across a number of qualifying hedge funds. Commenters stated that a
mismatch in timing between redemption requests and subscriptions could
distort reporting of this item, but withdrawals or redemptions in
excess of 50 percent in spite of subscriptions would still be a notable
event for which notice would provide the Commission and FSOC with
important insight.\134\ Based on the above, timely notice of such
events in this current report will allow the Commission and FSOC to
analyze the potential implications for the fund's investors and
systemic risks should such withdrawals or redemptions precipitate
large-scale liquidations.
---------------------------------------------------------------------------

    \134\ MFA Comment Letter.
---------------------------------------------------------------------------

    Under the withdrawals and redemptions current report, an adviser
will enter: (1) the date on which the net redemption requests exceeded
50 percent of the most recent net asset value; (2) the net value of
redemptions paid from the reporting fund between the last data
reporting date (the end of the most recently reported fiscal quarter on
Form PF) and the date of the current report; (3) the percentage of the
fund's net asset value the redemption requests represent; and (4)
whether the adviser has notified the investors that the reporting fund
will liquidate.
b. Inability To Satisfy Redemptions or Suspension of Redemptions
    We are adopting, largely as proposed, the requirement for an
adviser to report if a qualifying hedge fund is unable to satisfy
redemptions, or suspends redemptions for more than five consecutive
business days. We have modified the form text from the proposal to
state that an adviser would report in either of two cases: if the
reporting fund (1) is unable to pay redemption requests, or (2) has
suspended redemptions and the suspension lasts for more than 5
consecutive business days. One commenter stated that the proposed item
was indicative of significant distress that could potentially lead to
counterparty losses and that the five consecutive business day
qualification period would appropriately limit reporting of temporary
redemption suspensions that would have less of an impact on investors
or the broader market.\135\ Another commenter suggested that the
trigger for reporting a failure to pay redemption requests should be
five days following the due date specified for payment of redemption
proceeds under a fund's governing documents and that hedge funds
typically have a specified timeframe for paying redemption requests,
and a filing should be triggered under this current report only after
this timeframe has passed if a redemption remains unsatisfied.\136\
---------------------------------------------------------------------------

    \135\ AIMA/ACC Comment Letter.
    \136\ MFA Comment Letter.
---------------------------------------------------------------------------

    This reporting item will help the Commission and FSOC identify
stress at a reporting fund and evaluate the effects of these
circumstances on fund investors and the markets more broadly. We
recognize that redemptions are governed by preexisting terms and
conditions outlined in fund contracts and governing documents. However,
we are not modifying the item in response to commenters stating that
reporting should be triggered only after the period specified for
payment of redemption proceeds under a fund's governing documents
because reporting should be based on whether, as a factual matter, the
fund has suspended redemptions for a period of five consecutive
business days or not. The reporting of inability to satisfy redemptions
or a prolonged suspension of redemptions will provide a potential early
warning of the fund's liquidation and potentially allow the Commission
or FSOC to analyze or respond to any perceived harm to investors or
systemic risks on an expedited basis before they worsen. The five
consecutive business day period for suspensions is properly balanced so
as to limit reporting of temporary redemption suspensions that we
believe have less of an impact on investors or the broader market.
Under this current report, the adviser is required to report: (1) the
date the reporting fund was unable to pay redemption requests or
suspended redemptions; (2) the percentage of redemptions requested and
not yet paid; and (3) whether the adviser has notified the investors
that the reporting fund will liquidate.
8. Explanatory Notes
    We are adopting the explanatory notes item, largely as proposed.
This item will allow an adviser to provide a narrative response if it
believes that additional information would be helpful in understanding
the information reported in the current report(s). Current reports may
benefit from additional context so that the Commission and FSOC can
effectively evaluate them. This approach is consistent with other
current reports filed with the Commission, where registrants have
requested the flexibility to provide additional narrative information
relating to the

circumstances surrounding the current report.\137\
---------------------------------------------------------------------------

    \137\ See Part H of Form N-RN.
---------------------------------------------------------------------------

    There were limited comments on this item. One commenter stated that
this information would be helpful in understanding the information
reported in response to any item in section 5, but that it is unlikely
to be helpful if operations events do not require additional
elaboration in the narrative response section.\138\ As discussed above,
we believe the operations event and its underlying reporting fields
will capture enough data so as to enable the Commission and FSOC to
assess the event properly in circumstances where advisers do not think
a narrative response would be helpful. However, in certain
circumstances where advisers check an ``other'' box we are now
requiring advisers to provide an additional explanation in the
explanatory notes section. We believe that requiring additional context
for the ``other'' items will allow the Commission and FSOC to assess
current reports, and especially the operations event item, more
readily. As reporting under this section is largely optional outside of
instances where they check ``other'', commenters will not need to
respond to this item if additional elaboration is not helpful. The same
commenter also stated that subsequent updates to the current report
should provide more detail, including when the event is resolved. We
are not, however, adopting a follow-up option for operations event
reports as these current reports' primary purpose is advance notice of
a potential systemic risk event or potential harm to investors.
---------------------------------------------------------------------------

    \138\ CRINDATA Comment Letter.
---------------------------------------------------------------------------

B. Quarterly Private Equity Event Reports for All Private Equity Fund
Advisers

    In a change from the proposal, we are modifying section 6 of the
proposed Form PF to be filed on a quarterly basis rather than on a
current basis and moving one of the proposed private equity event
reports to annual reporting in section 4.\139\ Under the proposal,
private equity adviser current reporting events included: (1) execution
of an adviser-led secondary transaction, (2) implementation of a
general partner or limited partner clawback, and (3) investor election
to remove a fund's general partner or to terminate a fund's investment
period or a fund. We will require reporting of the adviser-led
secondaries event and the investor election to remove a fund's general
partner or to terminate a fund's investment period or a fund event, but
in a change from the proposal, we are moving the general partner or
limited partner clawbacks event to section 4, where it will be reported
on an annual basis with the other large private equity fund adviser
reporting.\140\ The section 6 reports will be termed ``private equity
event reports'' and advisers will file these reports within 60 days
after the end of their fiscal quarters.\141\ If a private equity event
did not occur during a particular quarter, then an adviser would not be
required to file a section 6 report for that quarter. Receiving this
information on a quarterly basis will provide timely notice of these
private equity events and important information for the Commission's
regulatory programs, including examinations, investigations, investor
protection efforts, and policy relating to private fund advisers. It
also will improve the Commission and FSOC's ability to evaluate
material changes in market trends at the reporting funds by providing
information on certain events that could significantly affect both
investors and markets more broadly.
---------------------------------------------------------------------------

    \139\ All private equity advisers will need to report if any of
these events occurred during the applicable quarter for each private
equity fund they advise. Private equity fund advisers must only
report each instance of a reporting event once on the section 6
filing that covers the quarter in which such instance occurred. It
is not necessary to report the same instance of a reporting event
again on future section 6 filings.
    \140\ See discussion infra in section II.D.1.
    \141\ See Form PF Glossary (definition of ``private equity event
reports'').
---------------------------------------------------------------------------

    Some commenters agreed that collecting this information from all
private equity fund advisers would be beneficial \142\ by, for
instance, providing meaningful information to the Commission's
oversight efforts \143\ and improving the Commission's and FSOC's
ability to react to market events.\144\ Other commenters argued that
the proposal did not sufficiently demonstrate how this information is
connected to systemic risk \145\ or how the Commission would use this
information to uphold investor protection.\146\ One commenter stated
that there was little justification for one business day reporting for
both the adviser-led secondary transactions event and the removal of a
general partner, termination of the investment period or termination of
a fund event and advocated for extending the time period.\147\
---------------------------------------------------------------------------

    \142\ See, e.g., ILPA Comment Letter; ICGN Comment Letter; and
Comment Letter of the Private Equity Stakeholder Project (Mar. 21,
2022) (``PESP Comment Letter'').
    \143\ See ILPA Comment Letter.
    \144\ See PESP Comment Letter.
    \145\ See, e.g., AIMA Comment Letter and Schulte Comment Letter.
    \146\ See, e.g., AIMA Comment Letter; NVCA Comment Letter; and
AIC Comment Letter.
    \147\ See, e.g., AIMA Comment Letter.
---------------------------------------------------------------------------

    Several commenters asserted that a one-business-day reporting
requirement may be unnecessary in certain instances for these private
equity event reports. While some commenters recognized the importance
of timely reporting through a one-business-day reporting regime for the
events set forth in the proposal,\148\ a number of other commenters
criticized the proposed one-business-day reporting as being
unnecessarily onerous.\149\ Several commenters requested, as an
alternative, an annual reporting requirement for these events.\150\
Other commenters supported changing section 6 reporting from current
reporting to quarterly reporting if there was an event to report, and
that this delay would not diminish the Commission's ability to
investigate and, if appropriate, respond to protect investors.\151\
Some commenters stated that some of the reporting events can occur in
the ordinary course of business and do not require urgent action.\152\
---------------------------------------------------------------------------

    \148\ See, e.g., ICGN Comment Letter and PESP Comment Letter.
One commenter requested that we consider using calendar days instead
of business days to avoid delays in reporting. See Sarah A. Comment
Letter.
    \149\ See, e.g., MFA Comment Letter and AIC Comment Letter.
    \150\ See, e.g., Comment Letter of Ropes and Gray LLP (Mar. 21,
2022) (``Ropes & Gray Comment Letter'') (recommending that if the
Commission wishes event reporting on adviser-led secondaries, it be
included as part of the regular annual reporting of large private
equity advisers on Form PF) and IAA Comment Letter (generally
objecting to the reporting of the current event items for private
equity fund advisers but saying any reporting of such items should
at a minimum be moved to section 4 of Form PF for annual reporting
by large private equity fund advisers).
    \151\ See, e.g., NVCA Comment Letter (suggesting the Commission,
instead of requiring current reports for private equity fund
advisers, require quarterly event reports filed 60 days after the
end of each fiscal quarter if those events occur) and MFA Comment
Letter (suggesting quarterly reporting).
    \152\ Id.
---------------------------------------------------------------------------

    After considering comments, we are requiring all private equity
fund advisers reporting on Form PF to file reports on a quarterly basis
upon (1) execution of an adviser-led secondary transaction, or (2)
investor election to remove a fund's general partner or to terminate a
fund's investment period or a fund, rather than within one business day
after a reporting event as proposed.\153\ We recognize that removal of
a general partner or the termination of a fund's investment period or a
fund may result from a stress event at a fund,

but this may not come into effect until after the stress event occurs.
For example, we understand that such an event could involve a
longstanding decline in performance, a disagreement concerning the
direction of the fund, or the replacement of key fund personnel, all of
which are events that may have serious implications for investors, but
would not necessarily indicate urgent harm or imminent systemic risk
that would necessitate a current report. We also acknowledge that some
adviser-led secondary transactions, may not inherently indicate that a
fund is in urgent distress, and that such transactions do not occur
rapidly, thus creating less of a need for a current report.\154\ We
remain concerned, however, that some of these events, which include a
higher potential for conflicts of interest or fund distress generally
may signal an investor protection issue at a particular fund. Moreover,
these reports will enable the Commission to assess trends in these
reporting events that may signal the exacerbation of conflicts of
interest within the private equity industry. Though we are adopting
quarterly reporting, we did consider requiring private equity fund
advisers to file current reports within 72 hours instead of one
business day as proposed. After considering comments, we view these
reporting items as likely to reveal trends that emerge more slowly as
compared to hedge funds because private equity funds typically invest
in more illiquid assets over longer time horizons with more limited
redemption rights.\155\ Thus, we believe that requiring reporting of
these events on a quarterly basis appropriately balances the effects
and burdens of imposing these reporting obligations on private equity
fund advisers \156\ while also enhancing the Commission's investor
protection efforts and FSOC's ability to monitor for systemic risk.
---------------------------------------------------------------------------

