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Risky reporting: Form PF in a nutshell - EY - United States

Risky reporting:
Form PF in a nutshell

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In all its sections, Form PF requires investment advisers to collect and report data that many advisers may have never collected.

The adoption of Rule 204(b)-1 under the Investment Advisers Act of 1940 and the finalization of Form PF is a watershed event for private fund advisers. Rule 204(b)-1 will require SEC-registered investment advisers who manage private funds to report risk exposure statistics on a consistent basis starting June 15, 2012 on Form PF.

Investment advisers: Are you prepared for Form PF?

Many private funds are within the scope of Form PF and subject to various levels of reporting; however, private funds with less than $150 million in assets under management and venture capital funds are not required to report on Form PF.

Form PF requires extensive information from three types of funds: hedge funds, liquidity funds and private equity funds. Hedge funds are generally defined as private funds that are able to earn performance fees based on unrealized gains, are permitted to borrow in excess of one-half of net asset value, are permitted to have gross notional exposure in excess of twice net asset value, or are permitted to sell securities or other assets short.

Liquidity funds are funds that seek to generate income by investing in short-term securities while maintaining a stable net asset value for investors. Finally, private equity funds are funds that are not hedge funds, liquidity funds, real estate funds, securitized asset funds or venture capital funds and do not normally provide investors with redemption rights.

When classifying its funds, a manager needs to pay close attention to the instructions and definitions on Form PF and the fund's offering documents, which may give funds more trading latitude than they currently utilize to provide flexibility. This latitude may cause the fund to meet the definition of a hedge fund, and therefore subject the fund to expanded reporting.

Reporting requirements

Form PF utilizes the SEC's newly adopted definition of "regulatory assets under management" (RAUM). RAUM are the gross assets under management, without the subtraction of borrowings, short sales or other forms of leverage. Within a private equity fund, RAUM includes investors' unfunded commitments.

It is important to note that RAUM is different from the more commonly used "net assets under management" (NAUM), which is calculated by subtracting outstanding liabilities from fund assets. Form PF requires the use of RAUM to determine the requirement to complete certain Form PF sections.

Are you prepared to complete Form PF on time?

As firms are deep in the throes of Form PF and other regulatory initiatives, it will be difficult to remember that the initial goal was simply to provide risk information. As despair sets in among Form PF filers and you fear that you will never complete Form PF on time, here are several items you might find useful to remember in the midst of the process:

Are we fish or fowl?

Form PF filers' reporting obligations are not a simple determination. Even more daunting is fund aggregation for purposes of fund-level reporting. These decisions will take careful consideration as there will be many differences of opinion in reading the same words. Judgment calls require careful documentation to preserve the history in case of subsequent reviews or reclassifications.

The early bird gets the worm.

Form PF will require considerable time and effort. Most firms could not fill out Form PF in a weekend. This is a process, not a report. The compliance date is June 15, 2012, which would require large private liquidity fund advisers to file on July 15, 2012. Firms need to start the project quickly if they intend to file on a timely basis.

There are no stupid questions.

Form PF contains many ambiguities. In some responses, notional amounts and market values are commingled. The rolling submission dates are unclear since the SEC staggered the reporting deadlines. Firms should not be afraid to call the SEC and to seek clarifications or explanations.

Beware of snake-oil salesmen.

Software firms will over-emphasize their ability to deliver a unified solution and under-emphasize the effort required to integrate their solution into your organization. After you fill out Form PF yourself, you will be in a position to determine your system requirement.

Great pains grow from little aches.

Although the SEC admits that there will be inconsistencies between similar responses on Form ADV and Form PF, private fund advisers must be prepared to explain their inconsistencies. This will require contemporaneous reconciliations between the two forms and easily retrievable storage.

Seek out experience.

There are advisers available that have experience making detailed, frequent filings to regulatory bodies (call reports, FSA reports) and rating agencies (special purpose vehicles with investment grade ratings). This experience can help you determine how to access the required information quickly and can give you a sense of how to design your processes in order to deliver the information less painfully in the future.

When in doubt, document.

There will be many assumptions made in the first several filings of Form PF. Questions about those decisions will probably come a year or more after the decisions are made. A simple memo about the decision will help to jog memories when the questions come and provide contemporary evidence of intent.

Expect the unexpected.

There will be innumerable issues that arise as you fill out Form PF. Inevitably, the traders will decide to acquire a unique position or execute some futures contract with a bizarre extended value. A little forethought can limit this, but make sure that you leave some time to deal with last-minute exceptions.

Keep your sense of humor.

Form PF will be frustrating and require a lot of time. Firms will ask already stretched resources to do even more. With a little planning, the process can be successful and bring long-term benefits.

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