Articles Posted in Investment Advisers

Published on:

By

The Securities and Exchange Commission has proposed a new rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act to define the term “family offices.” Advisers falling within this definition will be excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940 and will therefore not be required to register with the SEC. Many family offices had previously relied on the “private adviser exemption” from registration, which exempted advisers with fewer than 15 clients from the registration requirement of the Advisers Act. As we have previously discussed, the Dodd-Frank Act removed the private adviser exemption from the Advisers Act.

Proposed Rule 202(a)(11)(G)-1 defines a family office as any firm satisfying the following three conditions:

  • Family Clients. Family offices may only provide investment advice to “family clients.” Family clients include family members, certain employees of the family office, charities established and funded exclusively by family members, trusts or estates existing for the sole benefit of family clients and entities wholly owned and controlled by family clients. Former family members may retain investments held through a family office but may not make new investments.
  • Ownership and Control. The family office must be wholly owned and controlled by family members.
  • Holding Out. The family office may not hold itself out to the public as an investment adviser.

The SEC noted that a family office that fails to meet the requirements of the new rule would still be able to seek an exemptive order from the SEC.

Comments on the proposed rule must be received by the SEC by Nov. 18, 2010.

Published on:

By

On September 22, 2010, the Managed Funds Association submitted initial comments to the Securities and Exchange Commission and the Commodity Futures Trading Commission on regulatory topics under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The MFA’s comments reflected concerns that the broad wording of the Dodd-Frank Act would result in certain provisions being inappropriately applied to private investment funds. To address these concerns, the MFA proposed that:

  • the SEC not create a self-regulatory organization to oversee investment advisers;
  • the SEC and the CFTC adopt guidance clarifying the criteria relevant to determining whether an investment adviser or a CTA that is registered with one of the agencies can rely on the relevant exemption from registration with the other agency;
  • strong confidentiality safeguards be put in place to protect proprietary information of private fund advisers provided to the SEC or CFTC;
  • appropriate implementation periods be provided to allow market participants time to adjust to any change in the definitions of “accredited investor” or “qualified client;”
  • the SEC define “accredited investor” to include “knowledgeable employees” of a private investment fund and amend Rule 3c-5 under the Investment Company Act of 1940 to expand the types of employees who can qualify as “knowledgeable employees” under that Rule;
  • the SEC and CFTC define “Security-Based Swap Dealer” (“SSD”) to exclude those market participants who are not in the business of buying and selling securities as well as those who buy and sell for their own account;
  • the SEC and CFTC exclude swap customers from SSD registration and regulation with respect to their cleared security-based swaps;
  • in setting capital requirements for non-bank Major Security-Based Swap Participants (“MSSPs”), the SEC and CFTC count collateral posted by such non-bank MSSPs towards any capital requirements;
  • position limits not be imposed on swaps;
  • the SEC not apply rules prohibiting incentive-based compensation to advisers of private investment funds;
  • the SEC retain the existing reporting periods under Section 13(d) and Section 16(a) of the Securities Exchange Act of 1934; and
  • the SEC not impose a new standard of conduct for investment advisers with retail customers.
Published on:

By

The Securities and Exchange Commission has published its schedule for adopting rules to implement the Dodd-Frank Act. The proposed timetable for adopting rules related to the oversight of investment advisers and exempt offerings is as follows:

October – December 2010

  • §§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk
  • §§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
  • §409: Propose rules defining “family office”
  • §410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act
  • §418: Propose rules to adjust the threshold for “qualified client”
  • §413: Propose rules to revise the “accredited investor” standard
  • §926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

January – March 2011

  • §913: Report to Congress regarding the study of the obligations of brokers, dealers and investment advisers
  • §914: Report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement
  • §919B: Complete study of ways to improve investor access to information about investment advisers and broker-dealers

April – July 2011

  • §§404 and 406: Adopt rules (jointly with the CFTC for dual-registered investment advisers) to implement reporting obligations on investment advisers related to the assessment of systemic risk
  • §§407 and 408: Adopt rules implementing the exemption from registration for advisers to venture capital firms and to certain advisers to private funds
  • §409: Adopt rules defining “family office”
  • §410: Adopt rules and form changes to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act
  • §418: Adopt rules to adjust the threshold for “qualified client”
  • §413: Adopt rules to revise the “accredited investor” standard
  • §926: Adopt rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated
Published on:

By

Bloomberg reports that the SEC is engaged in a probe of investment advisers who invest client assets in hedge funds, funds of funds, private equity, venture capital and other alternative investments. The SEC’s Office of Compliance Inspections and Examinations has recently requested that advisers provide extensive information about their alternative investments, particularly in regards to the due diligence processes used when evaluating alternative investments. A copy of the letter sent by the OCIE to examined advisers and the accompanying information request list is available here.