    \153\ As discussed below, we are requiring reporting of the
implementation of a general partner or limited partner clawback on
an annual basis from large private equity fund advisers. See infra
Section II.D.1.
    \154\ See, e.g., Ropes & Gray Comment Letter and IAA Comment
Letter.
    \155\ See discussion infra in section IV.B.2.
    \156\ See infra section IV.C.2 for a more detailed discussion of
the changes in these anticipated costs.
---------------------------------------------------------------------------

    Both of these reporting triggers are important events for a fund,
and each one raises distinct conflicts of interest, which we discuss in
greater detail below. As one example, we understand an investor
election to terminate a fund's investment period is often tied to a
change in how management fees are calculated for the remainder of the
fund's life. Specifically, following the termination of an investment
period, management fees generally ``step down'' to a percentage of
invested capital, rather than a percentage of aggregate capital
commitments. An adviser that fails to effectively administer such a
change may overcharge management fees--a deficiency that the staff has
observed in numerous instances.\157\ Requiring reporting of these key
events on a quarterly basis will allow the Commission to better
identify such events and more carefully evaluate when conflicts of
interests may be harming investors. In addition, because removals of
general partners, terminations of a fund or its investment period, and
adviser-led secondaries represent a significant potential for conflicts
of interest and other sources of investor harm, we are not limiting
reporting to only large private equity advisers in the annual reporting
presented in Section 4. By requiring reporting of these events from all
private equity fund advisers the Commission will receive broader
reporting coverage of such transactions across the private equity
industry to target its examination program more efficiently and better
identify areas in need of more timely regulatory oversight and
assessment, which should increase both the efficiency and effectiveness
of its programs and, thus, increase investor protection.\158\
---------------------------------------------------------------------------

    \157\ Risk Alert, Observations from Examinations of Private Fund
Advisers (Jan. 27, 2022) available at https://www.sec.gov/files/private-fund-risk-alert-pt-2.pdf (noting that EXAMS staff observed
private fund advisers that did not follow practices described in
fund disclosures regarding the calculation of the fund-level
management fee during a private fund's Post-Commitment Period. EXAMS
staff observed that such failures resulted in investors paying more
in management fees than they were required to pay under the terms of
the fund disclosures).
    \158\ See discussion infra at section IV.C.1.b.
---------------------------------------------------------------------------

    A few commenters requested additional private equity current
reporting events, including where the adviser has indemnified itself
from covering any penalties and/or legal costs and other ``for-cause''
key events.\159\ While these events can be significant for a fund, we
do not believe they are as critical for the FSOC to monitor systemic
risk or for the Commission's investor protection efforts and may be
difficult to tailor for reporting purposes. Indemnification for
penalties and/or legal costs can cover a litany of scenarios. It would
likely be difficult to compare a specific indemnification event against
another and, as a result, may be hard to determine greater trends in
the financial condition of the private equity industry. Similarly, a
``for-cause'' key event can include a broad range of events that are
difficult to compare. Trends in some of these events across large
private equity fund advisers may be related to systemic risk and some
of these events may relate to investor protection, but some--adviser-
specific poor performance, for example--may be idiosyncratic. The
reporting triggers we are adopting, on the other hand, are better
tailored to our overall policy goals.
---------------------------------------------------------------------------

    \159\ See, e.g., ILPA Comment Letter and PESP Comment Letter.
---------------------------------------------------------------------------

    Some commenters requested an exception for reporting events that
occur in the ordinary course of a private equity fund adviser's
business that are not suggestive of or do not give rise to concerns
related to market stress or risks to investors.\160\ While we
acknowledge that some of these reporting events may not indicate a
stress event for an individual fund, monitoring these events will
support the Commission's investor protection efforts by better
informing the Commission's regulatory programs while assessing trends
in the aggregate frequencies of these reporting events across the
private equity industry will enhance FSOC's monitoring of systemic
risk. While a single adviser-led secondary transaction may not be
significant on its own, an increase in the number of these transactions
across the private equity industry could be significant.
---------------------------------------------------------------------------

    \160\ See, e.g., Ropes & Gray Comment Letter and IAA Comment
Letter.
---------------------------------------------------------------------------

1. Adviser-Led Secondary Transactions
    We are adopting proposed section 6 Item B, requiring private equity
fund advisers to report any adviser-led secondary transactions, but
with reporting on a quarterly basis within 60 days of the end of each
fiscal quarter.\161\ This item requires reporting upon the completion
of an adviser-led secondary transaction, including the transaction
closing date and a brief description of the transaction. As proposed,
we are defining ``adviser-led secondary transaction'' as any
transaction initiated by the adviser or any of its related persons
\162\ that offers private fund investors the choice to: (1) sell all or
a portion of their interests in the private fund; or (2) convert or
exchange all or a portion of their interests in the private fund for
interests in another vehicle advised by the adviser or any of its
related persons.\163\ Transactions are only subject to reporting if
they are initiated by a private equity fund's

adviser or a related person of the adviser.\164\
---------------------------------------------------------------------------

    \161\ See Form PF Section 6, Item B.
    \162\ See Form PF Glossary (definition of ``related person'').
    \163\ See Form PF Glossary (definition of ``adviser-led
secondary transaction'').
    \164\ Whether a transaction is initiated by the adviser or its
related persons requires a facts and circumstances analysis.
However, we generally do not view a transaction to be initiated by
the adviser or one of its related persons to the extent the adviser
or one of its related persons, at the unsolicited request of an
investor, participates in the secondary sale of such investor's fund
interest.
---------------------------------------------------------------------------

    Some commenters supported the requirement to report adviser-led
secondary transactions, including some that agreed that this reporting
requirement will help the Commission fulfill its investor protection
role.\165\ Other commenters argued that adviser-led secondary
transactions are not historically connected to systemic risk, and that
they can represent a strengthening market in certain cases.\166\
---------------------------------------------------------------------------

    \165\ See, e.g., Better Markets Comment Letter and PDI Comment
Letter.
    \166\ See, e.g., AIMA Comment Letter; AIC Comment Letter; and
USCC Comment Letter.
---------------------------------------------------------------------------

    We acknowledge that an adviser-led secondary transaction can
indicate strength in a particular investment in certain cases. For
instance, we understand an adviser-led secondary transaction can be
used to extend or add on to a successful investment.\167\ Nonetheless,
adviser-led secondary transactions typically reflect a deviation from
the traditional life cycle of a private equity investment. In some
instances, an adviser may use an adviser-led secondary transaction to
attempt to restructure an investment portfolio that is struggling.\168\
In other instances, an adviser may use an adviser-led secondary
transaction to extend an investment beyond the contractually agreed
upon term of the fund that holds it.\169\ In either case, an adviser-
led secondary transaction can have a meaningful impact on the liquidity
profile of a private equity investment and/or the private equity fund
that held it originally. Additionally, we understand that these
transactions may present conflicts of interest that merit timely
reporting, particularly those conflicts that arise because the adviser
(or its related person) is on both sides of the transaction with
potentially different economic incentives.\170\ As an example, in the
continuation fund context, an investor may be forced to liquidate a
position it would otherwise wish to retain if it is unable to
adequately conduct diligence or negotiate the terms of the continuation
fund before its election is due. Requiring quarterly reporting of these
complex transactions will allow the Commission to identify when such
events have occurred and more carefully evaluate whether conflicts of
interests have harmed investors.
---------------------------------------------------------------------------

    \167\ See, e.g., Ropes & Gray Comment Letter. See also, GP-led
Secondary Fund Restructurings, Considerations for Limited and
General Partners, Institutional Limited Partners Association (Apr.
2019), available at https://ilpa.org/wp-content/uploads/2019/04/ILPA-Guidance-on-GP-Led-Secondary-Fund-Restructurings-Apr-2019-FINAL.pdf.
    \168\ See, e.g., Rae Wee, Turnover surges as funds rush to exit
private equity stakes, Reuters (Dec. 18, 2022) available at https://www.reuters.com/business/finance/global-markets-privateequity-pix-2022-12-19/.
    \169\ See, e.g., Madeline Shi, Investors up allocation to
secondaries as GPs seek alternative liquidity sources, PitchBook
(Sep. 15, 2022) available at https://pitchbook.com/news/articles/investor-secondaries-growth-alternative-liquidity.
    \170\ We recognize that other types of conflicted transactions,
such as investment-level cross transactions, often raise important
conflicts of interest. However, we view adviser-led secondaries as
presenting significant, intrinsic conflicts of interest due to their
nature as fund-level conflicted transactions that often affect all
investor capital in a fund.
---------------------------------------------------------------------------

    Additionally, adviser-led secondary transactions can have
implications for systemic risk assessment as they have become
increasingly common in the private equity industry in recent years, and
therefore could represent changes in the liquidity of the private
equity market. For example, to the extent that an upward trend in
adviser-led secondary transactions reflects a reduction in the
liquidity of the private equity market stemming from private equity
fund advisers' inability to sell portfolio companies to third-party
buyers (or to sell those companies at existing valuations),
transactions of this nature could be an indicator of a deflating
investment bubble that may be important in informing systemic risk
assessment. This quarterly event reporting will provide the Commission
and FSOC with timely data regarding the frequency and circumstances
surrounding these transactions and allow the Commission and FSOC to
better assess market trends and potential market impacts.
    One commenter stated that adviser-led secondary transactions can
raise conflicts of interest, but that such conflicts of interest can be
mitigated through thoughtful processes, disclosure and investor or
advisory board consent where necessary.\171\ While thoughtful
processes, disclosure and investor or advisory board consent can be
helpful, in the Commission's experience, they are not always utilized
and, even when used, do not always ameliorate investor protection
concerns. For example, it is the Commission's observation that
investors are often given very short timeframes in which to choose
whether to cash out of their investment or participate in an adviser-
led secondary transaction. Investors are not always able to
sufficiently diligence the adviser-led secondary transaction before
they must decide to whether to commit to it. As another example, some
advisers seek advisory board consent for adviser-led secondary
transactions, but such advisory boards are comprised of only the
largest investors in the fund, and the adviser does not seek consent
from the remaining investors. As a result, we believe it is appropriate
and necessary to require reporting of adviser-led secondary
transactions.
---------------------------------------------------------------------------

    \171\ See AIMA Comment Letter.
---------------------------------------------------------------------------

    Another commenter suggested an ordinary course exception.\172\
Ordinary course adviser-led secondary transactions are just as integral
to the Commission's investor protection concerns as they still involve
conflicts of interest. They also will be informative to FSOC's and
Commission's assessment of systemic risk in monitoring broader
liquidity trends in the private equity market.
---------------------------------------------------------------------------

    \172\ See IAA Comment Letter.
---------------------------------------------------------------------------

2. Removal of General Partner or Election To Terminate the Investment
Period or Fund
    We are adopting the requirement for all private equity fund
advisers to report the removal of a general partner or election to
terminate the investment period or fund item as an event reporting
item, but, in a change from the proposal, advisers will report these
events within 60 days after a fiscal quarter-end rather than within one
business day. As proposed, this item will require all private equity
fund advisers to report when a fund's investors have: (1) removed the
adviser or an affiliate as the general partner or similar control
person of a fund; (2) elected to terminate the fund's investment
period; or (3) elected to terminate the fund, in each case as
contemplated by the fund documents. This item requires reporting of the
effective date of the applicable removal or termination event and a
description of such removal or termination event. This required
reporting is triggered upon an adviser receiving notification of the
investors' election in each case.
    Some commenters supported the proposed requirement to report when
investors remove a general partner, or elect to terminate an investment
period or a fund.\173\ Others criticized this reporting requirement as
being unrelated to market conditions and/or

likely to cause a disproportionate number of false positives.\174\
---------------------------------------------------------------------------

    \173\ See, e.g., AFREF Comment Letter and Public Citizen Comment
Letter.
    \174\ See, e.g., AIC Comment Letter; AIMA Comment Letter; and
MFA Comment Letter.
---------------------------------------------------------------------------

