[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Proposed Rules]
[Pages 8068-8155]
[FR Doc No: 2011-2175]

Vol. 76

Friday,

No. 29

February 11, 2011

Part V

Commodity Futures Trading Commission

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17 CFR Part 4

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Securities and Exchange Commission

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17 CFR Parts 275 and 279

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

Federal Register / Vol. 76 , No. 29 / Friday, February 11, 2011 /
Proposed Rules

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3145; File No. S7-05-11]
RIN 3235-AK92

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

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

ACTION: Joint proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
the ``Commissions'') are proposing new rules under the Commodity
Exchange Act and the Investment Advisers Act of 1940 to implement
provisions of Title IV of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The proposed SEC rule would require investment
advisers registered with the SEC that advise one or more private funds
to file Form PF with the SEC. The proposed CFTC rule would require
commodity pool operators (``CPOs'') and commodity trading advisors
(``CTAs'') registered with the CFTC to satisfy certain proposed CFTC
filing requirements by filing Form PF with the SEC, but only if those
CPOs and CTAs are also registered with the SEC as investment advisers
and advise one or more private funds. The information contained in Form
PF is designed, among other things, to assist the Financial Stability
Oversight Council in its assessment of systemic risk in the U.S.
financial system. These advisers would file these reports
electronically, on a confidential basis.

DATES: Comments should be received on or before April 12, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

CFTC

     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
     Mail: David A. Stawick, Secretary, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
    ``Form PF'' must be in the subject field of comments submitted via
e-mail, and clearly indicated on written submissions. All comments must
be submitted in English, or if not, accompanied by an English
translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the CFTC to consider information that
may be exempt from disclosure under the Freedom of Information Act, a
petition for confidential treatment of the exempt information may be
submitted according to the established procedures in 17 CFR 145.9.
    The CFTC reserves the right, but shall have no obligation, to
review, prescreen, filter, redact, refuse, or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, including, but not limited to, obscene
language. All submissions that have been redacted or removed that
contain comments on the merits of the rulemaking will be retained in
the public comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the Freedom of Information Act, 5 U.S.C. 552, et seq.
(``FOIA'').

SEC

Electronic Comments

     Use the SEC's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-05-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The SEC will post all comments on the SEC's Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web
site viewing and printing in the SEC's Public Reference Room, 100 F
Street, NE., Washington, DC 20549 on official business days between the
hours of 10 a.m. and 3 p.m. All comments received will be posted
without change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.

FOR FURTHER INFORMATION CONTACT: CFTC: Daniel S. Konar II, Attorney-
Advisor, Telephone:<PHONE_NUMBER>, E-mail<EMAIL_ADDRESS>Amanda L.
Olear, Special Counsel, Telephone:<PHONE_NUMBER>, E-mail:
<EMAIL_ADDRESS>or Kevin P. Walek, Assistant Director, Telephone:
(202) 418-5405, E-mail<EMAIL_ADDRESS>Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; SEC:
David P. Bartels, Attorney-Adviser, Sarah G. ten Siethoff, Senior
Special Counsel, or David A. Vaughan, Attorney Fellow, at (202) 551-
6787 or<EMAIL_ADDRESS>Office of Investment Adviser Regulation,
Division of Investment Management, U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The CFTC is requesting public comment on
proposed rule 4.27(d) [17 CFR 4.27(d)] under the Commodity Exchange Act
(``CEA'') \1\ and proposed Form PF. The SEC is requesting public
comment on proposed rule 204(b)-1 [17 CFR 275.204(b)-1] and proposed
Form PF [17 CFR 279.9] under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (``Advisers Act'').\2\
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    \1\ 7 U.S.C. 1a.
    \2\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to Advisers Act rule 204(b)-1, or
any paragraph of this rule, we are referring to 17 CFR 275.204(b)-1
of the Code of Federal Regulations in which this rule would be
published. In addition, in this Release, when we refer to the
``Advisers Act,'' we refer to the Advisers Act as in effect on July
21, 2011.
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I. Background

A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\
While the Dodd-Frank Act provides for wide-ranging reform of financial
regulation, one stated focus of this legislation is to

``promote the financial stability of the United States'' by, among
other measures, establishing better monitoring of emerging risks using
a system-wide perspective.\4\ To further this goal, Title I of the
Dodd-Frank Act establishes the Financial Stability Oversight Council
(``FSOC''), which is comprised of the leaders of various financial
regulators (including the Commissions' Chairmen) and other
participants.\5\ The Dodd-Frank Act directs FSOC to monitor emerging
risks to U.S. financial stability and to require that the Board of
Governors of the Federal Reserve System (``FRB'') supervise designated
nonbank financial companies that may pose risks to U.S. financial
stability in the event of their material financial distress or failure
or because of their activities.\6\ In addition, the Dodd-Frank Act
directs FSOC to recommend to the FRB heightened prudential standards
for designated nonbank financial companies.\7\
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    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ See S. Conf. Rep. No. 111-176, at 2-3 (2010) (``Senate
Committee Report'').
    \5\ Section 111 of the Dodd-Frank Act provides that the voting
members of FSOC will be the Secretary of the Treasury, the Chairman
of the FRB, the Comptroller of the Currency, the Director of the
Bureau of Consumer Financial Protection, the Chairman of the SEC,
the Chairperson of the Federal Deposit Insurance Corporation, the
Chairperson of the CFTC, the Director of the Federal Housing Finance
Agency, the Chairman of the National Credit Union Administration
Board and an independent member appointed by the President having
insurance expertise. FSOC will also have five nonvoting members,
which are the Director of the Office of Financial Research, the
Director of the Federal Insurance Office, a state insurance
commissioner, a state banking supervisor and a state securities
commissioner.
    \6\ Section 112 of the Dodd-Frank Act.
    \7\ Id.
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    The Dodd-Frank Act anticipates that FSOC will be supported in these
responsibilities by various regulatory agencies, including the
Commissions. To that end, the Dodd-Frank Act amends certain statutes,
including the Advisers Act, to authorize or direct certain Federal
agencies to support FSOC. Title IV of the Dodd-Frank Act amends the
Advisers Act to generally require that advisers to hedge funds and
other private funds \8\ register with the SEC.\9\ Congress required
this registration in part because it believed that ``information
regarding [the] size, strategies and positions [of large private funds]
could be crucial to regulatory attempts to deal with a future crisis.''
\10\ To that end, Section 404 of the Dodd-Frank Act, which amends
section 204(b) of the Advisers Act, directs the SEC to require private
fund advisers \11\ to maintain records and file reports containing such
information as the SEC deems necessary and appropriate in the public
interest and for investor protection or for the assessment of systemic
risk by FSOC.\12\ The records and reports must include a description of
certain information about private funds, such as the amount of assets
under management, use of leverage, counterparty credit risk exposure,
and trading and investment positions for each private fund advised by
the adviser.\13\ The SEC must issue jointly with the CFTC, after
consultation with FSOC, rules establishing the form and content of any
such reports required to be filed with respect to private fund advisers
also registered with the CFTC.\14\
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    \8\ Section 202(a)(29) of the Advisers Act defines the term
``private fund'' as ``an issuer that would be an investment company,
as defined in section 3 of the Investment Company Act of 1940 (15
U.S.C. 80a-3) (``Investment Company Act''), but for section 3(c)(1)
or 3(c)(7) of that Act.'' Section 3(c)(1) of the Investment Company
Act provides an exclusion from the definition of ``investment
company'' for any ``issuer whose outstanding securities (other than
short-term paper) are beneficially owned by not more than one
hundred persons and which is not making and does not presently
propose to make a public offering of its securities.'' Section
3(c)(7) of the Investment Company Act provides an exclusion from the
definition of ``investment company'' for any ``issuer, the
outstanding securities of which are owned exclusively by persons
who, at the time of acquisition of such securities, are qualified
purchasers, and which is not making and does not at that time
propose to make a public offering of such securities.'' The term
``qualified purchaser'' is defined in section 2(a)(51) of the
Investment Company Act.
    \9\ The Dodd-Frank Act requires such private fund adviser
registration by amending section 203(b)(3) of the Advisers Act to
repeal the exemption from registration for any adviser that during
the course of the preceding 12 months had fewer than 15 clients and
neither held itself out to the public as an investment adviser nor
advised any registered investment company or business development
company. See section 403 of the Dodd-Frank Act. See also infra note
11 for the definition of ``private fund adviser.'' There are
exemptions from the registration requirement, including exemptions
for advisers to venture capital funds and advisers to private funds
with less than $150 million in assets under management in the United
States. There also is an exemption for ``foreign private advisers,''
which are investment advisers with no place of business in the
United States, fewer than 15 clients in the United States and
investors in the United States in private funds advised by the
adviser, and less than $25 million in assets under management from
such clients and investors. See sections 402, 407 and 408 of the
Dodd-Frank Act. See also Exemptions for Advisers to Venture Capital
Funds, Private Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers, Investment Advisers
Act Release No. IA-3111 (Nov. 19, 2010), 75 FR 77,190 (Dec. 10,
2010) (``Private Fund Exemption Release''); Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Release No. IA-3110 (Nov. 19, 2010), 75 FR 77,052 (Dec.
10, 2010) (``Implementing Release''). References in this Release to
Form ADV or terms defined in Form ADV or its glossary are to the
form and glossary as they are proposed to be amended in the
Implementing Release.
    \10\ See Senate Committee Report, supra note 4, at 38.
    \11\ Throughout this Release, we use the term ``private fund
adviser'' to mean any investment adviser that (i) is registered or
required to register with the SEC (including any investment adviser
that is also registered or required to register with the CFTC as a
CPO or CTA) and (ii) advises one or more private funds. We are not
proposing that advisers solely to venture capital funds or advisers
to private funds that in the aggregate have less than $150 million
in assets under management in the United States (``exempt reporting
advisers'') be required to file Form PF.
    \12\ While Advisers Act section 204(b)(1) could be read in
isolation to imply that the SEC requiring private fund systemic risk
reporting is discretionary, other amendments to the Advisers Act
made by the Dodd-Frank Act (such as Advisers Act section 204(b)(5)
and 211(e) suggest that Congress intended such rulemaking to be
mandatory. See also Senate Committee Report, supra note 4, at 39
(``this title requires private fund advisers * * * to disclose
information regarding their investment positions and strategies.'').
    \13\ See section 404 of the Dodd-Frank Act.
    \14\ See section 406 of the Dodd-Frank Act.
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    This joint proposal is designed to fulfill this statutory mandate.
Under proposed Advisers Act rule 204(b)-1, private fund advisers would
be required to file Form PF with the SEC. Private fund advisers that
also are registered as CPOs or CTAs with the CFTC would file Form PF to
satisfy certain CFTC systemic risk reporting requirements.\15\
Information collected about private funds on Form PF, together with
information the SEC collects on Form ADV and the information the CFTC
separately has proposed CPOs file on Form CPO-PQR and CTAs file on Form
CTA-PR, will provide FSOC and the Commissions with important
information about the basic operations and strategies of private funds
and will be important in FSOC obtaining a baseline picture of potential
systemic risk across both the entire private fund industry and in
particular kinds of private funds, such as hedge funds.\16\
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    \15\ For these private fund advisers, filing Form PF through the
Form PF filing system would be a filing with both the SEC and CFTC.
Irrespective of their filing a Form PF with the SEC, all private
fund advisers that are also registered as CPOs and CTAs with the
CFTC would be required to file Schedule A of proposed Form CPO-PQR
(for CPOs) or Schedule A of proposed Form CTA-PR (for CTAs).
Additionally, to the extent that they operate or advise commodity
pools that do not satisfy the definition of ``private fund'' under
the Dodd-Frank Act, private fund advisers that are also registered
as CPOs or CTAs would still be required to file proposed Form CPO-
PQR (for CPOs) and proposed Form CTA-PR (for CTAs), as applicable.
    \16\ The information reported through the various reporting
forms is designed to be complementary, and not duplicative.
Information reported on Form ADV would be publicly available, while
information reported on Form PF and proposed Forms CPO-PQR and CTA-
PR would be confidential to the extent permitted under applicable
law. Form ADV and Form PF also have different principal purposes.
Form ADV primarily aims at providing the SEC and investors with
basic information about advisers (including private fund advisers)
and the funds they manage for investor protection purposes, although
Form ADV information also will be available to FSOC. Information on
Form ADV is designed to provide the SEC with information necessary
to its administration of the Advisers Act and to efficiently
allocate its examination resources based on the risks the SEC
discerns or the identification of common business activities from
information provided by advisers. See Implementing Release, supra
note 9. In contrast, the Commissions intend to use Form PF primarily
as a confidential systemic risk disclosure tool to assist FSOC in
monitoring and assessing systemic risk, although it also would be
available to assist the Commissions in their regulatory programs,
including examinations and investigations and investor protection
efforts relating to private fund advisers.

