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.
At the end of this month, the annual updating amendments for investment advisers’ Form ADV will be due. 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) 2016 Enforcement Priorities In The Alternative Space; (iii) New Developments; and (iv) Continuing Compliance Areas.
See the deadlines below and in red
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.
On November 3, 2015, an Illinois federal jury convicted Michael Coscia, a high-frequency commodities trader, of six counts of commodities fraud and six counts of spoofing—entering a buy or sell order with the intent to cancel before the order’s execution.1 Coscia’s conviction was the first under the criminal anti-spoofing provisions added to the Commodity Exchange Act (CEA) by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In the press release touting its victory, the prosecution announced: “The jury’s verdict exemplifies the reason we created the Securities and Commodities Fraud Section in Chicago, which will continue to criminally prosecute these types of violations.” High-frequency traders should take note that the conviction on all six counts of spoofing charged in Coscia’s case may embolden prosecutors across the nation to pursue other spoofing cases with vigor. Given the real possibility of a felony indictment and conviction for spoofing—the latter of which exposes a defendant to imprisonment for up to ten years and significant monetary fines—high-frequency traders should carefully evaluate their strategies and conduct.2
U.S. Investment advisers, other financial services providers, and pooled investment vehicles – private and public funds – involved in certain cross-border transactions must file.
The U.S. Department of Commerce’s Bureau of Economic Analysis (“BEA”) is conducting its next five-year “Benchmark Survey of U.S. Financial Services Providers and Foreign Persons” on Form BE-180. The survey is mandatory and collects data on cross-border trade and financial services transactions of U.S. financial services providers, including investment advisers and other asset managers, broker-dealers and banks. BE-180 covers cross-border purchase and sales transactions that occurred or were charged during the U.S. reporter’s 2014 fiscal year. BE-180 is one of a series of benchmark surveys measuring international trade transactions and collecting data for use in various economic studies.
Who Is Required to Report
Each U.S. individual and entity that is a “financial services provider” and meets the reporting requirements must file form BE-180. Financial services providers include investment advisers and their pooled vehicles such as hedge funds, private equity funds, pension funds, mutual funds and real estate funds, and broker-dealers.
The reporting requirement applies to each U.S. individual or entity that is a financial services provider with (i) either sales or purchases directly with non-U.S. individuals or entities in excess of $3 million or more on a consolidated basis during the 2014 fiscal year, or (ii) sales or purchases directly with non-U.S. individuals or entities of less than $3 million, that were notified by the BEA about the survey. Any U.S. individual or entity that is notified by the BEA about the survey but has no transactions of the types of services covered must complete pages 1-3 of the survey.
Reportable financial transactions include investment management and advisory services, brokerage services, underwriting, custodial services, credit-related services, securities lending, and electronic funds transfer services – transactions involving cross-border payments, such as advisory or sub-advisory fees, brokerage commissions, custodial fees and securities lending fees.
Reportable data include the transactional counterparty’s location by country and the relationship between the U.S. reporter and its counterparty (i.e., foreign affiliates or unaffiliated foreign persons). You may have easy access to some of the required data (such as through your administrator or internal accounting systems). However, as with the other BE forms, obtaining some of the required information may involve additional legwork and cooperation with cross-border counterparties, which should be considered in meeting the deadlines.
Filing Deadline and Extensions
The BEA has granted automatic extensions to the original October 1 filing deadline, as follows:
File no later than November 1, 2015 if:
- You were notified of the BE-180 survey by BEA and have a BE-180 identification number below 140012490.
- You were NOT notified of the BE-180 survey by BEA and do NOT have a BE-180 identification number.
File no later than December 1, 2015 if:
- You were notified of the BE-180 survey by BEA and have a BE-180 identification number above 140012490.
Additional extensions to each filing deadline will be granted by the BEA if a request is submitted by November 1, 2015 as instructed by the BEA.
Failure to file a required report can lead to civil and criminal penalties.
Like it is the case with the other BE forms, information reported on BE-180 is confidential and may be used for only analytical or statistical purposes.
Form BE-180 is available online here.
Instructions for new filers are available here.
Form instructions are available here.
FAQs regarding the BE-180 benchmark survey are available here.
 Additional entities included in the definition are commercial banking entities, bank holding companies, financial holding companies, savings institutions, check cashing and debit card issuing entities, underwriters, investment bankers, providers of securities custody services, insurance carriers, insurance agents, insurance brokers, and insurance services providers.
 The $3 million threshold applies to purchases and sales separately, and must be reported on separate schedules to the BE-180. Consequently, a U.S. reporter, for example, that only exceeds the threshold for sales but does not reach the threshold for purchases, is only required to complete the schedule relating to sales.
