2016 Compliance Overview

Publication December 31, 2015

Advisers to private funds and managed accounts (including family offices) should consider their periodic regulatory and compliance obligations towards the beginning of each new year. The discussion below addresses select U.S. regulatory items that may be of interest to advisers depending on the type of adviser and the current activities, status and investment focus of their clients. [1] Garrett Lynam, General Counsel & Chief Compliance Officer at a private family office, is a contributing author of this article.

Although some items in this list apply only to registered investment advisers, many are generally applicable to all advisers. [2] Additionally, we have included a list of common compliance items arising under U.S. Commodity Futures Trading Commission (“CFTC”) and National Futures Association (“NFA”) rules for certain managers who are subject to regulation under the U.S. Commodity Exchange Act.

Securities Laws

Securities Offerings

  1. Form D and Form D Update: An issuer relying on Rule 506 must file a new Form D notice with the SEC for each new offering of securities no later than 15 calendar days after the date of first sale of securities in the offering. If a Form D is submitted in connection with a Rule 506 offering, it must be amended on or before the anniversary of the issuer’s filing if the offering is continuing at that time. Form D also needs to be amended to correct any material mistake or error, along with certain other changes.
  2. Rule 506(d) Certifications: In September 2013, the SEC adopted Rule 506(d) to prohibit issuers from relying on Rule 506 if a “bad actor” has the requisite connection to the issuer. Funds that are fundraising in 2016 (including those that are engaged in continuous offerings) should review their existing subscription documents and placement agent agreements in light of Rule 506(d)’s requirements. Additionally, managers need to conduct their own internal due diligence to determine the Rule 506(d) status of their relevant personnel, including obtaining “bring-down” representations in certain situations. [3]
  3. Blue SkyUpdates: Funds may be required to submit Rule 506 notice filings (and filing fees) in the US states where they offer securities. Certain states (including New York and Illinois) require that supplemental notice filings be filed for continuous offerings. These renewals may be required as frequently as annually. Certain states permit electronic “blue sky” filings. [4]

Investment Advisers Act of 1940 Requirements

  1. Form PF: An investment adviser must complete and file a Form PF if (i) it is registered or required to be registered with the SEC as an investment adviser; (ii) it manages one or more private funds; and (iii) it and its “related persons” (as defined in Form PF) collectively had at least $150 million in private fund assets under management as of the last day of its most recently completed fiscal year. [5]

    “Large private fund advisers” to hedge funds and liquidity funds must file Form PF on a quarterly basis (the exact due date varies depending on the adviser’s classification under Form PF) and must provide more detailed information than smaller advisers. “Large private fund advisers” include any adviser with at least $1.5 billion in hedge fund assets under management, at least $1 billion in liquidity fund or registered money market fund assets under management or at least $2 billion in private equity fund assets under management. [6]

    Smaller private fund advisers and large private equity advisers must file Form PF once a year within 120 days of the end of the fiscal year.

    Note that the filer’s IARD account needs to be funded with an amount sufficient to cover the relevant filing fee before any Form PF filing can be submitted (funding an IARD account may take a few days if funds are being wire transferred).

  2. Form ADV and Annual Update: Investment advisers who are registered with the SEC and those who are “exempt reporting advisers” must amend their Form ADV each year by filing an annual updating amendment within 90 days after the end of their fiscal year. The annual updating amendment must update responses to all applicable items. Advisers should pre-fund their IARD account with an amount sufficient to cover the relevant IARD filing fees (as mentioned above). In addition to annual updates, an adviser’s Form ADV may need to be amended promptly if (i) information it provided in response to Items 1, 3, 9 (except 9.A.(2), 9.B.(2), 9.E and 9.F) or 11 of Part 1A, or Items 1, 2.A through 2.F, or 2.I of Part 1B, becomes inaccurate in any way and (ii) information it provided in response to Items 4, 8, or 10 of Part 1A or Item 2.G of Part 1B becomes materially inaccurate. Annual amendments to the Part 2A “brochure” are discussed below.
  3. Form ADV Part 2A Updates: A registered adviser must generally provide a “brochure” to each client before or at the time it enters into an advisory agreement with that client. Also, each year a registered investment adviser must generally (i) deliver, within 120 days of the end of its fiscal year, to each client an updated brochure that includes a summary of any material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. [7]
  4. Annual Audit Requirements: SEC-registered investment advisers who have custody of their clients’ funds or securities must safeguard those funds as required under Rule 206(4)-2. This “custody rule” generally requires (i) the use of “qualified custodians” to hold client assets; (ii) notices to clients detailing how their assets are being held; (iii) account statements for clients setting forth their holdings; and (iv) annual “surprise” examinations. However, SEC-registered advisers to pooled investment vehicles are generally exempt from the annual surprise examination requirements if financial statements prepared in accordance with U.S. GAAP and audited by qualified independent public accountants are delivered to investors within 120 days after the end of each fund’s fiscal year (180 days in the case of funds of funds) and upon liquidation. [8]

