Articles Posted in Investment Advisers

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The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking on August 25, 2015 which, among other things, would add SEC-registered investment advisers to the “financial institutions” regulated under the Bank Secrecy Act (BSA). This represents another step by the U.S. government to expand the professions and industries deemed anti-money laundering (AML) gatekeepers. Covered investment advisers will face new AML program, reporting and record-keeping requirements, with implications for hedge, private equity and other funds; money managers; and public or private real estate funds.

FinCEN has long expressed an interest in regulating investment advisers, which it believes may be vulnerable to or may obscure money laundering and terrorist financing. Should the rule become final, SEC-registered investment advisers would be included in the regulatory definition of “financial institution” and, as a consequence, required to establish and implement appropriately comprehensive written AML programs and comply with a variety of reporting and recordkeeping requirements under the BSA. Investment advisers that already implemented AML programs would need to evaluate them to ensure they comply with BSA requirements.

Who are Covered “Investment Advisers”?

Investment advisers provide advisory services, such as portfolio management, financial planning, and pension consulting, to many different types of clients, including institutions, private funds and other pooled investment vehicles, pension plans, trusts, foundations and mutual funds. According to the proposed rule, an “investment adviser” would be defined as “[a]ny person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(a)).”

The definition would cover all investment advisers, including subadvisers, subject to Federal regulation which, generally speaking, would include advisers that have $100 million or more in assets under management. This includes investment advisers engaging in activities with publicly or privately offered real estate funds. Small- and medium-sized investment advisers that are state-registered and other investment advisers that are exempt from SEC registration requirements would not be captured by the proposed rule. FinCEN indicated, however, that future rulemaking may include those types of advisers.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

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In a release issued today, the Financial Crimes Enforcement Network (FinCEN) has proposed anti-money laundering (AML) regulations for investment advisers. The proposed rule requires investment advisers registered or required to be registered with the Securities and Exchange Commission (SEC) to establish AML programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (BSA). The SEC would be delegated authority by FinCEN to examine investment advisers for compliance. The proposed rule also makes investment advisers fall under the definition of “financial institution,” requiring them to file Currency Transaction Reports (CTRs) and comply with record keeping obligations under the BSA.

A full copy of the proposed rule is available HERE.

A related article about the new AML regulations was posted in our blog last week.

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Kimberly Mann, co-head of Pillsbury’s Investment Funds and Investment Management Group, was interviewed and quoted at length in an article published in FundFire this week. The article explored whether regulators should permit asset managers to settle cases without admitting culpability. In response to that question, Ms. Mann, who has expertise in investment advisor regulatory and fund-related matters, commented “If you’re asking investors, they would likely say “yes”, there should be an admission required. But if you ask fund managers, the response might be a little different and it might be nuanced; it might depend on the severity of the charge and the impact of the charge.” Ms. Mann added “There’s a lot to consider when one is trying to decide whether to make an admission. So, I think most would want flexibility.” She further commented “Some investors might shy away from anyone who’s even been charged, but there are others who might not be as put off if there weren’t an admission.”  To the question of how a regulator would determine when to require an admission, Ms. Mann responded “The broader the effect, the more aggressive [the regulator] would be in pursuing an admission.”

Read the full article HERE.

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The U.S. Treasury Department’s Financial Crimes Enforcement Network will soon propose new rules that may require investment advisers to establish and implement written anti-money laundering programs designed to prevent advisory clients from using advisers to launder funds or perpetrate other criminal activities. The rules also may require advisers to report suspicious client activity.

The new rules may be similar in certain respects to rules proposed by Treasury in 2003, when the Department attempted to subject investment advisers to the AML provisions of the Bank Secrecy Act. The 2003 rules would have required advisers to (1) establish and implement policies, procedures and controls reasonably designed to prevent advisers from being used to launder money or finance terrorist activities, (2) provide independent testing of compliance by the advisory firms’ personnel, affiliates or third parties, (3) designate persons responsible for implementing and monitoring the operations and internal controls of the program and (4) provide ongoing training for appropriate persons who are involved with the program.

The new rules are likely to reflect comments received in response to the 2003 proposal and may be informed, in part, by certain practices followed by advisers in offshore jurisdictions. It is unclear whether the rules will require investment advisers to apply their anti-money laundering programs to their clients’ beneficial owners.

