By Mail and Electronic Delivery
By Mail and Electronic Delivery
March 31,2011
1 CPIC is a coalition of private investment companies who are diverse in size and in the investment
strategies they pursue. Established in 2005, CPIC informs policy-makers, the media and the public about the
private fund industry and its role in the capital markets.
2 See ReI. No. IA-3145, Reporting by Investment Advisers to Private Funds and Certain Commodity Pool
Operators and Commodity Trading Advisors on Form PF, 76 Fed. Reg. 8068 (Feb. 11,2011), available at
http://www.sec.gov/rules/proposecl/201l/ia-3145fr.pdf.
3 See Pub. L. No. 111-203, § 404 (2010).
4 See 15 V.S.c. § 80b-4(b)(7)-(10).
415 Second St., N.E. ~ Suite 200 ~ Washington, DC 20002 ~ lei 202·715·0840 ~ fax 202·543·5781
The Honorable Mary L. Schapiro
March 31, 2011
Page 2
Under the proposal, investment advisers to hedge funds and other private funds that
are registered under the Advisers Act and manage one or moreyrivate funds would be
required to report information on new Form PF on a periodic basis. Private fund advisers
that are also registered with the Commodity Futures Trading Commission ("CFTC") as
commodity pool operators or commodity trading advisors would file Form PF to satisfy
5 See Testimony of James Chanos, Chairman, CPIC before the House of Representatives Financial Services
Committee: Hearing on Regulating Hedge Funds and Other Private Investment Pools (Oct. 6, 2009)
(available at http://financialservices.house.gov/media/file/hearingsIlIlichanos_testimony. pdf).
6 See Testimony of James Chanos, Chairman, CPIC before the House of Representatives Financial Services
Committee: Hearing on Regulating Hedge Funds and Other Private Investment Pools (Oct. 6, 2009)
(available at http://financialservices.house.gov/media/file/hearings/IIlIchanos_testimony.pdf), noting that
"regulators' lack of detailed information about private investment funds - the absence of a registration
requirement and the inability of a regulator to subject unregistered private funds to periodic reporting and
examination - may handicap the SEC in meeting its investor protection mandate, and may limit financial
regulators in addressing potential systemic risks."
7 See CPIC, Comment Letter dated November 5,2010 in response to Advance Notice ofProposed
Rulemaking Regarding Authority to Require Supervision and Regulation ofCertain Nonbank Financial
Companies, Financial Stability Oversight Council Release (Oct. 1,2020), 75 Fed. Reg. 61653 (Oct. 6,
2010").
8 See Report of the Asset Managers' Committee to the President's Working Group on Financial Markets,
Best Practices for the Hedge Fund Industry, Jan. 15,2009, available at
http://www.amaicmte.org/Public/AMC%20Report%20-%20Final.pdf. For example, the Report
recommended disclosures of possible risks associated with an investment fund, such as use of leverage, types
of assets held, counterparty credit risk exposure, valuation of investment positions, and restrictions on
redemptions (including redemption gates and side pocket investments). CPIC Chairman James Chanos
participated as a member of the Asset Managers Committee.
The Honorable Mary L. Schapiro
March 31, 2011
Page 3
certain systemic reporting requirements under proposed CFTC Rule 4.27(d). The amount
of information reported and the frequency of reporting would depend on whether a private
fund adviser is classified as a "large private fund adviser" or as a smaller private fund
adviser. "Large private fund advisers" would include any adviser with $1 billion or more
in hedge fund, "liquidity fund" (i.e., unregistered money market fund), or private equity
fund assets under management. All private fund advisers that do not fall within the
definition of a "large private fund adviser" would be classified as a smaller private fund
adviser.
Smaller private fund advisers would file Form PF only once a year as of 90 days
after the end of the adviser's fiscal year, and would only be required to report basic
information regarding their operations and the private funds that they advise, including
information on leverage, credit providers, investor concentration, and fund performance.
Smaller private fund advisers that manage hedge funds also would report information
about investment strategies, the percentage of assets managed using computer-driven
trading algorithms, significant counterparty credit risk, and trading and clearing practices.
Large private fund advisers would file Form PF on a quarterly basis within 15 days
of the end of a calendar quarter and provide more detailed information than smaller private
fund advisers. The information required of large private fund advisers would vary,
depending on the type of private fund (e.g., hedge fund, liquidity fund, or private equity
fund) that the adviser manages. Large hedge fund advisers would report on an aggregated
basis information regarding exposures by asset class, geographical concentration, and
turnover. In addition, for each managed hedge fund that has net asset value of $500
million or more, these advisers would report certain information relating to that fund's
investment, leverage, risk profile, and liquidity. Large liquidity fund advisers would
provide information on the types of assets in each of their liquidity fund's portfolios,
specified information relevant to the risk profile of the fund, and the extent to which the
fund has a policy of complying with certain provisions of Rule 2a-7 under the Investment
Company Act. Large private equity fund advisers would provide information about each
fund they manage, including the funds' borrowings and guarantees, the extent of leverage
incurred by their funds' portfolio companies, the use of bridge financing for portfolio
companies, and their funds' investments in portfolio companies in the financial industry.
CPIC Supports Detailed Reporting by Large Private Funds on Form PF; however,
the Proposed Filing Deadline for Larger Private Fund Advisers May be
Unworkable for Initial Reports.
