Sadis & Goldberg Blog

The SEC's Compliance Outreach Program's National Seminar will focus on issues relevant to chief compliance officers (CCOs) and other senior personnel.  The National Seminar will be held in Washington, DC on January 31, 2012.  The agenda for the seminar is available at http://www.sec.gov/info/complianceoutreach/complianceoutreachns2012-agenda.htm.  In-person attendance was limited to the first 500 registrants and the registration is now closed.

For those of you not able to attend in person, the Seminar will be simulcast over the Internet through the SEC's website at http://www.sec.gov/news/otherwebcasts.shtml.  You do not have to register for the webcast and there is no charge to access the seminar.

For additional details, please go to http://www.sec.gov/info/complianceoutreach/complianceaoutreachns2012.htm.  

If you have any concerns about your own compliance program, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com, Ron S. Geffner at 212.573.6660 or rgeffner@sglawyers.com, or Todd Warren at 212.573.8021 or twarren@sglawyers.com.

Institutional investment managers ("Managers") that exercise investment discretion over $100 million or more in Section 13(f) [1] securities are required to file quarterly reports disclosing their holdings on the Form 13F.  The deadline to file the initial Form 13F for the quarter ending December 2011 is February 14, 2012.   

A Manager who reaches the $100 million filing threshold [2] for its first time as of the last trading day of any month during a calendar year will be required to make its initial Form 13F filing within 45 days after the end of the calendar year during which it reached the $100 million filing threshold.[3]  Thereafter, the Manager will be required to file Form 13F within 45 days after the end of each of the first three calendar quarters (March 31, June 30 and September 30).  For example, if a Manger first met the $100 threshold on the last day of trading of July 2011, then its first Form 13F will be for the quarter ending December 2011 (to be submitted to the SEC via EDGAR by February 14, 2012).  The Manager will also have to file Form 13F reports for the calendar quarters ending in March 2012, June 2012 and September 2012. 

Any Managers with questions regarding Form 13F should not hesitate to contact either Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com or Micah Nessan at 212.573.8034 or mnessan@sglawyers.com.

[1] See Section 13(f) of the Securities Exchange Act of 1934.

[2]In calculating whether a Manager has met the $100 million threshold, Managers should use the fair market value of the Section 13(f) securities at the close of trading on the last trading day of each calendar month.  If a Manager's portfolio of Section 13(f) securities includes options, for purposes of calculating the $100 million threshold only, Managers are required to use the value of the options themselves and not the value of the shares underlying such options.

[3] Note that if a Manager has not been issued an EDGAR ID by the SEC then the Manager will have to apply for an EDGAR ID as Form 13Fs are submitted via the SEC's EDGAR system.   

By Daniel G. Viola and Charles H. Dufresne, Jr.                                                           

Municipal Advisers (as defined below), must now register with the Securities and Exchange Commission ("SEC"), as well as the Municipal Securities Rulemaking Board ("MSRB"). SEC registration must be completed by December 31, 2011, whereas registration with the MSRB was mandated as of December 31, 2010. "Municipal Advisers" who missed the filing deadline may be subject to enforcement action for acting as an unregistered "Municipal Adviser."  MSRB registration can only be completed after the SEC registration is in place. 

Background - 

The Dodd-Frank Act defines a "Municipal Adviser" as any person who provides advice to or on behalf of a "Municipal Entity" or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues, or who undertakes a solicitation of a "Municipal Entity". A "Municipal Adviser" excludes the following: 

1.     Broker-dealer of municipal securities dealer serving as an underwriter;

2.     Attorneys offering legal advice;

3.     Engineers providing engineering advice;

4.     Investment advisers registered under the Investment Advisers Act of 1940; and

5.     Commodity trading advisers registered under the Commodity Exchange Act. [1]

A "Municipal Entity" is defined as any state, political subdivision of a state, or municipal corporate instrumentality of a state, including:

1.     Agency, authority or instrumentality of the state, political subdivision, or municipal corporate instrumentality;

2.     Any plan, program or pool of assets sponsored or established by the state, political subdivision or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and

3.     Any other issuer of municipal securities. [2] 

If you have any questions regarding this Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com  or Charles H. Dufresne, Jr. at 212.573.8410 or cdufresne@sglawyers.com. 

