Articles Posted in Investment Advisers

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The Securities and Exchange Commission has proposed to amend rules and forms under both the Investment Advisers Act of 1940 and the Investment Company Act of 1940 to require registered investment advisers, certain advisers that are exempt from registration, registered investment companies, and business development companies, to provide additional information regarding their environmental, social, and governance (“ESG”) investment practices.

The proposed rule is available HERE.

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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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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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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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What happens if your company is a PPP or Main Street borrower and is contemplating a sale of the company while the loan is outstanding? Much has been written about the basis for applying for the loans, but Pillsbury partners Matt Swartz and Joel Simon dig deeper on Episode 6 of Pillsbury’s Industry Insights podcast to look at the practical implications down the road for borrowers who may be sold in a M&A transaction prior to the loan’s maturity or forgiveness. Continue reading →

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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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Registered and Exempt Reporting Firms:

The deadline for the annual update of Form ADV is approaching.  We have previously notified you regarding filing obligations that were due between January 1 and March 1.  Below is a recommended compliance and filing deadline table addressing registered firms’ obligations for the remainder of the calendar year.  Let us know if you need any assistance.

Annual Compliance Deadlines

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The California Consumer Privacy Act (CCPA), a broad statute which imposes new data privacy obligations on certain companies that do business in California, will become effective on January 1, 2020. Fund managers and other investment advisers (“Advisers”) and certain of their affiliates that are currently subject to data privacy laws pursuant to the Gramm-Leach-Bliley Act (GLBA) or the UK General Data Protection Regulation (GDPR) may have additional obligations to consider and prepare for as the CCPA compliance deadline approaches.

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While acknowledging the challenges in applying the securities laws to digital assets, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), in a joint statement on July 8, 2019, reaffirm that those rules equally apply to digital assets, and promise they will continue to engage the industry in finding solutions.

Read the full public statement HERE.