VI.
---------------------------------------------------------------------------

A. Need for and Objectives of the New Rule

    New Advisers Act rule 204(b)-1 and Form PF implement provisions of 
the Dodd-Frank Act by specifying information that private fund advisers 
must disclose confidentially to the SEC, which information the SEC will 
provide to FSOC for systemic risk assessment purposes. Under the new 
rule, private fund advisers must file information responsive to all or 
portions of Form PF on a periodic basis. The scope of the required 
information and the frequency of the reporting is related to the amount 
of private fund assets that each private fund adviser manages and the 
type of private fund to which those assets relate. Specifically, 
smaller private fund advisers and large private equity advisers must 
report annually, while large hedge fund and liquidity fund advisers 
must report quarterly and provide additional information regarding the 
hedge funds and liquidity funds, respectively, that they manage.\559\
---------------------------------------------------------------------------

    \559\ See section II.A of this Release (describing who must file 
Form PF), section II.B of this Release (discussing the frequency 
with which private fund advisers must file Form PF), and section 
II.C of this Release (describing the information that private fund 
advisers must report on Form PF). See also proposed Instruction 9 to 
Form PF for information regarding the frequency with which private 
fund advisers must file Form PF.
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA. In 
particular, we sought comment on the number of small entities, 
particularly small advisers, to which the new Advisers Act rule and 
reporting requirements would apply and the effect

[[Page 71173]]

on those entities, including whether the effects would be economically 
significant. None of the comment letters we received addressed the IRFA 
or the effect of the proposal on small entities, as that term was used 
in the IRFA.

C. Small Entities Subject to the Rule

    Under SEC rules, for the purposes of the Advisers Act and the 
Regulatory Flexibility Act, an investment adviser generally is a small 
entity if it: (i) Has assets under management having a total value of 
less than $25 million; (ii) did not have total assets of $5 million or 
more on the last day of its most recent fiscal year; and (iii) does not 
control, is not controlled by, and is not under common control with 
another investment adviser that has assets under management of $25 
million or more, or any person (other than a natural person) that had 
total assets of $5 million or more on the last day of its most recent 
fiscal year.\560\
---------------------------------------------------------------------------

    \560\ See Advisers Act rule 0-7(a).
---------------------------------------------------------------------------

    Advisers Act rule 204(b)-1 requires an investment adviser 
registered with the SEC to file certain information on Form PF if it 
manages one or more private funds and had at least $150 million in 
regulatory assets under management attributable to private funds as of 
the end of its most recently completed fiscal year. Under section 203A 
of the Advisers Act, most advisers qualifying as small entities are 
prohibited from registering with the SEC and are instead registered 
with state regulators. Therefore, few small advisers will meet the 
registration criterion. Fewer still are likely to meet the minimum 
reporting threshold of $150 million in regulatory assets under 
management attributable to private funds. By definition, no small 
entities will, on their own, meet this threshold, which the SEC did not 
include in the proposal but has added in response to commenter 
concerns.\561\ Advisers are, however, required to determine whether 
they exceed this threshold by aggregating their private fund assets 
under management with those of their related persons (other than 
separately operated related persons), with the result that some small 
entities may be subject to Form PF reporting requirements.\562\ The SEC 
does not have a precise count of the number of advisers that may 
satisfy the minimum reporting threshold based on the aggregate private 
fund assets that it and its related persons manage because such 
advisers file separate reports on Form ADV. However, because of the new 
minimum reporting threshold, the group of small entities subject to the 
rule as adopted will be a subset of the group that would have been 
subject to the proposed rule. In the Proposing Release, the SEC 
estimated that approximately 50 small entities were registered with the 
SEC and advised one or more private funds.\563\ Accordingly, the SEC 
estimates that no more than 50 small entities are likely to become 
subject to Form PF reporting obligations under the final rule.
---------------------------------------------------------------------------

    \561\ See supra note 56-59 and accompanying text.
    \562\ See supra section II.A.5 of this Release. The SEC notes 
that related persons are permitted to file on a single Form PF. As a 
result, even in the case that a larger related person causes a small 
entity to exceed the minimum reporting threshold, the small entity 
may not ultimately bear the reporting burden. See supra section 
II.A.6 of this Release. In addition, under Advisers Act rule 0-
7(a)(3), an adviser with affiliates exceeding the other small entity 
thresholds under that rule would not be regarded as a small entity, 
suggesting that it may not be possible both to qualify as a small 
entity under that rule and to satisfy the criteria that would 
subject an adviser to Form PF reporting obligations.
    \563\ See Proposing Release, supra note 12, at n.212 and 
accompanying text.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Advisers Act rule 204(b)-1 and Form PF impose certain reporting and 
compliance requirements on advisers, including small advisers. A small 
adviser that is subject to the rule must complete all or part of 
section 1 of the Form. As discussed above, the SEC estimates that 
completing, reviewing and filing Form PF will cost approximately 
$13,600 for each small adviser in its first year of reporting and 
$4,200 per year for each subsequent year.\564\ In addition, small 
entities must pay a filing fee of $150 per annual filing.\565\
---------------------------------------------------------------------------

    \564\ See supra notes 509-510 and accompanying text.
    \565\ See supra note 432 and accompanying text.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the SEC to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant impact on small entities. In 
connection with the proposed rules and amendments, the SEC considered 
the following alternatives: (1) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (3) the use 
of performance rather than design standards; and (4) an exemption from 
coverage of the rule, or any part thereof, for small entities.
    Regarding the first and fourth alternatives, the SEC is adopting a 
minimum reporting threshold of $150 million as well as reporting 
requirements and timetables that differ for entities of smaller sizes. 
A small entity adviser that is subject to the rule only needs to file 
Form PF annually and complete applicable portions of section 1 of the 
form.\566\ Large Private Fund Advisers must file additional 
information, and large hedge fund or large liquidity fund advisers must 
file more frequently. In addition, the filing fees that a smaller 
adviser must pay in a given year are lower than those that a large 
hedge fund or large liquidity fund advisers must pay over the same 
period. Regarding the second alternative, the information that a small 
entity subject to the rule must provide under section 1 of Form PF is 
much simpler than the information required of large hedge fund or large 
liquidity fund advisers and is consolidated in one section of the form. 
Regarding the third alternative, the SEC has, in a number of cases, 
permitted advisers to rely on their own methodologies in providing the 
information that the Form requires, though the use of performance 
standards is limited by the need to obtain comparable information from 
all filers.
---------------------------------------------------------------------------

    \566\ If the adviser has no hedge fund assets under management, 
it need not complete section 1.C of the Form. Advisers that manage a 
significant amount of both registered money market fund and 
liquidity fund assets must complete section 3 of Form PF, but there 
are no small entities that manage a registered money market fund.
---------------------------------------------------------------------------

    CFTC:
    Under CEA rule 4.27, the CFTC would not impose any additional 
burden upon registered CPOs and CTAs that are dually registered as 
investment advisers with the SEC because such entities are only 
required to file Form PF with the SEC. Further, certain CPOs registered 
with the CFTC that are also registered with the SEC would be deemed to 
have satisfied certain CFTC-related filing requirements, should the 
CFTC adopt such requirements, by completing and filing the applicable 
sections of Form PF with the SEC. Therefore, any burden imposed by Form 
PF through rule 4.27 on small entities registered with both the CFTC 
and the SEC has been accounted for within the SEC's calculations 
regarding the impact of this collection of information under the RFA 
or, to the extent the reporting may relate to commodity pools that are 
not private funds, the CFTC anticipates that it would account for this 
burden should it adopt a future rulemaking establishing

[[Page 71174]]

reporting requirements with respect to those commodity pools. 
Accordingly, the Chairman, on behalf of the CFTC, hereby certifies 
pursuant to 5 U.S.C. 605(b) that the rules as adopted will not have a 
significant impact on a substantial number of small entities.

VII. Statutory Authority

    CFTC:
    The CFTC is adopting rule 4.27 [17 CFR 4.27] pursuant to its 
authority set forth in section 4n of the Commodity Exchange Act [7 
U.S.C. 6n].
    SEC:
    The SEC is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant to 
its authority set forth in sections 204(b) and 211(e) of the Advisers 
Act [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.
    The SEC is adopting rule 279.9 pursuant to its authority set forth 
in sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4 and 
15 U.S.C. 80b-11], respectively.

List of Subjects

17 CFR Part 4

    Advertising, Brokers, Commodity futures, Commodity pool operators, 
Commodity trading advisors, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Parts 275 and 279

    Reporting and recordkeeping requirements, Securities.

Text of Final Rules

Commodity Futures Trading Commission

    For the reasons set out in the preamble, the CFTC is amending Title 
17, Chapter I of the Code of Federal Regulations as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. The authority citation for part 4 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, 
and 23.

0
2. Add Sec.  4.27 to subpart B to read as follows:

Sec.  4.27  Additional reporting by advisors of commodity pools.

    Except as otherwise expressly provided in this section, CPOs and 
CTAs that are dually registered with the Securities and Exchange 
Commission and are required to file Form PF pursuant to the rules 
promulgated under the Investment Advisers Act of 1940, shall file Form 
PF with the Securities and Exchange Commission in lieu of filing such 
other reports with respect to private funds as may be required under 
this section. In addition, except as otherwise expressly provided in 
this section, CPOs and CTAs that are dually registered with the 
Securities and Exchange Commission and are required to file Form PF 
pursuant to the rules promulgated under the Investment Advisers Act of 
1940, may file Form PF with the Securities and Exchange Commission in 
lieu of filing such other reports with respect to commodity pools that 
are not private funds as may be required under this section. Dually 
registered CPOs and CTAs that file Form PF with the Securities and 
Exchange Commission will be deemed to have filed Form PF with the 
Commission for purposes of any enforcement action regarding any false 
or misleading statement of a material fact in Form PF.

