harm to investors or potential risks to financial stability on an
expedited basis before those harms or risks worsen.
    In addition, current reporting of stress events at multiple
qualifying hedge funds may indicate broader market instability with
potential risks for similarly situated funds, or markets in which these
funds invest. Current reports will allow the Commission and FSOC to
assess the prevalence of the reported stress events based on the number
of funds filing in a short time frame, and identify patterns among
similarly situated funds and common factors that contributed to the
reported stress events. In that regard, current reports will be
especially useful during periods of market volatility and stress, when
the Commission and FSOC are actively and quickly ascertaining the
affected funds, gathering information to assess systemic risk, and
determining whether and how to pursue regulatory responses, if any, and
when the Commission is actively determining whether and how to pursue
outreach, examinations, or investigations. We anticipate that the
current reporting requirement will improve the transparency to the
Commission and FSOC of hedge fund activities and risk exposures, which
will enhance systemic risk assessment and investor protection efforts.
    We believe that those efforts will be beneficial for hedge fund
advisers, hedge funds, and hedge fund investors, as well as for other
market participants, as the new and timely information about stress
events at hedge funds will help the Commission and FSOC to assess
emerging risk events proactively, and will help the Commission further
evaluate the need for outreach, examinations, or investigations, in
order to minimize market disruptions. In turn, this could help develop
robust resolution mechanisms for dealing with the stress at
systemically important hedge funds, which could lead to more resilient
financial markets and instill stronger investor confidence in the U.S.
hedge fund industry and financial markets more broadly.\297\ The
Commission may also use this information to further advance investor
protection efforts.
---------------------------------------------------------------------------

    \297\ See, e.g., J[oacute]n Dan[iacute]elsson, Ashley Taylor &
Jean-Pierre Zigrand, Highwaymen or Heroes: Should Hedge Funds Be
Regulated? A Survey, 1 J. Fin. Stability 522 (2005).
---------------------------------------------------------------------------

    We also anticipate that the current reporting requirements might
incentivize some hedge fund managers to enhance internal risk controls
and reporting, which could support more effective risk management for
these funds.\298\ However, some investment advisers commented that they
did not believe that a current reporting regime would provide any
incentive for enhanced internal controls.\299\ We disagree with the
assertion that there will be no additional incentives to enhance
internal risk controls. We believe that at the margin there may be such
enhanced incentives. To the extent these enhanced internal risk
controls and reporting improve managers' ability to monitor and respond
to potential stress events, we believe this could provide market-wide
benefits to funds, their investors, and financial markets more broadly.
---------------------------------------------------------------------------

    \298\ For example, fund advisers may not internalize all of the
benefits that enhanced risk reporting provides other fund advisers
and investors to other fund advisers. Current reporting requirements
may result in reporting practices that are more consistent with fund
advisers considering the impact of their internal risk reporting on
the broader market.
    \299\ See, e.g., MFA Comment Letter.
---------------------------------------------------------------------------

    Additionally, other commenters stated that under the current
reporting regime, investors may demand additional reporting themselves,
knowing that reporting systems are being developed for Commission and

FSOC reporting.\300\ To the extent investors secure this additional
reporting, those investors would benefit from enhanced information on
potential risks associated with their investments.\301\
---------------------------------------------------------------------------

    \300\ See, e.g., SIFMA Comment Letter; AIMA Comment Letter.
    \301\ These benefits would be partially offset by the additional
costs to funds of this reporting, and those costs may be passed on
to investors. See infra section IV.C.2.
---------------------------------------------------------------------------

    Furthermore, requiring hedge fund advisers to report stress events
on Form PF will support regulatory efficiency because all eligible
hedge fund advisers will be required to file information about certain
stress events on a standardized form. 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).\302\ Having standardized information, plus
additional potential narrative detail explaining additional context
behind the standardized reporting, will provide a more complete record
of significant stress events in the hedge fund industry that can be
used by the Commission and FSOC to identify regulatory tools and
mechanisms that could potentially be used to make future systemic
crises episodes both less likely to occur as well as less costly and
damaging when they do occur.\303\ The observations from this research
could help inform and frame regulatory responses to future market
events and policymaking.
---------------------------------------------------------------------------

    \302\ See supra section II.A.8.
    \303\ For instance, a more complete record would allow the staff
to more accurately assess the prevalence of the reported stress
events, identify patterns among affected funds, and detect factors
that contributed to the reported stress events. The observations
from this research could be used to identify causes for, and
implications of, possible future similar stress events, or causes
of, and implications for, investor harm, thus enabling the
Commission and FSOC to better assess such future events.
---------------------------------------------------------------------------

    Some investment adviser groups raised three categories of concerns
with respect to current reporting, which we will discuss in turn:
First, some commenters broadly question whether current reporting can
provide useful data indicative of systemic risk or market stress at
all.\304\ Second, as a closely related matter, one commenter questioned
whether the Commission would be able to take relevant actions using the
data from the current reporting regime in the event of systemic risk or
market stress.\305\ Lastly, some commenters questioned the Commission's
analysis in the particular threshold choices of the trigger events in
the current reporting regime.\306\
---------------------------------------------------------------------------

    \304\ AIMA/ACC Comment Letter; MFA Comment Letter.
    \305\ AIMA/ACC Comment Letter.
    \306\ AIMA/ACC Comment Letter; MFA Comment Letter.
---------------------------------------------------------------------------

    First, some commenters more broadly questioned the benefits of
current reporting. For example, one commenter stated that ``there is no
policy justification for the proposed amendments which would seek to
impose unnecessary and disproportionate compliance and operational
burdens on advisers.'' \307\ Commenters also stated, broadly, that the
events the Commission requests reporting on are not indicative of
systemic risk and market disruption,\308\ or that the data produced
will have little utility in assessing actual systemic risks.\309\ We
disagree. As an initial matter, the above literature supports a view
that extraordinary investment losses (or other systemic stress events)
at one large hedge fund may potentially spill over to the fund's
lenders, counterparties, and across the entire financial system. We
believe the broader criticisms by commenters do not dispute these
results. These commenters also do not dispute that the current
reporting regime will facilitate outreach, examinations, or
investigations.
---------------------------------------------------------------------------

    \307\ AIMA/ACC Comment Letter.
    \308\ Id.
    \309\ MFA Comment Letter.
---------------------------------------------------------------------------

    Moreover, other commenters support the stated benefits. For
example, one commenter stated that ``[t]he Financial Crisis Inquiry
Commission in 2011 cited the lack of transparency into the non-bank
sector numerous times as a major contributor to the financial crisis of
2008. To prevent additional financial instability stemming from a lack
of visibility for regulators into hedge fund holdings, and to enable
the FSOC and policy makers to consider appropriate policy responses,
the Commission and FSOC both need to have this critical data.'' \310\
Another commenter supported the current reporting disclosures, stating
that they believed the systemic risk posed by private funds ought to be
monitored.\311\ As a final example, a third commenter specifically
described the risks from extraordinary investment losses at a hedge
fund as being able to impact markets, necessitating intervention to
protect markets and investors, and stating broadly that the rest of the
triggering events are similarly important.
---------------------------------------------------------------------------

    \310\ AFREF Comment Letter; see also supra section II.A.
    \311\ Public Citizen 50 Comment Letter (``We support these
additional disclosures. Because the scope of private funds is so
large, the systemic risk they pose must be monitored with greater
care. We specifically support the urgent reporting of losses. Losses
of 20% or more may indicate stress at the fund or even the markets
where the fund participates.''); see also supra section II.A.
---------------------------------------------------------------------------

    Certain revisions to the final amendments are in response to
comments that specific elements of the proposed current reporting
triggers were redundant or likely to result in false positive reports
that were not indicators of systemic stress, and thus preserve the
benefits of the proposal while removing unnecessary costs as compared
to the proposed current reporting triggers. For example, some
commenters stated that parties may terminate prime broker relationships
for ordinary business reasons that are not indicative of fund or
counterparty stress, among other related concerns.\312\ After
considering comments, we are narrowing the prime broker reporting items
to only apply when the prime broker terminates the agreement or
materially restricts its relationship with the fund, in whole or in
part, in markets where that prime broker continues to be active,\313\
or when there is a termination of the relationship between the prime
broker and the reporting fund if a ``termination event'' was activated
in the prime brokerage agreement, or related agreements, in the last 12
months.\314\ Similarly, with respect to changes in unencumbered cash,
some commenters argued that the proposed current reporting trigger
would capture routine cash movements in certain strategies resulting in
some funds filing numerous reports over the course of a year.\315\ We
are persuaded by commenters and are not adopting this item after
considering comments received.\316\ Lastly, some commenters argued that
the proposed extraordinary investment loss and margin increase
reporting based on outdated NAV figures would yield unreliable current
reports. For example, an extraordinary investment loss current report
regime based on an outdated NAV figure would yield excessive reports
during upward-trending markets, when current fund values greatly exceed
last quarter's NAV and subsequent losses are therefore overly likely to
exceed 20 percent of last quarter's NAV.\317\ The final amendments
instead require reporting based on the more timely RFACV measure.\318\
We believe these changes

preserve the benefits of the final amendments while reducing the costs
relative to the proposal.
---------------------------------------------------------------------------

    \312\ See supra section II.A.4.
    \313\ This instruction excludes termination events related to
the financial state, activities or other characteristics solely of
the prime broker. See supra section II.A.4.
    \314\ See supra section II.A.4.
    \315\ See supra section II.A.5.
    \316\ See supra section II.A.5.
    \317\ See supra section II.A.2.
    \318\ See supra sections II.A.2, II.A.3.
---------------------------------------------------------------------------

    Second, in addition to questioning whether the trigger events in
the current reporting regime are useful as relevant indicators of
systemic risk or market stress, one commenter questioned whether the
Commission had demonstrated an ability to intervene to avoid a
subsequent systemic event using current reporting data.\319\ However,
again, this commenter broadly does not dispute that the current
reporting trigger events will facilitate outreach, examinations, or
investigations. We have also discussed above the other potential
responses that would be facilitated by the timely notices of a stress
event under the current reporting regime, such as FSOC and the
Commission analyzing the scale and scope of the event and identifying
whether additional funds that may have similar investments, market
positions, or financing profiles are at risk.\320\ For example, as
noted above, if one fund that was particularly concentrated in a
deteriorating position or strategy reported an extraordinary loss or
was terminated by their prime broker for reasons related to that
position or strategy, Commission staff could potentially conduct
outreach to fund counterparties or other similarly situated funds to
assess whether any regulatory action could mitigate the potential for
contagion or harm to investors.\321\
---------------------------------------------------------------------------

    \319\ AIMA/ACC Comment Letter.
    \320\ See supra sections II.A., II.A.2.
    \321\ See supra section II.A.
---------------------------------------------------------------------------

    Third, some commenters argue that benefits of certain current
reports will be mitigated where other triggering events have already
provided pertinent information.\322\ We agree that this may be true in
certain cases. For example, for extraordinary losses that result from
adverse movements against short positions, the reporting fund will, in
general, be required to post additional margin or collateral. The
benefits from the subsequent margin, collateral, or equivalent increase
may be limited by the Commission having already received an
extraordinary investment loss current report. However, we believe that
the current reporting triggering events all offer unique benefits. For
example, margin, collateral, or equivalent increases may result from
increased volatility before defaults actually occur, providing early
warning indicators of hedge fund stress or potential liquidation, much
like extraordinary investment losses.
---------------------------------------------------------------------------

