Tag: Form PF

Changes to Form PF

It’s been a decade since the SEC and FSOC pushed Form PF on to private funds. The SEC has decided it wants more data and has proposed an amendment to Form PF.  

The big change is next day reporting for key events by Large Hedge Fund Advisers and Private Equity Funds 

For large Hedge Funds: 

  • certain extraordinary investment losses 
  • significant margin and counterparty default events,  
  • material changes in prime broker relationships,  
  • changes in unencumbered cash,  
  • operations events, and  
  • events associated with withdrawals and redemptions 

For Private Equity Funds: 

  • execution of adviser-led secondary transactions,  
  • implementation of general partner or limited partner clawbacks,  
  • removal of a fund’s general partner,  
  • termination of a fund’s investment period, or  
  • termination of a fund. 

The purpose is provide more timely information to the SEC and FSOC and presumably signal distress in the markets quicker than the current delayed reporting. 

Commissioner Pierce opposed the changes. She does not think it will actually provide useful information for FSOC. She thinks it’s just a grab by the SEC to enhance enforcement activity and twist the form into micro-management by the SEC. In particular, the one-day period is an incredibly short term for a firm that will likely be focused on trying to resolve issues rather than regulatory reporting.  

Chair Gensler raised the specter of Long Term Capital Management in 1998. He used this as the boogeyman for why the SEC needs such intensive and quick reporting. 

Net assets managed by private funds rose to $11.7 trillion in the first quarter of last year from $5.3 trillion in 2013, SEC data show. There were 6,910 private equity funds with $1.60 trillion in gross assets in first quarter of 2013 and 15,584 funds with $4.71 trillion in gross assets in the fourth quarter of 2020. 

The proposal would reduce the threshold that triggers reporting as a large private-equity adviser to $1.5 billion from $2 billion in assets under management. That would pull approximately 75% of private equity funds into the reporting regime. 

The Form PF still has that clunky definition of a “hedge fund” that leaves fund managers with subscription credit facilities wondering if they might considered a hedge fund.

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More Filing Relief from the SEC

The SEC must have realized that its relief from Form ADV filing and Form PF filing deadlines was not providing much relief. The SEC issued a new order for the deadlines.

You still have to send the SEC a notice that your firm is relying on the Order, but you no longer have to say why you can’t file the forms on a timely basis and don’t have to provide an estimated date for delivery.

The SEC has not extended the deadline. It’s still only 45 days.

If you are relying on the Order, you still need to post a notice on your firm’s website.

I think most firm’s are not going to take advantage of the order. Nobody wants to tell the SEC that can’t meet a deadline, even in the case of a pandemic.

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Enforcement Actions for Failure to File Form PF

A mentioned two weeks ago that the Securities and Exchange Commission was looking at private fund managers who failed to Form PF. That is now official and the SEC announced enforcement actions against 13 private fund managers.

The SEC’s orders are against:

Each of the enforcement orders are cookie cutter and straight-forward:

  1. The private fund manager is registered with the SEC and manages private funds.
  2. Rule 204(b)-1 applies to the manager, requiring it file Form PF.
  3. The manager failed to file Form PF.
  4. The manager willful violated Rule 204(b)-1.
  5. The manager has to pay the SEC $75,000.

In each of the orders, the manager is noted as failing to file Form PF in multiple years.

As I said earlier, this is an easy violation for the SEC to catch. When filing Form ADV and listing a private fund, it gets a private fund identification number. It should be fairly easy for the SEC to search its database to see which funds in Form ADV filings were not in Form PF filings.

If you don’t want to file Form PF, you now know the result. You get subject to cease and desist, you get censured, and you pay $75,000. Since you get a cease and desist, you have to file Form PF or face even more serious consequences.

I’m not sure if the 13 orders surprises me because it’s a mistake that nobody should make (or that it’s too high and that there are many other firms out there not doing the filing). I know that there was a great deal of uncertainty about the definitions in Form PF with many funds being advised to file as hedge fund because of the poorly written definitions of the different fund types. These cases are all wholesale failures to file, not for filing the wrong form.

If you’re a private fund manager and haven’t filed a Form PF for one or more of your funds, the SEC has fired this shot across the bow. You’ve been warned. Be prepared to pay your $75,000.

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Form ADV and Form PF

With the statutory changes from Dodd-Frank, the Securities and Exchange Commission started gathering basic information about private fund managers and their funds on Form ADV.

The SEC increased that information flow by requiring Form PF. Unlike Form ADV, Form PF provides detailed information about the private fund’s activities and performance. That left many reluctant to release this information.

Apparently many managers followed through on this reluctance. According to a story in IA Watch, the SEC is matching up Form ADV Filings for private funds and identifying the lack of filing in Form PF.

