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

    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\
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    \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

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.
---------------------------------------------------------------------------

    \177\ See Instruction 9 to Form PF.
    \178\ See Advisers Act rule 204(b)-1(f); Instruction 14 to Form
PF. The adviser would complete and file on paper Item A of section
1a and section 5 of Form PF, checking the box in section 1a
indicating that it is requesting a temporary hardship exemption. The
adviser must file any request for a temporary hardship exemption no
later than one business day after the electronic Form PF filing was
due. The adviser must then submit the filing that is the subject of
the Form PF paper filing in electronic format with the Form PF
filing system no later than seven business days after the filing was
due.
---------------------------------------------------------------------------

C. Information Required on Form PF

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

    \179\ See supra section I.B of this Release.
---------------------------------------------------------------------------

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

questions, which relate to valuation, beneficial ownership and the
identity of service providers, would require competitively sensitive or
proprietary information and would be more appropriately reported
confidentially on Form PF.
---------------------------------------------------------------------------

    \180\ See, e.g., AFL-CIO Letter; AFR Letter; Merkl February
Letter; MSCI Letter; comment letter of Plexus Consulting Group (Feb.
28, 2011). See also supra note 76 and accompanying text.
    \181\ See, e.g., AIMA General Letter; IAA Letter; Olympus
Letter; PEGCC Letter. See infra note 309 and accompanying text.
    \182\ See IAA Letter; MFA Letter; Seward Letter.
---------------------------------------------------------------------------

    As discussed in greater detail below, Form PF, as adopted,
addresses the concerns of many commenters with changes from the
proposal that we believe will significantly reduce the burden of
reporting and clarify how commenters are expected to respond. At the
same time, the final Form preserves much of the information that the
proposal would require. Our revised approach is intended to respond to
industry concerns while still providing FSOC the information it needs
to monitor systemic risk across the private fund industry.
    Two of the changes we are making, in particular, illustrate this
revised approach. The first is the removal of the proposed
certification language. This would have required an authorized
individual to affirm ``under penalty of perjury'' that the statements
made in Form PF are ``true and correct.'' \183\ This certification was
borrowed from the SEC's existing Advisers Act reporting form, Form ADV.
However, a number of commenters expressed concern that such a standard
would be inappropriate for Form PF because the Form requires advisers
to provide estimates and exercise significant judgment in preparing
responses.\184\ In consideration of the nature of the information
required on Form PF, we are persuaded that a certification is
unnecessary and that a signature confirming that the Form is filed with
proper authority is sufficient.\185\
---------------------------------------------------------------------------

    \183\ See Question 2 and Instruction 11 to Form PF. If the
adviser is also registered with the CFTC as CPO or CTA, the
signature page also requires the signatory to acknowledge that
misstatements or omissions of material fact on Form PF constitute a
violation of the CEA. This acknowledgement is included simply to
remove any doubt created by the filing of the Form through the SEC
rather than directly with the CFTC, which is merely a matter of
convenience for advisers.
    \184\ See, e.g., ABA Committees Letter; AIMA General Letter;
Kleinberg General Letter; MFA Letter; PEGCC Letter. Some of these
commenters also saw the certification standard and the reporting
deadlines as related issues, arguing that the more quickly advisers
are required to report, the less confidence they will have in their
estimates. See, e.g., BlackRock Letter; Fidelity Letter; PEGCC
Letter; SIFMA Letter; USCC Letter. As discussed above in section
II.B.2 of this Release, we have also extended the proposed filing
deadlines. Several commenters compared Form PF to other SEC forms
and suggested that we either require just a signature without a
certification or that we use a less stringent standard, such as good
faith. See MFA Letter (pointing to the certification in the SEC's
Schedule 13G). See also ABA Committees Letter (comparing Form PF to
other SEC forms, including Form N-SAR, Form N-Q, Schedule 13D and
Schedule 13G); AIMA General Letter (pointing to Schedule 13G);
BlackRock Letter; Kleinberg General Letter.
    \185\ We note, however, that even absent the certification, a
willful misstatement or omission of a material fact in any report
filed with the SEC under the Advisers Act is unlawful. See section
207 of the Advisers Act. We have also added an instruction to the
Form that clarifies when an adviser is required to amend its filing
to correct an error. In particular, Instruction 16 to Form PF
explains that an adviser is not required to update information that
it believes in good faith properly responded to Form PF on the date
of filing even if that information is subsequently revised for
purposes of the adviser's recordkeeping, risk management or investor
reporting (such as estimates that are refined after completion of a
subsequent audit). The instruction also explains that large hedge
fund advisers and large liquidity fund advisers that comply with
their fourth quarter filing obligations by submitting an initial
filing followed by an amendment in accordance with Instruction 8 to
Form PF will not be viewed as affirming responses regarding one fund
solely by providing updated information regarding another fund at a
later date.
---------------------------------------------------------------------------