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    Information the SEC obtains through reporting under section 404 of
the Dodd-Frank Act is to be shared with FSOC as FSOC considers
necessary for purposes of assessing the systemic risk posed by private
funds and generally is to remain confidential.\17\ Our staffs have
consulted with staff representing FSOC's members in developing this
proposal. We note that simultaneous with our staffs' FSOC consultations
relating to this rulemaking, FSOC has been building out its standards
for assessing systemic risk across different kinds of financial firms
and has recently proposed standards for determining which nonbank
financial companies should be designated as subject to FRB
supervision.\18\
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    \17\ See section 404 of the Dodd-Frank Act; infra note 39 and
accompanying text.
    \18\ See, e.g., Authority to Require Supervision and Regulation
of Certain Nonbank Financial Companies, Financial Stability
Oversight Council Release (Jan. 18, 2011); Advance Notice of
Proposed Rulemaking Regarding Authority to Require Supervision and
Regulation of Certain Nonbank Financial Companies, Financial
Stability Oversight Council Release (Oct. 1, 2010), 75 FR 61653
(Oct. 6, 2010) (``FSOC Designation ANPR'').
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B. International Coordination

    In assessing systemic risk, the Dodd-Frank Act requires that FSOC
coordinate with foreign financial regulators.\19\ This coordination may
be particularly important in assessing systemic risk associated with
hedge funds and other private funds because they often operate globally
and make significant investments in firms and markets around the
world.\20\ As others have recognized, ``[g]iven the global nature of
the markets in which [private fund] managers and funds operate, it is
imperative that a regulatory framework be applied on an internationally
consistent basis.'' \21\ International regulatory coordination also has
been cited as a critical element in facilitating financial regulators'
formulation of a comprehensive and effective response to future
financial crises.\22\ Collecting consistent and comparable information
is of added value in private fund systemic risk reporting because it
would aid in the assessment of systemic risk on a global basis and thus
enhance the utility of information sharing among U.S. and foreign
financial regulators.\23\
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    \19\ See section 175 of the Dodd-Frank Act.
    \20\ See Damian Alexander, Global Hedge Fund Assets Rebound to
Just Over $1.8 Trillion, Hedge Fund Intelligence (Apr. 7, 2010)
(``HFI'').
    \21\ Group of Thirty, Financial Reform: A Framework for
Financial Stability (Jan. 15, 2009).
    \22\ See U.S. Department of the Treasury, Financial Regulatory
Reform: A New Foundation (2009), at 8; and Equipping Financial
Regulators with the Tools Necessary to Monitor Systemic Risk, Senate
Banking Subcommittee on Security and International Trade and
Finance, Feb. 12, 2010 (testimony of Daniel K. Tarullo, member of
the FRB). See also Group of 20 and the International Monetary Fund,
The Global P Crisis for Fure Regulation of Financial Institutions
and M arkets and for Liquidity Management (Feb. 4, 2009).
    \23\ The Commissions expect that they may share information
reported on Form PF with various foreign financial regulators under
information sharing agreements in which the foreign regulator agrees
to keep the information confidential.
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    Recognizing this benefit, our staffs participated in the
International Organization of Securities Commissions' (``IOSCO'')
preparation of a report regarding hedge fund oversight.\24\ Among other
matters, this report recommended that hedge fund advisers provide to
their national regulators information for the identification, analysis,
and mitigation of systemic risk. It also recommended that regulators
cooperate and share information where appropriate in order to
facilitate efficient and effective oversight of globally active hedge
funds and to help identify systemic risks, risks to market integrity,
and other risks arising from the activities or exposures of hedge
funds.\25\ The types of information that IOSCO recommended regulators
gather from hedge fund advisers is consistent with and comparable to
the types of information we propose to collect from hedge funds through
Form PF, as described in further detail below.\26\
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    \24\ Technical Committee of the International Organization of
Securities Commissions, Hedge Funds O (June 2009), available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD293.pdf (``IOSCO
Report'').
    \25\ Id. at 3.
    \26\ See IOSCO Report, supra note 24, at 14; Press Release,
International Regulators Publish Systemic Risk Data Requirements for
Hedge Funds (Feb. 25, 2010), available at https://www.iosco.org/news/pdf/IOSCONEWS179.pdf. The IOSCO Report states that systemic
risk information that hedge fund advisers should provide to
regulators should include, for example: (1) Information on their
prime brokers, custodian, and background information on the persons
managing the assets; (2) information on the manager's larger funds
including the net asset value, predominant strategy/regional focus
and performance; (3) leverage and risk information, including
concentration risk of the hedge fund adviser's larger funds; (4)
asset and liability information for the manager's larger funds; (5)
counterparty risk, including the biggest sources of credit; (6)
product exposure for all of the manager's assets; and (7) investment
activity known to represent a significant proportion of such
activity in important markets or products. Some of this information
would be collected through the revised Form ADV, as proposed by the
SEC in the Implementing Release, rather than Form PF.
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    In addition, our staffs have consulted with the United Kingdom's
Financial Services Authority (the ``FSA''), which has conducted a
voluntary semi-annual survey since October 2009 by sampling the largest
hedge fund groups based in the United Kingdom.\27\ Because many hedge
fund advisers are located in the United Kingdom and subject to the
jurisdiction of the FSA, this coordination has been particularly
important.\28\ UK hedge fund advisers complete this survey on a
voluntary basis, and the survey collects information regarding all
funds managed by the particular hedge fund adviser as well as for
individual funds with at least $500 million in assets. The information
the survey collects is designed to help the FSA better understand hedge
funds' use of leverage, ``footprints'' in various asset classes
(including concentration and liquidity issues), the scale of asset/
liability mismatches, and counterparty credit risks.\29\ In addition,
for more than five years the FSA has been conducting a semi-annual
survey of hedge fund counterparties to assist it in assessing trends in
counterparty credit risk, margin requirements, and other matters.\30\
Our staffs' consultation with the FSA as they designed and conducted
their hedge fund surveys has been very informative, and we have
incorporated into proposed Form PF many of the types of information
collected through the FSA surveys.
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    \27\ The survey canvasses approximately 50 FSA-authorized
investment managers. See, e.g., Financial Services Authority,
Assessing Possible Sources of Systemic Risk from Hedge Funds: A
Report on the Findings of the Hedge Fund as Counterparty Survey and
the Hedge Fund Survey (Jul. 2010), available at http://www.fsa.gov.uk/pubs/other/hf_report.pdf (``FSA Survey'').
    \28\ According to Hedge Fund Intelligence, U.K.-based advisers
manage approximately 16% of global hedge fund assets. This
concentration of hedge fund advisers is second only to the United
States (managing approximately 76% of global hedge fund assets). See
HFI, supra note 20.
    \29\ FSA Survey, supra note 27.
    \30\ Id.
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    SEC staff also has consulted with Hong Kong's Securities and
Futures Commission regarding hedge fund oversight and data collection
because Hong Kong is an important jurisdiction for hedge funds in
Asia.\31\ This consultation also has proven helpful in designing
proposed Form PF.

Collectively, hedge fund advisers based in the United States, the
United Kingdom, and Hong Kong represent over 92 percent of global hedge
fund assets, and thus a broad consistency among these jurisdictions'
hedge fund information collections, including our own, will facilitate
the sharing of consistent and comparable information for systemic risk
assessment purposes for most global hedge fund assets under
management.\32\ Finally, in connection with the IOSCO report, IOSCO
members (including the SEC and CFTC) agreed, on a ``best efforts''
basis, to conduct a survey of hedge fund reporting data as of the end
of September 2010 based on the guidelines established in the IOSCO
report and the FSA survey. This internationally coordinated survey
effort has also informed our proposed reporting.
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    \31\ According to Hedge Fund Intelligence, Hong Kong-based
advisers manage approximately 0.54% of global hedge fund assets,
which is the largest concentration of hedge fund advisers in Asia.
See HFI, supra note 20.
    \32\ See HFI, supra note 20.
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    International efforts also have focused on potential systemic
considerations arising out of other types of private funds, such as
private equity funds. For example, an International Monetary Fund
(``IMF'') staff paper has focused on ``extending the perimeter'' of
effective regulatory oversight to capture all financial activities that
may pose systemic risks, regardless of the type of institution in which
they occur.\33\ The IMF paper proposed that these financial activities
be subject to reporting obligations so that regulators may assess
potential systemic risk and emphasized the need to capture all
financial activities conducted on a leveraged basis, including
activities of leveraged private equity vehicles.\34\ Others also have
recognized a need for monitoring the private equity sector because
having information on its potentially systemically important
interactions with the financial system are an important part of
regulators' obtaining the complete picture of the broader financial
system that is so vital to effective systemic risk monitoring.\35\ We
have taken these international efforts relating to systemic risk
monitoring in private equity funds into account in the proposed
reporting discussed below.
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    \33\ See Ana Carvajal et al., The Perimeter of Financial
Regulation, IMF Staff Position Note SPN/09/07 (Mar. 26, 2009),
available at http://www.imf.org/external/pubs/ft/spn/2009/spn0907.pdf.
    \34\ Id., at 8.
    \35\ See, e.g., Lorenzo Bini Smaghi, Member of the Executive
Board of the European Central Bank, Going Forward--Regulation and
Supervision after the Financial Turmoil, Speech by at the 4th
International Conference of Financial Regulation and Supervision
(Jun. 19, 2009), available at http://www.bis.org/review/r090623e.pdf
(stating ``macro-prudential analysis needs to capture all components
of financial systems and how they interact. This includes all
intermediaries, markets and infrastructures underpinning them. In
this respect, it is important to consider that at present some of
these components, such as hedge funds, private equity firms or over-
the-counter (OTC) financial markets, are not subject to micro-
prudential supervision. But they need to be part of macro-prudential
analysis and risk assessments, as they influence the overall
behaviour of the financial system. To gain a truly ``systemic''
perspective on the financial system, no material element should be
left out.''); Private Equity and Leveraged Finance Markets, Bank for
International Settlements Committee on the Global Financial System
Working Paper No. 30 (Jul. 2008), available at http://www.bis.org/publ/cgfs30.pdf (``BIS Private Equity Paper'') (``Going forward, the
Working Group believes that enhancing transparency and strengthening
risk management practices [relating to private equity and leveraged
finance markets] require special attention. * * * The recent market
turmoil has demonstrated that a number of the risks in the leveraged
finance market are likely to materialise in combination with other
financial market risks in stressed market conditions. * * * In the
public sector, there is a stronger case for developing early warning
indicators and devoting more research efforts to modelling the
dynamic relationships between risk factors with a view to
understanding the interrelationships across markets and their impact
on the financial sector.''). See also Macroeconomic Assessment Group
established by the Financial Stability Board and the Basel Committee
on Banking Supervision, Interim Report: Assessing the Macroeconomic
Impact of the Transition to Stronger Capital and Liquidity
Requirements (Aug. 2010), at section 5.2, available at http://www.financialstabilityboard.org/publications/r_100818b.pdf.
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II. Discussion

