[Federal Register Volume 76, Number 221 (Wednesday, November 16, 2011)]
[Rules and Regulations]
[Pages 71128-71239]
[FR Doc No: 2011-28549]

Vol. 76

Wednesday,

No. 221

November 16, 2011

Part II

Commodities and Future Trading Commission

Securities and Exchange Commission

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

17 CFR Parts 4, 275 and 279

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

Federal Register / Vol. 76 , No. 221 / Wednesday, November 16, 2011 /
Rules and Regulations

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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-3308; 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 final rules.

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

SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, ``we'' or
the ``Commissions'') are adopting 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 new SEC rule requires investment advisers
registered with the SEC that advise one or more private funds and have
at least $150 million in private fund assets under management to file
Form PF with the SEC. The new CFTC rule requires commodity pool
operators (``CPOs'') and commodity trading advisors (``CTAs'')
registered with the CFTC to satisfy certain CFTC filing requirements
with respect to private funds, should the CFTC adopt such 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 are required to
file Form PF under the Advisers Act. The new CFTC rule also allows such
CPOs and CTAs to satisfy certain CFTC filing requirements with respect
to commodity pools that are not private funds, should the CFTC adopt
such requirements, by filing Form PF with the SEC. Advisers must file
Form PF electronically, on a confidential basis. 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.

DATES: The effective date for the addition of 17 CFR 4.27 (rule 4.27
under the Commodity Exchange Act), 17 CFR 275.204(b)-1 (rule 204(b)-1
under the Investment Advisers Act of 1940) and 17 CFR 279.9 (Form PF),
as well as the revision to the authority citation for 17 CFR part 4, is
March 31, 2012. See section III of this Release for compliance dates.

FOR FURTHER INFORMATION CONTACT: CFTC: Amanda L. Olear, Special
Counsel, Telephone:<PHONE_NUMBER>, Email<EMAIL_ADDRESS>or Kevin P.
Walek, Assistant Director, Telephone:<PHONE_NUMBER>, Email:
<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, Senior
Counsel, or Sarah G. ten Siethoff, Senior Special Counsel, 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 adopting rule 4.27 [17 CFR 4.27]
under the Commodity Exchange Act (``CEA'') \1\ and Form PF.\2\ The SEC
is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] and Form PF [17 CFR
279.9] under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
(``Advisers Act'').\3\
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 1a.
    \2\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the Form. Sections 3 and 4 of
the Form are adopted solely by the SEC.
    \3\ 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 will be
published. In addition, when we refer to the ``Investment Company
Act,'' or any paragraph of the Investment Company Act, we are
referring to 15 U.S.C. 80a of the United States Code, at which the
Investment Company Act of 1940 is codified.

Table of Contents

I.Background
    A. The Dodd-Frank Act and the Financial Stability Oversight
Council
    B. International Coordination
II. Discussion
    A. Who Must File Form PF
    1. ``Hedge Fund'' Definition
    2. ``Liquidity Fund'' Definition
    3. ``Private Equity Fund'' Definition
    4. Large Private Fund Adviser Thresholds
    5. Aggregation of Assets Under Management
    6. Reporting for Affiliated and Sub-Advised Funds
    7. Exempt Reporting Advisers
    B. Frequency of Reporting
    1. Annual and Quarterly Reporting
    2. Reporting Deadlines
    3. Initial Reports
    4. Transition Filings, Final Filings and Temporary Hardship
Exemptions
    C. Information Required on Form PF
    1. Section 1 of Form PF
    2. Section 2 of Form PF
    3. Section 3 of Form PF
    4. Section 4 of Form PF
    5. Aggregation of Master-Feeder Arrangements, Parallel Fund
Structures, and Parallel Managed Accounts
    D. Confidentiality of Form PF Data
    E. Filing Fees and Format for Reporting
III. Effective and Compliance Dates
IV. Paperwork Reduction Act
    A. Burden Estimates for Annual Reporting by Smaller Private Fund
Advisers
    B. Burden Estimates for Large Hedge Fund Advisers
    C. Burden Estimates for Large Liquidity Fund Advisers
    D. Burden Estimates for Large Private Equity Advisers
    E. Burden Estimates for Transition Filings, Final Filings, and
Temporary Hardship Exemption Requests
    F. Aggregate Hour Burden Estimates
    G. Cost Burden
V. Economic Analysis
    A. Benefits
    B. Costs
    C. CFTC Statutory Findings
    1. General Costs and Benefits
    2. Section 15(a) Determination
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the New Rule
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority
Text of Final Rules

I. Background

A. The Dodd-Frank Act and the Financial Stability Oversight Council

    On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\4\
One significant 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.\5\
To further this goal, the Act establishes the Financial Stability
Oversight Council (``FSOC'') and directs it to monitor risks to the
U.S. financial system. The Act also gives FSOC a number of tools to
carry out this mission.\6\ For instance, FSOC may

determine that a nonbank financial company will be subject to the
supervision of the Board of Governors of the Federal Reserve System
(``FRB'') if the company may pose risks to U.S. financial stability as
a result of its activities or in the event of its material financial
distress.\7\ In addition, FSOC may issue recommendations to primary
financial regulators, like the SEC and CFTC, for more stringent
regulation of financial activities that FSOC determines may create or
increase systemic risk.\8\
---------------------------------------------------------------------------

    \4\ Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ S. Rep. No. 111-176, at 2-3 (2010) (``Senate Committee
Report'').
    \6\ See Sections 113 and 120 of the Dodd-Frank Act. In a recent
rulemaking release, FSOC explained that its response to any
potential threat to financial stability will be based on an
assessment of the circumstances. See Authority to Require
Supervision and Regulation of Certain Nonbank Financial Companies,
Financial Stability Oversight Counsel Release (Oct. 11, 2011)
(``FSOC Second Notice'').
    \7\ Section 113 of the Dodd-Frank Act. The Dodd-Frank Act also
directs FSOC to recommend to the FRB heightened prudential standards
for designated nonbank financial companies. Section 112(a)(2) of the
Dodd-Frank Act.
    \8\ Section 120 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Dodd-Frank Act anticipates that various regulatory agencies,
including the Commissions, will support FSOC.\9\ To that end, the Dodd-
Frank Act amended section 204(b) of the Advisers Act to require that
the SEC establish reporting and recordkeeping requirements for advisers
to private funds,\10\ many of which must also register for the first
time as a consequence of the Dodd-Frank Act.\11\ These new requirements
may include maintaining records and filing 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 SEC and CFTC must jointly issue, after
consultation with FSOC, rules establishing the form and content of any
reports to be filed under this new authority.\13\
---------------------------------------------------------------------------

    \9\ See, e.g., section 112(d)(1) of the Dodd-Frank Act, which
authorizes FSOC to collect information from member agencies to
support its functions. See also FSOC Second Notice, supra note 6
(explaining that information reported on Form PF will be important
to FSOC's policy-making in regard to the assessment of systemic risk
among private fund advisers).
    \10\ 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, 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.
    \11\ See sections 402, 403, 407 and 408 of the Dodd-Frank Act.
The SEC recently adopted rule 203-1(e) providing a transition period
for certain private advisers previously relying on the repealed
exemption in section 203(b)(3) of the Advisers Act. The transition
rule requires these advisers to register with the SEC by March 30,
2012. See Rules Implementing Amendments to the Investment Advisers
Act of 1940, Investment Advisers Act Release No. IA-3221 (June 22,
2011), 76 FR 42950 (July 19, 2011) (``Implementing Adopting
Release''). 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-3222 (June 22, 2011), 76 FR 39646 (July 6, 2011)
(``Exemptions Adopting Release'').
    \12\ The Dodd-Frank Act does not identify specific information
to be included in these reports, but section 204(b) of the Advisers
Act does require that the records and reports required under that
section cumulatively 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.
See Reporting by Investment Advisers to Private Funds and Certain
Commodity Pool Operators and Commodity Trading Advisors on Form PF,
Investment Advisers Act Release No. 3145 (January 26, 2011), 76 FR
8068 (February 11, 2011) (``Proposing Release'') at n. 13 and
accompanying text.
    \13\ See section 211(e) of the Advisers Act.
---------------------------------------------------------------------------

    On January 26, 2011, in a joint release, the CFTC and SEC proposed
new rules and a new reporting form intended to implement this statutory
mandate.\14\ In the release, the SEC proposed new Advisers Act rule
204(b)-1, which would require private fund advisers to file Form PF
periodically with the SEC.\15\ In addition, the CFTC proposed new rule
4.27,\16\ which would require private fund advisers that are also
registered as CPOs or CTAs with the CFTC to satisfy certain proposed
CFTC systemic risk reporting requirements, should the CFTC adopt such
requirements, by filing Form PF.\17\ Today, we are adopting these
proposed rules and Form PF with several changes from the proposal that
are designed to respond to commenter concerns. Consistent with the
proposal, advisers must report on Form PF certain information regarding
the private funds they manage, and this information is intended to
complement information the SEC collects on Form ADV and information the
CFTC separately has proposed to collect from CPOs and CTAs.\18\
Collectively, these reporting forms will provide FSOC and the
Commissions with important information about the basic operations and
strategies of private funds and help establish a baseline picture of
potential systemic risk in the private fund industry.
---------------------------------------------------------------------------

    \14\ As discussed below, Form PF is a joint form between the SEC
and the CFTC only with respect to sections 1 and 2 of the Form.
    \15\ 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. Advisers
solely to venture capital funds or advisers solely to private funds
that in the aggregate have less than $150 million in assets under
management in the United States that rely on the exemption from
registration under, respectively, section 203(l) or 203(m) of the
Advisers Act (``exempt reporting advisers'') are not required to
file Form PF. See infra section II.A.7 of this Release.
    \16\ Because the CFTC is not adopting the remainder of proposed
CEA rule 4.27 at the same time as it is adopting this rule, the CFTC
has modified the designation of CEA rule 4.27(d) to be the sole text
of that section. See Commodity Pool Operators and Commodity Trading
Advisors: Amendments to Compliance Obligations (Jan. 26, 2011), 76
FR 7976 (Feb. 11, 2011) (``CFTC Proposing Release''). Additionally,
the CFTC has made some revisions to the text of rule 4.27 to: (1)
Clarify that the filing of Form PF with the SEC will be considered
substitute compliance with certain CFTC reporting obligations (i.e.,
for Schedules B and C of Form CPO-PQR and Schedule B of Form CTA-PR
as proposed) should the CFTC determine to adopt such requirements
and (2) to allow CPOs and CTAs who are otherwise required to file
Form PF the option of submitting on Form PF data regarding commodity
pools that are not private funds as substitute compliance with
certain CFTC reporting obligations (i.e., for Schedules B and C of
Form CPO-PQR and Schedule B of Form CTA-PR as proposed) should the
CFTC determine to adopt such requirements.
    \17\ 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, the CFTC has
proposed that all private fund advisers that are also registered as
CPOs and CTAs with the CFTC would be required to file Schedule A of
Form CPO-PQR (for CPOs) or Schedule A of Form CTA-PR (for CTAs). See
CFTC Proposing Release, supra note 16.
    \18\ See Proposing Release, supra note 12, at n. 16, comparing
the purposes of Form ADV and Form PF. References in this Release to
Form ADV or terms defined in Form ADV or its glossary are to the
form and glossary as amended in the Implementing Adopting Release,
supra note 11.
---------------------------------------------------------------------------

