2011-28549

Federal Register, Volume 76 Issue 221 (Wednesday, November 16, 2011)[Federal Register Volume 76, Number 221 (Wednesday, November 16, 2011)]

[Rules and Regulations]

[Pages 71128-71239]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-28549]

[[Page 71127]]

Vol. 76

Wednesday,

No. 221

November 16, 2011

Part II

Commodities and Future Trading Commission

Securities and Exchange Commission

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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

[[Page 71128]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 4

RIN 3038-AD03

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-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.

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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: (202) 418-5283, Email: [email protected], or Kevin P.

Walek, Assistant Director, Telephone: (202) 418-5463, Email:

[email protected], 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 protected], 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\

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\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

[[Page 71129]]

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\

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\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.

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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\

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\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.

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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.

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\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.

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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

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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\

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\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.'').

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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.

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\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'').

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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\

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\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'').

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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

[[Page 71131]]

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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\42\ See Proposing Release, supra note 12, at section II.A and

at n. 49.

\43\ See supra note 6.

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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\

[[Page 71132]]

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.

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\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.

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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.

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\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.

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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\

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\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.

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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.

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\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.

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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.

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\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.

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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

[[Page 71133]]

of ``Large Private Fund Advisers'' would be required to complete

certain additional sections of Form PF:

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\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.

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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\

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\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).

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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

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\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.

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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.

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\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.

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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

[[Page 71134]]

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\

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\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.

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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.

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\72\ See PEGCC Letter.

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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\

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\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.

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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.

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

Letter; Seward Letter.

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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.

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\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'').

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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.

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

SIFMA Letter; TCW Letter.

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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

[[Page 71135]]

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.

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

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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.

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\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.

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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.

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\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.

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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\

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\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.

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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,

[[Page 71136]]

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\

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\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.

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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\

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\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.

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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.

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\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.

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Commenters expressed support for a tiered reporting system based on

size.\97\

[[Page 71137]]

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\

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\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.

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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\

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\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.

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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.

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\104\ See supra note 89.

\105\ See supra note 89.

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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,

[[Page 71138]]

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.

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\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.

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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\

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\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.

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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

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\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.

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Assets of private funds advised by any of the adviser's

``related persons'' other than related persons that are separately

operated.\117\

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\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.

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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\

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\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.

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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\

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\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.

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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

[[Page 71139]]

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\

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\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.''

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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.

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\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.

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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\

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\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.

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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.

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\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.

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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

[[Page 71140]]

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

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\135\ See Instruction 2 to Form PF. See supra note 117 for the

definition of ``related person.''

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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).

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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-

[[Page 71141]]

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\

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\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.

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After consultation with staff representing FSOC's members, we

continue to believe that quarterly reporting is important to provide

FSOC with meaningfully current information with respect to the hedge

fund and liquidity fund industries and to allow FSOC to identify

rapidly emerging trends among these types of funds.\152\ Although some

commenters suggested that the speed with which markets and portfolios

change may warrant even more frequent reporting, we believe at this

time that the additional benefit to FSOC from reporting more often than

once a quarter would not justify the additional burdens imposed on

advisers.\153\ On the other hand, we are also not convinced that less

frequent (e.g., semi-annual) reporting would provide sufficient, or

sufficiently timely, information to enable FSOC to identify and respond

to rapidly emerging trends. In addition, we believe that international

approaches to private fund reporting may be shifting in favor of

quarterly, rather than semi-annual, reporting.\154\

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\152\ Moreover, we believe that quarterly reporting helps to

discourage ``window-dressing'' around the reporting dates. See infra

notes 285-292 and accompanying text.

\153\ See supra note 148. We also note that FSOC has the

authority to direct OFR to gather additional data where systemic

risk concerns merit the reporting. See, e.g., sections 153 and 154

of the Dodd-Frank Act.

\154\ ESMA's proposed reporting template would impose quarterly

reporting requirements on private fund advisers. See ESMA Proposal,

supra note 33.

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With respect to large private equity advisers, however, the SEC is

persuaded that the generally illiquid nature of private equity fund

portfolios means that trends emerge more slowly in that sector.\155\ As

a result, the proposal has been modified so that large private equity

advisers are required to report information regarding private equity

funds on an annual basis only.\156\

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\155\ See supra note 151.

\156\ See Instruction 9 to Form PF.

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Fewer commenters addressed the frequency of reporting for smaller

advisers. One commenter agreed that annual reporting would be

appropriate for these advisers,\157\ and several others argued that

smaller advisers should report more frequently, proposing at least

semi-annual filings.\158\ Again, although we acknowledge the potential

value of more frequent reporting from smaller private fund advisers, we

are concerned about the burden this would impose. At this time, we are

not convinced that more frequent reporting from smaller private fund

advisers would, from a systemic risk monitoring perspective, be

justified by the value of the additional data.

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

\157\ See AIMA General Letter.

\158\ See AFL-CIO Letter; AFR Letter. See also MFA Letter

(arguing that all advisers, large and small, should report on a

semi-annual basis).

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

As noted above, the requirements we are adopting also differ from

the proposal in that even those advisers who must report on a quarterly

basis are only required to do so with respect to the type of fund that

caused them to exceed the reporting threshold. We are adopting this

approach in part because these other funds will include private equity

funds, venture capital funds and real estate funds, all of which are

likely to have generally illiquid portfolios and for which we believe

annual reporting is appropriate, as explained above. This approach also

reflects the different implications for systemic risk that may be

presented by different investment strategies.

Reporting Deadlines

Large private equity advisers and smaller private fund advisers

have 120 days from the end of their fiscal years to file Form PF.\159\

In contrast, large hedge fund advisers have 60 days from the end of

each fiscal quarter, and large liquidity fund advisers have 15

days.\160\ The deadlines we are adopting for large hedge fund advisers,

large private equity advisers and smaller advisers are longer than the

deadlines we proposed. In particular, we have extended the deadline for

large hedge fund advisers from 15 days to 60 days, the deadline for

large private equity fund advisers from 15 days to 120 days and the

deadline for smaller private fund advisers from 90 days to 120

days.\161\

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\159\ See Instruction 9 to Form PF; Advisers Act rule 204(b)-

1(a).

\160\ See Instruction 9 to Form PF. As discussed above, a large

hedge fund adviser (or large liquidity fund adviser) that also

manages other types of funds must file quarterly updates with

respect to its hedge funds (or liquidity funds, as applicable) but

only needs to update information regarding its other funds when it

files its fourth quarter update. Such an adviser may comply with its

filing obligations by initially filing a fourth quarter update that

includes only information about its hedge funds (or liquidity funds,

as applicable) within 60 days (or 15 days, as applicable) and then

amending its filing within 120 days after the end of the quarter to

include information about its other funds.

\161\ We noted in the Proposing Release that the proposed 90 day

deadline would allow these advisers to file amendments at the same

time as they file their Form ADV annual updating amendment, which

may make certain aspects of the reporting more efficient, such as

reporting assets under management. Proposing Release, supra note 12,

at section II.C. We believe these efficiencies will still be

realized because the reporting continues to be ``as of'' the same

date as the annual reports on Form ADV and an adviser may still file

on or after the date on which it files Form ADV.

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The proposed deadline of 15 days for large hedge fund and private

equity fund advisers attracted significant opposition. Commenters

offered a number of reasons to extend the deadline, including that: (1)

15 days is not enough time to prepare and submit a report with reliably

accurate data, particularly where the adviser must value illiquid fund

assets; \162\ (2) other SEC reporting requirements allow more time;

\163\ (3) the FSA Survey has allowed more time (approximately 30 to 45

days in the most recent surveys) and required less detail; \164\ (4)

the same personnel will be closing the books at the end of the quarter

and completing Form PF; \165\ and (5) the more current the information

reported, the greater the consequences should it become public.\166\

These commenters suggested alternatives that ranged from 45 to 120

days.\167\ We understand from the comments, however, that the proposed

reporting deadlines would be more problematic for some types of

advisers than for

[[Page 71142]]

others. For instance, commenters focusing on private equity advisers

generally suggested longer deadlines than commenters focusing on hedge

fund advisers, and the valuation of illiquid portfolios is likely to be

a more common problem for private equity advisers.\168\ Also, although

a number of commenters addressed hedge fund advisers and private equity

advisers, none commented specifically on whether liquidity fund

advisers could meet the proposed deadline.

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\162\ See, e.g., ABA Committees Letter; AIMA General Letter;

BlackRock Letter; IAA Letter; MFA Letter; USCC Letter.

\163\ See, e.g., ABA Committees Letter (noting that Forms N-SAR

and N-Q, used by registered investment companies, allow 60 days);

AIMA General Letter (pointing to Form 13F (allowing 45 days), Form

10-K (allowing at least 60 days), and Form 10-Q (allowing at least

40 days)); Fidelity Letter; Kleinberg General Letter; MFA Letter

(pointing to the 120 days allowed for audited financial statements

under the Advisers Act custody rule); TCW Letter.

\164\ See, e.g., AIMA General Letter; IAA Letter.

\165\ See, e.g., Kleinberg General Letter.

\166\ See, e.g., AIMA General Letter; Kleinberg General Letter.

Some commenters also pointed to the Form's proposed signature page,

which would have required advisers to certify that the information

provided is ``true and correct,'' arguing that this standard would

be difficult to satisfy in 15 days. See, e.g., AIMA General Letter.

As discussed below, we are not adopting the proposed certification

requirement. See infra notes 183-185 and accompanying text.

\167\ See, e.g., AIMA General Letter (45 days); Akina Letter

(120 days for private equity fund data); BlackRock Letter (120

days); CPIC Letter (45 days, at least initially); Fidelity Letter

(preferably 90 days, but no less than 45 days); IAA Letter (90

days); Kleinberg General Letter (60 days); Lone Star Letter (60 days

for private equity fund data); Merkl February Letter (four months

for private equity fund data); MFA Letter (120 days); PEGCC Letter

(at least 90 days for private equity fund data); Seward Letter (120

days); SIFMA Letter (120 days); TCW Letter (60 days); USCC Letter

(120 days).

\168\ Id.

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We are persuaded that longer deadlines are appropriate for large

hedge fund advisers and large private equity fund advisers and that,

with respect to large private equity fund advisers in particular, the

work required to value the generally illiquid portfolios of private

equity funds favors a substantially longer reporting deadline than was

proposed.\169\ A few commenters favored a deadline for large hedge fund

advisers longer than the one we are adopting, but several commenters

indicated that a deadline shorter than the one we are adopting would be

adequate.\170\ We believe that our revised approach strikes an

appropriate balance between the need to provide FSOC with timely data

and the ability of these advisers to prepare and submit Form PF. We

also believe it will reduce the burden of reporting for these advisers.

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\169\ We note that many of the questions in section 4, which

large private equity fund advisers must file, relate to information

that should be available on the financial statements of their

portfolio companies. By extending the deadline to 120 days for these

advisers, we anticipate that the burden of reporting will be reduced

because, in many cases, they will now be able to delay reporting

until after receiving financial statements from their portfolio

companies.

\170\ See supra note 167.

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Fewer commenters addressed the proposed reporting deadline of 90

days for smaller advisers. One commenter supported the proposal,\171\

but several argued that smaller advisers should have more than 90 days

to prepare and submit their filings.\172\ Several commenters noted that

the Advisers Act custody rule allows advisers up to 120 days to

distribute audited financial statements to investors when relying on

the annual audit provision under that rule.\173\ We believe that our

revised deadline of 120 days will enable these advisers to benefit from

the availability of financial statements and also help to avoid

crowding advisers' calendars with end of year reporting obligations

while at the same time providing FSOC with reasonably timely data.

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\171\ See AIMA General Letter.

\172\ See, e.g., BlackRock Letter (120 days); MFA Letter (120

days); PEGCC Letter (150 days for private equity fund data).

\173\ See, e.g., BlackRock Letter; MFA Letter; USCC Letter. See

also Advisers Act rule 206(4)-2(b)(4).

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3. Initial Reports

Newly registering private fund advisers are subject to the same

Form PF reporting deadlines as currently registered advisers.\174\

Advisers are not, however, required to file Form PF with respect to any

period that ended prior to the effective date of their registrations.

Accordingly, a smaller private fund adviser that registers during its

2013 fiscal year must file Form PF within 120 days following the end of

its 2013 fiscal year. It would not, however, need to file Form PF for

its 2012 fiscal year. Similarly, a large hedge fund adviser that

registers during its third fiscal quarter must file Form PF within 60

days following the end of that quarter but need not file for the

preceding fiscal quarter.\175\

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\174\ See Advisers Act rule 204(b)-1(a); supra section II.B.2 of

this Release.

\175\ Whether an adviser is a large hedge fund or large

liquidity fund adviser would be determined as of the date specified

in Form PF, not the date of registration. When filing an initial

Form PF, a large hedge fund or large liquidity fund adviser that

also manages other types of private fund may rely on the

instructions in the Form allowing it to delay updating information

regarding these other fund types when filing an update.

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

We have extended the deadlines for initial filings from the 15 days

that we proposed. One commenter argued that the proposed deadline would

be too short and suggested 90 days instead.\176\ We believe the revised

initial filing deadlines are more consistent with the deadlines for

updating Form PF discussed above in section II.B.2 of this Release.

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

\176\ See AIMA General Letter.

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4. Transition Filings, Final Filings and Temporary Hardship Exemptions

An adviser must file Form PF to report that it is transitioning to

only filing Form PF annually with the Commissions or to report that it

no longer meets the requirements for filing Form PF no later than the

last day on which the adviser's next Form PF update would be

timely.\177\ This allows us to determine promptly whether an adviser's

discontinuance in reporting is due to it no longer meeting the form's

reporting thresholds as opposed to a lack of attention to its filing

obligations. Advisers may also avail themselves of a temporary hardship

exemption in a similar manner as with other SEC filings if they are

unable to file Form PF electronically in a timely manner due to

unanticipated technical difficulties.\178\ No commenters addressed the

proposed transition filings, final filings or temporary hardship

exemption, and we are adopting them as proposed.

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\177\ See Instruction 9 to Form PF.

\178\ See Advisers Act rule 204(b)-1(f); Instruction 14 to Form

PF. The adviser would complete and file on paper Item A of section

1a and section 5 of Form PF, checking the box in section 1a

indicating that it is requesting a temporary hardship exemption. The

adviser must file any request for a temporary hardship exemption no

later than one business day after the electronic Form PF filing was

due. The adviser must then submit the filing that is the subject of

the Form PF paper filing in electronic format with the Form PF

filing system no later than seven business days after the filing was

due.

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C. Information Required on Form PF

The questions contained in Form PF reflect relevant requirements

and considerations under the Dodd-Frank Act, consultations with staff

representing FSOC's members, and the Commissions' experience in

regulating those private fund advisers that are already registered with

the Commissions. As discussed above, with respect to hedge fund

advisers in particular, the information collected on Form PF is also

broadly based on the guidelines initially developed in the FSA Survey

and the IOSCO report on hedge fund oversight, and many of the more

detailed items are similar to questions proposed to be included in

ESMA's reporting template.\179\ Form PF has been designed to collect

information to assist FSOC in monitoring and assessing systemic risks

that private funds may pose, as discussed in section II.A above.

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\179\ See supra section I.B of this Release.

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Commenters' reactions to the scope of Form PF varied, with some

proposing further enhancements and others arguing that the proposed

reporting is excessive. Commenters arguing for expanded reporting

recommended additional questions about counterparty exposures and short

selling or suggested having all advisers complete the entire form.\180\

In contrast, critics of the proposal argued that information required

on Form PF would be unduly burdensome to provide or is available to

regulators from other sources.\181\ A few commenters who objected to

other aspects of the proposal recommended adding several questions that

were originally proposed on Form ADV.\182\ Although this would expand

the Form, these commenters believed that these

[[Page 71143]]

questions, which relate to valuation, beneficial ownership and the

identity of service providers, would require competitively sensitive or

proprietary information and would be more appropriately reported

confidentially on Form PF.

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\180\ See, e.g., AFL-CIO Letter; AFR Letter; Merkl February

Letter; MSCI Letter; comment letter of Plexus Consulting Group (Feb.

28, 2011). See also supra note 76 and accompanying text.

\181\ See, e.g., AIMA General Letter; IAA Letter; Olympus

Letter; PEGCC Letter. See infra note 309 and accompanying text.

\182\ See IAA Letter; MFA Letter; Seward Letter.

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As discussed in greater detail below, Form PF, as adopted,

addresses the concerns of many commenters with changes from the

proposal that we believe will significantly reduce the burden of

reporting and clarify how commenters are expected to respond. At the

same time, the final Form preserves much of the information that the

proposal would require. Our revised approach is intended to respond to

industry concerns while still providing FSOC the information it needs

to monitor systemic risk across the private fund industry.

Two of the changes we are making, in particular, illustrate this

revised approach. The first is the removal of the proposed

certification language. This would have required an authorized

individual to affirm ``under penalty of perjury'' that the statements

made in Form PF are ``true and correct.'' \183\ This certification was

borrowed from the SEC's existing Advisers Act reporting form, Form ADV.

However, a number of commenters expressed concern that such a standard

would be inappropriate for Form PF because the Form requires advisers

to provide estimates and exercise significant judgment in preparing

responses.\184\ In consideration of the nature of the information

required on Form PF, we are persuaded that a certification is

unnecessary and that a signature confirming that the Form is filed with

proper authority is sufficient.\185\

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\183\ See Question 2 and Instruction 11 to Form PF. If the

adviser is also registered with the CFTC as CPO or CTA, the

signature page also requires the signatory to acknowledge that

misstatements or omissions of material fact on Form PF constitute a

violation of the CEA. This acknowledgement is included simply to

remove any doubt created by the filing of the Form through the SEC

rather than directly with the CFTC, which is merely a matter of

convenience for advisers.

\184\ See, e.g., ABA Committees Letter; AIMA General Letter;

Kleinberg General Letter; MFA Letter; PEGCC Letter. Some of these

commenters also saw the certification standard and the reporting

deadlines as related issues, arguing that the more quickly advisers

are required to report, the less confidence they will have in their

estimates. See, e.g., BlackRock Letter; Fidelity Letter; PEGCC

Letter; SIFMA Letter; USCC Letter. As discussed above in section

II.B.2 of this Release, we have also extended the proposed filing

deadlines. Several commenters compared Form PF to other SEC forms

and suggested that we either require just a signature without a

certification or that we use a less stringent standard, such as good

faith. See MFA Letter (pointing to the certification in the SEC's

Schedule 13G). See also ABA Committees Letter (comparing Form PF to

other SEC forms, including Form N-SAR, Form N-Q, Schedule 13D and

Schedule 13G); AIMA General Letter (pointing to Schedule 13G);

BlackRock Letter; Kleinberg General Letter.

\185\ We note, however, that even absent the certification, a

willful misstatement or omission of a material fact in any report

filed with the SEC under the Advisers Act is unlawful. See section

207 of the Advisers Act. We have also added an instruction to the

Form that clarifies when an adviser is required to amend its filing

to correct an error. In particular, Instruction 16 to Form PF

explains that an adviser is not required to update information that

it believes in good faith properly responded to Form PF on the date

of filing even if that information is subsequently revised for

purposes of the adviser's recordkeeping, risk management or investor

reporting (such as estimates that are refined after completion of a

subsequent audit). The instruction also explains that large hedge

fund advisers and large liquidity fund advisers that comply with

their fourth quarter filing obligations by submitting an initial

filing followed by an amendment in accordance with Instruction 8 to

Form PF will not be viewed as affirming responses regarding one fund

solely by providing updated information regarding another fund at a

later date.

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The second change is to increase the ability of advisers to rely on

their internal methodologies when reporting on Form PF.\186\ A number

of commenters encouraged this approach, recommending ``that the

instructions to the Form be modified to confirm that advisers be able

to rely on the same internal reporting procedures and practices when

reporting on the Form that they would use when reporting to advisory

clients, unless directly contradicted by the instructions.'' \187\ The

revised approach strikes an appropriate balance between easing the

burden on advisers by allowing them to rely on their existing practices

and ensuring that FSOC receives comparable data across the industry.

This change is intended, together with the removal of the

certification, to clarify that Form PF does not require the time or

expense involved in, for instance, an audit of the information included

on Form PF, and we anticipate that these changes will reduce the burden

that many advisers incur in completing the Form.\188\

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\186\ See Instruction 15 to Form PF. As noted in the

instruction, we would expect reporting on Form PF to be consistent

with information the adviser uses for internal and investor

reporting purposes. Methodologies also must be consistently applied,

and to the extent we have indicated how an adviser should respond to

a question, the answer should be consistent with our instructions.

In addition to this general instruction, we have increased the

ability of advisers to rely on their own methodologies with a number

of specific changes throughout the Form, including permitting

advisers to report performance using their existing practices,

allowing flexibility in reporting interest rate sensitivities and

changing the frequency and substance of reporting for large private

equity advisers. See, e.g., infra notes 202, 241-242, 247-248 and

258-260 and accompanying text and section II.C.4.

\187\ BlackRock Letter. See also IAA Letter; MFA Letter; PEGCC

Letter; SIFMA Letter; TCW Letter.

\188\ If audited information is available at the time an adviser

files Form PF, we would of course expect responses to Form PF to be

consistent with that audited information.

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The information that Form PF requires and the changes made from the

proposal are discussed in detail below.

1. Section 1 of Form PF

Each adviser required to file Form PF must complete all or part of

section 1. This section of the Form is divided into three parts:

section 1a requires information regarding the adviser's identity and

assets under management, section 1b requires limited information

regarding the size, leverage and performance of all private funds

subject to the reporting requirements, and section 1c requires

additional basic information regarding hedge funds. We are adopting

Form PF with several changes to the information that advisers are

required to report in section 1. These changes, which are discussed in

detail below, are intended to respond to industry concerns while still

providing FSOC the information it needs to monitor systemic risk across

the private fund industry. In general, we expect that these changes

will reduce the burden of responding to the Form and more closely align

the Form with ESMA's proposed reporting template.

a. Section 1a of Form PF

Item A of section 1a seeks identifying information about the

adviser, such as its name and the name of any of its related persons

whose information is also reported on the adviser's Form PF. The

adviser will also be required to provide its large trader

identification number, if any.\189\ The addition of the large trader

identification number will enhance the value of Form PF information by

allowing it to be quickly and accurately linked to other information

that may be available to the SEC while imposing little additional

burden. Section 1a also requires basic aggregate information about the

private funds managed by the adviser, such as the portion of gross

(i.e., regulatory) and net assets under management attributable to

certain types of private funds.\190\ This identifying information

[[Page 71144]]

will assist us and FSOC in monitoring the amount of assets managed by

private fund advisers and the general distribution of those assets

among various types of private funds.\191\ This information also

provides data about the size of the adviser, the nature of the

adviser's activities and the extent to which assets are managed rather

than owned, which are factors that FSOC must consider in making a

determination to designate a nonbank financial company for FRB

supervision under the Dodd-Frank Act.\192\

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\189\ See Question 1 on Form PF.

\190\ See Question 3 on Form PF. This question requires the

adviser to report the portion of its assets under management that

are attributable to hedge funds, liquidity funds, private equity

funds, real estate funds, securitized asset funds, venture capital

funds, other private funds, and funds and accounts other than

private funds. We have modified the instructions to Question 3 to

improve their consistency and to respond to a commenter's request

for clarification regarding the meaning of ``funds and accounts

other than private funds.'' See MFA Letter. We have also determined

not to adopt a proposed question that would have required advisers

to report their aggregate gross and net regulatory assets under

management because this information can be derived from the data

reported in Question 3. See the Proposing Release, supra note 12,

for the proposed Question 3 on Form PF.

\191\ Question 4 in section 1a of Form PF also permits an

adviser to explain any assumptions it made in responding to Form PF.

This question is optional. One commenter expressed support for

``providing space for managers to describe any assumptions they make

in responding to a question,'' and we are adopting this question

substantially as proposed. See MFA Letter.

\192\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

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b. Section 1b of Form PF

Section 1b of Form PF elicits certain identifying and other basic

information about each private fund the adviser manages. The adviser

generally must complete a separate section 1b for each private

fund.\193\ This section of the Form requires reporting of each private

fund's gross and net assets and the aggregate notional value of its

derivative positions.\194\ It also requires basic information about the

fund's borrowings, including a breakdown showing whether the creditor

is based in the United States and whether it is a financial

institution.\195\ Advisers must also report the percentage of the

fund's equity held by the five largest equity holders, which provides

information about the concentration of the fund's investor base.\196\

Two new questions, which we have added in connection with other changes

to the Form, also require the value of the fund's investments in other

private funds and of the parallel managed accounts managed alongside

the fund.\197\

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\193\ However, if the adviser elects to report on an aggregated

basis regarding the funds comprising a master-feeder arrangement or

a parallel fund structure, it would only file a single section 1b

for the master fund in the master-feeder arrangement or for the

largest fund in the parallel fund structure. We have modified the

approach to aggregation of master-feeder arrangements and parallel

fund structures to allow advisers more flexibility in determining

how to report. See Instruction 5 to Form PF. This change is

discussed in greater detail below in section II.C.5 of this Release.

\194\ See Questions 8, 9 and 13 on Form PF. With respect to

Question 13 and similar questions regarding the value of

derivatives, the Form requires the adviser to report the gross

notional value of its funds' derivative positions, except that

options must be reported using their delta adjusted notional value.

See Instruction 15 to Form PF. In contrast, Questions 8 and 9, and

similar questions that refer to gross asset value or net asset

value, require valuations based on the instruction in Form ADV for

calculating regulatory assets under management. See definitions of

``gross asset value'' and ``net asset value'' in the Glossary to

Form PF.

\195\ See Question 12 on Form PF. One commenter suggested that

the amount of borrowings should be netted where a private fund is

both a lender to and a creditor of a counterparty. See MFA Letter.

The commenter's approach would, however, obscure the total amount of

leverage the fund has incurred, and we have clarified that such

amounts should not be netted. Also, in response to this commenter,

we have modified the instructions to clarify that collateral should

not be netted against borrowings. We have also modified this

question, and other questions on the Form requiring a breakdown of

creditor types, to split the non-financial institution category into

U.S. and non-U.S. creditors. This change is intended to increase the

usefulness of this data for the FRB's flow of funds report, which is

an important tool for evaluating trends in and risks to the U.S.

financial system. See infra note 475.

We proposed that advisers completing section 1b also report the

identity of, and amount owed to, each creditor to which the fund

owed an amount equal to or greater than 5 percent of the fund's net

asset value as of the reporting date. See the Proposing Release,

supra note 12, for the proposed Question 10 on Form PF. This

question has been moved to section 2b of the Form so that only large

hedge fund advisers must provide this information. This change is

intended to respond to commenter concerns that completing this

question will be burdensome but also preserve information regarding

interconnectedness that may be important to FSOC's monitoring of

systemic risk among large hedge funds. See, e.g., PEGCC Letter.

\196\ See Question 15 on Form PF. For purposes of this question

and Question 16 on Form PF, beneficial owners are persons who would

be counted as beneficial owners under section 3(c)(1) of the

Investment Company Act or who would be included in determining

whether the owners of the fund are qualified purchasers under

section 3(c)(7) of that Act. (15 U.S.C. 80a-3(c)(1) or (7)). The

proposal would have required that advisers report the number of

beneficial owners of the fund. However, we are not adopting this

question because, as a result of our revised approach to reporting

on parallel managed accounts, this information will largely

duplicate information collected on Form ADV, and we do not believe

that receiving updated responses on a quarterly basis from large

hedge fund advisers and large liquidity fund advisers is necessary

with respect to this information. See infra section II.C.5 of this

Release. See also the Proposing Release, supra note 12, for the

proposed Question 12(a) on Form PF; Question 13 of section 7.B.1. of

Schedule D to Form ADV.

\197\ See Questions 10 and 11 on Form PF. Question 10, which

asks for the value of the fund's investments in other private funds,

has been added because our expanded Instruction 7 otherwise allows

these investments to be disregarded on Form PF and it is important

that FSOC have a basic measure of the extent of assets not otherwise

reflected on the Form. This will also serve as a measure of

interconnectedness among private funds. See supra notes 128 and 131

and accompanying text for a discussion of Instruction 7. Question

11, relating to the value of parallel managed accounts, has been

added for similar reasons. See infra section II.C.5 of this Release

for a discussion of our revised approach to reporting on parallel

managed accounts.

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Section 1b also requires that advisers report in response to

Question 17 the performance of each fund, both on a gross basis and net

of management fees and incentive fees and allocations. Advisers must

provide performance information that is consistent with the performance

results they report to investors (or use internally, if not reported to

investors). Advisers are required, at a minimum, to report annual

performance results for the fund's most recently completed fiscal year

but only need to report monthly and quarterly performance information

if that information is already being calculated for the fund.

