Articles Posted in Advisory

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In today’s press release, the Securities and Exchange Commission announced the adoption of rules and amendments to require certain documents, including Form ADV-NR, filed by investment advisers, institutional investment managers, and certain other entities to be filed or submitted electronically.  Form ADV-NR is the appointment of agent for service of process by a non-resident general partner or a non-resident managing agent of any investment adviser (domestic or non-resident), including exempt reporting advisers.  The amendments also make technical amendments to modernize Form 13F and enhance the information provided.  The new rules and form amendments will be effective 60 days after publication in the Federal Register. The amendments to Form 13F will be effective on January 3, 2023.

The press release is available HERE and text of the Final Rules is available HERE.

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Enhanced Focus on Private Funds, ESG, and Operational Resiliency

The Securities and Exchange Commission’s Division of Examinations today announced its 2022 examination priorities.  The Division will focus on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

The Division will focus on registered investment advisers (RIAs) who manage private funds. Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks, and controls around material nonpublic information. The Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas.  In addition, the Division will review the practices, controls, and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance.

The SEC press release is here.  The full priorities memorandum is here.

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The SEC today proposed rule amendments to update beneficial ownership reporting under 1934 Act Sections 13(d) and 13(g).

The proposed amendments to Regulation 13D-G would

  • accelerate the filing deadlines for Schedule 13D beneficial ownership reports from 10 days to five days and require that amendments be filed within one business day (which has been the practice for amendments since the 1985 Cooper Labs SEC decision);
  • generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (which differ based on the type of filer);
  • accelerate the filing deadlines for Schedule 13G amendments
  • expand the application of Regulation 13D-G to certain derivative securities;
  • clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; provide new exemptions to permit certain persons to communicate and consult with one another, jointly engage issuers, and execute certain transactions without being subject to regulation as a “group;” and
  • require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

The Fact Sheet summarizing the proposed amendments:

https://www.sec.gov/files/33-11030-fact-sheet.pdf

Text of proposed rule amendments:

https://www.sec.gov/rules/proposed/2022/33-11030.pdf

Please contact your Pillsbury investment management attorney with any questions.

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The Securities and Exchange Commission today voted to propose amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds. The proposed amendments are designed to enhance the Financial Stability Oversight Council’s (FSOC) ability to assess systemic risk as well as to bolster the Commission’s regulatory oversight of private fund advisers and its investor protection efforts in light of the growth of the private fund industry.

The proposed amendments would require current reporting for large hedge fund advisers and advisers to private equity funds. These advisers would file reports within one business day of events that indicate significant stress at a fund that could harm investors or signal risk in the broader financial system. The proposed amendments would provide the Commission and FSOC with more timely information to analyze and assess risks to investors and the markets more broadly.

The proposal also would decrease the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. Lowering the threshold would result in reporting on Form PF that continues to provide robust data on a sizable portion of the private equity industry. Finally, the proposal would require more information regarding large private equity funds and large liquidity funds to enhance the information used for risk assessment and the Commission’s regulatory programs.

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Recent enforcement action could signal expanding the boundaries of misappropriation theory, with significant implications for SEC-regulated entities and other market participants.

TAKEAWAYS

  • With Chair Gensler at the helm, an emboldened SEC Enforcement Division will continue to take aggressive positions in insider trading enforcement actions and is willing to test the contours of insider trading law in litigation.
  • The Panuwat enforcement action advances the novel theory that possessing confidential information about one issuer may preclude trading in the securities of competitors and other companies in a business sector.
  • In light of the increased risk posed by the Panuwat matter, regulated entities and other market participants should review their policies and procedures to ensure that they are reasonably designed and tailored to
    prevent the misuse of material nonpublic information.

On August 17, 2021, the U.S. Securities and Exchange Commission (SEC) charged a former pharmaceutical company executive with insider trading for purchasing the securities of a rival company based on confidential information he learned about his own employer’s contemplated merger with another pharmaceutical company. The SEC’s enforcement action, which is being litigated in the United States District Court for the Northern District of California, appears to confirm early predictions that the SEC, with Chair Gary Gensler at the helm, would aggressively police the securities markets for insider trading.

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Read this article and additional Pillsbury publications at Pillsbury Insights.

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Most 3(c)(1) private equity and hedge funds are impacted; exempt venture capital funds are not impacted.

Effective August 16, 2021, the dollar thresholds specified in the definition of “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (“Advisers Act”) will increase (i) from $2.1 million to $2.2 million (net worth test) and (ii) from $1 million to $1.1 million (assets under management (AUM) test).  Clients that enter into investment advisory agreements (and existing fund investors that make additional fund investments) in reliance on the net worth test prior to the effective date will be “grandfathered” in under the prior net worth threshold.  The increases are made pursuant to a five-year inflation adjustment required by section 205(e) of the Advisers Act (section 419 of the Dodd-Frank Act).  (The most recent prior change was effective August 15, 2016.)

Section 205(a)(1) of the Advisers Act generally restricts an investment adviser from entering into, extending, renewing, or performing any investment advisory contract that provides for compensation to the adviser based on a share of capital gains on, or capital appreciation of, the funds of a client (“performance compensation prohibition”).  Rule 205-3 of the Advisers Act provides a limited exemption from the performance compensation prohibition and permits investment advisers to receive performance-based compensation (incentive allocations, carry, carried interest, performance fee etc.) from “qualified clients.”