    The SEC is adopting Advisers Act rule 204(b)-1 and Form PF to
enable FSOC to obtain data that will facilitate monitoring of systemic
risk in U.S. financial markets. Our understanding of the utility to
FSOC of the data to be collected is based on our staffs' consultations
with staff representing the members of FSOC. The design of Form PF is
not intended to reflect a determination as to where systemic risk
exists but rather to provide empirical data to FSOC with which it may
make a determination about the extent to which the activities of
private funds or their advisers pose such risk. The information made
available to FSOC will be collected for FSOC's use by the Commissions
in their role as the primary regulators of private fund advisers. The
policy judgments implicit in the information required to be reported on
Form PF reflect FSOC's role as the primary user of the reported

information for the purpose of monitoring systemic risk. The SEC would
not necessarily have required the same scope of reporting if the
information reported on Form PF were intended solely for the SEC's use.
    We expect the information collected on Form PF and provided to FSOC
will be an important part of FSOC's systemic risk monitoring in the
private fund industry.\19\ We note that, simultaneous with the
consultations between our staffs and the staff representing FSOC's
members, FSOC has been building out its standards for assessing
systemic risk across different kinds of financial firms and has
proposed guidance and standards for determining which nonbank financial
companies should be designated as subject to FRB supervision.\20\ In
its most recent release on this subject, FSOC confirmed that the
information reported on Form PF is important not only to conducting an
assessment of systemic risk among private fund advisers but also to
determining how that assessment should be made.\21\
---------------------------------------------------------------------------

    \19\ See section 204(b) of the Advisers Act. Today, regulators
have little reliable data regarding this rapidly growing sector and
frequently have to rely on data from other sources, which when
available may be incomplete. See, e.g., FSOC 2011 Annual Report,
http://www.treasury.gov/initiatives/fsoc/Pages/annual-report.aspx
(``FSOC 2011 Annual Report'') at 69. The SEC recently adopted
amendments to Form ADV that will require the reporting of important
information regarding private funds, but this includes little or no
information regarding, for instance, performance, leverage or the
riskiness of a fund's financial activities. See Implementing
Adopting Release, supra note 11. The data collected through Form PF
will be more reliable than existing data regarding the industry and
significantly extend the data available through the revised Form
ADV.
    \20\ See, e.g., FSOC Second Notice, supra note 6; Authority to
Require Supervision and Regulation of Certain Nonbank Financial
Companies, Financial Stability Oversight Council Release (Jan. 18,
2011), 76 FR 4555 (Jan. 26, 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).
    \21\ See FSOC Second Notice, supra note 6 (``[FSOC] recognizes
that the quantitative thresholds it has identified for application
during [the initial stage of review] may not provide an appropriate
means to identify a subset of nonbank financial companies for
further review in all cases across all financial industries and
firms. While [FSOC] will apply [such] thresholds to all nonbank
financial companies, including * * * asset management companies,
private equity firms, and hedge funds, these companies may pose
risks that are not well-measured by the quantitative thresholds
approach. * * * Using [Form PF] and other data, [FSOC] will consider
whether to establish an additional set of metrics and thresholds
tailored to evaluate hedge funds and private equity firms and their
advisers.'').
---------------------------------------------------------------------------

    The Commissions received more than 35 letters responding to the
proposal, with trade associations, investment advisers and law firms
accounting for most of the comments. Commenters representing investors
were generally supportive of the proposal but thought it should have
required more of private fund advisers.\22\ Some of these supporters
argued, in particular, for more detailed and more frequent reporting
than we proposed.\23\ In contrast, advisers and those writing on their
behalf expressed concern regarding the scope, frequency and timing of
the proposed reporting.\24\ A number of these commenters generally
supported the systemic risk monitoring goals of the Dodd-Frank Act or
the broad framework of the proposal but argued that specific aspects of
the proposal were impractical or burdensome.\25\ We respond to these
comments in section II of this Release.
---------------------------------------------------------------------------

    \22\ See, e.g., comment letter of the American Federation of
Labor and Congress of Industrial Organizations (Apr. 12, 2011)
(``AFL-CIO Letter''); comment letter of the Council of Institutional
Investors (Apr. 11, 2011) (``CII Letter'') (agreeing that ``the
SEC's proposal will facilitate FSOC's ability to promote the
soundness of the U.S. financial system'' but noting that the
commenter's own working group report favored real-time reporting of
position-level information).
    \23\ See AFL-CIO Letter (``We support the Proposed Rule, but
believe it should be strengthened in a few key areas by requiring
more frequent reporting, omitting the arbitrary distinction by
investment strategy, and adding additional disclosure requirements
necessary to protect investors and prevent systemic risks.'');
comment letter of the Americans for Financial Reform (Apr. 12, 2011)
(``AFR Letter'') (endorsing the AFL-CIO Letter).
    \24\ See, e.g., comment letter of the Alternative Investment
Management Association (Apr. 12, 2011) (``AIMA General Letter'');
comment letter of the Investment Adviser Association (Apr. 12, 2011)
(``IAA Letter''); comment letter of the Managed Funds Association
(Apr. 8, 2011) (``MFA Letter''); comment letter of the Private
Equity Growth Capital Council (Apr. 12, 2011) (``PEGCC Letter'');
comment letter of Seward & Kissel, LLP (Apr. 12, 2011) (``Seward
Letter''); comment letter of the Securities Industry and Financial
Markets Association, Asset Management Group (Apr. 12, 2011) (``SIFMA
Letter'').
    \25\ See, e.g., comment letter of BlackRock Inc. (Apr. 12, 2011)
(``BlackRock Letter''); IAA Letter (stating that they ``fully
support the Commission's goal of enhancing transparency of private
funds that may be deemed to present systemic risk to the U.S.
financial markets'' but arguing that the proposal is too broad in
scope); MFA Letter (supporting ``the approach proposed by the SEC
and CFTC to collect information from registered private fund
managers through periodic, confidential reports on Form PF'' and
stating that the collection of data from market participants,
including investment advisers and the funds they manage, ``is a
critical component of effective systemic risk monitoring and
regulation'').
---------------------------------------------------------------------------

    This rulemaking is intended primarily to support FSOC, consistent
with the mandate to adopt private fund reporting requirements under the
Dodd-Frank Act. Determinations made with respect to the Form PF
reporting requirements have been made in furtherance of this goal and
to comply with this legislative mandate.

B. International Coordination

    The Dodd-Frank Act states that FSOC shall coordinate with foreign
financial regulators in assessing systemic risk.\26\ In recognition of
this, our proposal discussed the potential importance of international
regulatory coordination in responding to future financial crises.\27\ A
number of groups have continued to advance international efforts
relating to the collection of systemic risk information. For example,
recent reports from the Financial Stability Board (``FSB''),
International Monetary Fund (``IMF'') and Bank for International
Settlements (``BIS'') emphasize the importance of identifying and
addressing gaps in the information available to systemic risk
regulators.\28\ One goal of this coordination is to collect comparable
information regarding private funds, which will aid in the assessment
of systemic risk on a global basis.\29\ Several commenters agreed that
international coordination in connection with private fund reporting is
important and encouraged us to take an approach consistent with
international precedents.\30\
---------------------------------------------------------------------------

    \26\ See section 175(b) of the Dodd-Frank Act. See also
Proposing Release, supra note 12, at nn. 19-22 and accompanying
text.
    \27\ See Proposing Release, supra note 12, at section I.B.
    \28\ See, e.g., FSB, IMF and BIS, Macroprudential Policy Tools
and Frameworks, Update to G20 Finance Ministers and Central Bank
Governors (Feb. 14, 2011) (highlighting the need for ``[d]esign and
collection of better information and data to support systemic risk
identification and modelling [sic]''); FSB, Shadow Banking: Scoping
the Issues, A Background Note of the Financial Stability Board (Apr.
12, 2011) (``FSB Shadow Banking Report'') (``authorities should cast
the net wide, looking at all non-bank credit intermediation to
ensure that data gathering and surveillance cover all the activities
within which shadow banking-related risks might arise''); FSB and
IMF, The Financial Crisis and Information Gaps, Implementation
Progress Report (June 2011) (``Report on Information Gaps'').
    \29\ See, e.g., Report on Information Gaps, supra note 28, at 5.
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.
    \30\ See, e.g., comment letter of the American Bar Association,
Federal Regulation of Securities Committee and Private Equity and
Venture Capital Committee (Apr. 11, 2011) (``ABA Committees
Letter''); AIMA General Letter; comment letter of the Committee on
Capital Markets Regulation (Apr. 12, 2011) (``CCMR Letter'').
---------------------------------------------------------------------------

    To this end, our staffs have consulted with the United Kingdom's
Financial Services Authority (the ``FSA''), the European Securities and
Markets Authority (``ESMA''), the International Organization of
Securities Commissions (``IOSCO'') and Hong Kong's Securities and
Futures Commission.\31\ The FSA

was the first to develop significant experience with hedge fund
reporting, conducting a voluntary, semi-annual survey beginning in
October 2009 by sampling large hedge fund groups based in the United
Kingdom.\32\ IOSCO, in turn, used the guidelines established in the FSA
Survey, together with its own report on hedge fund oversight, in
coordinating a survey of hedge funds conducted by IOSCO's members
(including the SEC and CFTC) as of the end of September 2010.
---------------------------------------------------------------------------

    \31\ These consultations began prior to issuance of the Form PF
proposal and have continued during the development of the final
rules and Form. See also Proposing Release, supra note 12, at nn.
24-32 and accompanying text.
    \32\ See, e.g., Financial Services Authority, Assessing the
Possible Sources of Systemic Risk from Hedge Funds: A Report on the
Findings of the Hedge Fund Survey and the Hedge Fund as Counterparty
Survey (July 2011), available at http://www.fsa.gov.uk/pubs/other/hedge_fund_report_july2011.pdf (``FSA Survey''). See also
Proposing Release, supra note 12, at nn. 27-30 and accompanying
text.
---------------------------------------------------------------------------

    Most recently, ESMA has proposed its own template for private fund
reporting, which shares many common elements with the FSA Survey (as
well as the IOSCO survey and Form PF).\33\ ESMA's proposed template
will serve as the basis for mandatory private fund reporting in Europe
under the European Union's Directive on alternative investment fund
managers (``EU Directive'') and is expected eventually to supersede the
FSA Survey in the United Kingdom. The proposed ESMA template is broader
in scope than the FSA Survey, requiring information about a wide range
of alternative investment funds, including private equity funds,
venture capital funds and real estate funds.\34\ Form PF includes many
of the types of information collected through the FSA Survey and
proposed to be collected in the ESMA template, and a number of the
changes we are making from the proposal further align Form PF with
these international approaches to private fund reporting.\35\
---------------------------------------------------------------------------

    \33\ See ESMA's draft technical advice to the European
Commission on possible implementing measures of the Alternative
Investment Fund Managers Directive, ESMA/2011/209 (July 2011),
available at http://www.esma.europa.eu/index.php?
page=consultation--details&id=185 (``ESMA Proposal''). See also
Directive 2011/61/EU of the European Parliament and of the Council
of 8 June 2011 on Alternative Investment Fund Managers and amending
Directives 2003/41/EU and 2009/65/EC and Regulations (EC) No 1060/
2009 and (EU) No 1095/2010 (published July 1, 2011, in the Official
Journal of the European Union).
    \34\ For additional discussion of international efforts relating
to systemic risk monitoring in private equity funds, see Proposing
Release, supra note 12, at nn. 33-35 and accompanying text.
    \35\ See, e.g., infra notes 227, 231, 244-246, 258, 279, 283 and
297 and accompanying text.
---------------------------------------------------------------------------

II. Discussion

    The SEC is adopting Form PF and rule 204(b)-1 under the Advisers
Act with several changes from the proposal that are designed to respond
to commenter concerns. Under the new rule, SEC-registered investment
advisers must report systemic risk information to the SEC on Form PF if
they advise one or more private funds.\36\ The final rule and changes
from the proposal are discussed below.\37\
---------------------------------------------------------------------------