    \322\ See, e.g., AIMA/ACC Comment Letter; MFA Comment Letter.
---------------------------------------------------------------------------

    Lastly, commenters questioned the Commission's analysis in several
of the particular parameter choices of the current reporting regime. We
discuss these parameter choices each in turn.
    First, some commenters questioned whether the extraordinary
investment loss current report threshold should be set at 20 percent,
or some higher threshold.\323\ While the Commission requested comment
on the choice of threshold,\324\ no commenter offered data or analysis
targeted at estimating a different threshold for extraordinary
investment losses. Only one commenter suggested an alternative
threshold of 50 percent, but did so with no data or analysis defending
this alternative threshold as more optimal than a 20 percent threshold,
besides the fact that it would generate fewer current reports.\325\
Moreover, other commenters supported the extraordinary loss current
reporting regime as proposed, with a 20 percent threshold.\326\ As
noted above, it is also our understanding that NAV decline triggers in
risk control provisions of prime broker agreements or ISDA master
agreements typically range from 10 percent to 25 percent declines over
a 30 day period.\327\ We are not aware of any data or literature that
would suggest a flaw in a choice of a 20 percent threshold. We
therefore continue to believe that the benefits stated above will be
achieved with an extraordinary loss current reporting regime based on a
20 percent loss threshold.
---------------------------------------------------------------------------

    \323\ See supra section II.A.2; see also, e.g., AIMA/ACC Comment
Letter (``[T]he Proposing Release does not elaborate on its
`experience' nor does it provide robust data or examples of hedge
funds experiencing equal or greater losses than 20 percent of the
fund's most NAV reported on Form PF that would justify inclusion of
the quantitative threshold.''); MFA Comment Letter (``For reports
required under section 5.B. (Extraordinary Investment Loss), raise
the threshold of extraordinary losses to 50 percent. . . . A higher
reporting threshold will reduce the `noise' of a large number of
reports that are based on temporary market events.'').
    \324\ 2022 Form PF Proposing Release, supra footnote 6, at 19,
116.
    \325\ MFA Comment Letter.
    \326\ See supra section II.A; see also, e.g., Better Markets
Comment Letter (``[A] 20 percent loss in value over such a short
term would certainly rattle investors, spook markets, and
necessitate an urgent and hard look by regulators into a variety of
issues related to the fund to protect markets and investors.'');
Public Citizen 50 Comment Letter (``Losses of 20 percent or more may
indicate stress at the fund or even the markets where the fund
participates.'').
    \327\ See supra section II.A.2; see also, e.g., HFL Report,
supra footnote 46.
---------------------------------------------------------------------------

    Nevertheless, in further response to the comment file's concerns
regarding the parameter choice for extraordinary investment losses, we
are able to examine existing Form PF's monthly reports of gross and net
performance. While there are no existing data on how often
extraordinary investment loss current reports would be received under
the final amendments to Form PF, we have examined the number of times a
qualifying hedge fund's monthly gross and net performance, as reported
on the existing Form PF, crossed thresholds of 10 percent through 35
percent from 2013-2021.\328\ We believe that, in general, a hedge fund
reporting a monthly loss of X percent in historical Form PF data
indicates that, had a current reporting regime with a threshold of X
percent for extraordinary investment losses been in place in the past,
that hedge fund would have generated a current report in that month.
Therefore, the frequency of hedge funds reporting monthly losses of
different percentages in historical data represents a useful proxy for
how often current reports are likely to be generated in the future.
---------------------------------------------------------------------------

    \328\ A qualifying hedge fund is defined in Form PF as ``any
hedge fund that has a net asset value (individually or in
combination with any feeder funds, parallel funds and/or dependent
parallel managed accounts) of at least $500 million as of the last
day of any month in the fiscal quarter immediately preceding your
most recently completed fiscal quarter.'' Monthly gross and net
performance results are reported in Section 1b, Item C, Question 17.
See supra footnote 13.
---------------------------------------------------------------------------

    Before analyzing the data, we evaluate two reasons why these data
may differ from the rate that current reports will be generated. First,
the reference statistics used for extraordinary investment loss current
reporting do not require the deduction of all fees and expenses or the
inclusion of income accruals. Therefore, the rate of reporting under
the current reporting regime will likely be in the range of, but not
necessarily equal to, the gross and net performance loss threshold
crossing rates provided above. Second, while statistical models and
literature vary in terms of whether they indicate 10-day hedge fund
losses are likely to be greater or less than monthly losses, as a
leading matter, standard deviations of many statistical processes
increase with time horizon. We therefore believe that both the gross
and net performance tables as presented below, which are based on
monthly performances, likely overstate the rate at which hedge fund
losses under the current reporting regime would be triggered by each of
the above thresholds. This would indicate that a 20 percent threshold
is conservatively high and is likely to reduce costs from false
positive reports during periods where there is no market stress,

potentially at the expense of generating fewer current reports during a
systemic risk episode.
    We first tabulate the number of private funds in Form PF with
performance data. This is provided in Table 1. The third and fourth
columns demonstrate that the majority of funds and advisers in all
years report 12 months of performance data.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                                Number of
                                                                                Number of funds   advisers with
                    Year                      Number of funds     Number of      with 12 months    12 months of
                                                                   advisers      of performance    performance
                                                                                data             data
----------------------------------------------------------------------------------------------------------------
2013........................................             1369              469             1041              402
2014........................................             1515              514             1207              450
2015........................................             1570              522             1241              458
2016........................................             1572              509             1241              455
2017........................................             1699              528             1345              474
2018........................................             1718              538             1394              471
2019........................................             1684              525             1388              472
2020........................................             1722              526             1272              454
2021........................................             1727              561             1430              509
----------------------------------------------------------------------------------------------------------------

    We next examine two key features of Form PF monthly performance
data: The number of threshold crossings during periods where there is
no market stress, and the number of threshold crossings during periods
of market stress. Tables 2 and 3 display the number of times a
qualifying hedge fund's monthly gross and net performance, as reported
on the existing Form PF, crossed thresholds of 10 percent through 35
percent separately in 2020 and then in the years 2013-2019 and 2021.

                                                     Table 2
----------------------------------------------------------------------------------------------------------------
                                      Average number of instances per year of qualifying hedge fund monthly net
                                                      performance losses greater than threshold
              Year(s)              -----------------------------------------------------------------------------
                                        -10%         -15%         -20%         -25%         -30%         -35%
----------------------------------------------------------------------------------------------------------------
2013-2019, 2021...................          127           49           27           17           11            8
2020..............................          885          443          229          135           90           63
----------------------------------------------------------------------------------------------------------------

                                                     Table 3
----------------------------------------------------------------------------------------------------------------
                                     Average number of instances per year of qualifying hedge fund monthly gross
                                                      performance losses greater than threshold
              Year(s)              -----------------------------------------------------------------------------
                                        -10%         -15%         -20%         -25%         -30%         -35%
----------------------------------------------------------------------------------------------------------------
2013-2019, 2021...................          133           48           27           16           11            9
2020..............................          902          446          230          132           91           63
----------------------------------------------------------------------------------------------------------------

    Thresholds of 10 percent and 15 percent demonstrate substantially
high rates of crossing of these thresholds in all years, including
periods with no indicators of market stress. This indicates a high
likelihood that extraordinary investment loss current reporting
thresholds set at 10 percent or 15 percent would yield a large number
of current report filings every month, regardless of market conditions.
Thresholds of 30 percent and 35 percent demonstrate few crossings of
these thresholds even in 2020, indicating a risk that extraordinary
investment loss current reporting with a 30 percent (or higher)
threshold would fail to generate a sufficiently broad sample that would
allow FSOC and the Commission to analyze the scale and scope of any
future systemic events and whether additional funds that may have
similar investments, market positions, or financing profiles are at
risk. This risk is exacerbated by the fact that Tables 3 and 4 are
likely conservative estimates of the number of current reports that
would be generated by each threshold choice.
    While the thresholds of both 20 percent and 25 percent yield
relatively few crossings of thresholds prior to 2020, and a large
number of threshold crossings in 2020, we believe the additional
current reports generated in 2020 using a period of 20 percent will
lead to substantially improved systemic risk assessment. As noted
above, one commenter suggested a threshold of 50 percent.\329\ However,
it is clear from Tables 2 and 3 that any threshold greater than 35
percent would substantially or completely erode the benefits of the
current reporting system by producing negligible numbers of current
reports even in a systemic crisis. To the extent that that these tables
overstate the rate at which hedge fund losses under the current
reporting regime would be triggered by each of the above thresholds, as
noted above, we believe that a 20 percent threshold is conservatively
high. To the extent we have selected a conservatively high threshold,
the choice will reduce costs from false positive reports during periods
where there is no market stress,

potentially at the expense of reduced benefits if the current reporting
regime generates fewer current reports during a systemic risk episode.
---------------------------------------------------------------------------

    \329\ See MFA Comment Letter.
---------------------------------------------------------------------------

    Similar concerns from commenters arose with respect to threshold
choices for significant margin increases, default events, and
withdrawals and redemptions.\330\
---------------------------------------------------------------------------

    \330\ See supra sections II.A.3, II.A.7.
---------------------------------------------------------------------------

    With respect to margin increases, as an initial matter, margin
increases may be viewed as potential hedges by a counterparty against
future possible losses of an investment portfolio. From that
perspective, we believe that it is reasonable to use the same threshold
for margin increases as for extraordinary investment losses. Moreover,
as with extraordinary investment losses, while the Commission requested
comment on the appropriateness of this threshold choice,\331\ no
commenter offered data or analysis targeted at estimating a different
threshold, or indicated any data or literature that would suggest a
flaw in our threshold choices.
---------------------------------------------------------------------------

    \331\ 2022 Form PF Proposing Release, supra footnote 6, at 27.
---------------------------------------------------------------------------

    In further response to commenter concerns, we have also re-
evaluated the literature on margin increases. One recent estimate from
the academic literature indicates that an increase in margin or
collateral of 20 percent of the average daily RFACV over a 10-day
period represents a substantially large increase in the actual level of
margin/collateral.\332\ Specifically, this estimate from the
literature, based on a sample of large hedge fund advisers' qualifying
hedge funds from Q4 2012 to Q1 2017, finds that the hedge funds in the
sample had median collateral as a percentage of borrowings of 121
percent, median borrowings of $.443 billion, and a median NAV of $.997
billion. This indicates that a typical hedge fund in the sample has
collateral as a percentage of NAV of approximately 54.1 percent.\333\
For such a hedge fund, an increase in margin/collateral of 20 percent
of RFACV represents an almost 40 percent increase in the level of
margin/collateral posted.\334\ We believe this represents a
substantially large increase in the level of margin/collateral.
---------------------------------------------------------------------------

    \332\ Kruttli, Monin & Watugala, supra footnote 261.
    \333\ 1.21851*.443/.997 = .541.
    \334\ Kruttli, Monin & Watugala, supra footnote 261. While there
is not reliable data on the average level of margin/collateral
increases by bilateral intermediaries during the Covid-19 financial
turmoil, we note that a 40% increase in the level of margin/
collateral is consistent with how much central counterparties
increased their initial margin requirements during this period. See,
e.g., Basel Committee on Banking Supervision, Committee on Payments
and Market Infrastructures, Board of the International Organization
of Securities Commissions, Consultative Report, Review of Margining
Practices (Oct. 2021), available at https://www.bis.org/bcbs/publ/d526.pdf.
---------------------------------------------------------------------------