    Investor removal of a general partner or election to terminate a
fund's investment period or a fund itself are uncommon events. We
understand that, generally, investors would prefer to avoid these
actions unless unavoidable because the consequence of each could be
damaging to a fund.\175\ If a general partner is removed, there will
likely be a gap in management of a fund as well as the risk that a new
general partner may not be able to manage the fund as effectively. If
investors elect to terminate the investment period of a fund or the
fund itself, the entire investment strategy and planning of the fund
can be disrupted and could indicate the occurrence of investor harm at
the fund or other ongoing risks to investors. A collective increase in
the number of any or all of these events occurring also could indicate
a risk of market deterioration, particularly given the broader market
impact of individual private equity funds due to the increase in the
median fund size for the private equity asset class and rise in larger
private equity funds.\176\ If the general partner of a large buy-out
fund is removed, it could also increase risk for its portfolio
companies if the adviser is no longer as willing to insert equity
capital when needed. Requiring reporting of these events will provide
the Commission and FSOC with notification of this event (of which we
might otherwise be unaware at the time it is initiated), and allow for
better evaluation and monitoring.
---------------------------------------------------------------------------

    \175\ See, e.g., LPs Vote to Boot GP from Debut Fund, but the
Real Challenge Lies Ahead, Buyout Insider (July 27, 2021) available
at https://www.buyoutsinsider.com/lps-vote-to-boot-gp-from-debut-fund-but-the-real-challenge-lies-ahead/.
    \176\ See Private Market Mega-Funds Raise More than $329B in
2021, PitchBook (Dec. 14, 2021) (``Pitchbook Article''), available
at https://pitchbook.com/news/articles/2021-largest-mega-funds-private-equity.
---------------------------------------------------------------------------

    Furthermore, these trigger events are all indicative of critical
circumstances for conflicts of interest that present increased risks to
investors. Removal of a general partner presents an inherent conflict
for private equity fund advisers. An election to terminate an
investment period of a fund or a fund itself has numerous consequences
for investors, such as changes to management fees and liquidation
requirements, and the staff has often had insufficient visibility into
these activities by private equity fund advisers, which may pose risks
to fund investors.\177\ Requiring reporting of these events will allow
the Commission to identify such events and any associated investor
protection concerns better, including by more carefully evaluating the
inherent conflicts of interests that these events represent.
---------------------------------------------------------------------------

    \177\ For example, we are aware that there have been instances
where management fees were overcharged after certain triggering
events like the write-off of specific portfolio investments. See,
e.g., In the Matter of ECP Manager LP, Investment Advisers Act
Release No. 5373 (Sep. 27, 2019) (settled action) (alleging that
private equity fund adviser failed to apply the management fee
calculation method specified in the limited partnership agreement by
failing to account for write downs of portfolio securities causing
the fund and investors to overpay management fees).
---------------------------------------------------------------------------

    We recognize, however, that these events likely do not create the
type of urgent distress that would necessitate current reporting, as we
had proposed. We understand that these decisions are not arrived at
suddenly and that the assets of the fund will still be held for a
significant period of time if the fund is wound down. Thus, we believe
that requiring reporting of these events on a quarterly basis
appropriately balances the effects and burdens of imposing these
reporting obligations on private equity fund advisers \178\ while also
enhancing the Commission's investor protection efforts and FSOC's
ability to monitor for systemic risk.
---------------------------------------------------------------------------

    \178\ See infra section IV.C.2 for a more detailed discussion of
the changes in these anticipated costs.
---------------------------------------------------------------------------

    Several commenters suggested limiting reporting for termination of
a fund's investment period to ``for cause'' terminations only.\179\ We
understand that general partner removals and investor elections to
terminate a fund's investment period or a fund are typically associated
with a serious conflict between investors and the adviser or between
different members of the adviser.\180\ While not all instances of these
events may be strictly ``for cause,'' they all represent serious
departures from ordinary course operations. Additionally, we are not
requiring reporting for all terminations of a fund's investment period
or of a fund. Rather, we are only requiring reporting when investors
elect to terminate a fund's investment period or a fund. We believe
that events of this nature are rare, and accordingly, reporting will
also be rare.
---------------------------------------------------------------------------

    \179\ See, e.g., MFA Comment Letter and NVCA Comment Letter.
    \180\ In our experience, advisers sometimes pursue these actions
when there is disagreement between different investment
professionals at an adviser that wish to separate their businesses.
For example, one of these individuals may remain associated with the
fund through a new general partner entity while the other individual
leaves the adviser entirely.
---------------------------------------------------------------------------

    Similar to the explanatory notes item that we are adopting in
section 5 for current reporting by large hedge fund advisers to
qualifying hedge funds, section 6, Item D, will allow an adviser to
provide an optional narrative response if it believes that additional
information is helpful in explaining the circumstances of events
reported in section 6. We proposed including an optional explanatory
note question in the proposed Section 6, Item E as part of the current
reports for private equity fund advisers. Since this explanatory note
question is optional, we think it is appropriate to give private equity
fund advisers the opportunity to provide any explanatory notes for
section 6 quarterly reporting that they deem helpful. We did not
receive specific comments on whether to include this section to allow
an adviser to provide an optional narrative response. We continue to
believe this will allow an adviser the ability to provide additional,
helpful information where necessary.

C. Filing Fees and Format for Reporting

    Consistent with the proposal, we are requiring large hedge fund
advisers to file current reports and private equity advisers to file
quarterly private equity event reports through the same non-public
filing system they use to file the rest of Form PF, the Private Fund
Reporting Depository (``PFRD'').\181\ Large hedge fund advisers will
file current reports on section 5, and all private equity advisers will
file event reports on section 6 of Form PF. Filers will not submit any
other sections of Form PF at the time a either of these reports is
filed. This requirement is designed to facilitate reporting of clear
information in an efficient manner. Under the rule, advisers filing
reports on section 5 and 6 are required to pay to the operator of PFRD
fees that have been approved by the SEC. The SEC in a separate action
will approve filing fees that reflect the reasonable costs associated
with the filings and the establishment and maintenance of the filing
system.\182\ Advisers also will be able to amend their section 5 and 6
reports if they discover that information they filed was not accurate
at the time of filing.\183\
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    \181\ See Instruction 12. See also rule 17 CFR 275.204(b)-1.
    \182\ See section 204(c) of the Advisers Act.
    \183\ Consistent with the current instructions for other types
of Form PF filings, large hedge fund advisers are not required to
update information that they believe in good faith properly
responded to Form PF on the date of filing even if that information
is subsequently revised for purposes of recordkeeping, risk
management or investor reporting (such as estimates that are refined
after completion of a subsequent audit). This requirement is
designed to provide advisers with a way to correct current reports,
just as all advisers can correct other types of Form PF filings. See
Instruction 16.
---------------------------------------------------------------------------

    One commenter stated that it could be counterproductive to require
an adviser

to pay a fee to report a potential operations event.\184\ However, this
approach is consistent with established Form PF requirements, and we
have not observed a correlation between filing fees and lower levels of
filing Form PF in the past. Filing fees also support the system for
Form PF filing, including cybersecurity and other technological
supports, which we believe benefits filers.
---------------------------------------------------------------------------

    \184\ See CRINDATA Comment Letter.
---------------------------------------------------------------------------

D. Large Private Equity Fund Adviser Reporting

    We are amending the requirements relating to reporting by large
private equity fund advisers in section 4 of Form PF to: (1) add
certain questions that are designed to improve FSOC's ability to
monitor systemic risk and FSOC's and the Commission's ability to
evaluate material changes in market trends at the reporting funds; and
(2) add new questions designed to enhance our understanding of certain
practices of private equity fund advisers and amend certain existing
questions to improve data collection.\185\
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    \185\ Consistent with the proposal, Item B is being split into
three new items to be designated new Item B ``Certain information
regarding the reporting fund,'' new Item C ``Reporting fund and
controlled portfolio company financing,'' and new Item D ``Portfolio
company investment exposures.''
---------------------------------------------------------------------------

    This reporting also will improve FSOC's ability to monitor systemic
risk and the Commission and FSOC's ability to evaluate material changes
in market trends at the reporting private equity funds by providing
information on certain events and developments that could significantly
affect both investors and markets more broadly. Reporting of this type
on an annual basis by the largest private equity fund advisers has
become increasingly important as private equity has continued to grow
over the last decade and become a significant part of the economy and
financial markets. Investors are increasingly exposed to the private
equity industry as many pension funds and other institutional investors
have allocated more assets to private equity investments. The number of
investors \186\ and median fund size \187\ of private equity funds has
increased. The number of larger private equity funds has risen.\188\
These developments merit greater risk-based monitoring and oversight by
the Commission and FSOC given the potential consequences for an
increasing pool of private equity investors as well as financial
markets broadly.
---------------------------------------------------------------------------

    \186\ Since 2013, the number of private equity funds has more
than doubled from under 7,000 to nearly 19,000, private equity fund
gross assets have quadrupled from $1.6 trillion to $6.4 trillion,
and private equity fund net assets have also nearly quadrupled,
increasing from $1.5 trillion to $5.7 trillion. See Private Funds
Statistics, supra footnote 4.
    \187\ See Pitchbook Article, supra footnote 176.
    \188\ Id.
---------------------------------------------------------------------------

    We proposed, but are not adopting, lowering the reporting threshold
for large private equity fund advisers for purposes of section 4 of
Form PF from $2 billion to $1.5 billion in private equity fund assets
under management. A number of commenters criticized the proposal to
lower this threshold as being arbitrary and/or not connected to
systemic risk.\189\ Some commenters stated that reducing this threshold
would result in substantial burdens for small and mid-sized private
equity fund advisers who will be newly covered.\190\ Of these, one
commenter argued that lowering this threshold could limit competition,
as the smaller private equity fund advisers find it more difficult to
compete against larger advisers, which can absorb the costs related to
the additional filing requirements more easily due to scale.\191\ Some
commenters suggested increasing the threshold rather than
reducing.\192\ On the contrary, several commenters supported the
reduction to the large private equity fund adviser reporting threshold,
stating that it is important for the Commission and FSOC to receive
reporting from the same proportion of private equity funds, based on
committed capital, as when Form PF was created.\193\
---------------------------------------------------------------------------

    \189\ See, e.g., IAA Comment Letter; AIC Comment Letter; and
USCC Comment Letter.
    \190\ See, e.g., Schulte Comment Letter; IAA Comment Letter; and
RER Comment Letter.
    \191\ See Schulte Comment Letter.
    \192\ See RER Comment Letter and AIC Comment Letter.
    \193\ See, e.g., ICGN Comment Letter and Better Markets Comment
Letter.
---------------------------------------------------------------------------

    When Form PF was originally adopted in 2011, the $2 billion
reporting threshold was intended to capture 75 percent of the U.S.
private equity industry based on committed capital.\194\ At proposal,
the existing $2 billion threshold captured about 67 percent of the U.S.
private equity industry.\195\ However, in response to commenters, we
have conducted additional analysis on the U.S. private equity industry
and have observed recent accelerated growth in the relative percentage
of large private equity fund advisers. The existing $2 billion
threshold now captures about 73 percent of the U.S. private equity
industry.\196\ If these trends continue, we expect the $2 billion
threshold to capture 75 percent or more of the U.S. private equity
industry in the near future. As a result, at this time, we no longer
believe it is appropriate to reduce this reporting threshold to $1.5
billion to achieve the original intention for Form PF to capture 75
percent of the U.S. private equity industry.
---------------------------------------------------------------------------

    \194\ See 2011 Form PF Adopting Release, supra footnote 3, at
32.
    \195\ Based on data reported on Form PF and Form ADV as of Dec.
2020.
    \196\ Based on data reported on Form PF and Form ADV as of June
2022.
---------------------------------------------------------------------------

    One commenter stated that private equity fund advisers with less
than $1.5 billion in private equity fund assets under management have
the potential to either make higher risk loans or take on higher risk
borrowing.\197\ While some smaller private equity fund advisers may
sometimes engage in risky behaviors, it is less likely that such
practices by smaller advisers will lead to systemic risks based solely
on their size.
---------------------------------------------------------------------------