Securities Exchange Act of 1934 Requirements

  1. Form 13H: Registered “large traders” (as defined in Rule 13h-1) must generally submit an annual filing on Form 13H within 45 days after the end of the calendar year and submit any amendments promptly after the end of any calendar quarter to correct inaccuracies. [9] However, certain large traders may be eligible to obtain “Inactive Status” under Rule 13h-1, which permits them to cease filing Form 13H while they are on Inactive Status.
  2. Form 13F: If an “institutional investment manager” (which includes registered and unregistered advisers, including family offices) exercised investment discretion over $100 million or more of “13(f) securities” (as included on the list published by the SEC) as of the last trading day of any calendar month, its quarter-end holdings of 13(f) securities must generally be reported to the SEC by filing a Form 13F. Form 13F must be filed for year-end holdings for the first year the $100 million threshold is crossed and quarterly thereafter, 45 days after the relevant reporting date.
  3. Schedules 13D and 13G: Generally, Schedule 13D filing requirements arise when a person acquires direct or indirect beneficial ownership of more than five percent of a class of publicly-traded equity securities with the purpose of effecting a change in (or influencing the control of) the issuer. A Schedule 13D filing is generally filed with the SEC within 10 days after exceeding the threshold and must be promptly amended if there is a material change to the facts disclosed therein. If a beneficial owner is eligible to file a Schedule 13G in lieu of a Schedule 13D, the Schedule 13G must generally be filed within 45 days after the end of the calendar year. A Schedule 13G filer may be required to amend its Schedule 13G (i) within 45 days of the end of the calendar year if certain information therein needs to be updated and (ii) promptly if its beneficial ownership of the issuer increases to more than 10% (and promptly thereafter if its beneficial ownership increases or decreases by more than five percent of the class).
  4. Section 16 Reporting Requirements: Under Section 16 of the Securities Exchange Act of 1934, corporate insiders (i.e., a company’s officers and directors and any beneficial owners of more than 10% of a class of the company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934) must file with the SEC a statement of ownership regarding those securities. Certain private funds may need to submit a Form 3, Form 4 or Form 5 if they trigger the beneficial ownership threshold. Also, insiders of fund managers may have individual reporting requirements if they have the requisite policy-making authority over a covered issuer. Finally, private funds and other persons subject to Section 16 of the Securities Exchange Act may be required to disgorge certain “short swing” profits they realize pursuant to Section 16(b).

State Investment Adviser Requirements

  1. Some states require that SEC-registered investment advisers and “exempt reporting advisers” submit notice filings to the local regulator. For example, exempt reporting advisers with the SEC who have their principal place of business in Connecticut can file a duplicate Form ADV Part 1A with the State of Connecticut. This duplicate filing is submitted through the IARD system and is done annually (see above regarding Form ADV annual updates).
  2. Advisers who are not registered with the SEC and have their principal office and place of business in a U.S. state should review their registration status under state law. For example, an adviser generally needs to register with the State of New York if it has six or more clients in New York (and if an adviser is registered with the SEC, it should submit a notice filing through the IARD system if it has six or more clients in New York).

Department of the Treasury (Selected Filings)

  1. TIC Form SLT: TIC Form SLT is filed by U.S. persons who are U.S. resident custodians, U.S.-resident issuers and/or U.S. resident end-investors and whose consolidated long-term reportable securities equal or exceed $1 billion as of the last business day of the reporting month. Once the consolidated total of reportable securities for a reporting entity equals or exceeds the exemption level on the last business day of a reporting month, the reporting entity must submit a report for that month. In addition, the reporting entity must also submit a report for each remaining month in that calendar year, regardless of the consolidated total of reportable securities held in any subsequent month. The form must be submitted no later than the 23rd calendar day of the month following the applicable reporting date.
  2. TIC B Forms: The TIC B Forms are designed to survey the international portfolio capital claims and liabilities with foreigners of U.S. banks, securities brokers and dealers, and other financial firms (which can include U.S. funds and U.S. investment advisers). The forms are filed either quarterly or monthly depending on the information being reported. In certain cases, a U.S. custodian is required to report instead of an end investor (e.g., a U.S. fund).
  3. TIC Form SHL: TIC Form SHL is a survey that the Department of Treasury conducts every five years. The last survey was due on August 29, 2014. With respect to investment advisers, a Form SHL filing obligation arises if (i) an investment adviser receives a letter notifying it that it has a filing obligation or (ii) an adviser’s fund(s) collectively have at least US$100 million in “reportable” securities (generally defined as portfolio securities of U.S. issuers that are not held by a U.S. custodian and securities held by non-U.S. investors in U.S. funds).