    The distributions of fund borrowings and collateralization in the
sample are right-skewed, and so the results for the largest hedge funds
in the data differ from the results for the median hedge fund.\335\ The
75th percentile fund NAV in the data is $2 billion, the 75th percentile
of fund borrowings is $1.3 billion, and the 75th percentile for
collateral as a percentage of borrowings is 183.8 percent.\336\ Such a
hedge fund has collateral as a percentage of NAV of approximately
119.47 percent. For such a hedge fund, an increase in margin/collateral
of 20 percent of RFACV represents a 16.7 percent increase in the level
of margin/collateral, compared to almost 40 percent for the median
hedge fund. This indicates that the largest hedge funds may be required
to file current reports for smaller increases in the level of their
margin/collateral as compared to smaller hedge funds. However, for such
a fund, an increase in margin/collateral of 20 percent of RFACV
represents a $400 million increase in margin/collateral, and we believe
such large increases in margin/collateral at the largest hedge funds
are likely still to be indicative of potential systemic risk,
especially if multiple such increases are reported to the Commission
and FSOC.
---------------------------------------------------------------------------

    \335\ Kruttli, Monin & Watugala, supra footnote 261.
    \336\ Id.
---------------------------------------------------------------------------

    Default events and withdrawals/redemptions also have associated
parameter choices. Counterparty defaults must be reported that
accounted for a greater portion of the fund's NAV than a 5 percent
threshold, and withdrawals/redemptions must be reported when they
exceed 50 percent of the most recent net asset value (after netting
against subscriptions or other contributions from investors received
and contractually committed).\337\
---------------------------------------------------------------------------

    \337\ See supra sections II.A.3, II.A.7.
---------------------------------------------------------------------------

    There are no data currently available that we are aware of, in Form
PF or otherwise, that would provide an estimate as to how often
counterparty default or withdrawal/redemption current reports are
likely to be received. While the Commission requested comment on the
appropriateness of these threshold choices,\338\ no commenter offered
data or analysis targeted at estimating a different threshold, or
indicated any data or literature that would suggest a flaw in our
threshold choices. However, as discussed above, we believe that the
counterparty default threshold represents an often-used industry
practice for measuring significant exposure at both the position level
and the counterparty-exposure level. A default at this level could be a
sign of issues at both the fund and counterparty making it well suited
for systemic risk monitoring. Even if a five percent default is
insignificant at a fund level, a high number of such reports can be
significant systemically.\339\ We also believe that withdrawals/
redemptions exceeding 50 percent of a fund net asset value is well
accepted as a substantial withdrawal that threatens a fund's health and
potentially markets if it requires substantial portfolio sales.\340\
---------------------------------------------------------------------------

    \338\ 2022 Form PF Proposing Release, supra footnote 6, at 29,
41.
    \339\ See supra section II.A.3.
    \340\ Id.
---------------------------------------------------------------------------

b. Quarterly Private Equity Event Reports for All Private Equity
Advisers
    In a change from the proposal, the final amendments will require
section 6 of Form PF to be filed on a quarterly basis and will narrow
the scope of events included in this reporting to only include (1)
execution of an adviser-led secondary transaction, and (2) investor
election to remove a fund's general partner or to terminate a fund's
investment period or a fund.\341\
---------------------------------------------------------------------------

    \341\ The required reporting of these events was initially
proposed as a current reporting requirement. See supra section II.B.
---------------------------------------------------------------------------

    Although advisers to private equity funds have become an essential
part of the U.S. financial system,\342\ there is only partial and
insufficient information about their funds' governance, strategies,
performance, and volatility available to regulators. Moreover, because
private equity funds' investments are mostly in private companies and
businesses, there is limited information available on the performance
of these investments, on the performance and volatility of private
equity funds, and therefore on potential harms investors may face.\343\
As a result, significant events at private equity funds that could have
substantial

consequences for a fund's investors--namely a removal of a general
partner, termination of a fund or its investment period, or the
occurrence of an adviser-led secondary--may not be known to the
Commission or FSOC early enough to enable any effective regulatory
response, outreach, examinations, or investigation that could
effectively further investor protection.
---------------------------------------------------------------------------

    \342\ See supra section IV.B.2.
    \343\ Even when the updated valuations of private equity
portfolio companies are available, these valuations may appear
relatively uninformative as they tend to respond slowly to market
information and could be artificially smoothed. See Tim Jenkinson,
Miguel Sousa & R[uuml]diger Stucke, How Fair are the Valuations of
Private Equity Funds? (Feb. 2013) (unpublished manuscript),
available at https://www.psers.pa.gov/About/Investment/Documents/PPMAIRC%202018/27%20How%20Fair%20are%20the%20Valuations%20of%20Private%20Equity%20Funds.pdf; Robert Harris, Tim Jenkinson & Steven Kaplan, Private
Equity Performance: What Do We Know?, 69 J. Fin. 1851 (Mar. 27,
2014).
---------------------------------------------------------------------------

    These new quarterly reporting requirements for private equity fund
advisers will provide a timelier alert to the Commission on significant
developments at the reporting funds that could potentially cause
investor harm and loss of investor confidence. Such alerts will enable
the Commission to assess in a reasonably prompt time-frame the severity
of the reported events at the reporting private equity fund and, to the
extent the reported event may cause significant investor harm and loss
of investor confidence, these alerts will allow the Commission to frame
potential regulatory responses.
    The Commission could also use the information provided in these
quarterly reports 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.
For example, the removal of a fund's adviser or affiliate as general
partner, termination of a fund's investment period, or termination of a
fund could signal the liquidation of the fund earlier than anticipated,
which could present risks to investors and potentially certain markets
in which the fund assets were invested, as the entire investment
strategy and planning of the fund can be disrupted.\344\ We understand
that, because the consequence of each of these actions could be
damaging to a fund, investors would generally prefer to negotiate with
a fund's adviser to avoid the adviser pursuing any of these
actions.\345\ Quarterly reports of these events from private equity
fund advisers of any size may therefore reflect potential areas for
Commission outreach, examinations, or investigations.
---------------------------------------------------------------------------

    \344\ See supra section II.B.
    \345\ Id.
---------------------------------------------------------------------------

    As another example, a report about an adviser-led secondary
transaction may signal to the Commission a potential area for inquiry
to prevent investor harm and protect investors' interests, as such
transactions may present fund-level conflicts of interest, such as
those that arise because the adviser (or its related person) is on both
sides of the transaction in adviser-led secondary transactions with
potentially different economic incentives.\346\ Reporting about such
events could alert the Commission to specific investor protection
issues at the fund's adviser, including potential conflicts of
interest, and therefore merit targeted oversight and assessment.
Quarterly reporting about such events could alert the Commission to
specific investor protection issues at the fund's adviser, including
potential conflicts of interest that merit more timely targeted
oversight and assessment.
---------------------------------------------------------------------------

    \346\ Id.
---------------------------------------------------------------------------

    These events may also signal to the Commission and FSOC the
presence of significant changes in market trends and potential
developing or growing risks to broader financial markets, as well as
indicate potential areas for the Commission to pursue outreach,
examinations, and investigations designed to prevent investor harm and
protect investors' interests. Private equity fund investors will
benefit, as the new and timely information about private equity funds
and their advisers would help the Commission and FSOC to assess risks
as they emerge and address them with appropriate regulatory responses,
if any, thereby minimizing potential investor harms and market
disruptions, as well as limiting potential damages and costs associated
with them. Data on these events may also may help inform and frame any
regulatory response to future market events and future policymaking.
    Also, multiple reports about removals of general partners,
terminations of a fund's investment period, or terminations of a fund
itself may reflect rising market stress. In particular, these events
may pose risks for private equity portfolio companies, who may face
liquidity challenges from removal of the private equity fund's capital,
for example if the adviser is no longer as willing to insert equity
capital when needed once key GPs are removed.\347\ Similarly, multiple
reports about adviser-led secondary transactions such as a fund
reorganization may serve as a warning to the Commission and FSOC about
deteriorating market conditions that may prevent private equity
managers from utilizing more traditional ways to exit their portfolio
companies and realize gains.\348\ These events also can represent risks
for private equity portfolio companies, who may face liquidity risks
from removal of a private equity fund's capital.
---------------------------------------------------------------------------

    \347\ Id.
    \348\ For example, private equity exits have been adversely
affected by the global Covid-19 pandemic as the three traditional
ways for private equity fund advisers to exit portfolio companies--
trade sales, secondary buy-outs and initial public offerings
(``IPOs'')--became unattainable or unattractive for some advisers.
See, e.g., Alastair Green, Ari Oxman & Laurens Seghers, Preparing
for Private-Equity Exits in the COVID-19 Era, McKinsey & Co.,
Private Equity & Principal Investors Insights (June 11, 2020),
available at https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/preparing-for-private-equity-exits-in-the-covid-19-era. Conversely, during the same period, there was
an increase in the adviser-led secondary transactions. See, e.g.,
Nicola Chapman, Martin Forbes, Colin Harley & Sherri Snelson,
Private Equity Turns to Fund Restructurings in COVID-19 Slowdown,
White & Case Debt Explorer (Feb. 8, 2021), available at https://debtexplorer.whitecase.com/leveraged-finance-commentary/private-equity-turns-to-fund-restructurings-in-covid-19-slowdown#!.
---------------------------------------------------------------------------

    A number of commenters stated that private equity reporting of
these events does not need to be done within one business day in order
for the information to be actionable for the Commission and FSOC.\349\
We agree with these commenters in part, for example that 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,\350\ and have revised the reporting requirement
timeline to instead be quarterly, within 60 days of the end of the
quarter.\351\ However, because we believe that these events represent
more timely risks of conflicts of interest between advisers and their
investors, we do not agree that the investor protection benefits from
these quarterly reporting events could be substantially achieved with
an annual reporting requirement, unlike general partner and limited
partner clawbacks, for which we are replacing the proposed current
reporting requirements with annual reporting requirements.\352\ As
discussed below, general partner and limited partner clawbacks
represent the realization of risk that develop over the life of a
private equity fund, potentially over several years, and so do not
represent sources of investor harm requiring more frequent reporting
than annual.\353\
---------------------------------------------------------------------------

    \349\ See, e.g., MFA Comment Letter; AIC Comment Letter; see
also supra section II.B.
    \350\ See supra section IV.B.2.
    \351\ See supra section II.B. One commenter suggested quarterly
reporting as an alternative for private equity current reports. See
MFA Comment Letter.
    \352\ Id., see also infra section IV.C.1.c.
    \353\ Id.
---------------------------------------------------------------------------

    We similarly believe that, because removals of general partners,
terminations of a fund or its investment period, and adviser-led
secondaries represent potentially significant potential for conflicts
of interest and other sources of investor harm, that

limiting reporting to only large private equity advisers would
substantially reduce the benefits of the required reporting. We believe
that the investor protection benefits associated with these events
require reporting from all private equity fund advisers.
    Some advisers' comment letters asserted that these events in
private equity funds do not reflect areas of systemic risk or investor
harm.\354\ However, other comment letters from investors agreed with
our description of benefits in the proposing release and stated that
reporting of these private equity events are relevant for systemic risk
and investor protection.\355\ Moreover, the comment letters disputing
the relevance of private equity reporting benefits do not address the
above facts demonstrating that the private equity industry can be a
relevant source of investor harm or systemic risk. Commenters also did
not dispute the increasing number of investors in private equity funds
and the increasing exposure of public pension plans to private
equity.\356\ It is also the Commission's view that quarterly reporting
of these events may provide insight into key events in the private
equity industry and allow the Commission and FSOC to identify sources
of investor harm and potential risks, as they emerge, in the private
equity space that might otherwise be obscured.\357\
---------------------------------------------------------------------------