    \36\ See Advisers Act rule 204(b)-1.
    \37\ As noted above, section 204(b) of the Advisers Act gives
the SEC authority to establish both reporting and recordkeeping
requirements for private fund advisers. See supra note 12 and
accompanying text. One commenter asked why the SEC proposed
reporting requirements before proposing recordkeeping requirements
for private fund advisers, expressing concern that advisers would
need to know what records to maintain in order to report on Form PF.
See comment letter of Congressman Darrell E. Issa, Chairman of the
House Committee on Oversight and Government Reform (Sept. 20, 2011)
(``Issa Letter''). Recordkeeping requirements serve a number of
important purposes, such as ensuring that advisers maintain adequate
documentation relevant to the disposition of their clients' and
investors' assets and that SEC examiners are able to effectively
inspect advisers' operations. The SEC does not believe, however,
that establishing recordkeeping requirements is a necessary
prerequisite to establishing reporting requirements.
---------------------------------------------------------------------------

    In addition, the CFTC is adopting rule 4.27 with minor
revisions.\38\ This new rule provides that, for registered CPOs and
CTAs that are also registered as investment advisers with the SEC and
are required to file Form PF, filing Form PF serves as substitute
compliance for certain of the CFTC's proposed systemic risk reporting
requirements should the CFTC adopt such requirements.\39\ The CFTC has
revised the new rule to allow CPOs and CTAs who are otherwise required
to file Form PF the option of submitting on Form PF data regarding
commodity pools that are not private funds as substitute compliance
with certain of the CFTC's proposed systemic risk reporting
requirements should the CFTC adopt such requirements.\40\ The CFTC
believes that the revisions to the CEA rule adopted in this Release
provide additional clarity with respect to the filing obligations of
dually registered CPOs and CTAs. Because commodity pools that are
reported or required to be reported on Form PF are categorized as hedge
funds for purposes of Form PF, as discussed below, CPOs and CTAs filing
Form PF need to complete only the sections applicable to hedge fund
advisers.\41\
---------------------------------------------------------------------------

    \38\ See supra note 16.
    \39\ See CEA rule 4.27. For purposes of this rule, it is the
CFTC's position that any false or misleading statement of a material
fact or material omission in the jointly adopted sections (sections
1 and 2) of Form PF that is filed by these CPOs and CTAs shall
constitute a violation of section 6(c)(2) of the CEA.
    \40\ Id.
    \41\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the Form. Accordingly, private
fund advisers that are also CPOs or CTAs would be obligated to
complete only section 1 and, if they meet the applicable threshold,
section 2 of Form PF.
---------------------------------------------------------------------------

    As discussed above and in the Proposing Release, we have designed
Form PF, in consultation with staff representing FSOC's members, to
provide FSOC with information important to its understanding and
monitoring of systemic risk in the private fund industry.\42\ Based on
our staffs' consultations with staff representing FSOC's members, we
expect that FSOC will use the information collected on Form PF,
together with market data from other sources, to assist in determining
whether and how to deploy its regulatory tools. This may include, for
instance, identifying private funds that merit further analysis or
deciding whether to recommend to a primary financial regulator, like
the SEC or CFTC, more stringent regulation of the financial activities
of the private fund industry.\43\
---------------------------------------------------------------------------

    \42\ See Proposing Release, supra note 12, at section II.A and
at n. 49.
    \43\ See supra note 6.
---------------------------------------------------------------------------

    Although the Form we are adopting will provide information useful
to FSOC's regulatory mission, the Form has not been designed to be
FSOC's exclusive source of information regarding the private fund
industry.\44\ FSOC's recently proposed guidance regarding its process
for designating nonbank financial companies that may pose risks to U.S.
financial stability for FRB supervision helps to illustrate how FSOC
may use the Form PF data along with other data sources.\45\ This
guidance would establish a three-stage process for determinations, at
least in non-emergency situations. In the first and second stages, FSOC
would screen firms using progressively more granular analyses of
publicly available data and data that, like Form PF, are collected by
other regulators. In the third stage, FSOC would work with the Office
of Financial Research (``OFR'') to conduct an in-depth review of
specific firms identified in the first two stages, and this would
generally involve OFR collecting additional, targeted information
directly from these firms.\46\

Similarly, in determining whether to exercise its other authorities for
addressing potential systemic risks, we expect that FSOC would likely
utilize data from other sources in addition to Form PF.
---------------------------------------------------------------------------

    \44\ See Proposing Release, supra note 12, at n. 50 and
accompanying text.
    \45\ See FSOC Second Notice, supra note 6. See also 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
will be supervised by the FRB and subject to prudential standards.
    \46\ See sections 153 and 154 of the Dodd-Frank Act. One
commenter expressed support for our approach, agreeing that, ``Form
PF should be used to obtain enough information to make a preliminary
assessment, which can be followed up with data requests and dialogue
for those firms who may potentially pose systemic risks--Form PF
should not be considered the `complete picture' of the private fund
industry.'' AIMA General Letter.
---------------------------------------------------------------------------

    Form PF is primarily intended to assist FSOC in its monitoring
obligations under the Dodd-Frank Act, but the Commissions may use
information collected on Form PF in their regulatory programs,
including examinations, investigations and investor protection efforts
relating to private fund advisers. In section VI.A of this Release, we
discuss some of the ways in which the SEC could use proposed Form PF
data for its regulatory activities and investor protection efforts.
    As discussed in more detail below, the amount and type of
information required on Form PF varies based on both the size of the
adviser and the types of funds managed. For instance, Form PF requires
more detailed information from advisers managing a large amount of
hedge fund or liquidity fund assets than from advisers managing fewer
assets or other types of funds. This scaled approach is intended to
provide FSOC with a broad picture of the private fund industry while
relieving smaller advisers from much of the detailed reporting.\47\
Based on our staffs' consultations with staff representing FSOC's
members, we understand that obtaining this broad picture will help FSOC
to contextualize its analysis and assess whether systemic risk may
exist across the private fund industry and to identify areas where OFR
may want to obtain additional information. This scaled approach is also
designed to reflect the different implications for systemic risk that
may be presented by different investment strategies.
---------------------------------------------------------------------------

    \47\ In this Release, we refer to advisers that do not satisfy a
Large Private Fund Adviser threshold as ``smaller private fund
advisers.'' This is not intended to imply that these advisers are
small, only that they fall under certain of the Form's reporting
thresholds. See section VI of this Release for a discussion of
entities that are regarded as small for purposes of the Advisers
Act.
---------------------------------------------------------------------------

A. Who Must File Form PF

    An investment adviser must file Form PF if it: (1) Is registered or
required to register with the SEC; (2) advises one or more private
funds; and (3) had at least $150 million in regulatory assets under
management attributable to private funds as of the end of its most
recently completed fiscal year.\48\ A CPO or CTA that is also
registered or required to register with the SEC as an investment
adviser and satisfies the other conditions described above must file
Form PF with respect to any commodity pool it manages that is a
``private fund'' and may file Form PF with respect to any commodity
pool it manages that is not a ``private fund.'' \49\ By filing Form PF
with respect to these commodity pools, a CPO will be deemed to have
satisfied certain filing requirements for these pools under the CFTC's
regulatory regime should the CFTC adopt such requirements.\50\
---------------------------------------------------------------------------

    \48\ See Advisers Act rule 204(b)-1. This rule requires advisers
to calculate the value of private fund assets under management
pursuant to instructions in Form ADV, which provide a uniform method
of calculating assets under management for regulatory purposes under
the Advisers Act. See Implementing Adopting Release, supra note 11,
at section II.A.3 (discussing the rationale underlying the new
instructions for calculating assets under management for regulatory
purposes).
    \49\ See supra note 10 for the definition of ``private fund.''
    \50\ See CEA rule 4.27. In the Proposing Release, the CFTC
stated that 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 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.
---------------------------------------------------------------------------

    We have modified the conditions under which an adviser must file
Form PF by adding a minimum reporting threshold of $150 million in
private fund assets under management.\51\ Under the proposal, all
private fund advisers registered with the SEC would have been required
to file Form PF. The Dodd-Frank Act modified the Advisers Act's minimum
registration requirements so that most advisers with less than $100
million in assets under management must register with one or more
states rather than the SEC.\52\ In addition, the Dodd-Frank Act created
exemptions from SEC registration for advisers solely to venture capital
funds and for advisers solely to private funds that in the aggregate
have less than $150 million in assets under management in the United
States.\53\ As a result, under our proposed approach, most advisers
with under $100 million in assets under management, and many advisers
with less than $150 million in private fund assets under management,
would not have reported on Form PF because they would not be registered
with the SEC. However, some registered advisers with relatively few
private fund assets would have been required to report on Form PF while
exempt advisers with less than $150 million in private fund assets
under management would not have been required to file Form PF.
---------------------------------------------------------------------------

    \51\ See Advisers Act rule 204(b)-1.
    \52\ See section 203A of the Advisers Act. See also Implementing
Adopting Release, supra note 11, at section II.A.
    \53\ See sections 203(l) and 203(m) of the Advisers Act and
rules 203(l)-1 and 203(m)-1 under the Advisers Act. See also
Exemptions Adopting Release, supra note 11.
---------------------------------------------------------------------------

    Commenters argued that this outcome was not justified from a
systemic risk perspective and recommended a minimum reporting threshold
for advisers based on the amount of private fund assets under
management.\54\ One commenter proposed setting the threshold at $150
million to match the new private fund adviser exemption under section
203(m) of the Advisers Act.\55\ From the perspective of systemic risk
monitoring, it does not appear at this time that the value of gathering
this information from registered advisers with less than $150 million
in private fund assets under management justifies the burden to these
advisers.
---------------------------------------------------------------------------

    \54\ See, e.g., IAA Letter; Seward Letter. Two commenters also
supported a minimum reporting threshold based on the size of
individual funds, suggesting an exclusion for funds ``with net asset
values of less than $250 million and that are less than 5% of a
manager's assets under management * * *.'' MFA Letter; see also
BlackRock Letter. We do not believe that a threshold based on fund
size would be appropriate because the aggregate amount of assets in
smaller funds that an adviser controls may contribute significantly
to the adviser's total ability to affect financial markets and the
$150 million minimum reporting threshold that we are adopting, based
on the adviser's private fund assets under management, will
adequately differentiate between advisers with only smaller funds
and those with significant fund assets.
    \55\ See IAA Letter.
---------------------------------------------------------------------------

    Most private fund advisers that are required to file Form PF will
only need to complete section 1 of the Form. This section requires
advisers to provide certain basic information regarding any private
funds they advise in addition to information about their private fund
assets under management and their funds' performance and use of
leverage. We describe the information to be collected under section 1
of Form PF in further detail in section II.C.1 of this Release.
    As discussed below, however, certain larger private fund advisers
must complete additional sections of Form PF, which require more
detailed information.\56\ Specifically, three types

of ``Large Private Fund Advisers'' would be required to complete
certain additional sections of Form PF:
---------------------------------------------------------------------------

    \56\ See Instruction 3 to Form PF. With this scaled approach,
the reporting requirements we are adopting reflect the Dodd-Frank
Act directive that, in formulating systemic risk reporting and
recordkeeping for investment advisers to mid-sized private funds,
the SEC take into account the size, governance, and investment
strategy of such funds to determine whether they pose systemic risk.
See section 203(n) of the Advisers Act. The Dodd-Frank Act also
provides 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 204(b) of the Advisers Act.
---------------------------------------------------------------------------

     Any adviser having at least $1.5 billion in regulatory
assets under management attributable to hedge funds as of the end of
any month in the prior fiscal quarter; \57\
---------------------------------------------------------------------------

    \57\ See Instruction 3 to Form PF. To determine whether an
adviser must file a quarterly report at the end of the second
quarter, it must look to its hedge fund assets under management as
of the end of each month in the first quarter. See infra text
accompanying note 112. We have modified the amount of this threshold
from the proposal. For a discussion of this modification and the
reasons for establishing the threshold at this amount, see below in
section II.A.4.a of this Release (including notes 90-92 and
accompanying text).
---------------------------------------------------------------------------

     Any adviser managing a liquidity fund and having at least
$1 billion in combined regulatory assets under management attributable
to liquidity funds and registered money market funds as of the end of
any month in the prior fiscal quarter; \58\ and
---------------------------------------------------------------------------