“This is further evidence of the SEC’s more proactive approach to the hedge-fund industry,” said Jay Gould, a partner at Pillsbury Winthrop Shaw Pittman LLP in San Francisco. “Hedge-fund managers, including funds of funds, can expect the agency to take a greater interest in their policies, practices and their relationships with investors and other fund managers.”

Published on:

By

As we have previously discussed here, the Securities and Exchange Commission adopted significant changes to Part 2 of Form ADV. Among other things, the new Part 2 requires greatly expanded disclosure presented in a narrative, plain English format. The California Department of Corporations has now also adopted the new Part 2, effective October 12, 2010, thereby subjecting California-registered investment advisers to these same disclosure requirements. Compliance dates for California investment advisers are as follows:

  • As of January 1, 2011 all new investment adviser applicants will have to file the new Part 2 of Form ADV as part of their application.
  • As of January 1, 2011 all licensed investment advisers will need to incorporate the new Part 2 of Form ADV with their next filing of an amendment to Form ADV, or their annual updating amendment to Form ADV.
  • Between October 12, 2010 and January 1, 2011 applicants and currently licensed investment advisers filing amendments to their Part II of Form ADV may use either the current Part II or the new Part 2.
Published on:

By

In its first regulation implementing the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission announced today its adoption of a temporary rule requiring municipal advisors to register with the SEC by October 1, 2010.

“Municipal advisors” are persons who provide advice to a state or local government regarding municipal derivatives, guaranteed investment contracts, investment strategies or the issuance of municipal securities. The term is also defined to include persons who solicit business for these advisory services from a state or local government on behalf of a third party broker, dealer, municipal securities dealer, municipal advisor or investment adviser.

Municipal advisors must register with the SEC by completing and submitting new Form MA-T, which requires a municipal advisor to disclose certain basic identifying and contact information concerning its business, indicate the nature of its municipal advisory activities, and supply information about its disciplinary history and the disciplinary history of its associated municipal advisor professionals. Municipal advisors must amend the form whenever any identifying or contact information or disciplinary information has become inaccurate in any way.

Form MA-T and the Municipal Advisor Temporary Registration website can be accessed through the SEC’s website. Given the need to obtain an ID and password prior to submitting Form MA-T, it is recommended that municipal advisors begin the registration process immediately.

Published on:

By

On July 21, 2010, the Securities and Exchange Commission voted to adopt changes to Part 2 of Form ADV (commonly referred to as the “brochure”), which is the principal disclosure document provided by SEC-registered investment advisers to their clients. SEC Chairman Mary Shapiro described the changes as being necessary to ensure that the information most relevant to clients is included in the brochure and that such information is presented in a way that is accessible to investors.

The amendments drastically alter both the form and content of Part 2. The principal changes are to require:

  • Narrative, plain English disclosure. Part 2 previously required advisers to respond to a series of multiple-choice and fill-in-the-blank questions organized in a “check-the-box” format.  The revised Part 2 directs advisers to provide a narrative brochure written in plain English. Advisers are to tailor the presentation of their disclosure to their clients’ level of financial sophistication, employ clear, concise language, use examples and otherwise seek to ensure that material information is effectively communicated to clients.
  • Expanded disclosure. The amended Part 2 requires advisers to discuss more topics and provide more detailed disclosure regarding their business and employees, particularly in regards to any arrangements that may give rise to conflicts of interest. In addition to the information explicitly required to be disclosed in Part 2, advisers have a fiduciary duty to provide clients with all material information regarding the advisory relationship. Such disclosure may be included in Part 2 or disclosed to clients by some other means.
  • Public accessibility. Part 2A of Form ADV must be filed electronically and will be publicly available on the SEC’s website.

