Tag: Form PF

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.

Gathering Information on Your Private Fund Investors

One item that I picked up from PEI’s recent Private Fund Compliance Conference is the new way you need gather information about investors in your private fund for Form PF. I put Form PF to the side because my filing is not required until next year. However, there is a key March 31, 2012 date in the Adopting Release for Form PF (.pdf).

In Section 1b, Item B. Question 16 (.pdf)Form PF  asks the manager to “specify the approximate percentage of the reporting fund’s equity that is beneficially owned” by the listed category of investors. You need to file Form PF if you listed private funds in your Form ADV.

The catch in the instruction is:

With respect to beneficial interests outstanding prior to March 31, 2012, that have not been transferred on or after that date, you may respond to this question using good faith estimates based on data currently available to you.
(my emphasis)

If you are fundraising now, it looks like you need to make sure your subscription documents require the investor to self-select their designation. I suppose you also need to do some diligence to make sure the selection is correct.

Even if you’re not fundraising, you need to address this change for any transfers in a private fund after March 31, 2012.

The analysis for which sections of Form PF you need to fill out is a bit complicated. But every private fund needs to fill out Section 16 and answer the question about the beneficial ownership of the fund. Every private fund needs to start gathering information about their investors using this data scheme:

(a) Individuals that are United States persons (including their trusts);
(b) Individuals that are not United States persons (including their trusts);
(c) Broker-dealers;
(d) Insurance companies;
(e) Investment companies registered with the SEC;
(f) Private funds;
(g) Non-profits;
(h) Pension plans (excluding governmental pension plans);
(i) Banking or thrift institutions (proprietary);
(j) State or municipal government entities (excluding governmental pension plans);
(k) State or municipal government pension plans;
(l) Sovereign wealth funds and foreign official institutions; or
(m) Investors that are not United States persons and about which the foregoing beneficial ownership information is not known and cannot reasonably be obtained because the beneficial interest is held through a chain involving one or more third-party intermediaries.
(n) Other

 

Sources:

Update on the new regulations and how they will impact you going forward

These are my notes from the “Update on the new regulations and how they will impact you going forward” session at the Private Fund Compliance Forum 2012. Excuse the typos and rambling nature. They are just my raw notes.

Moderator:

  • Karen Barr, General Counsel, Investment Adviser Association

Panel Members:

  • Jason E. Brown, Partner, Ropes & Gray LLP
  • Jason Mulvihill, General Counsel, Private Equity Growth Capital Council

Form PF

Should you be thinking about Form PF now? Depends. The reporting deadlines and substantive information varies depending on the type of fund and the size of the fund. If you filled out 7B1 in the Form ADV Part 1 then you need to file a Form PF.

Distinguishing between a hedge fund and private equity fund is a key to the reporting. It’s very technical. Can you charge a carry based on unrealized gains? Can you sell short? You may be a hedge fund. If you have different types of funds, you could be consolidated together to be a large hedge fund and have increased reporting obligations.

Good news. The filing of Form PF no longer has the “signing under penalty of perjury standard.” The SEC realized it’s more of an art than a science.

Focus on section 16 that asks for characterizations of investors. The SEC has made it clear that you need to gather the information on investors starting in March 2012. This is for new fund raising and transfers.
Is the Form PF information confidential? Supposedly. SEC says it will be confidential. Congress will have access. You can avoid listing the name of your fund.

Volker Rule

We are still waiting on the final wording of the Volker Rule. The Devil is in the details. The rule could limit the types of investors in private equity firms and limit the amount an investor could commit to a fund. There is lots of crafting going on. The final rule could be materially different from the proposed rule. There is a statutory compliance deadline starting on July 21, 2012. How do you become compliant with a rule that does not yet exist? Lots of uncertainty. Wait and see.

Incentive Compensation Rules

Section 956 of Dodd-Frank requires some disclosure and rule around executive compensation. The regulators issued a proposed rule. Firms will need to disclose compensation structure to regulators. Not the dollar amount, but how the compensation is calculated. Firms will need to analyze whether the compensation resulted in increased risk taking.

The level is $1 billion of asset. Not assets under management, but assets on the balance sheet. That would seem to exclude most private equity fund managers. You should expect some more clarification under the final rule. The proposed rule works well for banks, but gets murky when applied to fund managers. Look at question 1.O on Form ADV. If you checked that box, you are subject to this rule.
There is some concern that carried interest could be pulled into the 3 year holdback requirements under the proposed rule. That would seem strange since the carried interest has already been subject to a realization and usually lengthy investment period.

Treasury Regulations

There are treasury forms that have been on the books for years that nobody fills out.
Form SLT is the new form and the Treasury has used that as a tool to make firms aware of the other forms. Form SLT is based on foreign investments. The form is looking for more than $1 billion in foreign investments and more than $1 billion of foreign investors. There is an exclusion for direct investments.

Form S is also there for foreign investments and foreign investors. Add in Form SH.

BEA filings come out of the Department of Commerce, but Treasury helped publicize it. The BEA form is triggered if you own more than 10% of a foreign company. It requires lots of information. (The instructions say it will take 84 hours to complete the form and are required quarterly.)

FBAR is if you have control over a non-US account. Fortunately, it’s a short form. Add in FATCA and the proposed rules coming out on reporting for foreign accounts.

CFTC Regulations on swaps

The CFTC definitions are very broad. Trading even a small amount of commodities pulls you into the definition of a commodity fund. Dodd-Frank includes swaps into the definition of a commodity. The rules are not final yet. However, the CFTC has begun changing lots of other rules that get affected by the change in definition.