    The SEC is proposing a new rule 204(b)-1 under the Advisers Act to
require that SEC-registered investment advisers report systemic risk
information to the SEC on Form PF if they advise one or more private
funds.\36\ For registered CPOs and CTAs that are also registered as
investment advisers with the SEC and advise a private fund, this report
also would serve as substitute compliance for a portion of the CFTC's
proposed systemic risk reporting requirements under proposed Commodity
Exchange Act rule 4.27(d).\37\ Because commodity pools that meet the
definition of a private fund are categorized as hedge funds for
purposes of Form PF as discussed below, CPOs and CTAs filing Form PF
would need to complete only the sections applicable to hedge fund
advisers, and the form would be a joint form only with respect to those
sections.\38\
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    \36\ See proposed Advisers Act rule 204(b)-1.
    \37\ See proposed Commodity Exchange Act rule 4.27(d), which
provides that these CPOs and CTAs would need to file other reports
as required under rule 4.27 with respect to pools that are not
private funds. For purposes of this proposed rule, it is the CFTC's
position that any false or misleading statement of a material fact
or material omission in the jointly proposed sections (sections 1
and 2) of proposed Form PF that is filed by these CPOs and CTAs
shall constitute a violation of section 6(c)(2) of the Commodity
Exchange Act. Proposed Form PF contains an oath consistent with this
position.
    \38\ Thus, private fund advisers that also are CPOs or CTAs
would be obligated to complete only section 1 and, if they met the
applicable threshold, section 2 of Form PF. Accordingly, Form PF is
a joint form between the SEC and the CFTC only with respect to
sections 1 and 2 of the form.
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    Form PF would elicit non-public information about private funds and
their trading strategies the public disclosure of which, in many cases,
could adversely affect the funds and their investors. The SEC does not
intend to make public Form PF information identifiable to any
particular adviser or private fund, although the SEC may use Form PF
information in an enforcement action. Amendments to the Advisers Act
added by the Dodd-Frank Act preclude the SEC from being compelled to
reveal the information except in very limited circumstances.\39\
Similarly, the Dodd-Frank Act exempts the CFTC from being compelled
under FOIA to disclose to the public any information collected through
Form PF and requires that the CFTC maintain the confidentiality of that
information consistent with the level of confidentiality established
for the SEC in section 404 of the Dodd-Frank Act. The Commissions would
make information collected through Form PF available to FSOC, as is
required by the Dodd-Frank Act, subject to the confidentiality
provisions of the Dodd-Frank Act.\40\
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    \39\ See section 404 of the Dodd-Frank Act stating that
``[n]otwithstanding any other provision of law, the Commission [SEC]
may not be compelled to disclose any report or information contained
therein required to be filed with the Commission [SEC] under this
subsection'' except to Congress upon agreement of confidentiality.
Section 404 also provides that nothing prevents the SEC from
complying with a request for information from any other federal
department or agency or any self-regulatory organization requesting
the report or information for purposes within the scope of its
jurisdiction or an order of a court of the U.S. in an action brought
by the U.S. or the SEC. Section 404 of the Dodd-Frank Act also
states that the SEC shall make available to FSOC copies of all
reports, documents, records, and information filed with or provided
to the SEC by an investment adviser under section 404 of the Dodd-
Frank Act as FSOC may consider necessary for the purpose of
assessing the systemic risk posed by a private fund and that FSOC
shall maintain the confidentiality of that information consistent
with the level of confidentiality established for the SEC in section
404 of the Dodd-Frank Act.
    \40\ See section 404 of the Dodd-Frank Act.
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    We propose that each private fund adviser report basic information
about the operations of its private funds on Form PF once each year. We
propose that a relatively small number of Large Private Fund Advisers
(described in section II.B below) instead be required to submit this
basic information each quarter along with additional systemic risk
related information required by Form PF concerning certain of their

private funds.\41\ In the sections below, we describe the principal
reasons we believe that FSOC needs this information in order to monitor
the systemic risk that may be associated with the operation of private
funds.
---------------------------------------------------------------------------

    \41\ See proposed Instructions to Form PF. Our proposed
reporting thus complies with the Dodd-Frank Act directive that, in
formulating systemic risk reporting and recordkeeping for investment
advisers to mid-sized private funds, the Commission take into
account the size, governance, and investment strategy of such funds
to determine whether they pose systemic risk. See section 408 of the
Dodd-Frank Act. The Dodd-Frank Act also states that the SEC may
establish different reporting requirements for different classes of
fund advisers, based on the type or size of private fund being
advised. See section 404 of the Dodd-Frank Act.
---------------------------------------------------------------------------

A. Purposes of Form PF

    The Dodd-Frank Act tasks FSOC with monitoring the financial
services marketplace in order to identify potential threats to the
financial stability of the United States.\42\ It also requires FSOC to
collect information from member agencies to support its functions.\43\
Section 404 of the Dodd-Frank Act directs the SEC to support this
effort by collecting from investment advisers to private funds such
information as the SEC deems necessary and appropriate in the public
interest and for the protection of investors or for the assessment of
systemic risk.\44\ FSOC may, if it deems necessary, direct the Office
of Financial Research (``OFR'') to collect additional information from
nonbank financial companies.\45\
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    \42\ See section 112(a)(2)(C) of the Dodd-Frank Act.
    \43\ See section 112(d)(1) of the Dodd-Frank Act.
    \44\ Section 404 of the Dodd-Frank Act requires that reports and
records that the SEC mandates be maintained for these purposes
include a description of certain categories of information, such as
assets under management, use of leverage, counterparty credit risk
exposure, and trading and investment positions for each private fund
advised by the adviser.
    \45\ See sections 153 and 154 of the Dodd-Frank Act.
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    The Commissions are jointly proposing sections 1 and 2 of Form PF,
and the SEC is proposing sections 3 and 4 of Form PF, to collect
information necessary to permit FSOC to monitor private funds in order
to identify any potential systemic threats arising from their
activities. The information we currently collect about private funds
and their activities is very limited and is not designed for the
purpose of monitoring systemic risk.\46\ We do not currently collect
information, for example, about hedge funds' primary trading
counterparties or significant market positions. The SEC also does not
currently collect data to assess the risk of a run on a private
liquidity fund, a risk that could transfer into registered money market
funds and into the broader short term funding markets and those that
rely on those markets.\47\ While we are proposing to collect
information on Form PF to assist FSOC in its monitoring obligations
under the Dodd-Frank Act, the information collected on Form PF would be
available to assist the Commissions in their regulatory programs,
including examinations and investigations and investor protection
efforts relating to private fund advisers.\48\
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    \46\ We note that the SEC has proposed amendments to Form ADV
that also would require private funds to report certain basic
information, such as the fund's prime broker and its gross and net
asset values. See Implementing Release, supra note 9.
    \47\ See section II.A.3 of this Release for a discussion of
liquidity funds and their potential risks.
    \48\ See SEC section VI.A of this Release for a discussion of
how the SEC could use proposed Form PF data for its regulatory
activities and investor protection efforts.
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    We have designed Form PF, in consultation with staff representing
FSOC's members, to provide FSOC with such information so that it may
carry out its monitoring obligations.\49\ Based upon the information we
propose to obtain from advisers about the private funds they advise,
together with market data it collects from other sources, FSOC should
be able to identify whether any private funds merit further analysis or
whether OFR should collect additional information. We have not sought
to design a form that would provide FSOC in all cases with all the
information it may need to make a determination that a particular
entity should be designated for supervision by the FRB.\50\ Such a
form, if feasible, likely would require substantial additional and more
detailed data addressing a wider range of possible fund profiles, since
it could not be tailored to a particular adviser, and would impose
correspondingly greater burdens on private fund advisers. This type of
information gathering may be better accomplished by OFR through
targeted information requests to specific private fund advisers
identified through Form PF, rather than through a general reporting
form.\51\
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    \49\ Industry participants (in response to FSOC Designation
ANPR, supra note 18) acknowledged the potentially important function
that such reporting may play in allowing FSOC to monitor the private
fund industry more generally and to assess the extent to which any
private funds may pose systemic risk more specifically. See, e.g.,
Comment Letter of the Managed Funds Association (Nov. 5, 2010)
(``the enhanced regulation of hedge fund managers and the markets in
which they participate following the passage of the Dodd-Frank Act
ensures that regulators will have a timely and complete picture of
hedge funds and their activities''), Comment Letter of the Coalition
of Private Investment Companies (Nov. 5, 2010) (``the registration
and reporting structure for private funds subject to SEC oversight
will result in an unprecedented range and depth of data to the
Council, its constituent members and the newly created Office of
Financial Research. From this information, in addition to the
information gathered by the Council, the Council should be able to
assemble a clear picture of the overall U.S. financial network and
how private investment funds fit into it, both on an individual and
overall basis''), Comment Letter of the Private Equity Growth
Council (Nov. 5, 2010) (``regulators also now have the authority to
require all private equity firms and private equity funds to provide
any additional data needed to assess systemic risk'') (``PE Council
Letter''). Comment letters in response to the FSOC Designation ANPR
are available at http://www.regulations.gov.
    \50\ See section 113 of the Dodd-Frank Act for a discussion of
the matters that FSOC must consider when determining whether a U.S.
nonbank financial company shall be supervised by the FRB and subject
to prudential standards.
    \51\ Recordkeeping requirements specific to private fund
advisers for systemic risk assessment purposes will be addressed in
a future release pursuant to our authority under section 404 of the
Dodd-Frank Act.
---------------------------------------------------------------------------

    The amount of information a private fund adviser would be required
to report on the proposed form would vary based on both the size of the
adviser and the type of funds it advises. This approach reflects our
initial view after consulting with staff representing FSOC's members
that a smaller private fund adviser may present less risk to the
stability of the U.S. financial system and thus merit reporting of less
information.\52\ It also reflects our understanding that different
types of private funds could present different implications for
systemic risk and that reporting requirements should be appropriately
calibrated.\53\ As discussed in more detail below, Form PF would
require more detailed information from advisers managing a large amount
of hedge fund or liquidity fund assets. Less information would be
required regarding advisers managing a large amount of private equity
fund assets because, after a review of available literature and
consultation with staff representing FSOC's members, it appears that
private equity funds may present less potential risk to U.S. financial
stability. The principal reasons for Form PF's proposed reporting
specific to hedge funds, liquidity funds, and private equity funds are
discussed below.
---------------------------------------------------------------------------

    \52\ We discuss the information we propose requiring smaller
private fund advisers report in section II.D.1 of this Release.
    \53\ Congress recognized this need as well. See supra note 41.
---------------------------------------------------------------------------

1. Hedge Funds
    We believe that Congress expected hedge fund advisers would be
required to report information to the Commissions under Title IV of the
Dodd-Frank Act.\54\ After consulting with

staff representing FSOC's members, our initial view is that the
investment activities of hedge funds \55\ may have the potential to
pose systemic risk for several reasons and, accordingly, that advisers
to these hedge funds should provide targeted information on Form PF to
allow FSOC to gain a better picture of the potential systemic risks
posed by the hedge fund industry. Hedge funds may be important sources,
and users, of liquidity in certain markets. Hedge funds often use
financial institutions that may have systemic importance to obtain
leverage and enter into other types of transactions. Hedge funds employ
investment strategies that may use leverage, derivatives, complex
structured products, and short selling in an effort to generate
returns. Hedge funds also may employ strategies involving high volumes
of trading and concentrated investments. These strategies, and in
particular high levels of leverage, can increase the likelihood that
the fund will experience stress or fail, and amplify the effects on
financial markets.\56\ While many hedge funds are not highly leveraged,
certain hedge fund strategies employ substantial amounts of
leverage.\57\ Significant hedge fund failures (whether caused by their
investment positions or use of leverage or both) could result in
material losses at the financial institutions that lend to them if
collateral securing this lending is inadequate.\58\ These losses could
have systemic implications if they require these financial institutions
to scale back their lending efforts or other financing activities
generally.\59\ The simultaneous failure of several similarly positioned
hedge funds could create contagion through the financial markets if the
failing funds liquidate their investment positions in parallel at
firesale prices, thereby depressing the mark-to-market valuations of
securities that may be widely held by other financial institutions and
investors.\60\ Many of these concerns were raised in September 1998 by
the near collapse of Long Term Capital Management, a highly leveraged
hedge fund that experienced significant losses stemming from the 1997
Russian financial crisis.\61\
---------------------------------------------------------------------------