After August 16, a “qualified client” is a person that:

(i) has at least $1.1 million in assets under management with the investment adviser immediately after entering into the advisory contract (AUM test); or

(ii) has a net worth (in the case of a natural person client, together with assets held jointly with a spouse) that the investment adviser reasonably believes is in excess of $2.2 million immediately prior to entering into the advisory contract (net worth test).

As a reminder, the value of a natural person’s primary residence must not be included in net worth; indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time the investment advisory contract is entered into, need not be counted as a liability toward net worth (except that debt acquired or a loan amount increased within 60 days before investment or contract execution date must be counted); and indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the residence also must be counted as a liability.

A qualified client also includes both a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and an investment adviser’s “knowledgeable employees.”  The newly revised definition will, therefore, affect certain private investment funds that rely on Section 3(c)(1) of the Investment Company Act (but not those funds relying on Section 3(c)(7)) and separately managed accounts that charge performance fees.

Advisory clients that established an advisory relationship (signed a contract) before the effective date of the new thresholds will be “grandfathered” in under the prior net worth threshold.  Investors in a private fund are considered, for these purposes, a client of the adviser (fund manager).  Therefore, future investments in a fund by the same investor who first invested in that fund before August 16 also will be grandfathered at the prior dollar thresholds. However, managers of section 3(c)(1) funds should update their subscription agreements and other offering documents to reflect the new qualified client threshold for new investors who first invest after August 16, 2021. In addition, notably, existing investors in a 3(c)(1) fund of funds (investor fund) that first invests in a 3(c)(1) fund (investee fund) after the effectiveness of a new threshold would nevertheless each have to be qualified client under the new thresholds because the investor fund’s investment in the investee fund would count as a new advisory relationship.

Private fund advisers (hedge fund, private equity and venture capital fund managers) that rely on the federal ‘private fund adviser” exemption from investment adviser registration will not be impacted, including with respect to their 3(c)(1) funds. The Adviser’s Act performance compensation prohibition applies only to registered investment advisers but does not apply to investment advisers relying on the federal private fund adviser exemption (so called “exempt reporting advisers”). Certain states (e.g., California, Texas), however, mandate under their state equivalent private fund adviser exemptions that even exempt reporting advisers, other than exempt venture capital fund advisers, only charge a performance fee to qualified clients with respect to their 3(c)(1) funds. Therefore, while private fund advisers that qualify as “venture capital fund advisers” will not be impacted by the new qualified client thresholds, exempt reporting advisers that are private equity or hedge fund managers will have to comply with the qualified client standard in their 3(c)(1) funds under certain state laws.

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Please contact your attorney at Pillsbury’s Investment Funds Group for additional information.

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Today, the Securities and Exchange Commission announced it had finalized reforms under the Investment Advisers Act to modernize rules that govern investment adviser advertisements and payments to solicitors. The amendments create a single rule that replaces the current advertising and cash solicitation rules. The final rule is designed to comprehensively and efficiently regulate investment advisers’ marketing communications.

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The Commodity Futures Trading Commission at its open meeting on Tuesday, October 6, unanimously approved a final rule adopting amendments to Form CPO-PQR for commodity pool operators (CPOs).

The amendments to Form CPO-PQR (1) eliminate existing Schedules B and C of the form, except for the Pool Schedule of Investments; (2) amend the information requirements and instructions to request Legal Entity Identifiers (LEIs) for commodity pool operators and their operated pools that have them, and to delete questions regarding pool auditors and marketers; and (3) make certain other changes due to the rescission of Schedules B and C, including the elimination of all existing reporting thresholds. Click here for the full press release.

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An expanded universe of individuals and entities will be able to participate as “accredited investors” in securities offerings as a result of recent SEC rulemaking.

TAKEAWAYS

  • The SEC has expanded its definition of “Accredited Investor” to additional individuals and entities, including individuals with certain professional certifications and knowledgeable employees of private funds.
  • The amendments may provide additional regulatory certainty for issuers, investors and counsel.

On August 26, 2020, the Securities and Exchange Commission (the SEC) adopted amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act of 1933 (the Amendments). The Amendments, which will become effective 60 days after they are published in the Federal Register, expand the pool of individuals and entities that qualify as accredited investors. The definition of accredited investor is relevant, among other things, to the operation of Rule 506 of Regulation D, which is a safe harbor under Section 4(a)(2) of the Securities Act. Rule 506 is the most commonly-used exemption for private offerings, accounting for the vast majority of the trillions of dollars raised through unregistered offerings every year. Unregistered, private offerings of securities have supplanted public offerings as the dominant form of capital-raising in the United States. Since regulatory requirements are much greater for offerings that include non-accredited investors, an overwhelming majority of Rule 506 offerings are offered only to accredited investors.

READ MORE. . .

Read this article and additional Pillsbury publications at Pillsbury Insights.

More of this will be covered at an ALI CLE webinar, sponsored by Pillsbury, later this month that focuses on Regulation D Offerings and Private Placements.  To find out more about this webinar and to register, please visit https://www.ali-cle.org/course/Regulation-D-Offerings-Private-Placements-2020-VCCP0922

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We urge our clients to consult Pillsbury’s comprehensive COVID-19 Resource Center for information regarding Responding to a Global Crisis, Business Interruption, Cybersecurity, Employer Concerns and other general matters related to the COVID-19 pandemic. We also recommend the following specific measures to mitigate risks of business interruption and regulatory noncompliance resulting from the COVID-19 pandemic.

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