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SEC PROPOSES PRIVATE FUND REPORTING RULE

01.31.11

The SEC has recently proposed rules to require advisors of hedge funds and other private funds to report information for use in monitoring risk to the U.S. financial system as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act

Under the proposed reporting requirements, private fund advisors would be required to file a new reporting form – Form PF – periodically with the SEC. The amount of information reported and the frequency of reporting would depend on whether the reporting party constitutes a “large private fund adviser” or a “smaller private fund adviser.”

The proposed rules define a “large private fund adviser” as an adviser with $1 billion or more in hedge fund, liquidity fund (i.e., an unregistered money market fund) or private equity fund assets under management and a “smaller private fund adviser” as including all other private fund advisers.

As should be expected, large private fund advisers would be subject to heightened information reporting obligations. Information to be reported by large private fund advisors would include, among other things, (1) exposures by asset class, geographical concentration and turnover, (2) the types of asets in each of their liquidity fund’s portfolios and (3) certain information relevant to the risk profile of the funds, including the extent of leverage and/or bridge financing by the funds. Smaller private fund advisors would report only basic information regarding the private funds they advise.

Large private fund advisers would be required to file their Form PF quarterly. Smaller private fund advisers would be required to file their Form PF annually.

OUR TAKE: If private fund advisers read the Dodd-Frank Act, they knew that new information reporting requirements were on the way. In its proposed rules, the SEC appears to acknowledge that the benefits of additional reporting requirements should always be examined against the burdens that reporting imposes on the regulated community. Specifically, by breaking private fund advisers into two groups for reporting purposes, the SEC places the majority of the burden on the limited number of large private fund advisers (the SEC estimates only around 200), which the SEC projects account for more than 80% of assets under management. This seems to be a reasonable approach for the SEC to take to implement this component of the Dodd-Frank Act.

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