    \54\ See Senate Committee Report, supra note 4, at 38 (``While
hedge funds are generally not thought to have caused the current
financial crisis, information regarding their size, strategies, and
positions could be crucial to regulatory attempts to deal with a
future crisis. The case of Long-Term Capital Management, a hedge
fund that was rescued through Federal Reserve intervention in 1998
because of concerns that it was ``too-interconnected-to-fail,''
shows that the activities of even a single hedge fund may have
systemic consequences.'').
    \55\ See section II.B of this Release for a discussion of the
definition of ``hedge fund'' in proposed Form PF. To prevent
duplicative reporting, commodity pools that meet the definition of a
private fund would be treated as hedge funds for purposes of Form
PF. CPOs and CTAs that are not also registered as an investment
adviser with the SEC would be required to file proposed Form CPO-PQR
(for CPOs) and proposed Form CTA-PR (for CTAs) reporting similar
information as Form PF requires for private fund advisers that
advise one or more hedge funds. See Commodity Pool Operators and
Commodity Trading Advisors: Amendments to Compliance Obligations,
CFTC Release (Jan. --, 2011). Deeming commodity pools that meet the
definition of a private fund to be hedge funds for purposes of Form
PF, therefore, is designed to ensure that the CFTC obtains similar
reporting regarding commodity pools that satisfy CFTC reporting
obligations by the CPO or CTA filing proposed Form PF.
    \56\ See President's Working Group on Financial Markets, Hedge
Funds, Leverage, and the Lessons of Long Term Capital Management
(Apr. 1999), at 23, available at http://www.ustreas.gov/press/releases/reports/hedgfund.pdf (``PWG LTCM Report'').
    \57\ See FSA Survey, supra note 27, at 5 (showing borrowings as
a multiple of net equity ranging from 100% in strategies such as
managed futures to 1400% in the fixed income arbitrage hedge fund
strategy).
    \58\ See, e.g., Id.; Ben S. Bernanke, Hedge Funds and Systemic
Risk, Speech at the Federal Reserve Bank of Atlanta's 2006 Financial
Market's Conference (May 16, 2006), available at http://www.federalreserve.gov/newsevents/speech/bernanke20060516a.htm
(``Bernanke''); Nicholas Chan et al., Systemic Risk and Hedge Funds,
National Bureau of Economic Research Working Paper 11200 (Mar.
2005), available at http://www.nber.org/papers/w11200.pdf; Andrew
Lo, Regulatory Reform in the Wake of the Financial Crisis of 2007-
2008, 1 J. Fin. Econ. P. 4 (2009); and John Kambhu et al., Hedge
Funds, Financial Intermediation, and Systemic Risk, FRBNY Econ. P.
Rev. (Dec. 2007) (``Kambhu'').
    \59\ Kambhu, supra note 58; Financial Stability Forum, Update of
the FSF Report on Highly Leveraged Institutions (May 19, 2007).
    \60\ See Bernanke, supra note 58; David Stowell, An Introduction
to Investment Banks, Hedge Funds & Private Equity: The New Paradigm
259-261 (2010).
    \61\ See PWG LTCM Report, supra note 56.
---------------------------------------------------------------------------

    Accordingly, proposed Form PF would include questions about large
hedge funds' investments, use of leverage and collateral practices,
counterparty exposures, and market positions that are designed to
assist FSOC in monitoring and assessing the extent to which stresses at
those hedge funds could have systemic implications by spreading to
prime brokers, credit or trading counterparties, or financial
markets.\62\ This information also is designed to help FSOC observe how
hedge funds behave in response to certain stresses in the markets or
economy. We request comment on this analysis of the potential systemic
risk posed by hedge funds. Does it adequately identify the ways in
which hedge funds might generate systemic risk? Are there other ways
that hedge funds could create systemic risk? Are hedge funds not a
potential source of systemic risk? Please explain your views and
discuss their implications for the reporting we propose on Form PF.
---------------------------------------------------------------------------

    \62\ See section II.D.2 of this Release.
---------------------------------------------------------------------------

2. Liquidity Funds
    ``Liquidity funds'' also may be important to FSOC's monitoring and
assessment of potential systemic risks, and the SEC believes
information concerning them, therefore, should be included on Form
PF.\63\ The proposed Form PF would define a liquidity fund as a private
fund that seeks to generate income by investing in a portfolio of
short-term obligations in order to maintain a stable net asset value
per unit or minimize principal volatility for investors.\64\ Liquidity
funds thus can resemble money market funds, which are registered under
the Investment Company Act of 1940 and seek to maintain a ``stable''
net asset value per share, typically $1, through the use of the
``amortized cost'' method of valuation.\65\
---------------------------------------------------------------------------

    \63\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the form. Section 3 of the form,
which would require more specific reporting regarding liquidity
funds, would only be required by the SEC.
    \64\ See section II.B of this Release for a discussion of the
definition of ``liquidity fund'' in proposed Form PF.
    \65\ Under the amortized cost method, securities are valued at
acquisition cost, with adjustments for amortization of premium or
accretion of discount, instead of at fair market value. To prevent
substantial deviations between the amortized cost share price and
the mark-to-market per-share value of the fund's assets (its
``shadow NAV''), a money market fund must periodically compare the
two. If there is a difference of more than one-half of 1 percent
(typically, $0.005 per share), the fund must re-price its shares, an
event colloquially known as ``breaking the buck.'' See Money Market
Fund Reform, Investment Company Act Release No. 28807 (June 30,
2009), 74 FR 32688 (July 8, 2009), at section III (``MMF Reform
Proposing Release'').
---------------------------------------------------------------------------

    A report recently released by the President's Working Group on
Financial Markets (the ``PWG MMF Report'') discussed in detail how
certain features of registered money market funds, many of which are
shared by liquidity funds, may make them susceptible to runs and thus
create the potential for systemic risk.\66\ The PWG MMF Report
describes how some investors may consider liquidity funds to function
as substitutes for registered money market funds and the potential for
systemic risk that

results.\67\ During the financial crisis, several sponsors of
``enhanced cash funds,'' a type of liquidity fund, committed capital to
those funds to prevent investors from realizing losses in the
funds.\68\ The fact that sponsors of certain liquidity funds felt the
need to support the stable value of those funds suggests that they may
be susceptible to runs like registered money market funds.
---------------------------------------------------------------------------

    \66\ Report of the President's Working Group on Financial
Markets: Money Market Fund Reform Options (Oct. 2010), available at
http://treas.gov/press/releases/docs/10.21%20PWG%20Report%20Final.pdf. The PWG MMF Report states that the
work of the President's Working Group on Financial Reform relating
to money market funds is now being taken over by FSOC. The SEC has
discussed previously registered money market funds' susceptibility
to runs. See MMF Reform Proposing Release, supra note 65, at section
III.
    \67\ PWG MMF Report, supra note 66, at section 3.h (``These
vehicles typically invest in the same types of short-term
instruments that MMFs hold and share many of the features that make
MMFs vulnerable to runs, so growth of unregulated MMF substitutes
would likely increase systemic risks. However, such funds need not
comply with rule 2a-7 or other [Investment Company Act] protections
and in general are subject to little or no regulatory oversight. In
addition, the risks posed by MMF substitutes are difficult to
monitor, since they provide far less market transparency than
MMFs.'').
    \68\ See, e.g., Sree Vidya Bhaktavatsalam, BlackRock Earnings
Beat Estimates on Hedge-Fund Fees, Bloomberg (Jan. 17, 2008)
(``During the fourth quarter, BlackRock spent $18 million to support
the net asset value of two enhanced cash funds whose values fell as
the credit markets got squeezed''); Sree Vidya Bhaktavatsalam &
Christopher Condon, Federated Investors Bails Out Cash Fund After
Losses, Bloomberg (Nov. 20, 2007).
---------------------------------------------------------------------------

    Registered money market funds are subject to extensive regulation
under Investment Company Act rule 2a-7, which imposes credit-quality,
maturity, and diversification requirements on money market fund
portfolios designed to ensure that the funds' investing remains
consistent with the objective of maintaining a stable net asset
value.\69\ While liquidity funds are not required to comply with rule
2a-7, we understand that many liquidity funds can suspend redemptions
or impose gates on shareholder redemptions upon indications of stress
at the fund. As a result, the risk of runs at liquidity funds may be
mitigated. The information that the SEC is proposing to require
advisers to liquidity funds report is designed to allow FSOC to assess
liquidity funds' susceptibility to runs and ability to otherwise pose
systemic risk.
---------------------------------------------------------------------------

    \69\ See 17 CFR 270.2a-7.
---------------------------------------------------------------------------

    The SEC requests comment on this analysis of the potential systemic
risk posed by liquidity funds. Does it adequately identify the ways in
which liquidity funds might generate systemic risk? Are there other
ways that liquidity funds could create systemic risk? Do liquidity
funds lack any potential to create systemic risk? Please explain your
views and discuss their implications for the reporting proposed on Form
PF.
3. Private Equity Funds
    It is the SEC's initial view, after consultation with staff
representing FSOC's members, that the activities of private equity
funds, certain of their portfolio companies, or creditors involved in
financing private equity transactions also may be important to the
assessment of systemic risk and, therefore, that large advisers to
these funds should provide targeted information on Form PF to allow
FSOC to conduct basic systemic risk monitoring.\70\
---------------------------------------------------------------------------

    \70\ See section II.B of this Release for a discussion of the
definition of ``private equity fund'' in Form PF. Form PF is a joint
form between the SEC and the CFTC only with respect to sections 1
and 2 of the form. Section 4 of the form, which would require more
specific reporting regarding private equity funds, would only be
required by the SEC.
---------------------------------------------------------------------------