You need a private fund identification number for the private fund in Form ADV. That makes it easy to search through the Form PF database for those filings or lack thereof. Someone in data analytics at the SEC decided to do just that.

That has resulted in at least a few dozen firms getting a letter from the SEC explaining why they didn’t file Form PF.

I understand why some firms may have had confusion over how to identify their funds on Form PF. Those definitions are problematic. But I have not run into anyone saying that they didn’t have to file.

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Real Estate Fund Information from the SEC

The Securities and Exchange Commission has been acquiring troves of data about private funds through the Form PF filing requirement. Some, including myself, have been skeptical that the SEC will figure out what to do with the data as a tool to protect investors. But, the SEC has been able to compile statistics and published a suite of new data and analyses of private fund statistics and trends. The SEC released the third quarter private fund statistics.

The number of real estate funds reporting on Form PF has increased.
The number of real estate funds reporting on Form PF has increased.

period 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3
Funds 1,802 1,800 1,801 1,806 2,056 2,093 2,091 2,108
Advisers 262 263 264 265 288 290 288 290
Net NAV ($billions) 280 280 281 319 323 323 323 323

The rise from 1802 to 2108 in advisers is a big increase. There is only a small rise of 52 from the end of 2015 to the end of the third quarter in 2016. It’s the larger multi-platform Form PF filers who file quarterly.

Pure real estate fund advisers are only filing quarterly. Given that, I didn’t expect to see much change intra-year, and that held true.

There is a wealth of information in the SEC’s report. I’m still looking for some trends.
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Private Fund Statistics

If you manage a private fund and are registered with the Securities and Exchange Commission, you spend a good chunk of April (and maybe more) filling out Form PF. Ever wonder what the SEC does with all that data? They publish an annual report on fund statistics, which was recently released.

Form PF

Form PF implemented Section 404 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the SEC to establish reporting requirements for advisers to private funds. That reported information was to be sent on for use by the Financial Stability Oversight Council in monitoring risk to the U.S. financial system. The SEC also purports to use information obtained from Form PF in its regulatory programs and investor protection efforts relating to private fund advisers.

As of the end of 2014, there were 24,725 private fund reporting to the SEC. About 1/3 were labeled hedge funds and another 1/3 were private equity funds. There were 1,789 real estate funds.

Managing those funds were 2,694 advisers. Of those, 260 were real estate fund managers.

Gross assets for all private funds just missed the $10 trillion mark of gross value. ($9.956 trillion to be more exact). Real estate funds comprised $350 billion of that total.

One surprise is that the biggest owner of private funds is other private funds. (see Table 10) Private funds hold 20% of all private funds, with government pension plans holding 12.8% and private pension plans holding 12.5%.

There is some other interesting data in the report. It’s worth spending a few minutes flipping through it.

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How Does the SEC Use Form PF in Adviser Exams?

Form PF

You slave over Form PF trying to get the information demanded by the Securities and Exchange Commission. What happens to that data?

The Dodd-Frank Wall Street Reform and Consumer Protection Act Section 404 directed the SEC to establish reporting requirements for investment advisers to private funds as necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk by the Financial Stability Oversight Council. Form PF was the result of Section 404. That section of Dodd-Frank also requires the SEC to submit an annual report to Congress on how the SEC is using the data.

According to the latest annual report, the SEC uses Form PF data in its examination and enforcement programs.

Prior to an examination of a private fund adviser that files Form PF, OCIE staff generally reviews the adviser’s Form PF filing as a part of a routine pre-examination evaluation. This review, in conjunction with other data sources, provides OCIE staff with an understanding of the nature of an adviser’s business and investment strategy.

I did not find this to be the case. The Form PF data is locked away from OCIE and examiners need permission to access the data. At least that was the case in the Boston office six months ago.

It’s good that potentially sensitive data is hard to access. That was supposed to be the case with Form PF data. Examiners are already deep into a fund manager’s business operations do the Form PF data would not likely contain any secrets that the examiners are not already looking at.

The examiners will compare the Form PF data to what shows up in due diligence reports, pitch books, offering documents, operating agreements and books and records. Exam staff will look for discrepancies between an adviser’s Form PF filing and any publicly-available documents related to the adviser, including Form ADV.

According to the report, the SEC is collecting Form PF data on 21,542 funds. Of those, 2,888 are large private equity fund advisers (over $2 billion in RAUM) of a pool of 7,004 private equity funds. There are 1,397 real estate funds reporting with $354 billion in RAUM.