The Commission has not yet decided upon the details of the electronic filing system
that will be used for Form PF. As discussed in the proposing release, the filing system will
need to have certain features, including special confidentiality protections designed to
ensure heightened confidentiality protections for Form PF filing information as required by
the DFA. At the same time, the system must allow for secure access by the Council and
other regulators as permitted under the DF A. The Commission has not yet selected the
system for the electronic filing or the filing fees that advisers would be required to pay the
operator ofthe system. The Commission is considering requiring private fund advisers to
eventually tag data filed on Form PF using a refined, future taxonomy to be defined by the
Commission, and is soliciting comment regarding whether all filings should be done in
eXtensible Markup Language ("XML") or an alternative format, such as eXtensible
Business Reporting Language ("XBRL").
understanding of the nature of the reporting mechanism, including logistics, fees, filing
requirements, and the level of security that will be accorded this information.
The Commission Should Not Create Broad Exemptions for Advisers to Private
Equity Firms.
CPIC believes the proposed rules are consistent with legislative direction in the
DFA to apply the registration, reporting, and record keeping provisions of the DFA to
private funds, including private equity funds, and we believe the Commission should resist
requests for broad exemptions for private equity funds.
In the proposing release, the Commission observed that international efforts have
not only focused on hedge funds, but also other types of private funds, such as private
equity funds, due to their potential systemic considerations. For example, an International
Monetary Fund ("IMF") staff paper has focused on "extending the perimeter" of effective
regulatory oversight so that it captures all financial activities that may pose systemic risks,
regardless of the type of institution in which it occurs. 10 The IMF paper states that
"[s]pecifically, entities engaged in financial activities on a leveraged basis should be
regulated regardless of the legal status of the institution-to capture all entities that
contribute to systemic risk on a significant scale."ll The proposing release further notes
that others recognize the need for monitoring the private equity sector because "having
information on its potentially systemically important interactions with the financial system
9 Testimony of James Chanos, Chairman, CPIC, before the House of Representatives Financial Services
Committee: Hearing on Regulating Hedge Funds and Other Private Investment Pools (Oct. 6, 2009),
available at http://fmancialservices.house.gov/media/file/hearings/111/chanos_testimony.pdf.
10 See Ana Carvajal et al., The Perimeter ofFinancial Regulation, IMF Staff Position Note SPN/09/07 (Mar.
26,2009), available at http://imf.org/external/pubs/ftJspn/2009/spn0907.pdf (hereinafter "IMF Staff Paper"),
cited in ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068, 8071.
11 See IMF Staff Paper, supra note 11, at 8.
The Honorable Mary L. Schapiro
March 31, 2011
Page 6
are an important part of regulators' obtaining the complete picture of the broader financial
system that is so vital to effective systemic risk monitoring." 12
The Commission also stated that its initial view, after consultation with staff
representing the Council's members, is that the "activities of private equity funds, certain
of their portfolio companies, or creditors involved in financing private equity transactions
may be important to the assessment of systemic risk and, therefore, that large advisers to
these funds should provide targeted information on Form PF to allow FSOC to conduct
basic systemic risk monitoring.,,13 The release enumerates several risks of the private
equity business model that may be cause for concern, including the reliance on banks to
provide bridge financing for leveraged private equity transactions who could be forced to
hold the financing if market conditions worsen, and the prospects for leveraged buyouts of
systemically important entities. 14 The Commission also states its view, shared by other
Council members, that "private equity transaction financings, and their interconnected
impact on the lending institutions" could be a useful area for the Council to monitor so that
it may have a more complete picture of the financial services marketplace in order to
identify potential threats to the. financial stability of the U.S. financial system. IS We agree.
We also note that the level of detail required by Form PF varies depending on the
type and size of private fund. Large Private Fund Advisers would be required to report
more information on Form PF than smaller private fund advisers, and a large hedge fund
adviser would report more information about itself and the funds that it advises than would
a large liquidity fund adviser, which in tum would report more information than a large
private equity fund adviser. 16 The burden imposed on large private equity fund advisers
under the proposed rules is less than for other large private fund advisers, and we believe
the Commission should not be pressured to scale it back further or provide broad
exemptions for private equity funds.
12 See ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068, 8071.
13 See ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068, 8074.
14 See ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068, 8074-8075.
15 See ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068, 8075.
16 See ReI. No. IA-3145, supra note 2, at 76 Fed. Reg. 8068,8085.
The Honorable Mary L. Schapiro
March 31, 2011
Page 7
Under subsections (b )(8) and (9) of Section 204 of the Advisers Act,
"[n]otwithstanding any other provision oflaw," the Commission, other government
agencies and self-regulatory organizations may not be compelled to disclose reports or
records that are required to be maintained or filed under Section 204(b). In addition,
proprietary information obtained from such records and reports, such as trading strategies,
research methodologies, software and trading data, must be protected from disclosure
under the Freedom of Information Act ("FOIA"). Further, even the transfer of such reports
and records to other regulators must be restricted. Such information may be furnished to
the FSOC only as necessary for the assessment of systemic risks that are presented by a
private fund, and records provided to the FSOC also must be exempt from public
disclosure under FOIA. 18
Because of the irreparable harm that would inure to private funds if their
confidential, proprietary information were to leak into the public domain or the possession
of unauthorized users, the Commission must establish procedures and systems to protect
information that is filed electronically on Form PF from hacking and any other means by
which such information could leak into the hands of unauthorized persons or the public
domain. 2o
Sincerely,
James S. Chanos
Chairman
Coalition of Private Investment Companies