    One aspect of the private equity business model that some have
identified as potentially having systemic implications is its method of
financing buyouts of companies. Leveraged private equity transactions
often rely on banks to provide bridge financing until the permanent
debt financing for the transaction is completed, whether through a
syndicated bank loan or issuance of high yield bonds by the portfolio
company or both.\71\ When market conditions suddenly turn, these
institutions can be left holding this potentially risky bridge
financing (or committed to provide the final bank financing, but no
longer able to syndicate or securitize it and thus forced to hold it)
at precisely the time when credit market conditions, and therefore the
institutions' own general exposure to private equity transactions and
other committed financings, have worsened.\72\ For example, prior to
the recent financial crisis, a trend in private equity transactions was
for private equity firms to enter into buyout transactions with seller-
favorable financing conditions and terms that placed much of the risk
of market deterioration after the transaction agreement was signed on
the financing institutions and the private equity adviser.\73\
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    \71\ See Steven M. Davidoff, The Failure of Private Equity, 82
S. Cal. L. Rev. 481, 494 (2009) (``Davidoff'').
    \72\ See Senior Supervisors Group, Observations on Risk
Management Practices during the Recent Market Turbulence, at 2 (Mar.
6, 2008), available at http://www.occ.gov/publications/publications-by-type/other-publications/pub-other-risk-mgt-practices-2008.pdf
(``Firms likewise found that they could neither syndicate to
external investors their leveraged loan commitments to corporate
borrowers nor cancel their commitments to fund those loans despite
material and adverse changes in the availability of funding from
other investors in the market''); BIS Private Equity Paper, supra
note 35, at 1-2 (``Conditions in the leveraged loan market
deteriorated in the second half of 2007, and demand for leveraged
finance declined sharply. An initial temporary adverse investor
reaction to loose lending terms and low credit spreads prevailing in
early 2007 became more protracted over the course of the second half
of the year as the turbulence in financial markets deepened and
contraction in demand for leveraged loans became more severe. Global
primary market leveraged loan volumes shrank by more than 50% in the
second half of 2007. The contraction in demand for leveraged loans
revealed substantial exposure of arranger banks to warehouse risk.
Undistributed loans will contribute to increased funding costs and
capital requirements for banks in 2008, on top of other offbalance
sheet products that they have been forced to bring on-balance sheet.
Moreover, with leveraged loan indices trading close to 90 cents on a
dollar in March 2008, realisation of warehouse risks has resulted in
significant mark to market losses to banks''); Bank of England,
Financial Stability Report, at 19 (Oct. 2007), available at http://www.bankofengland.co.uk/publications/fsr/2007/fsrfull0710.pdf
(``Bank of England'') (``The near closure of primary issuance
markets for collateralised loan obligations, and an increase in risk
aversion among investors, left banks unable to distribute leveraged
loans that they had originated earlier in the year. This exacerbated
a problem banks already faced, as debt used to finance a number of
high-profile private-equity sponsored leveraged buyouts (LBOs) had
remained on their balance sheets.'').
    \73\ See Davidoff, supra note 71, at 495-496 (noting the trend
in private equity transaction agreements signed prior to the
financial crisis to have no financing condition and to have limited
``market outs'' and ``lender outs'' in the debt commitment letters
and further noting that ``by agreeing to a more certain debt
commitment letter and providing bridge financing, the banks now took
on the risk of market deterioration between the time of signing and
closing.''). Bank regulators and industry observers also noted the
trend in private equity financing prior to the financial crisis for
banks to enter into ``covenant lite'' loans, which did not require
borrowers to meet certain performance metrics for cash flow or
profits. See The Economics of Private Equity Investments: Symposium
Summary, FRBSF Economic Letter (Feb. 29, 2008), available at http://www.frbsf.org/publications/economics/letter/2008/el2008-08.html
(noting growth in the first half of 2007 in such ``covenant lite''
loans); Financial Stability Forum, Report of the Financial Stability
Forum on Enhancing Market and Institutional Resilience, at 7 (Apr.
7, 2008), available at http://www.financialstabilityboard.org/publications/r_0804.pdf (``Another segment that saw rapid growth in
volume accompanied by a decline in standards was the corporate
leveraged loan market, where lenders agreed to weakened loan
covenants to obtain the business of private equity funds.''); Bank
of England, supra note 73, at 27 (``Market intelligence suggested
that private equity sponsors had considerable market power to impose
aggressive capital structures, tight spreads and weak covenants
because investor demand was so strong. But in August, the flow of
new LBOs came to a virtual standstill and the debt of a sequence of
high-profile companies could not be sold [by banks].'').
---------------------------------------------------------------------------

    In addition, some industry observers have noted that the leveraged
buyout investment model of imposing significant amounts of leverage on
their portfolio companies in an effort to meet investment return
objectives subjects those portfolio companies to greater risk in the
event of economic stress.\74\ If private equity funds conduct a

leveraged buyout of an entity that could be systemically important,
information about that investment could be important in FSOC monitoring
and assessing potential systemic risk.\75\
---------------------------------------------------------------------------

    \74\ See, e.g., Paying the Price, The Economist (Jul. 31, 2010)
(``Pension funds could decide to make a geared bet on equities by
borrowing money and investing in the S&P 500 index. But they would
understandably regard such a strategy as highly risky. Giving money
to private-equity managers, who then use debt to acquire quoted
companies, is viewed in an entirely different light but amounts to
the same gamble''). See also BIS Private Equity Paper, supra note
35, at 24-25.
    \75\ For example, some noted the role of private equity
investments in companies that the government ultimately bailed out
during the financial crisis. See, e.g., Casey Ross, Cerberus'
Success Hurt by a Pair of Gambles, The Boston Globe (Mar. 25, 2010)
(discussing private equity investments in GMAC and Chrysler Corp.,
both of which received government bailouts); and Louise Story, For
Private Equity, A Very Public Disaster, N.Y. Times (Aug. 8, 2009)
(same).
---------------------------------------------------------------------------

    For these reasons, the SEC believes certain information on the
activities of private equity funds and their portfolio companies is
relevant for purposes of monitoring potential systemic risk.\76\ In
addition, based on the SEC's consultations with staff representing
FSOC's members, private equity transaction financings, and their
interconnected impact on the lending institutions, could be a useful
area for FSOC to monitor in fulfilling its duty to gain a comprehensive
picture of the financial services marketplace in order to identify
potential threats to the stability of the U.S. financial system.
---------------------------------------------------------------------------

    \76\ See section II.D.4 of this Release for a discussion of the
information we propose requiring certain private equity fund
advisers report on Form PF.
---------------------------------------------------------------------------

    The SEC requests comment on this analysis of the potential systemic
risk posed by the activities of private equity funds. Does it identify
the ways in which private equity fund activities might generate
systemic risk? Are there other ways that private equity funds or their
activities could create systemic risk? Is the preliminary view that
private equity fund activities may have less potential to create
systemic risk than hedge funds and liquidity funds correct? Many
advisers to private equity funds have noted that certain features of
the private equity business model, such as its reliance on long-term
capital commitments from investors, lack of substantial debt at the
private equity fund level, and investment primarily in the equity of a
diverse range of private companies, mitigate its potential to pose
systemic risk.\77\ Do private equity funds not have any potential to
create systemic risk? Is the monitoring of private equity fund
activities unnecessary to assess systemic risk generally? Please
explain your views and discuss their implications for the reporting
proposed on Form PF.
---------------------------------------------------------------------------

    \77\ See, e.g., PE Council Letter, supra note 49; Testimony of
Mark Tresnowksi, General Counsel, Madison Dearborn Partners, before
the Senate Banking Subcommittee on Securities, Insurance and
Investment, July 15, 2009.
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B. Who Must File Form PF

    We propose that any investment adviser registered or required to
register with the SEC that advises one or more private funds must file
a Form PF with the SEC.\78\ A CPO or CTA that also is a registered
investment adviser that advises one or more private funds would be
required to file Form PF with respect to any advised commodity pool
that is a ``private fund.'' By filing Form PF with respect to these
private funds, a CPO will be deemed to have satisfied certain of its
filing requirements for these funds.\79\ Under these rules, most
private fund advisers would be required to complete only section 1 of
Form PF, providing certain basic information regarding any hedge funds
they advise in addition to information about their private fund assets
under management and more generally about their funds' performance and
use of leverage. The information collected under section 1 of Form PF
is described in further detail in section II.D.1 of this Release.
Certain larger private fund advisers would be required to complete
additional sections of Form PF, which require more detailed
information.
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    \78\ Proposed Advisers Act rule 204(b)-1.
    \79\ Proposed CEA rule 4.27(d). A CPO registered with the CFTC
that is also registered as a private fund adviser with the SEC will
be deemed to have satisfied its filing requirements for Schedules B
and C of proposed Form CPO-PQR by completing and filing the
applicable portions of Form PF for each of its commodity pools that
satisfy the definition of ``private fund'' in the Dodd-Frank Act.
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    Three types of ``Large Private Fund Advisers'' would be required to
complete certain additional sections of Form PF: \80\
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    \80\ See proposed Instruction 3 to Form PF.
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     Advisers managing hedge funds that collectively have at
least $1 billion in assets as of the close of business on any day
during the reporting period for the required report;
     Advisers managing a liquidity fund and having combined
liquidity fund and registered money market fund assets of at least $1
billion as of the close of business on any day during the reporting
period for the required report; and
     Advisers managing private equity funds that collectively
have at least $1 billion in assets as of the close of business on the
last day of the quarterly reporting period for the required report.
1. Types of Funds
    Proposed Form PF would define ``hedge fund'' as any private fund
that (1) has a performance fee or allocation calculated by taking into
account unrealized gains; (2) may borrow an amount in excess of one-
half of its net asset value (including any committed capital) or may
have gross notional exposure in excess of twice its net asset value
(including any committed capital); or (3) may sell securities or other
assets short.\81\ As noted above, ``liquidity fund'' would be defined
as any private fund that seeks to generate income by investing in a
portfolio of short term obligations in order to maintain a stable net
asset value per unit or minimize principal volatility for
investors.\82\ ``Private equity fund'' would be defined as any private
fund that is not a hedge fund, liquidity fund, real estate fund,
securitized asset fund or venture capital fund and does not provide
investors with redemption rights in the ordinary course.\83\
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    \81\ See proposed Glossary of Terms to Form PF. This definition
also is the same as the SEC has proposed in amendments to Form ADV.
See Implementing Release, supra note 9. For purposes of the
definition, the fund should not net long and short positions in
calculating its borrowings but should include any borrowings or
notional exposure of another person that are guaranteed by the fund
or that the fund may otherwise be obligated to satisfy. In addition,
a commodity pool that meets the definition of a private fund is
treated as a hedge fund for purposes of Form PF.
    \82\ See proposed Glossary of Terms to Form PF.
    \83\ See proposed Glossary of Terms to Form PF. Proposed Form PF
would define ``real estate fund'' as any private fund that is not a
hedge fund, that does not provide investors with redemption rights
in the ordinary course and that invests primarily in real estate and
real estate-related assets. Proposed Form PF would define
``securitized asset fund'' as any private fund that is not a hedge
fund and that issues asset backed securities and whose investors are
primarily debt-holders. These definitions are designed to encompass
entities that we believe are typically considered real estate or
securitized asset funds, respectively, and are primarily intended to
exclude these types of funds from our definition of private equity
fund to improve the quality of data reported on Form PF relating to
private equity funds. Proposed Form PF would define ``venture
capital fund'' as any private fund meeting the definition of venture
capital fund in rule 203(l)-1 of the Advisers Act for consistency.
See proposed Glossary of Terms to Form PF. See also Private Fund
Exemption Release, supra note 9, for a discussion of proposed
Advisers Act rule 203(l)-1.
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    Our proposed definition of hedge fund would cover any private fund
that has any one of three common characteristics of a hedge fund: A
performance fee using market value (instead of only realized gains),
high leverage or short selling. We are not aware of any standard
definition of a hedge fund,\84\ although we note that our proposed
definition is broadly based on those used in the FSA survey and in the
IOSCO report described in section I.B above and thus generally would
promote international consistency in

