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.
This article was originally published in Tech City News on May 6, 2015.
Much has been made of the UK’s growing fintech industry. Research published by Accenture in 2014 showed the UK and Ireland enjoyed a growth rate outstripping the rest of Europe and Silicon Valley over the past five years.
However, the more mature US technology sector and investment culture means UK businesses lag behind their US counterparts in attracting the investment to move them through the stages of growth. So what can early-stage, consumer-facing fintech companies do to make themselves more attractive to investment from private equity houses and venture capitalists?
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.
What is BE-10?
BE-10 is a benchmark survey of U.S. direct investment abroad, conducted once every five years by the Bureau of Economic Analysis (“BEA”) of the U.S. Department of Commerce. The purpose of the survey is to obtain economic data on the operations of U.S. parent companies and their foreign affiliates. The BE-10 survey is conducted pursuant to the International Investment and Trade in Services Survey Act, and the filing of reports is mandatory pursuant to Section 5(b)(2) of that Act. BE-10 reports are kept confidential and used for statistical analysis.
What is the filing deadline?
May 29, 2015 – if you are a U.S. Reporter (defined below) filing to report fewer than 50 Foreign Affiliates (defined below).
June 30, 2015 – if you are a U.S. Reporter filing to report 50 or more Foreign Affiliates.
Extensions. The BEA will consider reasonable requests for extensions if received before the applicable due date of the report. Extension requests should “enumerate the substantive reasons necessitating the extension” on the form provided by the BEA.
Who must file?
All U.S. persons that had direct or indirect ownership or control (each, a “U.S. Reporter”) of at least 10%[i] of the voting stock of a foreign business enterprise (a “Foreign Affiliate”) at any time during the entity’s 2014 fiscal year must file.
Any U.S. general partner or investment manager of a private fund could be a U.S. Reporter, and any hedge fund, private equity fund, or other private fund could be either a U.S. Reporter or a Foreign Affiliate, if they meet the above criteria.
____________________
[i] A U.S. Reporter’s ownership interest in a Foreign Affiliate may be held indirectly through a directly held Foreign Affiliate that owned the given foreign enterprise. You must “look through” all intervening foreign enterprises in the chain to determine whether you hold a foreign business enterprise to the extent of 10% or more. To calculate your ultimate ownership percentage, multiply the direct ownership percentage in the first Foreign Affiliate by that first Foreign Affiliate’s direct ownership percentage in the second enterprise in the chain, multiplied by the direct ownership percentage for all other intervening enterprises in the ownership chain, until you reach the ownership percentage in the final foreign business enterprise. To illustrate, if a U.S. Reporter owned 50% of Foreign Affiliate A directly, and A owned 75% of foreign business enterprise B which, in turn, owned 80% of foreign business enterprise C, the U.S. Reporter’s percentage of indirect ownership of B would be 37.5% (the product of the first two percentages), its indirect ownership of C would be 30% (the product of all three percentages), and B and C (as well as A) would be considered Foreign Affiliates of the U.S. Reporter.
Read this article and additional publications at pillsburylaw.com/publications-and-presentations.
The Division of Investment Management (the “Division”) of the Securities and Exchange Commission issued a cybersecurity guidance identifying cybersecurity of registered investment companies (“funds”) and registered investment advisers (“advisers”) as an important issue. Recognizing the rapidly changing nature of cyber threats and consequently, the necessity for funds and advisers to protect sensitive information including information of fund investors and advisory clients, the Division is suggesting a number of measures that funds and advisers may wish to consider in addressing the issue. To mitigate cybersecurity risk, the Division suggests that funds and advisers: 1) conduct a periodic assessment of their technology system and security controls and processes to identify potential cybersecurity threats and vulnerabilities, 2) create a strategy that is designed to prevent, detect and respond to cybersecurity threats, and 3) implement the strategy through written policies and procedures, training of officers and employees, and investor and client education. In addition, the Division also suggests that funds and advisers may wish to consider reviewing their operations and compliance programs whether they have measures in place that mitigate their exposure to cybersecurity risk, as well as assessing whether protective cybersecurity measures are in place at service providers that they rely on in carrying out their business operations.
