exempt reporting advisers must file form adv part 1a applies to most hedge fund and private equity...
TRANSCRIPT
Exempt Reporting Advisers Must File Form ADV Part 1A
Applies to most hedge fund and private equity fund managers that manage below $150 million in AUM
November 29, 2011
John Schrier, Fund StructuringCACEIS
2
John Schrier joined CACEIS (USA) Inc. in 2009 and currently serves as Corporate Counsel, Fund Structuring. Mr. Schrier has over 20 years of legal and tax experience in the area of alternative investments. His positions prior to joining CACEIS (USA) Inc. include serving as the partner in charge of the tax practice and co-head of the investment management practice of a midtown-Manhattan law firm, leading capital markets practice groups as a principal with Big 4 accounting firms, and serving as chief counsel with the U.S. subsidiary of Japan’s third-largest investment management firm. Mr. Schrier received a B.A. in Economics, cum laude, from the University of Missouri – Columbia, a Juris Doctorate with honors from the University of Maryland – Baltimore, a Masters Degree in Business Administration from the Smith School of Business, University of Maryland – College Park, and an Ll.M. in Taxation from New York University. He is a regular speaker on asset management regulatory compliance and tax matters, including recently at the Investment Advisers Association’s annual summit, and before a joint gathering of examiners from the Securities and Exchange Commission, Chicago Board of Exchange and North American Securities Administrators Association as one of three non-governmental speakers to provide instruction on the detection of hedge fund fraud. Mr. Schrier is on the Steering Committee of the Westchester Darfur Coalition, and holds a Class 8 USSF Soccer Referee License.
Ron S. Geffner, PartnerSadis & Goldberg LLP
Ron S. Geffner is a member of Sadis & Goldberg LLP and oversees the Financial Services Group. He regularly structures, organizes and counsels private investment vehicles, investment advisory organizations, broker-dealers, commodity pool operators and other investment fiduciaries. Mr. Geffner also routinely counsels clients in connection with regulatory investigations and actions. Mr. Geffner's broad background with federal and state securities laws and the rules, regulations and customary practices of the United States Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority, Commodities Futures Trading Commission and various other regulatory bodies, enables him to provide strategic guidance to a diverse clientele. He provides legal services to several hundred hedge funds, private equity funds and venture capital funds organized in the United States and offshore
3
Daniel G. Viola, PartnerSadis & Goldberg LLP
Daniel Viola is the Head of the Regulatory Defense and Compliance Group. He structures and organizes broker-dealers and investment advisers and regularly counsels investment professionals in connection with regulatory matters.
Mr. Viola served as a Senior Compliance Examiner for the Northeast Region of the U.S. Securities and Exchange Commission (“SEC”), where he worked from 1992 through 1996. During his tenure at the SEC, Mr. Viola worked on several compliance inspection projects involving
compliance examinations of registered investment advisers to ensure compliance with the Investment Advisers Act, the Investment Company Act, the Securities Act, and the Securities Exchange Act. Mr. Viola’s examination
experience includes financial statement, performance advertising, and disclosure document reviews, as well as analysis of investment adviser and hedge fund issues arising under ERISA and blue-sky laws.
4
Overview
• Investment Adviser Registration• Advisers Act Rule Changes• Best Practices for Investment Advisers• Exempt Reporting Advisers (“ERAs”)• Form ADV Part 1A• Registration Issues for Advisers• Form PF
5
Investment Adviser Registration• Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), the Investment Advisers Act of 1940 (the “Advisers Act”) was also amended to require many investment advisers that were exempt from registration with the SEC to register.
• Generally, the Dodd-Frank Act requires all investment advisers to hedge funds and/or private equity funds that manage $150 million or more in assets to register with the SEC.
• The new rules under the Advisers Act became effective on July 21, 2011.
6
Advisers Act Rule ChangesIA-3220 Family Offices
Rule 202(a)(11)(G)-1. Exclusion and Definition of Family offices.IA-3221 Rules Implementing Amendments to the Investment Advisers Act of
1940Rule 202(a)(30)-1. Foreign Private Advisers.
Includes important definition of “client” and “investor”.Rule 203-1. Application for investment adviser registration.
Subsection (e). March 30, 2012 deadline for Private Adviser Transition.Rule 203A-1. Eligibility for SEC registration.Rule 203A-2. Exemptions from prohibition on Commission registration.Rule 203A-3(d). Definition of assets under management. See Form ADV instruction. Rule 203A-5. Transition rules.Rule 204-1. Amendments to Form ADV.Rule 204-2. Books and records to be maintained by investment advisers.Rule 204-4. Reporting by exempt reporting advisers.Rule 206(4)-5. Political contributions by certain investment advisers.Rule 222-1. Definitions (b) Principal office and place of business.