    \197\ See PDI Comment Letter.
---------------------------------------------------------------------------

    Another commenter suggested using metrics other than assets under
management to determine if a firm meets the threshold for reporting as
a large private equity fund adviser.\198\ We have considered using
metrics other than assets under management for purposes of this
threshold, but we anticipate that they would be more likely to lead to
adverse incentives.\199\ We believe that assets under management
continues to be the appropriate metric and is less likely to create
these adverse incentives. In sum, given the recent trends in the U.S.
private equity industry discussed above, we believe that the existing
threshold strikes an appropriate balance between obtaining information
on a significant portion of the private equity industry and seeking to
minimize the burdens imposed on private equity fund advisers.
---------------------------------------------------------------------------

    \198\ See Comment Letter of Michelle Katauskas (Jan. 27, 2022).
    \199\ For instance, if we were to define large private equity
fund advisers based on number of employees, advisers may be
incentivized to outsource operations and minimize compliance
personnel.
---------------------------------------------------------------------------

1. New Question on General Partner or Limited Partner Clawbacks
    We proposed to require all advisers to private equity funds to file
a current report within one business day upon the implementation of a
general partner or limited partner clawback in excess of an aggregate
amount equal to 10 percent of a fund's aggregate capital commitments.
Some commenters supported the requirement to report general and limited
partner clawbacks.\200\ Other commenters criticized this reporting

requirement as being unrelated to declining market environments or
systemic risk.\201\
---------------------------------------------------------------------------

    \200\ See, e.g., AFREF Comment Letter; Public Citizen Comment
Letter.
    \201\ See, e.g., AIC Comment Letter; AIMA Comment Letter; and
SIFMA Comment Letter.
---------------------------------------------------------------------------

    Limited partner clawbacks could signal that a fund is under stress
or is anticipating being under stress. For example, a limited partner
clawback (or clawbacks) in an aggregate amount of more than 10 percent
of a private equity fund's aggregate capital commitments might suggest
that the fund is planning for a material event (e.g., substantial
litigation or legal judgment) that could negatively affect investors.
While an individual limited partner clawback of this magnitude may be
idiosyncratic, an upward trend in implementations of such limited
partner clawbacks may be a reflection of stress in the market. Such
potential impact merits regular reporting to allow for improved risked-
based monitoring.
    General and limited partner clawbacks also create complex conflicts
of interests. Typically, the legal mechanics of general partner and
limited partner clawbacks are negotiated early on in a fund's life,
long before the inciting event occurs. Furthermore, fund advisers
typically have significant control over the circumstances that
eventually lead to a general partner or limited partner clawback. For
instance, if a private equity fund adviser is concerned about over
performance towards the beginning of a fund's life and under
performance later on, it can delay realizing a portfolio investment to
reduce the risk of a general partner clawback. Similarly, if a private
fund adviser anticipates needing to initiate a limited partner clawback
due to litigation, the private fund adviser is likely the one already
responding to the litigation process and informing investors about it.
Each of these circumstances raises critical conflicts of interest that
may harm investors. Requiring reporting of general and limited partner
clawbacks will allow the Commission to better identify such events and
more carefully evaluate when and whether investors may have been
harmed.
    Additionally, we do not agree that general partner or limited
partner clawbacks are unrelated to systemic risk. These clawbacks often
occur when the fund has had successful investments earlier in the life
of the fund, but the fund's later investments are less successful.
Accordingly, while a single general partner clawback may not rise to a
level of systemic significance, the widespread implementation of
general partner clawbacks may be a sign of a deteriorating market,
which could have systemic risk implications. Given that the
implementation of general partner clawbacks by private equity funds is
typically rare, if there is an upward trend in funds implementing
general partner clawbacks, such trend could be indicative of a
distressed market. Reporting could help the Commission and FSOC
identify particular markets, sectors or funds on which such a declining
market environment could have an outsized impact and which may merit
additional monitoring given the potential consequence for both
investors and financial market stability.
    After considering comments, as noted above,\202\ we now are
requiring information about clawbacks to be reported annually by large
private equity fund advisers.\203\ General partner clawbacks and
certain limited partner clawbacks will be reported in response to new
Question 82 in section 4.\204\ Requiring reporting of clawbacks will
enable the Commission and FSOC to monitor declining market conditions
in the markets in which private equity invests, and will improve the
Commission's visibility into circumstances involving clawbacks that may
implicate investor protection risks.
---------------------------------------------------------------------------

    \202\ See supra section II.B.
    \203\ Large private equity fund advisers will need to report any
of these private equity reporting events that occurred during the
applicable reporting period of their filing for each private equity
fund they advise. Large private equity fund advisers must only
report each instance of a private equity reporting event once on the
Form PF filing that covers the period in which such instance
occurred. It is not necessary to report the same instance of a
private equity reporting event again on future Form PF filings.
    \204\ We are also making conforming changes for its new
placement in section 4 of Form PF.
---------------------------------------------------------------------------

    After considering comments, we recognize that requiring reporting
of clawbacks within one business day of the event could be unnecessary,
particularly given that these events tend to build over the life of a
private equity fund with a multi-year term.\205\ As a result, we are
requiring large private equity advisers to file these reports on an
annual basis as part of their regular Form PF filing rather than one
business day as proposed. We believe this timing better balances the
Commission's need for the information to enhance its regulatory
programs and the assessment of broader private equity trends and
declining market conditions while also recognizing that general partner
or limited partner clawbacks at a particular fund may occur during
years-long investment horizons. However, we continue to believe that
clawback reporting that indicated a large spike in the number of
limited partner clawbacks across the private equity industry may raise
systemic risk or investor protection concerns that the Commission would
need to evaluate.
---------------------------------------------------------------------------

    \205\ See, e.g., RER Comment Letter; SIFMA Comment Letter; AIMA
Comment Letter.
---------------------------------------------------------------------------

    In another modification from the proposal, we are only requiring
large private equity fund advisers to complete this question. While
some commenters broadly supported the former current event reporting
questions as proposed,\206\ a number of other commenters criticized
them, noting that the proposal did not require current reporting for
smaller hedge fund advisers and stating that the burdens of this
reporting would fall disproportionately on smaller private equity fund
advisers.\207\ Of these commenters, several suggested adding thresholds
to these reporting questions to mitigate these burdens.\208\ Requiring
all private equity fund advisers to complete the clawbacks question
would provide additional information to FSOC and Commission that may be
helpful in the assessment of systemic risk, but after reviewing
comments, we acknowledge that the clawback question pertains more to
the monitoring of broader developing trends in private equity fund
activities relevant to the protection of investors and to the
assessment of systemic risk. As mentioned above, the widespread
implementation of general partner clawbacks at large private equity
funds may signal deteriorating market trends, which could have systemic
risk implications given the large size of the private equity funds
involved. Accordingly, we believe that by focusing clawback reporting
on large private equity fund advisers on an annual basis, we will be
able to evaluate material changes in market trends and investor
protection issues in private equity funds. This approach also preserves
FSOC's ability to monitor for systemic risk. The existing questions in
section 4 are similarly intended to serve this purpose.\209\
---------------------------------------------------------------------------

    \206\ See, e.g., ICGN Comment Letter; Public Citizen Comment
Letter and PESP Comment Letter.
    \207\ See, e.g., IAA Comment Letter; SIFMA Comment Letter and
AIC Comment Letter.
    \208\ See, e.g., SIFMA Comment Letter and TIAA Comment Letter.
    \209\ See 2011 Form PF Adopting Release, supra footnote 3, at
text accompanying nn. 94-95. The relative percentage of large
private equity fund advisers in the U.S. private equity industry has
also broadly trended upwards over time. As a result, a growing
portion of private equity fund advisers are required to complete the
reporting in section 4. For example, based on staff review of Form
ADV filings and data from Private Fund Statistics reports, section 4
covered approximately 67% of private equity gross assets in 2020 and
covers 73% of private equity gross assets today. See Private Funds
Statistics, supra footnote 4.

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

    Question 82 is substantively identical to the proposed current
reporting requirement and will require reporting by large private
equity fund advisers on the implementation of: (1) any general partner
clawback or (2) a limited partner clawback (or clawbacks) in excess of
an aggregate amount equal to 10 percent of a fund's aggregate capital
commitments. This reporting includes the effective date of the clawback
and the reason for the clawback.\210\
---------------------------------------------------------------------------

    \210\ Question 83 pertains to both general partner clawbacks and
limited partner clawbacks. This question also requires filers to
specify the type of clawback implemented (i.e., whether it is a
general partner clawback or limited partner clawback).
---------------------------------------------------------------------------

    We are defining, as proposed, a ``general partner clawback'' as any
obligation of the general partner, its related persons, or their
respective owners or interest holders to restore or otherwise return
performance-based compensation to the fund pursuant to the fund's
governing agreements.\211\ For example, if the general partner of a
fund is entitled to performance-based compensation equaling 20 percent
of the fund's profits over the life of the fund and the fund
distributes such compensation to the general partner periodically based
on the profitability of the fund at the time of distribution, the
general partner may have received distributions of performance-based
compensation over the life of the fund in excess of 20 percent of the
fund's aggregate profits. In this situation, under the fund's governing
documents, the fund's general partner is required to return the excess
performance-based compensation it received to the fund.\212\
---------------------------------------------------------------------------

    \211\ See Form PF Glossary (definition of ``general partner
clawback''). We are defining ``performance-based compensation'' as
any allocations, payments, or distributions of capital based on the
reporting fund's (or its investments') capital gains, capital
appreciation and/or profit. This definition includes cash or non-
cash compensation, including in-kind allocations, payments, or
distributions of performance-based compensation. See also Form PF
Glossary (definition of ``performance-based compensation''). We have
slightly revised this definition from the proposal--and removed
``portfolio investment'' as a defined term--to more precisely
capture performance-based compensation in the private fund space. We
do not view these slight revisions as substantive changes from what
was proposed.
    \212\ Specifically, this required reporting is triggered at the
time the general partner becomes obligated to return to the fund
performance-based compensation in excess of the amount it was
ultimately entitled to receive under the fund's governing documents
regardless of when such compensation is actually returned.
---------------------------------------------------------------------------

    We are also defining, as proposed, ``limited partner clawback''
(sometimes referred to as a limited partner ``giveback'') as an
obligation of a fund's investors to return all or any portion of a
distribution made by the fund to satisfy a liability, obligation, or
expense of the fund pursuant to the fund's governing agreements.\213\
This required reporting is triggered when the aggregate limited partner
clawbacks over the course of a fund's life exceed 10 percent of such
fund's aggregate capital commitments at such time. Advisers generally
should file for each additional limited partner clawback, regardless of
its size, over the course of such fund's remaining life once such
fund's aggregate limited partner clawbacks have exceeded this 10
percent threshold.\214\ Requiring this minimum threshold is appropriate
because we believe a clawback of this magnitude is more likely to be
associated with an event that could have a significant negative impact
on a fund's investors.
---------------------------------------------------------------------------

    \213\ See Form PF Glossary (definition of ``limited partner
clawback'').
    \214\ For example, if a fund has a life of 10 years and has a
limited partner clawback equal to 4% of its aggregate capital
commitments each and every year of its life, this required reporting
will be triggered in each of years 3, 4, 5, 6, 7, 8, 9, and 10.
---------------------------------------------------------------------------

    One commenter suggested that, like for limited partner clawbacks,
we should limit reporting on general partner clawbacks to those that
are in excess of 10 percent of the fund's aggregate capital
commitments.\215\ However, it is our understanding that private fund
advisers generally should have greater control over the circumstances
leading to a general partner clawback than a limited partner clawback.
We understand that limited partner clawbacks, on the other hand, are
often associated with lawsuits or other unforeseen events which the
adviser may be able to influence but may not be able to prevent, even
if the amount of the limited partner clawback is small. Accordingly, we
believe it is important to require reporting on all general partner
clawbacks but to limit reporting of limited partner clawbacks to those
exceeding a minimum size threshold.
---------------------------------------------------------------------------

