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SEC | Hedge Fund Law Blog
Allows Hedge Funds to Openly Solicit Investors
President Obama has signed into law the Jumpstart Our Business Startups Act (“JOBS Act”), a law which eases some of the private investment fund industry’s long-standing regulatory burdens.
There are two parts of the JOBS Act which in particular stand out for the hedge fund industry: (1) private investment fund managers including hedge fund managers may now make general solicitations and advertise their fund in order to attract investors, as long as the funds only have accredited investors; and (2) private funds and hedge funds may now have up to 1,999 accredited investors, or 500 non-accredited investors, without having to register with the SEC under the 1934 Act. [For background information on this issue, please see section “500 or Fewer Investors” on our post about Section 3(c)(7) hedge funds.]
During the next 90 days the SEC will be promulgating regulations with respect to the changes in the securities laws.
Ban Lifted on General Solicitation and Advertising
Previously Rule 506 of Regulation D prevented private fundsfrom advertising publicly or soliciting the public for investment. This rule raised the specter of liability in numerous contexts. For example, private fund managers and employees could face serious consequences – including risking the fund’s SEC filing exemption (different from IA registration exemption) – for discussing their investment strategy with certain potential clients, or for putting their contact information on a fund’s publicly-accessible website. The JOBS Act changes this statutory scheme, allowing private funds to advertise publicly and to solicit the public for investment. It is not yet clear precisely what forms of advertising and solicitation will be permitted under the new rule. The SEC still has 90 days from the date of the signing of the JOBS Act to issue final regulations which will likely include more details on allowable advertisements and solicitation.
Increased Number of Accredited Investors
Prior to the JOBS Act, the Securities Exchange Act of 1934 required private funds to register with the SEC if they had more than 499 accredited investors (see 3(c)(7) link above). Under the new law, a private fund may have as many as 1,999 accredited investors without triggering that registration requirement. Increasing the number of permitted investors may allow private funds to raise more capital. [Note: the new law also creates a new source of financing called “crowdfunding.” A detailed analysis of this topic is beyond the scope of this blog post, but it should be noted that purchasers in a crowdfunding are not counted toward the 1,999 investor limit. Also not counted are employees who receive securities from a fund pursuant to an executive compensation plan.]
The new rules do not apply to commodity pools which are subject to other regulatory oversight from the CFTC because of the Commodities Exchange Act. In general many commodity pool operators are going through the CFTC CPO registration process because of separate CFTC rulemaking which we detailed in a previous post.
While many groups including hedge fund managers are applauding this shift in the law, the SEC is likely to craft regulations which seek to limit the full extent of the potential general solicitations. Fund managers should remember that while general solicitations may be allowable in the future, managers may still be subject to other regulations under the Investment Advisers Act, especially after the Dodd-Frank requirement for hedge funds to register with the SEC. Specifically, fund managers who are SEC registered IAs cannot use testimonials and there are a number of requirements for hedge fund performance reporting which will need to be followed. While it is clear that private fund managers will have more flexibility with respect
to advertising than before the JOBS Act was passed, managers will need to be vigilant with their compliance programs if they decide to adopt more agressive public advertising campaigns.
Many more updates on this topic are expected.
Cole-Frieman Mallon & Hunt LLP provides regulatory and legal services to the investment management community. Bart Mallon’s practice focuses on both hedge fund manages as well as the managed futures industry. Please contact us or you can reach Bart Mallon directly at 415-868-5345.
This entry was posted in SEC and tagged hedge fund general solicitation, hedge fund performance reporting, JOBS Act, JOBS Act hedge fund on April 16, 2012 by Hedge Fund Lawyer.
Rule 206(4)-2 – Hedge Fund Custody Rule
From time to time on this site we discuss the custody rule for SEC registered hedge fund managers. Below we have reprinted the entire regulation.
Rule 206(4)-2 –Custody of Funds or Securities of Clients by Investment Advisers
a. Safekeeping required. If you are an investment adviser registered or required to be registered under section 203 of the Act, it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for you to have custody of client funds or securities unless:
1. Qualified custodian. A qualified custodian maintains those funds and securities:
i. In a separate account for each client under that client's name; or
ii. In accounts that contain only your clients' funds and securities, under your name as agent or trustee for the clients.
2. Notice to clients. If you open an account with a qualified custodian on your client's behalf, either under the client's name or under your name as agent, you notify the client in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained, promptly when the account is opened and following any changes to this information. If you send account statements to a client to which you are required to provide this notice, include in the notification provided to that client and in any subsequent account statement you send that client a statement urging the client to compare the account statements from the custodian with those from the adviser.
3. Account statements to clients. You have a reasonable basis, after due inquiry, for believing that the qualified custodian sends an account statement, at least quarterly, to each of your clients for which it maintains funds or securities, identifying the amount of funds and of each security in the account at the end of the period and setting forth all transactions in the account during that period.