7
Advisers Act Rule ChangesIA-3222: SEC Exemptions for Private Fund Advisers
Rule 203(l)-1. Venture capital fund defined.Rule 203(m)-1. Private fund adviser exemption.
8
Best Practices for Investment Advisers• Review and revise Form ADV and disclosure brochure annually to reflect
current and accurate information.• Review and update all contracts.• Prepare and maintain all required records, including financial records.• Prepare and maintain client profiles.• Prepare a written compliance and supervisory procedures manual
relevant to the type of business.• Prepare and distribute a privacy policy initially and annually.• Keep accurate financials. File timely with the jurisdiction. Maintain
surety bond, if required.• Calculate and document fees correctly in accordance with contracts and
ADV.• Review all advertisements, including website and performance
advertising, for accuracy.• Implement appropriate custody safeguards, if applicable.• Review solicitor agreements, disclosure, and delivery procedures.
9
Exempt Reporting Advisers (“ERAs”)ERAs are investment advisers to hedge funds and private equity funds that avoid full SEC registration by relying on either Rule 203(m)-1 or Rule 203(1)-1.• Must prepare and file Form ADV Part 1A with the
SEC by March 30, 2012. Newly formed funds should file within 60 days from the date that such fund is formed.
• Rule 204A.• Rule 206(4)-5.
10
Form ADV Part 1 Expanded Scope
• New Filing Status for Exempt Reporting Advisers.• Contact person now CCO: additional persons may be named as authorized to discuss ADV.• More specific info. on numbers of employees, IARs, RR’s, new insurance agent info., total number of
clients (range reduced to within 100), percentage of clients who are non-U.S.• Item 5.D. Types of Clients, each client may be counted in multiple categories as appropriate.
▫ New Item requires approximate AUM for each type of client.• Amendments to Calculating Your Regulatory Assets Under Management.
▫ Include accounts for which you receive no compensation, inc. family and friends.▫ Private funds must include uncalled committed capital.
• Item 7. Other types of related persons, swap dealers and participants, etc.• Item 8. Are all soft dollar benefits received 28(e) eligible? Do you compensate any persons for
client referrals?• Item 9. Clarifies that custody questions apply when you or a related person has custody in
connection with advisory services you provide. How many persons act as qualified custodians to your clients?
• Schedule D, Section 7.B. More info. on private funds including Private fund identification number, and laws of what state or country in which funds organized, plus exclusion status, and master-feeder status, type of fund (hedge, liquidity, private equity, real estate, securitized asset, venture, other), ownership of funds, expanded info. on auditors, identification of prime brokers, custodians and administrators, identification of any third party marketers.
• See red-line version at: http://www.sec.gov/divisions/investment/iard/formadv1a-comparison.pdf.
11
Registration issues for advisers located in New York• New York advisers with pooled investment vehicles and/or separately
managed accounts and less than $25 million in AUM must register with New York if the adviser has six or more New York clients.
• Advisers with between $25-$100 million in AUM (“mid-sized advisers”) must register with the SEC. If they advise only pooled investment vehicles, they can avoid registration, but must file as exempt reporting advisers (“ERAs”).▫ Since New York does not have an examination program, mid-sized
advisers in New York with at least one separately managed account must register with the SEC.
• Advisers with over $150 million in AUM are required to register with the SEC.
12
Registration issues for advisers located in New York - continued
• Advisers who file as ERAs:▫ Required to fill out several items of Part 1A of Form ADV (“Part 1A”).▫ Subject to certain provisions of the Investment Advisers Act of 1940,
Sections 204A and 206.▫ Required to establish and maintain and enforce written policies and
procedures.▫ Subject to pay-to-play rules.▫ Not required to undergo routine SEC compliance examinations, still
subject to SEC’s examination authority.▫ Must submit their initial Form ADV within sixty (60) days of first
relying on the exemption with the first filing required to be made between January 1, 2012 and March 30, 2012 and then annually thereafter.
▫ All reports filed by ERAs will be made publicly available.
13
Registration issues for advisers located in California• On May 13, 2011, the California Department of Corporations published a
Status Quo Letter allowing advisers with a place of business in California who were previously relying on the private adviser exemption to continue to rely on the exemption until final rules were adopted. No final rules have been adopted as of yet.
• Advisers with less than $25 million in AUM do not have the option of registering as exempt reporting advisers and must register with California.