Advisers with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011. Given the need to provide greatly expanded and more individually tailored disclosure, investment advisers should anticipate that their next annual update will be a much more time and resource intensive exercise and involve the creation of a new, comprehensive disclosure document. Accordingly, they should begin their preparations, including discussions with outside counsel, well in advance of their filing deadline.

The revised Part 2 consists of two sub-parts: Part 2A (the “brochure”), which contains 18 disclosure items about the advisory firm, and Part 2B (the “brochure supplement”), which provides information about certain advisory personnel.

Part 2A – The Brochure

Content

Part 2A requires advisers to create narrative brochures responding to the following 18 separate disclosure items.

Item 1. Cover Page. The adviser must disclose on the cover page of its brochure the name of the firm, its business address, contact information, website (if applicable) and the date of the brochure. The brochure must also include a statement that the brochure has not been approved by the SEC or any state regulator.

Item 2. Material Changes. An adviser amending its brochure must identify and discuss the material changes since the last annual update. This information must be provided on the cover page, the page immediately following the cover page, or in a separate document accompanying the brochure.

Item 3. Table of Contents. The brochure must include a table of contents detailed enough to permit clients and prospective clients to locate topics easily.  Advisers must present information in the same order and under same headings as listed in Part 2A of Form ADV.

Item 4. Advisory Business. Item 4 requires each adviser to describe its advisory business, including how long it has been in business and the types of advisory services it offers. If an adviser offers substantially different types of advisory services, it can choose to prepare separate brochures so long as each client receives all applicable information about services and fees.

An adviser must also disclose the amount of client assets under its management. For the purpose of calculating the amount of assets under management for this Item, the adviser may use a method that differs from the method used to report assets under management in Part 1A of Form ADV.  Advisers must update the amount of assets under management annually (as part of their annual updating amendment) and make interim amendments only for material changes in assets under management when they are filing an “other than annual amendment” for a separate reason.

Item 5. Fees and Compensation. An adviser must describe in its brochure how it is compensated for advisory services, provide a fee schedule, and disclose whether fees are negotiable.  Adviser may omit providing fee schedules to clients who are “qualified purchasers,” as defined under the Investment Company Act of 1940.

Item 5 also requires advisers to disclose any compensation they or their personnel receive that is attributable to the sale of a security or other investment product (e.g., brokerage commissions), discuss the conflicts of interest such compensation creates and describe how the adviser addresses these conflicts. Advisers must also disclose that the client may purchase the same security or investment product from a broker that is not affiliated with the adviser.

Item 6. Performance-Based Fees. An adviser that charges performance-based fees must disclose this fact.  If an adviser manages both accounts that are charged a performance-based fee and accounts that are charged another type of fee, the adviser must discuss the conflicts of interest that arise from its simultaneous management of these accounts, including its incentive to favor the accounts it charges a performance-based fee, and describe how it addresses these conflicts.

Item 7. Types of Clients. Item 7 requires advisers to describe the types of advisory clients they have and any requirements they impose on opening or maintaining an account, such as minimum account size.

Item 8. Methods of Analysis, Investment Strategies and Risk of Loss. Item 8 requires advisers to describe their methods of analysis and investment strategies and the material risks involved for each significant investment strategy or method of analysis. If an adviser’s primary strategy involves frequent trading of securities, the adviser must explain how frequent trading can affect investment performance.

Item 9. Disciplinary Information. An adviser must disclose any legal or disciplinary event that is material to a client’s or prospective client’s evaluation of the integrity of the adviser or its management personnel. The Instructions to Item 9 contain a non-exclusive list of disciplinary events presumed to be material if they incurred in the previous 10 years. The list includes convictions for theft, fraud, bribery, perjury, forgery, counterfeiting, extortion and violations of securities laws.

Item 10. Other Financial Industry Activities and Affiliations. Each adviser must describe material relationships or arrangements the adviser (or any of its management personnel) has with related financial industry participants, any material conflicts of interest these relationships or arrangement create, and how the adviser addresses these conflicts.