A full version of the cybersecurity guidance is available HERE.
Please call an Investment Funds and Investment Management attorney with your inquiries regarding your firm’s cybersecurity risks and compliance procedures that address them.
The expense provisions of many private fund governing documents are becoming longer and more detailed for good reason – increased Securities and Exchange Commission (SEC) scrutiny and prosecution relating to expense allocation and disclosure.
On April 29th, the SEC announced charges against Alpha Titans LLC, a hedge fund advisory firm, its principal, Timothy P. McCormack and its general counsel, Kelly D. Kaeser, for improper use of fund assets to pay expenses that were not previously disclosed to fund investors. According to the SEC, office rent, employee salaries and benefits and other expenses totaling more than $450,000 were paid by two affiliated private funds without adequate disclosure or authorization. The SEC further alleged that Alpha Titans, McCormack and Kaeser sent investors audited financials that did not disclose that approximately $3 million of expenses pertained to transactions involving affiliates of McCormack.
According to the SEC, the funds’ outside auditor, Simon Lesser, was aware of the manner in which expenses and assets were allocated, yet approved audit reports containing unqualified opinions that the financial statements were presented fairly. He was charged with engaging in improper professional conduct in connection with an audit of the funds’ financial statements. The advisory firm also was charged with custody rule violations relating to its distribution on non-GAAP-compliant financial statements.
All of the charges were settled without admission or denial of responsibility; however, not without significant cost. McCormack and Kaeser will be barred from the securities industry for one year and Kaeser will be unable to represent an SEC-regulated entity for one year. Lesser will be suspended from providing accounting services on behalf of an entity regulated by the SEC for at least three years. Substantial monetary penalties also were assessed and the advisory firm and its principal agreed to pay disgorgement and prejudgment interest.
The lesson for private funds, their advisers and outside auditors is simple. First, fund documents should clearly, accurately and thoroughly disclose the types and amounts of expenses to be charged to the fund or its investors. Second, fund managers must allocate expenses and use fund assets strictly in accordance with the relevant provisions in the fund documents. Finally, outside auditors must be diligent in reviewing expense allocations and the use of fund assets to determine compliance with fund documents.
There should be no doubt that the risk of non-compliance is real.
On April 20, 2015, the Securities and Exchange Commission (“SEC”) issued an order against an investment advisory firm and its former chief compliance officer, for violating Sections 206(2) and 206(4) and rule 206(4)-7 of the Investment Advisers Act and rule 38a-1 of the Investment Company Act. The SEC charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest involving the outside business activity of one of its top-performing portfolio managers, Daniel J. Rice III. BlackRock agreed to be censured and to settle the charges by paying a $12 million penalty and engaging an independent compliance consultant to conduct an internal review.
During his tenure as an energy sector portfolio manager at BlackRock, Rice founded an oil and gas exploration and production company, formed a joint venture with a public company held in his managed funds, and acquired a second public company also held in BlackRock portfolios. BlackRock learned of Rice’s outside business activity, but allowed him to continue his involvement. The SEC found that BlackRock failed to report the conflicts of interest to the board of directors of the affected registered funds or advisory clients and failed to monitor and reassess Rice’s outside business activity after discovering the conflicts of interest. The SEC also censured BlackRock for failing to maintain and implement internal policies regarding the outside activities of employees. While Blackrock’s policies required employees to report potential conflicts and to seek pre-approval before serving on a board of directors, the firm failed to outline how employees’ outside activities would be assessed for conflicts purposes or to identify the individuals responsible for assessing outside activities.
Additionally, the SEC found BlackRock’s former chief compliance officer personally liable for causing the failure by BlackRock funds to report material compliance matters—namely Rice’s violation of BlackRock’s private investment policy—to their board of directors. The ex-officer agreed to pay a $60,000 civil penalty to settle the charge.
If you have question concerning your firm’s internal policies on the outside business activities of employees, please reach out to your Pillsbury attorney contact.