    \58\ See supra note 57. For a discussion of the reasons for
establishing the threshold at this amount, see below in section
II.A.4.a of this Release.
---------------------------------------------------------------------------

     Any adviser having at least $2 billion in regulatory
assets under management attributable to private equity funds as of the
last day of the adviser's most recently completed fiscal year.\59\
---------------------------------------------------------------------------

    \59\ See Instruction 3 to Form PF. For a discussion of the
reasons for establishing the threshold at this amount, see below in
section II.A.4.a of this Release.
---------------------------------------------------------------------------

    These large advisers must complete additional sections of Form PF,
with large hedge fund advisers completing section 2 and large liquidity
fund and private equity fund advisers completing sections 3 and 4,
respectively.\60\ The information each of these sections requires is
tailored to the type of fund, focusing on relevant areas of financial
activity that have the potential to raise systemic concerns. We discuss
these areas of financial activity as they relate to hedge funds,
liquidity funds and private equity funds in greater detail in the
Proposing Release and below.\61\
---------------------------------------------------------------------------

    \60\ As adopted, Form PF requires advisers to determine whether
they meet the large adviser thresholds less frequently than was
proposed (quarterly rather than daily for hedge fund and liquidity
fund advisers and annually rather than quarterly for private equity
advisers). We discuss this change in section II.A.4 of this Release.
    \61\ See sections II.A.1, II.A.2 and II.A.3 of the Proposing
Release, supra note 12, and sections II.C.2, II.C.3 and II.C.4 of
this Release.
---------------------------------------------------------------------------

1. ``Hedge Fund'' Definition
    Registered advisers managing hedge funds must submit information on
Form PF regarding the financing and activities of these funds in
section 1 of the Form, and large hedge fund advisers are required to
provide additional information in section 2 of the Form.\62\ Form PF
defines ``hedge fund'' generally to include any private fund having any
one of three common characteristics of a hedge fund: (a) A performance
fee that takes into account market value (instead of only realized
gains); (b) high leverage; or (c) short selling.\63\ Solely for
purposes of Form PF, a commodity pool that is reported or required to
be reported on Form PF is treated as a hedge fund.
---------------------------------------------------------------------------

    \62\ Several commenters debated whether the hedge fund industry
generally, or any hedge fund in particular, could pose systemic
risk. See, e.g., AFL-CIO Letter and CII Letter, identifying hedge
fund activities that could have systemic consequences; and AIMA
General Letter and MFA Letter, arguing that no hedge fund operating
today is likely to be systemically significant. Even among skeptical
commenters, however, there was recognition that ``there is no
concrete data to draw conclusions either way, and that the exercise
[of reporting] will be useful to allow the FSOC to make evidence-
based conclusions.'' AIMA General Letter; see also MFA Letter. As
discussed in the Proposing Release, we believe that Congress
expected hedge fund advisers would be required to report under Title
IV of the Dodd-Frank Act and that information regarding certain
activities of hedge funds may be important to FSOC's monitoring of
systemic risk. See Proposing Release, supra note 11, at nn. 54-61
and accompanying text.
    \63\ See Glossary of Terms to Form PF. We are defining the term
``hedge fund'' in Form PF solely for purposes of determining what
information an adviser is required to report on the Form. This
definition does not apply with respect to any other form or
regulation of either Commission unless otherwise specified. The SEC
has recently adopted this same definition in amendments to Form ADV.
See Implementing Adopting Release, supra note 11, at nn. 248-255 and
accompanying text. The CFTC has not adopted any definition of
``hedge fund'' beyond that adopted solely for purposes of Form PF.
---------------------------------------------------------------------------

    A number of commenters addressed the ``hedge fund'' definition.
Some of these suggested that we eliminate the distinctions among fund
types and instead require all advisers to complete the entire Form so
that advisers could not use the definitions to avoid reporting
requirements.\64\ Others, however, urged us to narrow the definition so
that fewer funds would be classified as hedge funds.\65\ Form PF
generally requires more information regarding hedge funds than other
types of funds, and in most cases, an adviser must conclude that a fund
is not a hedge fund in order to classify it as one of the six other
types of private fund defined in Form PF.\66\ As a result, narrowing
the ``hedge fund'' definition in Form PF could have a significant
effect on reporting. Commenters persuaded us, however, that certain
revisions to the proposed definition would result in a more accurate
grouping of funds, thereby improving the quality of the data collected
and, at the same time, reducing the reporting burdens on some
advisers.\67\
---------------------------------------------------------------------------

    \64\ See, e.g., AFL-CIO Letter.
    \65\ See, e.g., ABA Committees Letter; AIMA General Letter; IAA
Letter; PEGCC Letter; SIFMA Letter; comment letter of TCW Group,
Inc. (Apr. 12, 2011) (``TCW Letter'').
    \66\ See Glossary of Terms to Form PF. Altogether, the seven
types of private fund defined in Form PF are: (1) Hedge fund; (2)
liquidity fund; (3) private equity fund; (4) real estate fund; (5)
securitized asset fund; (6) venture capital fund; and (7) other
private fund.
    \67\ The ``hedge fund'' definition, as well as the six other
private fund definitions used in Form PF, are also included in the
SEC's recent revisions to Form ADV. See Implementing Adopting
Release, supra note 11, at section II.C.1. Although the SEC received
no comments on these same definitions in the context of that
rulemaking, the SEC believes that having consistent definitions in
the two forms is important. As a result, the SEC considered in the
context of that rulemaking the comments received on these
definitions in Form PF and determined, when adopting revisions to
Form ADV, to make several changes in that form. The changes we are
making to these definitions as used in Form PF conform the two sets
of definitions so that both forms use identical terms (with the
exception that, for purposes of Form PF, all commodity pools about
which an adviser is reporting are treated as hedge funds, while in
Form ADV, only commodity pools that are private funds are treated as
hedge funds). See Implementing Adopting Release, supra note 11, at
nn 248-255. The CFTC has not adopted any definition of ``hedge
fund'' beyond that adopted solely for purposes of Form PF.
---------------------------------------------------------------------------

    First, we have expressly excluded from the ``hedge fund''
definition in Form PF vehicles established for the purpose of issuing
asset backed securities (``securitized asset funds'').\68\ One
commenter noted that these funds could have been categorized as hedge
funds under our proposal, which was not the intended result.\69\
Although the issuance of asset backed securities may have systemic risk
implications, the questions on Form PF regarding hedge funds would not
yield relevant data regarding securitized asset funds. As a result,
including responses regarding securitized asset funds in the hedge fund
data could distort the information FSOC obtains from questions directed
at hedge funds.
---------------------------------------------------------------------------

    \68\ Specifically, the ``hedge fund'' definition in Form PF now
refers to any private fund having one of the listed characteristics
and excludes securitized asset funds. Under the proposal, a fund
that satisfied the ``hedge fund'' definition would have been
categorized as a hedge fund even if it otherwise would have
satisfied the ``securitized asset fund'' definition. As adopted,
Form PF defines ``securitized asset fund'' as any private fund
``whose primary purpose is to issue asset backed securities and
whose investors are primarily debt-holders.'' We have also modified
this definition from the proposal so that it is no longer defined by
reference to the ``hedge fund'' definition. See Glossary of Terms to
Form PF.
    \69\ See TCW Letter.
---------------------------------------------------------------------------

    Second, we have modified clause (a) Of the ``hedge fund''
definition in Form PF, which classifies a fund as a hedge fund if it
uses performance fees or allocations that are calculated by taking into
account unrealized gains. One

commenter pointed out that even funds that do not allow for the payment
of such fees or allocations, such as private equity funds, may be
required to accrue or allocate these amounts in their financial
statements to comply with applicable accounting principles.\70\ It was
not intended for funds that accrue or allocate these fees or
allocations solely for financial reporting purposes to be classified as
hedge funds, so we have clarified that clause (a) relates only to fees
or allocations that may be paid to an investment adviser (or its
related persons).\71\
---------------------------------------------------------------------------

    \70\ See TCW Letter.
    \71\ Some commenters objected to clause (a) of the ``hedge
fund'' definition more generally, arguing that it is too broad
because some traditional/long only funds use performance fees or
allocations calculated by taking into account unrealized gains. See,
e.g., AIMA General Letter; TCW Letter. However, based on our staffs'
discussions with staff representing FSOC's members, we believe that
funds using these types of fees are often active in markets that
FSOC may desire to monitor for concentration risks. In addition,
Form PF is intended to provide FSOC with a broad picture of the
private fund industry so that it has context against which to assess
systemic risk. An important part of this is gathering information
about funds with similar characteristics, such as performance fees
based on unrealized gains, so that industry-wide comparisons can be
made. The inclusion of any particular fund in a reporting group,
whether as a result of the private fund definitions or the reporting
thresholds, does not represent a conclusion that the fund engages in
activities that pose systemic risk.
---------------------------------------------------------------------------

    Third, we have addressed another commenter's concern that clause
(a) could inadvertently capture certain private equity funds because,
although these funds typically calculate currently payable performance
fees and allocations based on realized amounts, they will sometimes
reduce these fees and allocations by taking into account ``unrealized
losses net of unrealized gains in the portfolio.'' \72\ Funds should
not be classified as hedge funds for purposes of Form PF based solely
on this practice, and we have clarified that clause (a) would not
include performance fees or allocations the calculation of which may
take into account unrealized gains solely for the purpose of reducing
such fees or allocations to reflect net unrealized losses.
---------------------------------------------------------------------------

    \72\ See PEGCC Letter.
---------------------------------------------------------------------------

    Finally, several commenters asserted that clause (c) of the ``hedge
fund'' definition, which looks to whether a fund may engage in short
selling, should include an exception for a de minimis amount of short
selling or exclude short selling intended to hedge the fund's
exposures.\73\ However, short selling appears to be, for purposes of
Form PF, a potentially important distinguishing feature of hedge funds,
many of which may, as the name suggests, use short selling to hedge or
manage risk of various types. On the other hand, we also understand
that many funds pursuing traditional investment strategies use short
positions to hedge foreign exchange risk and to manage the duration of
interest rate exposure, and we are persuaded that including funds
within the definition of ``hedge fund'' in Form PF solely because they
use these particular techniques would dilute the meaningfulness of the
category. Therefore, we have modified clause (c) to provide an
exception for short selling that hedges currency exposure or manages
duration.\74\
---------------------------------------------------------------------------

    \73\ See IAA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.
    \74\ We have also made a change to clause (c) to clarify that
this clause includes traditional short sales and any transaction
resulting in a short exposure to a security or other asset (such as
using a derivative instrument to take a short position). The purpose
of this definition is to categorize funds that engage in certain
types of market activity, and therefore, whether the definition
applies should not depend on the form in which the fund engages in
that activity.
---------------------------------------------------------------------------

    Commenters arguing that, instead of a definition, the Commissions
should take an approach similar to that used in the FSA Survey, which
outlined common hedge fund characteristics and allowed an adviser ``to
make its own good faith judgment as to whether a particular fund is a
hedge fund,'' were not persuasive.\75\ Such an approach could
effectively defer to the adviser the determination of whether to report
on Form PF information about hedge funds--an approach that might be
appropriate for a voluntary survey, like the FSA's, but one that would
significantly compromise the value of data collected for FSOC and thus
would fail to achieve the purpose of this rulemaking.
---------------------------------------------------------------------------

    \75\ ABA Committees Letter. See also AIMA General Letter; IAA
Letter; Seward Letter.
---------------------------------------------------------------------------

    Two other commenters suggested instead that we eliminate all of the
private fund definitions and require that every private fund adviser
complete the entire Form.\76\ These commenters were concerned that any
distinction among funds tied to the amount or type of information
required would encourage advisers to change strategies in order to
avoid reporting. Although we are sensitive to these concerns, we
believe that distinguishing fund types is important for two reasons.
First, by distinguishing among types of funds, we are able to limit the
information collection burdens on advisers to funds for which the
information is most relevant.\77\ Second, separating reported data by
fund strategy allows extraneous information to be excluded, which we
believe will improve its utility to FSOC and the Commissions.
---------------------------------------------------------------------------