hedge fund reporting.\85\ Moreover, we believe that any fund meeting
this definition is an appropriate subject for this higher level of
reporting even if the fund would not otherwise be considered a hedge
fund.
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    \84\ See, e.g. Goldstein v. SEC, 451 F.3d 873 (DC Cir. 2006) (``
`Hedge funds' are notoriously difficult to define. The term appears
nowhere in the federal securities laws, and even industry
participants do not agree upon a single definition.'')
    \85\ The FSA survey is voluntary and does not proscriptively
define a hedge fund, but states that if a fund generally satisfies a
number of the following criteria, it should be deemed to fall within
the scope of the FSA hedge fund survey: (1) Employs investment
management techniques that can include the use of short selling,
derivatives, and leverage; (2) takes in external investor money; (3)
are not UCITS funds; (4) pursue absolute returns; (5) charge
performance-based fees; (6) have broader mandates than traditional
funds which give managers more flexibility to shift strategy; (7)
have higher trading volumes/fund turnover; and (8) frequently set a
high minimum investment limit. The IOSCO Report generally considered
as a hedge fund all investment schemes displaying a combination of
some of the following characteristics: (1) Borrowing and leverage
restrictions are not applied; (2) significant performance fees are
paid to the manager in addition to an annual management fee; (3)
investors are typically permitted to redeem their interests
periodically, e.g., quarterly, semi-annually or annually; (4) often
significant `own' funds are invested by the manager; (5) derivatives
are used, often for speculative purposes, and there is an ability to
short sell securities; and (6) more diverse risks or complex
underlying products are involved. See IOSCO Report, supra note 24,
at 4-5.
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    The Commissions request comment on the hedge fund definition
proposed in Form PF.\86\ Does this proposed definition capture the
appropriate features of funds that should be subject to more detailed
reporting as ``hedge funds''? Many private funds sell short. Is the
bright line of classifying any private fund that engages in short
selling as a hedge fund appropriate? Is the proposed leverage threshold
for hedge funds set at the appropriate level? One alternative approach
we could take is to not define a hedge fund in Form PF and simply
require that all advisers managing in excess of $1 billion in private
fund assets (regardless of strategy) complete section 2 of Form PF.
Would this be a more effective approach? For purposes of Form PF, a
commodity pool satisfying the definition of a ``private fund'' is
categorized as a hedge fund. Is this treatment appropriate?
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    \86\ The SEC previously defined private fund for purposes of
registration of advisers to hedge funds by focusing on the structure
of the fund to differentiate it from other pooled investment
vehicles, while the definition of hedge fund we propose today for
purposes of Form PF reporting focuses on the strategy of the fund in
order to monitor trading strategies and behaviors which could
contribute to systemic risk. See Registration under the Advisers Act
of Certain Hedge Fund Advisers, Investment Advisers Act Release No.
2333 (Dec. 2, 2004), 69 FR 72054 (Dec. 10, 2004) (rulemaking
vacated, Goldstein, 451 F.3d at 884).
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    The proposed definition of liquidity fund is designed to capture
all potential substitutes for money market funds because we believe
these funds may be susceptible to runs and otherwise pose systemic risk
that FSOC will want to monitor. The SEC recognizes that its proposed
definition of liquidity fund potentially could capture some short-term
bond funds. Are there ways that the SEC could define a liquidity fund
to capture all potential substitutes for money market funds, but not
short-term bond funds? The SEC requests comment on the liquidity fund
definition proposed in Form PF.
    Our proposed definition of a private equity fund is intended to
distinguish private equity funds from other private funds based upon
the lack of redemption rights and their not being engaged in certain
investment strategies (such as securitization, real estate or venture
capital), while these funds would typically have performance fees based
on realized gains. Has the SEC appropriately distinguished private
equity funds from other types of private funds in its proposed
definition? Should others be excluded? The SEC requests comment on the
private equity fund definition proposed in Form PF.
2. Large Private Fund Adviser Thresholds
    As noted above, we are proposing $1 billion in hedge fund assets
under management as the threshold for large hedge fund adviser
reporting, $1 billion in combined liquidity fund and registered money
market fund assets under management as the threshold for large
liquidity fund adviser reporting, and $1 billion in private equity fund
assets under management as the threshold for large private equity fund
adviser reporting. Advisers would be required to measure whether these
thresholds have been crossed daily for hedge funds and liquidity funds
and quarterly for private equity funds based on our belief that, as a
matter of ordinary business practice, advisers are aware of hedge fund
and liquidity fund assets under management on a daily basis, but are
likely to be aware of private equity fund assets under management only
on a quarterly basis. We designed these thresholds so that the group of
Large Private Fund Advisers that would be included based on the
proposed thresholds is relatively small in number but represents the
large majority of their respective industries based on assets under
management. For example, we understand that the approximately 200 U.S.-
based advisers managing at least $1 billion in hedge fund assets
represent over 80 percent of the U.S. hedge fund industry based on
assets under management.\87\ Similarly, SEC staff estimates that the
approximately 250 U.S.-based advisers managing over $1 billion in
private equity fund assets represent approximately 85 percent of the
U.S. private equity fund industry based on committed capital.\88\
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    \87\ See HFI, supra note 20.
    \88\ Preqin. The Preqin data relating to private equity fund
committed capital is available in File No. S7-05-11.
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    The SEC is proposing that private fund advisers combine liquidity
fund and registered money market fund assets for purposes of
determining whether the adviser meets the threshold for more extensive
reporting regarding its liquidity funds because it understands that an
adviser's liquidity funds and registered money market funds often
pursue similar strategies and invest in the same securities and thus
are subject to many of the same risks. Historically, most advisers of
enhanced cash funds or other unregistered money market funds also
advised a substantial amount of registered money market fund assets,
and so the SEC's criteria for liquidity fund reporting is expected to
encompass most significant managers of liquidity funds, which it
estimates number around 80 advisers.\89\
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    \89\ See, e.g., iMoneyNet, Enhanced Cash Report (3rd quarter
2009). The estimate of the number of large liquidity fund advisers
is based on the number of advisers with at least $1 billion in
registered money market fund assets under management.
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    We believe that requiring basic information from all advisers about
all private funds but more extensive and detailed information only from
advisers with these amounts of assets under management in hedge funds,
private equity funds, and liquidity funds would allow FSOC to
effectively conduct basic monitoring for potential systemic risk in
these private fund industries and to identify areas where OFR may want
to obtain additional information. In addition, requiring that only
these Large Private Fund Advisers complete additional reporting
requirements under Form PF would provide systemic risk information for
most private fund assets while minimizing burdens on smaller private
fund advisers that are less likely to pose systemic risk concerns. The
proposed approach thus incorporates Congress' directive in section 408
of the Dodd-Frank Act to take into account the size, governance, and
investment strategy of advisers to mid-sized private funds in
determining whether they pose systemic risk and formulating systemic
risk reporting and recordkeeping requirements for private funds.\90\
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    \90\ We note that the SEC has proposed to collect information
regarding the governance of private fund advisers through Form ADV.
See Implementing Release, supra note 9.

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

    We request comment on the proposed thresholds. Are there more
appropriate dividing lines as to when a private fund adviser should be
required to report more information? Should any of the assets under
management thresholds be lower or higher? Are the daily (for hedge fund
and liquidity fund managers) and quarterly (for private equity fund
managers) measurement periods for the assets under management
thresholds set appropriately? Should we, as proposed, base the
threshold on the amount of assets under management? If not, what should
we base it on?
    We request comment on our proposed approach of only requiring these
Large Private Fund Advisers to report additional information on Form
PF. Will collecting the information required by sections 2, 3, and 4 of
Form PF only from advisers managing in excess of these asset thresholds
provide adequate information about potential systemic risk in these
industries? Should we instead require that all private fund advisers
registered with the SEC complete all of the information on Form PF
appropriate to the type of private funds they advise regardless of fund
size or assets under management? Are there advisers to other types of
private funds that should be required to report more information on
Form PF? For example, should advisers to other types of private fund
report more information if they manage in excess of a certain threshold
of that type of private fund assets?
3. Aggregation of Assets Under Management
    For purposes of determining whether an adviser is a Large Private
Fund Adviser for purposes of Form PF, each adviser would have to
aggregate together:
     Assets of managed accounts advised by the firm that pursue
substantially the same investment objective and strategy and invest in
substantially the same positions as the private fund (``parallel
managed accounts''); \91\ and
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    \91\ See proposed Instructions 3, 5, and 6 to Form PF; and
proposed Glossary of Terms to Form PF. See also definitions of
``hedge fund assets under management,'' ``liquidity fund assets
under management,'' and ``private equity fund assets under
management'' in the proposed Glossary of Terms to Form PF.
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     Assets of that type of private fund advised by any of the
adviser's ``related persons.'' \92\

    \92\ See proposed Instructions 3 and 5 to Form PF. ``Related
person'' is defined generally as: (1) All of the adviser's officers,
partners, or directors (or any person performing similar functions);
(2) all persons directly or indirectly controlling, controlled by,
or under common control with the adviser; and (3) all of the
adviser's employees (other than employees performing only clerical,
administrative, support or similar functions). See proposed Glossary
of Terms to Form PF and Glossary of Terms to Form ADV. The adviser
would be permitted, but not required, to file one consolidated Form
PF for itself and its related persons. See section II.B.4 of this
Release below.
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These proposed aggregation requirements are designed to prevent an
adviser from avoiding the proposed Large Private Fund Adviser reporting
requirements by re-structuring the manner of providing private fund
advice internally within the private fund manager group. The adviser
also would be required to exclude any assets in any account that are
solely invested in other funds (i.e., internal or external fund of
funds) in order to avoid duplicative reporting.\93\ We request comment
on these proposed aggregation requirements. Would these proposed
aggregation rules appropriately meet our goal of preventing improper
avoidance of the reporting requirements while giving a complete picture
of private fund assets managed by a particular private fund adviser
group? Would aggregating in a different manner be more effective at
meeting our goal? Should funds that invest most (e.g., 95 percent), but
not all, of their assets in other funds be excluded from Form PF
reporting? Would excluding such funds still provide FSOC with a
complete enough picture of private fund activities to have an adequate
baseline for systemic risk monitoring purposes?
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    \93\ See proposed Instruction 7 to Form PF.
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    If the adviser's principal office and place of business is outside
the United States, the adviser could exclude any private fund that
during the last fiscal year was neither a United States person nor
offered to, or beneficially owned by, any United States person.\94\
This aspect of the proposed form is designed to allow an adviser to
report with respect to only those private funds that are more likely to
implicate U.S. regulatory interests. We request comment on this aspect
of the proposed form. Should we require different reporting relating to
foreign advisers or foreign private funds?
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    \94\ See proposed Instruction 1 to Form PF. ``United States
person'' would have the meaning provided in proposed rule 203(m)-1
of the Advisers Act, and ``principal office and place of business''
would have the same meaning as in Form ADV. See Private Fund
Exemption Release, supra note 9.
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4. Reporting for Affiliated and Subadvised Funds
    To provide private fund advisers with reporting flexibility and
convenience, the adviser could, but is not required to, report the
private fund assets that it manages and the private fund assets that
its related persons manage on a single Form PF.\95\ This would allow
affiliated entities that share reporting and risk management systems to
report jointly while also permitting affiliated entities that operate
separately to report separately. With respect to sub-advised funds, to
prevent duplicative reporting, only one adviser would report
information on Form PF with respect to that fund. For reporting
efficiency and to prevent duplicative reporting, we are proposing that
if an adviser completes information on Schedule D of Form ADV with
respect to any private fund, the same adviser would be responsible for
reporting on Form PF with respect to that fund.\96\ We request comment
on this approach. Should we not allow advisers to file a consolidated
form with its related persons? Are there other persons related to a
private fund adviser that should also be able to report on Form PF on a
consolidated basis? For example, should we adjust Form PF to permit
consolidated reporting with related persons that are exempt reporting
advisers in the event an adviser chooses to voluntarily report exempt
reporting adviser information? Should we allow a different arrangement
on reporting of sub-advised funds? If so, what would those arrangements
be?
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    \95\ See proposed Instruction 2 to Form PF. See supra note 92
for the definition of ``related person.''
    \96\ See proposed Instruction 4 to Form PF.
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5. Exempt Reporting Advisers and Other Advisers Not Registered With the
SEC
    We are proposing that only private fund advisers registered with
the SEC (including those that are also registered with the CFTC as CPOs
or CTAs) file Form PF.\97\ The Dodd-Frank Act created exemptions from
SEC registration under the Advisers Act for advisers solely to venture
capital funds or for advisers to private funds that in the aggregate
have less than $150 million in assets under management in the United
States (``exempt reporting advisers'').\98\ We are not proposing that
exempt reporting advisers be required to file Form PF.\99\ We believe
that Congress' determination to exempt these advisers from SEC
registration indicates Congress' belief that they are sufficiently
unlikely to pose systemic risk that regular reporting of detailed
information may not be necessary.\100\ Based on consultation