    \354\ See, e.g., AIMA/ACC Comment Letter; Schulte Comment
Letter.
    \355\ See, e.g., ILPA Comment Letter; ICGN Comment Letter; PESP
Comment Letter.
    \356\ See supra sections II.B, IV.B.2.
    \357\ Id.
---------------------------------------------------------------------------

c. Reporting of General Partner or Limited Partner Clawbacks for Large
Private Equity Fund Advisers
    The final amendments introduce a new annual reporting event into
section 4 of Form PF requiring all large advisers of private equity
funds to file a report with the Commission on an annual basis
disclosing whether an implementation of a general partner or limited
partner clawback occurred at one or more funds that they manage.\358\
An adviser would also be permitted to provide an optional narrative
response if it believes that additional information is helpful in
explaining the circumstances of its responses in section 4, including
general partner or limited partner clawbacks.\359\
---------------------------------------------------------------------------

    \358\ The required reporting of these events was initially
proposed as a current reporting requirement. See supra section II.D.
    \359\ See supra section II.D.
---------------------------------------------------------------------------

    As discussed above,\360\ although advisers to private equity funds
have become an essential part of the U.S. financial system,\361\ there
is only partial and insufficient information about their funds'
governance, strategies, performance, and volatility available to
regulators.\362\ As a result, general partner and limited partner
clawbacks at private equity funds that could have substantial
consequences for the fund's investors may not ever be known to the
Commission or FSOC, preventing any possible regulatory response,
outreach, examinations, or investigations that could further investor
protection. The final rule will also enable the Commission and FSOC to
identify trends in the use of clawbacks and any resulting potential
systemic risk and investor protection concerns. The observations from
this research could potentially inform and frame any regulatory
response to future market events and policymaking related to use of
clawbacks.
---------------------------------------------------------------------------

    \360\ See supra section IV.C.1.b.
    \361\ See supra section IV.B.2.
    \362\ See supra footnote 343 and accompanying text.
---------------------------------------------------------------------------

    Reports of general partner or limited partner clawbacks may signal
to the Commission and FSOC the presence of significant changes in
market trends surrounding liquidity or credit conditions, and potential
developing or growing risks to broader financial markets, as well as
indicate potential areas for the Commission to pursue outreach,
examinations, and investigations designed to prevent investor harm and
protect investors' interests. For example, an implementation of a
limited partner clawback may signal that the fund is planning for a
material event such as substantial litigation or a legal judgment that
could negatively impact the fund's investors and potentially other
market participants. This information could also be used to target its
examination program more efficiently and effectively and better
identify areas in need of regulatory oversight and assessment, which
should increase both the efficiency and effectiveness of its programs
and, thus, increase investor protection.
    In addition, reporting of clawbacks at multiple private equity
funds may indicate broader market instability that negatively affects
similarly situated funds, or markets in which these funds invest. For
example, widespread implementation of general partner clawbacks among
private equity funds may be a sign of an emerging market-wide stress
episode, worsening of economic conditions contributing to the
underperformance of the funds' portfolio companies, or deteriorating
private equity credit environments. Because limited partner clawbacks
may signal increasing rates of litigation or legal judgment, widespread
increased rates of such clawbacks may also indicate stress in the
market as evidenced by higher rates of legal judgments.\363\
---------------------------------------------------------------------------

    \363\ See supra section II.D.1.
---------------------------------------------------------------------------

    These reports will therefore allow the Commission and FSOC to
assess the prevalence of clawbacks and identify patterns among
similarly situated funds and any common factors that contributed to the
reported events. We anticipate that the improved transparency of
private equity fund activities as a result of the final reporting
requirements to the Commission and FSOC will enhance regulatory
systemic risk assessment and investor protection efforts. Because an
adviser will also be allowed to provide a narrative response if it
believes that additional information would be helpful in understanding
the information reported in new section 4 reporting questions on
clawbacks,\364\ the Commission's and FSOC's efforts will benefit from
additional potential narrative detail explaining the context behind the
reporting events.
---------------------------------------------------------------------------

    \364\ Id.
---------------------------------------------------------------------------

    A number of commenters stated that private equity reporting of
these events does not need to be done within one business day in order
to achieve these benefits.\365\ Unlike the quarterly reporting
requirements discussed above,\366\ for general partner and limited
partner clawbacks we agree that the principal benefits from reporting
of these events accrue from revealing the frequency of these reporting
events and an enhanced ability for the Commission to examine potential
conflicts of interest across the private equity industry.\367\ In
particular, we believe that these events tend to build over the life of
a private equity fund with a multi-year term.\368\ In particular, 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.\369\ Then, an inciting event for a clawback actually occurs,
typically, when the fund has had successful investments earlier in the
life of the

fund, but the fund's later investments are less successful.\370\ Thus,
we believe that many of the benefits of private equity reporting of
these events that we described in the proposing release will be
maintained with annual reporting, and that annual reporting (rather
than current reporting or quarterly reporting) will substantially
mitigate the burden on private equity fund advisers, relative to the
proposal.
---------------------------------------------------------------------------

    \365\ See, e.g., MFA Comment Letter; AIC Comment Letter; see
also supra section II.D.1.
    \366\ See supra section IV.C.1.b.
    \367\ See supra section II.D.1.
    \368\ See supra section II.B.2; see also, e.g., RER Comment
Letter; SIFMA Comment Letter; AIMA Comment Letter.
    \369\ Id.
    \370\ Id.
---------------------------------------------------------------------------

    We believe the benefits of the new annual reporting events will be
substantially preserved, relative to the proposal to have these events
be current reports. We believe that annual reporting of clawbacks will
substantially preserve the benefits of the required reporting because
it will still produce data on trends in these reporting events, and
upwards trends may represent rising systemic stress at private equity
funds and rising conflicts of interest within the private equity
industry. Unlike the quarterly reporting events,\371\ we believe that
measurement of annual trends is sufficiently informative for the
Commission's and FSOC's systemic risk assessment and investor
protection efforts, as we believe general partner and limited partner
clawbacks currently do not represent more immediate systemic risks or
risks of investor harm. General partner and limited partner clawbacks
represent the realization of risk that develop over the life of a
private equity fund, potentially over several years, and so we believe
that they do not represent sources of investor harm requiring more
frequent reporting than annual.\372\
---------------------------------------------------------------------------

    \371\ See supra section II.B.
    \372\ See supra section II.D.1.
---------------------------------------------------------------------------

    We have also limited the reporting requirements to large private
equity fund advisers only. While the threshold for which private equity
fund advisers must file section 4 of Form PF captures approximately 73
percent of assets held by private equity funds, preserving the majority
of systemic risk assessment and investor protection benefits, the
investor protection benefits will be reduced by the loss of reporting
of these events for smaller private equity fund advisers.\373\ However,
the staff's understanding is that general partner and limited partner
clawbacks are comparatively rare, and so we believe the losses of
benefits from this reduction in reporting are likely to be small, while
the reduction in burden will be comparatively larger from narrowing the
scope to only large private equity advisers.\374\
---------------------------------------------------------------------------

    \373\ Moreover, this coverage has broadly trended upwards over
time. 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 Division of Investment
Management, Private Fund Statistics (Jan. 3, 2023), available at
https://www.sec.gov/divisions/investment/private-funds-statistics.shtml; see also supra sections II.B., IV.B, footnotes
251, 284. Lastly, limiting the reporting to only large private
equity fund advisers means that smaller private equity fund advisers
will face no increased burdens under the final amendments.
    \374\ See infra sections IV.C.2, V.C.
---------------------------------------------------------------------------

    Some advisers' comment letters asserted that these events in
private equity funds do not represent areas of systemic risk or
investor harm.\375\ However, other comment letters from investors
agreed with the benefits articulated in the proposing release, and
stated that reporting of these private equity events are relevant for
systemic risk monitoring and investor protection.\376\ Moreover, as
discussed above,\377\ the comment letters disputing the relevance of
private equity reporting benefits did not address the above facts
motivating these private equity events as a relevant source of
information on potential rising systemic risks over time. Commenters
also do not dispute the increasing number of investors in private
equity funds and the increasing exposure of public pension plans to
private equity.\378\ It is also the Commission's view that reporting of
these events may thus provide insight into key trends in the private
equity industry and potentially enable the Commission and FSOC to
identify risks in the private equity space that might otherwise be
obscured.\379\
---------------------------------------------------------------------------

    \375\ See, e.g., AIMA/ACC Comment Letter; Schulte Comment
Letter.
    \376\ See, e.g., ILPA Comment Letter; ICGN Comment Letter; PESP
Comment Letter.
    \377\ See supra section IV.C.1.b.
    \378\ See supra sections II.D.1, IV.B.2.
    \379\ Id.
---------------------------------------------------------------------------

d. Other Amendments To Reporting for Large Private Equity Fund Advisers
    The final amendments to section 4 of Form PF include requirements
for additional information that large private equity fund advisers must
provide regarding their activities, risk exposures, and counterparties
on an annual basis.\380\ The final amendments will further improve the
transparency of private equity fund activities and risks to the
Commission and FSOC and help in developing a more complete picture of
the markets where private equity funds operate. In turn, this will
enhance the Commission's and FSOC's ability to assess potential
systemic risks presented by private equity funds, as well as the
potential for loss of investor confidence should conflicts of interest
in private equity funds materialize. Specifically, new information
about private equity funds will assist regulators in understanding the
diversity of and trends in investment strategies employed by advisers
to private equity funds,\381\ as well as their fund-level
borrowings.\382\ The final amendments will also provide for more
information regarding risks from default,\383\ risks from counterparty
exposures,\384\ and risks from outside the U.S.\385\ An adviser would
also be permitted to provide an optional narrative response if it
believes that additional information is helpful in explaining the
circumstances of any of its responses in section 4.\386\ This improved
understanding will aid the Commission and FSOC in effectively and
efficiently assessing new systemic risks and other potential sources of
investor harm, as well as informing the Commission's and FSOC's broader
views on the private equity landscape.
---------------------------------------------------------------------------

    \380\ See supra section II.D.2.
    \381\ The final amendments introduce a new Question 66 that asks
advisers to provide information about their private fund strategies
by choosing from a mutually exclusive list of strategies, allocating
the percent of capital deployed to each strategy, even if the
categories do not precisely match the characterization of the
reporting fund's strategies. If a reporting fund engages in multiple
strategies, the adviser would provide a good faith estimate of the
percentage the reporting fund's deployed capital represented by each
strategy. We believe that analysis of trends from this question, and
resulting systemic risk assessment, will also benefit from allowing
advisers to choose from a drop-down menu that includes all
investment strategy categories for Form PF. We believe this will
increase the likelihood that advisers will be able to easily
identify a selection that accurately reflects their fund's strategy.
See supra section II.D.2. Along with this question, the final
amendments will define ``general partner stakes investing'' in the
glossary, providing specificity regarding the reporting of this term
and improving data quality. See supra footnote 216 and accompanying
text.
    \382\ The final amendments introduce a new Question 68 that
requires advisers to report additional information on fund-level
borrowing. Id.
    \383\ The final amendments amend existing Question 74 to require
advisers to provide more 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). Id.
    \384\ The final amendments amend 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).
Id.
    \385\ The final amendments amend existing Question 78, which
asks advisers to report the geographical breakdown of investments by
private equity funds. The new requirement asks for a private equity
fund's greatest country exposures based on a percent of net asset
value. Id.
    \386\ See supra section II.D.