    \76\ See AFL-CIO Letter; AFR Letter.
    \77\ For instance, one commenter, in agreeing that Form PF
appropriately differentiates ``between the reporting requirements
for hedge funds and private equity funds,'' pointed out that section
2 of the Form, which would be completed by large hedge fund
advisers, contains many questions that ``are not relevant to private
equity funds.'' This commenter also explained that requiring
response to ``questions that are not directly related to'' the
operations of private equity advisers would impose burdens on both
FSOC and the advisers. See comment letter of Lone Star U.S.
Acquisitions (Apr. 12, 2011) (``Lone Star Letter'').
---------------------------------------------------------------------------

    Several commenters also expressed concern that clauses (b) and (c)
of the ``hedge fund'' definition in Form PF are too broad because many
funds have the capacity to borrow or incur derivative exposures in
excess of the specified amounts or to engage in short selling but do
not in fact engage, or intend to engage, in these practices.\78\ These
commenters generally argued that clauses (b) and (c) should focus on
actual or contemplated use of these practices rather than potential
use. Changes to the ``hedge fund'' definition in response to these
comments have not been made because clauses (b) and (c) properly focus
on a fund's ability to engage in these practices. Even a fund for which
leverage or short selling is an important part of its strategy may not
engage in that practice during every reporting period. Thus, the
suggested approach could result in incomplete data sets for hedge
funds, a class of funds that may be systemically significant. However,
a private fund would not be a ``hedge fund'' for purposes of Form PF
solely because its organizational documents fail to prohibit the fund
from borrowing or incurring derivative exposures in excess of the
specified amounts or from engaging in short selling so long as the fund
in fact does not engage in these practices (other than, in the case of
clause (c), short selling for the purpose of hedging currency exposure
or managing duration) and a reasonable investor would understand, based
on the fund's offering documents, that the fund will not engage in
these practices.
---------------------------------------------------------------------------

    \78\ See, e.g., AIMA General Letter; IAA Letter; PEGCC Letter;
SIFMA Letter; TCW Letter.
---------------------------------------------------------------------------

    Finally, some commenters recommended that a fund should not be
classified as a ``hedge fund'' for purposes of Form PF unless it
satisfies at least two of the prongs of the ``hedge fund'' definition
(rather than any one prong).\79\ The definition is designed to identify
funds that are an appropriate subject for the higher level of reporting
to which hedge funds will be subject

under Form PF, and, based on our staffs' consultations with staff
representing FSOC's members, we believe that any one of the identified
characteristics is sufficient to appropriately distinguish a fund for
this purpose. We have not, therefore, made the change these commenters
suggested. The changes to the ``hedge fund'' definition discussed above
are intended to more accurately group private funds for purposes of
Form PF and, thereby, improve the quality of information reported.
---------------------------------------------------------------------------

    \79\ See, e.g., Lone Star Letter; PEGCC Letter; TCW Letter.
---------------------------------------------------------------------------

2. ``Liquidity Fund'' Definition
    Registered advisers managing liquidity funds must submit
information on Form PF regarding the financing and activities of these
funds in section 1 of the Form, and large liquidity fund advisers are
required to provide additional information in section 3 of the
Form.\80\ For purposes of Form PF, a ``liquidity fund'' is 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.\81\ Commenters did not
address the ``liquidity fund'' definition, which the SEC is adopting as
proposed.
---------------------------------------------------------------------------

    \80\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the Form. Section 3 of the Form,
which requires more specific reporting regarding liquidity funds, is
only required by the SEC.
    \81\ See Glossary of Terms to Form PF. As discussed in the
Proposing Release, liquidity funds can resemble registered money
market funds, certain features of which may make them susceptible to
runs and thus create the potential for systemic risk. See Proposing
Release, supra note 12, at section II.A.2.
---------------------------------------------------------------------------

3. ``Private Equity Fund'' Definition
    Registered advisers managing private equity funds must submit
information on Form PF regarding the financing and activities of these
funds in section 1 of the Form, and large private equity advisers are
required to provide additional information in section 4 of the
Form.\82\ Consistent with the proposal, Form PF defines ``private
equity fund'' 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\ Two commenters advocated for a definition of ``private
equity fund'' that would not depend on whether a fund is a hedge
fund.\84\ This approach could, however, create gaps between the
definitions and encourage advisers to structure around the reporting
requirements.\85\ The changes we have made to the ``hedge fund''
definition substantially address the concerns of these commenters.\86\
Therefore, we believe that the proposed approach to defining ``private
equity fund'' continues to be appropriate for the purposes of Form PF.
---------------------------------------------------------------------------

    \82\ Form PF is a joint form between the SEC and the CFTC only
with respect to sections 1 and 2 of the Form. Section 4 of the Form,
which requires more specific reporting regarding private equity
funds, is only required by the SEC.
    \83\ See Glossary of Terms to Form PF. The definitions of ``real
estate fund'' and ``venture capital fund'' are being adopted as
proposed, and changes to the definition of ``securitized asset
fund'' are discussed above. See supra note 69. These definitions 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.
    \84\ See PEGCC Letter (proposing an alternative that largely
inverts the proposed ``hedge fund'' definition but would allow for
short selling and soften other distinctions); SIFMA Letter
(suggesting an alternative that would define a ``private equity
fund'' as a private fund having ``a large number of sophisticated,
third-party institutional and high net worth investors'' and
satisfying ten additional criteria, including that ``the fund and
its investment activities are not subject to regulatory restrictions
or limitations.'').
    \85\ Some commenters were concerned that creating any
distinctions among funds would encourage advisers to change
strategies in order to avoid reporting. See supra note 76 and
accompanying text. The SEC believes, based on its staff's
consultations with staff representing FSOC's members, that this risk
is best addressed by tightly integrating the definitions.
    \86\ See supra notes 64-79 and accompanying text for a
discussion of comments on the ``hedge fund'' definition and the
changes we are making from the proposal. Some of these comments
reflected concern that the breadth of the ``hedge fund'' definition
would cause it to capture some private equity funds. Commenters
arguing for an independent ``private equity fund'' definition
expressed similar concerns. As discussed above, certain of the
changes we are making to the ``hedge fund'' definition are designed
to address these concerns.
---------------------------------------------------------------------------

4. Large Private Fund Adviser Thresholds
a. Amounts
    As noted above, we are adopting a threshold of $1.5 billion in
hedge fund assets under management for large hedge fund adviser
reporting, $1 billion in combined liquidity fund and registered money
market fund assets under management for large liquidity fund adviser
reporting, and $2 billion in private equity fund assets under
management for large private equity fund adviser reporting.\87\ These
thresholds are designed so that the group of Large Private Fund
Advisers filing Form PF will be relatively small in number but
represent a substantial portion of the assets of their respective
industries. For example, we estimate that approximately 230 U.S.-based
advisers each managing at least $1.5 billion in hedge fund assets
represent over 80 percent of the U.S. hedge fund industry based on
assets under management.\88\ Similarly, SEC staff estimates that the
approximately 155 U.S.-based advisers each managing over $2 billion in
private equity fund assets represent approximately 75 percent of the
U.S. private equity fund industry based on committed capital.\89\
---------------------------------------------------------------------------

    \87\ As proposed, we are requiring that an adviser determine
whether it meets a threshold and qualifies as a large hedge fund
adviser, large liquidity fund adviser or large private equity
adviser based solely on the assets under management attributable to
the particular types of fund. Two commenters suggested that we
instead require advisers to aggregate all of their assets under
management, regardless of strategy, for purposes of the thresholds.
See AFL-CIO Letter; AFR Letter. These commenters cautioned that our
approach could allow advisers with substantial private fund assets
under management to nevertheless avoid classification as a Large
Private Fund Advisers. We are sensitive to these commenters'
concerns, but we continue to believe that the hedge fund, liquidity
fund and private equity fund business models are sufficiently
distinct that for FSOC's purposes they are most appropriately
analyzed on a separate basis.
    \88\ See Billion Dollar Club, HedgeFund Intelligence (``HFI'')
(Oct. 3, 2011). We estimate that, in addition to the 230 U.S.-based
hedge fund advisers that will exceed the threshold, approximately 23
non-U.S. private fund advisers will also be classified as large
hedge fund advisers, for a total of approximately 250 large hedge
fund advisers. We have based this estimate of non-U.S. advisers on
IARD data as of October 1, 2011, showing that, among currently
registered private fund advisers, fewer than 10% are non-U.S.
advisers. (We are not aware of any reason that recent changes in the
exemptions available under the Advisers Act would affect the
relative representation of U.S. and non-U.S. advisers.) One
commenter suggested that estimates based on HFI data should be
grossed up because the database is under-inclusive. See comment
letter of the Alternative Investment Management Association (Jul.
26, 2011) (``AIMA AUM Letter''). Although we acknowledge that this
database is likely somewhat under-inclusive, we believe that the
amount of assets under management not represented in the database is
relatively small because the aggregate amount of assets reported to
the database is consistent with other data sources estimating the
total size of the hedge fund industry. In addition, we believe the
uncounted assets are likely skewed toward the smaller advisers in
the industry because the identity and size of the industry's largest
advisers are relatively consistent across sources. As a result,
although this database may under-represent the total amount of hedge
fund industry assets under management, the count of large hedge fund
advisers is likely to be relatively accurate. The changes to the
``hedge fund'' definition discussed above will likely result in
fewer funds being classified as hedge funds than under the proposed
definition. However, these changes are intended to more accurately
group private funds for purposes of Form PF and should more closely
align the definition to the estimates discussed above.
    \89\ Preqin. The Preqin data relating to private equity fund
committed capital is available in File No. S7-05-11. We estimate
that, in addition to the 155 U.S.-based private equity advisers that
will exceed the threshold, approximately 16 non-U.S. private fund
advisers will also be classified as large private equity advisers,
for an approximate total of 170 large private equity advisers. See
supra note 88 for a discussion of the basis for this estimate.
---------------------------------------------------------------------------

    The threshold we are adopting for large hedge fund advisers
reflects an increase from the $1 billion threshold that we proposed. We
do not expect,

however, that this increase will substantially change the group of
advisers that were estimated in the proposal would be classified as
large hedge fund advisers. Rather, the change is intended simply to
adjust for a difference in how assets under management are measured in
Form PF compared to how they are measured in the commercial databases
that we consulted in proposing the $1 billion threshold amount. Form PF
uses the definition of ``regulatory assets under management'' that the
SEC recently adopted in connection with amendments to its Form ADV.
This definition measures assets under management gross of outstanding
indebtedness and other accrued but unpaid liabilities. One commenter
pointed out, however, that the assets under management that advisers
report to the currently available third-party databases are generally
calculated on a net basis.\90\ In other words, without adjustment, our
proposed threshold of $1 billion in gross assets would have captured
advisers with less than $1 billion in net assets, expanding the group
of advisers classified as large hedge fund advisers beyond what we
intended.\91\ We believe this revised threshold strikes an appropriate
balance between obtaining information regarding a significant portion
of the hedge fund industry while minimizing the burden imposed on
smaller advisers.\92\
---------------------------------------------------------------------------