Question 17 has been modified from the proposal in response to

commenter concerns regarding the burden of providing performance

results in the form proposed.\198\ In particular, it omits the

requirement to report the change in net asset value, allows advisers to

report performance gross and net of management fees and incentive fees

and allocations (rather than gross and net of incentive fees and

allocations only) and makes reporting of monthly and quarterly

performance mandatory only for those funds for which advisers are

already calculating performance results with that frequency. Commenters

were concerned primarily that the proposed instructions to this

question would require advisers to calculate performance in a manner

different from that used for investor reporting purposes or more

frequently than is their current practice.\199\ A number of commenters

explained that funds with illiquid portfolios, such as private equity

funds, typically do not calculate performance on a monthly (and in many

cases, even quarterly) basis and that calculating performance more

frequently would impose a significant burden on these advisers.\200\ As

discussed above, we are persuaded that trends emerge more slowly in

private funds having illiquid portfolios, meaning that developments in

these funds may be tracked using information reported on a less

frequent basis.\201\ We believe that the revised approach, which allows

advisers to rely on their existing procedures for calculating and

reporting fund performance, significantly reduces the burden of

responding to this question but will nonetheless yield valuable

information for FSOC.\202\

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\198\ See infra notes 199 and 200.

\199\ See, e.g., ABA Committees Letter; MFA Letter (recommending

that ``the Form be revised to request (i) Gross performance and (ii)

performance net of all fees'' and suggesting that advisers be

permitted to report what they report to private fund investors).

\200\ See, e.g., ABA Committees Letter; IAA Letter; Merkl

February Letter; MFA Letter; PEGCC Letter; SIFMA Letter; TCW Letter.

\201\ See supra text accompanying note 156.

\202\ See Question 17 on Form PF. See also Proposing Release,

supra note 12, at text accompanying n. 115 for a discussion of

potential uses for this data.

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[[Page 71145]]

We have also added to section 1b two questions that the SEC

originally proposed as part of the expanded private fund reporting in

Form ADV.\203\ The first, Question 14, requires that advisers report

the assets and liabilities of each fund broken down using categories

that are based on the fair value hierarchy established under U.S.

generally accepted accounting principles (``GAAP'').\204\ The second,

Question 16, requires that advisers provide the approximate percentage

of each fund beneficially owned by certain types of investors.\205\ As

discussed in the Implementing Adopting Release, the SEC determined not

to adopt these questions on Form ADV in response to commenter concerns

that they would result in the public disclosure of competitively

sensitive or proprietary information.\206\ We have added these

questions to Form PF (with the modifications discussed below) because,

as the SEC explained in the Implementing Adopting Release, this

information may be important to FSOC's systemic risk monitoring

activities and to our investor protection mission.\207\

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\203\ See Questions 14 and 16 on Form PF.

\204\ Advisers must report this information annually (or on

their fourth quarter updates, in the case of large hedge fund and

large liquidity fund advisers). This question will provide

information indicating the illiquidity and complexity of a fund's

portfolio and the extent to which the fund's value is determined

using metrics other than market mechanisms. In a recent rulemaking

release, FSOC identified this fair value categorization as the type

of information that may be important for assessing liquidity risk

and maturity mismatch, one factor in determining whether a nonbank

financial company may pose systemic risk. See FSOC Second Notice,

supra note 6. See also Rules Implementing Amendments to the

Investment Advisers Act of 1940, Investment Advisers Act Release No.

3110 (Nov. 19, 2010), 75 FR 77052 (Dec. 10, 2010) (``Implementing

Proposing Release'') for the proposed version of Form ADV, Part 1A,

section 7.B.(1)A. of Schedule D, question 12. See also FASB ASC 820-

10-50-2b.

We have modified this question from the proposal to expressly

include definitions for Levels 1, 2 and 3 of the hierarchy. This

change is intended to minimize ambiguity for advisers that do not

utilize GAAP or another international accounting standard that

requires the contemplated breakdown of assets and liabilities.

Advisers that already prepare this breakdown for financial reporting

purposes should respond to this question using the fair value

hierarchy established under the applicable accounting standard.

\205\ See the Implementing Proposing Release for the proposed

version of Form ADV, Part 1A, section 7.B.(1)A. of Schedule D,

question 17.

\206\ See Implementing Adopting Release, supra note 11, at nn.

246-247. Information filed on Form ADV is made available to the

public through the Investment Adviser Public Disclosure (IAPD) Web

site. In contrast, information filed on Form PF will generally

remain confidential. See infra section II.D of this Release.

\207\ Id. Several commenters responding to the Proposing Release

also encouraged us to move these questions from Form ADV to Form PF.

See IAA; MFA Letter; Seward Letter.

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Commenters responding to these questions as proposed on Form ADV

argued that they would be difficult or burdensome to complete. With

respect to Question 14, commenters argued that some private funds--

especially non-U.S. funds--do not use generally accepted accounting

principles (whether U.S. or international) or obtain audited financial

statements, making the requirement to report a breakdown of fair values

potentially costly.\208\ We understand, however, that the group of

funds not using some form of generally accepted accounting standard is

relatively small and that most private funds already utilize GAAP or

other international accounting standards that require the contemplated

breakdown of assets and liabilities.\209\ In addition, funds are not

required to adopt GAAP for these purposes, and Question 14 does not

require that the valuations within the breakdown of assets and

liabilities be audited, or even determined in accordance with GAAP. For

instance, an adviser could rely on the procedure for calculating fair

value that is specified in a private fund's governing documents.\210\

As a result, we are not convinced that the aggregate burden

attributable to this reporting is unreasonable or even as significant

as some commenters contend. The question has, however, been modified

from the proposal to require a breakdown only by category and not by

class.\211\ For advisers that do not already prepare this breakdown for

financial reporting purposes, this revised approach will significantly

reduce the work required to respond to this question.\212\ Such

advisers may, nevertheless, incur additional costs to complete this

question, and we are sensitive to these costs. We believe, however,

that this question will provide valuable information for FSOC's

systemic risk monitoring activities and our investor protection mission

and that the associated burden is warranted.\213\

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\208\ Comment letter of the American Bar Association, Federal

Regulation of Securities Committee and Private Equity and Venture

Capital Committee (Jan. 31, 2011) (commenting on the Implementing

Proposing Release, supra note 204) (``ABA Committees Implementing

Proposal Letter''); comment letter of the Alternative Investment

Management Association (Jan. 24, 2011) (commenting on the

Implementing Proposing Release, supra note 204) (``AIMA Implementing

Proposal Letter''); comment letter of Dechert LLP (Jan. 24, 2011)

(commenting on the Implementing Proposing Release, supra note 204);

comment letter of the Investment Adviser Association (Jan. 24, 2011)

(commenting on the Implementing Proposing Release, supra note 204)

(``IAA General Implementing Proposal Letter''); comment letter of

Katten, Muchin, Rosenman, LLP (Jan. 24, 2011) (commenting on the

Implementing Proposing Release, supra note 204); comment letter of

George Merkl (Jan. 25, 2011) (commenting on the Implementing

Proposing Release, supra note 204); comment letter of the National

Venture Capital Association (Jan. 24, 2011) (commenting on the

Implementing Proposing Release, supra note 204). Some of these

commenters further contended that investors would bear any new audit

costs or that advisers would not necessarily have audited numbers

within 90 days after fiscal year end, when Form ADV is due. See,

e.g., ABA Committees Implementing Proposal Letter; AIMA Implementing

Proposal Letter; IAA General Implementing Proposal Letter.

\209\ See, e.g., Implementing Proposing Release, supra note 204,

at n. 56. Indeed, even in the context of this rulemaking, the

Managed Funds Association suggested that we use a GAAP standard to

measure advisers' assets, asserting that ``GAAP information is

regularly reported across the industry and is a data point that most

managers track in the ordinary course * * *'' MFA Letter. Others

advisers may use international accounting standards requiring

substantially similar information. In the Implementing Adopting

Release, the SEC estimated that only about 3% of registered advisers

have at least one private fund client that may not be audited. See

Implementing Adopting Release, supra note 11, at nn. 634-636 and

accompanying text.

\210\ The fair valuation process need not be the result of a

particular mandated procedure and the procedure need not involve the

use of a third-party pricing service, appraiser or similar outside

expert. The fund's governing documents may provide, for example,

that the fund's general partner determines the fair value of the

fund's assets. We would, however, expect that an adviser that

calculates fair value in accordance with GAAP or another basis of

accounting for financial reporting purposes will also use that same

basis for purposes of determining the fair value of its assets and

liabilities for this purpose.

This question has been modified from the proposal to include a

column titled ``cost-based'' for those assets and liabilities valued

on the fund's financial statements using a measurement attribute

other than fair value. This change recognizes that, even among

advisers that already prepare a similar fair value breakdown for

financial reporting purposes in accordance with GAAP, some assets

and liabilities are not accounted for at fair value and, therefore,

would not be included in the fair value hierarchy disclosures.

\211\ In other words, although an adviser will need to provide

the fund's aggregate assets and liabilities categorized as Level 1,

2 or 3, it will not need to indicate the types of assets and

liabilities in each of those categories.

\212\ In addition, for advisers that already prepare this

breakdown for financial reporting purposes, this revised approach

will reduce the amount of information that needs to be re-entered on

Form PF.

\213\ See supra note 204 for a discussion of potential uses for

this data.

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Commenters also expressed concern regarding the burden of reporting

the types of beneficial owners investing in each fund, as required in

Question 16.\214\ One of these commenters noted,

[[Page 71146]]

for instance, that many advisers either do not have this information or

keep this information on a basis different from that set out in the

Form.\215\ We believe, however, that many advisers to private funds are

already collecting some of this beneficial ownership data as part of

their processes for analyzing compliance with exemptions under the

Investment Company Act and the Securities Act of 1933.\216\ To the

extent this information is not currently collected, we do not

anticipate that adding this to the information advisers already

routinely collect from fund investors will impose a significant burden.

We acknowledge, however, that advisers managing funds with securities

outstanding prior to the adoption of Form PF would have to take

additional steps in order to obtain this information because the

investor diligence process will already have been completed. As a

result, with respect to beneficial interests outstanding prior to March

31, 2012, that have not been transferred on or after that date,

advisers may respond to Question 16 using good faith estimates based on

data available to them without making additional inquiries of

investors.

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\214\ Comment letter of Debevoise & Plimpton, LLP (Jan. 24,

2011) (commenting on the Implementing Proposing Release, supra note

204) (``Debevoise Implementing Proposal Letter''); IAA General

Implementing Proposal Letter; comment letter of Shearman & Sterling,

LLP (Jan. 24, 2011) (commenting on the Implementing Proposing

Release, supra note 204) (``Shearman Implementing Proposal

Letter''). These commenters argued that advisers may have difficulty

obtaining the required information for certain types of funds,

particularly for funds established before the adoption of the

reporting requirement.

\215\ See IAA General Implementing Proposal Letter (stating that

the reporting would require ``significant system enhancements'').

\216\ 15 U.S.C. 77a.

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Question 16 has also been modified by adding a row for non-U.S.

investors about which the adviser does not have and cannot reasonably

obtain beneficial ownership information.\217\ This change acknowledges

that obtaining beneficial ownership information about certain non-U.S.

investors may be difficult for some advisers and ameliorates that

burden by allowing advisers to report only the size of the ownership

interest about which data is not available. We have also modified from

the proposal some of the other categories in this question based on our

consultations with staff representing FSOC's members. In particular, we

have split out categories regarding individuals and pension plans to

obtain a slightly more granular breakdown and added a category for

sovereign wealth funds and foreign official institutions. We intend

these changes to increase the usefulness of this data for the FRB's

flow of funds report, a tool that is used for evaluating trends in and

risks to the U.S. financial system.\218\

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\217\ An adviser may only report in this category beneficial

ownership interests that are held through a chain involving one or

more third-party intermediaries. If the beneficial owner has, for

instance, simply interposed a wholly-owned holding company or trust

as the legal owner, the interest would need to be reported in one of

the other categories of beneficial owner.

\218\ See infra note 475. See also Flow of Funds Accounts of the

United States, available at http://www.federalreserve.gov/releases/z1/.

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The information that section 1b requires is designed to allow FSOC

to monitor certain systemic trends for the broader private fund

industry, such as how certain kinds of private funds perform and

exhibit correlated performance behavior under different economic and

market conditions and whether certain funds are taking significant

risks that may have systemic implications. It is also intended to allow

FSOC to monitor borrowing practices across the private fund industry,

which may have interconnected impacts on banks and thus the broader

financial system. Question 14, which requires that advisers report the

assets and liabilities of each fund broken down using categories that

are based on the fair value hierarchy established under GAAP, will

provide information indicating the illiquidity and complexity of a

fund's portfolio and the extent to which the fund's value is determined

using metrics other than market mechanisms. In a recent rulemaking

release, FSOC identified this fair value categorization as the type of

information that may be important for assessing liquidity risk and

maturity mismatch, one factor in determining whether a nonbank

financial company may pose systemic risk.\219\ Finally, as noted above,

certain of the information that section 1b requires is designed for use

in the FRB's flow of funds report, a tool that is used for evaluating

trends in and risks to the U.S. financial system.\220\

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\219\ See supra note 204.

\220\ See supra note 218 and accompanying text.

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c. Section 1c of Form PF

Section 1c is the final part of section 1 and requires advisers to

report information regarding the hedge funds they manage, if any. This

information includes each fund's investment strategies \221\ and the

percentage of the fund's assets managed using high-frequency trading

strategies.\222\ Advisers must also report each hedge fund's

significant counterparty exposures (including identity of

counterparties).\223\ In response to comments, we have modified the

questions regarding counterparty exposures to clarify instructions and

to reduce the reporting burden by more closely aligning the

requirements with information already determined in connection with

many contractual trading arrangements.\224\

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\221\ See Questions 19 and 20 on Form PF. One commenter,

although advising caution in using strategy data to analyze industry

trends, asserted that the reporting could provide valuable

information about emerging systemic risk. See MSCI Letter (``a

buildup of assets in one or a set of related strategies should cause

the FSOC to question the market's capacity to support such a

strategy * * *'' and create ``conditions where crowded trades could

be unwound quickly, with a systemic impact.''). Another commenter

suggested that we revise the question to allow reporting as of the

end of the reporting period rather than over the course of the

period and to permit advisers to report based on capital allocation

rather than net asset value. See MFA Letter. We have revised the

instructions to permit both these options. We have, however, also

retained the requirement to report based on percentage of net asset

value because we believe this will provide valuable information

regarding leverage.

\222\ See Question 21 on Form PF. Some commenters suggested

removing this question because, in their view, it would not provide

information relevant to systemic risk assessment. See, e.g., AIMA

General Letter; MFA Letter. This information may, however, be

important to understanding how hedge funds interact with the markets

and their role in providing trading liquidity. We have modified the

instructions to this question to make it easier for advisers to

determine whether a particular fund is using a relevant strategy.

\223\ See Questions 22 and 23 on Form PF.

\224\ See MFA Letter. Specifically, these questions have been

modified to (i) Clarify that exposure should be mark-to-market

exposure (rather than potential exposure), (ii) narrow the

conditions under which affiliates are treated as a single

counterparty group in order to track legal and contractual

arrangements among the parties, (iii) focus on counterparties

generally (rather than just trading counterparties), (iv) reference

exposures before taking into account collateral postings and (v) be

less prescriptive regarding the treatment of assets in custody and

unsettled trades.

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Finally, section 1c requires information regarding each hedge

fund's trading and clearing practices in Question 24 and activities

conducted outside the securities and derivatives markets in Question

25. Some commenters supported the reporting required in Question

24.\225\ However, one commenter expressed concern that the question as

proposed would require burdensome manual aggregation.\226\ In response,

we have simplified this question by requiring a less detailed

breakdown, removing the sub-classes of securities and derivatives

included in the proposal. We expect that, by requiring less refinement

in the categories of investments, these changes will reduce the burden

of responding to this question. The revisions also align this question

with the similar questions in the FSA Survey and ESMA's proposed

reporting template.\227\

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\225\ See AFL-CIO Letter; AFR Letter.

\226\ See MFA Letter.

\227\ See ESMA Proposal, supra note 33.

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The information required in section 1c is designed to enable FSOC

to monitor systemic risk that could be transmitted through counterparty

exposure, track how different strategies are affected by and correlated

with different market stresses, and follow the

[[Page 71147]]

extent of private fund activities conducted away from regulated

exchanges and clearing systems. This information could be important to

understanding interconnectedness, which relates to the factors that

FSOC must consider in making a determination to designate a nonbank

financial company for FRB supervision under the Dodd-Frank Act.\228\

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\228\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

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Several commenters agreed that some or all of the information

required in section 1c would be valuable.\229\ For instance, one

commenter, referring to the counterparty information, argued that

``[f]rom a systemic risk perspective, this is the most relevant

information on the form, as it goes to the heart of the issue of

connectivity.'' \230\ Some of these questions, including those about

significant trading counterparty exposures and trading and clearing

practices, are based on the FSA Survey, and some of the changes from

the proposal discussed above more closely align this section with the

FSA Survey and ESMA's proposed reporting template, which will promote

international consistency in hedge fund reporting.\231\

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\229\ See AFL-CIO Letter; AFR Letter; MSCI Letter.

\230\ See MSCI Letter; infra note 274.

\231\ For example, ESMA's proposed reporting template would ask

for identification of the hedge fund's top five counterparties in

terms of net credit exposure. It would also ask for estimates of the

percentage of the fund's securities or derivatives traded on a

regulated exchange versus over the counter and the percentage of the

fund's derivatives and repos cleared by a central clearing

counterparty versus bilaterally. In addition, the template would

require advisers to identify a predominant trading strategy using

categories similar to those on Form PF. See ESMA Proposal, supra

note 33.

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2. Section 2 of Form PF

A private fund adviser must complete section 2 of Form PF if it had

at least $1.5 billion in hedge fund assets under management as of the

end of any month in the prior fiscal quarter.\232\ This section of the

Form requires additional information regarding the hedge funds these

advisers manage, which we have tailored to focus on relevant areas of

financial activity that have the potential to raise systemic concerns.

This information corresponds to areas of potential concern that were

identified in the Proposing Release and is designed to assist FSOC in

monitoring and assessing the extent to which stresses at hedge funds

could have systemic implications.

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\232\ See Instruction 3 to Form PF; supra section II.A.4 of this

Release.

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We are adopting Form PF with several changes to the information

that advisers are required to report in section 2. These changes, which

are discussed in detail below, are intended to respond to industry

concerns while still providing FSOC the information it needs to monitor

systemic risk across the hedge fund industry. In general, we expect

that these changes will reduce the burden of responding to the Form and

more closely align the Form with ESMA's proposed reporting template.

a. Section 2a of Form PF

Section 2a requires certain aggregate information about the hedge

funds the adviser manages. For example, Question 26 requires the

adviser to report the value of assets invested (on a short and long

basis) in different types of securities and commodities (e.g.,

different types of equities, fixed income securities, derivatives, and

structured products). One commenter acknowledged the importance of

collecting this information, agreeing that it ``could feed a variety of

possible systemic risk indices.'' \233\ Some commenters, however,

expressed concern regarding the amount of detail required in this

question,\234\ and the commenter who generally supported this question

nonetheless thought the asset classes placed too much emphasis on asset

backed securities when compared with other asset classes.\235\ In

response, the amount of detail regarding asset backed securities has

been reduced so that the adviser need only provide a breakdown of

mortgage backed securities, asset backed commercial paper,

collateralized debt and loan obligations, other asset backed securities

and other structured products.\236\ We continue to believe, however,

that the remaining detail in this question is justified by the

potential value of this information to FSOC's systemic risk monitoring

activities.\237\ One commenter suggested that, instead of the proposed

categories of assets, we allow advisers to report based on GAAP

classifications under FAS 157.\238\ We do not believe this is a

workable alternative because FAS 157 does not employ a standard set of

asset classes, and the value of this information depends in part on the

ability of regulators to make comparisons across funds.\239\ We also

believe that our approach is more consistent with international hedge

fund reporting standards.\240\

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\233\ MSCI Letter.

\234\ See, e.g., ABA Committees Letter; MFA Letter.

\235\ See MSCI Letter.

\236\ This question has also been modified to separate foreign

exchange derivatives used for investment from those used for hedging

in response to a comment arguing that the proposed category should

exclude foreign currency hedges. See MFA Letter. We have also added

a category for physical real estate, which was not included in the

FSA Survey but has been added in ESMA's proposed reporting template,

in order to increase international consistency. See ESMA Proposal,

supra note 33; see also supra note 31. In addition, following

consultation with staff representing FSOC's members, we have

separated investments in money market funds from other types of cash

management funds and deposits from other types of cash equivalents.

These changes are intended to provide additional detail regarding

how cash equivalents are held because, at times of economic stress,

these forms of holdings may have different implications for systemic

risk.

\237\ See Proposing Release, supra note 12, at text accompanying

n. 120 for a discussion of potential uses for this data.

\238\ See MFA Letter (this comment letter refers only to GAAP

categories, but the commenter clarified on a call with staff that it

was referring to the classifications under FAS 157).

\239\ We note that nothing would prevent an adviser from relying

on its classifications of assets for financial reporting purposes

when completing Form PF to the extent that asset classes overlap.

\240\ See FSA Survey; ESMA Proposal, supra note 33.

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Question 26 also requires the adviser to report the duration,

weighted average tenor or 10-year bond equivalent of fixed income

portfolio holdings (including asset backed securities). This differs

from the proposal, which would have required all advisers to report

duration. We are giving advisers the option of instead reporting

weighted average tenor or 10-year bond equivalents because we

understand from comments received that advisers use a wide range of

metrics to measure interest rate sensitivity.\241\ We expect that this

revised approach will reduce the burden of reporting because advisers

will generally be able to rely on their existing practices when

providing this information. This approach may limit the ability of

regulators to make comparisons across advisers but will still yield

valuable information about sensitivities to interest rate changes.\242\

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\241\ See ABA Committees Letter; MFA Letter.

\242\ See MSCI Letter (arguing that duration information may not

be valuable for making comparisons across the industry because there

are many ways in which it may be calculated).

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Question 27 requires the adviser to report the value of turnover in

certain assets classes (including listed equities, corporate bonds,

sovereign bonds and futures) in the hedge funds' portfolios during the

reporting period. This is intended to provide an indication of the

adviser's frequency of trading in those markets and the amount of

liquidity hedge funds contribute to those markets. The proposal would

have required the adviser to calculate a single turnover rate for its

entire hedge fund portfolio. However, commenters warned that this would

prove difficult to calculate if an adviser trades in many different

instrument types and, in particular, that the value of certain types of

derivatives would overwhelm the influence of other instruments on the

aggregate turnover

[[Page 71148]]

number.\243\ These commenters suggested instead that we ask for

turnover by asset class, as was done in the FSA Survey (and, more

recently, ESMA's proposed reporting template).\244\ We found these

comments persuasive and have revised the question to request turnover

in targeted asset classes.\245\

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\243\ See ABA Committees Letter; MFA Letter. Some commenters

also argued that this question would not provide information

valuable to monitoring systemic risk. See, e.g., ABA Committees

Letter; Fidelity Letter; SIFMA Letter. However, based on our

consultation with staff representing FSOC's members, we believe that

turnover will provide important insight into the role of hedge funds

in providing trading liquidity in certain markets.

\244\ See FSA Survey, supra note 32; ESMA Proposal, supra note

33.

\245\ This is generally consistent with the international

standards, though, unlike the FSA Survey and ESMA's proposed

reporting template, we do not include derivatives (other than

futures) because we have focused on assets classes where we believe

turnover is currently most likely to occur at rates that raise

systemic concerns.

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Question 27 has also been revised to request turnover data

expressed as the value of transactions during the period rather than as

a rate. This change has been made in order to make the data easier to

compare to broader market data and to improve the comparability of the

data with data that is or would be collected on the FSA survey and

ESMA's proposed reporting template. In addition, we believe that the

revised approach will be less burdensome for advisers than calculating

the proposed portfolio turnover rate because advisers would have been

required to determine the value of purchases and sales during the

period as an intermediate step in calculating the portfolio turnover

rate.\246\

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\246\ See the Proposing Release, supra note 12, for the proposed

definition of ``turnover rate'' in the Glossary of Terms to Form PF.

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Finally, in response to Question 28, the adviser must report a

geographical breakdown of investments held by the hedge funds it

advises.\247\ This question has been modified from the proposal to

require a less detailed breakdown (focusing on regions rather than

countries) with additional, separate disclosure regarding investment in

particular countries of interest. These changes are intended to respond

to comments we received suggesting that advisers do not track this

information in a manner consistent with our proposed, more granular

geographical breakdown.\248\ We anticipate that the revised approach

will reduce the burden of responding to this question because the less

granular categories should allow more advisers to rely on their

existing classifications.

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\247\ See Question 28 on Form PF.

\248\ See ABA Committees Letter; MFA Letter. We have not, as one

commenter suggested, used any particular service provider's

methodology of categorizing geographical exposures because our staff

understands, based on conversations with industry representatives,

that there is no single methodology that hedge fund advisers employ.

See MFA Letter (suggesting that we use ``Bloomberg's country of risk

methodology''). In response to commenter concerns, we have removed

some of the instructions regarding how the location of investments

should be determined and expanded Instruction 15 to explain that the

numerator should be calculated in the same manner as gross asset

value. See MFA Letter. These changes allow advisers to rely on their

internal methodologies and service provider reports in determining

where to report investments and, by using gross asset value, rather

than the more general value definition set out in Instruction 15,

avoid the possibility that the reported value of certain derivative

instruments would overwhelm the influence of other instruments. We

have also added a ``supranational'' region, which is intended to

capture investments that, because of their multinational scope,

cannot meaningfully be placed in a single region.

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The information required in section 2a is designed to assist FSOC

in monitoring asset classes in which hedge funds may be significant

investors and trends in hedge funds' exposures. In particular, it is

intended to allow FSOC to identify concentrations in particular asset

classes (or in particular geographic regions) that are building or

transitioning over time. It will also aid FSOC in examining large hedge

fund advisers' role as a source of liquidity in different asset

classes. In some cases, section 2a requires that the information be

broken down into categories that are designed to facilitate use in the

FRB's flow of funds report, a tool that is used for evaluating trends

in and risks to the U.S. financial system.\249\ This information also

is designed to address requirements under section 204(b)(3) of the

Advisers Act specifying certain mandatory contents for records and

reports that must be maintained and filed by advisers to private funds.

For example, it will provide information about the types of assets held

and trading practices.

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\249\ See supra note 218 and infra note 475. For example, in

some cases the data is required to be broken down between issuers

that are financial institutions and those that are not. The FRB

publishes flow of funds data on a quarterly basis.

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One commenter expressed concern that advisers do not collect or

calculate the exposure or turnover information that section 2a requires

on a monthly basis or track geographical concentrations.\250\ As

discussed above, we are adopting section 2a with several changes that

are designed to address commenters' concerns and reduce the reporting

burden, though we continue to believe that monthly exposure and

turnover values will be important to allow FSOC to track trends in the

industry and to discourage ``window dressing.'' \251\ We acknowledge

that advisers may incur additional burdens in responding to these

questions, and we have taken this into account in considering the costs

and benefits of this rulemaking.\252\ The revised approach to the

information required in section 2a strikes an appropriate balance

between the burden imposed and need for the information.

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\250\ See ABA Committees Letter.

\251\ See infra notes 285-292 and accompanying text. See also

Proposing Release, supra note 12, at text accompanying n. 120 for a

discussion of potential uses for this data.

\252\ See infra sections IV.B and V of this Release (discussing

increases in our burden and cost estimates in response to comments

received).

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b. Section 2b of Form PF

Consistent with our proposal, section 2b of Form PF requires a

large hedge fund adviser to report certain additional information about

any hedge fund it advises that has a net asset value of at least $500

million as of the end of any month in the prior fiscal quarter (a

``qualifying hedge fund'').\253\ Two commenters disagreed with limiting

reporting on section 2b to hedge funds with net assets of $500 million

or more, arguing that information regarding smaller funds is important

to monitoring certain group behaviors relevant to systemic risk and

that smaller funds are equally likely to engage in improper activities,

such as insider trading.\254\ Two other commenters argued for a higher

threshold, suggesting that no fund of this size could be systemically

important.\255\ We are adopting the

[[Page 71149]]

threshold as proposed because we believe it balances the needs of FSOC

for information regarding relatively large hedge funds and the burdens

of the more detailed reporting that section 2b requires.\256\

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\253\ See Instruction 3 to Form PF. An adviser is not required

to complete section 2 with respect to a fund of hedge funds that

satisfies the requirements described in Instruction 7 to Form PF.