If the new rules are adopted, investment advisers will need to review and update their compliance manuals, as necessary, to incorporate anti-money laundering policies and procedures that are tailored to their business, clients and risks. In addition, private offering memoranda, fund governance documents, advisory agreements and other client communications should be updated to include information about the anti-money laundering program and suspicious activity reporting requirements.

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In the Federal Register for July 23, 2015, the Treasury Department published proposed regulations regarding the circumstances under which partnership allocations and distributions will be treated as disguised payments for services. These proposed regulations are aimed at attempts by investment fund managers to convert ordinary, management fee income into tax-favored long-term capital gains through the use of management fee waivers.

The proposed regulations draw heavily on the legislative history to Internal Revenue Code section 707(a)(2)(A), enacted as part of the Deficit Reduction Act of 1984 (P.L. 98-369), which provides that allocations and distributions to a partner by a partnership will be disregarded and instead treated as disguised payments for services if the performance of such services and the related direct or indirect allocation and distribution, taken together, are properly characterized as a transaction between the partnership and a partner acting other than in his capacity as a member of the partnership.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

Related post: Proposed Treasury Regulations May End Private…

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It has been a common practice of private equity firms to convert their right to receive management fees from the funds they manage into the right to receive profits and distributions from the funds through management fee waiver arrangements.  As a result of these arrangements, the firms achieve a lower tax rate because the profits and distributions they receive in place of the fees usually receive capital gains treatment while the fees would otherwise have generated ordinary income, subject to higher tax rates.  In the proposed regulations, the IRS suggests that these arrangements may be disguised payments for services and result in ordinary income anyways.

While the proposed regulations would be effective when final regulations are published, the IRS has indicated that it believes the principles reflected in the proposed regulations generally reflect Congressional intent—signaling that it may apply these principles to existing arrangements even prior to the adoption of final regulations.

Read the proposed rule in the Federal Register HERE.

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On July 15, 2015, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued Administrator’s Interpretation No. 2015-1, adopting a very expansive interpretation of the definition of employees under the Fair Labor Standards Act (FLSA) under which many workers currently treated as independent contractors will need to be reclassified as employees. The Administrator’s Interpretation identifies the issue of a worker’s economic dependence as the most important factor in distinguishing between independent contractors and employees. The Administrator’s Interpretation puts employers on notice that “the FLSA covers workers of an employer even if the employer does not exercise the requisite control over the workers, assuming the workers are economically dependent on the employer.”

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A U.S. person with a financial interest in or signature authority over a foreign bank, securities (including brokerage account, margin account, mutual fund, trust) or other financial account in another country that has an aggregate value exceeding $10,000 at any time during the 2014 calendar year must file FinCEN Report 114 by June 30, 2015. FinCEN Report 114 supersedes Form TD F 90-22.1. Individuals filing the report must file electronically through the BSA E-Filing System.

For additional information on filing FBAR, see the Treasury Department’s FBAR E-Filing FAQs and the BSA E-Filing System FAQs.

If you need assistance, please call an attorney in our Investment Funds and Investment Management group.

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The Bureau of Economic Analysis (BEA) has extended the deadline to file Form BE-10, Benchmark Survey of U.S. Direct Investment Abroad, to June 30, 2015, for all new filers.

For information on Form BE-10 filing, please read our recent article HERE.

Further information on BE-10 is available at the BEA website.

 

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The Securities and Exchange Commission (SEC) today proposed rules, forms and amendments to modernize and enhance the reporting and disclosure of information by investment advisers and investment companies.

Investment advisers. The investment adviser proposed rules would amend the investment adviser registration and reporting form (Form ADV), and Investment Advisers Act Rule 204-2. On Form ADV, the proposed rules would require investment advisers to provide additional information for the SEC and investors to better understand the risk profile of individual advisers and the industry. Investment advisers would be required to report, among other things, detailed information about their separately managed accounts, including assets under management and types of assets held in the accounts. The proposed amendments to Investment Advisers Act Rule 204-2 would require advisers to maintain records of performance calculations and communications related to performance.

Investment companies. The investment company proposed rules would enhance data reporting for mutual funds, ETFs and other registered investment companies.  The proposals would require a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information.  The information would be reported in a structured data format, which would allow the SEC and the public to better analyze the information.  The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.

Highlights of the investment adviser and investment company proposals are available HERE.

The SEC is requesting for comments which should be submitted to be received within 60 days from publication of the proposed rules in the Federal Register.