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Bracing for Impact: The Heavier Burden of Form PF Compliance on Private Funds

In the wake of amendments to Form PF introduced by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), and set to take effect on March 12, 2025, private funds—especially hedge funds—are at the threshold of adapting to a revamped regulatory environment.

As part of our ongoing Emerging Regulations Watch series, this blog highlights key modifications and their consequences for the sector, signaling a substantial transformation in the reporting and operational protocols of private funds amidst intensified oversight.

Form PF Compliance on Private Funds

Expanded Look-Through New From PF Requirements

The amendments introduce expanded look-through requirements, signifying a deeper dive into a fund’s investment activities. This change ensures greater transparency and better risk assessment by requiring funds to provide a more detailed analysis of their investments. The goal is to give regulators a clearer picture of the fund’s exposure and strategies, thereby enhancing oversight and systemic risk monitoring.


Nuanced Treatment of Derivatives

A critical aspect of the amendments is the nuanced treatment of derivatives, including swaps and credit default swaps (CDS) positions. One of the key updates revolves around how transactions with offsetting and partially offsetting legs are reported. Previously, the instructions allowed the filer to treat such legs of a transaction as a single position. However, under the revised instruction, each leg must be reported as a separate transaction, irrespective of whether it is offsetting, or partially offsetting, even if entered into with the same counterparty under the same master agreement. This requirement stands regardless of whether the filer traditionally reported these internally as a single transaction.

Additionally, the introduction of 10-year bond equivalents for interest rate derivatives mandates funds to present a more detailed view of their exposure. This change aims to refine the understanding of the risks associated with derivatives, contributing to more informed regulatory oversight and investment decisions. It underscores the regulators’ intent to enhance transparency and risk assessment by requiring a more granular level of reporting on derivative positions, which could have significant implications for the way funds manage and report their derivatives exposure.


Differentiated Treatment of Master Feeder Structures under Form PF

The Form PF amendments also address the differentiated treatment of master-feeder structures, mandating separate Form PF filings under certain conditions. This change could significantly impact the operational and reporting workflows of many funds, highlighting the need for adapted strategies to comply with the new regulatory demands.


Broadening of Regulatory Scope for Form PF Reporting

The recent adjustments in the treatment of “other private funds” for threshold testing and reporting significantly broaden the scope for regulatory scrutiny. Previously, certain investments in other private funds could be disregarded to determine whether investment advisers were required to file Form PF. This approach also influenced the determination of qualifying hedge funds and impacted the thresholds for reporting as large hedge fund advisers, large liquidity fund advisers, and large private equity fund advisers.

Under the new regulations, this exception has been removed. Investments in other private funds are no longer allowed to be disregarded, marking a critical shift in the regulatory perspective. This change could significantly affect the filing requirements and categorization of funds, potentially requiring more investment advisers to file Form PF and altering their status as a large hedge fund, large liquidity fund, or large private equity fund advisers.


New Reporting Requirements Under Form PF Amendments

The introduction of new reporting requirements covers a range of operational and investment activities. This includes the types of funds, internal private fund investments outside of master-feeder structures, detailed inquiries into fund performance, including internal rate of return (IRR), and industry-specific exposures. These requirements underscore a comprehensive approach to capturing the nuances of fund operations and risk profiles.


Implications for the Industry Amidst Form PF Changes

These changes underscore a shift towards greater regulatory oversight and aim to enhance systemic risk monitoring and increase transparency within the private funds sector. As funds adapt to these new requirements, the industry is likely to see a reshaping of reporting practices. To effectively manage and scale their operations in light of these regulatory changes, fund managers must leverage technology partners and innovative solutions to ensure compliance.


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