    \215\ See NVCA Comment Letter.
---------------------------------------------------------------------------

    Similar to section 5, Item J and the proposed section 6, Item E,
Question 83 will allow an adviser to provide an optional narrative
response if it believes that additional information is helpful in
explaining the circumstances of its responses in section 4. We had
proposed including an optional explanatory note question in the
proposed section 6, Item E as part of the current reports for private
equity fund advisers. Since we are including the general partner or
limited partner clawbacks in the reporting for large private equity
fund advisers as part of section 4, we are adding an optional
explanatory note question for section 4. Since this explanatory note
question is optional, we think it is appropriate to give large private
equity fund advisers the opportunity to provide any explanatory notes
for section 4 that they deem helpful. We did not receive specific
comments on whether to include this section to allow an adviser to
provide an optional narrative response. We continue to believe this
will allow an adviser the ability to provide additional, helpful
information where necessary.
2. Other Amendments to Large Private Equity Fund Adviser Reporting
    Private Equity Fund Investment Strategies. As proposed, we are
adding Question 66 to section 4 to collect information about private
equity fund investment strategies.\216\ Form PF does not currently
collect data on private equity fund strategies. Question 66 is
structured similarly to Question 20, which collects information about
hedge fund strategies and includes common strategies employed by
private equity funds. This question requires advisers to choose from a
list of strategies by percent of deployed capital even if the
categories do not precisely match the characterization of the reporting
fund's strategies. To facilitate completion of this question and
alleviate challenges filers face in choosing among a limited list of
investment strategy types, in a modification from the proposal, filers
will be able to choose from a drop-down menu that includes all
investment strategy categories for Form PF. If a reporting fund engages
in multiple strategies, the adviser will have to provide a good faith
estimate of the percentage the reporting fund's deployed capital
represented by each strategy.
---------------------------------------------------------------------------

    \216\ For purposes of this question, which is to be completed by
Form PF filers that fill out section 4, private equity fund
investment strategies generally include private credit (and
associated sub-strategies such as distressed debt, senior debt,
special situations, etc.), private equity (and associated sub-
strategies such as early stage, buyout, growth, etc.), real estate,
annuity and life insurance policies, litigation finance, digital
assets, general partner stakes investing, and others. In connection
with this question, we are also adding one new term to the Form PF
Glossary of Terms for ``general partner stakes investing'' to
provide specificity regarding the reporting of this term and to
improve data quality. See Form PF Glossary of Terms. We proposed
adding ``digital assets'' as a new term to the Form PF Glossary of
Terms. The Commission and staff are continuing to consider this term
and are not adopting ``digital assets'' as part of this rule at this
time.
---------------------------------------------------------------------------

    Question 66 also includes an ``other'' category for advisers to
select in cases where a reporting fund's strategy is not listed, but an
adviser selecting ``other'' in response to this question must explain
why. This requirement is designed to improve data quality by

providing context to an adviser's selection of the ``other'' category.
It also should help ensure that advisers are not selecting the
``other'' category when they should be reporting information in a
different strategy category. Question 66 is designed to allow FSOC to
filter data for targeted analysis, monitor trends in the private equity
industry, analyze potential systemic risk, and to support the
Commission's oversight of advisers to the private equity industry and
investor protection efforts.
    Some commenters supported adding this investment strategy reporting
requirement as being beneficial to the FSOC and Commission's oversight
of advisers to the private equity industry.\217\ Other commenters
argued that this investment strategy reporting requirement is too
burdensome relative to its nexus to systemic risk.\218\
---------------------------------------------------------------------------

    \217\ See, e.g., ICGN Comment Letter and PDI Comment Letter.
    \218\ See, e.g., REBNY Comment Letter and RER Comment Letter.
---------------------------------------------------------------------------

    Due to the growth in the industry since adoption of Form PF and the
diversity of strategies currently employed by private equity funds, it
is important that we collect this investment strategy information.
Different strategies carry different types and levels of risk for the
markets and financial stability. Reporting on investment strategies
will allow the Commission and FSOC to understand and better assess the
potential market and systemic risks presented by the different
strategies to both markets and investors. A shift in the reporting of
private equity assets towards riskier strategies, for instance, could
provide valuable information about emerging systemic risks. Similarly,
this information will allow the Commission and FSOC to better assess
private equity funds' increasing role in providing credit to companies.
    While we recognize that adding this question will create some
additional burdens for large private equity fund advisers, these
burdens should be small relative to the benefits discussed above. We do
not believe that a large private equity fund adviser providing a good
faith estimate of its investment strategies by percentage will require
substantial, additional accounting or other compliance work. We have
also included the ``other'' category to allow large private equity fund
advisers some flexibility with respect to reporting these investment
strategies provided that they explain their use of this category.
    One commenter suggested requiring more granular disclosure of
private equity fund investment strategies, including requiring the
disclosure of industries included in each strategy.\219\ Types of
industries are generally more amorphous than investment strategies, and
many industries also overlap--for example, an investment in a
healthcare technology company could be interpreted as either a
healthcare or technology investment. It is also difficult to correlate
risk with specific industries, as subcategories within industries may
vary widely in terms of risk. Accordingly, we are not requiring
reporting of industries at this time.
---------------------------------------------------------------------------

    \219\ See PDI Comment Letter.
---------------------------------------------------------------------------

    Fund-Level Borrowings. As proposed, we are adding Question 68 to
require advisers to report additional information on any fund-level
borrowing. If a fund engages in fund-level borrowing, this question
requires the adviser to provide (1) information on each borrowing or
other cash financing available to the fund,\220\ (2) the total dollar
amount available, and (3) the average amount borrowed over the
reporting period. Consistent with the requirements for hedge fund
reporting on borrowing in Form PF, private equity fund advisers that
are required to complete this question in section 4 may skip Question
12 in section 1b.\221\
---------------------------------------------------------------------------

    \220\ We are including other cash financing available to the
fund as part of this question to capture instances in which a fund
has access to capital that would not be considered borrowing, for
example, where a private equity fund adviser agrees to provide a
cash infusion to a fund it advises.
    \221\ Consistent with the requirements for hedge fund reporting
on borrowing in Form PF, we have integrated the components of
question 12 into this Question 68 that were not already included at
proposal.
---------------------------------------------------------------------------

    Some commenters supported adding this fund-level borrowing
reporting requirement, stating that it will help the Commission and
FSOC better identify and monitor the use of leverage within private
equity funds.\222\ Other commenters argued that this reporting
requirement is unrelated to systemic risk.\223\
---------------------------------------------------------------------------

    \222\ See, e.g., ICGN Comment Letter; PDI Comment Letter; and
TIAA Comment Letter.
    \223\ See, e.g., IAA Comment Letter; and NYC Bar Comment Letter.
---------------------------------------------------------------------------

    We understand that fund-level borrowing--particularly subscription
lines of credit--have become increasingly important to the operation of
private equity funds since the adoption of Form PF.\224\ Funds vary in
how they employ these facilities and their impacts can often be opaque
for investors. While some private equity funds use subscription lines
appropriately, we have observed some funds seeking to take advantage of
these arrangements. For instance, certain funds may use subscription
lines to inflate the performance metrics--such as the internal rate of
return--that are reported to investors. Other funds may not
appropriately inform investors about the costs that investors must bear
in connection with the use of a subscription line. Additionally, funds
that allow large unpaid amounts to remain on their subscription lines
over an extended period of time may be exposed to greater liquidity
risk which may have knock-on effects for their investors and portfolio
investments. We believe that the prevalence of these subscription lines
of credit could raise important systemic risk and investor protection
concerns, and therefore it is important that the Commission and FSOC
receive more detailed information on them.
---------------------------------------------------------------------------

    \224\ See, e.g., Enhancing Transparency Around Subscription
Lines of Credit, Institutional Limited Partners Association (June
2020), available at https://ilpa.org/wp-content/uploads/2020/06/ILPA-Guidance-on-Disclosures-Related-to-Subscription-Lines-of-Credit_2020_FINAL.pdf.
---------------------------------------------------------------------------

    Events of Default, Bridge Financing to Controlled Portfolio
Companies, and Geographic Breakdown of Investments. As proposed, we are
amending three existing questions in section 4. First, we are amending
existing Question 74 to require advisers to provide more granular
information about the nature of reported events of default, such as
whether it is a payment default of the private equity fund, a payment
default of a CPC, or a default relating to a failure to uphold terms
under the applicable borrowing agreement (other than a failure to make
regularly scheduled payments).\225\ This more detailed information will
help the Commission and FSOC better assess the impact of default events
to both investors and markets more generally and may indicate emerging
potential systemic risks.
---------------------------------------------------------------------------

    \225\ We would redesignate Question 74 as Question 77.
---------------------------------------------------------------------------

    Second, we are amending existing Question 75, which requires
reporting on the identity of the institutions providing bridge
financing to the adviser's CPCs and the amount of such financing, to
add additional counterparty identifying information (i.e., LEI (if any)
and if the counterparty is affiliated with a major financial
institution, the name of the financial institution).\226\ This
information should be readily available to advisers, and will provide
globally standardized identification information about counterparty
entities reported in this

question that will enhance the Commission's and FSOC's ability to
analyze exposure data for purposes of assessing systemic risk.
---------------------------------------------------------------------------

    \226\ We would redesignate Question 75 as Question 78.
---------------------------------------------------------------------------

    Third, we are amending existing Question 78, which requires
reporting on the geographical breakdown of investments by private
equity funds, by moving away from reporting based on a static group of
regions and countries and towards identifying a private equity fund's
greatest country exposures based on a percent of net asset value.\227\
These changes to existing Question 78 will improve the usefulness of
data collected, as reporting is currently limited to exposure by region
with additional reporting on a limited number of countries of interest.
For example, information obtained from this question could provide
insight into whether a critical mass of private equity funds have
investments concentrated in a country that is experiencing significant
political instability or a natural disaster, which could be important
for systemic risk assessments. We have found the existing reporting
approach lacks precision because the regions are not uniformly defined
and although countries of interest change over time, the form is not
dynamic in this regard. This amendment will require advisers to report
all countries (by ISO country code \228\) to which a reporting fund has
exposure of 10 percent or more of its net asset value. We believe this
exposure threshold represents significant country exposure, while
balancing the burden that the question would create for advisers.
Advisers will have to follow Instruction 15 for purposes of calculating
the information in the proposal, including reporting the exposure in
U.S. dollars which will improve data comparability across funds.
Advisers also will categorize investments based on concentrations of
risk and economic exposure. We are also removing regional level
reporting because we are now able to analyze regional exposure using
the country level information.
---------------------------------------------------------------------------

    \227\ We would redesignate Question 78 as Question 67.
    \228\ This is similar to reporting on Form N-PORT and will
improve the comparability of data between Form PF and Form N-PORT.
---------------------------------------------------------------------------

    Several commenters supported amending these questions to require
more granular information, agreeing with the proposal that these
amendments will improve the FSOC and Commission's assessment of
systemic risk.\229\ Commenters otherwise generally did not specifically
address these proposed amendments. We continue to believe that we
should amend these questions as proposed for the reasons set forth
above.
---------------------------------------------------------------------------

    \229\ See ICGN Comment Letter and PDI Comment Letter.
---------------------------------------------------------------------------

    Not Adopting Certain Proposed Large Private Equity Fund Adviser
Questions. In response to commenters, we are not adopting the following
proposed large private equity fund adviser questions at this time: (1)
restructuring/recapitalization of a portfolio company; \230\ (2)
investments in different levels of a single portfolio company's capital
structure by related funds; \231\ (3) financing of portfolio companies;
\232\ (4) floating rate borrowings of controlled portfolio companies;
\233\ and (5) controlled portfolio companies owned by private equity
funds.\234\
---------------------------------------------------------------------------

    \230\ Proposed as Question 70 in section 4.
    \231\ Proposed as Question 71 in section 4.
    \232\ Proposed as Question 74 in section 4.
    \233\ Proposed as Question 82 in section 4.
    \234\ Proposed as Question 67 in section 4.
---------------------------------------------------------------------------