Item 11. Code of Ethics, Participation in Client Transactions and Personal Trading. Item 11 requires advisers to describe their codes of ethics and state that a copy is available upon request. If the adviser or a related person recommends to clients, or buys or sells for client accounts, securities in which the adviser or a related person has a material financial interest, the adviser must describe this practice and the conflicts of interest presented. Items 11.C and 11.D require disclosure of personal trading by the adviser and its personnel in securities that the adviser or a related person recommends to clients.

Item 12. Brokerage Practices. Item 12 requires advisers to describe their practices regarding soft dollars, client referrals, directed brokerage and trade aggregation and discuss the conflicts of interest resulting from such practices.

Item 13. Review of Accounts. An adviser must disclose whether it reviews client accounts and, if so, the frequency of such reviews.

Item 14. Client Referrals and Other Compensation. Item 14 requires advisers to describe any arrangement under which they or a related person compensates another for client referrals, any conflicts of interest arising from such arrangement and how the adviser addresses these conflicts of interest. The brochure must also disclose any arrangement under which the adviser receives any economic benefit from a person who is not a client for providing advisory services to clients.

Item 15. Custody. Item 15 requires an adviser with custody of client funds or securities to explain in its brochure that clients will receive account statements directly from the qualified custodian. Advisers must also explain to clients that they should carefully review the account statements they receive from the qualified custodian. In addition, if an adviser also sends clients account statements, the adviser’s explanation must include a statement urging clients to compare the account statements they receive from the qualified custodian with those they receive from the adviser.

Item 16. Investment Discretion. An adviser must disclose if it has discretionary authority over client accounts and any limitations clients may place on this authority.

Item 17. Voting Client Securities. Advisers must disclose whether they have or will accept authority to vote client securities and, if so, describe the voting policies they have adopted. Each adviser must describe whether (and how) clients can direct it to vote in a particular solicitation, how the adviser addresses conflicts of interest when it votes securities, and how clients can obtain information from the adviser on how the adviser voted their securities. Advisers that do not accept authority to vote securities must disclose how clients receive their proxies and other solicitations.

Item 18. Financial Information. This item requires disclosure of any financial condition reasonably likely to impair the adviser’s ability to meet contractual commitments to clients. An adviser that requires prepayment of fees must give clients an audited balance sheet showing the adviser’s assets and liabilities at the end of its most recent fiscal year.

Appendix 1. The Wrap Fee Program Wrap. Advisers that sponsor wrap fee programs continue to be required to prepare a separate, specialized firm brochure for clients of the wrap fee program in lieu of the sponsor’s standard brochure.

Delivery

Initial Delivery. Advisers must deliver a current brochure before or at the time of entering into an advisory contract with a client. Advisers are not required to deliver brochures to clients who (i) receive only impersonal investment advice and are charged less than $500 in adviser fees per year; (ii) are investment companies registered under the Investment Company Act; or (iii) are business development companies subject to Section 15(c) of the Investment Company Act.

Annual Delivery. Advisers must annually provide to each client to whom they must deliver a brochure either: (i) a copy of the current (updated) brochure that includes or is accompanied by the summary of material changes; or (ii) a summary of material changes that includes an offer to provide a copy of the current brochure. Each adviser must make this annual delivery no later than 120 days after the end of its fiscal year.

Interim Delivery. Advisers must deliver an updated brochure (or a document describing the material facts relating to the amended disciplinary event) promptly whenever the adviser amends its brochure to add a disciplinary event or to change material information already disclosed in response to Item 9 of Part 2A.

Updating

Advisers are required to keep their brochures current by updating them at least annually, and updating them promptly when any information in the brochures (except the summary of material changes and the amount of assets under management, which only has to be updated annually) becomes materially inaccurate.

Filing

Brochures must be filed with the SEC electronically through the Investment Adviser Registration Depository system. Although previously filed versions of an adviser’s brochure will remain in the IARD system, only the most recent version will be publicly accessible through the SEC’s website.

Part 2B – The Brochure Supplement

Each brochure must be accompanied by brochure supplements providing information about the officers, partners, directors and employees of the adviser who provide investment advice (collectively, “supervised persons”). Specifically, advisers are required to provide a client with a brochure supplement for each supervised person who: (i) formulates investment advice for that client and has direct client contact; or (ii) makes discretionary investment decisions for that client’s assets. If investment advice is provided by a team comprised of more than five supervised persons, brochure supplements need only be provided for the five supervised persons with the most significant responsibility for the day-to-day advice provided to the client.