Bureau of Economic Analysis (“BEA”)(Selected Filings) [10]

  1. Quarterly Survey of U.S. Direct Investment Abroad (Form BE-577): Form BE-577 is a quarterly report of U.S. direct investment abroad required from U.S. persons who have had direct transactions or positions with a foreign business enterprise in which it held indirectly or directly an ownership interest of at least 10% of voting interests at any time during the reporting period.
  2. Annual Survey of U.S. Direct Investment Abroad (Form BE-11): Form BE-11 is an annual report (other than BE-10 years) of U.S. direct investment abroad required from U.S. persons for each foreign business enterprise (that is not an exempt foreign affiliate) in which it held, directly or indirectly, an ownership interest of at least 10% of voting interests.
  3. Benchmark Survey of U.S. Direct Investment Abroad (Form BE-10): Form BE-10 is the BEA’s most comprehensive survey of U.S. direct investment abroad. It is conducted every 5 years (in lieu of the BE-11 annual survey). A response is required from entities subject to the reporting requirements of the BE-10, whether or not they are contacted by the BEA. The next Form BE-10 survey will be conducted in 2020.
  4. Quarterly Survey of Foreign Direct Investment in the U.S. (Form BE-605): Form BE-605 is a quarterly report of foreign direct investment in the U.S. required from U.S. persons in which foreign persons own, directly or indirectly, a 10% or more voting interest.
  5. Annual Survey of Foreign Direct Investment in the U.S. (Form BE-15): Form BE-15 is an annual report (other than BE-12 years) of foreign direct investment in the U.S. required from U.S. persons in which foreign persons own, directly or indirectly, a 10% or more voting interest.
  6. Benchmark Survey of Foreign Direct Investment in the U.S. (Form BE-12): Form BE-12 is the BEA’s most comprehensive survey of foreign direct investment in the U.S. It is conducted every 5 years (in lieu of the BE-15 annual survey). A response is required from entities subject to the reporting requirements of the BE-12, whether or not they are contacted by the BEA. The next Form BE-12 survey will be conducted in 2018.
  7. Benchmark Survey of Financial Services Transactions Between U.S. Financial Services Providers and Foreign Persons (Form BE-180): Form BE-180 is conducted every 5 years to obtain information on financial services transactions between U.S. financial service providers and foreign persons. The next Form BE-180 survey will be conducted in 2020.

FINRA

  1. Restricted New Issues: Generally, a FINRA member cannot sell “new issues” to a client unless it obtains a representation from the client within the past 12 months that the client is eligible to purchase new issues in compliance with FINRA Rules 5130 and 5131. Broker-dealers may require that a fund provide similar representations prior to allocating “new issues” to the fund. Advisers should review their status and eligibility on an annual basis.

Other Calendar Items

  1. Compliance Policies and Procedures Annually: Under Rule 206(4)-7 of the Advisers Act, SEC-registered advisers must review, no less frequently than annually, the adequacy of their policies and procedures and the effectiveness of their implementation. As a matter of best practices, an investment adviser’s chief compliance officer should also implement annual training for personnel covering all compliance policies and procedures.
  2. FATCA: Advisers should continue to review compliance with FATCA, including obtaining necessary tax forms from new investors.
  3. Side Letters: Certain investors may have ongoing reporting or compliance requirements under their side letters. Advisers should review their funds’ side letters regularly to check that any ongoing requirements are satisfied.
  4. Privacy Notice: Advisers generally must provide an annual privacy notice to clients and investors who are individuals pursuant to Regulation S-P under the Gramm-Leach-Bliley Act.
  5. Pursuant to the “FAST Act” signed by President Obama on December 4, 2015, under certain circumstances, financial institutions (including investment advisers and broker-dealers, among others) may no longer be required to send annual privacy notices if they do not share non-public personal information with third parties for marketing purposes.
  6. Code of Ethics: Investment advisers should regularly review their codes of ethics so that they remain up-to-date and consistent with actual practice. Under Rule 204A-1 of the Advisers Act, an SEC-registered adviser must obtain a written acknowledgment from its “supervised persons” of their receipt of the code of ethics and any amendments thereto. Additionally, Rule 204A-1 requires that holdings and transaction reports be provided by “access persons” at various times throughout the year.
  7. Business Continuity and Disaster Recovery Plans: All advisers should review and test their business continuity and disaster recovery plans at least annually. Also, cybersecurity is an important item for advisers to review and bolster on an ongoing basis (the SEC’s 2015 Examination Priorities noted that the SEC is continuing its initiative to examine investment advisers’ cybersecurity compliance and controls).
  8. Update PPMs: Offering documents should be reviewed and updated to reflect material business changes. [11]
  9. ERISA Review: Advisers should review benefit plan investors’ ownership of their managed funds to determine if participation in a fund by “benefit plans” is “significant” (i.e., whether it qualifies for the 25% “significant participation” exemption under ERISA).
  10. All advisers should regularly review the SEC’s website so that they are current with SEC releases and guidance. In particular, it is important for advisers to review and understand SEC releases discussing examination priorities.

