Category Archives: Regulation

SEC Provides Guidance on Registration of Advisers Related to Registered Investment Advisers

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On January 18, 2012, the Securities and Exchange Commission (the “SEC”)  issued a No-Action letter (the “2012 ABA Letter”) to the American Bar Association (the “ABA”), Business Law Section, providing guidance as to when certain entities affiliated with a registered investment adviser would be permitted to rely on the registered investment adviser’s registration, and would not be required to register separately as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”).  The 2012 ABA Letter confirms the SEC’s guidance on these issues in Question and Answer G.1. of its December 8, 2005 letter addressed to the ABA’s Subcommittee on Private Investment Entities and responds to additional related questions.  Question and Answer G.1. is referred to as the “2005 ABA Letter” and is further described below.  The continued applicability of the 2005 ABA Letter had been called into question by the amendments resulting from the repeal of the section 203(b)(3) private adviser exemption under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Continue reading →

Recent SEC Investment Adviser Enforcement Cases – Deficient Compliance Programs and Aberrational Performance

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HedgeOp would like to take the opportunity to highlight recent enforcement actions brought by the SEC Enforcement Division’s Asset Management Unit and remind all about the importance of  implementing a thorough compliance program and of maintaining a robust culture of compliance.

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Insider Trading Action: Exchange-Traded Funds (“ETFs”)

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The SEC appears to be focusing on markets and products not previously investigated in the insider trading context. According to Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, the SEC is “aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations.”
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Final Form PF Approved by CFTC

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Recently, the Commodity Futures Trading Commission (the “CFTC”) approved joint final rules under the Commodity Exchange Act (the “CEA”) and the Investment Advisers Act of 1940 (the “Advisers Act”) and the final Form PF (report by private fund advisers). The new rules implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Continue reading →

SEC To Finally Clarify Registration Extension?

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Weeks after an unofficial comment by a senior SEC staffer, we may finally find out the plans for a registration extension for hedge fund and other private fund managers. The SEC announced that it will be holding an Open Meeting on June 22nd where Item 1 of discussion includes:

The Commission will consider whether to adopt new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration of investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and address reporting by certain investment advisers that are exempt from registration.

Hopefully this will finally allow worried managers to know whether or not they will have until next year to file their Form ADVs. We will keep you posted of any developments coming out of the meeting.

FINRA 5131 Anti-Spinning Rule Delayed

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On May 18, 2011, the U.S. Securities and Exchange Commission approved certain amendments to the originally adopted version of FINRA Rule 5131 (the “anti-spinning rule”).  Most importantly, the recent amendments delay the implementation date from May 27, 2011 until September 26, 2011.  In addition, the old FINRA Rule 5131(b)(1) is deleted.  Such provision had required FINRA members to establish and maintain policies and procedures to ensure that investment banking personnel have no involvement or influence in the new issue allocation decisions of FINRA members.

The rule change can be found here.

Division of Investment Management Requests Extensions of Deadlines for Mid-Sized Advisers and Private Fund Advisers

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IA Watch is reporting that the Division of Investment Management has formally requested that the Securities and Exchange Commission (SEC) move to next year the deadlines for mid-sized advisers (certain advisers with between $25 million and $100 million in assets under management) to switch to state registration and for private fund advisers with more than $150 million in assets under management to register with the SEC.  IA Watch states: “The formal request moves this closer to becoming reality, should the Commission act on it.”

Robert E. Plaze, Associate Director of the Division of Investment Management, had suggested that extensions to the first quarter of 2012 were a possibility in his April 8, 2011 letter to David Massey, President, North American Securities Administrators Association, Inc. and Deputy Securities Administrator, North Carolina Securities Division.

“We anticipate that the Commission will complete its implementing rulemaking by July 21,2011 in accordance with the Dodd-Frank Act, but expect in connection therewith that the Commission will consider providing additional time for investment advisers affected by these provisions to come into compliance.”