On April 14, 2015, the Department of Labor issued its much anticipated re-proposal of regulations defining and expanding the persons who are treated as ERISA fiduciaries. Under the proposal, subject to certain exceptions, all persons who provide investment advice or recommendations for a fee to an employer-sponsored retirement plan, plan fiduciary, plan participant, IRA or IRA owner would be deemed “fiduciaries”. Other than investment education and “order taking”, most other investment sales related activities will result in fiduciary status. Some of these advisors are subject to federal securities laws, others are not.
Being a fiduciary means that the advisor must provide impartial advice and put the client’s best interest first and must not accept any compensation payments creating conflicts of interest unless the payments qualify for an exemption (newly proposed) intended to ensure that the customer is adequately protected. If the regulations are finalized, compliance with the terms of the new exemption will be a necessary condition for continuing many of the compensation practices currently in use by the investment industry.
We expect to issue a Client Alert on the Proposal and new Rule. If you have any questions, please feel free to contact our Funds or Employee Benefits attorneys.
On March 10, 2015, the New Jersey Division of Taxation issued Technical Advisory Memorandum TAM-2015-1, explaining its policy regarding convertible virtual currency.1
Read this article and additional publications at pillsburylaw.com/publications-and-presentations.
Partners Kimberly Mann in Washington, DC and Ildiko Duckor in San Francisco will co-lead the IFIM group. The group now integrates all investment management and funds professionals across the firm’s offices. Our interdisciplinary approach also draws on the experience of other practices that enhance the depth and scope of our services to clients. The IFIM group now comprises more than two-dozen business and litigation attorneys in London, Los Angeles, New York, San Francisco, Silicon Valley, Tokyo, and Washington, DC. Together, the group’s experience extends across the following disciplines: manager and fund formation and compliance, private equity, hedge funds, registered funds, tax, ERISA, complex transactions, finance and derivatives, employment, bank regulation, real estate, estate planning, regulatory investigations, and civil and criminal litigation. Our London office provides U.K. legal capabilities and a window into the E.U. Our offices in Tokyo, Beijing and Shanghai provide access to the Asian markets.
Kim Mann has been with the firm for 18 years. She focuses her practice on private funds, including, formation and maintenance, and represents domestic and international fund sponsors, general partners and fund managers in structuring, organizing and negotiating the terms of private equity, venture capital, mezzanine debt and real estate funds. A significant aspect of her practice also involves representation of institutional investors in private fund investments, direct investments, co-investments and other matters involving alternative investments. She also advises private funds, investment advisers and broker-dealers in matters relating to registration under and regulatory compliance with federal and state securities laws. Her transactional practice includes, among other things, acquisitions and dispositions by entities regulated under the Investment Company Act, the Securities Exchange Act and the Investment Advisers Act.
Before joining Pillsbury, Kim practiced corporate and securities law at Miles and Stockbridge in Baltimore, Maryland.
She is a member of the ALI-CLE faculty and serves on the Regulation D Offerings and Private Placements panel. She is also a Certified Public Accountant.
Ildiko Duckor provides strategic and legal advice for clients in the investment management industry. She has represented hedge fund managers, other investment advisers, dually registered adviser-brokers, commodity pool operators and commodity trading advisors with respect to the structuring, registration, operation and management of their firms, domestic and offshore private funds, and accounts. Ms. Duckor has extensive experience preparing and negotiating agreements for various managed account, funds-of-one and subadvisory arrangements. She regularly negotiates on managers’ behalf investments by institutional investors (side letters) and seed capital arrangements. Ms. Duckor also counsels her clients on state and federal regulatory compliance matters and helps them develop compliance and internal control policies and procedures.
Ildi Duckor’s prior experience in the investment management area includes both private practice (Schulte Roth & Zabel LLP in New York) and in-house (Barclays Global Investors, N.A., now BlackRock). Previous industry engagements include Chair of the policy committee of the California Hedge Fund Association and membership on the steering committee of the Association of Women in Alternative Investing.
Ailyn Cabico, the group’s experienced legal assistant, continues to assist clients with their Form ADV, regulatory filings and other paralegal needs, including the updates to the Form ADV due on March 31, 2015. Should you need assistance with these filings, please contact Ailyn at ailyn.cabico@pillsburylaw.com and Ildi Duckor at ildiko.duckor@pillsburylaw.com.
