More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Approximately one year ago, the SEC, per Rule 204(b)-1 of the Advisers Act, required SEC-registered advisors who manage private funds to periodically file Form PF. Commodity pool operators and commodity trading advisors dually registered with the SEC and the CFTC are also required to file Form PF. There continues to be some confusion regarding the applicability of the form. In this column, I hope to dispel some of that confusion.
Form PF is not applicable to private funds with less than $150 million in regulatory assets under management (RAUM), as opposed to the traditional net assets under management. RAUM is generally defined as the gross AUM without subtracting borrowings, short-sales or other modes of leverage. Accordingly, smaller funds that use leverage or have unfunded investor commitments may be required to report them on Form PF. To calculate RAUM, advisors must use the current market value, or fair value where current value is unavailable. In addition, advisors are required to follow certain aggregation rules when determining whether their RAUM satisfies the $150 million threshold. Aggregation must also be applied to the large private fund threshold for the three types of funds— hedge funds, liquidity funds and private equity funds—covered by Form PF. The three fund types are defined as follows:
- Hedge funds are any fund that: charges a performance fee or allocation calculated by taking into account unrealized gains; may borrow an amount in excess of one half its net asset value or may have gross national exposure in excess of twice its net asset value; or may sell securities or other assets short or enter into similar transactions.
- Liquidity funds are defined as any private fund that seeks to generate income by investing in a portfolio of short-term obligations to maintain a stable net asset value or minimize principal volatility.
- Private equity funds are defined as any private fund that: is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture fund capital fund; and does not provide investors with redemption rights in the ordinary course of business.
When determining the type of fund and reporting requirements, advisors must carefully consider the appropriate definitions. For example, the SEC opined that a fund permitting short sales in its prospectus would be considered a hedge fund, even if the fund never engages in short sales.
Form PF comprises four sections. Section 1(a) requires basic identifying information about the advisor and related persons that must be filed by all private fund advisors. Section 1(b) seeks information about the private funds advised, such as gross and net asset value and value of investments in other private funds. Section 1(c) seeks information about hedge funds advised, such as investment strategies and percentage of assets using trading algorithms.
Section 2(a) requires certain aggregate information about the hedge funds advised. This section is more technical and asks for, among other things, the value of assets invested in different types of securities, derivatives and commodities; the geographical breakdown of investments; and the monthly turnover value in certain asset classes. Section 2(b) requires information about any managed hedge funds advised that have a net asset value of at least $500 million at the end of any month in the prior fiscal quarter. The advisor must report the fund exposures and trading, risk metrics, financing information and investor information.
Section 3 only applies to large liquidity funds. This section requires certain information regarding valuation methodology and the amount of assets invested in different instruments.
Section 4 only applies to large private fund advisors and requires information about the fund’s financing and investments.
Firms will be required to file periodic updates to Form PF, as applicable, depending upon the type of private fund and the amount of RAUM as indicated in the chart above.