The SEC has recently proposed new disclosure requirements for hedge funds and private equity funds that have the potential to impact the extent and timeliness of reporting for these types of investment vehicles.
The proposal is part of a series of new and amended rules for registered fund advisors reflecting the SEC's goal to streamline their analysis process and alleviate inconsistencies in a fast-paced industry. In the past decade, the private fund sector has experienced rapid change from changes to business practices, increasing complexity of fund structures, and evolving investment strategies. The SEC hopes these changes will allow for more transparency and efficiency in reporting to provide a clearer picture for outside analysis.
More specifically, the proposed amendments to Form PF were designed to enhance the Financial Stability Oversight Council's (FSOC) ability to monitor systemic risk, address significant information gaps, gather more specific information, and bolster the SEC's regulatory oversight of private fund advisers while the industry continues to boom.
Below, we've outlined the key changes proposed.
Amendments to Private Fund Reporting
On Jan. 26, 2022, the SEC issued a release proposing amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The proposal includes new reporting requirements, a lowered threshold for large private equity adviser reporting, and requirements for more information regarding large private equity funds and large liquidity funds.
The proposed amendments require large hedge funds and private equity funds advisers to file current reports within one business day of events relevant to financial stability and investor protection.
The events for private equity funds are:
- Execution of an advisor-led secondary transaction
- Implementation of a general partner or limited partner clawback
- Removal of a fund's general partner, termination of a fund's investment period, or termination of a fund
The events for large hedge fund advisers are:
- Extraordinary investment losses
- Significant margin and default events
- Material change in relationship with prime broker
- Changes in unencumbered cash
- Operations events
- Withdrawals and redemptions
The proposal also decreases the reporting threshold for large private equity advisors from $2 billion to $1.5 billion in private equity fund assets under management.
Additional Reporting Requirements
Per the new regulations, the proposal would require more information regarding large private equity funds and large liquidity funds to enhance the data used for risk assessment and the SEC's regulatory programs.
The SEC states the proposed amendments would require large private equity advisers to gather additional information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolios companies (CPCs) and CPC borrowings, fund investments in different levels of a single portfolio company's capital structure, and portfolio company restructurings or recapitalizations.
Additionally, it would require large liquidity fund advisers to report substantially the same information that money market funds would report on Form N-MFP per the proposed amendments.
Preparing for the Changes
These proposed changes may significantly expand the reporting requirements to many advisors, and others could face additional reporting obligations. It is recommended you work with your private equity fund advisor to review these proposed new reporting requirements and the potential ramifications they could have on your organization.
Published on April 05, 2022