Compliance Avenue

The Dodd-Frank financial reform bill, signed into law by President Obama on July 21, 2010, has left behind an odd but important ambiguity for investment advisers located in New York state.  The law requires most investment advisers with less than $100 million in assets under management to register with the securities commissioner of the state where the adviser maintains its principal office and place of business, provided that the adviser “would be subject to examination as an investment adviser” by such commissioner.  Unlike most other states, however, New York has never conducted examinations of investment advisers and currently its General Business Laws provide no specific authority for such examinations.

The Investment Adviser Association (the “IAA”), a not-for-profit association representing the interests of federally registered investment advisers, has estimated that approximately 350 New York-based advisers would be forced to de-register with the SEC as a result of the Dodd-Frank law.  David Tittsworth, the executive director of the IAA, has commented that “the answer about where they register is unclear.  It’s highly likely that the SEC will, in time, issue some sort of transitional rules that will deal with this and other questions.”

In order to avoid leaving these New York advisers in “no man’s land”, one of two responses is likely before the law takes effect in July of next year: either the SEC will bring these advisers back within its jurisdiction or New York will adopt an examination program to meet the requirements of the law.  New York advisers affected by the law will have to sit tight for the time being until guidance is released.

On July 21 — the same the day that President Obama signed into law a landmark piece of financial legislation that (among other things)  significantly increases the number of managers that will be required to register with the SEC as investment advisers — the SEC voted unanimously to adopt significant amendments to the Form ADV Part 2, which is the principal disclosure document (commonly referred to as the “brochure”) that an SEC-registered investment adviser must provide to its clients and prospective clients.

As described more fully below, the amendments will (among other things) require advisers to make their brochures publicly available via electronic filing, and will change the format of the brochure from its current “check the box” approach to a more narrative, “plain English” approach.

The amendments are intended to substantially improve the quality of the disclosures advisers provide to their clients.  As stated by SEC Chairman Mary L. Schapiro:

“These changes are designed to provide clients with greater information about the individuals who will provide them with investment advice.  These amendments will help transform the brochure into a plain English narrative that is well-suited to serve investors’ needs and describes the adviser’s conflicts, compensation, business activities, and disciplinary history.”

Read the rest of this entry »

Earlier today the Senate voted to approve an amendment to the portion of the financial regulatory reform bill dealing with “too big to fail” financial institutions.  The amendment is the result of an agreement reached earlier today between Senator Chris Dodd (D-Conn.), the chairman of the Senate Banking Committee, and Senator Richard Shelby (R-Ala.), the ranking member of that committee.

The amendment excludes the $50 billion liquidation fund previously proposed in the bill, opting instead to cover the costs of liquidations from asset sales and, in case of shortfalls, from fees assessed against other large firms.

The Senate also approved an amendment offered by Senator Barbara Boxer (D-CA) that would prohibit the use of taxpayer funds to bail out financial institutions.

Today’s vote was the first formal movement on the reform bill since Republican senators allowed debate to begin late last week on the legislation, and has cleared the way for voting to proceed on the hundreds of other amendments being proposed by senators from both sides of the aisle.

Advisers Act Rule 206(4)-7 requires that SEC-registered hedge fund managers conduct an annual compliance review of their compliance infrastructure and procedures. In adopting the Rule, the SEC did not specify exactly what the annual review should entail.

Today, HedgeOp Compliance CEO Bill Mulligan taught a webinar on “Conducting an Annual Compliance Review” as part of HedgeOp’s Excellence in Compliance seminar series.  This seminar looks at HedgeOp’s suggested method for conducting an annual review including: review of compliance inventory items, conflicts of interest of review, use of employee and service provider questionnaires and more.   This seminar is not only geared towards SEC-registered managers, but also unregistered managers looking to conduct an annual compliance review as a form of “best practice.”

Download Presentation Materials

For all of the SEC registered investment advisers out there, don’t forget that your annual ADV Part 1 update filing is due at the end of march (90 days after fiscal year end).  Update filings are made via the IARD system and AUM-based filing fees will be required this year.