    \90\ See AIMA AUM Letter.
    \91\ We are not aware of any existing source with data regarding
the gross assets under management of U.S. hedge fund managers.
Therefore, based on our staffs' consultations with staff
representing FSOC's members, we have established this threshold by
multiplying the proposed threshold by an industry average leverage
ratio of 1.5 times net assets. The commenter suggested that industry
leverage ranges between 1.5 and 3 times net assets but noted that
leverage ratios over the preceding 12 months had dropped to 1.1
times investment capital. See AIMA AUM Letter; see also MFA Letter
(citing leverage ratios from 3.0 to as low as 1.16); Andrew Ang, et
al., Hedge Fund Leverage, National Bureau of Economic Research (Feb.
2011). We have used a leverage ratio at the lower end of this range
because, without data regarding the industry's gross assets, it
cannot confidently be estimated that a higher threshold would
capture a portion of the industry sufficient to allow FSOC to
effectively perform systemic risk assessments. Also, although the
definition of ``regulatory assets under management'' is measured
gross of certain liabilities, it does not capture all forms of
leverage that may be included in the sources cited in the AIMA AUM
Letter, such as off-balance sheet leverage. As a result, the
leverage implied by ``regulatory assets under management'' may be
lower than the leverage estimated based on these sources. The AIMA
AUM Letter also suggested that the average leverage ratio used
should be asset-weighted because advisers with over $1 billion in
net assets under management tend to use greater amounts of leverage.
However, these larger advisers would exceed the threshold even if
measured on a net basis. The adjustment to the threshold to account
for leverage is most relevant for the middle group of advisers, not
the large advisers, and the leverage ratio we have used is
consistent with the leverage ratio this commenter estimates for
advisers with $200 million to $1 billion in net assets under
management.
    \92\ Similar adjustments to the thresholds applicable to
liquidity fund advisers and private equity fund advisers have not
been made because we understand these strategies typically involve
little leverage at the fund level. See infra note 306 and
accompanying text.
---------------------------------------------------------------------------

    An adviser managing liquidity funds must combine liquidity fund and
registered money market fund assets for purposes of determining whether
it meets the threshold for more extensive reporting regarding its
liquidity funds. Liquidity funds and registered money market funds
often pursue similar strategies, invest in the same securities and
present similar risks. An adviser is, however, only required to report
information about unregistered liquidity funds on Form PF. This
information will supplement data the SEC collects about registered
money market funds on its Form N-MFP and provide FSOC a more complete
picture of large liquidity pools and their management. The SEC expects
this approach to the reporting threshold to capture approximately 80 of
the most significant managers of liquidity funds.\93\ Commenters
supported this approach, which we are adopting as proposed.\94\
---------------------------------------------------------------------------

    \93\ See also Proposing Release, supra note 12, at n. 89. 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, as reported on Form N-MFP as of
October 1, 2011.
    \94\ See AFL-CIO Letter; AFR Letter.
---------------------------------------------------------------------------

    Based on our staffs' consultations with staff representing FSOC's
members, we believe that requiring basic information from all
registered advisers over the minimum reporting threshold but more
extensive and detailed information only from advisers meeting the
higher thresholds is important to enabling FSOC to obtain a broad
picture of the private fund industry. We understand that obtaining this
broad picture will help FSOC to contextualize its analysis and assess
whether systemic risk may exist across the private fund industry and to
identify areas where OFR may want to obtain additional information. At
the same time, requiring that only these Large Private Fund Advisers
complete additional reporting requirements under Form PF will provide
systemic risk information for a substantial majority of private fund
assets while minimizing burdens on smaller private fund advisers that
are less likely to pose systemic risk concerns.
    Although thresholds set at a higher amount could still yield
information regarding much or a majority of the private fund industry's
assets under management, such thresholds would potentially impede
FSOC's ability to obtain a representative picture of the private fund
industry. The activities of private fund advisers may differ
significantly depending on size because, for instance, some strategies
may be practical only at certain scales.\95\ As a result, obtaining
information regarding, for instance, 50 percent or 60 percent of the
industry's assets under management may not be sufficient to confidently
draw conclusions regarding the remaining portion of the industry.
However, because relatively few advisers manage most of the industry's
assets under management, a substantial reduction in the potential
burdens of reporting can be achieved without sacrificing the ability to
obtain a more representative picture. For example, setting the
threshold to cover, for instance, 80 percent of industry assets under
management rather than 100 percent would relieve thousands of advisers
from more detailed reporting while still obtaining a reasonably
representative picture.\96\ There are, however, limits to the range
within which this tradeoff can be effectively made. For example,
setting the thresholds to cover, for instance, 60 percent of industry
assets under management rather than 80 percent would relieve a
relatively small segment of advisers from more detailed reporting but
might not result in a picture broad enough to be representative.
Accordingly, the thresholds have been established to balance FSOC's
need for a broad, representative set of data regarding the private fund
industry with the desire to limit the potential burdens of private fund
systemic risk reporting.
---------------------------------------------------------------------------

    \95\ For example, one commenter cited evidence suggesting that
the use of leverage varies significantly with fund size, though they
did not state whether this variation continues among advisers with
over $1 billion in net assets under management. See AIMA AUM Letter.
See also Ibbotson, Roger G., Peng Chen, and Kevin X. Zhu, 2011, The
ABCs of Hedge Funds: Alphas, Betas, and Costs, Financial Analysts
Journal 67 (1) (``Ibbotson, et al.'') at 17-18 (discussing possible
explanations for observed differences in returns for larger and
smaller hedge funds).
    \96\ In the PRA analysis below, the SEC estimates that the large
adviser thresholds will result in approximately 500 advisers
reporting additional information in section 2, 3 or 4 of Form PF
while approximately 3,070 advisers will report information only in
section 1 and another 700 will not report on Form PF at all because
of the minimum reporting threshold. See infra section IV.A of this
Release.
---------------------------------------------------------------------------

    Commenters expressed support for a tiered reporting system based on
size.\97\

However, most commenters thought the proposed threshold of $1 billion
was either too high or too low.\98\ Commenters arguing for a lower
threshold expressed concern that, at $1 billion, regulators would
receive insufficient information to monitor certain types of market
behavior with potentially systemic consequences.\99\ In contrast, a
number of commenters argued that even an adviser with $1 billion in
assets under management could not pose systemic risk.\100\ Several of
these commenters supported an increase to $5 billion, which they argued
would still capture over half the hedge fund industry while ensuring
that advisers have sufficient operational capabilities to complete the
Form.\101\
---------------------------------------------------------------------------

    \97\ See, e.g., comment letter of Coalition of Private
Investment Companies (Mar. 31, 2011) (``CPIC Letter'') and MFA
Letter.
    \98\ Compare AFL-CIO Letter and AFR Letter (supporting a lower
threshold) to AIMA General Letter; IAA Letter; MFA Letter; PEGCC
Letter; SIFMA Letter (supporting a higher threshold). See also
comment letter of George Merkl (Feb. 22, 2011) (``Merkl February
Letter'') (supporting the proposed thresholds).
    \99\ See AFL-CIO Letter (arguing that the proposal would not
allow regulators to monitor ``herding'' behavior, which it defines
as the tendency for market participants to trade together on one
side of the market; also suggesting that, at a minimum, advisers
with between $150 million and $1 billion in assets under management
``should be required to complete all applicable sections of Form PF
on a semi-annual basis.''); AFR Letter.
    \100\ See, e.g., AIMA General Letter (also questioning whether
the SEC and FSOC have the capacity to analyze the data from all the
advisers above the proposed threshold); IAA Letter; MFA Letter;
comment letter of Olympus Partners (Apr. 1, 2011) (``Olympus
Letter''); PEGCC Letter (preferring that there be no large adviser
category for private equity fund advisers because, in their view,
these advisers pose little systemic risk); Seward Letter; SIFMA
Letter; comment letter of the United States Chamber of Commerce,
Center for Capital Markets Competitiveness (Apr. 12, 2011) (``USCC
Letter'').
    \101\ See, e.g., AIMA General Letter (asserting that a $5
billion threshold ``still captures around 50-60% of the US hedge
fund industry assets or just over 75 large hedge fund managers.'');
MFA Letter (``Based on estimates, 77 hedge fund managers
representing approximately 50-60% of hedge fund industry assets
would exceed this [$5 billion] threshold.''); Seward Letter; USCC
Letter (citing figures similar to those provided in the AIMA General
Letter and the MFA Letter in support of a $5 billion threshold).
Other commenters asserted that the thresholds should take into
account measures of leverage or derivatives exposures rather than
just assets under management. See, e.g., ABA Committees Letter; AIMA
General Letter. As discussed above, measuring these thresholds using
``regulatory assets under management,'' as defined in Form ADV,
implies adjustment for some forms of leverage. Two commenters
suggested that, instead of assets under management, the adviser's
proprietary assets are the most appropriate measure of assets at
risk. See PEGCC Letter; USCC Letter. However, private fund advisers
exercise significant discretion over the assets they manage, which
makes assets under management a more accurate measure of an
adviser's ability to affect the U.S. financial system.
---------------------------------------------------------------------------

    We have carefully considered these comments in light of the
information we understand FSOC desires and its intended use by FSOC.
Based on this, the SEC has determined to adopt the proposed threshold
for large liquidity fund advisers and to increase the threshold for
large private equity fund advisers to $2 billion. We are adopting the
threshold for large hedge fund advisers with the corrective change
discussed above. Although we understand commenters' concerns that the
proposed thresholds are too high and will not permit regulators to
detect certain group behaviors among smaller private fund advisers, we
believe at this time that the amount of additional information that
would be required for this purpose would impose a significant burden on
these smaller advisers and not significantly expand FSOC's ability to
understand the industry.
    On the other hand, in light of the information we understand FSOC
desires and its intended use by FSOC, we are also not persuaded that a
larger increase in the thresholds would be appropriate. Commenters
supporting an increase may be correct that an adviser just exceeding
these thresholds could not be large enough to pose systemic risk.
However, the thresholds are not intended to establish a cutoff
separating the risky from the safe but rather to provide FSOC with
sufficient context for the assessment of systemic risk while minimizing
the burden imposed on smaller advisers.\102\ We understand based on our
staffs' consultation with staff representing FSOC's members that, in
order to assess potential systemic risk posed by the activities of
certain funds, FSOC would benefit from access to data about funds that,
on an individual basis, may not be a source of systemic risk. As
discussed above, the increase that some commenters supported would
result in coverage of a substantially smaller part of the industry,
potentially impeding FSOC's ability to obtain a broad picture of the
private fund industry.\103\
---------------------------------------------------------------------------

    \102\ See supra text accompanying notes 94-96. As noted above,
the FSOC Second Notice highlights that even establishing guidelines
for evaluating private fund advisers may require the context that
Form PF will provide. See supra note 21.
    \103\ In particular, the activities of private fund advisers may
differ significantly depending on size and that the portion of
industry assets represented by advisers with over $5 billion in
private fund assets under management may look substantially
different from the portion of industry assets represented by
advisers with between, for instance, $1 billion and $5 billion.
---------------------------------------------------------------------------

    The SEC is, however, persuaded that an increase in the threshold
for large private equity advisers that is smaller than some commenters
advocated can be made without sacrificing the ability to obtain a broad
picture of the private equity industry. SEC staff estimates that an
increase in this threshold to $2 billion from the proposed $1 billion
will reduce the portion of U.S. private equity industry assets covered
by the more detailed reporting in section 4 of the Form from
approximately 85 percent to approximately 75 percent.\104\ At the same
time, it reduces the number of U.S.-based advisers SEC staff estimates
will be categorized as large private equity advisers from approximately
270 to approximately 155.\105\ This will significantly mitigate the
number of advisers subject to the more detailed reporting while still
covering a substantial majority of industry assets. As a result of this
change, section 4 of Form PF will cover a smaller portion of U.S.
private equity industry assets than section 2 covers of U.S. hedge fund
industry assets. However, the SEC believes this result is appropriate
because private equity funds tend to pursue a narrower range of
strategies than hedge funds, reducing concerns regarding the level of
representativeness.
---------------------------------------------------------------------------