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

    Overall, the amendments to section 4 of Form PF will ultimately
assist the Commission and FSOC in better identifying and assessing
risks to U.S. financial stability and pursuing appropriate regulatory
policy in response, and will further assist the Commission in
determining the potential need for outreach, examinations, and
investigations, thereby enhancing efforts to protect investors and
other market participants. We expect that the new information about
large private equity fund advisers and funds they manage will enable
the Commission and FSOC to better assess potential risks to financial
markets and investor harm.
    Some commenters argued that investment strategy reporting
requirement is too burdensome relative to its nexus to systemic
risk.\387\ Other commenters also argued that the new fund-level
borrowing reporting requirement is unrelated to systemic risk.\388\
---------------------------------------------------------------------------

    \387\ See, e.g., REBNY Comment Letter; RER Comment Letter.
    \388\ See, e.g., IAA Comment Letter; NYC Bar Comment Letter.
---------------------------------------------------------------------------

    However, as noted above,\389\ some commenters supported the
benefits from these two new reporting requirements, stating that adding
investment strategy reporting requirement as being beneficial to the
FSOC and Commission's oversight of advisers to the private equity
industry.\390\ One commenter suggested requiring more granular
disclosure of private equity fund investment strategies, including
requiring the disclosure of industries included in each strategy.\391\
Some commenters also supported adding the additional fund-level
borrowings reporting requirement, stating that it will help the
Commission and FSOC identify and assess the use of leverage within
private equity funds.\392\
---------------------------------------------------------------------------

    \389\ See supra section II.D.2.
    \390\ See, e.g., ICGN Comment Letter; PDI Comment Letter.
    \391\ See PDI Comment Letter.
    \392\ See, e.g., ICGN Comment Letter; PDI Comment Letter; TIAA
Comment Letter.
---------------------------------------------------------------------------

    Moreover, we believe both of these new reporting requirements offer
specific insights that contribute to systemic risk and investor
protection benefits. First, different investment strategies carry
different types and levels of risk for the markets and financial
stability. Second, advisers to private equity funds vary in their use
of fund-level borrowing, in particular with certain funds using
subscription credit facilities to boost performance metrics, with
investors bearing the cost of interest on the debt used and potentially
suffering lower total returns.\393\ Moreover, large unpaid borrowings
that remain on subscription lines can pose additional liquidity risks
during periods of market stress, potentially contributing to systemic
risks. The additional private equity reporting in the final amendments
will therefore allow the Commission and FSOC to understand and better
assess these risks, and will further allow the Commission to analyze
new areas of potential investor harm to determine any necessary
outreach, examination, or investigation.
---------------------------------------------------------------------------

    \393\ See, e.g., James F. Albertus & Matthew Denes, Distorting
Private Equity Performance: The Rise of Fund Debt, Frank Hawkins
Kenan Institute of Private Enterprise Report (June 2019), available
at https://www.kenaninstitute.unc.edu/wp-content/uploads/2019/07/DistortingPrivateEquityPerformance_07192019.pdf.
---------------------------------------------------------------------------

    Lastly, as noted above,\394\ several comments supported the
benefits from amendments requiring more information, and commenters
otherwise did not specifically address those amendments.\395\
---------------------------------------------------------------------------

    \394\ See supra section II.D.2.
    \395\ See, e.g., ICGN Comment Letter; PDI Comment Letter.
---------------------------------------------------------------------------

2. Costs
    The final amendments to Form PF will lead to certain additional
costs for private fund advisers. These costs are broadly most likely to
be borne by private funds, and therefore by private funds' investors,
though some portion of these costs may be borne by advisers. These
costs will vary depending on the scope of the required information and
the frequency of the reporting, which is determined based on the size
and types of funds managed by the adviser. For the current reporting
requirements for hedge funds and the new quarterly and annual reporting
requirements for private equity funds on the occurrence of reporting
events, the costs will also vary depending on whether funds experience
a reporting event and the frequency of those events. Generally, the
costs will be lower for private fund advisers that manage fewer private
fund assets or that do not manage types of private funds that may be
more prone to financial stress events. These costs are quantified, to
the extent possible, by examination of the analysis in section
V.C.\396\
---------------------------------------------------------------------------

    \396\ A 2015 survey of SEC-registered investment advisers to
private funds affirmed the Commission's cost estimates for smaller
private fund advisers' Form PF compliance costs, and found that the
Commission overestimated Form PF compliance costs for larger private
fund advisers. See Wulf Kaal, Private Fund Disclosures Under the
Dodd-Frank Act, 9 Brook. J. Corp., Fin., and Comm. L. (2015).
---------------------------------------------------------------------------

    We anticipate that the costs to advisers will be comprised of both
direct compliance costs and indirect costs. Direct costs for advisers
will consist of internal costs (for compliance attorneys and other non-
legal staff of an adviser, such as computer programmers, to prepare and
review the required disclosure) and external costs (including filing
fees as well as any costs associated with outsourcing all or a portion
of the Form PF reporting responsibilities to a filing agent, software
consultant, or other third-party service provider).\397\
---------------------------------------------------------------------------

    \397\ See infra section V.C. (for an analysis of the direct
costs associated with the new Form PF requirements for quarterly and
annual filings).
---------------------------------------------------------------------------

    We believe that the direct costs associated with the final
amendments will be most significant for the first updated Form PF
report that a private fund adviser will be required to file because the
adviser will need to familiarize itself with the new reporting form and
may need to configure its systems to efficiently gather the required
information. In addition, we believe that some large private fund
advisers will find it efficient to automate some portion of the
reporting process, which will increase the burden of the initial
filing. In subsequent reporting periods, we anticipate that filers will
incur significantly lower costs because much of the work involved in
the initial report is non-recurring and because of efficiencies
realized from system configuration and reporting automation efforts
accounted for in the initial reporting period. This is consistent with
the results of a survey of private fund advisers, finding that the
majority of respondents identified the cost of subsequent annual Form
PF filings at about half of the initial filing cost.\398\
---------------------------------------------------------------------------

    \398\ Id.
---------------------------------------------------------------------------

    We anticipate that the final amendments aimed at improving data
quality and comparability will impose limited direct costs on advisers
given that advisers already accommodate similar requirements in their
current Form PF and Form ADV reporting and can utilize their existing
capabilities for preparing and submitting an updated Form PF. We expect
that most of the costs will arise from the requirements for large
private equity fund advisers to report additional information on Form
PF,\399\ as well as new current reporting requirements for advisers to
qualifying

hedge funds as well as new quarterly and annual reporting requirements
for private equity funds on the occurrence of reporting events.
---------------------------------------------------------------------------

    \399\ These costs will be substantially mitigated, in comparison
to the proposing release, by the removal of several items from the
final amendments in response to comment letters. For example, 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.
See supra section II.D.2.
---------------------------------------------------------------------------

    For existing section 4 filers, the direct costs associated with the
final amendments to section 4 will mainly include an initial cost to
set up a system for collecting, verifying additional information, and
limited ongoing costs associated with periodic reporting of this
additional information.\400\ Certain elements of the final adopted
amendments to section 4 are designed to mitigate these costs. For
example, we believe that allowing advisers to choose from a drop-down
menu that includes all investment strategy categories for Form PF will
reduce the burden of strategy reporting by making it easier for
advisers to identify a selection that reflects their fund
strategy.\401\ We have also removed certain questions from the final
amendments in response to commenters' concerns on the burden of those
questions.\402\
---------------------------------------------------------------------------

    \400\ Based on the analysis in section V.C., direct internal
compliance costs for section 4 filers associated with the
preparation and reporting of additional information is estimated at
$13,905 per annual filing per large private equity fund adviser, and
includes the new costs associated with new annual event reporting.
This is calculated as the cost of filing under the proposal of
$41,730 minus the cost of filing prior to the proposal of $27,825.
See Table 8. It is estimated that there will be no additional direct
external costs and no changes to filing fees associated with the
final amendments to section 4. See Table 10.
    \401\ See supra section II.D.2.
    \402\ Id.
---------------------------------------------------------------------------

    The direct costs associated with the new current reporting
requirements for the advisers of qualifying hedge funds and quarterly
reporting for private equity funds on the occurrence of reporting
events will include initial costs required to set up a system for
monitoring significant events that are subject to the reporting
requirement as well as filing fees (the amount of which would be
determined by the Commission in a separate action).\403\ We anticipate
these initial costs to be limited because the reporting events were
tailored and designed not to be overly burdensome and to allow hedge
fund advisers and private equity fund advisers to use existing risk
management frameworks that they already maintain to actively assess and
manage risk. For example, for private equity fund advisers, we believe
that every private equity fund adviser already has systems for
documenting the occurrence of an adviser-led secondary transactions. In
particular, advisers will use the same PFRD non-public filing system as
used to file the rest of Form PF.\404\ The subsequent compliance costs
will depend on the occurrence of the reporting events and frequency
with which those events occur.\405\ To the extent that the reporting
events occur infrequently, we anticipate the costs to be limited as
hedge fund advisers and private equity fund advisers will not be
required to file reports in the absence of the events. For example,
during periods of normal market activity, we expect relatively few
filings for this part of Form PF. The costs associated with the
amendment, however, will increase with the frequency of stress events
at the adviser's hedge funds.
---------------------------------------------------------------------------

    \403\ See infra section V.
    \404\ Id.
    \405\ Based on the analysis in section V.C., direct internal
costs associated with the preparation and filing of current reports
is estimated at $5,160 per report for large hedge fund advisers and
$2,024 per quarterly filing of a private equity event report for all
private equity fund advisers. See Table 9. In addition, large hedge
fund advisers and all private equity fund advisers will be subject
to an external cost burden of $1,695 per report associated with
outside legal services and additional one-time cost ranging from $0
to $15,000 per adviser associated with system changes. See Table 12.
Additionally, there will be a filing fee per current report for
hedge fund advisers and all private equity fund advisers that is yet
to be determined. See Table 12.
---------------------------------------------------------------------------

    We believe that the corresponding initial costs associated with the
final annual reporting requirements of general partner or limited
partner clawbacks for private equity fund advisers, which was
previously proposed as a reporting event requiring a current report,
will be limited.\406\ This is because we are requiring the reporting
only from large private equity fund advisers on an annual basis, which
we believe will allow those advisers to modify existing systems and
processes--rather than generate new ones--as these advisers are already
collecting and reporting information specific to private equity funds
on an annual basis. We similarly anticipate these initial costs to be
limited because we believe that every private equity fund adviser
already has systems for documenting the occurrence of general partner
or limited partner clawbacks. Also, limiting the reporting to only
large private equity fund advisers means that smaller private equity
fund advisers will face no increased burdens under the final
amendments.\407\
---------------------------------------------------------------------------

    \406\ Based on the analysis in section V.C., the initial direct
internal costs associated with the preparation of annual reporting
of general partner or limited partner clawbacks for large private
equity fund advisers, previously required as current event
reporting, is $3,965 per year over three years (given by the
additional direct initial costs relative to the proposal, or $32,592
- $26,775, which includes an amortization over three years). See
Table 7. Similarly, the direct ongoing annual costs for the former
current event reporting questions for large private equity fund
advisers is $6,480 (given by the additional direct internal costs
relative to the proposal, or $41,730 - $35,250). See Table 8.
Private equity fund advisers will no longer face an additional
external cost burden associated with the annual event reporting
items. See Table 11.
    \407\ See infra section V.C.
---------------------------------------------------------------------------