The CFTC has removed the broad exemption if you had all sophisticated investors, analogous to 3(c)(7). The other common exemption is a de minimis exemption. The broad exemption has been eliminated. There is a December 31, 2012 deadline for compliance. It’s tricky because a swap is not yet a commodity. There are lots of interpretive issues.

If you register as a commodity pool operator do the rules harmonize with the SEC’s investment adviser rules? No. The NFA (equivalent to FINRA) requires lots of information.

If you can fit under the de minimis exception, there is an annual filing requirement. For most private equity firms, you should be able to meet the de minimis exception. The threshold is 5% and 100% notional. The biggest footfall is likely to be hedging a credit facility before there is much investing.

JOBS Act

What happened? It was surprise that there was such bi-partisan support for this bill.

The law repeals the ban on general solicitation and advertising. This is still subject to SEC rule making. Don’t start advertising yet.

Keep in mind that two of the SEC commissioners sent letters to Congress that they were opposed to the bill and may take a harsh view in implementing the rules.

The change to 12(g) raising the limit of holders of record above 500 to 2000 allows for bigger funds. Although it be unusual to have a private fund with so many LPs.

Real Estate Funds and Form PF

In addition to filing Form ADV with the SEC when they register with the Securities and Exchange Commission, private fund managers will also need to start filing Form PF. I received a helpful reminder about this last week form SEC’s IARD system. (I’ll need to get used to messages with the subject line: “Firm 158137: An Important Message from the SECURITIES AND EXCHANGE COMMISSION”.)

SEC-registered investment advisers that manage one or more private funds and, collectively with an adviser’s related persons, had at least $150 million in private fund assets under management will be required to file Form PF in the future (beginning either after June 2012 or December 2012 depending upon each adviser’s specific situation). Please see Form PF and its general instructions for additional information … and the SEC’s recently adopted rule …. Please note that advisers report private funds in Item 7.B on Form ADV as well. Form PF will be filed in the future either through an online form or through an XML submission process.

The amount of information required by Form PF is tiered, depending on the type of fund. Hedge funds have the biggest burden.

Where do real estate funds fit into the reporting requirements?

In the glossary, 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 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.

The last category that has enhanced reporting is liquidity fund advisers:

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.

That leaves real estate funds reporting the information in Section 1a and Section 1b. That’s still a great deal of information.

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.

Sources:

Form PF and Private Funds

IN addition to filing Form ADV with the SEC when they register with the Securities and Exchange Commission, private fund managers will also need to start filing Form PF next year. The amount of information required by Form PF is tiered. Advisers managing less than $150 million in private funds are not required to file, as these firms are not likely to generate systemic risk within the financial industry. Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year, and report only basic information regarding the private funds they advise. This includes limited information regarding size, leverage, investor types and concentration, liquidity, and fund performance. Smaller advisers managing hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms. Larger private fund advisers must provide more detailed information than private fund advisers. For example, large hedge fund advisers managing more than $1.5 billion (this threshold was raised from $1 billion in the proposed rule) need to file additional information on Form PF. Large private equity advisers with $2 billion in assets under management (this threshold was raised from $1 billion in the proposed rule) also must submit additional information on 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. For real estate private equity funds, the 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. So real estate funds should only have to make the shorter annual report. Regarding timeframes, smaller private fund advisers and smaller private equity fund advisers only need to file Form PF once per year. Larger hedge fund advisers must file Form PF quarterly and have 60 days after each quarter ends to submit the form. (This is longer than the originally proposed 15 days.) Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. However, three categories of advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012:

  • Advisers with at least $5 billion in assets under management attributable to hedge funds.
  • Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds.
  • Advisers with at least $5 billion in assets under management attributable to private equity funds.

One other noteworthy change to Form PF requirements is that advisers will not be required, as originally proposed, to formally certify that information submitted on Form PF is “true and correct” under penalty of perjury. SEC has chosen FINRA to accept Form PF filings. That means more use of the IARD filing system. And perhaps, moving a step closer to FINRA becoming the SRO for investment advisers. Sources:

The SEC Wants to Know if You Are Systemically Important

The Securities and Exchange Commission proposed a new rule that would require advisers to private funds to report information for use by the Financial Stability Oversight Council in monitoring risk to the U.S. financial system. Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to gather this information.

The SEC is proposing a new Rule 204(b)-1 under the Investment Advisers Act that would require SEC-registered investment advisers to report systemic risk information on Form PF if they advise one or more private funds.

Each private fund adviser would report basic information about the operations of its private funds on Form PF once each year. Large Private Fund Advisers would be required to submit this basic information each quarter along with additional systemic risk related information required by Form PF concerning certain of their private funds.

“Large Private Fund Advisers” would be

  • Advisers managing hedge funds that collectively have at least $1 billion in assets as of the close of business on any day during the reporting period for the required report;
  • Advisers managing a liquidity fund and having combined liquidity fund and registered money market fund assets of at least $1 billion as of the close of business on any day during the reporting period for the required report; and
  • Advisers managing private equity funds that collectively have at least $1 billion in assets as of the close of business on the last day of the quarterly reporting period for the required report.

The SEC estimates that approximately 4,450 advisers would be required to file Form PF. Of those, approximately 3,920 would be smaller private fund advisers not meeting the thresholds for reporting as Large Private Fund Advisers.

It looks like the definition of private equity fund for purposes of the Large Private Fund Adviser reporting requirements will exclude real estate funds.

Private equity fund:

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.

Under the proposed rule, real estate private equity funds will be subject to the annual reporting, but not subject to the more detailed quarterly reporting. This is just a proposed rule, so the final requirements and definitions may change in the final rule when it is issued. In the meantime, you can make comments.

Sources: