SEC Proposes Private Fund Reporting Rule Requiring Significant Additional Disclosures by Private Fund Advisers

On January 25, 2011, the SEC proposed new Rule 204(b)–1 under the Advisers Act to require that SEC-registered investment advisers report systemic risk information to the SEC on Form PF if they advise one or more private funds. The information provided on Form PF would be used by the Financial Stability Oversight Council (FSOC) to monitor systemic risk. The proposed rule is adopted under Section 404 of the Dodd-Frank Act, which amends section 204(b) of the Advisers Act, and directs the SEC to require private fund advisers “to maintain records and file reports containing such information as the SEC deems necessary and appropriate in the public interest and for investor protection or for the assessment of systemic risk by FSOC.” Because Form PF would elicit non-public information about private funds and their trading strategies, which, if made public, could adversely affect the funds and their investors, the SEC and FSOC are required to ensure the information remains confidential. How exactly this will be done, and what measures the regulators will take to maintain confidentiality, remains to be seen.

Under the proposed rule, the frequency of filing and the amount of information required to be reported on Form PF would vary based on both the size of the adviser and the type of funds it advises. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, "liquidity fund" (i.e. unregistered money market fund), or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers. Smaller private fund advisers would file Form PF only once a year and would report only basic information regarding leverage, credit providers, investor concentration and fund performance. Smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms. Large private fund advisers would file Form PF on a quarterly basis and would provide more detailed information regarding exposures by asset class, geographical concentration and turnover. In addition, for each hedge fund having a net asset value of at least $500 million, large advisers would report certain information relating to that fund's investments, leverage, risk profile and liquidity.

The SEC release explaining the proposal is available here, and includes the full text of proposed Rule 204(b)–1 and Form PF. Comments on the proposed rule may be submitted electronically using the SEC’s Internet Comment Form. For additional information on Form PF or proposed Rule 204(b)–1, please contact us at (619) 278-0020.