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NEW YORK—Pillsbury has been named Best Onshore Law Firm for Hedge Fund Startups by HFMWeek at its HFM U.S. Hedge Fund Services Awards 2016. Partner Ildiko Duckor, who is co-leader of the firm’s Investment Funds & Investment Management practice, accepted the honor at the awards ceremony, which was held at New York’s Cipriani restaurant on October 20.

The HFM awards recognize the top U.S. hedge fund service providers that have demonstrated exceptional customer service and innovative product development over the past 12 months. Winners are determined by a panel of independent industry experts, who look at a combination of quantitative and qualitative measures. Pillsbury was shortlisted in two of the three onshore law firm categories this year. Last year, the firm was honored by HFM in the Client Service category.

Pillsbury’s Investment Funds & Investment Management (IFIM) practice comprises more than two dozen business and litigation lawyers across the firm’s U.S. and international offices. The group represents investment advisers, including hedge fund managers, private equity sponsors and mutual fund advisers; commodity pool operators and commodity trading advisors; benefit plans; broker-dealers; and other industry participants in a variety of strategic, regulatory, compliance and enforcement matters; and institutional investors in connection with alternative investment transactions.

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To increase the transparency of fees and expenses paid to alternative funds, every California public pension plan must require each alternative fund in which they invest to make various disclosures, and California public pension plans are required to disclose that information during meetings open to the public.

Assembly Bill 2833 was signed into law by California Governor Jerry Brown on September 14, 2016. Beginning January 1, 2017, the new law mandates that California public pension plans (PPPs), whether at the state, county or city level, require all private equity funds, venture funds, hedge funds or absolute return funds, whether a limited partnership, limited liability company or similar legal structure (Alternative Funds), to make disclosures of fees and expenses paid by PPPs. In turn, the PPPs must disclose such information during meetings open to the public.

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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 here.

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  • 3(c)(1) funds should update their offering documents to reflect $2.1 million net worth requirement.
  • Assets under management threshold remains unchanged at $1 million.
  • Only new client relationships entered and new investors admitted in private funds after August 15, 2016 are affected; new contributions by pre-August 15 investors are grandfathered.

The Securities and Exchange Commission (the “SEC”) issued an order on June 14, 2016 raising the net worth threshold for “qualified clients” in Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).  Effective August 15, 2016, the dollar amount of the net worth test increased from $2 million to $2.1 million. The dollar threshold of the assets-under-management test has not changed and remains at $1 million.  Adjustments to the dollar thresholds for the assets-under-management and net worth tests under Rule 205-3 are made pursuant to section 418 of the Dodd-Frank Act and section 205(e) of the Advisers Act and are intended to reflect inflation.  The adjusted amounts would reflect inflation from 2011 until the end of 2015.

Under the Advisers Act, an investment adviser is generally prohibited from receiving performance fees or other performance-based compensation.  Section 205(e) of the Advisers Act provides for an exemption to this prohibition and Rule 205-3 under the Advisers Act permits an investment adviser to receive performance fees only from “qualified clients.”  The increased threshold affects private funds that rely on the exception to the definition of investment company provided in section 3(c)(1) of the Investment Company Act (“3(c)(1) Funds”) which, under the rule, are allowed to pay performance-based fees if their investors are qualified clients.  Accordingly, 3(c)(1) Funds must amend their offering documents to conform to the new qualified client net worth threshold.

Grandfathering:  Subject to the transition rules of Rule 205-3, the June 2016 SEC order generally does not apply retroactively to clients that entered into advisory contracts (including investors that invested in a private fund) prior to the August 15, 2016 effective date.

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On July 14, 2016, the Securities and Exchange Commission (SEC) announced an enforcement action against RiverFront Investment Group, LLC, a registered investment adviser serving as sub-adviser to clients in wrap fee programs established by various sponsors. The enforcement action resulted from RiverFront’s materially inadequate disclosure about changes in its trading practices and attendant transaction costs which exceeded wrap fees and caused millions of dollars in extra transaction costs for its clients.

In its role as sub-adviser, RiverFront had discretion to determine whether to send trades to sponsor-designated broker-dealers (whose costs were covered under the wrap fee program) or to other brokers in which case the clients would pay additional transaction costs. Wrap fee programs enable clients to pay one fee to cover a bundle of services, including, for example, trading, investment management and custody. From 2008 to 2011, RiverFront disclosed on its Form ADV that trades were “generally” executed through designated broker-dealers. It also disclosed that it may trade away in an effort to obtain best execution on behalf of its clients. A “trade away” is the practice of sending trades to a broker-dealer that has not previously been designated. In 2009, RiverFront started trading away significantly more transactions and charging clients fees that were not included in the annual wrap fee. However, in its annual Form ADV amendment filings from 2009 to 2011, RiverFront did not change its disclosures to reflect the frequency of its trade aways.