1.     See Section 15B(e)(4)(A) of the amended Securities Exchange Act of 1934

2.     See Section 15B(e)(8) of the amended Securities Exchange Act of 1934

To avoid becoming subject to additional requirements under SEC Rule 206(4)-2 of the Investment Advisers Act of 1940 (the "Custody Rule"), advisers to "fund of funds" must distribute their fund's audited financial statements to investors within 180 days from the end of their fiscal year end.  Advisers will need to deliver the audited financial statements by June 30, 2011, assuming a fiscal year end of December 31st. The SEC defines a "fund of funds" as a pooled investment vehicle that invests 10 percent or more of its total assets in other pooled investment vehicles that are not, and are not advised by, a related person of the pool, its general partner, or its adviser. In general, the audited financial statements must be prepared in accordance with GAAP.
 
Advisers that fail to distribute the audited financial statements by the required deadline will be deemed to have custody of investor assets under the Custody Rule and be subject to additional requirements, including, but not limited to, engaging an independent public accountant to perform a surprise audit before December 31, 2011.
 
If you have any questions concerning this Alert or if you would like to review any annual requirements, please contact Daniel G. Viola at 212.573.8038 or via email at dviola@sglawyers.com.
 
 

On May 10^th, the U. S. Securities and Exchange Commission ("SEC") issued a proposed rule that would raise the performance fee eligibility thresholds of Rule 205-3 under the U.S. Investment Advisers Act of 1940 as amended ("Advisers Act"),  to $1 million in assets-under-management ("AUM").[1]   If the proposed rule is enacted, a client will have to have $1 million (increased from $750,000) in AUM with the adviser or $2 million (increased from $1.5 million) in net worth.

Section 205(a)(1) of the Advisers Act generally prohibits 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.  However, Section 205(e) of the Advisers Act authorizes the SEC to exempt an adviser from the performance fee prohibition if the SEC determines that the client does not need the protection of the prohibition.

In 1985, the SEC adopted Rule 205-3 which exempts an investment adviser from the prohibition against charging a client performance fees if the client has at least $750,000 under management with the adviser or if the adviser believes that the client had a net worth of $1.5 million at the time the investment advisory contract was entered into.  Under the proposed rule, the AUM threshold would be raised to $1 million and the net worth threshold would be raised to $2 million.  Clients who are "qualified purchasers" or "knowledgeable employees" will continue to be exempt under the proposed rule.

Additional proposed changes to Rule 205-3 include the following:  

1. The SEC will issue an order every five (5) years adjusting the dollar amounts for inflation;
2. Exclude the value of a person's primary residence from such person's net worth to be considered a "qualified client" (similar to the recent changes to the definition of "accredited investor"); and
3. "Grandfather" adviser's existing contractual relationships.

The SEC is seeking comments on the proposed rule on or before July 11, 2011.  If you have any questions regarding this Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com. 

[1]  See Investment Adviser Performance Compensation, Advisers Act Release No. 3198 (May 10, 2011), http://www.sec.gov/rules/proposed/2011/ia-3198.pdf

The information contained herein was prepared by Sadis & Goldberg LLP for general informational purposes for clients and friends of Sadis & Goldberg LLP. Its contents should not be construed as legal advice, and readers should not act upon the information in this Alert without consulting counsel. This information is presented without any representation or warranty as to its accuracy, completeness or timeliness. Transmission or receipt of this information does not create an attorney-client relationship with Sadis & Goldberg LLP. Electronic mail or other communications with Sadis & Goldberg LLP cannot be guaranteed to be confidential and will not create an attorney-client relationship with Sadis & Goldberg LLP.

The SEC sent a letter to the North American Securities Administrators Association Inc., stating that it is considering extending the reporting and registration deadlines for investment advisers until the first quarter of 2012.1

Subject to narrowly defined exemptions, the Dodd-Frank Act requires all investment advisers that manage $100 million or more in assets to register with the SEC. Investment advisers with less than $100 million of assets may also be required to register with the SEC or relevant state regulators.  Importantly, the "private adviser" exemption which many hedge fund and private equity fund managers relied upon in the past is being eliminated. The "private adviser" exemption enabled an investment adviser to avoid SEC registration if it: (i) did not act as an investment adviser to a registered investment company or business development company; (ii) had fewer than 15 clients (counting each fund as 1 client); and (iii) did not hold itself out to the public as an investment adviser. The SEC has been issuing additional guidance, on an ongoing basis, on numerous aspects of the Dodd-Frank Act relating to investment adviser registration.  The SEC must also coordinate its efforts with various State regulators.  While the SEC has proposed extending the deadline to the first quarter of 2012, it is advised that investment advisers that fall under registration requirements prepare the necessary applications to register well in advance of the proposed deadlines to ensure that regulators will be able to approve their applications in a timely manner.  Regulators may impose sanctions on investment advisers that fail to register. 