With respect to the switch of mid-sized advisers to state registration, Mr. Plaze’s letter noted that once the SEC  adopts the implementing rulemaking, the Investment Adviser Registration Depository system (lARD) will “require re-programming to accept advisers’ transition filings” and that they “understand that the re-programming process will take until the end of the year to complete.”  As a result, under consideration was the possibility that  “all SEC-registered advisers would be required to report their eligibility for registration with the Commission in the first quarter of 2012.”  He went on to say that, even if the implementing rulemaking is completed prior to July 21, 2011,  private fund advisers will need time to register and come fully into compliance with the accompanying obligations, and that they “expect that the Commission will consider extending the date by which these advisers must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”

IA Watch‘s report is not surprising given recent reports in industry publications (including a May 2 report by IA Watch) that SEC staff members have indicated the expectation that the delays will go through.  One such statement was reported to have been made by Sara Crovitz, a Branch Chief in the Office of Chief Counsel in the Division of Investment Management, as  a participant in a DC bar luncheon panel discussion on “Cross Border Issues Affecting Investment Advisers in the World of  Dodd-Frank.”

SEC Division of Investment Management Staff Responds to Questions about Form ADV Part 2

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On March 18, 2011, the staff of the SEC’s Division of Investment Management issued responses to questions about the amended Part 2 of Form ADV.

The Division answered questions regarding the following topics, generally restating information already known about the compliance dates for delivery questions, but providing guidance not previously offered on the remaining issues:

  • compliance dates for delivery of Part 2A and Part 2B
  • Part 2A brochure format, material change and risk disclosure, filing and delivery requirements
  • “covered persons” for Part 2B brochure supplements
  • Part 2B brochure supplement delivery requirements

Among the responses offered are the following:

  • An offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV. (Question II. 6)
  • An adviser that is not required to deliver a brochure, but nevertheless chooses to prepare and deliver one, is not required to file the brochure with the SEC. (Question III. 1)
  • An adviser to a hedge or other private fund could meet its delivery obligation to the fund client by delivering the brochure to a “legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity.”  In its response, the staff cites the U.S. Court of Appeals D.C. Circuit 2006 decision in Goldstein v. Securities and Exchange Commission (“Goldstein”) that the “client” of an investment adviser managing a hedge fund is the fund itself and not any of the investors in the fund. (Question III. 2)

Despite the Goldstein decision, many advisers provide copies of their brochures to all investors in their funds, as a matter of best business practice.   It is expected that many advisers will continue to do so, as a matter of best business practice, despite the staff’s response to Question III. 2.

In their introduction to these responses, the staff of the Division of Investment Management state that they expect to update the site with their responses to additional questions “from time to time.”    Investment advisers  will continue to look for further guidance from the staff.

The full text of the Division of Investment Management staff responses may be found here and the final rule adopting the related amendments to Part 2 may be found here.

Proposed: Private Fund Adviser Systemic Risk Report Rules and Changes to CFTC Regulations

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This past week, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (“CFTC”) jointly proposed rules requiring SEC-registered investment advisers, CFTC-registered commodity pool operators (“CPOs”) and CFTC-registered commodity trading advisers (“CTAs”) that advise private funds to report certain information about their businesses and the private funds they manage.  Information reported on the new proposed forms will be confidential, to the extent permitted under applicable law, and will be used by the Financial Stability Oversight Council to help the Council assess and monitor the potential risk posed to the U.S. financial markets by the private funds.

The CFTC separately proposed related modifications to CPO and CTA regulations, including rescinding Commodity Exchange Act Rule 4.13(a)(3) and Rule 4.13(a)(4), two exemptions from CFTC registration used by many advisers to private funds investing in commodities. Unless otherwise exempt or excluded from the requirement to register, advisers previously exempt under these Rules would be required to register with the CFTC and the advisers and the commodity pools they advise would become subject to certain requirements, including disclosure, financial reporting and recordkeeping.  Registration with the CFTC generally includes registration of the adviser’s principals and associated persons, who would have to satisfy certain proficiency or examination requirements.

The Comment Period on the Proposed Rules will be open for 60 days following publication of the Proposed Rules in the Federal Register.