It was RiverFront’s failure to accurately and timely disclose on its Form ADV its trading practices and the potential for additional transaction costs that resulted in the SEC sanctions. The SEC held that RiverFront willfully violated Sections 207 and 204(a) of the Investment Advisers Act of 1940 and Rule 204-1(a) thereunder.

The SEC imposed sanctions against RiverFront, namely:

  • censorship; and
  • a $300,000 fine.

RiverFront also undertook to disclose quarterly on its website the volume of trades executed with non-designated brokers and the costs to be passed onto clients.

The RiverFront enforcement action serves as a reminder to investment advisers to review their Forms ADV to ensure that trading practices, costs and other material information regarding their advisory businesses are adequately and accurately disclosed.  Please contact an Investment Funds and Investment Management Group attorney for assistance with issues pertaining to Form ADV disclosure and related matters.

The SEC Press Release can be found here.

The full text of the SEC order can be found here.

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Pillsbury is hosting Plum Alley Investments, a private-membership on-line platform connecting women investors with businesses run by women entrepreneurs.  The breakfast will feature an intimate conversation about shaping the world by investing in private companies led by women entrepreneurs.  Venue: Pillsbury office, 22nd Floor, Four Embarcadero Center, San Francisco; Wednesday, July 20th, 8:30 – 10 a.m.

Plum Alley gives members access to select opportunities to invest in private companies along with custom experiences both on-line and off-line to collaborate, imagine and transform the world. Plum Alley founders Deborah Jackson and Andrea Turner Moffitt have over three decades of relevant expertise as investors, entrepreneurs, experts in capital raising and finance.  Plum Alley members represent a diverse range of women and men with expertise across technology, financial services, philanthropy, healthcare, consumer, and more. They have deep expertise, connections, financial resources and prominence in their personal and professional lives.

For more about Plum Alley:

Fortune: The Creative Way This Firm Is Getting Female Investors into the Big Leagues

Forbes: How A Crowdfunding Site Helps Women Support Women

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Pillsbury is hosting a hedge fund startup event with 100 Women in Hedge Funds next Thursday, July 14.  Experts representing two firms named as Institutional Investor’s 2015 Hedge Fund Rising Stars will discuss the essentials to launch and grow an investment firm in today’s environment.  They, along with a tenured hedge fund consulting professional, and Ildiko Duckor, co-head of Pillsbury’s Investment Funds practice will discuss how to build and scale an institutional quality business, address strategy marketability and infrastructure, cover legal and compliance considerations and tackle successful fundraising techniques.

Pillsbury has been named “Best Onshore Law Firm-Client Service” by HFMWeek at its HFM U.S. Hedge Fund Services Awards several times, including in 2015.  Pillsbury’s Emerging Hedge Fund Manager program provides packaged launch solutions to small hedge fund startups for a reasonable fixed fee and other startup benefits.

RSVP:  Please contact Ailyn Cabico if you are interested in attending the event.

For more event information, please read the Event Invitation.

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In line with the Securities and Exchange Commission’s (SEC) goal to enhance regulatory safeguards in the asset management industry, the SEC yesterday released a proposed new rule and rule amendments under the Investment Advisers Act of 1940. The proposed new rule 206(4)-4 would require SEC-registered investment advisers to adopt and implement written business continuity and transition plan (BCP) and review the plan’s adequacy and effectiveness at least annually.  The proposed amendment to rule 204-2 would require such advisers to keep copies of all BCPs that are in effect or were in effect during the last five years, and any records documenting the adviser’s annual review of its BCP.

The proposed rule is designed to address operational and other risks (internal or external) related to a significant disruption (temporary or permanent) in the investment adviser’s operations. Operational risks and disruptions generally include natural disasters or calamities, cyber-attacks, system failures, key personnel departure, business sale, merger, bankruptcy and similar events.

Under the proposed rule, an SEC-registered adviser should develop its BCP based upon risks associated with the adviser’s business operations and must include policies and procedures that minimize material service disruptions and address the following critical elements:

  • System maintenance and data protection
  • Pre-arranged alternate physical locations
  • Communication plans
  • Review of third-party service providers
  • Transition plan in the event of dissolution or inability to continue providing advisory services

The comment period will be 60 days after the proposed rule is published in the Federal Register.

A full copy of the proposed rule is available HERE.

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The CFTC’s recent enforcement against Bitfinex’s financed trading activities demonstrates the Commission’s increasing interest in virtual currency and digital assets.

