As a result of the implementation of new registration requirements adopted by the U.S. Securities and Exchange Commission (SEC) implementing certain provisions of The Private Fund Investment Advisers Registration Act of 2010 (“Title IV”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), some 3,000 advisers were required to register with the SEC in early 2012.  Those of these newly registered investment advisers are now subject to a wide range of reporting obligations, including on Form PF, the rules (the “Rules”) for which were newly adopted by the SEC in late 2011 to help monitor systemic risk in the U.S. financial system.  The Rules, however, apply not only to those financial institutions that are “too big to fail” but also to much smaller private fund advisors which have never been subject to SEC registration or this level of regulatory oversight and which now have to provide much greater disclosure to the regulators.  Moreover, the new private fund adviser exemption under the Rules, while exempting some advisers from registration with the SEC (often at the cost of state registration), no longer completely frees such exempt advisers, regardless of the size of their AUM, from reporting requirements, preventing them from “flying under the radar” as far as public disclosure of their investment operations is concerned.

The key innovation and, for many, a serious hurdle, in the new reporting requirements for all SEC-registered investment advisers is Form PF.  With respect to newly registered advisers, many of which managed relatively small funds, in particular, the Rules will require so-called “smaller” investment advisers (managing between $150 million and $1.5 billion in AUM) to report extensive information to the SEC on Form PF about the private funds they advise.  Form PF is designed to supplement Form ADV, which was also revised in 2011 to include substantial information about private funds advised by reporting advisers.  Although Form PF has been significantly streamlined from the original version as it appeared in the SEC Proposing Release,  it continues to represent an arduous task for smaller advisers without organizational resources to manage the new reporting process.

The information requested on Form PF is quite detailed and extensive and may require advisers to alter their compliance policies and procedures and, possibly, even to revise their recordkeeping systems.  It calls for disclosure about the management company, the assets under management and fund performance.  As adopted, however, Form PF generally permits advisers to rely on existing systems to provide information, a notable difference compared to the requirements proposed earlier.  In particular, Form PF removed the proposed requirement that submitting officials of the adviser certify, under penalty of perjury, the information contained therein.  An adviser is not required to update information that was provided in good faith at the time of submitting Form PF even if such information was subsequently revised for recordkeeping, risk management, or investor reporting purposes.  Although reporting advisers may only have to submit Form PF to the SEC on a quarterly or annual basis, much of the required information may need to be gathered monthly.

Smaller advisers are only required to complete Section 1 of Form PF, which calls for the provision of general identifying information, assets under management, size, leverage and performance information for each private fund and also basic information on hedge funds. Advisers must also provide information about related persons and their large trader identification numbers. With respect to each private fund, advisers must provide gross and net assets, derivative positions, borrowings, concentration of equity holders, investments in private funds and parallel managed accounts, performance information (with the same frequency with which the advisers already calculate performance), beneficial ownership, assets and liabilities, investment strategies (including use of high-frequency strategies) and counterparty exposures.  Although information submitted on Form PF is nonpublic and not subject to Freedom of Information Act requests, it is not completely confidential.  The SEC may use the information in enforcement actions and it may be accessed by various federal departments and agencies.

Advisers potentially subject to Form PF reporting have some time to review their structures and determine their status and subsequent reporting requirements (advisers to smaller funds with less than $1.5 billion in assets will make the first Form PF filings on April 30, 2013 assuming calendar fiscal year).  Nonetheless, because of the substantial reporting requirements, advisers should begin reviewing Form PF now to ensure that their internal systems are appropriately designed to capture necessary information before their applicable deadline looms close.  The advisers solely to private funds with less than $150 million in AUM, venture capital funds and family offices, among others, will not be required to file Form PF, provided that such advisers satisfy the definitional requirements under the Rules.  

Advisers to funds that qualify as venture capital funds under the definition contained in Rule 203(I)-1, and are therefore excluded from the definition of “investment adviser,” do not have any obligations to file Form PF.  Qualifying for this exemption has been made somewhat easier in the Rules as compared with the original SEC proposal largely due to the use of a 20% basket for non-qualifying investments and abandoned requirement for management involvement in portfolio companies.  Still, venture capital fund advisers would need to determine whether the funds they manage meet the new requirements under the Rules or under the grandfathering provisions of the Rules.  Similarly, advisers that qualify as “family offices” under Section 202(a)(11)(G) and the recently adopted Rule 202(a)(11)(G)-1 do not have any obligations with respect to Form PF.  Although not every “family office” would automatically qualify under this rule, advisers should carefully consider its requirements and, if necessary, take steps to alter their structure or operations to qualify for the Section 202(a)(11)(G) exception or for other Section 202(a)(11) exceptions in order to avoid Form PF filing obligations.  Foreign SEC-registered advisers with minimal U.S. assets under management may be able to reorganize those U.S. assets into a separate fund that is offered only to U.S. investors, which could avoid Form PF filing requirements (if it has less than $150 million of U.S. assets under management) regardless of the total AUM of such advisers.

It should be noted that, apart from Form PF, the SEC has imposed certain reporting requirements applicable even to the investment advisers exempt from registration under the Rules, such as those advisers with less than $25 million in AUM.  For example, exempt advisers, must comply with the reporting requirements by filing reports with the SEC through completing specific items on Part IA of Form ADV (but not Part II) and filing amendments to Form ADV.   These reports are publicly available on the SEC website.  The value of assets under management is to be calculated by reference to Form ADV and is generally equal to the fair market value of the assets of the qualifying private funds, plus the amount of uncalled capital commitments.  In a change from the quarterly calculation originally proposed, advisers are required to determine the value of assets that they manage on an annual basis.  Recordkeeping obligations of exempt investment advisers are yet to be specifically addressed by the SEC.