    Some commenters supported adopting these proposed questions on the
belief that they would be beneficial to the FSOC and Commission's
assessment of systemic risk.\235\ Of these, one commenter argued that
some of these questions would be particularly helpful to understand
systemic risk related to leverage and credit.\236\ Another commenter
stated that these questions will improve monitoring of where risks
might be building up in the industry as a whole, in particular funds,
at fund investors, and in the portfolio companies of private equity
funds.\237\ On the other hand, some commenters criticized these
questions as being burdensome and unrelated to systemic risk.\238\
Several commenters emphasized the additional difficulty that these
questions pose due to the complexity and administrative expense
inherent in collecting the necessary information at the portfolio-
company-level.\239\ A few commenters stated that a private equity fund
may not have a controlling interest in all of its portfolio company
investments and thus may not be able to collect the required
information.\240\ Several commenters also argued that the scope of some
of these questions is too broad and that they would capture minor and/
or ordinary course transactions.\241\
---------------------------------------------------------------------------

    \235\ See, e.g., ICGN Comment Letter; PDI Comment Letter; and
AFREF Comment Letter.
    \236\ See PDI Comment Letter.
    \237\ See Better Markets Comment Letter.
    \238\ See, e.g., IAA Comment Letter; RER Comment Letter; and
SIFMA Comment Letter.
    \239\ See, e.g., SIFMA Comment Letter; RER Comment Letter; and
MFA Comment Letter.
    \240\ See, e.g., SIFMA Comment Letter and REBNY Comment Letter.
The SIFMA Comment Letter also stated that the existence of minority
investors in a single portfolio company may result in duplicative
reporting for certain of these proposed questions.
    \241\ See, e.g., TIAA Comment Letter; SIFMA Comment Letter; and
MFA Comment Letter.
---------------------------------------------------------------------------

    While we continue to believe that these questions would provide
benefits to the FSOC's and Commission's assessment of systemic risk and
the Commission's investor protection efforts for the reasons described
above, we acknowledge the concerns raised by some commenters. For
example, each of these questions is focused on collecting information
at the portfolio company-level rather than the fund-level. As stated by
commenters,\242\ private equity funds may not have a controlling
interest in any or all of their portfolio company investments. In such
cases, a private equity fund may not be able to obtain or accurately
report the portfolio company information that was proposed. Depending
on size and strategy, many private equity funds also have ten or more
portfolio company investments and some may have hundreds or more. As a
result, as some commenters argued,\243\ we recognize that the costs
associated with collecting this information may be far higher than
collecting information at the fund itself. Additionally, we understand
that some of these questions may capture ordinary course transactions
in certain instances. We believe that narrowing these questions in a
productive and meaningful way will require further study and analysis.
---------------------------------------------------------------------------

    \242\ See, e.g., SIFMA Comment Letter and REBNY Comment Letter.
    \243\ See, e.g., SIFMA Comment Letter; RER Comment Letter; and
MFA Comment Letter.
---------------------------------------------------------------------------

    We considered, but are not adopting, a modification of these
questions, in each case, to only require reporting of controlled
portfolio companies. However, this modification would reduce the value
of this reporting because non-controlling investments in portfolio
companies can still be substantial and have systemic consequences.
Accordingly, we have decided to adopt the proposed questions that are
at the fund-level, but not adopt these proposed questions that focus on
a fund's portfolio investments at this time. We believe this approach
strikes the right balance between collecting beneficial information and
minimizing the burdens placed on private equity funds and their
advisers.

E. Effective and Compliance Dates

    In order to provide time for advisers to prepare to comply with the
amendments, including reviewing the requirements, building the
appropriate internal reporting and tracking systems, and collecting the
required information,

as well as to simplify the compliance process, the effective dates for
the amendments are the same as the compliance dates. A commenter noted
that different compliance dates for these amendments as well as those
proposed in the 2022 Form PF Joint Proposing Release may lead to
inconsistent reporting as well as additional compliance burdens.\244\
We acknowledge that having separate effective and compliance dates
could cause reporting that is inconsistent since we are amending
certain existing questions in Form PF. If a period exists during which
some advisers may be completing the old version of these questions and
other advisers are completing the amended versions, they may be
providing different types of information. For example, private equity
fund advisers might provide different categories of information with
respect to geographical breakdowns of investments due to the amendments
to Question 67 during this interim period. This information could be
difficult to compare and thus would limit its value for the FSOC and
our assessment of systemic risk.
---------------------------------------------------------------------------

    \244\ See MFA Comment Letter (Mar. 16, 2023).
---------------------------------------------------------------------------

    We are, however, adopting two separate effective/compliance dates.
For new sections 5 and 6, the effective/compliance date is December 11,
2023, which is six months after the date of publication of the rules;
and for the amended, existing sections, the effective/compliance date
is June 11, 2024, which is one year from the date of publication of the
rules. We are requiring an earlier effective/compliance date for the
new Form PF sections 5 and 6, because it requires reporting based on
distinct event triggers, and it is important that the Commission and
FSOC begin receiving this information as soon as practicable to improve
their assessment of systemic risk. Similarly, we are adopting these
changes to the Commission's sections of Form PF separately and before
any changes proposed in the 2022 Form PF Joint Proposing Release
because it is important that the Commission and FSOC begin receiving
this information, especially hedge fund current reporting and private
equity event reporting, on a more expedited basis to improve the
assessment of systemic risk and investor protection. We are adopting a
later effective/compliance date for the amended, existing sections to
provide advisers with additional time to review the amendments, build
the appropriate internal reporting and tracking systems, and collect
the required information.
    One commenter requested a compliance period of at least 18 months
after the effective date for all amendments to Form PF.\245\ We are
providing a six-month period before the simultaneous compliance/
effective date for the new current and quarterly reporting in sections
5 and 6, as indicated above, because this information is imperative to
FSOC and our assessment of systemic risk as well as the Commission's
investor protection mission. After reviewing comments, we believe it is
necessary that the Commission and FSOC begin receiving these current
and quarterly reports in a shorter six-month time frame to promptly
improve their assessment of systemic risk. Additionally, while we
recognize that preparing to complete the amended, existing sections
will require additional time, we believe that providing a one-year
period to do so is sufficient given the modifications of this rule from
the proposal. Accordingly, beginning six months after the date of this
rule's publication in the Federal Register, any adviser that is
required to file sections 5 or 6 of Form PF must do so. Starting one
year after the date of publication of the rule in the Federal Register,
any adviser that is required to file Form PF must complete the fully
amended form.
---------------------------------------------------------------------------

    \245\ See IAA Comment Letter.
---------------------------------------------------------------------------

    The amendments we adopt relate to different sections of Form PF
than those proposed in the 2022 Form PF Joint Proposing Release and,
because they are separate, we believe that the compliance periods are
appropriate. If the Commission adopts amendments proposed in the 2022
Form PF Joint Proposing Release, the Commission may address any
potential issues or concerns with the compliance date at that time.

III. Other Matters

    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules as not a ``major
rule'' as defined by 5 U.S.C. 804(2).
    The requirements for reporting by hedge funds, including the
amendments adopted here, function independently from those governing
reporting by private equity funds. As explained above, each set of
amendments addresses particular concerns of the Commission focused on
the context in which they function, and provide benefits in furtherance
of the Commission's mission of investor protection and systemic risk
monitoring by FSOC. If any of the provisions of these rules, or the
application thereof to any person or circumstance, is held to be
invalid, such invalidity shall not affect other provisions or
application of such provisions to other persons or circumstances that
can be given effect without the invalid provision or application.

IV. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the
costs and benefits, of the final amendments. Section 202(c) of the
Advisers Act provides that when the Commission is engaging in
rulemaking under the Advisers Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission shall also consider whether the action will
promote efficiency, competition, and capital formation, in addition to
the protection of investors.\246\ The analysis below addresses the
likely economic effects of the final amendments, including the
anticipated and estimated benefits and costs of the amendments and
their likely effects on efficiency, competition, and capital formation.
The Commission also discusses the potential economic effects of certain
alternatives to the approaches taken in these final amendments.
---------------------------------------------------------------------------

    \246\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to
quantify. For example, the Commission cannot quantify how regulators
may adjust their policies and oversight of the private fund industry in
response to the additional data collected under the final amendments.
Also, in some cases, data needed to quantify these economic effects are
not currently available and the Commission does not have information or
data that would allow such quantification. For example, costs
associated with the final amendments may depend on existing systems and
levels of technological expertise within the private fund advisers,
which could differ across reporting persons. While the Commission has
attempted to quantify economic effects where possible, much of the
discussion of economic effects is qualitative in nature. The Commission
has sought comment on all aspects of the economic analysis, especially
any data or information that would enable a quantification of economic
effects, and the analysis below takes into consideration relevant
comments received.

B. Economic Baseline and Affected Parties

1. Economic Baseline
    The Commission adopted Form PF in 2011, with additional amendments
made to section 3 along with certain money market reforms in 2014.\247\
Form PF complements the basic information about private fund advisers
and funds reported on Form ADV.\248\ Unlike Form ADV, Form PF is not an
investor-facing disclosure form. Information that private fund advisers
report on Form PF is provided to regulators on a confidential basis and
is nonpublic.\249\ The purpose of Form PF is to provide the Commission
and FSOC with data that regulators can deploy in their regulatory and
oversight programs directed at assessing and managing systemic risk and
protecting investors both in the private fund industry and in the U.S.
financial markets more broadly.\250\
---------------------------------------------------------------------------

    \247\ See supra footnote 3.
    \248\ Investment advisers to private funds report on Form ADV
general information about private funds that they advise. This
includes basic organizational, operational information, and
information about the fund's key service providers. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser. See, e.g.,
Form ADV, Investor.gov, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/form-adv; see also
SEC, Investment Adviser Public Disclosure, available at https://adviserinfo.sec.gov/. Some private fund advisers that are required
to report on Form ADV are not required to file Form PF (for example,
exempt reporting advisers and advisers with less than $150 million
in private fund assets under management). Other advisers are
required to file Form PF and are not required to file Form ADV (for
example, commodity pools that are not private funds). Based on the
staff review of Form ADV filings and the Private Fund Statistics,
less than 10% of funds reported on Form ADV but not on Form PF in
2022. See infra footnote 284.
    \249\ Commission staff publish quarterly reports of aggregated
and anonymized data regarding private funds on the Commission's
website. See Division of Investment Management, Private Fund
Statistics, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml; see also supra footnote 4.
    \250\ See supra section I.
---------------------------------------------------------------------------

    Private funds and their advisers play an important role in both
private and public capital markets. These funds, including hedge funds
and private equity, currently have more than $17.0 trillion in gross
private fund assets.\251\ Private funds invest in large and small
businesses and use strategies that range from long-term investments in
equity securities to frequent trading and investments in complex
instruments. Their investors include individuals, institutions,
governmental and private pension funds, and non-profit organizations.
---------------------------------------------------------------------------

    \251\ These estimates are based on staff review of data from the
Private Fund Statistics report for the first quarter of 2022, issued
in Jan. 2023. Private fund advisers who file Form PF currently have
$20.1 trillion in gross assets. See Division of Investment
Management, Private Fund Statistics (Jan. 3, 2023), available at
https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. As discussed above, not all private fund advisers
are required to file Form PF. See supra footnote 248.
---------------------------------------------------------------------------

    Before Form PF was adopted, the Commission and other regulators had
limited visibility into the economic activity of private funds and
their advisers, and relied largely on private vendor databases about
private funds that covered only voluntarily provided private fund data
and are not representative of the total population.\252\ Form PF
represented an improvement in available data about private funds and
their advisers, both in terms of its reliability and completeness.\253\
Generally, investment advisers registered (or required to be
registered) with the Commission with at least $150 million in private
fund assets under management must file Form PF.\254\ Smaller private
fund advisers and all private equity fund advisers file annually to
report general information such as the types of private funds advised
(e.g., hedge funds or private equity funds), fund size, use of
borrowings and derivatives, strategy, and types of investors.\255\
Large private equity fund advisers also provide data about each private
equity fund they manage. Large hedge fund advisers also provide data
about each reporting fund they manage, and are required to file
quarterly.\256\
---------------------------------------------------------------------------