For purposes of determining whether a private fund is a qualifying

hedge fund, the adviser must aggregate any parallel funds and funds

that are part of the same master-feeder arrangement and, to the

extent discussed above in section II.A.5 of this Release, any

parallel managed accounts and relevant funds of related persons. See

Instructions 5 and 6 to Form PF and the definition of ``qualifying

hedge fund'' in the Glossary of Terms to Form PF. See also infra

section II.C.5 of this Release for a discussion of parallel funds,

master-feeder arrangements and aggregation for reporting purposes.

This aggregation is intended to prevent an adviser from structuring

its activities to avoid the reporting requirements.

\254\ See AFL-CIO Letter; AFR Letter.

\255\ See Fidelity Letter (arguing that the FSA threshold of

$500 million, upon which the qualifying hedge fund threshold used in

the Form PF is based, should be scaled to $2.4 billion based on the

relative size of equity markets in the United States and the United

Kingdom); SIFMA Letter. As discussed above, these comments appear to

be based on the mistaken premise that the thresholds are intended to

establish a cutoff separating the risky from the safe. To the

contrary, the reporting thresholds are intended only to ensure that

FSOC has sufficient context for its analysis while minimizing the

burden imposed on advisers. 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.

\256\ In addition, certain of the information that would be

obtained with respect to smaller hedge funds will already have been

captured on an aggregate basis in section 2a.

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Also consistent with our proposal, Question 30 in section 2b

requires reporting of the same information as that requested in section

2a regarding exposure to different types of assets except, in this

case, the information is reported for each qualifying hedge fund,

rather than on an aggregate basis. This question has been modified from

the proposal in the same manner as Question 26.\257\

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\257\ See supra notes 233-242 and accompanying text for a

discussion of those changes.

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Section 2b also requires, on a per fund basis, data not requested

in section 2a. For instance, the adviser must report information

regarding the qualifying hedge fund's portfolio liquidity,\258\

holdings of unencumbered cash \259\ and concentration of

positions.\260\ These questions have been modified from the proposal to

allow advisers to rely more on their own methodologies in responding,

consistent with our changes to Instruction 15 to the Form, and to align

the Form more closely with ESMA's proposed reporting template. A new

Question 31 has been added, which requires the adviser to identify the

reporting fund's base currency because this information is necessary to

interpret responses to questions regarding foreign exchange exposures

and the effect of changes in currency rates on the reporting fund's

portfolio.\261\

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\258\ See Question 32 on Form PF. This question requires

reporting of the percentage of the fund's portfolio capable of being

liquidated within different time periods. See Proposing Release,

supra note 12, at text accompanying n. 124 for a discussion of

potential uses for this data. We have modified the instructions to

this question to address commenter concerns by allowing advisers to

rely more on their own methodologies in responding. See CCMR Letter;

MFA Letter. We have also conformed the liquidity periods to those

included in ESMA's proposed reporting template. See ESMA Proposal,

supra note 33. One commenter objected to the question more

generally, saying that the data is not currently tracked in the

manner required and many firms would need to ``devote significant

time and resources'' to building models and systems. TCW Letter.

Another commenter, however, supported this question, noting that

``[t]his [information] is increasingly a request of hedge fund

investors, particularly for comingled funds, where a given investor

can be adversely impacted by a sudden large redemption by another

party.'' MSCI Letter. We have taken into account both of these

comments in considering the costs and benefits of this rulemaking

and believe that the value of the information to FSOC warrants the

potential burden imposed. See infra sections IV.B and V of this

Release (discussing increases in our burden and cost estimates in

response to comments received).

\259\ See Question 33 on Form PF. In response to a comment we

received, we have modified the definition of ``unencumbered cash''

to include the value of ``overnight repos'' used for liquidity

management (so long as the assets purchased are U.S. treasury

securities or agency securities) because we are satisfied that, for

this purpose, the liquidity of these positions is sufficiently cash-

like. See MFA Letter.

\260\ See Questions 34 and 35 on Form PF. Question 34 requires

the total number of open positions held by the fund, and Question 35

requires reporting, for each position that represents 5% or more of

the fund's net asset value, of the position's portion of the fund's

net asset value and sub-asset class. One commenter asked for

clarification regarding the meaning of ``position,'' as used in

these questions and elsewhere in the Form. See MFA Letter. In

response, we have added an instruction to the Form explaining that

advisers should determine whether a set of legal and contractual

rights constitutes a ``position'' in a manner consistent with their

internal recordkeeping and risk management procedures. See

Instruction 15 to Form PF. This general instruction also supplants

the detailed instructions proposed in Question 35, which have,

accordingly, been removed.

\261\ See also Question 30, regarding reporting fund exposures,

and Question 42, regarding the effect of changes in certain market

factors on the fund's portfolio.

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In Questions 36 through 38, the adviser must also provide

information regarding the fund's collateral practices with

counterparties.\262\ These questions have been significantly modified

from the proposal in order to reduce the amount of detail required,

including by removing the breakdown of collateral into initial and

variation margin. These changes were made because a commenter persuaded

us that ``[w]hile some of this information is potentially illuminating

in the context of systemic risk * * * this section [as proposed] is

more burdensome than it need be for its purpose.'' \263\ We have also

modified these questions by requiring information regarding

rehypothecation only with respect to the fund's aggregate collateral

(rather than on a counterparty-by-counterparty basis). Commenters

persuaded us that, because collateral is often fungible, this question

would have been difficult to answer as proposed and that the additional

detail is unnecessary.\264\ We anticipate that these changes will

reduce the burden of responding to these questions.

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\262\ Questions 36 and 37 focus on collateral practices with the

fund's top five counterparties, and Question 38 focuses on

rehypothecation of the fund's aggregate collateral.

\263\ MSCI Letter.

\264\ See MFA Letter; MSCI Letter.

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Question 39 in section 2b also requires the adviser to report

whether the hedge fund cleared any trades directly through a central

clearing counterparty (``CCP'') during the reporting period. The

proposal would have required the adviser to identify the three CCPs to

which the fund has the greatest net counterparty credit exposure and

provide the amount of that exposure. The information this question

requires has been significantly reduced because commenters argued

persuasively that the fund's relationship is typically with a swap

dealer, futures commission merchant or direct clearing member who then

interacts with the CCP rather than directly with a CCP and that, as a

result, advisers ``may not have easy access to the data requested by

this question.'' \265\ If responses to the revised question indicate

that many reporting funds clear transactions directly through CCPs, the

Commissions may consider in the future whether a question like the one

proposed should be added to the Form. The change to Question 39 will

reduce the burden of responding to the Form.

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\265\ MFA Letter; see also AIMA General Letter.

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

The information that Questions 30 through 35 require is designed to

assist FSOC in monitoring the composition of hedge fund exposures over

time as well as the liquidity of those exposures. In addition,

information reported in response to Questions 36 through 38 is intended

to aid FSOC in its monitoring of credit counterparties' unsecured

exposure to hedge funds as well as the hedge fund's exposure and

ability to respond to market stresses. Finally, Question 39 is intended

to assist FSOC in monitoring whether hedge funds and CCPs become

increasingly interconnected over time. This information could be

important to understanding, for instance, concentrations in the hedge

fund industry and interconnectedness, which relate to the factors that

FSOC must consider in making a determination to designate a nonbank

financial company for FRB supervision under the Dodd-Frank Act.\266\

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\266\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

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Section 2b also requires for each qualifying hedge fund data

regarding certain hedge fund risk metrics. For instance, Question 40

requires the adviser to report value at risk (``VaR'') for each month

of the reporting period if, during the reporting period, the adviser

regularly calculated a VaR metric for the qualifying hedge fund. One

commenter confirmed that, ``[f]or all but the most illiquid strategies,

hedge fund managers utilize these statistical measures [VaR and similar

measures] for internal management and

[[Page 71150]]

for investor reporting.'' \267\ We are adopting this question

substantially as proposed but with several clarifying changes.\268\

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\267\ See MSCI Letter. This commenter, however, cautioned that

variability in the calculation of VaR will make meaningful

aggregation of this information difficult and suggested removing the

question. As proposed, in order to minimize the reporting burden

associated with this question, we are not requiring that all

advisers calculate VaR using a standardized set of assumptions.

Although this approach may, as the commenter suggested, reduce the

ability of regulators to make comparisons across hedge funds using

this data, we believe that it will also provide valuable risk

information with respect to individual funds.

\268\ For instance, we have specified the units for reporting

the confidence interval and weighting factor, combined the ``none''

and ``equal'' weighting options and clarified that the monthly

reporting should be at the end of each month and not for the span of

the month.

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In Question 41, the adviser must also indicate whether there are

risk metrics other than, or in addition to, VaR that it considers

important to managing the fund's risks. Several commenters, noting that

some advisers do not use VaR, expressed concern that a negative

response regarding the use of VaR would create a presumption that the

adviser is not prudently managing risk.\269\ This new question will

give advisers an opportunity to indicate that they are using risk

metrics other than VaR, and it will also provide valuable information

regarding industry practice that may inform FSOC's understanding of

risk management and future rulemakings.

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\269\ See IAA Letter; MFA Letter.

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In addition, Question 42 requires the adviser to report the impact

on the fund's portfolio from specified changes to certain identified

market factors, if regularly considered in formal testing in the fund's

risk management, broken down by the long and short components of the

qualifying hedge fund's portfolio. We are adopting this question with

several changes from the proposal.\270\ Most of the changes clarify the

instructions, but the question has also been modified so that an

adviser may omit a response to any market factor that it did not

regularly consider in formal testing even if the factor could have an

impact on the fund's portfolio or the adviser considered it

qualitatively.\271\ Under the proposal, an adviser would have been

permitted to omit a response with respect to a market factor only if it

did not regularly consider that factor in the reporting fund's risk

management, whether in formal testing or otherwise. This change has

been made in response to commenter concerns regarding the potential

burden of responding to this question.\272\ We believe it will reduce

that burden in the aggregate because fewer advisers will need to

provide detailed responses and for individual advisers because those

without existing quantitative models will not be required to build or

acquire them in order to respond to the question.

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\270\ These include changes intended to clarify (1) How the

fund's portfolio should be separated into long and short components,

(2) the period over which the changes should be deemed to occur and

(3) how to address factors that would otherwise become negative when

a given change is applied. We have also modified the magnitude of

some of the market factor changes that advisers must test in order

to reflect recent data on the frequency with which such changes may

occur.

\271\ For this purpose, ``formal testing'' means that the

adviser has models or other systems capable of simulating the effect

of a market factor on the fund's portfolio, not that the specific

assumptions outlined in the question were used in testing. If the

factor is relevant but not tested, the adviser would need to check a

box to that effect but would not report a numerical response.

\272\ See, e.g., TCW Letter. This commenter wrote that ``[a]n

analyst at the firm estimated that it would take one to two days for

the firm's systems to compute and verify the data for one fund's

response to [this question].'' Based on a discussion with this

commenter, our staff understands that this estimate assumes that the

fund holds securities that are very complex to model (such as non-

agency mortgage backed securities) and that the modeling is intended

to achieve a high level of confidence. Our staff further understands

that for many other asset classes, this modeling would require

minutes or hours rather than days and that, even for complex

securities, advisers are able to obtain approximations about which

they are reasonably confident in significantly less time. As a

result, we believe that this commenter's estimate represents an

effort significantly beyond the likely average burden this question

requires. We also understand that the majority of the estimated one

to two days represents time spent allowing the adviser's systems to

calculate the responses and not employee hours. We note, finally,

that we have significantly extended the filing deadline for large

hedge fund advisers, reducing the likelihood that this task will

compete with other tasks for the firm's computing resources and,

consequently, the potential systems costs associated with this

question. See supra section II.B.2 of this Release. Nonetheless, we

have taken this comment into account in considering the costs and

benefits of this rulemaking. See infra sections IV.B and V of this

Release (discussing increases in our burden and cost estimates in

response to comments received).

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Some commenters would have preferred removal of Question 42

entirely, arguing that it would not yield information valuable to

systemic risk monitoring because the variability in responses would

hinder the ability of regulators to make comparisons across funds.\273\

However, although variability in the assumptions used to complete the

question may limit certain types of industry-wide comparisons, the

variability itself, when taken together with other information

collected on the Form, may provide important comparative information.

Based on our staffs' consultations with staff representing FSOC's

members, we believe this question will also provide valuable risk

information with respect to individual funds.\274\

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\273\ See IAA Letter; TCW Letter.

\274\ See Proposing Release, supra note 12, at text accompanying

n. 127 (discussing potential uses for this data). One commenter

suggested removing this question in favor of expanding the questions

regarding counterparty exposures so that an adviser would complete

those questions using multiple stress scenarios to probe for

contingent exposures. See MSCI Letter; see also supra note 230. We

believe at this time that the question we are adopting strikes a

more appropriate balance between the value of the information

collected and the burden of reporting.

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Item D of section 2b also requires reporting of certain financing

information for each qualifying hedge fund in Question 43. This

question includes a monthly breakdown of the fund's secured and

unsecured borrowing, the value of the collateral and other credit

support posted in respect of the secured borrowing and the types of

creditors. Question 43 has been modified from the proposal to clarify

instructions and remove some of the detail regarding collateral

postings (including information regarding rehypothecation of

collateral, which is now covered on an aggregate basis elsewhere in

section 2b).\275\ We anticipate that these changes will reduce the

burden of responding to this question. One commenter argued that

advisers would have difficulty responding to the parts of Question 43

relating to the fund's borrowings via prime brokerage because they lack

transparency into the prime brokerage relationship.\276\ This comment

suggests, however, that prime brokers do not currently report this

information to advisers, not that advisers are unable to obtain this

information on request. It should be noted that advisers have

successfully completed the FSA Survey, which includes a similar

breakdown of borrowings (though not the collateral information), and

that the revisions we have made to this question simplify the

collateral reporting requirements.

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

\275\ See supra note 264 and accompanying text.

\276\ See MFA Letter.

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

An adviser must also report in Questions 44 and 45 the fund's total

notional derivatives exposures as well as the net mark-to-market value

of its uncleared derivatives positions and the value of the collateral

and other credit support posted in respect of those uncleared

positions. Under the proposal, advisers would have reported only the

notional value of the fund's derivatives positions and the value of

collateral posted in respect of those positions. One commenter pointed

out, however, that the ``absolute value of notional values cannot

meaningfully be compared to variation margin amounts'' because margin

is posted based on net

[[Page 71151]]

market values rather than notional amounts.\277\ At this commenter's

suggestion, this question has been revised to request both notional

value and net market value. We have, however, narrowed the scope of

transactions about which collateral information is requested.

Specifically, an adviser is required to report market values and

collateral values only for transactions that are not cleared by a CCP.

We have taken this approach because we believe margining practices

associated with cleared derivatives make obtaining information

regarding collateral practices in connection with those transactions

unnecessary. For the same reasons discussed above in connection with

changes made to Questions 36 and 37, this question has been revised to

reduce the amount of detail required regarding the posting of

collateral.\278\ We anticipate that these changes will, on net, reduce

the burden of responding to Questions 44 and 45 and, by allowing

comparisons of collateral practices to net exposures, provide more

valuable information for FSOC.

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

\277\ See MFA Letter.

\278\ See supra notes 262-264 and accompanying text.

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

In response to Questions 46 and 47, the adviser must provide a

breakdown of the term of the fund's available financing and the

identity of, and amount owed to, each creditor to which the fund owed

an amount equal to or greater than 5 percent of the fund's net asset

value as of the reporting date.\279\ One commenter argued that the

breakdown of available financing should not include uncommitted lines

of credit because the lender may not provide them on request.\280\

However, the extent to which financing may become rapidly unavailable

is precisely the information this question is designed to elicit. We

are adopting Questions 46 and 47 substantially in the form

proposed.\281\

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\279\ To improve international consistency, we have conformed

the liquidity periods in Question 46 to those included in ESMA's

proposed reporting template. See ESMA Proposal, supra note 33. As

explained above, we have moved Question 47 from section 1b to

section 2b. See supra note 195.

\280\ See MFA Letter.

\281\ But see, supra note 279. We have also added an instruction

to Question 47 clarifying that the precise legal name of the

creditor is not required.

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The information that Item D of section 2b requires is designed to

assist FSOC in monitoring, among other things, the qualifying hedge

fund's leverage, the unsecured exposure of credit counterparties to the

fund, and the committed term of that leverage, which may be important

to monitor if the fund comes under stress. This information is also

relevant to the fund's interconnectedness and leverage, which relate to

factors that FSOC must consider in making a determination to designate

a nonbank financial company for FRB supervision under the Dodd-Frank

Act.\282\

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\282\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

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Item E of section 2b requires the adviser to report information

about each qualifying hedge fund's investor composition and liquidity.

Questions 48 and 49, for example, require information regarding the

fund's side-pocket and gating arrangements. These questions have been

modified to increase their clarity and to require numerical responses

regarding gating arrangements only if investors have withdrawal or

redemption rights in the ordinary course, potentially reducing the

number of advisers that need to respond to all elements of Question 49.

Question 48 has also been expanded so that the adviser must check a box

indicating whether additional assets have been placed in a side-pocket

since the end of the prior reporting period. Without this additional

information, FSOC would not be able to distinguish between advisers

frequently using side-pockets and those who have simply had a side-

pocket in place for an extended period. We believe, therefore, that

this additional information will be important to interpreting the

information proposed to be collected. We do not anticipate that this

addition will significantly increase the burden of responding to this

question because we believe that advisers already track assets held in

side-pockets and the response only requires checking a box.

Finally, the adviser must provide, in Question 50, a breakdown of

the percentage of the fund's net asset value that is locked in for

different periods of time. This question has been modified from the

proposal to clarify instructions and to improve international

consistency by conforming the liquidity periods to those included in

ESMA's proposed reporting template.\283\

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

\283\ See ESMA Proposal, supra note 33.

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

The information that Item E of section 2b requires is designed to

allow FSOC to monitor the hedge fund's susceptibility to failure

through investor redemptions in the event the fund experiences stress

due to market or other factors. For instance, this information,

together with information collected in Questions 32 and 46 and

elsewhere on the Form, is intended to assist FSOC in determining

whether the fund may have a mismatch in the maturity or liquidity of

its assets and liabilities, which relate to factors that FSOC must

consider in making a determination to designate a nonbank financial

company for FRB supervision under the Dodd-Frank Act.\284\

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\284\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

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

Certain data in the Form, while filed with the Commissions on an

annual or quarterly basis, must be reported on a monthly basis to

provide sufficiently granular data to allow FSOC to better identify

trends and to mitigate ``window dressing.'' \285\ Nearly all of these

requirements appear in section 2 of the Form, which only large hedge

fund advisers complete. Although no commenters expressly supported the

monthly data requirements within the Form, some commenters recommended

that large advisers be required to file more often than quarterly,

which could impose a greater burden than monthly reporting on a

quarterly filing.\286\ Several commenters, however, suggested that

advisers should only report data as of the end of the quarterly

reporting period.\287\ One commenter, while conceding that some funds

already report certain data to investors on a monthly basis, asserted

that such monthly reporting involves significantly less data and is

based on internal valuation estimates only.\288\ Other commenters

doubted that advisers would engage in ``window dressing'' and argued

that the increased costs to advisers would outweigh the benefits.\289\

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\285\ See, e.g., Questions 27, 28, 31, 33, 34, 43, 44, 45, and

56 on Form PF.

\286\ See AFL-CIO Letter; AFR Letter. See also CII Letter.

\287\ See, e.g., BlackRock Letter (arguing that data should be

provided, at most, on a quarterly basis); Fidelity Letter; MFA

Letter; SIFMA Letter (proposing that reporting be no more frequent

than quarterly, at least for private equity fund advisers).

\288\ See BlackRock Letter.

\289\ See, e.g., Fidelity Letter; MFA Letter.

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

Based on our staffs' consultations with staff representing FSOC's

members, we agree with commenters who argued that rapidly changing

markets and portfolios merit collecting certain information more often

than on a quarterly basis, and we are not persuaded that the large

hedge fund and large liquidity fund advisers required to respond to

these questions will be overwhelmed by this reporting. Also, as

discussed above, we have made several changes that increase the ability

of advisers to rely on their own internal methodologies in responding

to the Form, which is expected to ease the burden of reporting monthly

information by clarifying that advisers need not incur substantial

additional

[[Page 71152]]

burdens in verifying the data.\290\ Finally, the monthly data about

which commenters were most concerned were the monthly performance data

proposed to be collected in section 1b of the Form.\291\ Question 17

has, however, been modified to require monthly data only in the case

that the adviser is already calculating it, making the reporting burden

essentially one of copying information onto the Form.\292\ Accordingly,

except as discussed above, we are adopting the requirements to report

monthly information as proposed.

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

\290\ See supra note 188 and text accompanying.

\291\ See Question 17 on Form PF; supra section II.C.1.b of this

Release.

\292\ See supra nn. 198-202 and accompanying text.

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

3. Section 3 of Form PF

A private fund adviser must complete section 3 of Form PF if it

manages one or more liquidity funds and had at least $1 billion in

combined liquidity fund and registered money market fund assets under

management as of the end of any month in the prior fiscal quarter.\293\

Section 3 requires that the adviser report certain information for each

liquidity fund it manages. The adviser must provide information

regarding the fund's portfolio valuation and its valuation methodology,

as well as the liquidity of the fund's holdings.\294\ This section also

requires information regarding whether the fund, as a matter of policy,

is managed in compliance with certain provisions of rule 2a-7 under the

Investment Company Act, which is the principal rule through which the

SEC regulates registered money market funds.\295\ Items B and C of

section 3 require the adviser to report the amount of the fund's assets

invested in different types of instruments, information for each open

position of the fund that represents 5 percent or more of the fund's

net asset value and information regarding the fund's borrowings.\296\

Finally, Item D of section 3 asks for certain information regarding the

fund's investors, including the concentration of the fund's investor

base and the liquidity of its ownership interests.\297\

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\293\ See sections II.A.2 and II.B.4 of this Release for the

definition of ``liquidity fund'' and a discussion of this reporting

threshold. See also Instructions 3, 5, and 6 to Form PF. Form PF is

a joint form between the SEC and the CFTC only with respect to

sections 1 and 2 of the form. Section 3 of the form, which requires

more specific reporting regarding liquidity funds, is only required

by the SEC.

\294\ See Questions 52, 53, and 55 on Form PF. The SEC has

modified the instructions to Question 55 to clarify the units in

which responses are to be reported and to clarify that the net asset

value requested in parts (a) and (b) of Question 55 is the net asset

value reported to current and prospective investors, which may or

may not be the same as the net asset value reported in Questions 9

and 55(c), which are based on fair value.

\295\ See Question 54 of Form PF. The restrictions in rule 2a-7

are designed to ensure, among other things, that money market funds'

investing remains consistent with the objective of maintaining a

stable net asset value. Many liquidity funds state in investor

offering documents that the fund is managed in compliance with

Investment Company Act rule 2a-7 even though that rule does not

apply to liquidity funds.

\296\ See Questions 56-59 on Form PF. The SEC has modified these

questions from the proposal by removing instructions that have been

supplanted by general instructions. See Instruction 15 to Form PF.

\297\ See Questions 60-64 on Form PF. For purposes of these

questions, beneficial owners are persons who would be counted as

beneficial owners under section 3(c)(1) of the Investment Company

Act or who would be included in determining whether the owners of

the fund are qualified purchasers under section 3(c)(7) of that Act.

(15 U.S.C. 80a-3(c)(1) or (7)). The SEC has made clarifying changes

to the instructions to Question 64. To improve international

consistency, the SEC has also conformed the liquidity periods in

Question 64 to those included in ESMA's proposed reporting template.

See ESMA Proposal, supra note 33.

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The information that section 3 requires is designed to assist FSOC

in assessing the risks undertaken by liquidity funds, their

susceptibility to runs, and how their investments might pose systemic

risks either among liquidity funds or through contagion to registered

money market funds. In addition, this information is intended to aid

FSOC in monitoring leverage practices among liquidity funds and their

interconnectedness to securities lending programs, which relate to

factors that FSOC must consider in making a determination to designate

a nonbank financial company for FRB supervision under the Dodd-Frank

Act.\298\ Finally, this information will assist FSOC in assessing the

extent to which the liquidity fund is being managed consistent with

restrictions imposed on registered money market funds that might

mitigate their likelihood of posing systemic risk. Commenters generally

did not address the requirements of section 3, and the SEC is,

therefore, adopting this section of the Form substantially as

proposed.\299\

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\298\ See section 113(a) of the Dodd-Frank Act; FSOC Second

Notice, supra note 6.

\299\ The SEC received only one comment specifically addressing

the requirements of section 3, which questioned whether requiring

information regarding investor liquidity is appropriate considering

the focus of liquidity funds on short-term investments. See MFA

Letter. The SEC continues to believe that this information is

important to understanding whether a fund may suffer a mismatch

between the maturity of its obligations and the maturity of its

investments and is, therefore, adopting this question substantially

as proposed. But see, supra note 297.

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4. Section 4 of Form PF

A private fund adviser must complete section 4 of Form PF if it had

at least $2 billion in private equity fund assets under management as

of the end of its most recently completed fiscal year.\300\ This

section of the Form requires additional information regarding the

private equity funds these advisers manage, which has been tailored to

focus on relevant areas of financial activity that have the potential

to raise systemic concerns. As discussed in the Proposing Release,

information regarding the activities of private equity funds, certain

of their portfolio companies and the creditors involved in financing

private equity transactions may be important to the assessment of

systemic risk.\301\ The Proposing Release identified two practices of

private equity funds, in particular, that could result in systemic

risk: (1) The potential shift of market risk to lending institutions

when bridge loans cannot be syndicated or refinanced; \302\ and (2) the

imposition of substantial leverage on portfolio companies that may

themselves be systemically significant.\303\

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\300\ See Instruction 3 to Form PF. See also sections II.A.3 and

II.B.4 of this Release for the definition of ``private equity fund''

and a discussion of this reporting threshold. 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.

\301\ See Proposing Release, supra note 12, at section II.A.3.

\302\ See Proposing Release, supra note 12, at nn. 71-73 and

accompanying text.

\303\ See Proposing Release, supra note 12, at nn. 74-75 and

accompanying text.

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

Several commenters agreed that the activities identified in the

Proposing Release are important areas of concern for monitoring

systemic risk with respect to private equity funds.\304\ Other

commenters, however, disagreed with the analysis, arguing that private

equity funds and their advisers do not have the potential to pose

systemic risk.\305\ These commenters affirmed that certain

characteristics identified in the

[[Page 71153]]

Proposing Release, including limitations on investor redemption rights

and an absence of significant leverage at the fund level, are common to

private equity funds and tend to mitigate their potential for systemic

risk.\306\

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

\304\ See, e.g., AFL-CIO Letter (pointing to evidence that the

use of so-called ``covenant-lite'' loans is again expanding); CPIC

Letter (noting the importance of gathering information about all

types of entities using leverage and asserting that, ``the

Commission should not be pressured to scale back further or provide

broad exemptions for private equity funds.''); Merkl February

Letter. See also Proposing Release, supra note 12, at n. 73 and

accompanying text (discussing risks associated with ``covenant-

lite'' loans).

\305\ See, e.g., Olympus Letter; PEGCC Letter (contending that

private equity funds are like any other shareholders and that they

should not be singled out for ``a discriminatory and onerous

reporting regime designed to monitor how their portfolio companies

use leverage.''); SIFMA Letter.

\306\ See, e.g., Olympus Letter; PEGCC Letter; SIFMA Letter.

These commenters also noted that these funds typically focus on

long-term investments and are legally isolated from the financial

obligations of portfolio companies and other funds. They also

asserted that private equity funds and their investments tend to be

relatively small and are not interconnected. See also Proposing

Release, supra note 12, at n. 77 and accompanying text.

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

The SEC acknowledges that several potentially mitigating factors

suggest that private equity funds may have less potential to pose

systemic risk than some other types of private funds, and this has been

taken into account in requiring substantially less information with

respect to private equity funds than with respect to hedge funds or

liquidity funds. The design of Form PF, however, 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 equity funds or

their advisers pose such risk.\307\ Based on SEC staff's consultation

with staff representing FSOC's members, the SEC continues to believe

that targeted information regarding private equity leverage practices

may be important to FSOC's monitoring of systemic risk.\308\

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

\307\ One industry observer has explained the importance of

transparency in allowing regulators to examine where risks may exist

in the alternative investment industry, arguing that, ``[r]egulation

has to aim at trying to prevent the next crisis, not simply cleaning

up the mess from the previous one. It may indeed be the case that

the alternative investment industry is too small and/or is leveraged

at too low a level, at least relative to average bank sector

leverage, to be a likely source of future systemic harm but the

opacity issue, which has for a long time hampered supervisors'

efforts to understand the industry's significance, makes this hard

to tell. Requiring the industry to submit at least to disclosure and

transparency obligations that help regulators and central banks do a

better job of identifying systemic risk concentrations in the system

is a reasonable step forward. Resistance to the imposition of

obligations of this sort would merely serve to suggest that there is

something to hide.'' Eilis Ferran, The Regulation of Hedge Funds and

Private Equity: A Case Study in the Development of the EU's

Regulatory Response to the Financial Crisis, University of Cambridge

and European Corporate Governance Institute (Feb. 2011).

