On January 18, the Securities and Exchange Commission issued a no-action letter (the 2012 Letter) in response to a number of questions relating to the registration requirements of certain entities that are affiliated with registered investment advisers.
Continue Reading...On October 26, the Securities and Exchange Commission adopted Form PF, which it jointly designed with the Commodity Futures Trading Commission to collect systemic risk data about hedge funds and other private funds. The CFTC is expected to vote on adopting the form within the next week. While Form PF is not yet available, SEC Chairman Mary Schapiro indicated that the new form reflects changes to the original proposal. These changes include:
Continue Reading...On July 26, the Securities and Exchange Commission adopted Rule 13h-1 under Section 13(h) of the Securities Exchange Act of 1934. The rule is intended to help the SEC identify market participants engaged in substantial trading, obtain information needed to monitor the impact of those trades, and analyze such market participants’ trading activity.
Continue Reading...Co-authored by Sarah E. Connolly
On July 12, the Securities and Exchange Commission issued an order raising the thresholds for determining who is a "qualified client" for purposes of Rule 205-3 under the Investment Advisers Act of 1940. Rule 205-3 exempts an investment adviser from the prohibition against charging a client performance fees in certain circumstances, including when the client is a qualified client. Under the order, a qualified client is one who: (1) has at least $1 million under the management of the adviser immediately after entering into the advisory contract, or (2) the adviser reasonably believes has a net worth of more than $2 million at the time the contract is entered into. These thresholds were raised from $750,000 and $1,500,000, respectively, to adjust for inflation, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC's order becomes effective on September 19.
Continue Reading...Co-authored by Maxwell Li
On July 11, the U.S. Government Accountability Office (GAO) released a report on the feasibility of forming a self-regulatory organization (SRO) to provide primary oversight of private fund advisers. The report was part of a mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act to address the potential gap in the regulation of private fund advisers. In preparing the report, GAO reviewed federal securities laws, the recently completed Securities and Exchange Commission study on the investment adviser examination program, past regulatory and legislative proposals to create an SRO for investment advisers, and associated comment letters. GAO believes that the formation of a private fund adviser SRO is feasible but includes challenges such as the passage of new legislation, raising sufficient start-up capital and reaching agreements on fee and governance structures. The report also notes that while a private fund adviser SRO could supplement and help the SEC's oversight of investment advisers, the fragmentation between regulation of private fund advisers and non-private fund advisers could lead to regulatory gaps, duplication and inconsistencies.
Click here to read the GAO report.
Click here to read a summary of the SEC's study on the investment adviser examination program in the January 21 edition of Corporate and Financial Weekly Digest.
Click here to read a summary of industry comments on the desirability of a private fund adviser SRO in the November 12, 2010, edition of Corporate and Financial Weekly Digest.
Co-authored by Robert Grundstein
The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority's proposed rule changes to Rule 5131 that delete paragraph (b)(1) and delay the implementation date of paragraphs (b) and (d)(4) until September 26. Removal of paragraph (b)(1) of Rule 5131, which would have required members to establish, maintain and enforce policies and procedures reasonably designed to ensure that "investment banking personnel" have no involvement or influence (directly or indirectly) in the members' new issue allocation decisions, simplifies the spinning prohibitions on FINRA members and eliminates potential constraints on certain necessary functions traditionally performed by syndicate personnel. Postponing the implementation date will enable FINRA members to develop a reliable identification process for new issues allocations and to modify existent order handling systems to prevent the acceptance of market orders in new issue shares, thereby promoting effective compliance with Rule 5131 in the future.
Click here to read the SEC's release.
Click here to read a summary of FINRA's proposed changes to Rule 5131 in the May 6 edition of Corporate and Financial Weekly Digest.
Co-authored by Robert Grundstein
Section 403 of the Dodd-Frank Wall Street Reform and Consumer Protection Act repeals, as of July 21, the private adviser exemption in Section 203(b)(3) of the Investment Advisers Act of 1940 and will require advisers relying on that exemption (including advisers to many hedge funds and other private funds) to register with the Securities and Exchange Commission.
Continue Reading...The U.S. Department of the Treasury has published a revised version of, and has delayed the first required filing of, the monthly report to the Federal Reserve Bank relating to the aggregate holdings of long-term securities by U.S. and foreign residents (Form SLT). Investment advisers and/or private investment funds that exceed the $1 billion threshold described below must file their first Form SLT report no later than October 23.
Continue Reading...Co-authored by Maxwell Li
On February 8, the U.S. Federal Reserve Board adopted a final rule to implement the conformance period for compliance with the Volcker Rule, which generally prohibits banking entities from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The Volcker Rule generally provides banking entities two years to bring their activities and investments into compliance and allows the Board to extend this conformance period under certain conditions. The prohibitions and restrictions of the Volcker Rule take effect on the earlier of July 21, 2012, or 12 months after the issuance of final regulations. The conformance period will generally extend through the date that is two years after the effective date, and this period may be extended by the Board for up to three additional one-year periods if the Board determines that such extension(s) would not be detrimental to the public interest. The Board clarified that it will not grant all three one-year extensions at a single time as requested by several commenters, but will instead grant up to three separate one-year extensions of the general conformance period.
To read the Federal Reserve adopting release, click here.
To read the Federal Reserve press release, click here.