Commodities Trading Laws

  1. Form PR: A registered CTA must file a Form CTA-PR with the NFA within 45 days after the end of each calendar quarter.
  2. Form PQR: A registered CPO (including registered CPOs that file Form PF with the SEC) must file a quarterly Form CPO-PQR with the NFA (the content of the filing is expanded for the fourth quarter filing). “Large CPOs” (i.e., CPOs with AUM of at least $1.5 billion) file on a quarterly basis within 60 days of each quarter end. Other CPOs file within 60 days of the first, second and third quarter end, and within 90 days of the end of the fourth quarter.
  3. NFA Bylaw 1101 Review: Registered CPOs and CTAs should regularly check that their investors/clients and relevant counterparties are NFA members. Similarly, registered and unregistered CPOs and CTAs should check that investors in their funds have reaffirmed their NFA notice filings each year.
  4. Annual Affirmation of Exclusions and Exemptions from CPO and CTA Registration: Any person who claims an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), or an exemption from CTA registration under 4.14(a)(8), to annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year end, which is February 29, 2016 for this affirmation cycle.
  5. NFA Registration: Registered CPOs and CTAs must update their NFA registration information through the NFA’s Online Registration System and pay annual NFA dues on or before the anniversary of their registration date.
  6. CPO and CTA Questionnaire: Registered CPOs and CTAs must complete the NFA’s “self-examination questionnaire” annually.
  7. Commodity Pool Annual Reports: CPOs must distribute an “Annual Report,” certified by an independent public accountant, to each participant in each pool it operates within 90 days of the pool’s fiscal year-end. CPOs are also required to file this report electronically with the NFA through the EasyFile system. Alternate due dates exist for pools that are operated as a “fund of funds.”
  8. Other CPO/CTA Compliance Considerations: At least annually, registered CPOs and CTAs must test disaster recovery plans, deliver privacy policies to investors, provide ethics training and update disclosure documents (if applicable).



[1] This outline is for an investment adviser that is not registered (or required to be registered) with a U.S. state regulator.

[2] Several items in this article, including the items referenced under “Securities Offerings,” “Securities Exchange Act of 1934 Requirements” and “Department of the Treasury (Selected Filings),” could impact registered and unregistered investment advisers, including family offices.

[3] For additional information regarding Rule 506(d), please see Chadbourne’s prior article entitled “Demystifying How the New Rule 506 ‘Bad Actor’ Disqualification Impacts Private Funds.”

[4] The State of New Hampshire recently revised its securities act, which revisions will become effective in January 2016. Pursuant to these revisions, issuers will no longer be required to effect renewal filings in respect of Regulation D, Rule 506 notice filings made with the State of New Hampshire.

[5] The SEC has published additional Form PF guidance in the form of “FAQs.” See questions A.5 and F.3 at http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml

[6] Large private equity advisers must submit Form PF within 120 calendar days after the end of their fiscal year and complete Section 4 of Form PF.

[7] Although the delivery requirement only applies to “clients,” we recommend delivery to private fund investors as well.

[8] As discussed below, a registered CPO must distribute an “Annual Report,” certified by an independent public accountant, to each participant in each pool it operates within 90 days of the pool’s fiscal year-end.

[9] Large traders may complete an “annual filing” and also designate it as an “amended filing” in respect of the fourth quarter, so long as the submission is made promptly after the end of the fourth quarter.

[10] Generally required only if requested by the BEA.

[11] For more information on the SEC’s focus on cybersecurity, please refer to the “Investment Adviser Cybersecurity: Understanding What is at Stake and How to Prevent Cyber Attacks” in Chadbourne & Parke LLP’s Fall 2014 NewsWire.

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