    \104\ See supra note 89.
    \105\ See supra note 89.
---------------------------------------------------------------------------

b. Frequency of Testing
    The proposal would have required hedge fund and liquidity fund
advisers to measure whether they had crossed these thresholds on a
daily basis and private equity advisers to measure them on a quarterly
basis. The proposed approach was based on our understanding 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.
    However, several commenters argued that advisers would have
difficulty monitoring on a daily basis the value of private funds
holding complex or illiquid investments.\106\ One commenter also noted
that, in any given quarter, an adviser could experience significant
spikes in the value of its assets under management.\107\ These
commenters suggested a variety of alternatives, such as testing at the
end of the prior reporting period,\108\ using an average over the
period (possibly based on values at the end of each month in the
quarter),\109\ or testing at the end of each month.\110\ We are
persuaded that requiring daily testing of complex or illiquid
investments could impose a substantial burden on some advisers,

and we have, accordingly, modified the Form so that advisers need only
test whether their hedge fund or liquidity fund assets meet the
relevant threshold as of the end of each month.\111\ In addition, as
some commenters suggested, the test will look back one quarter so that
these advisers know at the start of each reporting period whether they
will be required to complete the more detailed reporting required of
large hedge fund advisers and large liquidity fund advisers.\112\ We
did not adopt an approach using an average because it would add
unnecessary complexity and potentially allow an adviser whose assets
under management have grown significantly during a quarter to delay
more detailed reporting for an additional quarter.
---------------------------------------------------------------------------

    \106\ See, e.g., ABA Committees Letter; BlackRock Letter; MFA
Letter; Seward Letter.
    \107\ See ABA Committees Letter.
    \108\ See BlackRock Letter; MFA Letter.
    \109\ See ABA Committees Letter; AIMA General Letter; IAA
Letter.
    \110\ See Seward Letter.
    \111\ See Instruction 3 to Form PF.
    \112\ Id. See also supra note 108.
---------------------------------------------------------------------------

    Commenters also objected to the proposed quarterly testing with
respect to private equity advisers, suggesting that even such
infrequent testing may be difficult for some advisers.\113\ As we
discuss in further detail below, large private equity fund advisers
will be required to report information regarding their private equity
funds only on an annual (rather than quarterly) basis, with the result
that quarterly testing of the threshold is unnecessary.\114\
Accordingly, advisers need only test whether their private equity fund
assets meet the relevant threshold at the end of each fiscal year.\115\
---------------------------------------------------------------------------

    \113\ See Merkl February Letter (noting that some private equity
funds do not provide first and third quarter financial statements to
investors); PEGCC Letter (suggesting annual testing and asserting
that the less volatile nature of private equity investments would
not justify the cost of quarterly valuation).
    \114\ See section II.B of this Release.
    \115\ See Instruction 3 to Form PF.
---------------------------------------------------------------------------

5. Aggregation of Assets Under Management
    For purposes of determining whether an adviser meets the $150
million minimum reporting threshold or is a Large Private Fund Adviser
for purposes of Form PF, the adviser must 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 private funds advised by the firm
(``parallel managed accounts'') unless the value of those accounts
exceeds the value of the private funds with which they are managed;
\116\ and
---------------------------------------------------------------------------

    \116\ See Instructions 1, 3, 5, and 6 to Form PF; and Glossary
of Terms to Form PF. See also definitions of ``dependent parallel
management account,'' ``hedge fund assets under management,''
``liquidity fund assets under management,'' and ``private equity
fund assets under management'' in the Glossary of Terms to Form PF.
---------------------------------------------------------------------------

     Assets of private funds advised by any of the adviser's
``related persons'' other than related persons that are separately
operated.\117\
---------------------------------------------------------------------------

    \117\ See 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). For purposes of Form
PF, a related person is ``separately operated'' if the advisers is
not required to complete section 7.A. of Schedule D to Form ADV with
respect to that related person. See Glossary of Terms to Form PF and
Glossary of Terms to Form ADV. In addition, an adviser may, but is
not required to, file one consolidated Form PF for itself and its
related persons. See infra section II.A.6 of this Release.
---------------------------------------------------------------------------

    These aggregation requirements are designed to prevent an adviser
from avoiding Form PF reporting requirements by re-structuring how it
provides advice.
    We have modified these aggregation requirements from the proposal.
As adopted, an adviser may exclude parallel managed accounts if the
value of those accounts is greater than the value of the private funds
with which they are managed.\118\ This change recognizes that, as some
commenters noted, an adviser managing a relatively small amount of
private fund assets could end up crossing a reporting threshold simply
because it has a significant separate account business using a similar
strategy.\119\ We believe this approach is consistent with section
204(b) of the Advisers Act, the focus of which is private fund
reporting.\120\ We remain concerned, however, that advisers focusing on
private funds may increasingly structure investments as separate
accounts to avoid Form PF reporting requirements, which could diminish
the utility to FSOC of the information collected on Form PF.\121\
Accordingly, an adviser must still include the value of parallel
managed accounts in determining whether it meets a reporting threshold
if the value of those accounts is less than the value of the private
funds managed using substantially the same strategy.\122\
---------------------------------------------------------------------------

    \118\ See supra note 116.
    \119\ See IAA Letter; TCW Letter.
    \120\ An adviser managing primarily separate accounts would, of
course, still be subject to the applicable Form PF reporting
requirements if its private fund assets, taken alone, would cause it
to exceed one or more reporting thresholds.
    \121\ Commenters disagreed over whether such evasion was likely.
One commenter supported the proposed aggregation rules, agreeing
that they ``will prevent [an adviser from splitting itself] into
smaller components to avoid reporting requirements that are
triggered by the amount of assets that are managed by an investment
adviser.'' Merkl February Letter. Another commenter, however, was
skeptical that advisers would re-structure to avoid reporting
because clients typically determine the structure of their
investments. See IAA Letter. Although clients may in many cases
dictate the form of investment, we believe that advisers are not
without influence in such structuring decisions and may prefer to
avoid reporting on Form PF. (We note that advisers, as fiduciaries,
may not subordinate clients' interests to their own such as by
altering the structure of investments in a way that is not in the
client's best interest in an attempt to remain under the reporting
thresholds.)
    \122\ See supra note 116. Some commenters also encouraged us to
narrow the definition of ``parallel managed account'' so that fewer
accounts or fewer types of accounts would be covered. See, e.g.,
AIMA General Letter; IAA Letter (suggesting that we replace
``substantially the same'' with the ``same''); comment letter of the
Investment Company Institute (Apr. 12, 2011); TCW Letter (suggesting
we exclude registered investment companies, undertakings for
collective investment in transferable securities (UCITS) and
SICAVs). We have, however, determined to adopt this definition as
proposed because we believe that it appropriately reflects the total
amount of assets that an adviser is managing using a particular
strategy. In addition, the changes we are making with respect to how
these account assets are treated for purposes of the reporting
thresholds, as well as changes discussed below that allow advisers
not to aggregate these account assets with their private funds for
reporting purposes, substantially address the concerns of these
commenters. See infra note 335 and accompanying text.
---------------------------------------------------------------------------

    We have also modified these aggregation requirements from the
proposal so that advisers may exclude the assets under management of
related persons that are separately operated.\123\ There was general
support for the proposed aggregation of related persons.\124\ However,
commenters argued that ``[r]equiring aggregation of funds managed by
`any related person' is not possible for many large institutions such
as a large firm which operates under separate business units with
independent asset management functions and decision making by
affiliated entities.'' \125\
---------------------------------------------------------------------------

    \123\ See supra note 117. See also Proposing Release, supra note
12, for the proposed version of Instructions 3, 5 and 6 to Form PF.
    \124\ See, e.g., Merkl February Letter.
    \125\ TCW Letter. See also IAA Letter.
---------------------------------------------------------------------------

    We are persuaded that advisers may have difficulty gathering the
information necessary to aggregate the assets of related persons whose
operations are genuinely independent of their own and that, with an
appropriate standard of separateness, the risk of evasion is
substantially mitigated. Having considered several existing SEC
standards of separateness, we believe that the most appropriate for
this purpose is the standard the SEC recently adopted in Item 7.A of
Form ADV for determining whether an adviser must complete section 7.A
of Schedule D to that form with respect to a related

person.\126\ Although the Item 7.A standard was adopted for a somewhat
different regulatory purpose, we believe it suits this role as well. In
addition, every adviser filing Form PF will have already considered
this standard with respect to its related persons, which means that
applying the standard in the context of Form PF will impose little or
no incremental burden on advisers. Accordingly, for purposes of
determining whether an adviser meets one or more of the reporting
thresholds, the adviser need only aggregate its private fund assets
with those of its related persons for which it is required to complete
section 7.A of Schedule D to Form ADV.\127\
---------------------------------------------------------------------------

    \126\ One commenter suggested that we use the standard under
section 13 of the Securities Exchange Act of 1934 (``Exchange Act'')
or look to whether the related persons ``share information about
investment decisions on a real time basis.'' TCW Letter. We are
concerned that using the standard under sections 13(d) and 13(g) of
the Exchange Act would impose additional burdens on advisers as
compared to the Item 7.A standard because advisers will not
necessarily have considered the former in the ordinary course of
business, and we believe the alternative proposed by this commenter
would make it too easy to conclude that a related person is
separately operated.
    \127\ See supra note 117. The relevant instruction to Item 7.A
of Form ADV reads as follows: ``You do not need to complete Section
7.A. of Schedule D for any related person if: (1) You have no
business dealings with the related person in connection with
advisory services you provide to your clients; (2) you do not
conduct shared operations with the related person; (3) you do not
refer clients or business to the related person, and the related
person does not refer prospective clients or business to you; (4)
you do not share supervised persons or premises with the related
person; and (5) you have no reason to believe that your relationship
with the related person otherwise creates a conflict of interest
with your clients.''
---------------------------------------------------------------------------

    For purposes of both the reporting thresholds and responding to
questions on Form PF, an adviser may exclude any assets invested in the
equity of other private funds.\128\ In addition, if any of the
adviser's private funds invests substantially all of its assets in the
equity of other private funds and, aside from those investments, holds
only cash, cash equivalents and instruments intended to hedge currency
risk, the adviser may complete only section 1b with respect to that
fund and otherwise disregard that fund.\129\ These instructions are
intended to avoid duplicative reporting, which reduces the burden of
reporting for advisers and improves the quality of the data reported.
---------------------------------------------------------------------------

    \128\ See Instruction 7 to Form PF. The adviser must, however,
treat these assets consistently for purposes of Form PF. For
example, an adviser may not count these assets when determining
whether the fund's borrowing may exceed half its net asset value and
then disregard these assets for purposes of the reporting
thresholds. Although this instruction allows an adviser to disregard
these investments in other private funds, it would not allow an
adviser to disregard any liabilities of the private fund, even if
incurred in connection with an investment in other private funds.
    \129\ See Instruction 7 to Form PF. Solely for purposes of this
instruction, an adviser is also permitted to treat as a private fund
any non-U.S. fund that would be a private fund had it used U.S.
jurisdictional means in offering its securities. A non-U.S. fund
that has never used U.S. jurisdictional means in the offering of the
securities it issues would not be a private fund. See infra note
134; Exemptions Adopting Release, supra note 11, at n.294 and
accompanying text.
---------------------------------------------------------------------------

    Based on our staffs' consultation with staff representing FSOC's
members, we have expanded from the proposal the scope of assets that
may be disregarded under this instruction. The proposed instruction
would have allowed advisers to disregard only fund of funds that invest
exclusively in other private funds.\130\ Commenters expressed concern
that the proposed instruction would prove too narrow to accommodate
many funds of funds, noting that these funds often hold cash or some
amount of direct investments.\131\ These commenters generally sought a
broader exclusion for funds of funds, suggesting alternatives that
would allow these funds to hold essentially unlimited dollar amounts of
direct investments while not reporting on Form PF.\132\ In light of the
purpose for which information is collected on Form PF, we are not
convinced that an adviser should not have to report on a fund's direct
investments simply because it primarily holds investments in other
private funds. However, we are persuaded that our proposed exception
for funds of funds was too narrow in that it did not allow for a de
minimis amount of cash, cash equivalents and currency hedges. These
limited non-private fund holdings appear unlikely, on their own, to
raise systemic concerns. We are also persuaded that, even where a fund
is not necessarily a ``fund of funds'' but holds investments in other
private funds, reporting on those investments is unnecessary because
information regarding the other private funds will, in most cases, be
reported separately on Form PF, and we have modified the instructions
accordingly.\133\
---------------------------------------------------------------------------