with staff representing FSOC's members and on the basic information
that the SEC has proposed requiring exempt reporting advisers report to
the SEC on Form ADV, the SEC is not proposing to extend Form PF
reporting to these advisers.
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    \97\ See proposed Advisers Act rule 204(b)-1.
    \98\ See Private Fund Exemption Release, supra note 9;
Implementing Release, supra note 9.
    \99\ To the extent an exempt reporting adviser is registered
with the CFTC as a CPO or CTA, that adviser would be obligated to
file either proposed Form CPO-PQR or CTA-PR, respectively.
    \100\ See Senate Committee Report, supra note 4, at 74 (``The
Committee believes that venture capital funds * * * do not present
the same risks as the large private funds whose advisers are
required to register with the SEC under this title. Their activities
are not interconnected with the global financial system, and they
generally rely on equity funding, so that losses that may occur do
not ripple throughout world markets but are borne by fund investors
alone.''). See also Private Fund Exemption Release, supra note 9.
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    Our proposed rules, however, would require some advisers managing
less than $150 million in private fund assets to report limited
information on Form PF. While Congress exempted from registration with
the SEC advisers solely to private funds that in the aggregate have
less than $150 million in assets under management, it provided no such
exemption for advisers with less than $150 million in private fund
assets under management that also, for example, advise individual
clients with over $100 million in assets under management. Because this
latter group of advisers is registered with the SEC and thus is subject
to the full range of investor protection efforts that accompany
registration, and because of the limited burden of the basic reporting,
we believe it is appropriate to require these advisers to complete and
file section 1 of Form PF. We request comment on this approach. Should
we require that exempt reporting advisers file Form PF? \101\ Why or
why not? If so, which portions of Form PF should we require that exempt
reporting advisers complete?
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    \101\ Section 404 of the Dodd-Frank Act states that the SEC
``shall issue rules requiring each investment adviser to a private
fund to file reports containing such information as the [SEC] deems
necessary and appropriate in the public interest and for the
protection of investors or for the assessment of systemic risk,''
(emphasis added).
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C. Frequency of Reporting

    The Commissions propose to require that all private fund advisers
other than the Large Private Fund Advisers discussed above complete and
file a Form PF on an annual basis. A newly registering adviser's
initial Form PF filing would be submitted within 15 days of the end of
its next occurring calendar quarter after registering with the SEC so
that FSOC can begin including this data in its analysis as soon as
possible.\102\ Annual updates would be due no later than the last day
on which the adviser may timely file its annual updating amendment to
Form ADV (currently, 90 days after the end of the adviser's fiscal
year).\103\ This frequency of reporting would allow the Commissions and
FSOC to periodically monitor certain key information relevant to
assessing systemic risk posed by these private funds on an aggregate
basis. It also would allow these advisers to file amendments at the
same time as they file their Form ADV annual updating amendment, which
may make certain aspects of the reporting more efficient, such as
reporting assets under management. Finally, this timing will facilitate
FSOC's compilation and analysis of Form PF and Form ADV data for these
filers since both sets of data will be reported as of the same date.
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    \102\ See proposed rule 204(b)-1(a).
    \103\ See proposed Advisers Act rule 204(b)-1(e).
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    Large Private Fund Advisers would be required to complete and file
a Form PF no later than 15 days after the end of each calendar
quarter.\104\ Our preliminary view is that, unlike for smaller private
fund advisers, quarterly reporting for Large Private Fund Advisers is
necessary in order to provide FSOC with timely data to identify
emerging trends in systemic risk. We understand that hedge fund
advisers already collect and calculate much of the information that
would be required by Form PF relating to hedge funds on a quarterly
basis.\105\ As a result, quarterly reporting on Form PF would coincide
with most hedge fund advisers' internal reporting cycles and leverage
data collection systems and processes already existing at these
advisers. In addition, we believe that most liquidity fund advisers
collect on a monthly basis much of the information that we are
proposing be reported in section 3 of Form PF and thus quarterly
reporting should be relatively efficient for these advisers. We
anticipate that Large Private Fund Advisers would be able to collect
and file this information within 15 days after the end of each quarter,
which is sufficiently timely for FSOC's use in conducting systemic risk
monitoring.
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    \104\ See proposed Instruction 7 to Form PF.
    \105\ See Report of the Asset Manager's Committee to the
President's Working Group on Financial Markets, Best Practices for
the Hedge Fund Industry (Jan. 15, 2009), available at http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf (discussing
best practices on disclosing to investors performance data, assets
under management, risk management practices (including on asset
types, geography, leverage, and concentrations of positions) with
which SEC staff understands many hedge funds comply).
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    Advisers would be required to file Form PF to report that they are
transitioning to only filing Form PF annually with the Commissions or
to report that they no longer meet the requirements for filing Form PF
no later than the last day on which the adviser's next Form PF update
would be timely.\106\ This would allow us to determine promptly whether
an adviser's discontinuance in reporting is due to it no longer meeting
the form's reporting thresholds as opposed to a lack of attention to
its filing obligations. Advisers also would be able to avail themselves
of a temporary hardship exemption in a similar manner as with other
Commission filings if they are unable to file Form PF electronically in
a timely manner due to unanticipated technical difficulties.\107\
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    \106\ See proposed Instruction 8 to Form PF.
    \107\ See proposed rule 204(b) 1(f). The adviser would check the
box in Section 1a of Form PF indicating that it was requesting a
temporary hardship exemption and complete Section 5 of Form PF no
later than one business day after the electronic Form PF filing was
due and submit the filing that is the subject of the Form PF paper
filing in electronic format with the Form PF filing system no later
than seven business days after the filing was due.
---------------------------------------------------------------------------

    We request comment on our proposed filing frequency. Are the filing
requirements for private fund advisers frequent enough to assess high-
level systemic risk posed by private funds? Should smaller private fund
advisers have to file more frequently or less frequently? Should Large
Private Fund Advisers be required to file Form PF more frequently (such
as monthly) or less frequently (such as annually or semiannually)? Is
90 days for an annual update or 15 days for a quarterly update too long
to ensure reporting of timely information? Would more or less time be
more appropriate? Specifically, would 15 days be enough time for Large
Private Fund Advisers to prepare and file quarterly reports? Is there
information in the form that should be amended promptly if it becomes
inaccurate? Should Large Private Fund Advisers be required to file Form
PF as of the end of each calendar quarter or as of the end of each
fiscal quarter?
    Currently, we anticipate that the proposed rules requiring filing
of Form PF would have a compliance date of December 15, 2011, at which
time Large Private Fund Advisers would begin filing 15 days after the
end of each quarter (i.e., Large Private Fund Advisers would need to
make their initial Form PF filing by January 15, 2012). This timing
should allow sufficient time for Large Private Fund Advisers to develop
systems for collecting the information required on Form PF and prepare
for filing. We currently anticipate that this timeframe also would give
the SEC sufficient time to create and program a system to accept
filings of Form PF.\108\ We are proposing

that the rules allow smaller private fund advisers until 90 days after
the end of their first fiscal year occurring on or after the compliance
date of the proposed rule to file their first Form PF (with the
expectation that this would result in smaller private fund advisers
with a December 31 fiscal year end filing their first Form PF by March
31, 2012) because we anticipate that some of these advisers may require
more time to prepare for their initial Form PF filing and so that the
first group of private fund advisers filing Form PF would all be
reporting based generally on information as of December 31, 2011.\109\
Under this proposed compliance date and transition rule, smaller
private fund advisers would have at least eight months after adoption
of the proposed form, depending on their fiscal year end, to file their
first Form PF. We request comment on when advisers should be required
to comply with the proposed rules and file Form PF. Do the compliance
dates and transition times that we have proposed provide sufficient
time for smaller advisers and Large Private Fund Advisers to prepare
for filing?
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    \108\ The SEC will work closely with the firm it selects to
create and program a system for Form PF filings and will monitor
whether it could do so on this timeframe.
    \109\ See proposed Advisers Act rule 204(b)-1(g).
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D. Information Required on Form PF

    The questions contained in proposed Form PF reflect relevant
requirements and considerations under the Dodd-Frank Act, consultations
with staff representing FSOC's members, and the Commissions' experience
in regulating those private fund advisers that are already registered
with the Commissions. As discussed above, with respect to hedge fund
advisers in particular, the information we propose requiring registered
advisers to file on Form PF also is broadly based on the guidelines
discussed in the IOSCO Report with many of the more detailed items
generally tracking questions contained in the surveys of large hedge
fund advisers conducted by the FSA and other IOSCO members.\110\ We
expect that the information collected on Form PF would assist FSOC in
monitoring and assessing any systemic risk, as discussed in section
II.A above, that may be posed by private funds. We discuss below the
information that Form PF would require.
---------------------------------------------------------------------------

    \110\ See supra note 24.
---------------------------------------------------------------------------

1. Section 1
    Section 1 would apply to all investment advisers required to file
Form PF. Item A of Section 1a seeks identifying information about the
adviser, such as its name and the name of any of its related persons
whose information is also reported on the adviser's Form PF. Section 1a
also would require reporting of basic aggregate information about the
private funds managed by the adviser, such as total and net assets
under management, and the amount of those assets that are attributable
to certain types of private funds.\111\ This identifying information
would assist us and FSOC in monitoring the amount of assets managed by
private fund advisers and the general distribution of those assets
among various types of private funds.
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    \111\ Section 1 would require the adviser to indicate the
adviser's total ``regulatory assets under management,'' using the
same proposed definition of that term as used on proposed amendments
to Part 1 of Form ADV, and its net assets under management, which
subtracts out any liabilities of the private funds. See Implementing
Release, supra note 9. Form PF, however, would require the adviser
to aggregate parallel managed accounts with related private funds in
reporting its assets under management (even if the accounts are not
``securities portfolios'' within the meaning of proposed Instruction
5.b, Instructions to Part 1A of Form ADV), and thus the total and
net assets under management figures reported in section 1a of Form
PF may differ from what the adviser reports on Form ADV. Proposed
question 2 would require the adviser to report what portion of these
assets under management are attributable to hedge funds, liquidity
funds, private equity funds, real estate funds, securitized asset
funds, venture capital funds, other private funds, and funds and
accounts other than private funds. See section II.B.1 of this
Release for a discussion of these different types of funds and their
proposed definitions for purposes of Form PF.
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    Section 1b of Form PF would elicit certain identifying and other
basic information about each private fund advised by the investment
adviser. The adviser generally would need to complete a separate
section 1b for each private fund it advised. However, because feeder
funds typically invest substantially all their assets in a master fund,
to prevent duplicative reporting the adviser must report information in
section 1b on an aggregated basis for private funds that are part of a
master-feeder arrangement and so would not file a separate section 1b
for any feeder fund.\112\
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    \112\ See proposed Instructions 5 and 6 to Form PF. When
providing responses in Form PF with respect to a private fund, the
adviser also must include any parallel managed accounts related to
the private fund. Id.
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    Section 1b would require reporting of each private fund's gross and
net assets and the aggregate notional value of its derivative
positions.\113\ It also would require basic information about the
fund's borrowings, including a breakdown of the fund's borrowing based
on whether the creditor is a U.S. financial institution, foreign
financial institution or non-financial institution as well as the
identity of, and amount owed to, each creditor to which the fund owed
an amount equal to or greater than 5 percent of the fund's net asset
value as of the reporting date. This section would require reporting of
certain basic information about how concentrated the fund's investor
base is, such as the number of beneficial owners of the fund's equity
and the percentage of the fund's equity held by the five largest equity
holders.\114\ Finally, section 1b would require monthly and quarterly
performance information about each fund.
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    \113\ The form would require the adviser to report the total
gross notional value of its funds' derivative positions, except that
options would be reported using their delta adjusted notional value.
Long and short positions would not be netted. See proposed Form PF,
instructions to question 11.
    \114\ See proposed question 12 on Form PF.
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    The information required by section 1b would allow FSOC to monitor
certain systemic trends for the broader private fund industry, such as
how certain kinds of private funds perform and exhibit correlated
performance behavior under different economic and market conditions and
whether certain funds are taking significant risks that may have
systemic implications.\115\ It would allow FSOC to monitor borrowing
practices for the broader private fund industry, which may have
interconnected impacts on banks (including specific banks) and thus the
broader financial system. We believe that collecting both monthly and
quarterly performance data also would allow FSOC to monitor the data at
sufficient granularity to track trends.
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    \115\ This information also would be useful for advancing the
Commissions' investor protection goals.
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    Finally, section 1c would require reporting of certain information
only about hedge funds managed by the adviser, such as their investment
strategies, percentage of the fund's assets managed using computer-
driven trading algorithms, significant trading counterparty exposures
(including identity of counterparties),\116\ and trading and clearing
practices.\117\ This information will enable FSOC to

