The Commission is amending the recordkeeping obligations set forth in Commission regulations along with corresponding technical changes to certain provisions regarding retention of oral communications and record retention requirements applicable to swap dealers and major swap participants, respectively. The amendments modernize and make technology neutral the form and manner in which regulatory records must be kept, as well as rationalize the rule text for ease of understanding for those persons required to keep records pursuant to the Commodity Exchange Act and regulations promulgated by the Commission thereunder. The amendments do not alter any existing requirements regarding the types of regulatory records to be inspected, produced, and maintained set forth in other Commission regulations.
The following are some of the important annual compliance obligations investment advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) and commodity pool operators (“CPOs”) or commodity trading advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.
This summary consists of the following segments: (i) List of Annual Compliance Deadlines; (ii) 2017 Enforcement Priorities In The Alternative Space; (iii) New Developments; and (iv) Continuing Compliance Areas.
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On December 5, 2016, a Notice of reporting requirements was filed in the Federal Register by the U.S. Department of Treasury informing the public of the Treasury’s mandatory survey, due every 5 years, of ownership of foreign securities by U.S. residents as of December 31, 2016. All U.S. persons who meet the reporting requirements must respond to, and comply with, this survey on Form TIC-SHC by March 3, 2017.
Who Must Report?
i. Fund Managers and Investors. U.S. persons who own foreign securities for their own portfolios and/or who invest in foreign securities on behalf of others (referred to as ‘‘end-investors’’), including investment managers and fund sponsors such as:
- Managers of private and public pension funds
- Hedge fund managers
- Managers and sponsors of private equity funds, venture capital companies and similar private investment vehicles
- Managers and sponsors of commingled funds such as money market mutual funds, country funds, unit-investment funds, exchange-traded funds, collective-investment trusts, and similar funds
- Foundations and endowments
- Trusts and estates
- Insurance companies
- U.S. affiliates of foreign entities that fall into the above categories.
These U.S. Persons must report on Form SHC if the total fair value of foreign securities—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.
ii. Custodians. U.S. persons who manage, as custodians, the safekeeping of foreign securities for themselves and other U.S. persons (including affiliates in the U.S. of foreign entities). These U.S. persons must report on Form SHC if the total fair value of the foreign securities whose safekeeping they manage on behalf of U.S. persons—aggregated over all accounts and for all U.S. branches and affiliates of their firm—is $200 million or more as of the close of business on December 31, 2016.
iii. Those Notified. U.S. persons who are notified by letter from the Federal Reserve Bank of New York. These U.S. persons must file Schedule 1, even if the recipient of the letter is under the reporting threshold of $200 million and need only report ‘‘exempt’’ on Schedule 1. U.S. persons who meet the reporting threshold must also file Schedule 2 and/or Schedule 3.
What To Report?
Information on holdings by U.S. residents of foreign securities, including equities, long-term debt securities, and short-term debt securities (including selected money market instruments).
How To Report?
Completed reports on Form TIC-SHC can be submitted electronically or mailed to the Federal Reserve Bank of New York, Statistics Function, 4th Floor, 33 Liberty Street, New York, NY 10045–0001. Inquiries can be made to the survey staff of the Federal Reserve Bank of New York at (212) 720–6300 or email: SHC.email@example.com. Inquiries can also be made to Dwight Wolkow at (202) 622–1276, email: comments2TIC@do.treas.gov
When To Report?
The report must be submitted by March 3, 2017.
Additional information including technical information for electronic submission can be obtained from the Form SHC Instructions available here.
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.
- 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.
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.
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.
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.
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.
The Cayman Islands Tax Information Authority advised yesterday that it will allow Cayman Islands Financial Institutions to rely on CRS due diligence procedures for new accounts opened on or after 1 January 2016 to identify specified/reportable persons for the purposes of UK FATCA and CRS reporting. This means that, provided CRS compliant self-certification forms are provided to and returned by new investors/account holders going forward, it is no longer obligatory to include a UK FATCA specific self-certification form.
The Foreign Account Tax Compliance Act (FATCA) is intended to detect and deter the evasion of US tax by US persons who hide money outside the US. FATCA creates greater transparency by strengthening information reporting and compliance through rules around the processes of documenting, reporting and withholding on a payee. More than 90 jurisdictions, including all 34 member countries of the OECD and the G20 members, have committed to implement the Common Reporting Standard for automatic exchange of tax information (“CRS”). Building on the model created by FATCA, the CRS creates a global standard for the annual automatic exchange of financial account information between the relevant tax authorities.
In general, the differences between CRS and FATCA have largely to do with the multilateral nature of the CRS and the US specific attributes of FATCA. The CRS is intended to allow countries to use the exchange system without having to negotiate a separate annex with each counterpart country. The CRS is more closely aligned to ‘UK FATCA’ than US FATCA in terms of account due diligence and related reporting requirements. The principal (but not the only) differences between US FATCA and CRS are:
- Registration – CRS has no requirement to register with any foreign tax authority or to obtain any global identification number (such as a GIIN under FATCA).
- Withholding – while domestic laws may impose penalties for non-compliance, CRS does not impose a punitive withholding tax regime.
- Client Classification – CRS classification is based on tax residency rather than nationality or citizenship. A client could be taxable in several countries in the relevant reporting period. CRS allows reliance on client self-certification.
Call us to learn more and to request an update of the self-certification forms in your subscription documents.
The ERISA Advisory Council recently announced that, as part of its goals for 2016, it will be focusing on cybersecurity issues affecting retirement plans and, in particular, the extent to which such issues relate to third-party administrators and vendors (TPAs) of retirement plans. By shining the spotlight on the role of TPAs in combatting cyber-related threats to retirement plans, this announcement
demonstrates that retirement plan sponsors would be well-served to proactively assess the cyber risk profiles of their retirement plans. Specifically, retirement plan sponsors should focus on developing and implementing a comprehensive and effective risk management strategy that includes, among other actions, the implementation and periodic review of contractual protections in arrangements
with their plans’ TPAs.
This advisory is the second in a series of advisories dedicated to understanding cybersecurity issues.