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Form PF Filing Day

Form PF

If you run a private fund, today is deadline for the annual Form PF filing with the Securities and Exchange Commission. Depending on the type of fund, you have different reporting requirements. The SEC gets bogged down with poor definitions trying to distinguish among the types of funds.

In the glossary to Form PF, a Real estate fund is

Any private fund that is not a hedge fund, that does not provide investors with redemption rights in the ordinary course and that invests primarily in real estate and real estate related assets.

That sounds right, but I still need to look at the definition of Hedge fund:

Any private fund (other than a securitized asset fund):

(a) with respect to which one or more investment advisers (or related persons of investment advisers) may be paid a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses);

(b) that may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or

(c) that may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).

That definition talks about getting performance fees on unrealized gains. That would be unusual for a real estate fund or private equity fund. The borrowing standard in part (b) may cause some people to pause on the definition and get entwined in a rabbithole of definition.

The form also has more detailed requirements for large private equity advisers. For purposes of Form PF, “private equity fund” is

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.

So a real estate fund is not a private equity fund and not subject to the additional reporting requirements.

Being a member of the “all other advisers” category, the filing is due with 120 days after the end of the fiscal year. Assuming calendar year is my fiscal year, the first filing is due by April 30, 2013.

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Use of Data Collected from Form PF

compliance and form pf

Many private funds struggled with getting Form PF filed. Many in fund compliance were dubious that the Securities and Exchange Commission would be able to do anything meaningful with the massive amount of data pushed through the form. Regardless, Section 404 of Dodd-Frank required the SEC to gather the data so the Financial Stability Oversight Council could assess systemic risk.

Section 404 also required an annual report on how the SEC has used the data collected in Form PF. The first report came out a short time ago.

In total, there are big numbers:

Types of Private Funds Advised by all Filers

  • 6,683 Hedge Funds ($4.061 trillion cumulative RAUM)
  • 5,928 Private Equity Funds ($1.603 trillion cumulative RAUM)
  • 2,922 Other Private Fund Type ($698 billion cumulative RAUM)
  • 1,121 Real Estate Funds ($299 billion cumulative RAUM)
  • 966 Securitized Asset Funds ($338 billion cumulative RAUM)
  • 329 Venture Capital Funds ($23billion cumulative RAUM)
  • 66 Liquidity Funds ($258 billion cumulative RAUM)

For a total of $7.280 trillion in Private Fund Regulatory Assets Under Management Reported by all Filers

The report goes on to imply that the SEC is still figuring out what to do with the data after it passes on the information to FSOC.

The mysterious Division of Economic and Risk Analysis is plugging some of the information into its black box of analytic tools.

More importantly for fund managers, the Office of Compliance Inspections and Examinations is using the information for pre-examination and research. Once selected for an exam, a fund manager should assume that the examiners have a copy of Form PF. OCIE is also working with a system to use Form PF to identify red flags that could trigger exams.

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Borrowings and Form PF

Form PF

A question popped up during a meeting of some real estate compliance folks talking about Form PF. How do you treat subsidiary mortgage borrowings? Question 12(a) asks for the dollar amount of borrowings for the fund. Two main issues came into play: write-downs and recourse.

As many real estate funds are still recovering from the 2008 financial crisis they may have some properties that are underwater. They could have debt in excess of the value of the property. If the loan obligation is isolated at a property and the recourse is limited to the subsidiary then the investment would have a negative valuation. For accounting treatment, the loan value is likely written down to the fair value of the property. That results in a zero valuation rather than a negative valuation.

When Form PF asks for the value of the borrowing should you include the full value or the written down value? Italics means there is a definition and it refers to Instruction 15.

15. May I rely on my own methodologies in responding to Form PF? How should I enter requested information? …

for … borrowings where the reporting fund is the debtor, “value” means the value you report internally and to current and prospective investors;

So the value of a mortgage borrowing should be reported based on the value you report internally and to current and prospective investors. If you write down the mortgage in your annual report, then you can write down the value of the mortgage on Form PF.

That leads to the next question, which is whether to include the debt at all. Without recourse the borrowing is not a direct obligation of the fund. You could argue that the mortgage debt is not part of the “reporting fund’s borrowings.”

A private equity fund would likely not report the value of debt owed by portfolio companies unless the debt were recourse to the fund. I’m not sure that the position changes when the investment is a single real estate instead of an operating portfolio company.

There is the fallback in question 4 which allows you to explain any assumptions you made in responding to questions. You could include all of the debt and state that it includes non-recourse debt. Or take the opposite approach and exclude the non-recourse debt but explain that you excluded non-recourse debt from the answer.

A third question was how to treat debt on joint venture properties. Most seem to agree that you would only include your proportionate share of the debt. Again, you could make arguments either way.