Rightly or wrongly, a consensus has emerged among global regulators that private funds – most notably, hedge funds and private equity funds – may collectively pose a risk to the global financial system. The often cited evidence of this view includes the 1998 collapse of Long Term Capital Management and the 2008 financial crisis. Neither, of course, conclusively demonstrates that private funds pose systemic risk, and we at the Hedge Fund Law Report have not seen persuasive evidence of the thesis. In fact, we have seen persuasive evidence to the contrary, namely, that the collective buying power of private funds mitigates systemic risk by providing, if you will, a “buyer of penultimate resort.” (The taxpayer remains the buyer of last resort.) When the going gets tough, it is hedge and private equity funds that typically buy the distressed assets, receive novations of derivatives and provide rescue funding to institutions teetering on the brink. See “Treatment of a Hedge Fund’s Claims Against and Other Exposures To a Covered Financial Company Under the Orderly Liquidation Authority Created by the Dodd-Frank Act
,” Hedge Fund Law Report, Vol. 4, No. 15 (May 6, 2011). But perception, demagoguery and skewed incentives often affect the shape of legislation and regulation more powerfully than evidence or economic reality. The perception of risk in the private funds industry has given us the reality of Form PF. Form PF generally calls for voluminous disclosure by private fund managers to regulators of fund, investor, counterparty, credit and other information. It calls for a level of disclosure that is unprecedented in the U.S. hedge fund industry. The form is legally complex and operationally challenging. On the legal side, its novelty means that there is no direct market practice to assess the form’s application or to guide completion. On the operational side, its novelty means that managers and service providers do not have dedicated systems in place to create, organize, scrub, update and secure the relevant data. See “Technical and Operational Considerations for Hedge Fund Managers in Connection with Preparing, Filing and Updating Form PF
,” Hedge Fund Law Report, Vol. 4, No. 37 (Oct. 21, 2011). To bring some clarity to the complexity, on October 25, 2011, Advise Technologies
and the Hedge Fund Law Report
co-sponsored a seminar on Form PF. The seminar consisted of two panels, the first focusing on legal questions raised by the form, and the second focusing on operational considerations in connection with the form. On October 26, 2011 – the day after our seminar – the SEC adopted Rule 204(b)-1 under the Investment Advisers Act of 1940 requiring periodic reporting by private fund managers on Form PF. In other words, we discussed proposed Form PF at the seminar and a day later the SEC adopted final Form PF. However, as detailed in this article, most of the changes from the proposed form to the final form involved thresholds and timing provisions. While the seminar covered thresholds and timing provisions, the more important discussion at the seminar focused on market color, relevant practice, context and lore. The final rule did not change any of that; and that is precisely the information that you as a hedge fund manager, investor or service provider need to grapple successfully with Form PF. Moreover, the final rule says nothing about operations – what you actually have to do to prepare, file and update the form – and that was an important focus of the seminar. In recognition of the ongoing relevance of the discussion at the seminar, the Hedge Fund Law Report is publishing a two-part series on changes to Form PF and the key legal and operational points made by seminar participants. This article – the first part of the two-part series – provides a line-by-line comparison of proposed Form PF and final Form PF, including the instructions and the form itself. To do so, this article links to a redline prepared by Advise Technologies highlighting the differences between the proposed and final instructions and forms. The second article in this series will summarize the key legal points made at the seminar. Taken together, the two parts of this series are intended to help HFLR subscribers determine whether they have to file Form PF, what they have to file, how they can go about filing and how their obligations have changed from the proposed rule to the final rule.