    Some commenters stated that there would be substantial burden
including initial set-up costs, external costs, and ongoing costs
associated with the current reporting regime.\408\ More specifically,
commenters expressed concern that the proposed requirement to file
reports within one business day to the Commission would be burdensome
and potentially lead to inaccurate or inadequate reporting at a time
when advisers and their personnel are grappling with a potential crisis
at the reporting fund.\409\ Some commenters also stated that advisers
would need to develop complicated internal operations capable of
performing calculations on a daily basis that may not be applicable to
illiquid or hard-to-value assets and that the resulting data may be of
limited utility to regulators.\410\ Some commenters identified specific
elements of the proposed current reporting regime as costly, such as
the proposed requirements that required a daily NAV calculation.\411\
One commenter lastly expressed concerns with the costs needed to build
these systems in time to meet the proposed compliance date timeline,
requesting an 18 month transition period instead.\412\
---------------------------------------------------------------------------

    \408\ See, e.g., MFA Comment Letter (stating, among other
concerns, that ``private fund managers and their administrators will
have to bear the costs of building and maintaining systems that
would have to monitor aspects of their funds' investments,
redemptions, margin and collateral positions, and other aspects of
fund operations on a daily basis to determine whether a report is
required.''); see also, e.g., AIMA/ACC Comment Letter.
    \409\ ILPA Comment Letter; AIMA/ACC Comment Letter; State Street
Comment Letter; NVCA Comment Letter; RER Comment Letter; SIFMA
Comment Letter; Schulte Comment Letter; IAA Comment Letter; NYC Bar
Comment Letter; REBNY Comment Letter.
    \410\ SIFMA Comment Letter and USCC Comment Letter.
    \411\ See, e.g., MFA Comment Letter; SIFMA Comment Letter.
    \412\ MFA Comment Letter. Our estimates of quantified costs,
including costs for one-time system changes, consider the need to
build systems in time for compliance dates for current and private
equity event reporting. See infra section V.
---------------------------------------------------------------------------

    Certain changes in the final amendments are in response to these
comment file considerations on the costs of the proposal, including the
changes to current reporting for extraordinary investment losses,
margin events, prime broker relationship changes, and operations
events, the decisions to extend hedge fund adviser current reporting to
72 hours, the decision to extend private equity fund adviser reporting
of general partner

removals and fund terminations to quarterly reporting, and the decision
to switch reporting of general partner and limited partner clawbacks
from current to annual reporting limited to large private equity fund
advisers.\413\ We believe that these changes to the final amendments
will help avoid unnecessary burdens on advisers. For example, we
specify that we believe the RFACV reference statistic for current
reporting of extraordinary investment losses and margin events will in
general be governed by existing fund valuation policies and
procedures.\414\ We have also narrowed the scope of current reporting
of prime broker relationship changes.\415\ The final amendments have
also changed the current reporting required timing for hedge funds from
one business day to 72 hours, changed the reporting timing for adviser-
led secondaries, removal of a general partner, and election to
terminate a fund or its investment period from current reporting to
quarterly reporting, changed the reporting timing and scope for
reporting of clawbacks by private equity funds from current reporting
for all private equity funds within one business day to annual
reporting only for large private equity fund advisers, and removed the
current reporting regime for changes in unencumbered cash
altogether.\416\
---------------------------------------------------------------------------

    \413\ See supra sections II.A, II.B, II.D.1.
    \414\ See supra sections II.A.2, II.A.3.
    \415\ See supra section II.A.4.
    \416\ See supra sections II.A, II.A.5, II.B, II.D.1.
---------------------------------------------------------------------------

    Some commenters also stated that certain terms associated with the
current reporting regime are potentially ambiguous. These commenters
specifically requested more precise definitions associated with
``margin'' and ``collateral.'' \417\ We believe that any such costs
associated with the ambiguity of the terms ``margin'' and
``collateral'' will be de minimis, because (1) we believe these are
common terms with accepted industry definitions,\418\ and (2) the Form
PF instructions on the current reporting of increases in margin include
language designed to provide increased flexibility to account for
funds' unique circumstances.\419\ Commenters' concerns could also be
relevant for the term ``termination event'' as applied in the current
report triggering event for prime broker relationship termination.\420\
We similarly believe in this instance that any costs associated with
ambiguity of the term ``termination event'' will be de minimis, because
we understand such termination events to be commonly understood clauses
in prime broker contractual relationships in the industry.\421\
---------------------------------------------------------------------------

    \417\ See AIMA Comment Letter; MFA Comment Letter; see also
supra section II.A.3.
    \418\ See supra footnote 69 and accompanying text.
    \419\ See supra section II.A.3.
    \420\ See supra section II.A.4.
    \421\ See, e.g., David S. Mitchell, William C. Thum, Aaron S.
Cutler & Eduardo Ugarte II, Trading Agreements and NAV Termination
Triggers--Avoiding Unexpected Landmines, Bloomberg Law Reports,
2009, available at https://www.friedfrank.com/uploads/siteFiles/Publications/576038144C948759E3DBB1410957B03B.pdf; The Credit and
Legal Risks of Entering Into an ISDA Agreement, ThinkAdvisor (Jan.
3, 2005), available at https://www.thinkadvisor.com/2005/01/03/the-credit-and-legal-risks-of-entering-into-an-isda-master-agreement/;
HFL Report, supra footnote 46.
---------------------------------------------------------------------------

    Indirect costs for advisers will include the costs associated with
additional actions that advisers may decide to undertake in light of
the additional reporting requirements. Specifically, to the extent that
the final amendments provide an incentive for advisers to improve
internal controls and devote additional time and resources to managing
their risk exposures and enhancing investor protection, this may result
in additional expenses for advisers, some of which may be passed on to
the funds and their investors.\422\ For example, as discussed above,
some commenters stated that under the current reporting regime,
investors may demand additional reporting themselves, knowing that
reporting systems are being developed for Commission and FSOC
reporting.\423\ While this additional reporting may benefit investors,
the costs of this additional reporting represent an additional cost of
the rule, and these costs may be passed on to investors.
---------------------------------------------------------------------------

    \422\ As discussed above, the length of the reporting period is
intended to mitigate costs associated with advisers needing to both
respond to the reporting event and file the required current report.
See supra section II.A.
    \423\ SIFMA Comment Letter; AIMA Comment Letter. See supra
section IV.C.1.a.
---------------------------------------------------------------------------

    Indirect costs for investors may also include unintended negative
consequences where advisers change their behavior in response to the
final reporting requirements.\424\ First, there may be unintended
changes in adviser behavior associated with extraordinary investment
loss current reporting based on the RFACV measure. Because the RFACV
measure requires reporting based on the most recent price or value
applied to the position for purposes of managing the investment
portfolio, advisers may have an incentive to change their valuation
methodologies for purposes of managing the investment portfolio in
order to circumvent required reporting of extraordinary investment
losses, and these changes may be to the detriment of fund investors.
For example, the RFACV measure allows advisers who do not value a
position daily to carry forward the last price when calculating RFACV,
and advisers may cease certain daily valuations in response.
---------------------------------------------------------------------------

    \424\ Whether respondents may want to change their behavior in
response to reporting requirements, in an effort to influence what
they must report, is referred to as the ``incentive compatibility''
of the reporting regime. An incentive compatible reporting regime is
one where respondents do not change their behavior in response to
reporting requirements. See, e.g., Andreu Mas-Colell, et al.,
Chapter 13, in Microeconomic Theory (Oxford Univ. Press, 1995), for
a discussion of incentive compatibility.
---------------------------------------------------------------------------

    However, we believe there are two key factors that mitigate, but
may not eliminate, this concern. First, advisers must document their
valuation principles and methodologies in investor-facing
documents.\425\ Investors are advised by industry literature to closely
scrutinize these manuals and evaluate the fund's valuation
practices.\426\ Second, we understand

that many advisers outsource the back office functionality of valuation
and other position-level reporting to fund administrators, and these
administrators would be unlikely to revise their valuation services to
aid an adviser in avoiding filing a current report.\427\
---------------------------------------------------------------------------

    \425\ See, e.g., Erin Faccone, The Essential Guide to Third-
Party Valuations for Hedge Fund Investors 1, CAIA (2018), available
at https://caia.org/sites/default/files/essentials.pdf (``Starting
from the top, every fund manager must have a written valuation
policy in place that is used to price the portfolio.''); PWC, Guide
to Sound Practices for the Valuation of Investments 4 (2018 ed.),
available at https://www.sec.gov/comments/s7-07-20/s70720-7464497-221255.pdf (``In advance of a fund's launch, a summary of practical
and workable pricing and valuation practices, procedures and
controls should be enshrined in a Valuation Policy Document and
approved by the fund governing body in consultation with the
investment manager and other relevant stakeholders. The Valuation
Policy Document, which may be based in whole or in part on the
investment manager's and/or the valuation service provider's
valuation policies, should address the universe of instruments in
which the fund may invest, and should be reviewed at least annually
(and more frequently where the circumstances warrant) by the
investment manager and the fund governing body. Regardless of how
simple a fund's valuation procedures may appear, proper
documentation of the valuation process removes the scope for dispute
or uncertainty in the future and provides a clear framework for
governance in the area.'').
    \426\ Id. See also, e.g., IOSCO, Principles for the Valuation of
Hedge Fund Portfolios Final Report, A Report of the Technical
Committee of the International Organization of Securities
Commissions 1 (Nov. 2007), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD253.pdf, (``This paper is focused on
principles for valuing the investment portfolios of hedge funds and
the challenges that arise when valuing illiquid or complex financial
instruments. The principles are designed to mitigate the structural
and operational conflicts of interest that may arise between the
interests of the hedge fund manager and the interests of the hedge
fund. Hedge funds may use significant leverage in their investment
strategies, the impact of which increases the importance of
establishing appropriate valuations of a hedge fund's financial
instruments . . . . Investors need to be vigilant with respect to
any hedge fund that does not exhibit these principles throughout all
aspects of its valuation process. Investors should satisfy
themselves that the management and governance culture promotes the
application of the principles to the extent practicable. While the
adoption and compliance with these principles should benefit
investors, the measures themselves will not reduce the need for
investors to conduct appropriate initial and ongoing due diligence
with respect to their interests in hedge funds.'').
    \427\ See, e.g., PWC, Asset Management Benchmarking--Fund
Administration 8 (July 2015), available at https://www.pwc.com/gx/
en/asset-management/benchmarking-hub/assets/pwc-am-fund-
administration.pdf#:~:text=More%20than%20half%20of%20hedge%20funds%20
and%20hybrid,of%20them%20to%20outsource%20some%20back%20office%20func
tions.%C2%B2 (``In recent PwC study on Hedge Fund Administration,
from 2006 to 2013, the percentage of hedge fund AUM outsourced to
administrators increased dramatically from 50 percent to 81
percent.''); Fund Administration Services, SS&C Tech, available at
https://www.ssctech.com/outsourcing-services/fund-administration-services (describing handling of NAV calculations, supplemental NAV
transparency reporting, income and expense accruals, and other
services); Fund Services, STP Investment Services, available at
https://stpis.com/services/fund-services/ (offering a variety of
fund services including a service to ``Price portfolio holdings
based upon your valuation policy'').
---------------------------------------------------------------------------