While you’re thinking about Form ADV’s, don’t forget that some states require that you submit a copy of your ADV Part II to them (if you have made a notice filing in that state).  For example, New York State requires that advisers who have made notice filings to the state must submit a copy of their ADV Part II to the NYS Dept. of Law.  An updated copy of Part II must also be offered to your investors and advisory clients once a year.

On December 16th, the SEC announced in a press release that they have approved certain amendments to the Advisers Act custody rule (Rule 206(4)-2). Amendments to this rule were originally proposed in May 2009. The final rule was released on December 20, 2009 and incorporates many of the amendments proposed in May, but also contains several modifications to the May 2009 proposal particularly with respect to the impact on advisers to pooled investment vehicles.

The Release actually makes a number of specific suggestions for additional compliance procedures that should be considered.

A few highlights of the final rule amendments include:

Read the rest of this entry »

Eight federal regulators (including the SEC and CFTC) recently released a final version of a model privacy notice that will make it easier for consumers (i.e. investors/advisory clients) to understand how financial institutions collect and use personal information.

As way of background, the Gramm-Leach-Bliley Act contains a series of requirements governing the disclosure and use of non-public personal information by financial institutions.   The GLB Act requires the SEC (among others) to carry out the purposes of the provisions and establish standards for their application.  The SEC’s Reg S-P covers investment companies, broker/ dealers and registered investment advisers.  In 2006, the Financial Services Regulatory Relief Act of 2006 amended the GLB Act to require the applicable agencies to provide a succinct model form that allows consumers to easily compare the privacy practices of different financial institutions.

The initial proposed form was released in 2007 and after a comment and research period, a new model form has now been released. This new model form (there’s actually two versions–one with opt-out and one with no opt-out), which can be found here, provides a safe harbor for complying with the privacy rules.

Willkie Farr & Gallagher has a very nice summary of some of the other features and drawbacks of the new model privacy form.

All registered investment advisers must file a Form ADV with the SEC and update it as necessary.   In this brief educational post, we discuss some of the basics about the Form ADV and the important compliance issues that all registered managers should know about.

The Form ADV has two parts:

• Part 1 - This online form discloses general information about the Manager and its key personnel (e.g., disciplinary history, number of clients, assets under management, custody issues, identity of Chief Compliance Officer, etc.).  Form ADV Part 1 is filed electronically via the IARD system, is publicly available and must be updated on an annual basis.
• Part II – This part discloses the Manager’s services, fees, privacy policies, proxy voting procedures, brokerage practices, conflicts, and investment strategies.  Part II serves as the brochure that MUST be provided to potential clients prior to entering into an advisory services agreement and it must also be offered to clients on an annual basis.  The Part II is not regularly submitted to the SEC and is not publicly available.  It should be noted however that the SEC has released a proposed rule that WOULD result in significant changes to ADV Part II.  If adopted, ADV Part II would become “ADV Part 2”, would be electronically filed via the IARD system, and would require a “plain English” format. Read the rest of this entry »

With an apparent push by U.S. Congress to enact Hedge Fund Registration Law by year end, hedge fund managers that were against previous registration proposals may be able to rest a bit easier.  It seems that the hedge fund lobby, anchored by the Managed Fund Association, is making its presence felt on Capitol Hill.  With the appointment of Richard Baker, a former chairman of a subcommittee of the House Financial Services Committee, as the MFA head, it seems the political ties have reaped some rewards.  As the NY Times points out:

“the proposals for hedge funds laid out by the Obama administration, as part of its overhaul of financial regulation, are strikingly similar to those that hedge fund lobbyists said they would accept.”

So with an uptick of political contributions from hedge funds (and their professionals) and the increased political exposure, the ultimate question is:  Will these efforts soften the regulatory blow on the industry?  Only time will tell…

If you read our post on the hedge fund registration bills that are currently in congress, you may start to get the feeling that hedge fund registration is all but inevitable.   The question that a lot of hedge fund managers are now facing is: when should I pull the trigger on registration?  Do I wait until legislation is passed or do I get ahead of the curve and register now? Read the rest of this entry »