    \252\ See, e.g., SEC, 2020 Annual Staff Report Relating to the
Use of Form PF Data (Nov. 2020), available at https://www.sec.gov/files/2020-pf-report-congress.pdf.
    \253\ Id.
    \254\ Registered investment advisers with less than $150 million
in private funds assets under management, exempt reporting advisers,
and state-registered advisers report general private fund data on
Form ADV, but do not file Form PF. See supra footnote 248.
    \255\ Id.
    \256\ See supra footnotes 13, 254.
---------------------------------------------------------------------------

    The Commission and FSOC now have almost a decade of experience with
analyzing the data collected on Form PF. The collected data has helped
FSOC establish a baseline picture of the private fund industry for the
use in assessing systemic risk \257\ and improved the Commission's
oversight of private fund advisers.\258\ Form PF data also has enhanced
the Commission and FSOC's ability to frame regulatory policies
regarding the private fund industry, its advisers, and the markets in
which they participate, as well as more effectively evaluate the
outcomes of regulatory policies and programs directed at this sector,
including the management of systemic risk and the protection of
investors.\259\ Additionally, based on the data collected through Form
PF filings, regulators have been able to regularly inform the public
about ongoing industry statistics and trends by generating quarterly
Private Fund Statistics reports \260\ and by making publicly available
certain results of staff research regarding the characteristics,
activities, and risks of private funds and their advisers.\261\
---------------------------------------------------------------------------

    \257\ See, e.g., Office of Financial Research (OFR), 2021 Annual
Report to Congress (Nov. 2021), available at https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf; and Financial Stability Oversight Council (FSOC), 2020
Annual Report (2020), available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
    \258\ See supra footnote 252.
    \259\ See supra footnotes 257, 258.
    \260\ See supra footnotes 4, 249.
    \261\ See, e.g., David C. Johnson & Francis A. Martinez, Form PF
Insights on Private Equity Funds and Their Portfolio Companies, Off.
Fin. Res. Brief Series 18-01 (June 14, 2018), available at https://www.financialresearch.gov/briefs/2018/06/14/form-pf-insights-on-private-equity-funds/; Daniel Hiltgen, Private Liquidity Funds:
Characteristics and Risk Indicators, DERA White Paper (Jan. 27,
2017) (``Hiltgen Paper''), available at https://www.sec.gov/files/2017-03/Liquidity%20Fund%20Study.pdf; George O. Aragon, Tolga Ergun,
Mila Getmansky & Giulio Girardi, Hedge Funds: Portfolio, Investor,
and Financing Liquidity, DERA White Paper (May 17, 2017), available
at https://www.sec.gov/files/dera_hf-liquidity.pdf; George O.
Aragon, A. Tolga Ergun & Giulio Girardi, Hedge Fund Liquidity
Management: Insights for Fund Performance and Systemic Risk
Oversight, DERA White Paper (Mar. 23, 2022), available at https://ssrn.com/abstract=3734596 (retrieved from Elsevier SSRN database);
Mathias S. Kruttli, Phillip J. Monin & Sumudu W. Watugala, The Life
of the Counterparty: Shock Propagation in Hedge Fund-Prime Broker
Credit Networks, 146 J. Fin. Econ. 965 (2022) (``Kruttli, Monin &
Watugala''); Mathias S. Kruttli, Phillip J. Monin, Lubomir Petrasek
& Sumudu W. Watugala, Hedge Fund Treasury Trading and Funding
Fragility: Evidence from the COVID-19 Crisis, Fed. Res. Bd., Fin. &
Econ. Discussion Series 2021-038 (Apr. 2021), available at https://www.federalreserve.gov/econres/feds/hedge-fund-treasury-trading-and-funding-fragility-evidence-from-the-covid-19-crisis.htm; Mathias S.
Kruttli, Phillip J. Monin & Sumudu W. Watugala, Investor
Concentration, Flows, and Cash Holdings: Evidence from Hedge Funds,
Fed. Res. Bd., Fin. & Econ. Discussion Series 2017-121 (Dec. 15,
2017), available at https://doi.org/10.17016/FEDS.2017.121.
---------------------------------------------------------------------------

    However, this decade of experience with analyzing Form PF data has
also highlighted certain limitations of information collected on Form
PF, including information gaps and situations where additional and
timelier information would improve the Commission and FSOC's
understanding of the private fund industry and the potential systemic
risk relating to its activities, and improve regulators' ability to
protect investors.\262\ The need for additional and timelier
information collected on Form PF is further

heightened by the increasing significance of private fund advisers to
financial markets and to the broader economy, and resulting regulatory
concerns regarding potential risks to U.S. financial stability from
this sector.\263\
---------------------------------------------------------------------------

    \262\ See supra section I.
    \263\ The private fund industry has experienced significant
growth in size and changes in terms of business practices,
complexity of fund structures, and investment strategies and
exposures in the past decade. See supra footnote 4.
---------------------------------------------------------------------------

2. Affected Parties
    The final rule amends and introduces new reporting requirements for
the advisers to hedge funds \264\ and private equity funds.\265\
---------------------------------------------------------------------------

    \264\ Form PF defines ``hedge fund'' broadly to include any
private fund (other than a securitized asset fund) that has any of
the following three characteristics: (1) a performance fee or
allocation that takes into account unrealized gains, or (2) a high
leverage (i.e., the ability to borrow more than half of its net
asset value (including committed capital) or have gross notational
exposure in excess of twice its net asset value (including committed
capital)), or (3) the ability to short sell securities or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration). Any non-exempt commodity pools about
which an investment adviser is reporting or required to report are
automatically categorized as hedge funds. Excluded from the ``hedge
fund'' definition in Form PF are vehicles established for the
purpose of issuing asset backed securities (``securitized asset
funds''). See Form PF Glossary.
    \265\ Form PF defines ``private equity fund'' broadly to include
any private fund that is not a hedge fund, liquidity fund, real
estate fund, securitized asset fund or venture capital fund and does
not provide investors with redemption rights in the ordinary course.
Private funds that have the ability to borrow or short securities
have to file as a hedge fund. See Form PF Glossary.
---------------------------------------------------------------------------

    Hedge funds are one of the largest categories of private
funds,\266\ and as such play an important role in the U.S. financial
system due to their ability to mobilize large pools of capital, take
economically important positions in a market, and their extensive use
of leverage, derivatives, complex structured products, and short
selling.\267\ While these features may enable hedge funds to generate
higher returns as compared to other investment alternatives, the same
features may also create spillover effects in the event of losses
(whether caused by their investment and derivatives positions or use of
leverage or both) that could lead to significant stress or failure not
just at the affected fund but also across financial markets.\268\
---------------------------------------------------------------------------

    \266\ See supra footnote 251.
    \267\ See, e.g., Lloyd Dixon, Noreen Clancy & Krishna B. Kumar,
Hedge Fund and Systemic Risk, RAND Corporation (2012); John Kambhu,
Til Schuermann & Kevin Stiroh, Hedge Funds, Financial
Intermediation, and Systemic Risk, Fed. Res. Bank of N.Y. Staff Rpt.
No. 291, July's Econ. Policy Rev. (2007).
    \268\ See supra footnotes 257, 263; see also infra section
IV.C.1.a.
---------------------------------------------------------------------------

    In the second quarter of 2022, there were 9,733 hedge funds
reported on Form PF, managed by 1,857 advisers. Hedge fund advisers
that are required to file Form PF had investment discretion over
approximately $9.4 trillion in gross assets under management, which
represented almost half of the reported assets in the private fund
industry.\269\ Currently, hedge fund advisers with between $150 million
and $2 billion in regulatory assets (that do not qualify as large hedge
fund advisers) file Form PF annually, in which they provide general
information about funds they advise such as the types of private funds
advised, fund size, their use of borrowings and derivatives, strategy,
and types of investors. Large hedge fund advisers with at least $1.5
billion in regulatory assets under management attributable to hedge
funds file Form PF quarterly, in which they provide data about each
hedge fund they managed during the reporting period (irrespective of
the size of the fund). Large hedge fund advisers must report more
information on Form PF about qualifying hedge funds \270\ than other
hedge funds they manage during the reporting period. In the second
quarter of 2022, there were 2,059 qualifying hedge funds reported on
Form PF, managed by 598 advisers. These advisers had $7.9 trillion in
gross assets under management, which represented approximately 84
percent of the reported hedge fund assets.\271\
---------------------------------------------------------------------------

    \269\ See supra footnote 251. In the second quarter of 2022,
hedge fund assets accounted for 47% of the gross asset value
(``GAV'') ($9.4/$20.1 trillion) and 35% of the net asset value
(``NAV'') ($4.9/$13.9 trillion) of all private funds reported on
Form PF.
    \270\ See supra footnote 13.
    \271\ See supra footnote 251. In the second quarter of 2022,
qualifying hedge fund assets accounted for 84% of the GAV ($7.9/$9.4
trillion) and 80% of the NAV ($3.9/$4.9 trillion) of all hedge funds
reported on Form PF.
---------------------------------------------------------------------------

    Private equity funds are another large category of funds in the
private fund industry. In the second quarter of 2022, there were 18,987
private equity funds reported on Form PF, managed by 1,635 advisers.
Advisers to private equity funds had investment discretion over
approximately one third of the reported gross assets in the private
fund industry.\272\ Many private equity funds focus on long-term
returns by investing in a private, non-publicly traded company or
business--the portfolio company--and engage actively in the management
and direction of that company or business in order to increase its
value.\273\ Investments in private equity funds are often more illiquid
with more limited redemption rights as a result.\274\ Other private
equity funds may specialize in making minority investments in fast-
growing companies or startups.\275\
---------------------------------------------------------------------------

    \272\ See supra footnote 251. In the first quarter of 2022,
private equity assets accounted for 32% of the GAV ($6.4/$20.1
trillion) and 41% of the NAV ($5.7/$13.9 trillion) of all private
funds reported on Form PF.
    \273\ After purchasing controlling interests in portfolio
companies, private equity fund advisers frequently get involved in
managing those companies by serving on the company's board;
selecting and monitoring the management team; acting as sounding
boards for CEOs; and sometimes stepping into management roles
themselves. See, e.g., Private Equity Funds, Investor.gov, available
at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/private-equity.
    \274\ Id.
    \275\ Id.
---------------------------------------------------------------------------

    While all fund advisers are subject to fiduciary duties to their
clients, private equity funds' long-term investment horizons and
various relationships with affiliates and portfolio companies mean that
there exist opportunities for fund advisers to pursue transactions or
investments despite conflicts of interest and also to extract private
benefits at the expense of the funds they manage and, by extension, the
limited partners invested in the funds.\276\ The Commission has brought
several enforcement actions against private equity fund advisers that
allegedly received undisclosed fees and expenses,\277\ impermissibly
shifted and misallocated expenses,\278\ or failed to disclose conflicts
of interests adequately.\279\ In addition, private equity funds'
increasingly extensive use of leverage for financing portfolio
companies and a significant increase in

the use of private credit strategies both raise systemic risk
concerns.\280\
---------------------------------------------------------------------------