Securities and Exchange Commission

    For the reasons set out in the preamble, the SEC is amending Title 
17, Chapter II of the Code of Federal Regulations as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
3. The authority citation for part 275 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *

0
4. Section 275.204(b)-1 is added to read as follows:

Sec.  275.204(b)-1  Reporting by investment advisers to private funds.

    (a) Reporting by investment advisers to private funds on Form PF. 
If you are an investment adviser registered or required to be 
registered under section 203 of the Act (15 U.S.C. 80b-3), you act as 
an investment adviser to one or more private funds and, as of the end 
of your most recently completed fiscal year, you managed private fund 
assets of at least $150 million, you must complete and file a report on 
Form PF (17 CFR 279.9) by following the instructions in the Form, which 
specify the information that an investment adviser must provide. Your 
initial report on Form PF is due no later than the last day on which 
your next update would be timely in accordance with paragraph (e) if 
you had previously filed the Form; provided that you are not required 
to file Form PF with respect to any fiscal quarter or fiscal year 
ending prior to the date on which your registration becomes effective.
    (b) Electronic filing. You must file Form PF electronically with 
the Form PF filing system on the Investment Adviser Registration 
Depository (IARD).

    Note to paragraph (b): Information on how to file Form PF is 
available on the Commission's Web site at http://www.sec.gov/iard.

    (c) When filed. Each Form PF is considered filed with the 
Commission upon acceptance by the Form PF filing system.
    (d) Filing fees. You must pay the operator of the Form PF filing 
system a filing fee as required by the instructions to Form PF. The 
Commission has approved the amount of the filing fee. No portion of the 
filing fee is refundable. Your completed Form PF will not be accepted 
by the operator of the Form PF filing system, and thus will not be 
considered filed with the Commission, until you have paid the filing 
fee.
    (e) Updates to Form PF. You must file an updated Form PF:
    (1) At least annually, no later than the date specified in the 
instructions to Form PF; and
    (2) More frequently, if required by the instructions to Form PF. 
You must file all updated reports electronically with the Form PF 
filing system.
    (f) Temporary hardship exemption.
    (1) If you have unanticipated technical difficulties that prevent 
you from submitting Form PF on a timely basis through the Form PF 
filing system, you may request a temporary hardship exemption from the 
requirements of this section to file electronically.
    (2) To request a temporary hardship exemption, you must:
    (i) Complete and file in paper format, in accordance with the 
instructions to Form PF, Item A of Section 1a and Section 5 of Form PF, 
checking the box in Section 1a indicating that you are requesting a 
temporary hardship exemption, no later than one business day after the 
electronic Form PF filing was due; and
    (ii) Submit the filing that is the subject of the Form PF paper 
filing in electronic format with the Form PF filing system no later 
than seven business days after the filing was due.
    (3) The temporary hardship exemption will be granted when you file 
Item A of Section 1a and Section 5 of Form PF, checking the box in 
Section 1a indicating that you are requesting a temporary hardship 
exemption.
    (4) The hardship exemptions available under Sec.  275.203-3 do not 
apply to Form PF.
    (g) Definitions. For purposes of this section:

[[Page 71175]]

    (1) Assets under management means the regulatory assets under 
management as determined under Item 5.F of Form ADV (Sec.  279.1 of 
this chapter).
    (2) Private fund assets means the investment adviser's assets under 
management attributable to private funds.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
5. The authority citation for Part 279 continues to read as follows:

    Authority: 15 U.S.C. 80b-1, et seq.

0
6. Section 279.9 is added to read as follows:

Sec.  279.9  Form PF, reporting by investment advisers to private 
funds.

    This form shall be filed pursuant to Rule 204(b)-1 (Sec.  
275.204(b)-1 of this chapter) by certain investment advisers registered 
or required to register under section 203 of the Act (15 U.S.C. 80b-3) 
that act as an investment adviser to one or more private funds.

    Note: The text of the following Form PF will not appear in the 
Code of Federal Regulations.

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    By the Commodity Futures Trading Commission.
    Dated: October 31, 2011.
David A. Stawick,
Secretary.
    By the Securities and Exchange Commission.
    Dated: October 31, 2011.
Elizabeth M. Murphy,
Secretary .
[FR Doc. 2011-28549 Filed 11-15-11; 8:45 am]
BILLING CODE 6351-01-P; 8011-01-P