    As a second example, there may be unintended consequences
associated with current reporting of margin/collateral increases. This
current reporting trigger event increases the incentives for hedge
funds to attempt to convince their counterparties to forego calling
more collateral in the opening stages of a systemic risk event, so that
the hedge fund can avoid filing a current report. Because
counterparties calling more collateral can be a prophylactic, systemic-
risk-reducing measure, this response by hedge funds carries a risk of
making subsequent systemic risk episodes more damaging. While we
believe the risk of this unintended consequence is low, because hedge
funds already have substantial incentives to attempt to avoid margin/
collateral increases and we do not believe this rule substantially
increases those incentives, at the margin it may occur. Hedge funds may
also have an increased incentive to avoid prime broker terminations in
response to the current reporting requirements, but we again believe
these potential costs are likely to be low, because hedge funds already
have a strong incentive to avoid prime broker terminations.
    Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. Some commenters expressed
concerns over these risks of potential inadvertent public
disclosures.\428\ However, we anticipate that these adverse effects
will be mitigated by certain aspects of the Form PF reporting
requirements and controls and systems designed by the Commission for
handling the data. For example, with the exception of select questions,
such as those relating to restructurings or recapitalizations of
portfolio companies and investments in different levels of the same
portfolio company by funds advised by the adviser and its related
person,\429\ Form PF data generally could not, on its own, be used to
identify individual investment positions. The Commission has controls
and systems for the use and handling of the final modified and new Form
PF data in a manner that reflects the sensitivity of the data and is
consistent with the maintenance of its confidentiality. The Commission
has substantial experience with the storage and use of nonpublic
information reported on Form PF as well as other nonpublic information
that the Commission handles in its course of business.
---------------------------------------------------------------------------

    \428\ See, e.g., AIMA Comment Letter.
    \429\ See supra section II.D.2.
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

    We anticipate that the increased ability for the Commission's and
FSOC's oversight, resulting from the final amendments, will promote
better functioning and more stable financial markets, which would lead
to efficiency improvements. The additional and timelier data collected
on the amended Form PF about private funds and advisers will help
reduce uncertainty about risks in the U.S. financial system and inform
and frame regulatory responses to future market events and
policymaking. It will also help develop regulatory tools and mechanisms
that could potentially be used to make future systemic crises episodes
less likely to occur and less costly and damaging when they do occur.
    Also, we believe that the final amendments will improve the
efficiency and effectiveness of the Commission's and FSOC's oversight
of private fund advisers by enabling them to manage and analyze
information related to the risks posed by private funds more quickly,
more efficiently, and more consistently than is currently possible.
Private fund advisers' responses to new questions will help the
Commission and FSOC better understand the investment activities of
private funds and the scope of their potential effect on investors and
the U.S. financial markets.
    We do not anticipate significant effects of the final amendments on
competition in the private fund industry because the reported
information generally will be nonpublic and similar types of advisers
will have comparable burdens under the amended Form. Some commenters
stated that the additional compliance costs of the rule will impact
smaller advisers, who may need to increase their management fees to
cover the cost of compliance with additional reporting requirements
more than larger advisers who can absorb the additional compliance
costs, and further stated this may negatively impact competition.\430\
We believe these impacts on competition will be limited for two
reasons. First, the reporting requirements were tailored and designed
not to be overly burdensome. Second, we have implemented changes in the
final amendments that are in response to comment file considerations on
the costs of the proposal that reduce the costs of the final amendments
relative to the proposal. However, at the margin, the heightened
compliance costs for smaller advisers from the final amendments may
negatively affect competition.
---------------------------------------------------------------------------

    \430\ See, e.g., Schulte Comment Letter; PDI Comment Letter.
---------------------------------------------------------------------------

    As discussed in the benefits sections, we expect the final
amendments will enhance the Commission's and FSOC's systemic risk
assessment and investor protection efforts, which could ultimately lead
to more resilient financial markets and instill stronger investor
confidence in the U.S. private fund industry and financial markets more
broadly. We anticipate that these developments will make U.S. financial
markets more attractive for investments and improve private fund
advisers' ability to raise capital, thereby, facilitating capital
formation.

E. Reasonable Alternatives

1. Changing the Frequency of Current Reporting, Quarterly Reporting
Events, and Annual Reporting Events
    At the proposing stage, we considered an alternative to current
reporting for hedge fund and private equity fund advisers, namely
requiring advisers to report relevant information as part of the
existing Form PF filing or on a scheduled basis, such as semi-annually,
quarterly, or monthly. The final amendments incorporate that
alternative in part, as the final amendments require all private equity
fund advisers to report certain events quarterly and requiring large
private equity fund advisers to

report other events annually, depending on the event, but still
requires current reporting for large hedge fund advisers to qualifying
hedge funds.\431\
---------------------------------------------------------------------------

    \431\ See supra section II.A, II.B, II.D.
---------------------------------------------------------------------------

    As an alternative to the final amendments, we considered requiring
these hedge fund advisers to report relevant information as part of the
existing Form PF filing or on a scheduled basis. In general, this
alternative would provide the Commission and FSOC with the same
information but on a less timely basis and without substantially
reducing the cost to hedge fund advisers. Specifically, we believe that
this alternative approach would not significantly reduce the cost
burden to hedge fund advisers compared to the final current reporting
requirement, because hedge fund advisers would still need to incur
initial costs to set up a system for monitoring significant events that
are subject to the final current reporting requirement.
    At the same time, delayed reporting about stress events at hedge
funds would significantly reduce the Commission's and FSOC's ability to
assess and frame timely responses to the emerging risks and limit
potential market disruptions, damages, and costs associated with them.
    We also considered a final rule for hedge fund advisers that would
require advisers to, on an annual basis, submit reports of their daily
tracking of the reference statistics currently included in the current
reporting regime. For example, instead of submitting a current report
of an extraordinary investment loss as defined by the above RFACV
measure, hedge fund advisers could file an annual report of their daily
RFACV values over the course of the year. This would provide more
granular information,\432\ but the information would still be less
timely, and this reporting would be a substantially higher burden for
hedge fund advisers, who would need to conduct additional due diligence
on every single daily RFACV value.
---------------------------------------------------------------------------

    \432\ For example, this alternative would allow the Commission
to more precisely measure the frequency of RFACV losses of different
sizes than is possible today. See supra IV.C.1.a.
---------------------------------------------------------------------------

    We lastly considered requiring all private equity fund advisers to
also report general partner or limited partner clawbacks quarterly, or
requiring only large private equity fund advisers to report adviser-led
secondaries, removals of general partners, and fund terminations
annually. Requiring all private equity fund advisers to report general
partner or limited partner clawbacks quarterly would substantially
increase the burden on private equity fund advisers, and by extension
their investors, especially for private equity fund advisers who do not
currently file Form PF sections for large private equity fund advisers.
As discussed above, we do not believe the additional investor
protection or systemic risk assessment benefits justify this additional
burden, particularly given that these events tend to build over the
life of a private equity fund with a multi-year term.\433\ In
particular, 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.\434\ Then, an inciting event for a clawback
actually occurs, typically, when the fund has had successful
investments earlier in the life of the fund, but the fund's later
investments are less successful.\435\ We believe trends of these types
of events can be appropriately analyzed through information from large
private equity fund advisers on an annual basis. Conversely, because
removals of general partners, terminations of a fund or its investment
period, and adviser-led secondaries represent potentially significant
and more timely potential for conflicts of interest and other sources
of investor harm, limiting reporting to annual reporting would
substantially reduce the benefits of the required reporting. We believe
that the investor protection benefits associated with these events
require more timely reporting.
---------------------------------------------------------------------------

    \433\ See supra sections II.B.2, IV.C.1.c.
    \434\ Id.
    \435\ Id.
---------------------------------------------------------------------------

2. Changing Current Reporting Filing Time
    At the proposing stage, we considered an alternative to require
hedge fund and private equity fund advisers to file current reports
within a time period longer than the proposed one business day. The
final amendments incorporate that alternative, and will require hedge
fund advisers to file current reports within 72 hours, and will no
longer require private equity fund advisers to file current reports,
instead requiring either quarterly or annual reporting depending on the
former current reporting event.\436\ We have also considered an
alternative to require hedge fund advisers to file current reports
within even longer time periods.
---------------------------------------------------------------------------

    \436\ See supra section II.A.
---------------------------------------------------------------------------

    Although this alternative would provide more time to hedge fund
advisers to prepare and file the form, we do not anticipate that this
would substantially reduce the cost burden to advisers as compared to
the final 72 hour reporting requirement. We believe that the structures
of the final reporting requirements are relatively simple and require
advisers to flag the reporting event from a menu of available options
and add straightforward explanatory notes about the events, which
generally should not require considerable time to complete. Extending
the reporting time period may increase internal costs to advisers to
prepare and review the required disclosure, to the extent a longer
reporting time period indirectly signals to advisers a need for greater
detail, thoroughness, or diligence.
    On the other hand, due to the time sensitive nature of the reported
events, additional reporting time would significantly reduce the
Commission's and FSOC's ability to assess and frame timely responses to
the emerging risks and limit potential market disruptions, damages and
costs associated with them.
3. Alternative Reporting Thresholds for Current Reporting by Hedge Fund
Advisers (Versus Just Large Hedge Fund Advisers to Qualifying Hedge
Funds)
    We considered an alternative to require all hedge fund advisers to
file section 5 of Form PF upon occurrence of stress events at one of
their hedge funds (irrespective of the fund size) instead of requiring
this reporting from only large advisers to qualifying hedge funds.
    Although this information would be beneficial for the Commission
and FSOC, as this would provide a more complete picture of the stress
events in the hedge fund industry and allow better assessment of
systemic risk and investor protection issues in the smaller hedge funds
space, we believe that this benefit would be marginal as compared to
the benefit of the information about qualifying hedge funds for two
reasons. First, the hedge fund industry is dominated by qualifying
hedge funds that currently account for approximately 81 percent of the
industry's gross assets under management among filers of Form PF.\437\
Therefore, the final current reporting requirement will cover stress
events that affect a broad, representative set of assets in the hedge
fund industry. Second, the final current reporting is designed to serve
as a signal to the Commission and FSOC about systemically important
stress events at hedge funds. Stress events at larger hedge funds are
more likely to be systemically important due to their quantitatively
important positions in a market and more extensive use of

leverage. Overall, we believe at this time that requiring advisers to
smaller hedge funds to file current reports would impose a significant
burden on these smaller advisers and not significantly expand or
improve the Commission's and FSOC's oversight and assessment of
systemic risk efforts.
---------------------------------------------------------------------------

    \437\ See supra footnote 271.
---------------------------------------------------------------------------