    \276\ Private equity fund advisers may be managing multiple
private equity funds and portfolio companies. The funds typically
pay the private equity fund adviser for advisory services.
Additionally, the portfolio companies may also pay the private
equity fund adviser for services such as managing and monitoring the
portfolio company. Affiliates of the private equity fund adviser may
also play a role as service providers to the funds or the portfolio
companies. See, e.g., SEC, Office of Compliance Inspections and
Examinations, Risk Alert, Observations from Examinations of
Investment Advisers Managing Private Funds (June 23, 2020),
available at https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf; Andrew Ceresney, Director, SEC
Division of Enforcement, Securities Enforcement Forum West 2016
Keynote Address: Private Equity Enforcement Securities and Exchange
Commission (May 12, 2016) (``Ceresney Keynote''), available at
https://www.sec.gov/news/speech/private-equity-enforcement.html.
    \277\ See, e.g., In the Matter of Blackstone Management
Partners, L.L.C., et. al., Advisers Act Release No. 4219 (Oct. 7,
2015) (settled action).
    \278\ See, e.g., In the Matter of Cherokee Investment Partners,
LLC and Cherokee Advisers, LLC, Advisers Act Release No. 4258 (Nov.
5, 2015) (settled action); In the Matter of Lincolnshire Management,
Inc., Advisers Act Release No. 3927 (Sept. 22, 2014) (settled
action).
    \279\ See, e.g., In the Matter of Mitchell J. Friedman, Advisers
Act Release No. 5338 (Sept. 4, 2019) (settled action).
    \280\ See Moody's Warns of `Systemic Risks' in Private Credit
Industry, Fin. Times (Oct. 26, 2021), available at https://www.ft.com/content/862d0efb-09e5-4d92-b8aa-7856a59adb20. One
commenter argues that this Moody's report is ``more speculative than
informative . . . Investors have significant transparency on how
leverage might be employed by the investment manager as part of
their due diligence process prior to investing. This will include
any appropriate leverage limits, risk management systems, the source
of financing as well as the collateral required. Leverage providers,
typically banks but also some pension funds or insurers, will also
undertake their own analysis before providing financing to private
credit funds. Their risk appetite therefore plays a significant role
in determining the availability of leverage for private credit
funds.'' The commenter argues that ``[t]he actual observations of
that report do not match the Commission's conclusion,'' based on a
quote that ``vehicles balance [. . .] risks through portfolio
diversity and stronger creditor protections in loan agreements than
for institutional loans.'' AIMA/ACC Comment Letter. However, while
we agree that it is important to distinguish leverage at the fund
level and portfolio company leverage, we believe that the
commenter's statements do not engage with key conclusions of the
Moody's study, namely that ``private credit also heightens credit
risks via reduced transparency, rising leverage and lender
concentrations. Additionally, its rapid growth and the
disintermediation of regulated financial institutions are sweeping a
mounting tide of leverage into a less-regulated grey zone, with
systemic implications. Risks that are rising beyond the spotlight of
public investors and regulators may be difficult to quantify, even
as they come to have broader economic consequences.'' Moody's
Investors Service, As Private Credit Continues to Grow, Risks are
Getting Swept Into Grey Zone (Oct. 25, 2021), available at https://live.moodys.io/global-banking-series-america-edition/global-investment-banks-navigating-a-changing-world/as-private-credit-continues-to-grow-risks-are-getting-swept-into-grey-zone. For
additional discussion of leveraged lending and systemic risk, see,
e.g., Rod Dubitsky, CLOs, Private Equity, Pensions, and Systemic
Risk, 26 J. Structured Fin. 8 (2020), available at https://jsf.pm-research.com/content/26/1/8.
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    Currently, all private equity fund advisers registered with the
Commission who are required to file Form PF must do so annually.
Private equity fund advisers with between $150 million and $2 billion
in regulatory assets under management attributable to private equity
funds must provide general information while large private equity fund
advisers with at least $2 billion in regulatory assets under management
must report more detailed data about the private equity funds they
manage (section 4 of Form PF).\281\ In the second quarter of 2022,
there were 18,987 private equity funds reported on Form PF, managed by
1,635 advisers, with $6.4 trillion in gross assets under
management.\282\ Of those, 6,644 funds were private equity funds
managed by 435 large private equity fund advisers with discretion over
nearly $4.9 trillion in gross assets, representing 77 percent of the
reported private equity assets.\283\ However, because not all private
equity fund advisers file Form PF, section 4 private equity fund
advisers represent less than 77 percent of total private equity fund
regulatory assets. Currently, the $2 billion reporting threshold
captures 73 percent of the entire private equity industry.\284\
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    \281\ See supra footnote 13.
    \282\ See supra footnote 251.
    \283\ Id.
    \284\ Based on staff review of Form ADV filings, in 2022, the
aggregate regulatory assets under management under the discretion of
private equity fund advisers were $6.7 trillion. According to the
Private Fund Statistics Report, this aggregate estimate includes
approximately $6.4 trillion (95%) in gross assets under management
by private equity fund advisers that file Form PF, $4.9 trillion of
which were under the discretion of large private equity fund
advisers. This represents 73% of the industry. See supra footnote
251.
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    Private funds are typically limited to accredited investors and
qualified clients such as pension funds, insurance companies,
foundations and endowments, and high income and net worth
individuals.\285\ Retail U.S. investors with exposure to private funds
are typically invested in private funds indirectly through public and
private pension plans and other institutional investors.\286\ In the
second quarter of 2022, public pension plans had $1,871 billion
invested in reporting private funds while private pension plans had
$1,341 billion invested in reporting private funds, making up 13.5
percent and 9.7 percent of the overall beneficial ownership in the
private equity industry, respectively.\287\ Private fund advisers have
also sought to be included in individual investors' retirement plans,
including their 401(k)s.\288\
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    \285\ See supra footnote 273; see also Hedge Funds,
Investor.gov, available at https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds.
    \286\ See supra footnotes 251, 285.
    \287\ Id.
    \288\ See, e.g., Dep't of Labor, Information Letter (June 3,
2020), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/information-letters/06-03-2020.
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C. Benefits and Costs

1. Benefits
    The final amendments are designed to facilitate two primary goals
the Commission sought to achieve with reporting on Form PF as
articulated in the original adopting release, namely: (1) facilitating
FSOC's understanding and monitoring of potential systemic risk relating
to activities in the private fund industry and assisting FSOC in
determining whether and how to deploy its regulatory tools with respect
to nonbank financial companies; and (2) enhancing the Commission's
ability to evaluate and develop regulatory policies and improving the
efficiency and effectiveness of the Commission's efforts to protect
investors and maintain fair, orderly and efficient markets.\289\
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    \289\ See supra footnote 3.
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    Specifically, the final amendments include amendments to section 4
of Form PF, which will enhance and provide more specificity regarding
the information collected on large advisers of private equity funds,
including new annual reporting for certain triggering events that were
originally proposed as current reporting requirements for all private
equity fund advisers. The final amendments also introduce new section 5
of Form PF, which will require advisers to qualifying hedge funds to
provide current reporting to the Commission when their funds are facing
certain events that may signal stress or potential future stress in
financial markets or implicate investor protection concerns. In
addition, the final amendments include improvements to definitions and
existing questions aimed to reduce their ambiguity and improve data
quality. Below we discuss benefits associated with the specific
elements of the amendments.
a. Current Reporting Requirements for Large Hedge Fund Advisers to
Qualifying Hedge Funds (Section 5 of Form PF)
    The final amendments introduce new section 5 of Form PF requiring
large hedge fund advisers to qualifying hedge funds (i.e., hedge funds
with a net asset value of at least $500 million) to file a current
report with the Commission when their funds experience certain stress
events: (1) extraordinary investment losses, (2) significant margin
events and default events, (3) a prime broker relationship being
terminated or materially restricted, (4) operations events, and (5)
certain events associated with withdrawals and redemptions at the
reporting hedge fund.\290\ These events may serve as signals to the
Commission and FSOC about significant stress at the reporting fund and
potential risks to financial stability. Advisers will be required to
file current reports within 72 hours of the occurrence of such an
event.\291\ Advisers will also be allowed to provide a narrative
response if they believe that additional information would be helpful

in understanding the information reported in the current
report(s).\292\
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    \290\ See supra section II.A.1. In a departure from the
proposal, we are not adopting a requirement that an adviser report a
significant decline in holdings of unencumbered cash.
    \291\ This is a departure from the proposal, which required
advisers to file a current report within one business day of the
occurrence of such an event. As discussed above, advisers should
consider filing a current report as soon as possible following such
an event. See supra section II.A.1.
    \292\ See supra section II.A.8.
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    The reporting of these stress events is designed to assist the
Commission and FSOC in assessing potential risks to financial stability
that hedge funds' activities could pose due to the complexity of their
strategies, their interconnectedness in the financial system, and the
limited regulations governing them.\293\ There are two main channels
through which stress events at an individual hedge fund may pose risks
to broader financial stability: forced liquidation of assets, which
could depress asset prices, and spillover of stress to the fund's
counterparties, which could negatively impact other activities of the
counterparties.
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    \293\ See supra sections II.A., II.A.1.
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    First, when a large hedge fund experiences significant losses, a
margin default, or faces large redemptions, it may be forced to
deleverage and liquidate its positions at substantially depressed
prices. Forced liquidation of assets by the hedge fund at depressed
prices may affect other investors and financial institutions holding
the same or similar assets.\294\ Consequently, more investors and
financial institutions may then face increased stress from margin calls
and creditor concerns. This could lead to more sales at depressed
prices, potentially causing stress across the entire financial system.
Second, large hedge funds that use leverage through loans, derivatives,
or reverse repurchase agreements with other financial institutions as
counterparties may cause significant problems at those financial
institutions in times of stress.\295\ This in turn may force those
institutions to scale back their lending efforts and other investment
and financing activities with other counterparties, thereby potentially
creating stress for other market participants.\296\
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    \294\ For example, because financial institutions base asset
valuations in part on recent transaction prices for comparable
assets, when assets are sold at depressed prices, forced
liquidations at depressed prices could lead to lower valuations for
entire classes of similar assets. See, e.g., Andrei Shleifer &
Robert Vishny, Fire Sales in Finance and Macroeconomics, 25 J. Econ.
Perspectives 29 (2011), available at https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.1.29; see also Fernando Duarte & Thomas
Eisenbach, Fire-Sale Spillovers and Systemic Risk, 76 J. Fin. 1251,
1251-1256 (2021), available at https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.13010; Wulf A. Kaal & Timothy A. Krause, Hedge
Funds and Systemic Risk, in Handbook on Hedge Funds (Oxford Univ.
Press 2016).
    \295\ For example, a lender to a hedge fund may view its loans
as increasingly high risk as the hedge fund's balance sheet
deteriorates. See, e.g., Mark Gertler & Nobuhiro Kiyotaki, Chapter
11--Financial Intermediation and Credit Policy in Business Cycle
Analysis, in Handbook of Monetary Economics (2010), available at
https://eml.berkeley.edu/~webfac/obstfeld/kiyotaki.pdf.
    \296\ For example, if a bank has a large exposure to a hedge
fund that defaults or operates in markets where prices are falling
rapidly, the bank's greater exposure to risk may reduce its ability
or willingness to extend credit to worthy borrowers. To the extent
that these bank-dependent borrowers cannot access alternative
sources of funding, their investment and economic activity could be
curtailed. See, e.g., Reint Gropp, How Important Are Hedge Funds in
a Crisis?, FRBSF Econ. Letter (Apr. 14, 2014), available at https://www.frbsf.org/economic-research/files/el2014-11.pdf. Even banks and
financial institutions that are not directly harmed by the forced
liquidation of assets by hedge funds may contribute to a system-wide
lending contraction in response to hedge fund crises, to the extent
they withdraw capital from lending to exploit distressed prices.
See, e.g., Jeremy Stein, Member of the Board of Governors of the
Federal Reserve System, Workshop on `Fire Sales' as a Driver of
Systemic Risk in Tri-Party Repo and Other Secured Funding Markets
(Oct. 4, 2013), available at https://www.bis.org/review/r131007d.pdf.
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    As a result, a stress event at one large hedge fund may potentially
spill over to the fund's lenders, counterparties, and across the entire
financial system, carrying with it significant economic costs and the
loss of confidence of investors. We believe that a timely notice about
stress events could provide an early warning of the fund's assets
liquidation and risk to counterparties. Such a timely notice could
allow the Commission and FSOC to assess the need for a regulatory
policy response, if any, and could allow the Commission to pursue
potential outreach, examinations, or investigations, in response to any