Content

Item 1. Cover Page. The cover page must include information identifying the supervised person covered by the supplement and the advisory firm.

Item 2. Educational Background and Business Experience. Item 2 requires the adviser to describe the supervised person’s formal education and his or her business background for the past five years. The business background section must identify the supervised person’s positions at prior employers and not merely list the names of prior employers.  If professional designations are disclosed in the supplement, the supplement must also provide a sufficient explanation of the minimum qualifications required for the designation to allow clients and potential clients to understand the value of the designation.

Item 3. Disciplinary Information. Item 3 requires disclosure of any legal or disciplinary event that is material to a client’s evaluation of the supervised person’s integrity. It includes certain disciplinary events that the SEC presumes are material to such an evaluation if they occurred during the last 10 years.

Item 4. Other Business Activities. Item 4 requires an adviser to describe other business activities of its supervised persons. The adviser must disclose other capacities in which the supervised person participates in any investment-related business, any compensation the supervised person receives based on the sales of securities or other investment products, and any material conflicts of interest such participation or compensation may create. The brochure supplement must also disclose other business activities or occupations that the supervised person engages in if they involve a substantial amount of time or pay. Business activities representing less than 10 percent of the supervised person’s time and income are presumed not to be substantial.

Item 5. Additional Compensation. This item describes arrangements in which someone other than a client gives the supervised person an economic benefit (such as a sales award or other prize) for providing advisory services.

Item 6. Supervision. This item requires an adviser to explain how the firm monitors the advice provided by the supervised person addressed in the brochure supplement. It also requires a firm to provide the client with the name, title, and telephone number of the person responsible for supervising the advisory activities of the supervised person.

Delivery

The supervised person’s supplement initially must be given to each client at or before the time when that specific supervised person begins to provide advisory services to that specific client.

Advisers are not required to deliver supplements to three types of clients: (i) clients to whom an adviser is not required to deliver a firm brochure (e.g., registered investment companies and business development companies); (ii) clients who receive only impersonal investment advice; and (iii) certain officers, directors, employees and other persons related to the adviser.

Updating

Advisers must deliver an updated supplement to clients only when there is new disclosure of a disciplinary event, or a material change to disciplinary information already disclosed, in response to Item 3 of Part 2B. As with the brochure, advisers must amend a brochure supplement promptly if information in it becomes materially inaccurate. Any new clients to whom the adviser is obligated to deliver a supplement must be given an amended supplement (or the “old” supplement and a sticker). Advisers are not required to deliver supplements to existing clients annually.

Filing

Advisers are not required to file brochure supplements or supplement amendments with the SEC, and they will not be available on the SEC’s public website. Advisers are required to maintain copies of all supplements and amendments in their files.

Compliance Dates

New Advisers

Advisers registering with the SEC after January 1, 2011 must file a brochure meeting the requirements of amended Part 2A and, upon registering, begin to deliver a brochure and brochure supplements to clients and prospective clients in accordance with the requirements discussed above.

Registered Advisers

Each adviser currently registered with the SEC whose fiscal year ends on or after December 31, 2010 must include in its next annual updating amendment to its Form ADV a brochure that meets the requirements of the amended form. Accordingly, each adviser with a fiscal year end of December 31, 2010 must file an annual updating amendment with the new brochures no later than March 31, 2011. Within 60 days of filing such amendment, the adviser must deliver to its existing clients a brochure and brochure supplement that meet the requirements of amended Form ADV. Each adviser must, after the initial filing of the brochures, begin to deliver to new clients and prospective clients a new brochure and brochure supplements satisfying the requirements discussed above.

Published on:

By

The Dodd-Frank Wall Street Reform and Consumer Protection Act will significantly change the regulatory regime governing investment advisers, particularly investment advisers to private funds, such as hedge funds and private equity funds.  The primary purpose of the new rules and requirements is to “fill the regulatory gap,” by requiring advisers to private funds to register as investment advisers with the Securities and Exchange Commission or state securities regulators, unless an exemption applies, and provide information about their activities to the SEC. For a detailed discussion of the provisions of the Dodd-Frank Act applicable to advisers to private funds, please see our related Client Alert.