    We also considered an alternative to increase the reporting
threshold for hedge funds that would require a subgroup of the largest
qualifying hedge funds to file current reports. Although this
alternative would reduce the reporting burden at smaller qualifying
hedge advisers, we believe that this would also reduce the benefit
associated with the final current reporting. Specifically, we believe
that this alternative would likely impede the Commission's and FSOC's
ability to assess and respond to emerging industry risks, as this would
reduce the scope of reported stress events to the events that affect
the largest qualifying hedge funds. To the extent that largest
qualifying hedge funds have a greater propensity to withstand
deteriorating market conditions, the Commission and FSOC would have
less visibility into the stress events that simultaneously affect
smaller qualifying hedge funds that may indicate or have implications
for systemic risk and investor protection concerns.
4. Different Size Thresholds for Private Equity Fund Advisers Who Must
File Quarterly and Annual Reports on the Occurrence of Reporting Events
    The final amendments will require new annual reporting of general
partner or limited partner clawbacks as part of section 4 for large
private equity fund advisers. We considered instead requiring this new
annual reporting for more private equity fund advisers, for example by
creating a new section 1d of Form PF that would apply to all private
equity fund advisers who file Form PF. This alternative would enhance
the benefits of the rule by generating annual reports on clawbacks.
This is because section 4 of Form PF, for large private equity fund
advisers, relies on a size threshold that already captures
approximately 73 percent of the private equity market.\438\ However, a
number of commenters criticized the proposed private equity reporting
requirements as being overly burdensome, and suggested adding
thresholds to the former current event reporting questions to mitigate
these burdens.\439\ We believe that the clawback question pertains more
to the evaluation of broader emerging trends in certain private equity
fund activities relevant to the assessment of systemic risk and to the
protection of investors, and so we believe the losses of benefits from
narrowing the scope to large private equity advisers will be small. We
also understand clawbacks to be infrequent activities. Accordingly, we
believe that by focusing clawback reporting on large private equity
fund advisers, we will be able to evaluate material changes in market
trends and investor protection issues in private equity funds.
---------------------------------------------------------------------------

    \438\ See supra sections II.B, IV.B.2.
    \439\ See supra sections II.B, II.D.
---------------------------------------------------------------------------

    The final amendments will also require new quarterly reporting of
removals of general partners, terminations of an investment period or
fund life, and adviser-led secondaries from all private equity fund
advisers. We considered instead requiring this new quarterly reporting
for only large private equity fund advisers. However, because removals
of general partners, terminations of a fund or its investment period,
and adviser-led secondaries represent potentially significant potential
for conflicts of interest and other sources of investor harm, we
believe limiting reporting to only large private equity advisers would
substantially reduce the benefits of the required reporting. We believe
that the investor protection benefits associated with these events
require reporting from all private equity fund advisers.
5. Changing the Reporting Events for Current Reporting by Hedge Fund
Advisers
    We also considered alternatives to which stress events should
trigger current reporting for hedge fund advisers. Alternative
reporting events include both different thresholds for how severe of a
stress event triggers a current report, as well as different categories
of stress events altogether, separate from those considered in the
final amendments. For example, hedge fund reporting for extraordinary
investment losses could be revised to be triggered by a 10 percent
loss, or a 30 percent loss, or any other threshold.\440\ As another
alternative, the threshold could instead compare losses against the
volatility of the fund's returns. As discussed above, commenters argued
that the Commission should consider alternative thresholds for every
reporting event, and in one case a commenter suggested an alternative
threshold choice for extraordinary investment loss current
reporting.\441\
---------------------------------------------------------------------------

    \440\ We estimated the likely relative frequency of current
reporting at these different thresholds above. See supra section
IV.C.1.a. MFA suggested a threshold of 50%, but did not offer any
analysis defending this alternative threshold choice. See MFA
Comment Letter.
    \441\ Id.
---------------------------------------------------------------------------

    Similar alternative thresholds were considered for other reporting
events. For example, current reporting of default events could be
limited to only defaults of a certain size.\442\ Current reporting of
margin/collateral increases could be limited to only report large
increases of margin/collateral on uncleared positions, or positions not
cleared by a central counterparty.\443\
---------------------------------------------------------------------------

    \442\ See supra section II.A.3.
    \443\ Id.
---------------------------------------------------------------------------

    Lastly, current reporting could alternatively be triggered by
stress events besides those considered in the final amendments. For
example, hedge fund current reporting could be triggered by a large
increase in the volatility of the fund's returns, even if that
volatility does not result in investment losses. We considered this
alternative again with respect to the final amendments.
    In general, alternative triggers to the final current reporting
requirements would either provide the Commission and FSOC with more
information at a greater cost to advisers, less information at a lower
cost to advisers, or an alternative metric for measuring the same
stress event as the final reporting event. We believe that the
thresholds in the final amendments will trigger reporting for relevant
stress events for which we seek timely information while minimizing the
potential for false positives and multiple unnecessary current reports.
For example, we have discussed the potential for alternative thresholds
associated with current reporting requirements in detail above,
including how the threshold choices balance the need for timely
information with risk of false positives.\444\ For other alternatives,
we believe that the alternative would not substantially reduce the
costs for advisers. For example, we do not believe that limiting
current reporting of margin/collateral increases to uncleared positions
would reduce costs because, as several commenters state, the cost of
margin/collateral current reporting includes the cost of developing
systems for daily tracking of margin/collateral at the reporting fund,
and limiting the triggering event to uncleared positions or positions
not cleared by a central counterparty would not alleviate those
costs.\445\ To the extent that hedge funds currently do track their
total daily margin/collateral, and this alternative would require them
to instead

disentangle margin/collateral for cleared and uncleared positions, this
alternative could be even more costly.
---------------------------------------------------------------------------

    \444\ See supra section IV.C.1.a.
    \445\ See supra section IV.C.2.
---------------------------------------------------------------------------

6. Alternative Size Threshold for Section 4 Reporting by Large Private
Equity Fund Advisers
    The final amendments to section 4 of Form PF will maintain the
current filing threshold for large private equity fund advisers at $2
billion. We also considered alternatives to reduce the reporting size
threshold below $2 billion or increase it above $2 billion.
    While some commenters suggested increasing the reporting
threshold,\446\ we believe that increasing the threshold for large
private equity fund advisers above $2 billion would likely impede the
Commission's and FSOC's ability to a representative picture of the
private fund industry and lead to misleading conclusions regarding
emerging industry trends and characteristics, as this would reduce the
coverage of private equity assets in today's market below 73
percent.\447\
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    \446\ RER Comment Letter; AIC Comment Letter.
    \447\ See supra section II.D.
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    On the other hand, reducing the current report size threshold below
$2 billion would be marginally beneficial for the Commission's and
FSOC's risk oversight and assessment efforts as this would increase the
representativeness of the sample of reporting advisers. While some
commenters supported lowering the threshold,\448\ most commenters
opposed the additional costs associated with lowering the threshold and
questioned the benefits of lowering the threshold.\449\ Collecting more
detailed information about these funds would help the Commission and
FSOC to detect certain new trends and group behaviors with potential
systemic consequences among these advisers and funds. However, this
would also increase the number of advisers that would be categorized as
large private equity fund advisers subject to the more detailed
reporting and impose additional reporting burden on those advisers.
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    \448\ See, e.g., ICGN Comment Letter and Better Markets Comment
Letter.
    \449\ See, e.g., Schulte Comment Letter; IAA Comment Letter; and
RER Comment Letter.
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    We think that the current threshold of $2 billion in the final
amendments strikes an appropriate balance between obtaining information
regarding a significant portion of the private equity industry for
analysis while continuing to minimize the burden imposed on smaller
advisers.
7. Alternatives to the New Section 4 Reporting Requirements for Large
Private Equity
    The additional large private equity fund adviser questions and
revisions to existing questions are designed to enhance the
Commission's and FSOC's understanding of certain practices in the
private equity industry and amend certain existing questions to improve
data collection.\450\ We also considered alternatives to these final
amendments in the form of different choices of framing, level of detail
requested, and precise information targeted, and considered these
alternatives again with respect to the final amendments. For example,
for Question 66 of section 4, on reporting of private equity
strategies, we considered consolidating ``Private Credit--Junior/
Subordinated Debt,'' ``Private Credit--Mezzanine Financing,'' ``Private
Credit--Senior Debt,'' and Private Credit--Senior Subordinated Debt''
into the ``Private Credit--Direct Lending/Mid Market Lending''
category.\451\
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    \450\ See supra section II.D.
    \451\ See supra section II.D.
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    We believe that the amendments as stated in the final rule,
including the decision to not adopt portfolio-level reporting
requirements, maximize data quality and enhance the usefulness of
reported data, without imposing unnecessary additional burden on
filers.\452\
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    \452\ Id.
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V. Paperwork Reduction Act

    Certain provisions of the final Form PF and rule 204(b)-1 revise an
existing ``collection of information'' within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\453\ The SEC published a
notice requesting comment on changes to this collection of information
in the 2022 Form PF Proposing Release and submitted the collection of
information to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA.\454\ The title for the collection of
information we are amending is ``Form PF and Rule 204(b)-1'' (OMB
Control Number 3235-0679), and includes both Form PF and rule 204(b)-1
(``the rules''). The Commission's solicitation of public comments
included estimating and requesting public comments on the burden
estimates for all information collections under this OMB control number
(i.e., both changes associated with the rulemaking and other burden
updates). These changes in burden also reflect the Commission's
revision and update of burden estimates for all information collections
under this OMB control number (whether or not associated with
rulemaking changes) and responses to the Commission's request for
public comment on all information collection burden estimates for this
OMB control number. An agency may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless it
displays a currently valid OMB control number. Compliance with the
information collection is mandatory.
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    \453\ 44 U.S.C. 3501 through 3521.
    \454\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
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    The respondents are investment advisers who are (1) registered or
required to be registered under Advisers Act section 203, (2) advise
one or more private funds, and (3) managed private fund assets of at
least $150 million at the end of their most recently completed fiscal
year (collectively, with their related persons).\455\ Form PF divides
respondents into groups based on their size and types of private funds
they manage, requiring some groups to file more information more
frequently than others. The types of respondents are (1) smaller
private fund advisers (i.e., private fund advisers who do not qualify
as a large private fund adviser), (2) large hedge fund advisers, (3)
large liquidity fund advisers, and (4) large private equity fund
advisers.\456\ As discussed more fully in section II above and as
summarized in sections V.A and V.C below, the rules will require
current reporting for qualifying hedge fund advisers, will require
private equity event reporting for all private equity fund advisers,
and will revise what large private equity fund advisers are required to
file.
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    \455\ See 17 CFR 275.204(b)-1.
    \456\ See supra footnote 13 (discussing the definitions of large
hedge fund advisers and large private equity fund advisers).
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    We have revised our burden estimates in response to comments we
received, to reflect modifications from the proposal, and to take into
consideration updated data. We received general comments to our time
and cost burdens indicating that we underestimated the burdens to
implement the proposed amendments to Form PF, particularly with respect
to the new systems required to comply with the proposed current
reporting obligations.\457\ One commenter stated that the proposed
``real-time'' current reporting requirements would impose significant
operational burdens on private fund advisers.\458\ Another commenter
stated that the calculations required for the operations event current

reporting item would be very costly.\459\ Conversely, as discussed
above more fully in sections I and II above, the amendments as adopted
have been modified in some respects from the proposal in a manner that
changes our time and cost burden estimates. The new current reporting
requirement for large hedge fund advisers will require such advisers to
report current reporting events as soon as practicable, but no later
than 72 hours from the current reporting event, rather than within one
business day as proposed. The new private equity event reporting
requirement for all private equity fund advisers will require such
advisers to report certain events within 60 days from the adviser's
fiscal quarter end, rather than within one business day as proposed. We
are also eliminating or tailoring certain reporting events that trigger
a current report filing obligation for large hedge fund advisers and a
private equity event report filing obligation for private equity fund
advisers. For example, we are tailoring the private equity fund adviser
event reporting requirement to be limited to reporting on a quarterly
basis on (1) general partner removals and investor elections to
terminate a fund or its investment period and (2) the occurrence of
execution of an adviser-led secondary transaction. Large private equity
fund advisers will be also required to report the implementation of a