A U.S. person with a financial interest in or signature authority over a foreign bank, securities (including brokerage account, margin account, mutual fund, trust) or other financial account in another country that has an aggregate value exceeding $10,000 at any time during the 2014 calendar year must file FinCEN Report 114 by June 30, 2015. FinCEN Report 114 supersedes Form TD F 90-22.1. Individuals filing the report must file electronically through the BSA E-Filing System.
If you need assistance, please call an attorney in our Investment Funds and Investment Management group.
The Securities and Exchange Commission (SEC) today proposed rules, forms and amendments to modernize and enhance the reporting and disclosure of information by investment advisers and investment companies.
Investment advisers. The investment adviser proposed rules would amend the investment adviser registration and reporting form (Form ADV), and Investment Advisers Act Rule 204-2. On Form ADV, the proposed rules would require investment advisers to provide additional information for the SEC and investors to better understand the risk profile of individual advisers and the industry. Investment advisers would be required to report, among other things, detailed information about their separately managed accounts, including assets under management and types of assets held in the accounts. The proposed amendments to Investment Advisers Act Rule 204-2 would require advisers to maintain records of performance calculations and communications related to performance.
Investment companies. The investment company proposed rules would enhance data reporting for mutual funds, ETFs and other registered investment companies. The proposals would require a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information. The information would be reported in a structured data format, which would allow the SEC and the public to better analyze the information. The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.
Highlights of the investment adviser and investment company proposals are available HERE.
The SEC is requesting for comments which should be submitted to be received within 60 days from publication of the proposed rules in the Federal Register.
The Division of Investment Management (the “Division”) of the Securities and Exchange Commission issued a cybersecurity guidance identifying cybersecurity of registered investment companies (“funds”) and registered investment advisers (“advisers”) as an important issue. Recognizing the rapidly changing nature of cyber threats and consequently, the necessity for funds and advisers to protect sensitive information including information of fund investors and advisory clients, the Division is suggesting a number of measures that funds and advisers may wish to consider in addressing the issue. To mitigate cybersecurity risk, the Division suggests that funds and advisers: 1) conduct a periodic assessment of their technology system and security controls and processes to identify potential cybersecurity threats and vulnerabilities, 2) create a strategy that is designed to prevent, detect and respond to cybersecurity threats, and 3) implement the strategy through written policies and procedures, training of officers and employees, and investor and client education. In addition, the Division also suggests that funds and advisers may wish to consider reviewing their operations and compliance programs whether they have measures in place that mitigate their exposure to cybersecurity risk, as well as assessing whether protective cybersecurity measures are in place at service providers that they rely on in carrying out their business operations.
A full version of the cybersecurity guidance is available HERE.
Please call an Investment Funds and Investment Management attorney with your inquiries regarding your firm’s cybersecurity risks and compliance procedures that address them.
In a February 2015 Guidance Update, the Securities and Exchange Commission’s Division of Investment Management (“SEC”), provided guidance on the acceptance of gifts or entertainment by fund advisory personnel under Section 17(e)(1) of the Investment Company Act of 1940 (the “Act”). Section 17(e)(1) provides that any affiliated person of a registered investment company, or any affiliated person of such person acting as agent, is prohibited from receiving any compensation, outside of regular salary or wages, for the purchase or sale of any property to or for the registered company or any controlled company thereof. The SEC has found that gifts or entertainment meet the definition of “compensation” as it is used in Section 17(e)(1), and proof of any intended or actual influence is not required. Pursuant to Rule 38a-1 of the Act, a fund must implement written policies and procedure designed to prevent the fund and its service providers from violating securities laws. The Guidance Update suggests that the policies and procedures concerning the receipt of gifts or entertainment should be included in the fund’s compliance policies and procedures, though it defers to the fund to determine whether there should be an outright ban, or a type of pre-clearance to determine if the gift or entertainment would violate Section 17(e)(1).
The Securities and Exchange Commission (“SEC”) issued a cease-and-desist order on February 19, 2015 against SEC-registered Logical Wealth Management, Inc. and owner, Daniel J. Gopen, (together, “Respondents”). The list of violations the SEC found the Respondents committed is extensive and includes improper registration, compliance, and recordkeeping. The SEC found the Respondents exaggerated their assets under management in order to register with the SEC, falsely reported their place of business as Wyoming, a state in which advisers are not regulated, and did not have compliance policies and procedures in place or books and records available to the SEC. The SEC has ordered the Respondents to cease and desist, revoked Logical Wealth’s registration, barred Mr. Gopen from any advisory activity and imposed a $25,000 civil penalty.