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Form PF is a reporting form for certain SEC-registered investment advisers to private funds. Form PF facilitates the Financial Stability Oversight Council’s ability to monitor systemic risk and the Securities and Exchange Commission’s (“SEC”) regulatory oversight of private fund advisers and investor protection efforts.On May 3, 2023, the Securities and Exchange Commission (SEC) adopted a final rule amending Form PF. The final rule amendments apply to large hedge fund advisers, having at least $1.5 billion in relevant AUM; private equity fund advisers, having at least $150 million in relevant AUM; and large private equity fund advisers, having at least $2 billion in relevant AUM.This blog focuses on the recent amendments with regard to large hedge fund advisers and examines how large hedge fund advisers can use AQMetrics technology to ensure they comply with the emerging Form PF regulatory change. In this blog, AQMetrics reviews how its technology can be used by large hedge fund advisers to comply with emerging regulatory change.
The Impact of Form PF Amendments on Large Hedge Fund Advisers
According to the amendments, large hedge fund advisers must file a report, as soon as practicable, but no later than 72 hours from the occurrence of a triggering event. Triggering events include certain extraordinary investment losses such as 20% or more of a fund’s “reporting fund aggregate calculated value (“RFACV”); significant margin or default events; terminations of prime broker relationships; and events associated with withdrawals and redemptions.
Extraordinary Investment Losses
RFACV is defined as “every position in the reporting fund’s portfolio, including cash and cash equivalents, short positions, and any fund-level borrowing, with the most recent price or value applied to the position for purposes of managing the investment portfolio” and may be calculated using the adviser’s own methodologies and conventions of the adviser’s service providers, provided that these are consistent with information reported internally. The RFACV is a signed value calculated on a net basis.
Events Associated With Withdrawals and Redemptions
Examples of the triggering events associated with withdrawals and redemptions include withdrawal or redemptions of 50% or more of net asset value; inability to satisfy redemptions; or suspension of redemptions.
Significant Margin or Default Events
Leveraging an investment with the hope of amplifying gains is a traditional approach used by large hedge fund advisers. It’s well recognised that this approach to leveraged investments is not without risk, most notably the risk of significant margin or default events. For over a decade, AQMetrics technology has been applying regulatory rules to monitor leverage and trigger the risk of significant margin or default events prior to occurrence.
Terminations of Prime Broker Relationships
To date, terminations of prime broker relationships have been recorded in a myriad of different ways across firms and there is no standard approach to capturing data related to terminations of prime broker relationships.
Form PF Reporting Requirements
The new and/or revised reporting requirements include information related to: investment strategies; fund-level borrowings; and events of default, bridge financing to controlled portfolio, and geographic breakdown of investments. AQMetrics technology currently automatically manages data for Form PF from data source to end report. In doing so AQMetrics technology captures the information related to investment strategies; fund-level borrowings; and events of default, bridge financing to controlled portfolios, and geographic breakdown of investments. AQMetrics technology automatically validates, contextualizes and aggregates the data for reporting purposes and then automatically places the requisite data in the Form PF report for digital sign-off and filing. The new Form PF report amendments will be available from AQMetrics technology before the fourth quarter of 2023.
Timeline for Implementation and Next Steps
The quarterly event reporting for large hedge fund advisers will commence six months after the publication in the Federal Register. There is current uncertainty with regard to the Federal Register publication deadline, however, it is likely that the quarterly and current event reporting will become effective in either the fourth quarter of 2023 or the first quarter of 2024. This means that end-to-end data management and automatic management, measuring and monitoring the risk of significant margin or default events through technology is key to the successful implementation of the amendments before the fourth quarter of 2023.