Update on the new regulations and how they will impact you going forward

These are my notes from the “Update on the new regulations and how they will impact you going forward” session at the Private Fund Compliance Forum 2012. Excuse the typos and rambling nature. They are just my raw notes.


  • Karen Barr, General Counsel, Investment Adviser Association

Panel Members:

  • Jason E. Brown, Partner, Ropes & Gray LLP
  • Jason Mulvihill, General Counsel, Private Equity Growth Capital Council

Form PF

Should you be thinking about Form PF now? Depends. The reporting deadlines and substantive information varies depending on the type of fund and the size of the fund. If you filled out 7B1 in the Form ADV Part 1 then you need to file a Form PF.

Distinguishing between a hedge fund and private equity fund is a key to the reporting. It’s very technical. Can you charge a carry based on unrealized gains? Can you sell short? You may be a hedge fund. If you have different types of funds, you could be consolidated together to be a large hedge fund and have increased reporting obligations.

Good news. The filing of Form PF no longer has the “signing under penalty of perjury standard.” The SEC realized it’s more of an art than a science.

Focus on section 16 that asks for characterizations of investors. The SEC has made it clear that you need to gather the information on investors starting in March 2012. This is for new fund raising and transfers.
Is the Form PF information confidential? Supposedly. SEC says it will be confidential. Congress will have access. You can avoid listing the name of your fund.

Volker Rule

We are still waiting on the final wording of the Volker Rule. The Devil is in the details. The rule could limit the types of investors in private equity firms and limit the amount an investor could commit to a fund. There is lots of crafting going on. The final rule could be materially different from the proposed rule. There is a statutory compliance deadline starting on July 21, 2012. How do you become compliant with a rule that does not yet exist? Lots of uncertainty. Wait and see.

Incentive Compensation Rules

Section 956 of Dodd-Frank requires some disclosure and rule around executive compensation. The regulators issued a proposed rule. Firms will need to disclose compensation structure to regulators. Not the dollar amount, but how the compensation is calculated. Firms will need to analyze whether the compensation resulted in increased risk taking.

The level is $1 billion of asset. Not assets under management, but assets on the balance sheet. That would seem to exclude most private equity fund managers. You should expect some more clarification under the final rule. The proposed rule works well for banks, but gets murky when applied to fund managers. Look at question 1.O on Form ADV. If you checked that box, you are subject to this rule.
There is some concern that carried interest could be pulled into the 3 year holdback requirements under the proposed rule. That would seem strange since the carried interest has already been subject to a realization and usually lengthy investment period.

Treasury Regulations

There are treasury forms that have been on the books for years that nobody fills out.
Form SLT is the new form and the Treasury has used that as a tool to make firms aware of the other forms. Form SLT is based on foreign investments. The form is looking for more than $1 billion in foreign investments and more than $1 billion of foreign investors. There is an exclusion for direct investments.

Form S is also there for foreign investments and foreign investors. Add in Form SH.

BEA filings come out of the Department of Commerce, but Treasury helped publicize it. The BEA form is triggered if you own more than 10% of a foreign company. It requires lots of information. (The instructions say it will take 84 hours to complete the form and are required quarterly.)

FBAR is if you have control over a non-US account. Fortunately, it’s a short form. Add in FATCA and the proposed rules coming out on reporting for foreign accounts.

CFTC Regulations on swaps

The CFTC definitions are very broad. Trading even a small amount of commodities pulls you into the definition of a commodity fund. Dodd-Frank includes swaps into the definition of a commodity. The rules are not final yet. However, the CFTC has begun changing lots of other rules that get affected by the change in definition.

The CFTC has removed the broad exemption if you had all sophisticated investors, analogous to 3(c)(7). The other common exemption is a de minimis exemption. The broad exemption has been eliminated. There is a December 31, 2012 deadline for compliance. It’s tricky because a swap is not yet a commodity. There are lots of interpretive issues.

If you register as a commodity pool operator do the rules harmonize with the SEC’s investment adviser rules? No. The NFA (equivalent to FINRA) requires lots of information.

If you can fit under the de minimis exception, there is an annual filing requirement. For most private equity firms, you should be able to meet the de minimis exception. The threshold is 5% and 100% notional. The biggest footfall is likely to be hedging a credit facility before there is much investing.


What happened? It was surprise that there was such bi-partisan support for this bill.

The law repeals the ban on general solicitation and advertising. This is still subject to SEC rule making. Don’t start advertising yet.

Keep in mind that two of the SEC commissioners sent letters to Congress that they were opposed to the bill and may take a harsh view in implementing the rules.

The change to 12(g) raising the limit of holders of record above 500 to 2000 allows for bigger funds. Although it be unusual to have a private fund with so many LPs.