Co-authored by Palash Pandya
On January 25, the Securities and Exchange Commission proposed rules amending the accredited investor standards under the Securities Act of 1933 to reflect the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules would amend Rules 215 and Rule 501(a)(5) of the Securities Act to exclude the value of a person's primary residence from the $1 million net worth (or joint net worth) test for determining whether a person is an "accredited investor" under Regulation D. The proposed rules would also amend Rules 215 and Rule 501(a)(5) to clarify that net worth is calculated by excluding only the investor's net equity in its primary residence by adding the phrase "calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property." While this clarification (as well as the technical and conforming amendments referenced below) supplements Section 413(a) of the Dodd-Frank Act, the exclusion itself was effective upon enactment of the Dodd-Frank Act.
Continue Reading...Co-authored by Joseph Iskowitz, Robert Grundstein and Maxwell Li
On January 18, the Financial Stability Oversight Council (FSOC) took three actions to satisfy statutory obligations imposed on it under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
1. Study on Implementation of the Volcker Rule
FSOC released the study on how best to comprehensively implement the Volcker Rule in a manner that constrains risk-taking by, and promotes the safety and soundness of, banking entities that is required under Section 619 of the Dodd-Frank Act. The study included the following key recommendations by the FSOC that seek to identify and eliminate prohibited proprietary trading activities and investments in or sponsorships of hedge funds and private equity funds by banking entities:
Continue Reading...Co-authored by Robert Grundstein
In an open meeting scheduled for November 19, the Securities and Exchange Commission will consider proposing rules that would increase the statutory threshold for registration by investment advisers with the SEC, require advisers to hedge funds and other private funds to register with the SEC, and address reporting by certain investment advisers that are exempt from registration. Other proposed rules to be considered would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States, and clarify the meaning of certain terms included in a new exemption for foreign private advisers.
To read the SEC News Digest click here.
Co-authored by Maxwell Li
The Securities and Exchange Commission filed a complaint on October 19 in the U.S. District Court for the Northern District of Georgia against hedge fund portfolio managers Paul Mannion, Jr. and Andrew Reckles and their investment advisory entities, PEF Advisors LLC and PEF Advisors Ltd., for defrauding investors in the Palisades Master Fund, L.P. According to the complaint, Mr. Mannion and Mr. Reckles knowingly or recklessly overvalued Fund investments that they placed in a “side pocket” and charged excessive management fees to the Fund while simultaneously selling millions of dollars worth of the same securities from their personal accounts. The complaint also alleges that the defendants stole and exercised warrants belonging to the Fund, misappropriated investor cash and securities on other occasions to make personal investments, and made material misrepresentations regarding their short trading positions in order to participate in a PIPE transaction. The SEC is charging defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and is seeking injunctive relief, disgorgement of profits, prejudgment interest and financial penalties.
To read the SEC’s press release, click here.
To read the SEC’s complaint, click here.
See "Dodd-Frank Reform Bill May Put a Damper On Private Placements" in SEC/Corporate. For purposes of the "accredited investor" test under Regulation D, effective immediately, the value of an individual's primary residence is no longer included as a component of net worth. All issuers, including hedge and private equity funds, currently engaged in private placements in the U.S. relying on Rule 506 of Regulation D must update their subscription documents immediately and take this new standard into account for pending and future subscriptions that were not consummated prior to July 21.
Click here to read the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
On July 1, the Securities and Exchange Commission adopted Rule 206(4)-5 under the Investment Advisers Act of 1940 to protect public pension plans and other government investors by deterring advisers from participating in “pay to play” practices. The new rule applies to investment advisers that are registered (or required to be registered) with the SEC or are exempt from registration under Section 203(b)(3) of the Advisers Act, including investment advisers to any “covered investment pool” in which a “government entity” (including public pension plans and other government investors) invests or is solicited to invest. Most, if not all, advisers that provide discretionary management with respect to public pension fund assets would fall under the scope of the new rule. “Covered investment pools” include entities that would be investment companies but for the exceptions provided by Sections 3(c)(1), 3(c)(7) or 3(c)(11) of the Investment Company Act of 1940, and any registered investment company that is an investment option under a government plan or program.
The new SEC rule has three key elements:
The SEC also adopted amendments to the books and records maintenance obligations in Rule 204-2 under the Advisers Act to require registered investment advisers that provide investment advisory services to government entities to make and keep additional records related to political contributions made by such advisers and their covered associates.
Rule 206(4)-5 and the recordkeeping requirements in the amendment to Rule 204-2 become effective 60 days after their publication in the Federal Register, and compliance will generally be required within six months of the effective date. However, the SEC has allowed one year for compliance with the prohibition on paying third-party marketers who do not meet the new requirements and for all of the requirements (under both Rule 206(4)-5 and Rule 204-2) for advisers to registered investment companies that are covered investment pools.
To read the SEC’s press release on Rule 206(4)-5 click here.
To read the Adopting Release click here.
Click here for more information on the Proposing Release in the July 24, 2009, edition of Corporate and Financial Weekly Digest.
Co-authored by Joseph Iskowitz
On May 28, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act of 2010 by a vote of 215 to 204. Among other things, the bill would tax a specified percentage of the income allocated to an interest in an investment fund or an investment real estate partnership held by the fund’s manager or other persons related to the manager disproportionately to capital invested—often referred to as the “carried interest”—as well as the gain from a sale of such interest as ordinary income. The bill would treat 50% of such income and gain as ordinary income prior to January 1, 2013, and 75% of such income and gain as ordinary income thereafter. Amounts treated as ordinary income under the provisions of the bill would also be deemed “self-employment income” for purposes of the self-employment tax, although the largest part of the self-employment tax is still capped. The bill is proposed to be effective January 1, 2011, for funds whose taxable year is the calendar year. The bill will now be sent to the Senate for its approval, and if approved, the bill is expected to be signed into law by President Obama.
To read the text of the bill, click here.
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