• Advisers with a place of business in California, between $25 and $150 million in AUM, who advise only pooled investment vehicles must file as ERAs by March 30, 2012.
• California advisers that only advise pooled investment vehicles and manage over $150 million in AUM are required to register with the SEC.
• California advisers that advise separately managed accounts and have over $100 million in AUM are required to register with the SEC.
14
Registration issues for advisers located in Connecticut• Recently adopted federal exemptions for Connecticut advisers allow many
advisers to avoid full SEC and state registration.• Advisers with a place of business in Connecticut and between $0 and
$150 million in AUM who advise only pooled investment vehicles are able to avoid full registration by filing as ERAs.
• Connecticut advisers with over $150 million in AUM are required to register with the SEC.
• Connecticut advisers that manage between $0 and $100 million in AUM must register with Connecticut, or if advising only pooled investment vehicles, can file as ERAs.
• Connecticut advisers with over $100 million in AUM who advise at least one separately managed account must register with the SEC.
15
Registration issues for advisers located in Texas, Maryland, Massachusetts and Pennsylvania
• In general, if an adviser is located in the above states, then they must register with their state regulators if they manage between $0 and $100 million in AUM.
16
Registration issues for advisers located in Illinois and New Jersey
• Advisers managing more than $25 million in AUM must register with the SEC, if the state does not require registration, unless the adviser can find an exemption from SEC registration.
• Advisers based in Illinois and New Jersey who have more than five (5) clients triggers state registration.
17
The Creation of Form PFWho is Required to File?
Registered investment advisers that advise one or more private funds and have at least $150 million in regulatory assets under management (“RAUM”). The filing deadlines vary based on the RAUM, as follows:
18
RAUM Attributable to Hedge Funds
Filing Frequency First Filing Deadline
Less than $150 million No filing required No filing required$150 million - $1.5 billion Annually, within 120 days
after end of fiscal year.April 30, 2013
$1.5 billion - $5 billion Quarterly, within 60 days after end of fiscal quarter.
February 28, 2013
$5 billion or more Quarterly, within 60 days after end of fiscal quarter.
August 31, 2012
For advisers with RAUM that is attributable to private equity funds, liquidity funds and registered money market funds, the RAUM threshold varies.ERAs are not required to file Form PF.
The Creation of Form PFThe Basis for the SEC’s Proposed Form PF
Section 204(b)(3) REQUIRED INFORMATION.—The records and reports required to be maintained by an investment adviser and subject to inspection by the Commission under this subsection shall include, for each private fund advised by the investment adviser, a description of—
(A) the amount of assets under management and use of leverage, including off-balance-sheet leverage;
(B) counterparty credit risk exposure; (C) trading and investment positions; (D) valuation policies and practices of the fund; (E) types of assets held; (F) side arrangements or side letters, whereby certain investors in a fund obtain more favorable rights or entitlements than other investors; (G) trading practices; and (H) such other information as the Commission, in consultation with the Council, determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk, which may include the establishment of different reporting requirements for different classes of fund advisers, based on the type or size of private fund being advised.
• Section 211. Requires rules within one year of Dodd-Frank Act passage.
19
Form PFTo comport with the provisions of Sections 404 and 406 of the Dodd-Frank Act requiring greater transparency for large funds with systemic risk implications for the stability of the nation’s financial markets, the SEC proposes a rule requiring advisers to large private funds to file a new, Form PF on a quarterly basis. The information on Form PF would remain confidential and unlikely to be released under Freedom of Information Act requests, and would be used by the Financial Stability Oversight Council (FSOC) to oversee systemic financial risks.
• Form PF disclosures would vary based upon fund type, but would include the following:▫ Large hedge funds - advisers would disclose their concentration by asset class, geography,
and turnover, and in certain instances would also disclose details including leverage, risk profile, and liquidity.
▫ Large liquidity funds – advisers would disclose asset type, risk profile, and details of the fund’s compliance, or lack thereof, with Investment Company Act Rule 2a-7.
▫ Large private equity funds – advisers would disclose leverage, bridge financing, and investments in financial institutions.
• For further information about the proposal, go to http://www.sec.gov/news/press/2011/2011-23.htm
• .
20
Sadis & Goldberg LLP
If you have questions, please contact:
Ron S. Geffner212.573.6660
Daniel G. Viola212.573.8038
Sadis & Goldberg LLP551 Fifth Avenue, 21st Floor
New York, NY 10176
21
CACEIS
If you have questions, please contact:
John Schrier212.403.9541
CACEIS295 Madison Avenue, 5th Floor
New York, NY 10017-6304
22