\308\ See Proposing Release, supra note 12, at section II.A.3.

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

One commenter argued that, if the SEC is concerned only with the

use of leverage, the information could be gathered more effectively

from the financial institutions that lend the money or, in the case of

leveraged portfolio companies that are themselves financial

institutions, incur the debt.\309\ Staff representing FSOC's members

has explained to the SEC's staff, however, that collecting leverage

data from private equity advisers has several potential advantages.

First, it provides a more complete accounting than other data sources

of the leverage that may have been imposed on portfolio companies.

Although portfolio companies may take on leverage through financial

institutions regulated in the United States, they may also incur

leverage from other sources, including hedge funds and foreign

financial institutions. As a result, portfolio company leverage

information collected through U.S. bank regulators would likely provide

an incomplete picture and may fail to capture trends with potential

systemic importance, such as greater reliance on leverage obtained from

outside the regulated financial sectors or from foreign sources. Even

if regulators are only concerned about the risks that a portfolio

company's debt may impose on financial institutions, those risks cannot

be fully understood without information regarding the company's entire

balance sheet, including debt from other sources.

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

\309\ See PEGCC Letter.

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

Second, because the SEC understands that private equity advisers

routinely track the leverage of their portfolio companies, collecting

data directly from these advisers is likely to be the most efficient

means of monitoring portfolio company leverage. In contrast, obtaining

portfolio company leverage information through bank regulators could be

less efficient because (1) Banks are less likely to be actively

tracking leverage information specifically attributable to portfolio

companies, (2) bank regulators do not have a single collection

mechanism for this data and (3) data may need to be aggregated across

several different bank regulators.

Third, collecting leverage data from private equity advisers would

fill gaps in the data that could appear if FSOC were to attempt

aggregating information from many different U.S. bank regulators. It

also provides a check on any data that may be collected from other

sources. Indeed, other types of information that the SEC collects from

investment advisers has already proven valuable in cross-checking data

that bank regulators collect.\310\

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

\310\ The SEC's Form N-MFP, for instance, has provided a

valuable check against information that banking regulators collect

with respect to portfolio holdings of registered money market funds.

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

Fourth, FSOC has stated that it is concerned that leveraged lending

practices can raise systemic risk concerns.\311\ Private equity

advisers are repeat participants in the leveraged loan market (often

more so than other types of companies that access credit through these

markets), and tracking their portfolio company leverage practices can

signal trends in emerging risks in those markets. Indeed a recent study

found that the private equity fund sponsors' bank relationships were an

important factor in explaining the favorable loan terms obtained by

private equity portfolio companies, both as a result of the private

equity sponsor's repeat interactions reducing information asymmetries

and the competition among banks to cross-sell other business to the

private equity sponsor.\312\ This empirical data suggests that

collecting data on private equity portfolio company leverage trends in

fact may be the most efficient way to collect systemic risk trend data

for the broader leveraged loan market because private equity portfolio

companies' practices in this area may be a bellwether due to their

sponsors' repeat player status. In addition, this approach appears

consistent with an emerging international approach favoring broad

monitoring of credit intermediation across the economy.\313\

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

\311\ See FSOC 2011 Annual Report, supra note 19, at 12

(``Although it is difficult to make definitive determinations

regarding the appropriateness of risk pricing, there have been some

indicators that credit underwriting standards might have overly

eased in certain products, such as leveraged loans, reflecting the

dynamics of competition among arranging bankers. * * * Sound

underwriting standards, which were abandoned in the run-up to the

crisis, will encourage greater investor confidence and stability in

the market'').

\312\ See Victoria Ivashina & Anna Kovner, The Private Equity

Advantage: Leveraged Buyout Firms and Relationship Banking, 24 Rev.

of Fin. Studies 7 (July 2011).

\313\ See FSB Shadow Banking Report, supra note 28; ESMA

Proposal, supra note 33; Proposing Release, supra note 12, at n. 33.

See also CPIC Letter (affirming the importance of gathering

information about all types of entities using leverage).

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The SEC is, however, adopting Form PF with several significant

changes that reduce the frequency of reporting with respect to private

equity funds, as discussed above, and more closely align the required

reporting with information available on portfolio company financial

statements. These changes, which are discussed in detail below and in

section II.B of this Release, are intended to respond to industry

concerns while still providing FSOC the information it needs to monitor

the potential for systemic risk across the private fund industry. In

general, we expect that these changes will reduce the burden of

responding to the Form.

[[Page 71154]]

Section 4 requires that large private equity advisers report

certain information for each private equity fund they manage, including

certain information about guarantees of portfolio company obligations

and the leverage of the portfolio companies that the fund controls.

Specifically, Question 66 requires information about the amount of

guarantees that the adviser, the reporting fund or any other related

person of the adviser issues in respect of a portfolio company's

obligations.\314\ Questions 67 through 70 require the adviser to

report: (1) The weighted average debt-to-equity ratio of controlled

portfolio companies in which the fund invests, (2) the range of that

debt-to-equity ratio among these portfolio companies and (3) the

aggregate gross asset value of these portfolio companies.\315\

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\314\ Following consultation with staff representing FSOC's

members, we have broadened the scope of this question to capture

guarantees from the adviser and its related persons rather than just

those from the reporting fund. This change is intended to allow FSOC

and other regulators to confirm broadly whether the adviser or the

reporting fund has direct or indirect exposure to the liabilities of

portfolio companies in excess of the amounts of their investments.

In addition to Question 66, the proposal included a separate

question regarding the fund's borrowings, but a commenter pointed

out that this substantially duplicated the information requested in

Question 13 on Form PF, so the proposed question is not being

adopted. See comment letter of George Merkl (Mar. 23, 2011). See

also the Proposing Release, supra note 12, for the proposed version

of Question 57 on Form PF.

\315\ A ``controlled portfolio company'' is defined as a

portfolio company that is controlled by the private equity fund,

either alone or together with the private equity fund's affiliates

or other persons that are, as of the reporting date, part of a club

or consortium investing in the portfolio company. ``Control'' has

the same meaning as used in Form ADV and generally means the power,

directly or indirectly, to direct the management or policies of a

person, whether through ownership of securities, by contract, or

otherwise. See Glossary of Terms to Form PF; Glossary of Terms to

Form ADV. One commenter suggested the average ratio required in

Question 68 would be unreliable because it depends on accounting

methodologies, which may vary. See PEGCC Letter. While this measure

may have its limitations, the SEC believes, based on its staff's

consultations with staff representing FSOC's members, that this

question will provide an important indication of portfolio company

leverage and is not aware of an alternative that would yield more

reliable information without imposing additional burdens on

advisers. Question 70, regarding the aggregate gross asset value of

the reporting fund's controlled portfolio companies, has been added

to provide a measure of scale as context for interpreting the

average leverage ratio. An adviser must already know this

information in order to calculate the average leverage ratio, so the

SEC does not expect this addition to meaningfully increase the

reporting burden.

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In addition, Questions 71 and 72 ask for the total amount of

borrowings categorized as current liabilities and as long-term

liabilities on the most recent balance sheets of the fund's controlled

portfolio companies. These questions replace the question that the SEC

proposed, which would have required advisers to report the maturity

profile of the debt of its private equity funds' controlled portfolio

companies.\316\ This change has been made in response to commenter

concerns regarding the burden of gathering the data that would have

been required to respond to the question as proposed.\317\ The SEC

anticipates that these changes will reduce the burden of responding to

these questions because less information is required and the

information will be readily available on the financial statements of

the fund's controlled portfolio companies.

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

\316\ See the Proposing Release, supra note 12, (discussing the

proposed version of Question 62 on Form PF).

\317\ See IAA Letter.

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

In response to Questions 73 and 74, the adviser must report the

portion of the controlled portfolio companies' borrowings that is

payment-in-kind or zero coupon,\318\ and whether the fund or any of its

controlled portfolio companies experienced an event of default on any

of its debt during the reporting period.\319\ In addition, Question 75

requires the adviser to provide the identity of the institutions

providing bridge financing to the adviser's controlled portfolio

companies and the amount of that financing. Question 76 requires

certain information if the fund controls any financial industry

portfolio company, such as the portfolio company's name, its debt-to-

equity ratio, and the percentage of the portfolio company beneficially

owned by the fund.\320\ Question 79 requires the adviser to report

whether any of its related persons co-invest in any of the fund's

portfolio companies.

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

\318\ See Question 73 on Form PF. One commenter argued that the

SEC should not include this question because it has not identified

any systemic risk associated with this type of indebtedness. See

PEGCC Letter. The indebtedness in question, however, allows the

borrower to increase its leverage by deferring interest payments

(all at a time subsequent to the creditors making their credit

determinations) and may result in additional risk being shifted to

systemically important financial institutions or other holders of

the debt.

\319\ See Question 74 on Form PF. One commenter suggested this

question should cover only controlled portfolio companies rather

than all of the fund's portfolio companies, and the SEC has made

this change. See ABA Committees Letter; see also infra discussion

accompanying notes 324-327. This commenter also suggested that

potential events of default that have not ripened into events of

default should not require an affirmative response, and the SEC has

modified the instructions to this address this comment.

\320\ A ``financial industry portfolio company'' generally is

defined as a nonbank financial company, as defined in the Dodd-Frank

Act, or a bank, savings association, bank holding company, financial

holding company, savings and loan holding company, credit union, or

other similar company regulated by a federal, state or foreign

banking regulator. See Glossary of Terms to Form PF. One commenter

suggested this question should cover only controlled portfolio

companies rather than all of the fund's portfolio companies, and the

SEC has made this change. See ABA Committees Letter; see also IAA

Letter; see also infra discussion accompanying notes 324-327. The

SEC has added a requirement to report the gross asset value of each

financial industry portfolio company to provide a measure of scale

as context for interpreting the leverage ratio. This information

should be readily available on portfolio company financial

statements, so the SEC does not expect this addition to meaningfully

increase the reporting burden.

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The information that Question 66 requires is intended to provide

FSOC information regarding the exposure of large private equity

advisers and their funds to the risks of their portfolio companies. The

information that Questions 67 through 76 require is designed to allow

FSOC to assess the potential exposure of banks and other lenders to the

portfolio companies of funds managed by large private equity advisers

and to monitor whether trends in those areas could have systemic

implications. Information reported in response to Question 76 is also

intended to allow FSOC to monitor investments by the funds of large

private equity advisers in companies in the financial industry that may

be particularly important to the stability of the financial system.

Finally, Questions 77 and 78 require a breakdown of the fund's

investments by industry and by geography.\321\ Two commenters suggested

removing these questions, arguing that the value of the information

would not exceed the burden of reporting it.\322\ Regulators, however,

will be able to use this information to monitor global and industry

concentrations among private equity funds, and concentration is one of

the factors that FSOC must consider in making a determination to

designate a nonbank financial company for FRB supervision under the

Dodd-Frank Act.\323\ In addition, the information required is largely

based on the financial statements of the controlled portfolio companies

and, therefore, should be readily available to the adviser.

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\321\ The SEC has modified the instructions to these questions

to reflect clarifications suggested by a commenter. See Merkl

February Letter. Question 78, which requires a geographical

breakdown of investments in portfolio companies, has also been

modified for reasons discussed above. See supra note 247 and

accompanying text.

\322\ See Merkl February Letter; PEGCC Letter.

\323\ See section 113(a) of the Dodd-Frank Act.

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Most of the reporting in section 4 relates to portfolio companies

because the SEC understands that leverage in private equity structures

is generally incurred at the portfolio company level.

[[Page 71155]]

This reporting is limited to controlled portfolio companies, rather

than portfolio companies generally, to ensure that advisers are able to

obtain the relevant information without incurring potentially

substantial additional burdens. Several commenters suggested, however,

that the proposed standard of ``control'' was too low, leaving advisers

responsible for reporting information they may not be entitled to

access.\324\ The SEC is not persuaded that advisers are likely to have

such difficulty obtaining the information required concerning

controlled portfolio companies because the majority of this information

is available from the financial statements of the portfolio companies

or relates to the fund's own investments in the portfolio

companies.\325\ In addition, modifications from the proposal have

replaced a requirement for information that may not have been available

on portfolio company financial statements with a requirement for

information that will appear on any audited portfolio company's

financial statements.\326\ Accordingly, the SEC is adopting the

definition of ``controlled portfolio company'' substantially as

proposed.\327\

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\324\ See, e.g., ABA Committees Letter (suggesting instead ``a

standard of majority voting control''); IAA Letter (asserting that

an adviser may not have access to some of the required data ``even

if the fund owns 50% or more of such portfolio company''); PEGCC

Letter. See supra note 315 (discussing the definition of

``control.)''

\325\ Advisers may not know the North American Industry

Classification System, or NAICS, codes for its controlled portfolio

companies, but this information should be readily obtainable from

the company. The details regarding bridge loans required in Question

75 on the Form may not be available directly from a controlled

portfolio company's financial statements, but it is likely either

that the adviser was involved in arranging or consenting to the

loans (because the loans were an important part of the fund's

investment in the company or because they were incurred after the

fund obtained a controlling interest in the company) or were the

subject of the fund's due diligence prior to investing in the

company.

\326\ See supra note 317 and accompanying text.

\327\ The SEC has, however, made one change to this definition,

which clarifies that whether a group is a club or consortium for

this purpose should be determined as of the reporting date. In other

words, the adviser need not aggregate the control rights of another

fund with those of its own solely because, at some point prior to

the reporting date, such as the date of acquisition, they formed a

club or consortium.

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Two commenters supported collecting the information proposed to be

required in section 4.\328\ However, they also argued that the required

reporting should not be restricted to controlled portfolio companies

but should extend to all of the fund's portfolio companies. In their

view, the largest portfolio companies are the least likely to have a

controlling shareholder and the most likely to pose systemic risk. The

SEC is sensitive to this concern but believes at this time that

requesting information regarding all portfolio companies would increase

the difficulty of responding to section 4 without a sufficiently large

corresponding increase in the value of the data collected.

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\328\ See AFL-CIO Letter; AFR Letter.

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5. Aggregation of Master-Feeder Arrangements, Parallel Fund Structures

and Parallel Managed Accounts

For purposes of reporting information on Form PF, an adviser may

provide information regarding master-feeder arrangements and parallel

fund structures in the aggregate or separately, provided that it does

so consistently throughout the Form.\329\ For example, an adviser may

complete either a single section 1b for all of the funds in a master-

feeder arrangement or a separate section 1b for each fund in the

arrangement. Any adviser choosing to aggregate funds in the reporting

must check the ``yes'' box in Question 6 or Question 7, as applicable,

and, in the case of Question 7, provide the additional information

required with respect to the other funds in the parallel fund

structure.\330\ Advisers are not required to report information

regarding parallel managed accounts other than to complete Question 11

in section 1b of the Form.\331\

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\329\ See Instructions 5 and 6 to Form PF. The aggregation

requirements for reporting purposes differ from the aggregation

requirements for determining whether the adviser or any fund meets a

reporting threshold. See supra section II.A.5. A ``parallel fund

structure'' is a structure in which one or more private funds

pursues substantially the same investment objective and strategy and

invests side by side in substantially the same positions as another

private fund. See Glossary of Terms to Form PF. A ``master-feeder

arrangement'' is an arrangement in which one or more funds (``feeder

funds'') invest all or substantially all of their assets in a single

private fund (``master fund'').

\330\ See also supra note 193 and accompanying text.

\331\ See Instructions 5 and 6 to Form PF. See also supra note

197.

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These aggregation requirements have been modified from the

proposal, which would have required advisers to report aggregated

information regarding master-feeder arrangements and parallel managed

accounts but separate information regarding parallel funds. One

commenter recommended that ``the Commissions instead provide managers

with flexibility to provide information about private funds in a manner

that best represents the activities of their funds and is consistent

with their internal reporting procedures, while providing complete

information to regulators.'' \332\ We are persuaded that requiring

advisers to aggregate or disaggregate funds in a manner inconsistent

with their internal recordkeeping and reporting may impose additional

burdens and that, so long as the structure of those arrangements is

adequately disclosed, a prescriptive approach to aggregation is not

necessary.

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\332\ MFA Letter.

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With respect to parallel managed accounts, commenters encouraged us

not to require aggregation for reporting purposes or at least limit the

questions that require advisers to aggregate parallel managed accounts

for reporting purposes.\333\ In particular, these commenters argued

that aggregating these funds for reporting purposes would be difficult

and ``result in inconsistent and misleading data'' because their

characteristics are often somewhat different from the funds with which

they are managed.\334\ We are persuaded that including parallel managed

accounts in the reporting may reduce the quality of data while imposing

additional burdens on advisers. As a result, the instructions have been

revised so that advisers are not required to aggregate parallel managed

accounts with their private funds for reporting purposes.\335\ A

question has, however, been added to the Form requiring advisers to

report the total amount of parallel managed accounts related to each

reporting fund.\336\ This will allow FSOC to take into account the

greater amount of assets an adviser may be managing using a given

strategy for purposes of analyzing the data reported on Form PF.

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\333\ See, e.g., IAA Letter; TCW Letter. One commenter agreed

that the proposal appropriately required reporting on parallel

managed accounts. See AIMA General Letter. For the reasons discussed

below, however, we are persuaded that the better approach is not to

require aggregation of these accounts for reporting purposes.

\334\ IAA Letter. See also MFA Letter.

\335\ See Instructions 5 and 6 to Form PF. The approach we are

adopting is also similar to the approach used in the FSA Survey,

which asks for only limited information regarding ``strategy

assets.'' See IAA Letter.

\336\ See question 12 of Form PF.

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D. Confidentiality of Form PF Data

Form PF elicits non-public information about private funds and

their trading strategies, the public disclosure of which could

adversely affect the funds and their investors. The SEC does not intend

to make public Form PF information identifiable to any particular

adviser or private fund, although the SEC may use Form PF information

in an enforcement action. The Dodd-Frank Act amends the Advisers Act to

preclude the SEC from being compelled to reveal this information except

in very limited

[[Page 71156]]

circumstances.\337\ Similarly, the Dodd-Frank Act exempts the CFTC from

being compelled under FOIA to disclose to the public any information

collected through Form PF and requires that the CFTC maintain the

confidentiality of that information consistent with the level of

confidentiality established for the SEC in section 204(b) of the

Advisers Act.\338\ The Commissions will make information collected

through Form PF available to FSOC, as the Dodd-Frank Act requires,

subject to the confidentiality provisions of the Dodd-Frank Act.\339\

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\337\ See Proposing Release, supra note 12, at n.39.

\338\ Form PF data is filed with the SEC, and made available to

the CFTC, pursuant to section 204(b) of the Advisers Act, making

this data subject to the confidentiality protections applicable to

data required to be filed under that section.

\339\ See section 204(b) of the Advisers Act.

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The Dodd-Frank Act contemplates that Form PF data may also be

shared with other Federal departments or agencies or with self-

regulatory organizations, in addition to the CFTC and FSOC, for

purposes within the scope of their jurisdiction.\340\ In each case, any

such department, agency or self-regulatory organization would be exempt

from being compelled under FOIA to disclose to the public any

information collected through Form PF and must maintain the

confidentiality of that information consistent with the level of

confidentiality established for the SEC in section 204(b) of the

Advisers Act.\341\ Prior to sharing any Form PF data, the SEC also

intends to require that any such department, agency or self-regulatory

organization represent to us that it has in place controls designed to

ensure the use and handling of Form PF data in a manner consistent with

the protections established in the Dodd-Frank Act.\342\

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\340\ See section 204(b)(8)(B)(i) of the Advisers Act.

\341\ See sections 204(b)(9) and (10) of the Advisers Act.

\342\ This would be consistent with the SEC's current practice

of requiring that it receive, prior to sharing nonpublic information

with other regulators, ``such assurances of confidentiality as the

[SEC] deems appropriate.'' See section 24(c) of the Exchange Act and

rule 24c-1 thereunder.

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Certain aspects of the Form PF reporting requirements also help to

mitigate the potential risk of inadvertent or improper disclosure. For

instance, because data on Form PF generally could not, on its own, be

used to identify individual investment positions, the ability of a

competitor to use Form PF data to replicate a trading strategy or trade

against an adviser is limited.\343\ In addition, the deadlines for

filing Form PF have, in most cases, been significantly extended from

the proposal.\344\ Some commenters supported these extensions in part

because filings will, as a result, generally contain less current, and

therefore less sensitive, data.\345\

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\343\ Questions 26, 30, 35 and 57 on Form PF ask about exposures

of the reporting fund but require only that the adviser identify the

exposure within broad asset classes, not the individual investment

position. Large private equity advisers must identify any financial

industry portfolio companies in which the reporting fund has a

controlling interest, but these investments are likely to be in

private companies whose securities are not widely traded (and,

therefore, do not raise the same trading concerns) or in public

companies about which information regarding significant beneficial

owners is already made public under sections 13(d) and 13(g) of the

Exchange Act.

\344\ See supra section II.B.2 of this Release (discussing

filing deadlines).

\345\ See infra note 351 and accompanying text.

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In addition, our staff is working to design controls and systems

for the use and handling of Form PF data in a manner that reflects the

sensitivity of this data and is consistent with the confidentiality

protections established in the Dodd-Frank Act. As discussed below, this

will include programming the Form PF filing system with appropriate

confidentiality protections.\346\ For instance, SEC staff is studying

whether multiple access levels can be established so that SEC employees

are allowed only as much access as is reasonably needed in connection

with their duties.

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

\346\ See infra section II.E of this Release.

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

Several commenters confirmed that the information collected on Form

PF is competitively sensitive or proprietary and emphasized the

importance of controls for safekeeping.\347\ These commenters also made

several recommendations for protecting the data, including: (1) Storing

identifying information using a code; \348\ (2) limiting the ability to

transfer Form PF data by email or portable media; \349\ (3) limiting

access to personnel who ``need to know''; \350\ (4) extending filing

deadlines so the data contains less current information; \351\ and (5)

sharing the data with other regulators only in aggregated and anonymous

form.\352\ As discussed above, the deadlines for filing Form PF have,

in most cases, been significantly extended from the proposal.\353\ SEC

staff is also carefully considering the other recommendations of

commenters in designing controls and systems for Form PF.

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\347\ See, e.g., ABA Committees Letter; AIMA General Letter;

CPIC Letter; MFA Letter; SIFMA Letter.

\348\ ABA Committees Letter; Kleinberg General Letter; Seward

Letter.

\349\ ABA Committees Letter.

\350\ Id.

\351\ AIMA General Letter; Kleinberg General Letter.

\352\ AIMA General Letter; Seward Letter.

\353\ See supra notes 344-345 and accompanying text.

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In advance of the compliance date for Form PF, SEC staff will

review the controls and systems in place for the use and handling of

Form PF data.\354\ Depending on the progress at that time toward the

development and deployment of these controls and systems, the SEC will

consider whether to delay the compliance date for Form PF.

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\354\ See infra section III of this Release (discussing the

compliance date for Form PF).

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E. Filing Fees and Format for Reporting

Under Advisers Act rule 204(b)-1(b), Form PF must be filed through

an electronic system designated by the SEC for this purpose. On

September 30, 2011, the SEC issued notice of its determination that the

Financial Industry Regulatory Authority (``FINRA'') will develop and

maintain the filing system for Form PF as an extension of the existing

Investment Adviser Registration Depository (``IARD'').\355\ This filing

system will have certain features, including being programmed to

reflect the heightened confidentiality protections created for Form PF

filing information under the Dodd-Frank Act and allow for secure access

by FSOC and other regulators as permitted under the Dodd-Frank Act.

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

\355\ See Approval of Filing Fees for Exempt Reporting Advisers

and Private Fund Advisers, Investment Advisers Act Release No. IA-

3297 (Sept. 30, 2011), 76 FR 62100 (Oct. 6, 2011).

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

Under the Advisers Act rule 204(b)-1, advisers required to file

Form PF must pay to the operator of the Form PF filing system fees that

the SEC has approved.\356\ The SEC in a separate order has approved

filing fees that reflect the costs reasonably associated with these

filings and the development and maintenance of the filing system.\357\

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

\356\ See Advisers Act rule 204(b)-1(d); section 204(c) of the

Advisers Act.

\357\ See Order Approving Filing Fees for Exempt Reporting

Advisers and Private Fund Advisers, Investment Advisers Act Release

No. IA-3305 (Oct. 24, 2011).

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

We are working with FINRA to allow advisers to file Form PF either

through a fillable form on the system Web site or through a batch

filing process utilizing the eXtensible Markup Language (``XML'')

tagged data format. In connection with the batch filing process, we

anticipate publishing a taxonomy of XML data tags in advance of the

compliance date for Form PF. We believe that certain advisers may

prefer to report in XML format because it allows them to automate

aspects of their reporting and thus minimize burdens and generate

efficiencies for the adviser.

[[Page 71157]]

Commenters who addressed this aspect of the proposal supported

having FINRA develop the reporting system as an extension of the IARD

platform.\358\ Commenters also supported a batch filing capability,

with one specifically agreeing that ``[a]utomated submission of

information via the IARD or other electronic system to [utilize] the

eXtensible Markup Language (XML) tagged data format or similar format

is likely to be an important time saver for a large number of firms.''

\359\

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

\358\ See AIMA General Letter (agreeing that using the IARD and

FINRA is a ``sensible solution.''); MFA Letter. We explained in the

Form PF Proposing Release that the filing system would need to be

programmed with special confidentiality protections designed to

ensure the heightened confidentiality protections created for Form

PF filing information under the Dodd-Frank Act. See Proposing

Release, supra note 12, at n. 9 and accompanying text and section

II.E. These commenters expressed the view that maintaining the

confidentiality of Form PF data is an important consideration in

developing the filing system. Our staffs are working closely with

FINRA in designing controls and systems to ensure that Form PF data

is handled and used in a manner consistent with the protections

established in the Dodd-Frank Act, and as noted above, we are

carefully considering recommendations from commenters in designing

controls and systems for the use and handling of Form PF data.

\359\ AIMA General Letter. See also Kleinberg General Letter.

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III. Effective and Compliance Dates

The effective date for CEA rule 4.27, Advisers Act rule 204(b)-1

and Form PF is March 31, 2012.

The Commissions are adopting a two-stage phase-in period for

compliance with Form PF filing requirements. For the following

advisers, the compliance date for CEA rule 4.27 and Advisers Act rule

204(b)-1 is June 15, 2012:

Any adviser having at least $5 billion in assets under

management attributable to hedge funds as of the last day of the fiscal

quarter most recently completed prior to June 15, 2012; \360\

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\360\ For this purpose, advisers must calculate the value of

assets under management pursuant to the instructions in Form ADV and

aggregate assets under management in the same manner as they would

when determining whether they satisfy reporting thresholds under

Form PF. See supra section II.A.5 of this Release.

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Any adviser managing a liquidity fund and having at least

$5 billion in combined assets under management attributable to

liquidity funds and registered money market funds as of the last day of

the fiscal quarter most recently completed prior to June 15, 2012;

\361\ and

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

\361\ Id.

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Any adviser having at least $5 billion in assets under

management attributable to private equity funds as of the last day of

its first fiscal year to end on or after June 15, 2012.\362\

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

\362\ Id.

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For instance, an adviser with $5 billion in hedge fund assets under

management as of March 31, 2012, must file its first Form PF within 60

days following June 30, 2012.\363\ In addition, an adviser having a

June 30 fiscal year end and $5 billion in private equity fund assets

under management as of June 30, 2012, must file its first Form PF

within 120 days following June 30, 2012.\364\

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\363\ This assumes the adviser's fiscal quarters are based on

calendar quarters. Of course, if the adviser also exceeds the

threshold for liquidity fund advisers, its filing would be due

within 15 days.

\364\ This assumes the adviser does not also exceed the $5

billion threshold for hedge fund or liquidity fund advisers.

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For all other advisers, the compliance date for CEA rule 4.27 and

Advisers Act rule 204(b)-1 is December 15, 2012. As a result, most

advisers must file their first Form PF based on information as of

December 31, 2012.