monitor systemic risk that could be transmitted through counterparty
exposure, track how different strategies are affected by and correlated
with different market stresses, and follow the extent of private fund
activities conducted away from regulated exchanges and clearing
systems. We have based some of this information, such as information
about significant trading counterparty exposures and trading and
clearing practices, on the FSA surveys, which would promote
international consistency in hedge fund reporting.\118\
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    \116\ Specifically, proposed questions 19 and 20 on Form PF
would require the adviser to identify the five trading
counterparties to which the fund has the greatest net counterparty
credit exposure (measured as a percentage of the fund's net asset
value) and that have the greatest net counterparty credit exposure
to the fund (measured in U.S. dollars).
    \117\ More specifically, proposed question 21 on Form PF would
require estimated breakdowns of percentages of the hedge fund's
securities and derivatives traded on a regulated exchange versus
over the counter and percentages of the hedge fund's securities,
derivatives, and repos cleared by a central clearing counterparty
(``CCP'') versus bilaterally (or, in the case of repos, that
constitute a tri-party repo).
    \118\ For example, the FSA survey asks for identification of the
hedge fund's top five counterparties in terms of net credit
exposure. It also asks for estimates of the percentage of the fund's
securities or derivatives traded on a regulated exchange versus over
the counter and the percentage of the fund's derivatives and repos
cleared by a CCP versus bilaterally.
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    We request comment on section 1 of proposed Form PF. Is there
additional basic information that we should require from all advisers
filing Form PF or regarding all of the hedge funds or other private
funds that they manage? For example, should we require any of the more
detailed information about their borrowing practices that we require
regarding large hedge funds in Item B of section 2b? Is a creditor
providing 5 percent of the fund's borrowings an appropriate threshold
for significant creditors of whose identity FSOC may want to be aware
for purposes of assessing the fund's interconnectedness in the
financial system? Should the threshold be more or less? Are the top
five equity holders in the fund an appropriate threshold for
significant investors in the fund? Should the threshold be more or
less? Should we require assets under management information for other
private fund categories than those specified in question 4? Should we
request that performance data be reported on a different basis than
monthly and quarterly? Are there other primary investment strategies
that hedge funds use that should be included in question 17? Is the
information we have proposed requiring on the fund's borrowings
necessary given that other questions in section 1b ask for information
on the fund's gross and net assets? Will asking for the amount and
identity of the five trading counterparties to which the fund has the
greatest net counterparty credit exposure and that have the greatest
net counterparty credit exposure to the fund appropriately track
significant exposures for systemic risk assessment purposes? Have we
requested appropriate information on trading and clearing practices
sufficient to allow FSOC to examine systemic risks relating to trading
and clearing outside of regulated exchanges and central clearing
systems? Is there information in section 1 that we should not require,
or that we should only require of large hedge fund advisers and why?
With respect to the aggregation of master-feeder arrangements for
reporting purposes, are there common situations in which an adviser
will not have sufficient access to a feeder fund's information to
report accurately on Form PF? If so, how should the form address those
situations? We also request comment more generally on the definitions
of terms we have proposed in the glossary of terms for Form PF.
2. Section 2
    Form PF would require private fund advisers who had at least $1
billion in hedge fund assets under management as of the close of
business on any day during the reporting period to complete section
2.\119\ Section 2a would require certain aggregate information about
the hedge funds advised by Large Private Fund Advisers, such as the
market value of assets invested (on a short and long basis) in
different types of securities and commodities (e.g., different types of
equities, fixed income securities, derivatives, and structured
products). It also would require the adviser to report the duration of
fixed income portfolio holdings (including asset backed securities), to
indicate the assets' interest rate sensitivity, as well as the turnover
rate of the adviser's aggregate portfolios during the reporting period
to provide an indication of the adviser's frequency of trading.
Finally, the adviser would be required to report a geographic breakdown
of investments held by the hedge funds it advises.
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    \119\ See section II.B of this Release.
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    This information would assist FSOC in monitoring asset classes in
which hedge funds may be significant investors and trends in hedge
funds' exposures to allow FSOC to identify concentrations in particular
asset classes (or in particular geographic regions) that are building
or transitioning over time. It would aid FSOC in examining large hedge
fund advisers' role as a source of liquidity in different asset
classes. In some cases, we are proposing that the information be broken
down into categories that would facilitate FSOC's use of flow of funds
information, which is an important tool for evaluating trends in and
risks to the U.S. financial system.\120\ This information also is
designed to address requirements under section 404 of the Dodd-Frank
Act specifying certain mandatory contents for records and reports that
must be maintained and filed by advisers to private funds. For example,
it would provide information about the types of assets held and trading
and investment positions and practices.
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    \120\ For example, we are proposing that in some cases the data
be broken down between issuers that are financial institutions and
those that are not. The FRB publishes flow of funds data, which is
available at http://www.federalreserve.gov/releases/z1/.
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    Section 2b of Form PF would require large hedge fund advisers to
report certain additional information about any hedge fund they advise
with a net asset value of at least $500 million as of the close of
business on any day during the reporting period (a ``qualifying hedge
fund'').\121\ For purposes of determining whether a private fund is a
qualifying hedge fund, the adviser would have to aggregate any parallel
managed accounts, parallel funds, and funds that are part of the same
master-feeder arrangement, and would have to treat any private funds
managed by its related person as if they were managed by the filing
adviser.\122\ We are proposing this aggregation to prevent an adviser
from structuring its activities to avoid the reporting requirement. We
have selected $500 million as a threshold for more extensive individual
hedge fund reporting because we believe that a $500 million hedge fund
is a substantial fund the activities of which could have an impact on
particular markets in which it invests or on its particular
counterparties. We also believe that setting this threshold at this
level would minimize reporting burdens on advisers to smaller or start
up hedge funds that are less likely to have a systemic impact. Finally,
this threshold is the same threshold used by the FSA in its hedge fund
surveys and thus would create a certain level of consistency in
reported data.
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    \121\ See proposed Instruction 3 to Form PF. Advisers should not
complete section 2 with respect to assets managed by a fund of hedge
funds. See proposed Instruction 7 to Form PF.
    \122\ See proposed Instructions 5 and 6 to Form PF. Parallel
funds are a structure in which one or more private funds pursues
substantially the same investment objective and strategy and invests
side by side in substantially the same positions as another private
fund. See proposed Glossary of Terms to Form PF.
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    We request comment on the qualifying hedge fund threshold. Should
it be lower or higher? If so, why? Should large hedge fund advisers
have to report the information for all their hedge funds? Could all of
such advisers' hedge funds, in the aggregate, potentially have a
systemic impact that would merit such

reporting? Should Form PF have different requirements regarding
aggregating parallel managed accounts, parallel funds, or feeder funds
or aggregating hedge funds managed by affiliates?
    Section 2b would require reporting of the same information as that
requested in section 2a regarding exposure to different types of
assets.\123\ In this section, however, this information would be
reported separately for each qualifying hedge fund the adviser manages.
Section 2b also would require on a per fund basis data not requested in
section 2a. The adviser would be required to report information
regarding the qualifying hedge fund's portfolio liquidity,
concentration of positions, collateral practices with significant
counterparties, and the identity of, and clearing relationships with,
the three central clearing counterparties to which the fund has the
greatest net counterparty credit exposure.\124\ This information is
designed to assist FSOC in monitoring the composition of hedge fund
exposures over time as well as the liquidity of those exposures. The
information also would aid FSOC in its monitoring of credit
counterparties' unsecured exposure to hedge funds as well as the hedge
fund's exposure and ability to respond to market stresses and
interconnectedness with central clearing counterparties. Finally, some
of this information, such as information about the identity of three
central clearing counterparties to which the fund has the greatest net
counterparty credit exposure and fund asset liquidity information, was
broadly based on information requested by the FSA survey, which would
promote international consistency in hedge fund reporting.\125\
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    \123\ See proposed question 26 on Form PF.
    \124\ See proposed questions 27-34 on Form PF. For example,
question 28 would require reporting of the percentage of the fund's
portfolio capable of being liquidated within different time periods.
Question 31 would require reporting, for each position that
represents 5% or more of the fund's net asset value, of the
position's portion of the fund's net asset value and sub-asset
class. Questions 32 and 33 would require reporting of initial and
variation margin for collateral securing exposure to the fund's top
five counterparty groups as well as the face amount of letters of
credit posted and certain information on rehypothecation of such
collateral.
    \125\ For example, the FSA survey asks for the percentage of the
hedge fund's portfolio that can be liquidated within different time
periods and the identity of the fund's top three CCPs in terms of
net credit exposure.
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    Section 2b also would require for each qualifying hedge fund data
regarding certain hedge fund risk metrics, financing information, and
investor information. If during the reporting period the adviser
regularly calculated a value at risk (``VaR'') metric for the
qualifying hedge fund, the adviser would have to report VaR for each
month of the reporting period.\126\ The form also would require the
adviser to report the impact on the fund's portfolio from specified
changes to certain identified market factors, if regularly considered
in the fund's risk management, broken down by the long and short
components of the qualifying hedge fund's portfolio.\127\ This
information is designed to allow FSOC to track basic sensitivities of
the hedge fund to common market sensitivities, correlations in those
factor sensitivities, and trends in those factor sensitivities among
large hedge funds.
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    \126\ If VaR was calculated, the adviser would have to report
the confidence interval, time horizon, whether any weighting was
used, and the method used to calculate VaR (historical simulation,
Monte Carlo simulation, parametric, or other). If applicable, the
adviser would have to report the historical lookback period used.
The adviser would also have to report if it did not regularly
calculate VaR. See proposed question 35 on Form PF.
    \127\ The market factors are changes in: equity prices, risk
free interest rates, credit spreads, currency rates, commodity
prices, option implied volatilities, ABS default rates, and
corporate bond default rates. Advisers are permitted to omit a
response with respect to any market factor that it did not regularly
consider in the reporting fund's risk management. However, to be
``regularly considered'' in the fund's risk management does not
require that the adviser have conducted stress testing on that
market factor (it could simply mean, for example, that the fund's
risk managers recognized that such a market factor could have an
impact on the fund's portfolio). See proposed question 36 on Form PF
and related instructions.
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    Item D of Section 2b would require reporting of certain financing
information for each qualifying hedge fund, including a monthly
breakdown of its secured and unsecured borrowing and its derivatives
exposures as well as information about the value of the collateral and
letters of credit supporting the secured borrowing and derivatives
exposures and the types of creditors. It also would require a breakdown
of the term of the fund's committed financing. This information would
assist FSOC in monitoring the qualifying hedge fund's leverage, the