The U.S. Commodity Futures Trading Commission (CFTC) is further expanding its oversight of virtual currency exchanges and digital assets in general. On June 2, 2016, Bitfinex (a Hong Kong-based bitcoin and cryptocurrency exchange) settled with the CFTC following an investigation into its trading activities. The CFTC charged that the exchange offered illegal off-exchange financed retail commodity transactions, and that Bitfinex had failed to register as a Futures Commission Merchant (FCM) as required by law. As a result, Bitfinex will pay $75,000 in civil penalties.

This action is more evidence of the CFTC’s interest in not only bitcoins, but any digital asset that can be considered a commodity. Transactions in decentralized digital tokens (such as Ether, DAO Tokens, Safecoins, Factoids, and Bitcrystals) are becoming more common, and so is regulatory interest.

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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 here.

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International investors have frequently used Mauritius holding companies for their Indian investments, seeking to take advantage of the exemption under the India-Mauritius income tax treaty (the “Mauritius Treaty”) from Indian capital gains tax generally applicable on the disposition of shares of Indian companies. On May 10, 2016, the Governments of Mauritius and the Republic of India announced the signing of a protocol (the “Protocol”) to the Mauritius Treaty, Article 4 of which revises Article 13 of the Mauritius Treaty, dealing with capital gains.

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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 here.

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President Obama signed into law the SBIC Advisers Relief Act (as part of the Fixing America’s Surface Transportation Act of 2015—the FAST Act) on December 4, 2015.  (See also our Annual Compliance Alert)  After the enactment of the Dodd-Frank Act, advisers to Small Business Investment Companies (SBICs) were limited in their choice to one of the available exemptions from registration under the Investment Advisers Act of 1940. The SBIC Advisers Relief Act provides certain additional relief for investment advisers that advise private funds and SBICs, and for those that advise venture funds and SBICs. The SEC’s Investment Management Guidance update  interprets the SBIC Advisers Relief Act and its implications.

What is an SBIC?

An SBIC is a privately owned and operated investment company making long term investments specifically in U.S. businesses and is licensed by the Small Business Administration (SBA). The primary reason firms choose to become licensed with the SBA is to secure SBA financing.

What is the SBIC Adviser Exemption?

As originally implemented by the Dodd-Frank Act, the SBIC adviser exemption provided relief from SEC registration to those advisers whose only clients consisted of one or more SBICs, irrespective of assets under management.  However, the SBIC adviser exemption did not allow advisers to combine multiple exemptions such as the private fund or venture capital fund adviser exemptions in order to avoid SEC registration.

For example, an Adviser to both a venture fund and an SBIC (that does not qualify as a venture fund) would not be able to rely on either the venture capital fund adviser exemption or the SBIC adviser exemption.  Instead, the adviser would have had to rely on the private fund adviser exemption which would only be available to it if it had less than $150 million in regulatory assets under management.

Impact of the SBIC Advisers Relief Act on the use of the Venture Capital Fund and Private Fund Adviser Exemptions

The SBIC Advisers Relief Act amends Investment Advisers Act by:

  • including in the definition of a venture capital fund SBIC funds (other than business development companies).
  • excluding from the private fund adviser exemption the $150 million asset limitation with respect to a private fund that is a SBIC fund (other than a business development company).

As a result, an adviser:

  • may rely on the venture capital fund adviser exemption and advise both SBICs and venture capital funds; or
  • may rely on the private fund adviser exemption and advise both SBICs and non-SBIC private funds as long as the non-SBIC private funds account for less than $150 million in assets under management.
  • that is registered and advises SBICs may be eligible to withdraw its registration and begin reporting to the SEC as an exempt reporting adviser under either the venture capital fund adviser exemption or the private fund adviser exemption.

In contrast to an adviser relying solely on the SBIC Adviser Exemption, the SEC staff believes that when an SBIC adviser choses to rely on the private fund or venture capital fund exemption, the adviser is required to submit reports to the SEC as an exempt reporting adviser.

Additionally, the SEC staff notes that (i) advisers currently relying on the private fund or venture capital adviser exemption may advise SBIC clients following the revised exemptions and (ii) certain registered advisers of SBICs may be eligible to withdraw their current registration and rely upon the private fund adviser or the venture capital fund exemption as exempt reporting advisers.

State Implications

It is important to note that the Investment Advisers Act, as amended by the SBIC Advisers Relief Act, now preempts states from requiring advisers that rely on the SBIC fund exemption to register, be licensed or qualify as an investment adviser in the state.  As a result of the federal preemption, advisers that manage only SBIC funds will be relieved from having to register (or may withdraw if registered) in states that have not adopted exemptions to investment adviser registration analogous to the Investment Advisers Act.

Please contact an Investment Funds and Investment Management group attorney for further detail and with your questions.