This timing provides most private fund advisers with a significant

amount of time to prepare for filing, requiring only the largest

advisers, whose resources and systems should better position them to

begin reporting, to report in less than a year following adoption of

Form PF. This approach is designed to balance the need for regulators

to begin collecting and analyzing data regarding the private fund

industry with the ability of advisers to efficiently prepare for

filing. We currently anticipate that this timeframe will also give the

SEC sufficient time to create and program a system to accept filings of

Form PF.\365\

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

\365\ The SEC is working closely with FINRA to create and

program a system for Form PF filings, and FINRA expects to be able

to accept Form PF filings in this timeframe.

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

We are adopting compliance dates that significantly extend the

proposed compliance date of December 15, 2011. We are taking this

approach, in part, because we are adopting these rules later than

originally expected. The revised approach is also intended to respond

to commenters who recommended a later compliance date. These commenters

argued that the proposed compliance date would have provided advisers

insufficient ``time to identify the information to be included,

establish automated systems and procedures to collect and calculate the

information, and develop procedures to review, complete and verify the

Form.'' \366\ A majority of these commenters suggested extending

compliance to at least nine months after publication of the final Form,

though some argued for a year or more.\367\ In support of an extended

compliance date, commenters emphasized that, without sufficient time to

prepare for the initial filing, the reporting process will be manually

intensive or require costly system enhancements.\368\ As explained

above, our revised approach is designed to provide the largest

advisers, whose resources and systems should better position them to

begin reporting, at least eight months before they start filing Form

PF, and the vast majority of advisers will have over a year before

their first Form PF is due.

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\366\ MFA Letter. See also infra note 367.

\367\ See, e.g., AIMA General Letter (nine months); BlackRock

Letter (nine months); CPIC Letter (one year); Fidelity Letter (one

year); IAA Letter (nine months); Kleinberg General Letter (one

year); MFA Letter (nine months); PEGCC Letter (one year); TCW Letter

(nine months); Seward Letter (two years); SIFMA Letter (nine

months); USCC Letter (270 days).

\368\ See AIMA General Letter; Kleinberg General Letter.

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IV. Paperwork Reduction Act

SEC:

Section 204(b) of the Advisers Act directs the SEC to require

private fund advisers to file reports containing such information as

the SEC deems necessary and appropriate in the public interest and for

investor protection or for the assessment of systemic risk. Rule

204(b)-1 and Form PF under the Advisers Act implement this requirement.

Form PF contains a new ``collection of information'' within the meaning

of the Paperwork Reduction Act (``PRA'').\369\ The title for the new

collection of information is: ``Form PF under the Investment Advisers

Act of 1940, reporting by investment advisers to private funds.'' For

purposes of this PRA analysis, the paperwork burden associated with the

requirements of rule 204(b)-1 is included in the collection of

information burden associated with Form PF and thus does not entail a

separate collection of information. The SEC is submitting this

collection of information to the Office of Management and Budget

(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR

1320.11. An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it displays

a currently valid control number.

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

\369\ 44 U.S.C. 3501-3521.

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Form PF is intended to provide FSOC with information that will

assist it in fulfilling its obligations under the Dodd-Frank Act

relating to nonbank financial companies and systemic risk

monitoring.\370\ The SEC may also use the information in connection

with its regulatory and examination programs.

[[Page 71158]]

The respondents to Form PF are private fund advisers.\371\ Compliance

with Form PF is mandatory for any private fund adviser that 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.

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\370\ See supra section I.A of this Release; see also of the

Proposing Release, supra note 12, at section II.A.

\371\ The requirement to file the Form applies to any investment

adviser registered, or required to register, with the SEC that

advises one or more private funds and 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. See Advisers

Act rule 204(b)-1(a). It does not apply to state-registered

investment advisers or exempt reporting advisers.

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

Specifically, smaller private fund advisers must report annually

and provide only basic information regarding their operations and the

private funds they advise. Large private equity advisers also must

report on an annual basis but are required to provide additional

information with respect to the private equity funds they manage.

Finally, large hedge fund advisers and large liquidity fund advisers

must report on a quarterly basis and provide more information than

other private fund advisers.\372\ The PRA analysis set forth below

takes into account the difference in filing frequencies among different

categories of private fund adviser. It also reflects the fact that the

additional information Form PF requires large hedge fund advisers to

report is more extensive than the additional information required from

large liquidity fund advisers, which in turn is more extensive than

that required from large private equity advisers.

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\372\ See section II.A of this Release (describing who must file

Form PF), section II.B of this Release (discussing the frequency

with which private fund advisers must file Form PF), section II.C.2

of this Release (describing the information that large hedge fund

advisers must report on Form PF), and sections II.C.3 and II.C.4 of

this Release (describing the information that large liquidity and

private equity fund advisers must report on Form PF). See also

Instruction 9 to Form PF (discussing the frequency with which

private fund advisers must file Form PF).

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

As discussed in section II of this Release, the SEC has sought to

minimize the reporting burden on private fund advisers to the extent

appropriate. In particular, the SEC has taken into account an adviser's

size and the types of private funds it manages in designing scaled

reporting requirements. In addition, where practical, the SEC has

permitted advisers to rely on their existing practices and

methodologies to report information on Form PF.\373\

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

\373\ The SEC also believes that private fund advisers already

collect or calculate some of the information required on the Form at

least as often as they must file the Form. See supra note 146.

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

Advisers must file Form PF through the Form PF filing system on the

IARD.\374\ Responses to the information collections will be kept

confidential to the extent permitted by law.\375\

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\374\ See section II.E of this Release.

\375\ See section II.D. of this Release.

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A. Burden Estimates for Annual Reporting by Smaller Private Fund

Advisers

In the Implementing Adopting Release, the SEC estimated that there

will be approximately 4,270 SEC-registered advisers managing private

funds after taking into account recent changes to the Advisers Act and

a year of normal growth in the population of registered advisers.\376\

The SEC estimates that approximately 700 of these advisers will not be

required to file Form PF because they have less than $150 million in

private fund assets under management.\377\ Accordingly, the SEC

anticipates that, when advisers begin reporting on Form PF, a total of

approximately 3,570 advisers will be required to file all or part of

the Form.\378\ Out of this total number, the SEC estimates that

approximately 3,070 will be smaller private fund advisers, not meeting

the thresholds as Large Private Fund Advisers.\379\ Commenters did not

address the SEC's estimates of the total number of respondents or the

number of smaller private fund advisers.\380\

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\376\ Specifically, the SEC estimated that (1) 3,320 private

fund advisers that are currently registered with the SEC will remain

registered after certain advisers make the switch to state

registration prompted by the Dodd-Frank Act's amendments to section

203A of the Advisers Act, (2) 750 advisers to private funds will

register with the Commission as a result of the Dodd-Frank Act's

elimination of the private adviser exemption and (3) 200 additional

advisers to private funds will register in the next year. See

Implementing Adopting Release, supra note 11, at n.637 and

accompanying text. Estimates of registered private fund advisers are

based in part on the number of advisers that reported a fund in

Section 7.B of Schedule D to the version of Form ADV in use prior to

the date of this release. Because these responses included funds

that the adviser's related persons manage as well as those the

adviser itself manages, these data may over-estimate the total

number of private fund advisers.

\377\ Based on IARD data as of October 1, 2011. See supra

section II.A of this Release for a discussion of the minimum

reporting threshold.

\378\ 4,270 total private fund advisers - 700 with less than

$150 million in private fund assets under management = 3,570

advisers. The SEC notes, however, that if a private fund is advised

by both an adviser and one or more subadvisers, only one of these

advisers is required to complete Form PF. See section II.A.6 of this

Release. As a result, it is likely that some portion of these

advisers either will not be required to file Form PF or will be

subject to a reporting burden lower than is estimated for purposes

of this PRA analysis. The SEC has not attempted to adjust the burden

estimates downward for this purpose because the SEC does not

currently have reliable data with which to estimate the number of

funds that have subadvisers.

\379\ Based on the estimated total number of registered private

fund advisers that would not meet the thresholds to be considered

Large Private Fund Advisers. (3,570 estimated registered private

fund advisers - 250 large hedge fund advisers - 80 large liquidity

fund advisers - 170 large private equity fund advisers = 3,070

smaller private fund advisers.)

\380\ The SEC has updated these estimates to reflect: (1)

Updated data from IARD, (2) the addition of a minimum reporting

threshold of $150 million in private fund assets, which reduces the

number of advisers subject to the reporting requirements, and (3)

the revised estimates of large hedge fund advisers and large private

equity advisers discussed in section II.A.4 of this Release. See

supra section II.A of this Release and notes 88 and 89.

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Smaller private fund advisers must complete all or portions of

section 1 of Form PF and file on an annual basis. As discussed in

greater detail above, section 1 requires basic data regarding the

reporting adviser's identity and certain information about the private

funds it manages, such as performance, leverage and investor data.\381\

If the reporting adviser manages any hedge funds, section 1 also

requires basic information regarding those funds, including their

investment strategies, counterparty exposures and trading and clearing

practices.

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\381\ See supra section II.C.1.

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The SEC estimates that smaller private fund advisers will require

an average of approximately 40 burden hours to compile, review and

electronically file the required information in section 1 of Form PF

for the initial filing and an average of approximately 15 burden hours

for subsequent filings.\382\ These estimates reflect an increase

compared to the proposal from 10 to 40 hours for the initial filing and

from 3 to 15 hours for subsequent filings.

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\382\ These estimates are based, in part, on the SEC's

understanding that much of the information in sections 1a and 1b of

Form PF is currently maintained by most private fund advisers in the

ordinary course of business. See supra note 146. In addition, the

SEC expects the time required to determine the amount of the

adviser's assets under management that relate to private funds of

various types to be largely included in the approved burden

associated with the SEC's Form ADV. As a result, responding to

questions on Form PF that relate to assets under management and

determining whether an adviser is a Large Private Fund Adviser

should impose little or no additional burden on private fund

advisers. Of course, not all questions on Form PF impose the same

burden, and the burden of responding to questions may vary

substantially from adviser to adviser. These estimates are intended

to reflect averages for compiling, reviewing and filing the Form, do

not indicate the time that may be spent on specific questions and

may not reflect the time spent by an individual adviser.

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The SEC has increased these estimates to reflect comments

suggesting that the estimates included in the proposal were too

low.\383\ Commenters did not provide alternative estimates for these

burdens. However, commenters addressing the

[[Page 71159]]

large hedge fund adviser burdens did provide alternative

estimates.\384\ As discussed below, the SEC is also increasing its hour

burden estimates with respect to large hedge fund advisers based on,

among other things, the estimates these commenters provided.\385\ In

the absence of specific commenter estimates for the smaller adviser

reporting burden, the SEC has, therefore, scaled these estimates in

proportion to the increases it is making to its burden hour estimates

for large hedge fund advisers.

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\383\ See, e.g., AIMA General Letter; IAA Letter; SIFMA Letter.

\384\ See, e.g., MFA Letter.

\385\ See infra section IV.B of this Release.

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Although the SEC has increased these estimates, it has also taken

into account changes from the proposal that it expects, on the whole,

to mitigate the burden of reporting the information required in section

1. For instance, we have modified the requirement to report performance

by allowing advisers to report monthly and quarterly results only if

such results are already calculated for the fund.\386\ In addition, we

have removed from section 1b a question requiring identification of

significant creditors and substantially reduced the amount of

information required with respect to trading and clearing practices in

section 1c.\387\ We have also made several global changes to the Form

that we anticipate will reduce the burden of reporting. These include

the removal of the certification, the increased ability of advisers to

rely on their existing methodologies and recordkeeping practices and

allowing advisers to omit information regarding parallel managed

accounts from their responses to the Form.\388\ We have also added four

new questions in section 1b that will increase the burden of completing

that portion of the Form, but the SEC expects the other changes

described above to result in a net reduction in the burden of

completing the Form relative to the proposal.\389\

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\386\ Several commenters argued that carrying out valuations to

report monthly and quarterly performance for private equity funds

would result in significant cost burdens and require significantly

more time than was estimated. See, e.g., comment letter of Atlas

Holdings (March 9, 2011) (``Atlas Letter''); PEGCC Letter. We have,

however, modified the reporting requirements so that advisers only

need to provide monthly and quarterly performance results to the

extent already calculated. See supra notes 198-202 and accompanying

text. In other words, because advisers will have always already

calculated the required performance data for purposes other than

reporting on Form PF, the burden of reporting it on the Form is

essentially one of data entry.

\387\ One commenter suggested the question we removed would have

been ``very burdensome.'' See PEGCC Letter.

\388\ See, e.g., supra section II.C.5 of this Release and notes

183-188 and accompanying text.

\389\ See supra section II.C.1 of this Release. The SEC

originally proposed one of the new questions on Form ADV, and it

requires that advisers report the assets and liabilities of each

fund broken down using categories that are based on the fair value

hierarchy established under GAAP. For advisers obtaining fund audits

in accordance with GAAP or a similar international accounting

standard, the burden of this question is simply that of entering the

data on the Form. In the Implementing Adopting Release, the SEC

estimated that approximately 3% of registered advisers have at least

one private fund client that may not be audited. See Implementing

Adopting Release, supra note 11, at nn. 634-636 and accompanying

text. For this sub-group of advisers, the cost and hour burdens of

determining fair values for the funds' assets have already been

accounted for in connection with Form ADV because advisers are

required to report regulatory assets under management in that form

using the fair value of private fund assets. See Implementing

Adopting Release, supra note 11, at section VI and nn. 632-641 and

723 and accompanying text. The question does not require advisers to

determine the fair value of liabilities for which they do not

already make such determination, so this sub-group of advisers would

not incur an incremental cost to fair value liabilities in order to

respond to this question. This sub-group of advisers may incur an

additional hours burden to determine the categories applicable to

the fund's assets and liabilities, and in determining to increase

its average hour burden estimates for both smaller private fund

advisers and Large Private Fund Advisers, the SEC has taken into

account the contribution of this additional hours burden.

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Based on the foregoing, the SEC estimates that the amortized

average annual burden of periodic filings will be 23 hours per smaller

private fund adviser for each of the first three years,\390\ and the

amortized aggregate annual burden of periodic filings for smaller

private fund advisers will be 70,600 hours for each of the first three

years.\391\

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\390\ The SEC estimates that a smaller private fund adviser will

make 3 annual filings in three years, for an amortized average

annual burden of 23 hours (1 initial filing x 40 hours + 2

subsequent filings x 15 hours = 70 hours; and 70 hours / 3 years =

approximately 23 hours). After the first three years, filers

generally will not incur the start-up burdens applicable to the

first filing.

\391\ 23 burden hours on average per year x 3,070 smaller

private fund advisers = 70,600 burden hours per year.

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B. Burden Estimates for Large Hedge Fund Advisers

The SEC estimates that 250 advisers will be classified as large

hedge fund advisers.\392\ As discussed above, large hedge fund advisers

must complete section 1 of the Form and provide additional information

regarding the hedge funds they manage in section 2 of the Form. These

advisers must report information regarding the hedge funds they manage

on a quarterly basis.

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

\392\ See supra note 88.

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Because large hedge fund advisers generally must report more

information on Form PF than other private fund advisers, the SEC

estimates that these advisers will require, on average, more hours than

other Large Private Fund Advisers to configure systems and to compile,

review and electronically file the required information. Accordingly,

the SEC estimates that large hedge fund advisers will require an

average of approximately 300 burden hours for an initial filing and 140

burden hours for each subsequent filing.\393\

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\393\ The estimates of hour burdens and costs for large hedge

fund advisers provided in the Paperwork Reduction Act and cost-

benefit analyses are based, in part, on burden data that advisers

provided in response to the FSA Survey and on the experience of SEC

staff. These estimates also assume that some Large Private Fund

Advisers will find it efficient to automate some portion of the

reporting process, which will increase the burden of the initial

filing but reduce the burden of subsequent filings. This efficiency

gain is reflected in our burden estimates, which are higher for the

first report than subsequent reports, and certain of the anticipated

automation costs are accounted for in our cost estimates. See infra

note 435 and accompanying text. Of course, not all questions on Form

PF impose the same burden, and the burden of responding to questions

may vary substantially from adviser to adviser. These estimates are

intended to reflect averages for compiling, reviewing and filing the

Form, do not indicate the time that may be spent on specific

questions and may not reflect the time spent by an individual

adviser.

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These estimates reflect an increase compared to the proposal from

75 to 300 hours for the initial filing and from 35 to 140 hours for

subsequent filings. The SEC has increased these estimates to reflect

comments suggesting that the estimates included in the proposal were

too low.\394\ One industry group reported that some members attempted

to complete the proposed version of Form PF for one or more funds and,

``[b]ased on their experience, and recognizing that efficiencies will

develop over time, [this group estimated] that large managers on

average will expend 150-300 hours to submit the initial Form.'' \395\

The SEC has revised its

[[Page 71160]]

estimates in this PRA analysis based on the top end of this range,

which represents a conservative interpretation of this commenter's

estimate. This approach appears justified in this case based on other

comments suggesting that the hours burden imposed on these advisers

could be significantly higher than the SEC estimated in the Proposing

Release.\396\

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\394\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General

Letter; MFA Letter; TCW Letter.

\395\ MFA Letter. This commenter referred to ``large managers''

generally, but based on the context, this comment appears to relate

to large hedge fund advisers specifically. This commenter went on to

state that ``managers with more complex strategies will expend

considerably more time.'' Other commenters addressing these

estimates did not provide alternative estimates, though one

indicated that some clients had already exceeded the Proposing

Release's estimates in preparing to report on the proposed Form and

another commenter, itself one of the largest private fund advisers

in the United States, argued that the estimates were understated by

``orders of magnitude.'' See BlackRock Letter; see also Kleinberg

General Letter. In addition, advisers that manage many funds may

incur higher costs than advisers that manage fewer funds even if

they manage similar amounts of assets. The SEC's estimates are

intended to reflect average burdens, and it recognizes that

particular advisers may, based on their circumstances, incur burdens

substantially greater than or less than the estimated averages. In

addition, we have based our estimates in part on data that advisers

provided in response to the FSA Survey regarding the time required

to complete that survey. Although Form PF generally requires more

information regarding hedge funds than the FSA Survey, the SEC

believes, based on this data and based on the MFA comment letter,

that the average burden of completing Form PF is very unlikely to be

in the thousands or tens of thousands of hours.

\396\ See supra note 394 and accompanying text.

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The SEC notes, however, that this commenter's estimates were based

on the Form as proposed and we have made a number of changes from the

proposal that we expect, on the whole, to mitigate significantly the

reporting burden. For example, we have modified a number of questions

to reduce the amount of detail required or to allow advisers to rely

more on their existing methodologies or recordkeeping practices,

including questions regarding trading and clearing practices, interest

rate sensitivities, geographical concentrations, turnover, collateral

practices, CCP exposures and sensitivities to changes in specified

market factors.\397\ We have also made several global changes to the

Form that we anticipate will reduce the burden of reporting. These

include allowing large hedge fund advisers to report only annually on

funds that are not hedge funds, the removal of the certification,

expanding the ability to disregard funds of funds and allowing advisers

to omit information regarding parallel managed accounts from their

responses to the Form.\398\ We have also added four new questions in

section 1b, which will increase the burden of completing that portion

of the Form.\399\ The SEC believes, however, that the increased burden

attributable to these new questions is less than the reduced burden

attributable to other changes to the Form because the new questions

require limited information that, in many cases, will be readily

available to advisers while some of the SEC's modifications to reduce

the reporting burdens are intended to address areas of the Form that

commenters identified as particularly burdensome. In light of these

changes, the SEC believes that the commenter estimates, which were

based on the proposed Form, likely represent an upper bound of the

average burden to large hedge fund advisers.

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\397\ See supra section II.C.1 and II.C.2 of this Release.

\398\ See, e.g., supra sections II.B.1 and II.C.5 of this

Release and notes 129 and 183-188 and accompanying text.

\399\ See supra section II.C.1.

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Based on the foregoing, the SEC estimates that the amortized

average annual burden of periodic filings will be 610 hours per large

hedge fund adviser for each of the first three years.\400\ In the

aggregate, the amortized annual burden of periodic filings will then be

153,000 hours for large hedge fund advisers for each of the first three

years.\401\

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\400\ The SEC estimates that a large hedge fund adviser will

make 12 quarterly filings in three years, for an amortized average

annual burden of 610 hours (1 initial filing x 300 hours + 11

subsequent filings x 140 hours = 1,840 hours; and 1,840 hours / 3

years = approximately 610 hours). After the first three years,

filers generally will not incur the start-up burdens applicable to

the first filing.

\401\ 610 burden hours on average per year x 250 large hedge

fund advisers = 153,000 hours.

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C. Burden Estimates for Large Liquidity Fund Advisers

The SEC estimates that 80 advisers will be classified as large

liquidity fund advisers.\402\ Commenters did not address this estimate.

As discussed above, large liquidity fund advisers must complete section

1 of the Form and provide additional information regarding the

liquidity funds they manage in section 3 of the Form. In addition,

these advisers must report information regarding the liquidity funds

they manage on a quarterly basis.

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\402\ See supra note 88.

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Large liquidity fund advisers generally must report less

information on Form PF than large hedge fund advisers but more

information than large private equity advisers and smaller private fund

advisers. Accordingly, the SEC estimates that large liquidity fund

advisers will require, on average, fewer hours than large hedge fund

advisers but more hours than other advisers to configure systems and to

compile, review and electronically file the required information.

Specifically, the SEC estimates these advisers will require an average

of approximately 140 burden hours for an initial filing and 65 burden

hours for each subsequent filing.\403\

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\403\ The estimates of hour burdens and costs for large

liquidity fund advisers provided in the Paperwork Reduction Act and

cost-benefit analyses are based, in part, on a comparison to the

requirements and estimated burden for large hedge fund advisers

(which estimates, in turn, are based in part on burden data that

advisers provided in response to the FSA Survey) and on the

experience of SEC staff. These estimates also assume that some Large

Private Fund Advisers will find it efficient to automate some

portion of the reporting process, which will increase the burden of

the initial filing but reduce the burden of subsequent filings. This

efficiency gain is reflected in our burden estimates, which are

higher for the first report than subsequent reports, and certain of

the anticipated automation costs are accounted for in our cost

estimates. See infra note 435 and accompanying text. Of course, not

all questions on Form PF impose the same burden, and the burden of

responding to questions may vary substantially from adviser to

adviser. These estimates are intended to reflect averages for

compiling, reviewing and filing the Form, do not indicate the time

that may be spent on specific questions and may not reflect the time

spent by an individual adviser.

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These estimates reflect an increase compared to the proposal from

35 to 140 hours for the initial filing and from 16 to 65 hours for

subsequent filings. The SEC has increased these estimates to reflect

comments suggesting that the estimates included in the proposal were

too low.\404\ Commenters did not provide alternative estimates for

these burdens. However, commenters addressing the large hedge fund

adviser burdens did provide alternative estimates.\405\ As discussed

above, the SEC is also increasing its hour burden estimates with

respect to large hedge fund advisers based on, among other things, the

estimates these commenters provided.\406\ In the absence of specific

commenter estimates for the large liquidity fund adviser reporting

burden, the SEC has, therefore, scaled these estimates in proportion to

the increases it is making to its burden hour estimates for large hedge

fund advisers.

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\404\ See, e.g., AIMA Letter; IAA Letter; BlackRock Letter. No

commenters specifically addressed the burden estimates for liquidity

fund advisers, though several commented on the burden estimates

generally.

\405\ See, e.g., MFA Letter.

\406\ See supra section IV.B of this Release.

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Although the SEC has increased these estimates, it has also taken

into account changes from the proposal that it expects, on the whole,

to mitigate the burden of reporting for large liquidity fund advisers.

For instance, we have eliminated from section 1b a question requiring

identification of significant creditors.\407\ We have also made several

global changes that we anticipate will reduce the burden of reporting.

These include allowing large liquidity fund advisers to report only

annually on funds that are not liquidity funds, removing the

certification, expanding the ability to disregard funds of funds, the

increased ability of advisers to rely on their existing methodologies

and recordkeeping practices and allowing advisers to omit information

regarding parallel managed accounts from their responses to the

Form.\408\ We have also

[[Page 71161]]

added four new questions in section 1b that will increase the burden of

completing that portion of the Form, but the SEC expects the other

changes described above to result in a net reduction in the burden of

completing the Form relative to the proposal.\409\

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\407\ See supra section II.C.1 of this Release. One commenter

suggested the question we removed would have been ``very

burdensome.'' See PEGCC Letter.

\408\ See, e.g., supra sections II.B.1 and II.C.5 of this

Release and notes 129 and 183-188 and accompanying text.

\409\ See supra section II.C.1 of this Release.

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Based on the foregoing, the SEC estimates that the amortized

average annual burden of periodic filings will be 290 hours per large

liquidity fund adviser for each of the first three years.\410\ In the

aggregate, the amortized annual burden of periodic filings will then be

23,200 hours for large liquidity fund advisers for each of the first

three years.\411\

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\410\ The SEC estimates that a large liquidity fund adviser will

make 12 quarterly filings in three years, for an amortized average

annual burden of 290 hours (1 initial filing x 140 hours + 11

subsequent filings x 65 hours = 855 hours; and 855 hours / 3 years =

approximately 290 hours). After the first three years, filers

generally will not incur the start-up burdens applicable to the

first filing.

\411\ 290 burden hours on average per year x 80 large hedge fund

advisers = 23,200 hours.

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D. Burden Estimates for Large Private Equity Advisers

The SEC estimates that 170 advisers will be classified as large

private equity advisers.\412\ As discussed above, large private equity

advisers must complete section 1 of the Form and provide additional

information regarding the private equity funds they manage in section 4

of the Form. These advisers are only required to report on an annual

basis.

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\412\ See supra note 89.

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Large private equity advisers generally must report less

information on Form PF than other Large Private Fund Advisers but more

information than smaller private fund advisers. Accordingly, the SEC

estimates that large private equity advisers will require, on average,

fewer hours than large hedge fund advisers and large liquidity fund

advisers but more hours than other advisers to configure systems and to

compile, review and electronically file the required information.

Specifically, the SEC estimates these advisers will require an average

of approximately 100 burden hours for an initial filing and 50 burden

hours for each subsequent filing.\413\

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\413\ The estimates of hour burdens and costs for large private

equity advisers provided in the Paperwork Reduction Act and cost-

benefit analyses are based, in part, on a comparison to the

requirements and estimated burden for large hedge fund advisers

(which estimates, in turn, are based in part on burden data that

advisers provided in response to the FSA Survey) and on the

experience of SEC staff. These estimates also assume that some Large

Private Fund Advisers will find it efficient to automate some

portion of the reporting process, which will increase the burden of

the initial filing but reduce the burden of subsequent filings. This

efficiency gain is reflected in our burden estimates, which are

higher for the first report than subsequent reports, and certain of

the anticipated automation costs are accounted for in our cost

estimates. See infra note 435 and accompanying text. Of course, not

all questions on Form PF impose the same burden, and the burden of

responding to questions may vary substantially from adviser to

adviser. These estimates are intended to reflect averages for

compiling, reviewing and filing the Form, do not indicate the time

that may be spent on specific questions and may not reflect the time

spent by an individual adviser.

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These estimates reflect an increase compared to the proposal from

25 to 100 hours for the initial filing and from 12 to 50 hours for

subsequent filings. The SEC has increased these estimates to reflect

comments suggesting that the estimates included in the proposal were

too low.\414\ Commenters did not provide alternative estimates for

these burdens. However, commenters addressing the large hedge fund

adviser burdens did provide alternative estimates.\415\ As discussed

above, the SEC is also increasing its hour burden estimates with

respect to large hedge fund advisers based on, among other things, the

estimates these commenters provided.\416\ In the absence of specific

commenter estimates for the large private equity adviser reporting

burden, the SEC has, therefore, scaled these estimates in proportion to

the increases it is making to its burden hour estimates for large hedge

fund advisers.

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\414\ See, e.g., Atlas Letter; PEGCC Letter; USCC Letter.

\415\ See, e.g., MFA Letter.

\416\ See supra section IV.B of this Release.

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Although the SEC has increased these estimates, it has also taken

into account changes from the proposal that it expects, on the whole,

to mitigate the burden of reporting for large private equity advisers.

For instance, we have modified the requirement to report performance by

allowing advisers to report monthly and quarterly results only if such

results are already calculated for the fund.\417\ In addition, we have

eliminated from section 1b a question requiring identification of

significant creditors and have revised questions in section 4 requiring

information regarding portfolio company leverage to align the

information required more closely with information available on the

balance sheets of those companies.\418\ We have also made several

global changes to the Form that we anticipate will reduce the burden of

reporting. These include requiring only annual (rather than quarterly)

reporting, removing the certification, expanding the ability to

disregard funds of funds, increasing the ability of advisers to rely on

their existing methodologies and recordkeeping practices and allowing

advisers to omit information regarding parallel managed accounts from

their responses to the Form.\419\ We have also added four new questions

in section 1b that will increase the burden of completing that portion

of the Form, but the SEC expects the other changes described above to

result in a net reduction in the burden of completing the Form relative

to the proposal.\420\

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\417\ See supra note 386.

