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.
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.
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.
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.
A group of related private equity (“PE”) funds were found liable for a bankrupt portfolio company’s pension plan debts in the latest and most worrisome decision in the long-running Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund dispute. The novel decision, if upheld on appeal, will trigger a reevaluation of common PE industry practices related to co-investments and management fee offset arrangements. The decision also signals increased transaction risks for PE funds, lenders who provide financing to portfolio companies, and potential buyers of portfolio companies from PE funds.
Background of the Sun Capital Dispute
In 2006, Scott Brass Inc. (SBI) was acquired by three investment funds linked to the Sun Capital Partners Inc. group for approximately $7.8M ($3M invested by the funds and $4.8M funded by debt). SBI participated in an underfunded multiemployer (or union) defined benefit pension plan, and when SBI declared bankruptcy in 2008, the pension plan assessed $4.5M in withdrawal liabilities against SBI. The pension plan pursued payment of the withdrawal liabilities from the deep pockets of the three Sun Capital funds who owned SBI: Sun Capital Partners III, LP (SCP-III), its parallel fund Sun Capital Partners III QP, LP (SCP-IIIQ) and Sun Capital Partners IV, LP (SCP-IV).
In February, California State Treasurer, John Chiang along with State Assemblyman Ken Cooley sponsored Assembly Bill (AB) 2833 which, if enacted, would require private equity firms to disclose fees and expenses for public pensions or retirement systems in California.
On March 17, 2016 Assemblyman Cooley submitted an amendment to the legislation that would include the University of California pension system as a pension covered by the newly proposed disclosure rules. Additionally, the legislation has been broadened to include all Alternative Investment Vehicles (defined as private equity funds, venture funds, hedge funds or absolute return funds) and require a disclosure of:
- Annual fees and expenses paid to an alternative investment vehicle
- Annual fees and expenses not previously disclosed including carried interest
- Annual fees and expenses paid by portfolio companies of the alternative investment vehicle
- The gross rate or return of each alternative investment vehicle since inception
Finally, the legislation would require public pensions or retirement systems to have an annual meeting that is open to the public. At the public meeting the public pension or retirement system would be required to disclose:
- Any fees and expenses required to be disclosed as listed above, subject to the exceptions provided in the California Public Records Act Section 6254.26
The full text of the amended AB 2833 can be found here.
Our prior post on the public pension fee and expense disclosure can be found here.
On January 11, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced its 2016 Examination Priorities (“Priorities”). To promote compliance, prevent fraud and identify market risk, OCIE examines investment advisers, investment companies, broker-dealers, municipal advisors, transfer agents, clearing agencies, and other regulated entities. In 2016, OCIE will continue to rely on the SEC’s sophisticated data analytics tools to identify potential illegal activity.
This year, private fund advisers should pay attention to the following OCIE Priorities:
- Side-by-side management of performance-based and asset-based fee accounts: controls and disclosure related to fees and expenses
- Cybersecurity: testing and assessments of firms’ implementation of procedures and controls
- High frequency trading: excessive or inappropriate trading
- Liquidity controls: potentially illiquid fixed income securities – focus on controls over market risk management, valuation, liquidity management, trading activities
- Marketing / Advertisements: new, complex, and high risk products, including potential breaches of fiduciary obligations
- Compliance controls: focus on repeat offenders and those with disciplined employees
Highlights for other market participants:
- Never-Before-Examined Investment Advisers and Investment Companies: focused, risk-based examinations will continue
- Marketing / Advertisements: new, complex, and high risk products and related sales practices, including potential suitability issues
- Fee selection / Reverse Churning: multiple fee arrangements – recommendations of account types, including suitability, fees charged, services provided, and disclosures
- Market Manipulation: pump and dump; OTC quotes; excessive trading
- Cybersecurity: testing and assessments of firms’ implementation of procedures and controls
- Anti-Money Laundering: missed SARs filings; adequacy of independent testing; terrorist financing risks
- Registered representatives in branch offices – focus on inappropriate trading
- Retirement Accounts: suitability, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices
- Public Pension Advisers: pay to play, gifts and entertainment
- Mutual Funds and ETFs: liquidity controls – potentially illiquid fixed income securities
- Immigrant Investor Program: Regulation D and other private placement compliance
For additional details, visit the SEC’s Examination Priorities for 2016. Please call an Investment Funds and Investment Management Attorney to discuss your firm’s risk areas.