    \130\ See the Proposing Release, supra note 12, for the proposed
version of Instruction 7 to Form PF. We have also added a new
Instruction 8, which clarifies that, except as provided in
Instruction 7, all investments in other funds should be included for
all purposes under Form PF but that advisers are not required to
``look through'' the other funds to the underlying assets (unless
the other fund's purpose is to act as a holding company for the
private fund's investments).
    \131\ See, e.g., ABA Committees Letter; comment letter of Akina
Limited (Feb. 25, 2011) (``Akina Letter''); MFA Letter; PEGCC
Letter; comment letter of Sidley Austin, LLP (submitted to the CFTC)
(Apr. 12, 2011) (``Sidley Letter''); SIFMA Letter.
    \132\ Id. Some commenters also suggested that advisers should
not report even the limited information required in section 1b with
respect to funds of funds. See, e.g., ABA Committees Letter; Sidley
Letter; SIFMA Letter. However, as one commenter pointed out, these
funds may be employing leverage at the fund of funds level, which
would not be reported if these funds did not complete this section.
See Merkl February Letter. In addition, information collected in
section 1b will provide regulators with information regarding the
extent of these funds' investments in other private funds, and
certain of the information collected in this section may be
important to our investor protection mission. See infra notes 133
and 197.
    \133\ See Instruction 7 to Form PF. We have, however, added a
new question 10 to Form PF, which requires the adviser to disclose
the amount that each private fund has invested in other private
funds. This will allow regulators to understand the extent to which
these investments occur and are otherwise being disregarded on Form
PF. See infra note 197.
---------------------------------------------------------------------------

    If an adviser's principal office and place of business is outside
the United States, the adviser may exclude any private fund that,
during the adviser's last fiscal year, was not a United States person,
was not offered in the United States, and was not beneficially owned by
any United States person.\134\ This approach is designed to reduce the
duplication of reporting requirements that foreign regulators may
impose and to allow an adviser to report with respect to only those
private funds that are more likely to implicate U.S. regulatory
interests.
---------------------------------------------------------------------------

    \134\ See Instruction 1 to Form PF. This portion of Instruction
1 is only necessary for those funds that fall within the definition
of ``private fund.'' A non-U.S. fund that has never used U.S.
jurisdictional means in the offering of the securities it issues
would not be a private fund. See Exemptions Adopting Release, supra
note 11, at n.294 and accompanying text. We have modified this
instruction from the proposal to more closely follow the
requirements of Regulation S; the instruction now looks to whether
the offering was made ``in the United States'' rather than ``to * *
* any United States person.'' See also Glossary of Terms to Form PF.
``United States person'' is defined for purposes of Form PF by
reference to the definition in rule 203(m)-1, which tracks the
definition of a ``U.S. person'' under Regulation S but contains a
special rule for discretionary accounts maintained for the benefit
of United States persons. See Exemptions Adopting Release, supra
note 11, at section II.B.4.
---------------------------------------------------------------------------

Reporting for Affiliated and Sub-advised Funds
    An adviser may, 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.\135\ This is intended to provide
private fund advisers with reporting flexibility and convenience,
allowing affiliated entities that share reporting and risk management
systems to report jointly while also permitting affiliated entities
that operate separately to report separately. Commenters did not
address

this aspect of the proposal, which we are adopting as proposed.
---------------------------------------------------------------------------

    \135\ See Instruction 2 to Form PF. See supra note 117 for the
definition of ``related person.''
---------------------------------------------------------------------------

    With respect to sub-advised funds, to prevent duplicative
reporting, only one adviser should report information on Form PF with
respect to that fund.\136\ For reporting efficiency and to prevent
duplicative reporting, if the adviser that completes information in
section 7.B.1. of Schedule D to Form ADV with respect to any private
fund is also required to file Form PF, the same adviser is responsible
for reporting on Form PF with respect to that fund.\137\ However, if
the adviser that completes information on Schedule D to Form ADV with
respect to the private fund is not required to file Form PF (such as in
the case of an exempt reporting adviser), then another adviser must
report on that fund on Form PF.\138\ If none of the advisers to a fund
is required to file Form PF because they are all exempt reporting
advisers or do not exceed the minimum reporting threshold, Instruction
4 to Form PF would not require any adviser to file the Form with
respect to that fund. Commenters did not address this aspect of the
proposal.
---------------------------------------------------------------------------

    \136\ Each adviser that meets the criteria for reporting on Form
PF has an independent obligation to file the Form with respect to
every fund it advises. See Advisers Act rule 204(b)-1(a);
Instructions 1 and 3 to Form PF. However, when one adviser files
Form PF with respect to a fund for a given reporting period, the
other advisers are relieved of their obligation to file for that
fund.
    \137\ See Instruction 4 to Form PF. We have modified this
instruction from the proposal to clarify who would report in the
case that the adviser completing section 7.B.1 of Schedule D to Form
ADV with respect to a particular private fund is an exempt reporting
adviser or does not meet the new minimum reporting threshold of $150
million in private fund assets under management.
    \138\ See Instruction 4 to Form PF. See supra note 48 and
accompanying text.
---------------------------------------------------------------------------

7. Exempt Reporting Advisers
    Only private fund advisers registered with the SEC (including those
that are also registered with the CFTC as CPOs or CTAs) must file Form
PF.\139\ As noted above, the Dodd-Frank Act created exemptions from SEC
registration under the Advisers Act for advisers solely to venture
capital funds and for advisers solely to private funds that in the
aggregate have less than $150 million in assets under management in the
United States.\140\ We believe that Congress' determination to exempt
these advisers from SEC registration indicates Congress' belief that
regular reporting of detailed systemic risk information may not be
necessary because they are sufficiently unlikely to pose this kind of
risk.\141\ After consultation with staff representing FSOC's members
and in light of the basic information that the SEC obtains from exempt
reporting advisers on Form ADV, the SEC did not propose to extend Form
PF reporting to these advisers.\142\ Commenters that addressed this
aspect of the proposal agreed that exempt reporting advisers should not
be required to file Form PF, and we have adopted this approach as
proposed.\143\
---------------------------------------------------------------------------

    \139\ See Advisers Act rule 204(b)-1.
    \140\ See supra note 53 and accompanying text.
    \141\ See Senate Committee Report, supra note 5, 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 Exemptions Adopting Release, supra note 11.
    \142\ See Implementing Adopting Release, supra note 11, for a
discussion of the information exempt reporting advisers are required
to provide on Form ADV.
    \143\ See AIMA General Letter; Lone Star Letter. To the extent
an exempt reporting adviser is registered with the CFTC as a CPO or
CTA, the CFTC has proposed that the adviser would be obligated to
file either Form CPO-PQR or CTA-PR, respectively.
---------------------------------------------------------------------------

B. Frequency of Reporting

1. Annual and Quarterly Reporting
    Most private fund advisers, including large private equity advisers
and smaller private fund advisers, are required to complete and file
Form PF only once per fiscal year.\144\ Large hedge fund advisers and
large liquidity fund advisers, on the other hand, must update
information relating to their hedge funds or liquidity funds,
respectively, each fiscal quarter.\145\ Periodic reporting will permit
FSOC to monitor periodically certain key information relevant to
assessing systemic risk posed by these private funds on both an
individual and aggregate basis. More frequent, quarterly reporting for
large hedge fund and large liquidity fund advisers is necessary in
order to provide FSOC with timely data to identify emerging trends in
systemic risk.\146\
---------------------------------------------------------------------------

    \144\ See Instruction 9 to Form PF.
    \145\ Even these advisers, however, need only update information
regarding other types of funds they manage on an annual basis. For
example, a large hedge fund adviser that also manages a small amount
of liquidity fund and private equity fund assets must update
information relating to its hedge funds each quarter but only needs
to update information relating to its liquidity funds and private
equity funds when it submits its fourth quarter filing. An adviser
that is both a large hedge fund adviser and a large liquidity fund
adviser must file quarterly updates regarding both its liquidity
funds and hedge funds. See Instruction 9 to Form PF.
    \146\ See Proposing Release, supra note 12, at section II.C. We
also noted in the Proposing Release that we understood hedge fund
advisers already collect and calculate on a quarterly basis much of
the information that Form PF requires relating to hedge funds. One
commenter argued that this is only true with respect to the
information required in sections 1a and 1b of Form PF. See comment
letter of Fidelity Investments (Apr. 12, 2011) (``Fidelity
Letter''); see also MFA Letter. We have taken these comments into
account in determining to extend the reporting deadlines for hedge
fund advisers, as discussed below in section II.B.2 of this Release.
We note, however, that another commenter also stated that ``Form PF
for the most part * * * [requests] information that is part of, or
should be part of, the existing risk management processes at the
responding institutions,'' and as such ``this information will
either be something the adviser produces already, or arguably
should.'' Comment letter of MSCI Inc. (submitted to the CFTC) (Apr.
11, 2011) (``MSCI Letter''). Commenters did not address the ability
of liquidity funds to prepare and submit quarterly filings, and we
continue to believe, as discussed in the Proposing Release, that
most liquidity fund advisers collect on a monthly basis much of the
information that we are requiring in section 3 of Form PF and that
quarterly reporting should, as a result, be relatively efficient for
these advisers.
---------------------------------------------------------------------------

    The filing requirements we are adopting differ from the proposal in
two principal respects. First, the proposal would have required large
private equity advisers to report on a quarterly, rather than annual,
basis. Second, under the proposal, once an adviser became subject to
quarterly reporting, it would have been required to update information
with respect to all of its private funds each quarter (not just for the
type of private fund that caused it to exceed the large adviser
threshold).\147\
---------------------------------------------------------------------------

    \147\ The proposal also would have required reporting based on
calendar quarters rather than the adviser's fiscal quarters. We have
made this change because some advisers with quarterly updating
obligations will now only need to update information about certain
funds on an annual basis. The annual reporting is intended to align
with typical end of fiscal year reporting activities, and requiring
advisers to file separate annual and fourth quarter reports would
impose additional burdens. We believe this change will, in practice,
have little effect on the reporting (based on IARD data as of
October 1, 2011, only about 2% of all registered advisers report a
fiscal year ending in a month other than March, June, September or
December, though the total may be slightly higher because IARD does
not distinguish among, for instance, mid-month and end-of-month
fiscal year ends).
---------------------------------------------------------------------------

    A number of commenters responded to our proposal regarding the
frequency of reporting. One agreed that quarterly reporting would be
appropriate, and two others argued that advisers should report even
more frequently because market conditions and portfolios can change
rapidly.\148\ On the other hand, a number of commenters disagreed with
the proposal, suggesting instead that Large Private Fund Advisers
should report no more than semi-annually.\149\ These commenters argued
that semi-

annual reporting would reduce the burden to advisers while also giving
regulators more time to analyze the data, and several compared Form PF
to the FSA Survey, which has been conducted on a voluntary, semi-annual
basis.\150\ Another commenter stated that the generally illiquid
portfolios of private equity funds fluctuate little in value throughout
the year, in its view, making quarterly reporting unnecessary.\151\
---------------------------------------------------------------------------

    \148\ See CPIC Letter (supporting the proposal with respect to
large private funds advisers); AFL-CIO Letter and AFR Letter
(arguing for more frequent reporting).
    \149\ See, e.g., ABA Committees Letter; BlackRock Letter;
Fidelity Letter; comment letter of Kleinberg, Kaplan, Wolff & Cohen,
P.C. (submitted to the SEC) (Apr. 12, 2011) (``Kleinberg General
Letter''); MFA Letter; SIFMA Letter; USCC Letter.
    \150\ See, e.g., ABA Committees Letter; Kleinberg General
Letter.
    \151\ See PEGCC Letter.