\418\ See supra sections II.C.1 and II.C.4 of this Release. One

commenter suggested the question we removed would have been ``very

burdensome.'' See PEGCC Letter.

\419\ See, e.g., supra sections II.B.1 and II.C.5 of this

Release and notes 129 and 183-188 and accompanying text.

\420\ See supra section II.C.1 of this Release.

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Based on the foregoing, the SEC estimates that the amortized

average annual burden of periodic filings will be 67 hours per large

private equity adviser for each of the first three years.\421\ In the

aggregate, the amortized annual burden of periodic filings will then be

11,400 hours for large private equity advisers for each of the first

three years.\422\

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\421\ The SEC estimates that a large private equity adviser will

make 3 annual filings in three years, for an amortized average

annual burden of 67 hours (1 initial filing x 100 hours + 2

subsequent filings x 50 hours = 200 hours; and 200 hours / 3 years =

approximately 67 hours). After the first three years, filers

generally will not incur the start-up burdens applicable to the

first filing.

\422\ 67 burden hours on average per year x 170 large private

equity advisers = 11,400 hours.

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E. Burden Estimates for Transition Filings, Final Filings and Temporary

Hardship Exemption Requests

In addition to periodic filings, a private fund adviser must file

very limited information on Form PF in three situations.

First, any adviser that transitions from quarterly to annual filing

because it has ceased to be a large hedge fund or large liquidity fund

adviser must file a Form PF indicating that it is no longer obligated

to report on a quarterly basis. The SEC estimates that approximately 9

percent of quarterly filers will need to make a transition filing each

year with a burden of 0.25 hours, or a total of 7 burden hours per year

for all private fund advisers.\423\ No commenters addressed these

estimates. The SEC has not changed its estimates of the rate of

transition filings and the burden hours per filing from the proposal,

but it has reduced its estimate of the total burden hours per year

because fewer filers will

[[Page 71162]]

be required to report on a quarterly basis.\424\

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\423\ This estimate is based on IARD data on the frequency of

advisers to one or more private funds ceasing to have assets under

management sufficient to cause them to be large hedge fund or large

liquidity fund advisers. ((80 large liquidity fund advisers + 250

large hedge fund advisers) x 0.09 x 0.25 hours = 7 hours.)

\424\ Under the proposal, large private equity advisers would

also have been required to file on a quarterly basis. See supra

section II.B.1 of this Release.

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Second, filers who are no longer subject to Form PF's periodic

reporting requirements must file a final report indicating that fact.

The SEC estimates that approximately 8 percent of the advisers required

to file Form PF will have to file such a report each year with a burden

of 0.25 of an hour, or a total of 71 burden hours per year for all

private fund advisers.\425\ No commenters addressed these estimates.

The SEC has not changed its estimates of the rate of final filings and

the burden hours per filing from the proposal, but it has reduced its

estimate of the total burden hours per year because the addition of a

minimum reporting threshold will result in fewer filers reporting on

Form PF.\426\

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\425\ Estimate is based on IARD data on the frequency of

advisers to one or more private funds withdrawing from SEC

registration. (3,570 private fund advisers x 0.08 x 0.25 hours = 71

hours.)

\426\ See supra section II.A of this Release.

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Finally, an adviser experiencing technical difficulties in

submitting Form PF may request a temporary hardship exemption by filing

portions of Form PF in paper format.\427\ The information that must be

filed is comparable to the information that Form ADV filers provide on

Form ADV-H when requesting a temporary hardship exemption relating to

that form. In the case of Form ADV-H, the SEC has estimated that the

average burden of filing is 1 hour and that approximately 1 in every

1,000 advisers will file annually.\428\ Assuming that Form PF filers

request hardship exemptions at the same rate and that the applications

impose the same burden per filing, the SEC expects approximately 4

filers to request a temporary hardship exemption each year \429\ for a

total of 4 burden hours.\430\ No commenters addressed these estimates,

and they remain unchanged from the proposal.

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\427\ See Advisers Act rule 204(b)-1(f). The rule requires that

the adviser complete and file Item A of Section 1a and Section 5 of

Form PF, checking the box in Section 1a indicating that the filing

is a request for a temporary hardship exemption.

\428\ See Implementing Adopting Release, supra note 11, at

section VI.F.

\429\ 3,570 private fund advisers x 1 request per 1,000 advisers

= approximately 4 advisers.

\430\ 4 advisers x 1 hour per response = 4 hours.

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F. Aggregate Hour Burden Estimates

Based on the foregoing, the SEC estimates that Form PF would result

in an aggregate of 258,000 burden hours per year for all private fund

advisers for each of the first three years, or 72 burden hours per year

on average for each private fund adviser over the same period.\431\

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\431\ 70,600 hours for periodic filings by smaller advisers +

153,000 hours for periodic filings by large hedge fund advisers +

23,200 hours for periodic filings by large liquidity fund advisers +

11,400 hours for periodic filings by large private equity fund

advisers + 7 hours per year for transition filings + 71 hours per

year for final filings + 4 hours per year for temporary hardship

requests = approximately 258,000 hours per year. 258,000 hours per

year / 3,570 total advisers = 72 hours per year on average.

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G. Cost Burden

In addition to the hour burdens identified above, advisers subject

to the Form PF reporting requirements will incur cost burdens. Firms

required to file Form PF must also pay filing fees. In a separate

order, the SEC has established filing fees for the Form PF filing

system of $150 per annual filing and $150 per quarterly filing.\432\ We

estimate that this will result in advisers paying aggregate filing fees

of approximately $684,000 per year.\433\

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\432\ See supra section II.E of this Release.

\433\ ((3,070 smaller private fund advisers + 170 large private

equity advisers) x $150 per annual filing) + ((250 large hedge fund

advisers + 80 large private equity advisers) x $150 per quarterly

filing x 4 quarterly filings per year) = $684,000 per year.

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Several commenters suggested that advisers would also need to

modify existing systems or deploy new systems to support Form PF

reporting.\434\ As discussed in the Proposing Release and below, the

SEC acknowledges that advisers may incur costs to develop systems and

expects that Large Private Fund Advisers, in particular, may find it

efficient to automate some portion of the reporting process, which will

increase the burden of the initial filing but reduce the burden of

subsequent filings.\435\ The SEC has assumed that some of the hours

that it estimates advisers will spend on preparing their initial

filings on Form PF will be attributable to programmers preparing

systems for the reporting.\436\ The SEC understands that some advisers

may outsource all or a portion of these systems requirements to

software consultants, vendors, filing agents or other third-party

service providers and believes that the emergence of such service

providers may serve to make filing on Form PF more efficient than is

reflected in its estimates.\437\

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\434\ See, e.g., BlackRock Letter; IAA Letter; Kleinberg General

Letter; PEGCC Letter; SIFMA Letter.

\435\ See infra section V.B of this Release, especially nn. 511-

515; Proposing Release, supra note 11, at section V.B.

\436\ See infra notes 511, 513 and 515.

\437\ The SEC has based its estimates on the use of internal

resources, for which some cost data is available, because it

believes that an adviser would engage third-party service providers

only if the external costs were comparable, or less than, the

estimated internal costs of compiling, reviewing and filing the Form

PF. As a result, the SEC's estimates of hour and cost burdens in

this PRA analysis, and of costs in section V.B of this Release, may

overstate the actual burdens and costs that will be incurred once

third-party services become available.

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Advisers may also incur costs associated with the acquisition or

use of hardware needed to perform computations or otherwise process the

data required on Form PF.\438\ Smaller private fund advisers are

unlikely to bear these costs because the information they are required

to provide is limited and will, in many cases, already be maintained in

the ordinary course of business.\439\ Even among Large Private Fund

Advisers, these costs are likely to vary significantly. For instance,

the cost to any Large Private Fund Adviser may depend on how many funds

or the types of funds it manages, the state of its existing systems and

the complexity of its business. In addition, large hedge fund and large

liquidity fund advisers must file Form PF more frequently, on shorter

deadlines and generally with more information than large private equity

advisers, increasing the likelihood that filings will compete with

other demands for computing resources and that additional resources

will be required.

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

\438\ See supra note 272.

\439\ See supra note 382.

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Commenters did not provide estimates for the costs of acquiring or

using hardware for purposes of Form PF. SEC staff contacted several

organizations, including self-regulatory organizations, prime brokers

and fund service providers, to help develop an estimate for these

costs. Although these organizations generally were not able to provide

such estimates, some expressed the view that the hardware costs would

be small relative to the human capital costs and, for Large Private

Fund Advisers, software development costs that Form PF imposes.\440\

The SEC estimates, based in part on these conversations and the factors

discussed above, that these costs will fall across a broad range for

Large Private Fund Advisers. Those who are required to file less

information, less frequently and on longer deadlines, who have excess

capacity in their existing systems or whose business is relatively

simple, may incur no incremental hardware costs. On the other hand,

some Large Private Fund Advisers may need to acquire (or obtain the use

of) computing resources equivalent to an additional server, which the

SEC estimates would

[[Page 71163]]

cost approximately $50,000 fully deployed. This suggests an aggregate

incremental cost in the first year of reporting between $0 and

$25,000,000, though the actual cost is likely to fall in between these

two end-points.\441\

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\440\ See supra notes 435-436 and accompanying text.

\441\ $50,000 x 500 Large Private Fund Advisers = $25,000,000.

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CFTC:

As adopted, CEA rule 4.27 does not impose any additional burden

upon registered CPOs and CTAs that are dually registered as investment

advisers with the SEC. By filing the Form PF with the SEC, these dual

registrants would be deemed to have satisfied certain of their filing

obligations with the CFTC should the CFTC adopt such requirements, and

the CFTC is not imposing any additional burdens herein. Therefore, any

burden imposed by Form PF through CEA rule 4.27 on entities registered

with both the CFTC and the SEC has been accounted for within the SEC's

calculations regarding the impact of this collection of information

under the PRA or, to the extent the reporting may relate to commodity

pools that are not private funds, the CFTC anticipates that it would

account for this burden should it adopt a future rulemaking

establishing reporting requirements with respect to those commodity

pools.\442\

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\442\ 44 U.S.C. 3501-3521.

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V. Economic Analysis

As discussed above, the Dodd-Frank Act amended the Advisers Act to,

among other things, authorize the SEC to promulgate reporting

requirements for private fund advisers. The Dodd-Frank Act also directs

the SEC and CFTC to jointly issue, after consultation with FSOC, rules

establishing the form and content of any reports to be filed under this

new authority.\443\ In enacting Sections 404 and 406 of the Dodd-Frank

Act, Congress determined to require that private fund advisers file

reports with the SEC and specified certain types of information that

should be subject to reporting and/or recordkeeping requirements, but

Congress left to the SEC the determination of the specific information

to be maintained or reported. When determining the form and content of

such reports, the Dodd-Frank Act authorizes the SEC to require that

private fund advisers file such information ``as necessary and

appropriate in the public interest and for the protection of investors,

or for the assessment of system risk by [FSOC].'' \444\

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\443\ See section 211(e) of the Advisers Act.

\444\ See section 204(b)(1)(A) of the Advisers Act.

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The SEC is adopting Advisers Act rule 204(b)-1 and Form PF, and the

CFTC is adopting CEA rule 4.27 and sections 1 and 2 of Form PF, to

implement the private fund adviser reporting requirements that the

Dodd-Frank Act directs the Commissions to promulgate. Under these new

rules, private fund advisers having at least $150 million in private

fund assets under management must file with the SEC information

responsive to all or portions of Form PF on a periodic basis. The scope

of the required information and the frequency of the reporting is

related to the amount of private fund assets that each private fund

adviser manages and the types of private fund to which those assets

relate.\445\ Specifically, smaller private fund advisers must report

annually and provide only basic information regarding their operations

and the private funds they advise. Large private equity advisers also

must report on an annual basis but are required to provide additional

information with respect to the private equity funds they manage.

Finally, large hedge fund advisers and large liquidity fund advisers

must report on a quarterly basis and provide more information than

other private fund advisers.

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\445\ See section II.A of this Release (describing who must file

Form PF); see also section II.B of this Release (discussing the

frequency with which private fund advisers must file Form PF);

section II.C of this Release (describing the information that

private fund advisers must report on Form PF). See also proposed

Instruction 9 to Form PF for information regarding the frequency

with which private fund advisers must file Form PF.

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The Advisers Act directs the SEC, when engaging in rulemaking that

requires it to consider or determine whether an action is necessary or

appropriate in the public interest, to consider, in addition to the

protection of investors, whether the action will promote efficiency,

competition and capital formation.\446\ The Commissions are sensitive

to the costs and benefits of their respective rules and have carefully

considered the costs and benefits of this rulemaking. The SEC's

consideration of the costs and benefits of this rulemaking has included

whether this rulemaking will promote efficiency, competition and

capital formation. In the proposal, the Commissions identified certain

costs and benefits of Advisers Act rule 204(b)-1, CEA rule 4.27 and

Form PF and requested comment on all aspects of their cost-benefit

analyses. The comments the Commissions received on those analyses are

discussed below.

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\446\ See section 202(c) of the Advisers Act.

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In considering the benefits and costs of this rulemaking, we have

also considered alternatives to the requirements we are adopting. All

of these alternatives would require at least some registered private

fund advisers to report at least some information because Congress

directed the SEC to adopt such reporting requirements. Among the

alternatives that we considered were requirements that varied along the

following five dimensions: (1) Requiring more or less information; (2)

requiring more or fewer advisers to complete the Form; (3) allowing

advisers to rely more on their existing methodologies and recordkeeping

practices in completing the Form (or, alternatively, requiring more

standardized responses); (4) requiring more or less frequent reporting;

and (5) allowing advisers more or less time to complete and file the

Form.

Alternatives along each of these dimensions have advantages and

disadvantages. Obtaining more standardized information from more

advisers more often and more quickly would likely improve the value of

the Form PF data to FSOC and other regulators, and several commenters

supported alternatives along one or more of these dimensions.\447\ The

Commissions are concerned, however, that the costs of such changes may,

in general, increase more quickly than the benefits.\448\ On the other

hand, the Commissions have considered, and are adopting changes from

the proposal, that allow advisers more time to file the Form,\449\

permit large private equity advisers to file less frequently,\450\

generally reduce the amount of information required,\451\ reduce the

number of advisers required to file the Form\452\ and allow advisers to

rely more on their existing methodologies and recordkeeping

practices.\453\ A number of commenters supported these changes and, in

some cases, would have preferred that we further reduce the reporting

burdens.\454\ We believe, however, that the approach we are adopting

strikes an appropriate balance between the benefits of the information

to be collected and the costs to advisers

[[Page 71164]]

of providing it. These benefits and costs are discussed in greater

detail below.

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\447\ See, e.g., AFL-CIO Letter; AFR Letter. See also CII

Letter; MSCI Letter.

\448\ See, e.g., supra discussion following notes 101 and 158

and text accompanying note 256. We believe, however, that there are

some exceptions, such as the additional information it has

determined to request in section 1b of the Form. See supra section

II.C.1 of this Release.

\449\ See supra section II.B.2 of this Release.

\450\ See supra section II.B.1 of this Release.

\451\ See supra section II.C of this Release.

\452\ See supra section II.A of this Release.

\453\ See supra section II.C of this Release.

\454\ See, e.g., IAA Letter; MFA Letter; PEGCC Letter; SIFMA

Letter.

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A. Benefits

We believe that Form PF will create two principal classes of

benefits. First, the information collected will facilitate FSOC's

understanding and monitoring of systemic risk in the private fund

industry and assist FSOC in determining whether and how to deploy its

regulatory tools with respect to nonbank financial companies. Second,

we expect this information to enhance the Commissions' ability to

evaluate and develop regulatory policies and improve the efficiency and

effectiveness of our efforts to protect investors and maintain fair,

orderly and efficient markets.

Congress passed the Dodd-Frank Act in the wake of what some have

called ``the greatest financial crisis since the Great Depression.''

\455\ The crisis imposed immense costs on individuals and businesses,

with millions of jobs disappearing from the U.S. economy, large numbers

of families losing their homes to foreclosure, nearly $11 trillion in

household wealth lost, including retirement accounts and life savings,

and many businesses, large and small, facing serious challenges.\456\

Congress responded to the crisis, in part, by establishing FSOC as the

center of a framework intended ``to prevent a recurrence or mitigate

the impact of financial crises that could cripple financial markets and

damage the economy.'' \457\ The goal of this framework, in other words,

is the avoidance of significant harm to the U.S. economy from future

financial crises.

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\455\ The Financial Crisis Inquiry Report: Final Report of the

National Commission on the Causes of the Financial and Economic

Crisis in the United States, Financial Crisis Inquiry Commission

(Jan. 2011) (``Financial Crisis Inquiry Report'') at xv.

\456\ See id., at xv-xvi. See also Senate Committee Report,

supra note 5, at 39.

\457\ Id.

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Under the Dodd-Frank Act, FSOC must ``monitor emerging risks to

U.S. financial stability'' and employ its regulatory tools to address

those risks.\458\ For this purpose, the Dodd-Frank Act granted FSOC the

ability to determine that a nonbank financial company will be subject

to the supervision of the 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. FSOC may also recommend to the FRB

heightened prudential standards for designated nonbank financial

companies.\459\ In addition, the Dodd-Frank Act authorizes FSOC to

issue recommendations to primary financial regulators for more

stringent regulation of financial activities that it determines may

create or increase systemic risk.\460\

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\458\ See id., at 2. See also supra note 6 and accompanying

text.

\459\ See supra note 7 and accompanying text.

\460\ See supra note 8 and accompanying text.

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Congress recognized that FSOC would need information from private

fund advisers to carry out its duties and to determine whether and how

to exercise these regulatory authorities. For instance, a Senate

committee report noted that ``no precise data regarding the size and

scope of hedge fund activities are available[, and while] hedge funds

are generally not thought to have caused the current financial crisis,

information regarding their size, strategies, and positions could be

crucial to regulatory attempts to deal with a future crisis.'' \461\ To

that end, Congress mandated that the Commissions, as the primary

regulators of private fund advisers, gather information from these

advisers for FSOC's use. The Commissions have designed Form PF, in

consultation with staff representing FSOC's members, to implement this

mandate.\462\

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

\461\ See Senate Committee Report, supra note 5, at 38.

\462\ See section II.C of this Release (describing the

information that private fund advisers must report on Form PF).

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Recent releases from FSOC illuminate how Form PF will serve an

essential role in FSOC's monitoring of, and exercise of regulatory

authority over, the private fund industry. For instance, in one

release, 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.\463\ Guidance in this FSOC release also suggests the

role Form PF data will play in the process of determining whether a

private fund adviser or the funds it manages will be subject to FRB

supervision.\464\ More specifically, the Dodd-Frank Act identifies

certain factors that FSOC must consider in making a determination to

designate a nonbank financial company for FRB supervision, and FSOC's

recent guidance organizes those factors into categories, including

size, interconnectedness, use of leverage, liquidity risk and maturity

mismatch and concentration.\465\ As discussed in detail throughout

section II.C of this Release, the information reported on Form PF is

designed, in part, to provide FSOC with data to assess these factors in

a manner that is relevant to the particular type of fund about which

the adviser is reporting.\466\ Finally, we expect that FSOC will use

Form PF data to supplement the data that it collects regarding other

financial market participants and gain a broader view of the financial

system than is currently available to regulators.\467\ In this manner,

we believe that the information collected through Form PF could play an

important role in FSOC's monitoring of systemic risk, both in the

private fund industry and in the financial markets more broadly.

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\463\ See supra note 21 and accompanying text.

\464\ In the proposed three-stage process for making such

determinations, the first and second stages would utilize publicly

available data and data that, like Form PF, is collected by other

regulators. A third stage of screening would generally involve OFR

collecting additional, targeted information directly from these

firms, which FSOC would analyze along with Form PF data and other

data used in the first two stages. See supra notes 45-46 and

accompanying text.

\465\ See FSOC Second Notice, supra note 6.

\466\ See, e.g., supra notes 192, 228, 266, 282, 284, 298 and

323 and accompanying text.

\467\ See, e.g., Proposing Release, supra note 12, at n. 120 and

accompanying text.

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In addition to the content of the Form, the reporting frequency,

filing deadlines and reporting thresholds have been designed to provide

FSOC the information it needs to monitor systemic risk across the

private fund industry while balancing the burdens these reporting

requirements will impose on advisers. For instance, although most

advisers will only report annually on Form PF, large hedge fund and

large liquidity fund advisers will report quarterly because we

understand, based on our staffs' consultations with staff representing

FSOC's members, that this will provide FSOC with timely data that it

may use to identify emerging trends in systemic risk.\468\ The filing

deadlines are, similarly, designed to provide FSOC with timely data so

that it may understand and monitor systemic risk on a reasonably

current basis.\469\ Moreover, as discussed above, the reporting

thresholds are designed to provide FSOC with a broad picture of the

private fund industry while relieving smaller advisers from much of the

costs associated with the more detailed reporting.\470\ 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

[[Page 71165]]

want to obtain additional information.\471\

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\468\ See supra section II.B.1 of this Release (discussing

reporting frequency and comments on the proposed reporting

frequency).

\469\ See supra section II.B.2 of this Release (discussing

reporting deadlines and comments on the proposed deadlines).

\470\ See supra section II.A.4.a of this Release (discussing

large adviser thresholds and comments on the proposed thresholds).

See also section II.A of this Release (discussing the minimum

reporting thresholds).

\471\ Id.

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Certain publications from international groups and researchers have

suggested that data like that collected on Form PF will be valuable to

the regulation of systemic risk. For instance, as discussed above,

several international groups have continued working to close

information gaps by increasing the disclosures provided to

regulators.\472\ These groups have emphasized the importance, in their

view, of designing and collecting better information to support the

identification and modeling of systemic risk.\473\ In addition,

research papers have suggested that information regarding private funds

should play an important role in monitoring systemic risk, and one

study argues that more direct measures of systemic risk would be

possible with information from the majority of funds in the

industry.\474\ Another recent research paper argues that expanding the

FRB's flow of funds data to include more detailed quarterly information

regarding the holding and transfer of financial instruments, including

information regarding the portfolios of hedge funds, ``would have been

of material value to U.S. regulators in ameliorating the recent

financial crisis and could be of aid in understanding the potential

vulnerabilities of an innovative financial system in the future.''

\475\ Others have commented on hedge fund reporting specifically,

stating that ``[t]ransparency to regulators can help them measure and

manage possible systemic risk and is relatively costless.'' \476\

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

\472\ See supra notes 28-29 and accompanying text.

\473\ Id.

\474\ See, e.g., Nicholas Chan, Mila Getmansky, Shane Haas and

Andrew Lo, Systemic Risk and Hedge Funds, in The Risks of Financial

Institutions (Mark Carey and Rene Stulz, eds., 2007) at 238; Monica

Billio, Mila Getmansky, Andrew Lo and Loriana Pelizzon, Econometric

Measures of Systemic Risk in the Finance and Insurance Sectors,

National Bureau of Economic Research (July 2010).

\475\ Leonard Nakamura, Durable Financial Regulation: Monitoring

Financial Instruments as a Counterpart to Regulating Financial

Institutions, National Bureau of Economic Research (May 2011) at 1.

\476\ Stephen Brown, et al., Hedge Funds, Mutual Funds, and

ETFs, in Regulating Wall Street: The Dodd-Frank Act and the New

Architecture of Global Finance 360 (Viral V. Acharya, et al., eds.,

2011) (supporting ``regular and timely'' reporting of asset

positions and leverage levels). See also Ferran, supra note 307, at

28.

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Other academics and economists, while supporting regulatory efforts

to assess and mitigate systemic risk, have cautioned that achieving the

goal of substantially reducing systemic risk may prove difficult. For

example, while the authors of one recent work support establishing

``early warning indicators'' for financial crises, they argue that the

most significant challenge is not the design of a framework for

systemic risk analysis but rather:

the well-entrenched tendency of policy makers and market

participants to treat the signals as irrelevant archaic residuals of

an outdated framework, assuming that old rules of valuation no

longer apply. If the past * * * is any guide, these signals will be

dismissed more often than not.\477\

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\477\ Carmen M. Reinhart and Kenneth S. Rogoff, This Time is

Different: Eight Centuries of Financial Folly (2009) (``Reinhart and

Rogoff'') at 277, 280 and 281 (after observing this tendency to

disregard signals of systemic risk, the authors conclude that this

``is why we also need to think about improving institutions,'' which

may be important to reducing this risk).

Accordingly, although collecting information on Form PF will

increase the transparency of the private fund industry to regulators

(an important prerequisite to understanding and monitoring systemic

risk), transparency alone may not be sufficient to address systemic

risk.\478\

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\478\ See also FSOC 2011 Annual Report, supra note 19, at ii

(explaining that identifying and mitigating potential threats to

financial stability ``is an inherently difficult exercise. No

financial crisis emerges in exactly the same way as its

predecessors, and the most significant future threats will often be

the ones that are hardest to diagnose and preempt'' but going on to

state that, ``[n]onetheless, there is a strong case for improving

the quality of information available to the public, supervisors, and

regulators about risks in financial institutions and markets.'')

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Some commenters agreed that Form PF data will ``facilitate FSOC's

ability to promote the soundness of the U.S. financial system.'' \479\

One commenter characterized Form PF as determining the extent to which

FSOC and the SEC have access to ``data essential to monitoring systemic

risks that, as we saw in 2007 and 2008, cause substantial damage to the

financial markets and the broader economy when they go unchecked.''

\480\ Another commenter stated that Form PF data could aid in the

assessment of ``systemic risks due to connectivity and contagion.''

\481\ One commenter who expressed reservations regarding specific

aspects of the proposal nonetheless supported ``the approach proposed

by the SEC and CFTC to collect information from registered private fund

managers through periodic, confidential reports on Form PF'' and agreed

that gathering data ``from different types of market participants,

including investment advisers and the funds they manage, * * *is a

critical component of effective systemic risk monitoring and

regulation.'' \482\

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\479\ CII Letter. See also, e.g., AFL-CIO Letter; AFR Letter.

\480\ AFL-CIO Letter.

\481\ MSCI Letter (though also noting that they ``see less

potential benefit from this exercise to track the formation of asset

class bubbles'' and that certain of the requested information would

be difficult to aggregate for purposes of industry-wide analysis;

see section II.C for a discussion of some of this commenter's

observations regarding use of particular data collected on Form PF).

\482\ MFA Letter.

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Some commenters, however, doubted that Form PF would be beneficial

for monitoring systemic risk.\483\ One commenter, for instance, argued

that ``Form PF requires firms to calculate and disclose information

with uncertain benefits to regulators, and the broad scope of private

funds subject to this burden has not been justified.'' \484\ Others

argued that particular types of funds, such as private equity funds,

should be excluded from the reporting because they do not, in their

view, have the potential to pose systemic risk or that certain of the

proposed questions on Form PF would not prove beneficial for systemic

risk analysis.\485\ As discussed above, based on SEC staff's

consultation with staff representing FSOC's members, we continue to

believe that targeted information regarding the leverage practices of

private equity funds will provide information that FSOC may use to

monitor activities and trends in this industry that are of potential

systemic importance.\486\ In addition, we have made a number of changes

from the proposal intended to address the specific concerns of these

commenters and believe that Form PF, as adopted, will be an important

source of information for FSOC as it carries out its duties as they

relate to the private fund industry.\487\

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\483\ See, e.g., Fidelity Letter; PEGCC Letter; TCW Letter; USCC

Letter.

\484\ CCMR Letter; see also USCC Letter (acknowledging, however,

that ``greater access to comprehensive market and industry

information will assist [FSOC] in identifying emerging threats to

the stability of the U.S. financial system.''); BlackRock Letter;

SIFMA Letter.

\485\ See, e.g., PEGCC Letter. See also supra section II.C of

this Release.

\486\ See supra notes 307-308 and accompanying text.

\487\ See supra section II of this Release (discussing changes

from the proposal).

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We cannot predict today what the scope of the next financial crisis

will be, and Form PF is only one part of a broader framework

established under the Dodd-Frank Act to monitor and address systemic

risk.\488\ Other measures contemplated by the Dodd-Frank Act, including

the so-called ``Volcker rule,'' enhanced regulation of swaps and the

FRB's oversight of systemically important financial

[[Page 71166]]

institutions may be critical to identifying and mitigating the next

financial crisis. We anticipate, however, that Form PF will improve the

information available to regulators as they seek to prevent or mitigate

the effects of future financial crises, and if this information helps

to avoid even a small portion of the costs of a financial crisis like

the most recent one, the benefits of Form PF will be very significant.