    The second change is to increase the ability of advisers to rely on
their internal methodologies when reporting on Form PF.\186\ A number
of commenters encouraged this approach, recommending ``that the
instructions to the Form be modified to confirm that advisers be able
to rely on the same internal reporting procedures and practices when
reporting on the Form that they would use when reporting to advisory
clients, unless directly contradicted by the instructions.'' \187\ The
revised approach strikes an appropriate balance between easing the
burden on advisers by allowing them to rely on their existing practices
and ensuring that FSOC receives comparable data across the industry.
This change is intended, together with the removal of the
certification, to clarify that Form PF does not require the time or
expense involved in, for instance, an audit of the information included
on Form PF, and we anticipate that these changes will reduce the burden
that many advisers incur in completing the Form.\188\
---------------------------------------------------------------------------

    \186\ See Instruction 15 to Form PF. As noted in the
instruction, we would expect reporting on Form PF to be consistent
with information the adviser uses for internal and investor
reporting purposes. Methodologies also must be consistently applied,
and to the extent we have indicated how an adviser should respond to
a question, the answer should be consistent with our instructions.
In addition to this general instruction, we have increased the
ability of advisers to rely on their own methodologies with a number
of specific changes throughout the Form, including permitting
advisers to report performance using their existing practices,
allowing flexibility in reporting interest rate sensitivities and
changing the frequency and substance of reporting for large private
equity advisers. See, e.g., infra notes 202, 241-242, 247-248 and
258-260 and accompanying text and section II.C.4.
    \187\ BlackRock Letter. See also IAA Letter; MFA Letter; PEGCC
Letter; SIFMA Letter; TCW Letter.
    \188\ If audited information is available at the time an adviser
files Form PF, we would of course expect responses to Form PF to be
consistent with that audited information.
---------------------------------------------------------------------------

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

will assist us and FSOC in monitoring the amount of assets managed by
private fund advisers and the general distribution of those assets
among various types of private funds.\191\ This information also
provides data about the size of the adviser, the nature of the
adviser's activities and the extent to which assets are managed rather
than owned, which are factors that FSOC must consider in making a
determination to designate a nonbank financial company for FRB
supervision under the Dodd-Frank Act.\192\
---------------------------------------------------------------------------

    \189\ See Question 1 on Form PF.
    \190\ See Question 3 on Form PF. This question requires the
adviser to report the portion of its assets under management that
are attributable to hedge funds, liquidity funds, private equity
funds, real estate funds, securitized asset funds, venture capital
funds, other private funds, and funds and accounts other than
private funds. We have modified the instructions to Question 3 to
improve their consistency and to respond to a commenter's request
for clarification regarding the meaning of ``funds and accounts
other than private funds.'' See MFA Letter. We have also determined
not to adopt a proposed question that would have required advisers
to report their aggregate gross and net regulatory assets under
management because this information can be derived from the data
reported in Question 3. See the Proposing Release, supra note 12,
for the proposed Question 3 on Form PF.
    \191\ Question 4 in section 1a of Form PF also permits an
adviser to explain any assumptions it made in responding to Form PF.
This question is optional. One commenter expressed support for
``providing space for managers to describe any assumptions they make
in responding to a question,'' and we are adopting this question
substantially as proposed. See MFA Letter.
    \192\ See section 113(a) of the Dodd-Frank Act; FSOC Second
Notice, supra note 6.
---------------------------------------------------------------------------