Here are some important compliance deadlines for investment adviser filings under the Dodd-Frank Act:

If you have any questions concerning this Alert or any related matters, please contact Daniel G. Viola, 212-573-8038 (dviola@sglawyers.com).  

1.      SEC letter, dated April 8, 2011, addressed to the North American Securities Administrators Association Inc., http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf.

2.     See, Rule 204-3(b) of the Investment Advisers Act of 1940, as amended (the "Advisers Act").

3.     See, Proposed Rule 203A-5 of the Advisers Act.

4.     See, Section 203(h) of the Advisers Act.

The Commodities Futures Trading Commission ("CFTC") recently issued proposals that would eliminate or narrow exemptions from registration and regulation currently available to investment funds.1   Many funds currently rely on such exemptions to avoid commodity pool operator ("CPO") and commodity trading advisor ("CTA") registration and the related regulatory requirements.

 
The CFTC proposes to make the following amendments, among others: 

• Rescind registration exemptions available for CPOs offering commodity pools; 2
• Require CPOs or CTAs claiming exemptive or exclusionary relief from registration to file annual notices; 3
• Require CPOs and CTAs that are registered solely with the CFTC to file detailed  reports regarding their commodity trading activities;
• Amend the risk disclosure requirements in CPO and CTA documents to include descriptions of certain risks related to swap transactions; and
• Implement a change to the reporting requirements and the criteria for participant qualifications for CPOs and CTAs relying on CFTC Regulation 4.7. 4

The CFTC has stated that the proposals are "consistent with the tenor of the provisions of the Dodd-Frank Act" even though they have not been mandated by Dodd-Frank. 5

If the proposals are enacted, the CFTC will have more oversight of market participants including registered and private funds participating in the commodity markets. 

Existing exemptions and exclusions to the current requirements remain available, as follows:  (i) for CPOs due to (a) their financial or investment sophistication or regulatory status; (b) the relatively small size of the pool; and/or (c) the limited amount of commodity interest trading in the pool; and (ii) for CTAs where (a) the person is exempt from CPO registration and provides commodity trading advice to such exempt pools; (b) is registered in another capacity and provides commodity trading advice solely incidental to that principal business; or (c) has provided advice to a limited number of clients in the past year and did not hold itself out to the public as a CTA. 
 

The CFTC appears intent on eliminating the CPO and CTA exclusions and exemptions.  However, the proposal is subject to a sixty (60) day comment period from the date the Proposing Release is published in the Federal Register. 6 

We will endeavor to update our clients with additional information related to the proposal as it becomes available.  Funds currently relying on an exemption from CPO or CTA registration should pay careful attention to CFTC proposals and notices on this topic.

If you have any questions concerning this Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com.  

-------------   

1. See Commodity Pool Operators and Commodity Trading Advisors:  Amendments to Compliance Obligations, 76 Fed. Reg. 7976.  Released on January 26, 2011. 

2. See CFTC Regulations 4.13(a)(3) or 4.13(a)(4) or 4.14(a)(5).  Rules can be found at the CFTC website: http://www.cftc.gov/foia/fedreg00/foi000301a.htm 

3. Id.

4. Id.

5. See, Dodd-Frank Wall Street Reform and Consumer Protection Act.  See also, Proposing Release at

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister012611b.pdf 

6. Id.

March 1, 2011 is the deadline for the SEC to receive the annual audit report for a broker-dealer with a fiscal year-end dated December 31.  The audit reports must also be sent to the broker-dealer's designated examining authority, such as FINRA or CBOE, and any states that require filings in which such broker-dealer is registered, by the due date. 

Every broker-dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), is required to file a certified annual audit no later than sixty (60) calendar days from its fiscal year-end.  A broker-dealer's designated examining authority may extend the deadline pursuant to the Exchange Act.  

If a broker-dealer does not believe that it can meet the deadline due to exceptional circumstances, it must request and receive an extension from its designated examining authority prior to the audit due date.  Grounds for an extension generally only involve obstacles to filing that the broker-dealer cannot control, such as the auditor's technical difficulties.  A broker-dealer that is a member of FINRA specifically must request an extension from its FINRA District Office no later than three (3) business days prior to the filing deadline.

If you have any questions concerning this Alert or if you would like to review any annual requirements, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com or Rachel Greer at 212.573.8168 or rgreer@sglawyers.com.