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

\488\ See supra note 457 and accompanying text.

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Reporting on Form PF will also benefit investors and other market

participants by improving the information available to the Commissions

regarding the private fund industry and how it interacts with markets.

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. 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.\489\ As discussed above,

the data collected through Form PF, which will be more reliable than

existing data regarding the industry and significantly extend the data

available through the revised Form ADV, will assist FSOC in identifying

and addressing risks to U.S. financial stability. This may, in turn,

protect investors and other market participants from significant

losses.

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\489\ See Implementing Adopting Release, supra note 11.

Information reported on Form ADV is made available to the public,

while Form PF data generally will not be. See supra section II.D

(discussing confidentiality of Form PF data). This has informed the

SEC's determination to require certain private fund information on

Form ADV and other private fund information on Form PF.

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

In addition, this data will provide the Commissions with a more

complete view of the financial markets in general and the private fund

industry in particular. This broader perspective and more reliable data

may enhance the Commissions' ability to develop and frame regulatory

policies regarding the private fund industry, its advisers and the

markets in which they participate, and to more effectively evaluate the

outcomes of regulatory policies and programs directed at this sector,

including for the protection of private fund investors. For instance,

Form PF data may help the Commissions to discern relationships between

regulatory actions and private fund results or activities.

We also expect the Form PF data to improve the efficiency and

effectiveness of the Commissions' oversight of private fund advisers by

enabling staff to manage and analyze information related to the risks

that private funds pose more quickly, more effectively and at a lower

cost than is currently possible. This will allow the Commissions to

more efficiently and effectively target their examination programs. The

Commissions will be able to use Form PF information to generate reports

on the industry, its characteristics and trends. We expect that these

reports will help the Commissions to anticipate regulatory problems,

allocate and reallocate resources, and more fully evaluate and

anticipate the implications of various regulatory actions the

Commissions may consider taking. This will increase both the efficiency

and effectiveness of the Commissions' programs and, thereby, increase

investor protection. Form PF data will also help the Commissions better

understand the investment activities of private funds and the scope of

their potential effect on investors and the markets that the

Commissions regulate.

Commenters generally focused on the benefits of Form PF as they

relate to systemic risk rather than investor protection. However, one

supporter, who represents twelve million workers and sponsors pension

and employee benefit plans holding almost half a trillion dollars in

assets, agreed that ``[c]omprehensive disclosure requirements for

private funds will provide important protections for [its] members'

retirement savings.'' \490\ On the other hand, some commenters who

questioned Form PF's merits expressed skepticism regarding the Form's

benefits generally, not just with respect to the monitoring of systemic

risk.\491\ As discussed in detail above, we have made a number of

changes from the proposal designed to address commenter concerns

regarding certain aspects of the proposed reporting requirements.\492\

However, we continue to believe that Form PF, as adopted, will increase

the amount and quality of information available regarding a previously

opaque area of investment activity and, thereby, enhance the ability of

regulators to protect investors and maintain fair, orderly and

efficient markets.

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

\490\ AFL-CIO Letter. See also AFR Letter.

\491\ See, e.g., supra note 484.

\492\ See supra section II of this Release (discussing changes

from the proposal).

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

The Commissions believe that private fund advisers, investors in

private funds and the companies in which private funds may invest will

also enjoy certain benefits related to Form PF. For example, we

identified above two principal classes of benefits--assistance to FSOC

in carrying out its mission and improvements to the ability of

regulators to protect investors and oversee markets--in which these

groups will share, including indirectly as participants in the U.S.

financial system. With respect to hedge fund advisers, for instance,

data indicate that the number of funds shut down each year increased

significantly during the recent financial crisis, suggesting that these

advisers may benefit if a future financial crisis is averted or

mitigated.\493\ Private fund investors and private fund advisers will

also benefit if reporting on Form PF, by requiring advisers to review

their fund's portfolios, trading practices and risk profiles, causes

advisers to improve their risk management practices or internal

controls.

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\493\ See HedgeFund Intelligence Global Review 2011, HFI (Spring

2011) (``HFI 2011 Global Review'').

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Reporting on Form PF may also result in a positive effect on

capital formation. Although Form PF data generally will be non-public,

Form PF will increase transparency to regulators.\494\ The SEC believes

that private fund advisers may, as a result, assess more carefully the

risks associated with particular investments and, in the aggregate,

allocate capital to investments with a higher value to the economy as a

whole. To the extent that changes in investment allocations lead to

improved economic outcomes in the aggregate, Form PF reporting may

result in a positive effect on capital available for investment.

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

\494\ See supra section II.D (discussing confidentiality of Form

PF data).

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

Should the CFTC adopt certain of its proposed systemic risk

reporting requirements, the coordination between the CFTC and SEC on

this rulemaking would result in significant efficiencies for any

private fund adviser that is also registered as a CPO or CTA with the

CFTC. This is because, under CEA rule 4.27, filing Form PF would

satisfy both SEC and CFTC reporting obligations with respect to

commodity pools that are ``private funds'' and CPOs and CTAs would have

the option of reporting on Form PF regarding commodity pools that are

not private funds to satisfy certain other CFTC reporting obligations,

in each case should the CFTC adopt such reporting obligations.

As discussed in section I.B of this Release, we have also

coordinated with foreign financial regulators regarding the reporting

of systemic risk information regarding private funds and

[[Page 71167]]

anticipate that this coordination, as reflected in Form PF, will result

in greater efficiencies in private fund reporting, as well as

information sharing and private fund monitoring among foreign financial

regulators. Ongoing work among various international organizations has

emphasized the importance of filling gaps in the data regarding

financial market participants, and 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.\495\ 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.\496\ We have made

several changes from the proposal intended to more closely align Form

PF with international precedent.\497\

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\495\ See supra note 29 and accompanying text.

\496\ See supra note 30 and accompanying text.

\497\ See supra note 35 and accompanying text.

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As discussed above, we also believe that private fund advisers

already collect or calculate some of the information required on the

Form at least as often as they must file the Form, creating

efficiencies for, and benefiting, advisers in satisfying their

reporting requirements.\498\

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

\498\ See supra note 382; Proposing Release, supra note 12, at

n.105; but see supra note 146.

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

B. Costs

Reporting on Form PF will also impose certain costs on private fund

advisers and, potentially, other market participants. For the most

part, these are the same costs discussed in the PRA analysis above

because that analysis must account for the burdens of responding to the

Commissions' reporting requirements. In order to minimize these direct

costs, the reporting requirements are scaled to the adviser's size, the

size of funds and the types of private funds each adviser manages. For

instance, smaller private fund advisers and large private equity

advisers generally must report less information and less frequently

than large hedge fund advisers and large liquidity fund advisers.\499\

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 costs associated with the more detailed reporting. It is also

designed to reflect the different implications for systemic risk that

may be presented by different investment strategies, and thus seeks to

adjust the costs of the reporting in proportion to the differing

potential benefits of the information reported with respect to these

strategies.

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\499\ See section II.A of this Release (describing who must file

Form PF); section II.B of this Release (discussing the frequency

with which private fund advisers must file Form PF); section II.C of

this Release (describing the information that private fund advisers

must report on Form PF). See also Instruction 9 to Form PF

(discussing information regarding the frequency with which private

fund advisers must file Form PF).

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We expect that the costs Form PF imposes will be most significant

for the first report that a private fund adviser is required to file

because the adviser will need to familiarize itself with the new

reporting form and may need to configure its systems in order to

efficiently gather the required information. We also anticipate that

the initial report will require more attention from senior personnel,

including compliance managers and senior risk management specialists,

than will subsequent reports. In addition, we expect that some Large

Private Fund Advisers will find it efficient to automate some portion

of the reporting process, which will increase the burden of the initial

filing but reduce the burden of subsequent filings.

Several commenters addressed the cost estimates included in the

Proposing Release. These commenters generally viewed these estimates as

understated and, in several cases, argued that the costs of the initial

report, in particular, would be greater than assumed.\500\ These

commenters offered two common explanations for the higher than

estimated costs: (1) ``[m]any of the requested items on Form PF are not

tracked by advisory firms on the frequency, by the category or on a

fund-by-fund basis in the manner requested by the proposed Form,''

meaning that advisers would need to develop systems for the reporting

or engage in a manual process of gathering and compiling data; \501\

and (2) completing the Form will require gathering information from

many different internal and external parties and systems.\502\

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\500\ See, e.g., AIMA Letter; IAA Letter; Kleinberg General

Letter; MFA Letter; PEGCC Letter; Seward Letter.

\501\ TCW Letter; but see also supra note 146.

\502\ See, e.g., Kleinberg General Letter; MFA Letter; PEGCC

Letter.

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We have carefully considered comments suggesting that the reporting

requirements would be more burdensome than estimated in the Proposing

Release, and the SEC has substantially increased its estimates of the

hour burdens included in this PRA analysis, which flow through to these

estimates of costs.\503\ We have, however, also taken these comments

into consideration in making a number of changes from the proposal that

are intended to reduce the burdens of reporting on Form PF. These

include global changes to the Form, such as allowing most advisers more

time to file following the end of a fiscal period (reducing the

likelihood that Form PF will compete with other priorities for

advisers' resources or require employment of additional personnel),

extending the compliance date, allowing large private equity advisers

to report annually rather than quarterly, increasing the threshold for

large private equity advisers and permitting greater reliance on

advisers' existing methodologies and recordkeeping practices. We have

also modified specific questions in response to comments so that

responding to the Form is less burdensome.\504\ We expect, on the

whole, that these changes will mitigate the cost of reporting.\505\ In

addition, we have added a minimum reporting threshold, which will not

reduce the burden to any particular filer of reporting but will reduce

the aggregate burden that Form PF imposes because fewer advisers will

be required to report.

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\503\ See supra notes 383, 394-395, 404 and 414 and accompanying

text.

\504\ See supra section II.C of this Release.

\505\ See supra notes 388-389, 397-398, 407-409 and 418-420 and

accompanying text. We also note that the original cost estimates, as

well as the revised estimates included in this Release, include

allocations for systems development among Large Private Fund

Advisers (who are most likely to find automation cost effective) and

assume that information would need to be gathered from many sources,

both internal and external. See supra note 435 and accompanying

text.

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After filing their initial reports, we anticipate that advisers

will incur significantly lower costs because much of the work involved

in the initial report is non-recurring and because of efficiencies

realized from system configuration and reporting automation efforts

accounted for in the initial reporting period. In addition, we estimate

that senior personnel will bear less of the reporting burden in

subsequent reporting periods, reducing costs though not necessarily

reducing the burden hours.

One commenter agreed that efficiencies will be realized over

time,\506\ but another stated that, at least for private real estate

funds, they would not.\507\ Having considered these comments, we

continue to believe that, for the average adviser (and particularly for

those with more liquid portfolios and greater systems capabilities),

efficiencies will be realized over time.

[[Page 71168]]

We have, however, also increased the cost estimates for subsequent

filings in recognition of concerns regarding the overall burden of the

reporting and the possibility that efficiencies are not the same for

all types of private fund adviser.

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

\506\ See MFA Letter.

\507\ See comment letter of The National Association of Real

Estate Investment Managers (Mar. 24, 2011).

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

Based on the foregoing, we estimate \508\ that the periodic filing

requirements under Form PF (including configuring systems and

compiling, automating, reviewing and electronically filing the report)

will impose:

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\508\ We understand that some advisers may outsource all or a

portion of their Form PF reporting responsibilities to software

consultants, vendors, filing agents or other third-party service

providers. We have based our estimates on the use of internal

resources, for which some cost data is available, because we believe

that an adviser would engage third-party service providers only if

the external costs were comparable, or less than, the estimated

internal costs of compiling, reviewing and filing the Form PF. The

hourly wage data used in this Economic Analysis section of the

Release is based on the Securities Industry and Financial Markets

Association's Report on Management & Professional Earnings in the

Securities Industry 2010 and Office Salaries in the Securities

Industry 2010 (``SIFMA Earnings Reports''). This data has been

modified to account for an 1,800-hour work-year and multiplied by

5.35 for management and professional employees and by 2.93 for

general and compliance clerks to account for bonuses, firm size,

employee benefits and overhead.

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(1) 40 burden hours at a cost of $13,600 \509\ per smaller private

fund adviser for the initial annual report;

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

\509\ We expect that for the initial report these activities

will most likely be performed equally by a compliance manager at a

cost of $273 per hour and a senior risk management specialist at a

cost of $409 per hour and that, because of the limited scope of

information required from smaller private fund advisers, these

advisers generally would not realize significant benefits from or

incur significant costs for system configuration or automation.

($273/hour x 0.5 + $409/hour x 0.5) x 40 hours = approximately

$13,600.

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

(2) 15 burden hours at a cost of $4,200 \510\ per smaller private

fund adviser for each subsequent annual report;

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

\510\ We expect that for subsequent reports senior personnel

will bear less of the reporting burden. As a result, we estimate

that these activities will most likely be performed equally by a

compliance manager at a cost of $273 per hour, a senior compliance

examiner at a cost of $235 per hour, a senior risk management

specialist at a cost of $409 per hour and a risk management

specialist at a cost of $192 per hour. ($273/hour x 0.25 + $235/hour

x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 15 hours =

approximately $4,200.

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

(3) 100 burden hours at a cost of $31,000 \511\ per large private

equity fund adviser for the initial annual report;

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

\511\ The SEC expects that for the initial report, of a total

estimated burden of 100 hours, approximately 60 hours will most

likely be performed by compliance professionals and 40 hours will

most likely be performed by programmers working on system

configuration and reporting automation. Of the work performed by

compliance professionals, the SEC anticipates that it will be

performed equally by a compliance manager at a cost of $273 per hour

and a senior risk management specialist at a cost of $409 per hour.

Of the work performed by programmers, the SEC anticipates that it

will be performed equally by a senior programmer at a cost of $304

per hour and a programmer analyst at a cost of $224 per hour. ($273/

hour x 0.5 + $409/hour x 0.5) x 60 hours + ($304/hour x 0.5 + $224/

hour x 0.5) x 40 hours = approximately $31,000.

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

(4) 50 burden hours at a cost of $13,900 \512\ per large private

equity fund adviser for each subsequent annual report;

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

\512\ The SEC expects that for subsequent reports senior

personnel will bear less of the reporting burden and that

significant system configuration and reporting automation costs will

not be incurred. As a result, the SEC estimates that these

activities will most likely be performed equally by a compliance

manager at a cost of $273 per hour, a senior compliance examiner at

a cost of $235 per hour, a senior risk management specialist at a

cost of $409 per hour and a risk management specialist at a cost of

$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x

0.25 + $192/hour x 0.25) x 50 hours = approximately $13,900.

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

(5) 300 burden hours at a cost of $93,100 \513\ per large hedge

fund adviser for the initial quarterly report;

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

\513\ We expect that for the initial report, of a total

estimated burden of 300 hours, approximately 180 hours will most

likely be performed by compliance professionals and 120 hours will

most likely be performed by programmers working on system

configuration and reporting automation. Of the work performed by

compliance professionals, we anticipate that it will be performed

equally by a compliance manager at a cost of $273 per hour and a

senior risk management specialist at a cost of $409 per hour. Of the

work performed by programmers, we anticipate that it will be

performed equally by a senior programmer at a cost of $304 per hour

and a programmer analyst at a cost of $224 per hour. ($273/hour x

0.5 + $409/hour x 0.5) x 180 hours + ($304/hour x 0.5 + $224/hour x

0.5) x 120 hours = approximately $93,100.

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

(6) 140 burden hours at a cost of $38,800 \514\ per large hedge

fund adviser for each subsequent quarterly report;

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

\514\ We expect that for subsequent reports senior personnel

will bear less of the reporting burden and that significant system

configuration and reporting automation costs will not be incurred.

As a result, we estimate that these activities will most likely be

performed equally by a compliance manager at a cost of $273 per

hour, a senior compliance examiner at a cost of $235 per hour, a

senior risk management specialist at a cost of $409 per hour and a

risk management specialist at a cost of $192 per hour. ($273/hour x

0.25 + $235/hour x 0.25 + $409/hour x 0.25 + $192/hour x 0.25) x 140

hours = approximately $38,800.

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

(7) 140 burden hours at a cost of $43,500 \515\ per large liquidity

fund adviser for the initial quarterly report; and

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

\515\ The SEC expects that for the initial report, of a total

estimated burden of 140 hours, approximately 85 hours will most

likely be performed by compliance professionals and 55 hours will

most likely be performed by programmers working on system

configuration and reporting automation. Of the work performed by

compliance professionals, the SEC anticipates that it will be

performed equally by a compliance manager at a cost of $273 per hour

and a senior risk management specialist at a cost of $409 per hour.

Of the work performed by programmers, the SEC anticipates that it

will be performed equally by a senior programmer at a cost of $304

per hour and a programmer analyst at a cost of $224 per hour. ($273/

hour x 0.5 + $409/hour x 0.5) x 85 hours + ($304/hour x 0.5 + $224/

hour x 0.5) x 55 hours = approximately $43,500.

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

(8) 65 burden hours at a cost of $18,000 \516\ per large liquidity

fund adviser for each subsequent quarterly report.

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

\516\ The SEC expects that for subsequent reports senior

personnel will bear less of the reporting burden and that

significant system configuration and reporting automation costs will

not be incurred. As a result, the SEC estimates that these

activities will most likely be performed equally by a compliance

manager at a cost of $273 per hour, a senior compliance examiner at

a cost of $235 per hour, a senior risk management specialist at a

cost of $409 per hour and a risk management specialist at a cost of

$192 per hour. ($273/hour x 0.25 + $235/hour x 0.25 + $409/hour x

0.25 + $192/hour x 0.25) x 65 hours = approximately $18,000.

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

Assuming that there are 3,070 smaller private fund advisers, 250

large hedge fund advisers, 80 large liquidity fund advisers, and 170

large private equity fund advisers, the foregoing estimates suggest an

annual cost of $107,000,000 \517\ for all private fund advisers in the

first year of reporting and an annual cost of $59,800,000 in subsequent

years.\518\

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\517\ (3,070 smaller private fund advisers x $13,600 per initial

annual report) + (170 large private equity fund advisers x $31,000

per initial annual report) + (250 large hedge fund advisers x

$93,100 per initial quarterly report) + (250 large hedge fund

advisers x 3 quarterly reports x $38,800 per subsequent quarterly

report) + (80 large liquidity fund advisers x $43,500 per initial

quarterly report) + (80 large liquidity fund advisers x 3 quarterly

reports x $18,000 per subsequent quarterly report) = approximately

$107,000,000.

\518\ (3,070 smaller private fund advisers x $4,200 per

subsequent annual report) + (170 large private equity fund advisers

x $13,900 per subsequent annual report) + (250 large hedge fund

advisers x 4 quarterly reports x $38,800 per subsequent quarterly

report) + (80 large liquidity fund advisers x 4 quarterly reports x

$18,000 per subsequent quarterly report) = approximately

$59,800,000.

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The cost estimates above assume that risk and compliance personnel

(and, in the case of Large Private Fund Advisers filing an initial

report, programmers) will carry out the work of reporting on Form PF.

Some commenters suggested that employees in portfolio management as

well as legal, controller and other back office functions may also be

involved in compiling, reviewing and filing Form PF.\519\ These

commenters did not provide estimates for how the reporting burdens

would be allocated among these groups of employees, and we believe the

allocation is likely to vary significantly among advisers depending on

the size and complexity of their operations. Based on available wage

data, we do not believe that variations in the allocation of these

responsibilities among the functions that we and commenters identified

[[Page 71169]]

would result in significantly different aggregate cost estimates.\520\

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

\519\ See, e.g., Kleinberg General Letter; MFA Letter.

\520\ For example, our estimates assume that the work is

performed by compliance managers at $273 per hour, senior compliance

examiners at $235 per hour, senior risk management specialists at

$409 per hour, risk management specialists at $192 per hour and, in

the case of Large Private Fund Advisers filing an initial report,

programmers ranging from $304 to $224 per hour. Based on the SIFMA

Earnings Reports, indicative costs in the other functions that

commenters identified are: $287 per hour for a senior portfolio

manager; $211 per hour for an intermediate portfolio manager; $430

per hour for an assistant general counsel; $165 per hour for a fund

senior accountant; $194 per hour for an intermediate business

analyst; and $154 per hour for an operations specialist. An

adviser's chief compliance officer (at a cost of $423 per hour) or

controller (at a cost of $433 per hour) may also review the filing,

though we would expect that in most cases their involvement would be

more limited than that of more junior employees.

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In addition, as discussed above, a private fund adviser must file

very limited information on Form PF if it needs to transition from

quarterly to annual filing, if it is no longer subject to the reporting

requirements of Form PF or if it requires a temporary hardship

exemption under rule 204(b)-1(f). We estimate that transition and final

filings will, collectively, cost private fund advisers as a whole

approximately $5,200 per year.\521\ We further estimate that hardship

exemption requests will cost private fund advisers as a whole

approximately $760 per year.\522\ No commenters addressed these

estimates. The estimate with respect to hardship exemptions is

unchanged from the proposal. The estimate with respect to transition

and final filings have been reduced because fewer filers will be

required to report on a quarterly basis and the addition of a minimum

reporting threshold means that fewer advisers will report in

total.\523\

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\521\ The SEC estimates that, for the purposes of the PRA,

transition filings will impose 7 burden hours per year on private

fund advisers in the aggregate and that final filings will impose 71

burden hours per year on private fund advisers in the aggregate. The

SEC anticipates that this work will most likely be performed by a

compliance clerk at a cost of $67 per hour. (7 burden hours + 71

burden hours) x $67/hour = approximately $5,200.

\522\ The SEC estimates that, for the purposes of the PRA,

requests for temporary hardship exemptions will impose 4 burden

hours per year on private fund advisers in the aggregate. The SEC

anticipants that five-eighths of this work will most likely be

performed by a compliance manager at a cost of $273 per hour and

that three-eighths of this work will most likely be performed by a

general clerk at a cost of $50 per hour. (($273 per hour x \5/8\ of

an hour) + ($50 per hour x \3/8\ of an hour)) x 4 hours =

approximately $760.

\523\ See supra note 424.

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Advisers may also incur costs related to the modification or

deployment of systems to support their reporting obligations under Form

PF.\524\ As discussed above, certain of the anticipated costs to Large

Private Fund Advisers of automating Form PF reporting are accounted for

in our cost estimates.\525\ In addition, Large Private Fund Advisers

may incur costs associated with the acquisition or use of hardware

needed to perform computations or otherwise process the data required

on Form PF.\526\ Commenters did not provide estimates for these costs.

However, as discussed above, we estimate that these costs, which are

likely to vary significantly among advisers, will range from $0 to

$25,000,000 in the aggregate for the first year of reporting, with the

actual costs likely to fall in between these two end-points.\527\

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

\524\ See supra section IV.G of this Release.

\525\ See supra note 438 and accompanying text.

\526\ See supra notes 434-441 and accompanying text.

\527\ Id.

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Based on the foregoing estimates, we estimate that the aggregate

annual costs of Form PF, other than for hardware costs, are

approximately $108,000,000 in the first year and $60,500,000 in

subsequent years.\528\ In addition, we estimate that hardware costs

will add between $0 and $25,000,000 in the first year.\529\

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

\528\ $107,000,000 (for periodic reporting in the first year) +

$5,200 (for transition and final filings) + $760 (for hardship

requests) + $684,000 (for filing fees) = approximately $108,000,000.

$59,800,000 (for periodic reporting in subsequent years) + $5,200

(for transition and final filings) + $760 (for hardship requests) +

$684,000 (for filing fees) = approximately $60,500,000.

\529\ See supra notes 440-441 and accompanying text.

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Reporting requirements can also impose costs beyond the direct

costs associated with compiling and submitting data, and advisers

subject to the Form PF reporting requirements may incur costs that are

more difficult to quantify. One commenter, for instance, suggested an

adviser may incur indirect ``costs associated with the risk of

disclosure of highly sensitive proprietary information.'' \530\ As

discussed above, Form PF elicits non-public information about private

funds and their trading strategies, the public disclosure of which

could adversely affect the funds and their investors.\531\ We are,

however, working to establish controls designed to protect this

sensitive information from improper or inadvertent disclosure and

believe that the risk of such disclosure is low.\532\ If an adviser's

Form PF data were disclosed despite the controls intended to maintain

its confidentiality, there is some risk that a competitor may be able

to use an adviser's data to replicate the adviser's trading strategy or

trade against the adviser, thereby potentially harming the

profitability of the strategy to that adviser. However, because data on

Form PF generally could not, on its own, be used to identify individual

investment positions, the ability of a competitor to use Form PF data

in this manner is limited.\533\ In addition, the deadlines for filing

Form PF have, in most cases, been significantly extended from the

proposal, meaning that the filings will generally contain less current,

and therefore less sensitive, data.\534\ In the very unlikely event

that improper or inadvertent disclosures of Form PF data occurred

frequently, the disclosures could discourage advisers from investing

the time and other resources required to develop novel strategies,

potentially reducing the range of options available to investors and

inhibiting financial innovation.

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

\530\ CCMR Letter.

\531\ See supra section II.D of this Release.

\532\ See supra sections II.D and II.E of this Release.

\533\ See supra note 343.

\534\ See supra notes 351 and 344 and accompanying text.

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We do not expect this rulemaking to have a significant negative

effect on competition because the information generally will be non-

public and similar types of SEC-registered advisers will have

comparable burdens under the Form.\535\ In addition, the SEC does not

expect this rulemaking to have a significant negative effect on capital

formation, again because the information collected generally will be

non-public and, therefore, should not affect private fund advisers'

ability to raise capital.

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

\535\ See supra section II.D of this Release for a discussion of

confidentiality of Form PF data.

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

Although Form PF data generally will be non-public, Form PF will

increase transparency to regulators.\536\ As discussed above, this may

result in a positive effect on capital formation because advisers may,

as a result, assess more carefully the risks associated with particular

investments and, in the aggregate, allocate capital to investments with

a higher value to the economy as a whole.\537\ However, this increased

transparency could also have a negative effect on capital formation if

it increases advisers' aversion to risk and, as a result, reduces

investment in projects that may be risky but beneficial to the economy

as a whole. To the extent that changes in investment allocations lead

to reduced economic outcomes in the aggregate, Form PF reporting may

result in a negative effect on capital available for investment.

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

\536\ See supra section II.D of this Release for a discussion of

confidentiality of Form PF data.

\537\ See supra note 494 and accompanying text.

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

The SEC also recognizes that the direct costs of completing and

filing Form PF may reduce the amount of

[[Page 71170]]

capital that funds have available for investment or, if the costs are

passed on to fund investors, reduce the amount of capital investors

have available for investment. This could, in turn, affect capital

formation.\538\ However, the direct costs of reporting on Form PF will,

to some extent, only transfer capital from private fund advisers to

other market participants, such as employees or service providers paid

to complete the Form. Because private fund advisers may have different

investment opportunities than these other market participants, this

transfer may negatively affect aggregate economic outcomes. However,

some of this transferred capital will be invested or spent and will not

represent an aggregate loss to the economy. In addition, the direct

costs of Form PF are, on average, small compared to other economic

incentives that motivate private funds and their advisers to invest and

grow.\539\

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

\538\ One commenter expressed concern regarding the possible

effects of Form PF reporting on economic growth, investors,

investment opportunities, companies, markets, market liquidity and

tax revenue as well as ``the cost in terms of jobs and capital.''

Issa Letter. This commenter suggested that these potential negative

effects could flow from several sources, including: (1) The

possibility that advisers will locate funds outside the United

States as a result of, or to avoid, Form PF compliance costs or that

these costs will be passed on to investors, causing them to seek

investment opportunities outside the United States; and (2) the

possibility that advisers will form fewer funds, slow the growth of

their funds or shut down existing funds as a result of, or to avoid,

Form PF compliance costs. We address these possible sources of

indirect costs below.

\539\ See infra notes 545 and 548 and accompanying text.

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

One commenter expressed concern that this rulemaking could cause

advisers, private funds or investors to seek investment opportunities

outside the U.S. as a result of, for instance, increased costs.\540\

This rulemaking could impose costs on U.S. private fund advisers that

non-U.S. private fund advisers would not bear unless they are subject

to the Advisers Act and the Form PF reporting requirements. However,

advisers generally would not be able to avoid these reporting

obligations by simply organizing the fund in a third country because

regulatory jurisdiction for Form PF does not depend solely on where the

fund is formed.\541\ In addition, as noted above, ESMA has proposed a

reporting regime similar to Form PF for alternative investment fund

managers subject to the EU Directive. If that regime is adopted, we

understand most such alternative investment managers would bear

reporting costs similar to those that Form PF imposes. Accordingly, we

believe the competitive impact of this difference in operating costs

will be limited. We also do not expect that private funds will, to any

significant extent, seek to avoid these regulatory burdens by foregoing

participation in the U.S. capital markets because of the depth and

liquidity of these markets and the stability afforded by the legal

structures in the U.S.

