SEC, lawyers highlight Form PF challenges

In order to protect the broader economy from systemic risk, private equity managers may have to report to the US Securities and Exchange Commission as hedge funds. 

The requirement to report to the SEC as hedge funds would apply to GPs with funds that use large amounts of leverage or have the ability to sell assets short, the US regulator said in recently published guidance around its Form PF, a document intended to highlight systemic risk. 

Firms with those characteristics would have to report as hedge funds even if they do not in fact actually intend to incur leverage or short any assets, the SEC said. 

Private equity and hedge funds managing more than $150 million in assets must periodically file Form PF. The form will be held by regulators on a “confidential basis”, used only by agencies to sniff out systematic risk. Moreover GPs with more than $2 billion in assets will need to submit detailed fund information – such as the use of bridge loans, leverage placed on portfolio companies and other metrics regulators’ feel important for the wider economy.  

During recent interviews and webinars, private equity lawyers warned SEC registered firms that the form will likely be used for examination purposes, including a review of GPs’ performance data to identify any aberrational returns. 

Regarding GPs’ confidentiality, lawyers highlighted a “Wikileaks risk” in which information is publicly disclosed not in accordance with the privacy rules. 

One New York-based lawyer, a former SEC examiner, also warned that the agency may check to see that GPs’ Form PF data syncs with their other reporting forms. GPs’ should ensure “Form PF says the same thing as their investor relations material or Form ADV”. 

A separate lawyer told PE Manager that GPs should begin making preparations for how they collect information from investors and portfolio companies for reporting purposes. “Form PF will ask: ‘Who are your investors?’ but will ask advisors to classify them into categories they’re not used to seeing in federal securities laws”, the lawyer said, adding that portfolio companies should be able to provide data on a timely basis that is accurate and complete for reporting purposes. 

One challenge relating to investor relations is the possibility that LPs will request a copy of their GPs’ Form PF reports. If they do, “it might be held to the standards of advertising”, warned a third private equity lawyer. “So think about it in that context and repackage it in a format or content that makes more sense to investors and omit data points confidential to your organisation if need be.”

A last challenge raised by some lawyers was GPs’ responsibility to aggregate data with affiliated funds. Larger firms must include funds managed by affliates when calculating assets under management. “So if you have a related advisor listed on item 7 of ADV, you have to look at their funds to determine if you meet various thresholds,” elaborated the first private equity lawyer. “This is particularly an issue for smaller managers affiliated with larger ones. Even though their AUM is not large they are tied to larger firms”. 

Form PF, which has tiered compliance dates, will fall due this June for firms managing $5 billion or more in assets. All other firms will be required to file their first Form PF in the second quarter of 2013, based on information as of December 31, 2012.   

GPs can send any further questions to the SEC by emailing: FormPF@sec.gov.