b. Section 1b of Form PF
    Section 1b of Form PF elicits certain identifying and other basic
information about each private fund the adviser manages. The adviser
generally must complete a separate section 1b for each private
fund.\193\ This section of the Form requires reporting of each private
fund's gross and net assets and the aggregate notional value of its
derivative positions.\194\ It also requires basic information about the
fund's borrowings, including a breakdown showing whether the creditor
is based in the United States and whether it is a financial
institution.\195\ Advisers must also report the percentage of the
fund's equity held by the five largest equity holders, which provides
information about the concentration of the fund's investor base.\196\
Two new questions, which we have added in connection with other changes
to the Form, also require the value of the fund's investments in other
private funds and of the parallel managed accounts managed alongside
the fund.\197\
---------------------------------------------------------------------------

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

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

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

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

    We have also added to section 1b two questions that the SEC
originally proposed as part of the expanded private fund reporting in
Form ADV.\203\ The first, Question 14, requires that advisers report
the assets and liabilities of each fund broken down using categories
that are based on the fair value hierarchy established under U.S.
generally accepted accounting principles (``GAAP'').\204\ The second,
Question 16, requires that advisers provide the approximate percentage
of each fund beneficially owned by certain types of investors.\205\ As
discussed in the Implementing Adopting Release, the SEC determined not
to adopt these questions on Form ADV in response to commenter concerns
that they would result in the public disclosure of competitively
sensitive or proprietary information.\206\ We have added these
questions to Form PF (with the modifications discussed below) because,
as the SEC explained in the Implementing Adopting Release, this
information may be important to FSOC's systemic risk monitoring
activities and to our investor protection mission.\207\
---------------------------------------------------------------------------

    \203\ See Questions 14 and 16 on Form PF.
    \204\ Advisers must report this information annually (or on
their fourth quarter updates, in the case of large hedge fund and
large liquidity fund advisers). This question will provide
information indicating the illiquidity and complexity of a fund's
portfolio and the extent to which the fund's value is determined
using metrics other than market mechanisms. In a recent rulemaking
release, FSOC identified this fair value categorization as the type
of information that may be important for assessing liquidity risk
and maturity mismatch, one factor in determining whether a nonbank
financial company may pose systemic risk. See FSOC Second Notice,
supra note 6. See also Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment Advisers Act Release No.
3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (``Implementing
Proposing Release'') for the proposed version of Form ADV, Part 1A,
section 7.B.(1)A. of Schedule D, question 12. See also FASB ASC 820-
10-50-2b.
    We have modified this question from the proposal to expressly
include definitions for Levels 1, 2 and 3 of the hierarchy. This
change is intended to minimize ambiguity for advisers that do not
utilize GAAP or another international accounting standard that
requires the contemplated breakdown of assets and liabilities.
Advisers that already prepare this breakdown for financial reporting
purposes should respond to this question using the fair value
hierarchy established under the applicable accounting standard.
    \205\ See the Implementing Proposing Release for the proposed
version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D,
question 17.
    \206\ See Implementing Adopting Release, supra note 11, at nn.
246-247. Information filed on Form ADV is made available to the
public through the Investment Adviser Public Disclosure (IAPD) Web
site. In contrast, information filed on Form PF will generally
remain confidential. See infra section II.D of this Release.
    \207\ Id. Several commenters responding to the Proposing Release
also encouraged us to move these questions from Form ADV to Form PF.
See IAA; MFA Letter; Seward Letter.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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\
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    \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.
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    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

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\
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    \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.
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    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\
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    \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.
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    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.
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    \309\ See PEGCC Letter.
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    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\
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    \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.
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    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\
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    \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).
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    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.

    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\
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    \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