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

\540\ See Issa Letter.

\541\ See supra note 134 and accompanying text.

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

This commenter also suggested that some fund advisers may determine

not to form a new private fund if the costs of Form PF outweigh the

marginal benefits the adviser expects to obtain by forming the

fund.\542\ Reduced fund formation could diminish competition and the

number of choices available to investors. The SEC does not, however,

believe the cost of reporting on Form PF will have a substantial

negative effect on fund formation. An adviser with no existing private

funds considering whether to form its first fund is likely to face

little or no costs as a result of Form PF because it is unlikely to

leap past a Large Private Fund Adviser Threshold and may not even

exceed the minimum reporting threshold of $150 million in private fund

assets under management.\543\ For an existing private fund adviser,

forming a new private fund would increase the cost of reporting on Form

PF, but the adviser would be able to leverage its experience and

existing systems, making the incremental reporting more efficient than

for an adviser first becoming subject to Form PF reporting

requirements.\544\ In the case of either an adviser newly managing

private funds or an adviser with existing private funds, the SEC

believes that Form PF reporting costs are unlikely to discourage the

formation of many funds because the costs of either becoming subject to

Form PF as a smaller private fund adviser or reporting incrementally

more information on Form PF are small when compared to possible

management and performance fees. For example, the SEC estimates that

the cost to smaller private fund advisers of completing and filing Form

PF will average less than $14,000 per initial annual filing and $5,000

per subsequent annual filing--or less than 0.01% of assets under

management for the smallest adviser subject to Form PF reporting

requirements--compared to annual management and performance fees that,

at least among hedge fund advisers, average approximately 1.5% of

assets under management and 20% of excess returns, respectively.\545\

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

\542\ See Issa Letter.

\543\ According to HFI data, even among the top 25 hedge fund

launches reported in 2010, the average fund size was approximately

$750 million, and existing advisers launched the majority of those

funds in any case. This data also shows that, out of 135 total hedge

fund launches reported in 2010 exceeding $50 million, at least 110

of them raised under $300 million. HFI does not report in their

annual global review hedge fund launches under $50 million. See HFI

2011 Global Review, supra note 493. See also supra sections IV.A and

IV.G of this Release (discussing estimates of Form PF reporting

costs for smaller private fund advisers).

\544\ In addition, in the case of large hedge fund advisers, the

more detailed information they must file in section 2b of the Form

only applies to qualifying hedge funds that have at least $500

million in net assets.

\545\ See Ibbotson, et al., supra note 95, at 15 (finding a

management fee of 1.5% of assets under management and a 20%

performance fee to be the median fee structure in the TASS hedge

fund database). $14,000/$150,000,000 = approximately 0.009%.

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In addition, this commenter expressed concern that the Large

Private Fund Adviser thresholds may encourage some private fund

advisers with assets under management near but below the thresholds to

attempt to staunch growth in their funds, either by refusing to admit

new investors or by managing the investments of the funds, to remain

below the thresholds.\546\ Similarly, this commenter suggested that

some funds may even shut down to avoid Form PF reporting costs.\547\

The SEC believes, however, that substantial economic incentives will

likely counter such behavior, including private fund performance fees

that incentivize the private fund adviser to continue advising its

funds and maximize fund appreciation and return. For example, a hedge

fund with an initial value of $1.5 billion that experiences a 1% excess

return will net $3 million in performance fees, and a 1% growth in

assets under management will net an additional $225,000 per year in

management fees, compared to an estimated cost of between $210,000 and

$260,000 in the first year of reporting.\548\ In addition, we believe

the cost to an adviser of reporting will decline over time as the

adviser becomes more familiar with the Form and realizes efficiencies

while, at the same time, the adviser will continue to charge management

fee and potentially collect performance fees each year. With

[[Page 71171]]

respect to the large adviser threshold specifically, we anticipate that

business relations with investors that may be damaged if the adviser

turns away investor assets may also motivate advisers to continue to

permit the size of their funds to increase as a result of new

investment.

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

\546\ See Issa Letter.

\547\ Id.

\548\ The calculations assume a management fee of 1.5% of assets

under management and a 20% performance fee. See supra note 545.

$93,100 for the initial quarterly report + $38,800 for each

subsequent quarterly reporting x 3 quarterly reports = approximately

$210,000 for the first year of reporting. See supra notes 513-514.

In addition, the SEC has estimated that a Large Private Fund Adviser

may incur between $0 and $50,000 in costs for the acquisition or use

of hardware in the first year of reporting. See supra note 441 and

accompanying text.

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As discussed above, we believe that private fund advisers,

investors in private funds and the companies in which private funds may

invest will enjoy certain benefits related to Form PF.\549\ We

recognize, however, that many of Form PF's benefits will be widely

distributed across the financial system while its costs will be

concentrated. Private fund advisers will bear most of these costs,

though they may also pass some of these costs on to fund investors, and

to the extent that capital available for investment is reduced, the

companies in which private funds would otherwise invest may also bear

costs. In addition, the costs of Form PF to an individual adviser will

vary depending on factors such as the state of its existing systems and

the complexity of its business. As a result, the costs and benefits of

Form PF to particular advisers, particular investors, particular

companies and individual American citizens will not be evenly

distributed. For certain individuals and entities, the costs of Form PF

may even exceed the benefits to them. However, we believe that the

aggregate benefits of this rulemaking will be substantial. Moreover,

the uneven distribution of the benefits and costs of Form PF reflects

the potential for an uneven distribution of the costs and benefits of

engaging in risky financial activities that may impose negative

externalities.\550\

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\549\ See supra section V.A of this Release.

\550\ See, e.g., Iman Anabtawi and Steven L. Schwarcz,

Regulating Systemic Risk: Towards an Analytical Framework, 86 Notre

Dame L. Rev. 4, 27 (2011) (arguing that financial market

participants will not expend sufficient effort to identify and avoid

conditions giving rise to systemic risk and explaining that one

factor contributing to this behavior is that ``the benefits of

exploiting finite capital resources accrue to individual market

participants, each of whom is motivated to maximize use of the

resource, whereas the costs of exploitation are distributed more

widely.* * * The root of the commons problem in financial markets is

the asymmetry in the distribution of gains and losses associated

with investment decisions.* * * In the case of a positive outcome,

the firm captures the full benefits of the investment's success. In

the case of a negative outcome, however, the firm may not suffer the

full consequences of the poor investment. Rather, if the firm fails

or merely defaults, those consequences will impact financial market

participants that rely on the soundness of the firm's financial

condition. Furthermore, if the firm is deemed too systemically

significant to fail, its loss may be absorbed by government as a

lender of last resort. In either case, the uninternalized costs

associated with risk-taking by financial firms leads them to

overexploit scarce capital resources in the form of socially

excessive risk-taking.'').

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C. CFTC Statutory Findings

Rule 4.27, as finalized, would deem a CPO registered with the CFTC

that is dually registered as a private fund adviser with the SEC to

have satisfied certain reporting requirements that the CFTC may adopt

by filing Form PF with the SEC. The CPOs and CTAs that are dually

registered as private fund advisers would be required to provide

annually a limited amount of basic information on Form PF about the

operations of their private funds. Only large CPOs and CTAs that are

also registered as private fund advisers with the SEC would have to

submit on a quarterly basis the full complement of systemic risk

related information required by Form PF.\551\ As noted above, the Dodd-

Frank Act tasks FSOC with monitoring the financial services marketplace

in order to identify potential threats to the financial stability of

the United States.\552\ The Dodd-Frank Act also requires FSOC to

collect information from member agencies--like the SEC and the CFTC--to

support its functions.\553\ The CFTC and the SEC are jointly adopting

sections 1 and 2 of Form PF as a means to collect the information

necessary to permit FSOC to fulfill its obligation to monitor private

funds, and in order to identify any potential systemic threats arising

from their activities. The CFTC and the SEC do not currently collect

the information that is covered in proposed sections 1 and 2 of Form

PF.

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\551\ See 5 U.S.C. 801(a)(1)(B)(i).

\552\ See section 112(a)(2)(C) of the Dodd-Frank Act.

\553\ See section 112(d)(1) of the Dodd-Frank Act.

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Section 15(a) of the CEA requires that the CFTC, before

promulgating a regulation under the Act or issuing an order, consider

the costs and benefits of its action. By its terms, CEA Section 15(a)

does not require the CFTC to quantify the costs and benefits of a new

regulation or determine whether the benefits of the regulation outweigh

its costs. Rather, CEA section 15(a) simply requires the CFTC to

``consider the costs and benefits'' of its action. CEA section 15(a)(2)

specifies that costs and benefits shall be evaluated in light of the

following considerations: (1) Protection of market participants and the

public; (2) efficiency, competitiveness and financial integrity of

futures markets; (3) price discovery; (4) sound risk management

practices; and (5) other public interest considerations.\554\

Accordingly, the CFTC could, in its discretion, give greater weight to

any of the five considerations and could, in its discretion, determine

that, notwithstanding its costs, a particular regulation was necessary

or appropriate to protect the public interest or to effectuate any of

the provisions or to accomplish any of the purposes of the Act.

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

\554\ 7 U.S.C. 19(a).

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

Before promulgating these final rules, the CFTC sought public

comment on the rules themselves, including the cost-benefit

considerations of section 1 and 2 of Form PF.\555\ The CFTC also

specifically invited commenters to submit ``any data or other

information that they may have quantifying or qualifying the perceived

costs and benefits of this proposed rule with their comment

letters.''\556\ As noted above, the CFTC and the SEC received comments

on the cost and benefits of the proposed regulations and the estimates

of costs included in the Proposing Release, and they have carefully

considered those comments. CEA Rule 4.27 does not impose any additional

burdens or costs upon registered CPOs and CTAs that are dually

registered as investment advisers with the SEC. By filing Form PF with

the SEC, these dual registrants would be deemed to have satisfied

certain reporting obligations with the CFTC, should the CFTC adopt such

requirements.

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\555\ See generally, CFTC Proposing Release, supra note 16, at

76 FR 8068, 8087 (for CFTC's request for comment on the cost-benefit

considerations).

\556\ See generally, CFTC Proposing Release, supra note 16, at

76 FR 8068, 8087.

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1. General Costs and Benefits

With respect to costs, the CFTC has determined that: (1) Without

the reporting requirements imposed by this rulemaking, FSOC will not

have sufficient information to identify and address potential threats

to the financial stability of the United States (such as the near

collapse of Long Term Capital Management); (2) the reporting

requirements, once finalized, will provide the CFTC with better

information regarding the business operations, creditworthiness, use of

leverage, and other material information of certain registered CPOs and

CTAs that are also registered as investment advisers with the SEC; and

(3) while they are necessary to U.S. financial stability, the reporting

requirements will create additional compliance costs for these

registrants, as discussed in the foregoing portions of the Economic

Analysis as well as in the PRA section of this Release.

The CFTC has determined that the proposed reporting requirements

will provide a benefit to all investors and

[[Page 71172]]

market participants by providing the CFTC and other policy makers with

more complete information about these registrants and the potential

risk their activities may pose to the U.S. financial system. In turn,

this information will enhance the CFTC's ability to appropriately

tailor its regulatory policies to the commodity pool industry and its

operators and advisors. As mentioned above, the CFTC and the SEC do not

have access to this information today and have instead been made to use

information from other, less reliable sources.

2. Section 15(a) Determination

As stated above, section 15(a) of the CEA requires the CFTC to

consider the costs and benefits of its actions in light of five broad

areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations.

a. Protection of Market Participants and the Public

Should the CFTC adopt certain of its proposed systemic risk

reporting requirements, the coordination between the CFTC and SEC on

this rulemaking would result in significant efficiencies for any

private fund adviser that is also registered as a CPO or CTA with the

CFTC. This is because, under CEA rule 4.27, filling Form PF would

satisfy both SEC and CFTC reporting obligations with respect to

commodity pools that are ``private funds'' and may satisfy CFTC

reporting obligations with respect to commodity pools that are not

``private funds,'' in each case should the CFTC adopt such reporting

obligations. As noted above, the CFTC has determined that this

coordination will protect such participants from duplicative reporting

while still providing FSOC with needed information to fulfill its

mission to protect the public from potential threats to the financial

stability of the United States.

Commodity pools that fall within the definition of private funds

and will be filing Form PF represent a sector of collective investment

vehicles that have experienced a substantial growth and have been the

subject of international concern regarding their size in juxtaposition

with the markets as a whole. This concern has led to several countries

instituting similar data collection efforts and it is well recognized

that the U.S. contingent of these funds represents a sizable portion of

all trading by this type of entity. Thus, this combined SEC/CFTC effort

will contribute substantially to a better understanding of the impact

of private investment vehicles on both the U.S. and international

markets and provide the information necessary to intelligently develop

regulatory efforts and oversight programs to provide adequate

protection of market participants and the public at large.

Finally, the CFTC agrees with the SEC that Form PF, as adopted,

will increase the amount and quality of information available regarding

a previously opaque area of investment activity and, thereby, enhance

the ability of regulators to protect investors and oversee the markets

that they regulate.

b. Efficiency, Competitiveness, and Financial Integrity of Futures

Markets

Although the CFTC does not believe this rule relates directly to

the efficiency or competitiveness of futures markets, the CFTC does

recognize that the interconnectedness of the United States financial

system is such that the integrity of futures markets depends on the

financial stability of the entire financial system. To the extent that

the information collected by Form PF assists the Commissions and FSOC

to identify threats that may damage the United States financial system,

the regulations herein indirectly protect the integrity of futures

markets.

c. Price Discovery

The CFTC has not identified a specific effect on price discovery as

a result of Form PF or related regulations.

d. Sound Risk Management

The Dodd-Frank Act tasks FSOC and its member agencies (including

both the SEC and the CFTC) with mitigating risks to the financial

stability the United States. The CFTC believes these regulations are

necessary to fulfill that obligation. Risk management is provided by

these regulations in two main ways: (1) Assisting FSOC in fulfilling

its mission of protecting the systemic financial stability of the

United States; and (2) improving the ability of regulators to oversee

markets. These benefits are shared by market participants, at least

indirectly, as a part of the United States financial system. In

addition, CPOs and CTAs that are dually registered as investment

advisers will benefit from these regulations to the extent that

reporting on Form PF requires such entities to review their firms'

portfolios, trading practices, and risk profiles; thus, the CFTC

believes that these regulations may improve the sound risk management

practices within their internal risk management systems.

e. Other Public Interest Considerations

The CFTC has not identified other public interest considerations

related to the costs and benefits of these regulations.

VI. Final Regulatory Flexibility Analysis

SEC:

The SEC has prepared the following Final Regulatory Flexibility

Analysis (``FRFA'') regarding Advisers Act rule 204(b)-1 in accordance

with section 4(a) of the Regulatory Flexibility Act (``RFA'').\557\ The

SEC prepared the Initial Regulatory Flexibility Analysis (``IRFA'') in

conjunction with the Proposing Release in January 2011.\558\

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

\557\ 5 U.S.C. 603(a).

\558\ See Proposing Release, supra note 12, at section VI.

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

A. Need for and Objectives of the New Rule

New Advisers Act rule 204(b)-1 and Form PF implement provisions of

the Dodd-Frank Act by specifying information that private fund advisers

must disclose confidentially to the SEC, which information the SEC will

provide to FSOC for systemic risk assessment purposes. Under the new

rule, private fund advisers must file information responsive to all or

portions of Form PF on a periodic basis. The scope of the required

information and the frequency of the reporting is related to the amount

of private fund assets that each private fund adviser manages and the

type of private fund to which those assets relate. Specifically,

smaller private fund advisers and large private equity advisers must

report annually, while large hedge fund and liquidity fund advisers

must report quarterly and provide additional information regarding the

hedge funds and liquidity funds, respectively, that they manage.\559\

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\559\ See section II.A of this Release (describing who must file

Form PF), section II.B of this Release (discussing the frequency

with which private fund advisers must file Form PF), and section

II.C of this Release (describing the information that private fund

advisers must report on Form PF). See also proposed Instruction 9 to

Form PF for information regarding the frequency with which private

fund advisers must file Form PF.

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B. Significant Issues Raised by Public Comment

In the Proposing Release, we requested comment on the IRFA. In

particular, we sought comment on the number of small entities,

particularly small advisers, to which the new Advisers Act rule and

reporting requirements would apply and the effect

[[Page 71173]]

on those entities, including whether the effects would be economically

significant. None of the comment letters we received addressed the IRFA

or the effect of the proposal on small entities, as that term was used

in the IRFA.

C. Small Entities Subject to the Rule

Under SEC rules, for the purposes of the Advisers Act and the

Regulatory Flexibility Act, an investment adviser generally is a small

entity if it: (i) Has assets under management having a total value of

less than $25 million; (ii) did not have total assets of $5 million or

more on the last day of its most recent fiscal year; and (iii) does not

control, is not controlled by, and is not under common control with

another investment adviser that has assets under management of $25

million or more, or any person (other than a natural person) that had

total assets of $5 million or more on the last day of its most recent

fiscal year.\560\

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

\560\ See Advisers Act rule 0-7(a).

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

Advisers Act rule 204(b)-1 requires an investment adviser

registered with the SEC to file certain information on Form PF if it

manages one or more private funds and 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. Under section 203A

of the Advisers Act, most advisers qualifying as small entities are

prohibited from registering with the SEC and are instead registered

with state regulators. Therefore, few small advisers will meet the

registration criterion. Fewer still are likely to meet the minimum

reporting threshold of $150 million in regulatory assets under

management attributable to private funds. By definition, no small

entities will, on their own, meet this threshold, which the SEC did not

include in the proposal but has added in response to commenter

concerns.\561\ Advisers are, however, required to determine whether

they exceed this threshold by aggregating their private fund assets

under management with those of their related persons (other than

separately operated related persons), with the result that some small

entities may be subject to Form PF reporting requirements.\562\ The SEC

does not have a precise count of the number of advisers that may

satisfy the minimum reporting threshold based on the aggregate private

fund assets that it and its related persons manage because such

advisers file separate reports on Form ADV. However, because of the new

minimum reporting threshold, the group of small entities subject to the

rule as adopted will be a subset of the group that would have been

subject to the proposed rule. In the Proposing Release, the SEC

estimated that approximately 50 small entities were registered with the

SEC and advised one or more private funds.\563\ Accordingly, the SEC

estimates that no more than 50 small entities are likely to become

subject to Form PF reporting obligations under the final rule.

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

\561\ See supra note 56-59 and accompanying text.

\562\ See supra section II.A.5 of this Release. The SEC notes

that related persons are permitted to file on a single Form PF. As a

result, even in the case that a larger related person causes a small

entity to exceed the minimum reporting threshold, the small entity

may not ultimately bear the reporting burden. See supra section

II.A.6 of this Release. In addition, under Advisers Act rule 0-

7(a)(3), an adviser with affiliates exceeding the other small entity

thresholds under that rule would not be regarded as a small entity,

suggesting that it may not be possible both to qualify as a small

entity under that rule and to satisfy the criteria that would

subject an adviser to Form PF reporting obligations.

\563\ See Proposing Release, supra note 12, at n.212 and

accompanying text.

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D. Projected Reporting, Recordkeeping and Other Compliance Requirements

Advisers Act rule 204(b)-1 and Form PF impose certain reporting and

compliance requirements on advisers, including small advisers. A small

adviser that is subject to the rule must complete all or part of

section 1 of the Form. As discussed above, the SEC estimates that

completing, reviewing and filing Form PF will cost approximately

$13,600 for each small adviser in its first year of reporting and

$4,200 per year for each subsequent year.\564\ In addition, small

entities must pay a filing fee of $150 per annual filing.\565\

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

\564\ See supra notes 509-510 and accompanying text.

\565\ See supra note 432 and accompanying text.

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

E. Agency Action To Minimize Effect on Small Entities

The Regulatory Flexibility Act directs the SEC to consider

significant alternatives that would accomplish the stated objective,

while minimizing any significant impact on small entities. In

connection with the proposed rules and amendments, the SEC considered

the following alternatives: (1) The establishment of differing

compliance or reporting requirements or timetables that take into

account the resources available to small entities; (2) the

clarification, consolidation, or simplification of compliance and

reporting requirements under the rule for small entities; (3) the use

of performance rather than design standards; and (4) an exemption from

coverage of the rule, or any part thereof, for small entities.

Regarding the first and fourth alternatives, the SEC is adopting a

minimum reporting threshold of $150 million as well as reporting

requirements and timetables that differ for entities of smaller sizes.

A small entity adviser that is subject to the rule only needs to file

Form PF annually and complete applicable portions of section 1 of the

form.\566\ Large Private Fund Advisers must file additional

information, and large hedge fund or large liquidity fund advisers must

file more frequently. In addition, the filing fees that a smaller

adviser must pay in a given year are lower than those that a large

hedge fund or large liquidity fund advisers must pay over the same

period. Regarding the second alternative, the information that a small

entity subject to the rule must provide under section 1 of Form PF is

much simpler than the information required of large hedge fund or large

liquidity fund advisers and is consolidated in one section of the form.

Regarding the third alternative, the SEC has, in a number of cases,

permitted advisers to rely on their own methodologies in providing the

information that the Form requires, though the use of performance

standards is limited by the need to obtain comparable information from

all filers.

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\566\ If the adviser has no hedge fund assets under management,

it need not complete section 1.C of the Form. Advisers that manage a

significant amount of both registered money market fund and

liquidity fund assets must complete section 3 of Form PF, but there

are no small entities that manage a registered money market fund.

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CFTC:

Under CEA rule 4.27, the CFTC would not impose any additional

burden upon registered CPOs and CTAs that are dually registered as

investment advisers with the SEC because such entities are only

required to file Form PF with the SEC. Further, certain CPOs registered

with the CFTC that are also registered with the SEC would be deemed to

have satisfied certain CFTC-related filing requirements, should the

CFTC adopt such requirements, by completing and filing the applicable

sections of Form PF with the SEC. Therefore, any burden imposed by Form

PF through rule 4.27 on small entities registered with both the CFTC

and the SEC has been accounted for within the SEC's calculations

regarding the impact of this collection of information under the RFA

or, to the extent the reporting may relate to commodity pools that are

not private funds, the CFTC anticipates that it would account for this

burden should it adopt a future rulemaking establishing

[[Page 71174]]

reporting requirements with respect to those commodity pools.

Accordingly, the Chairman, on behalf of the CFTC, hereby certifies

pursuant to 5 U.S.C. 605(b) that the rules as adopted will not have a

significant impact on a substantial number of small entities.

VII. Statutory Authority

CFTC:

The CFTC is adopting rule 4.27 [17 CFR 4.27] pursuant to its

authority set forth in section 4n of the Commodity Exchange Act [7

U.S.C. 6n].

SEC:

The SEC is adopting rule 204(b)-1 [17 CFR 275.204(b)-1] pursuant to

its authority set forth in sections 204(b) and 211(e) of the Advisers

Act [15 U.S.C. 80b-4 and 15 U.S.C. 80b-11], respectively.

The SEC is adopting rule 279.9 pursuant to its authority set forth

in sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4 and

15 U.S.C. 80b-11], respectively.

List of Subjects

17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Reporting and

recordkeeping requirements.

17 CFR Parts 275 and 279

Reporting and recordkeeping requirements, Securities.

Text of Final Rules

Commodity Futures Trading Commission

For the reasons set out in the preamble, the CFTC is amending Title

17, Chapter I of the Code of Federal Regulations as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0

1. The authority citation for part 4 is revised to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a,

and 23.

0

2. Add Sec. 4.27 to subpart B to read as follows:

Sec. 4.27 Additional reporting by advisors of commodity pools.

Except as otherwise expressly provided in this section, CPOs and

CTAs that are dually registered with the Securities and Exchange

Commission and are required to file Form PF pursuant to the rules

promulgated under the Investment Advisers Act of 1940, shall file Form

PF with the Securities and Exchange Commission in lieu of filing such

other reports with respect to private funds as may be required under

this section. In addition, except as otherwise expressly provided in

this section, CPOs and CTAs that are dually registered with the

Securities and Exchange Commission and are required to file Form PF

pursuant to the rules promulgated under the Investment Advisers Act of

1940, may file Form PF with the Securities and Exchange Commission in

lieu of filing such other reports with respect to commodity pools that

are not private funds as may be required under this section. Dually

registered CPOs and CTAs that file Form PF with the Securities and

Exchange Commission will be deemed to have filed Form PF with the

Commission for purposes of any enforcement action regarding any false

or misleading statement of a material fact in Form PF.

Securities and Exchange Commission

For the reasons set out in the preamble, the SEC is amending Title

17, Chapter II of the Code of Federal Regulations as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0

3. The authority citation for part 275 continues to read in part as

follows:

Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-

4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.

* * * * *

0

4. Section 275.204(b)-1 is added to read as follows:

Sec. 275.204(b)-1 Reporting by investment advisers to private funds.

(a) Reporting by investment advisers to private funds on Form PF.

If you are an investment adviser registered or required to be

registered under section 203 of the Act (15 U.S.C. 80b-3), you act as

an investment adviser to one or more private funds and, as of the end

of your most recently completed fiscal year, you managed private fund

assets of at least $150 million, you must complete and file a report on

Form PF (17 CFR 279.9) by following the instructions in the Form, which

specify the information that an investment adviser must provide. Your

initial report on Form PF is due no later than the last day on which

your next update would be timely in accordance with paragraph (e) if

you had previously filed the Form; provided that you are not required

to file Form PF with respect to any fiscal quarter or fiscal year

ending prior to the date on which your registration becomes effective.

(b) Electronic filing. You must file Form PF electronically with

the Form PF filing system on the Investment Adviser Registration

Depository (IARD).

Note to paragraph (b): Information on how to file Form PF is

available on the Commission's Web site at http://www.sec.gov/iard.

(c) When filed. Each Form PF is considered filed with the

Commission upon acceptance by the Form PF filing system.

(d) Filing fees. You must pay the operator of the Form PF filing

system a filing fee as required by the instructions to Form PF. The

Commission has approved the amount of the filing fee. No portion of the

filing fee is refundable. Your completed Form PF will not be accepted

by the operator of the Form PF filing system, and thus will not be

considered filed with the Commission, until you have paid the filing

fee.

(e) Updates to Form PF. You must file an updated Form PF:

(1) At least annually, no later than the date specified in the

instructions to Form PF; and

(2) More frequently, if required by the instructions to Form PF.

You must file all updated reports electronically with the Form PF

filing system.

(f) Temporary hardship exemption.

(1) If you have unanticipated technical difficulties that prevent

you from submitting Form PF on a timely basis through the Form PF

filing system, you may request a temporary hardship exemption from the

requirements of this section to file electronically.

(2) To request a temporary hardship exemption, you must:

(i) Complete and file in paper format, in accordance with the

instructions to Form PF, Item A of Section 1a and Section 5 of Form PF,

checking the box in Section 1a indicating that you are requesting a

temporary hardship exemption, no later than one business day after the

electronic Form PF filing was due; and

(ii) Submit the filing that is the subject of the Form PF paper

filing in electronic format with the Form PF filing system no later

than seven business days after the filing was due.

(3) The temporary hardship exemption will be granted when you file

Item A of Section 1a and Section 5 of Form PF, checking the box in

Section 1a indicating that you are requesting a temporary hardship

exemption.

(4) The hardship exemptions available under Sec. 275.203-3 do not

apply to Form PF.

(g) Definitions. For purposes of this section:

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(1) Assets under management means the regulatory assets under

management as determined under Item 5.F of Form ADV (Sec. 279.1 of

this chapter).

(2) Private fund assets means the investment adviser's assets under

management attributable to private funds.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF

1940

0

5. The authority citation for Part 279 continues to read as follows:

Authority: 15 U.S.C. 80b-1, et seq.

0

6. Section 279.9 is added to read as follows:

Sec. 279.9 Form PF, reporting by investment advisers to private

funds.

This form shall be filed pursuant to Rule 204(b)-1 (Sec.

275.204(b)-1 of this chapter) by certain investment advisers registered

or required to register under section 203 of the Act (15 U.S.C. 80b-3)

that act as an investment adviser to one or more private funds.

Note: The text of the following Form PF will not appear in the

Code of Federal Regulations.

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By the Commodity Futures Trading Commission.

Dated: October 31, 2011.

David A. Stawick,

Secretary.

By the Securities and Exchange Commission.

Dated: October 31, 2011.

Elizabeth M. Murphy,

Secretary .

[FR Doc. 2011-28549 Filed 11-15-11; 8:45 am]

BILLING CODE 6351-01-P; 8011-01-P

Last Updated: November 16, 2011