4. Independent verification. The client funds and securities of which you have custody are verified by actual examination at least once during each calendar year, except as provided below, by an independent public accountant, pursuant to a written agreement between you and the accountant, at a time that is chosen by the accountant without prior notice or announcement to you and that is irregular from year to year. The written agreement must provide for the first examination to occur within six months of becoming subject to this paragraph, except that, if you maintain client funds or securities pursuant to this section as a qualified custodian, the agreement must provide for the first examination to occur no later than six months after obtaining the internal control report. The written agreement must require the accountant to:
i. File a certificate on Form ADV-E (17 CFR 279.8) with the Commission within 120 days of the time chosen by the accountant in paragraph (a)(4) of this section, stating that it has examined the funds and securities and describing the nature and extent of the examination;
ii. Upon finding any material discrepancies during the course of the examination, notify the Commission within one business day of the finding, by means of a facsimile transmission or electronic mail, followed by first class mail, directed to the attention of the Director of the Office of Compliance Inspections and Examinations; and
iii. Upon resignation or dismissal from, or other termination of, the engagement, or upon removing itself or being removed from consideration for being reappointed, file within four business days Form ADV-E accompanied by a statement that includes:
A. The date of such resignation, dismissal, removal, or other termination, and the name, address, and contact information of the accountant; and
B. An explanation of any problems relating to examination scope or procedure that contributed to such resignation, dismissal, removal, or other termination.
5. Special rule for limited partnerships and limited liability companies. If you or a related person is a general partner of a limited partnership (or managing member of a limited liability company, or hold a comparable position for another type of pooled investment vehicle), the account statements required under paragraph (a)(3) of this section must be sent to each limited partner (or member or other beneficial owner).
6. Investment advisers acting as qualified custodians. If you maintain, or if you have custody because a related person maintains, client funds or securities pursuant to this section as a qualified custodian in connection with advisory services you provide to clients:
i. The independent public accountant you retain to perform the independent verification required by paragraph (a)(4) of this section must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and
ii. You must obtain, or receive from your related person, within six months of becoming subject to this paragraph and thereafter no less frequently than once each calendar year a written internal control report prepared by an independent public accountant:
A. The internal control report must include an opinion of an independent public accountant as to whether controls have been placed in operation as of a specific date, and are suitably designed and are operating effectively to meet control objectives relating to custodial services, including the safeguarding of funds and securities held by either you or a related person on behalf of your advisory clients, during the year;
B. The independent public accountant must verify that the funds and securities are reconciled to a custodian other than you or your related person; and
C. The independent public accountant must be registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules.
7. Independent representatives. A client may designate an independent representative to receive, on his behalf, notices and account statements as required under paragraphs (a)(2) and (a)(3) of this section.
1. Shares of mutual funds. With respect to shares of an open-end company as defined in section 5(a)(1) of the Investment Company Act of 1940 (“mutual fund”), you may use the mutual fund's transfer agent in lieu of a qualified custodian for purposes of complying with paragraph (a) of this section;
2. Certain privately offered securities.
i. You are not required to comply with paragraph (a)(1) of this section with respect to securities that are:
A. Acquired from the issuer in a transaction or chain of transactions not involving any public offering;
B. Uncertificated, and ownership thereof is recorded only on the books of the issuer or its transfer agent in the name of the client; and
ii. Notwithstanding paragraph (b)(2)(i) of this section, the provisions of this paragraph (b)(2) are available with respect to securities held for the account of a limited partnership (or a limited liability company, or other type of pooled investment vehicle) only if the limited partnership is audited, and the audited financial statements are distributed, as described in paragraph (b)(4) of this section.
3. Fee deduction. Notwithstanding paragraph (a)(4) of this section, you are not required to obtain an independent verification of client funds and securities maintained by a qualified custodian if:
i. you have custody of the funds and securities solely as a consequence of your authority to make withdrawals from client accounts to pay your advisory fee; and
ii. if the qualified custodian is a related person, you can rely on paragraph (b)(6) of this section.
4. Limited partnerships subject to annual audit. You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limite
d liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))):
i. At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year;
ii. By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and
iii. Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.
5. Registered investment companies. You are not required to comply with this section with respect to the account of an investment company registered under the Investment Company Act of 1940.
6. Certain Related Persons. Notwithstanding paragraph (a)(4) of this section, you are not required to obtain an independent verification of client funds and securities if:
i. you have custody under this rule solely because a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients; and
ii. your related person is operationally independent of you.
c. Delivery to Related Person. Sending an account statement under paragraph (a)(5) of this section or distributing audited financial statements under paragraph (b)(4) of this section shall not satisfy the requirements of this section if such account statements or financial statements are sent solely to limited partners (or members or other beneficial owners) that themselves are limited partnerships (or limited liability companies, or another type of pooled investment vehicle) and are your related persons.
d. Definitions. For the purposes of this section:
1. Control means the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise. Control includes:
i. Each of your firm's officers, partners, or directors exercising executive responsibility (or persons having similar status or functions) is presumed to control your firm;
ii. A person is presumed to control a corporation if the person:
A. Directly or indirectly has the right to vote 25 percent or more of a class of the corporation's voting securities; or
B. Has the power to sell or direct the sale of 25 percent or more of a class of the corporation's voting securities;
iii. A person is presumed to control a partnership if the person has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital of the partnership;
iv. A person is presumed to control a limited liability company if the person:
A. Directly or indirectly has the right to vote 25 percent or more of a class of the interests of the limited liability company;
B. Has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital of the limited liability company; or
C. Is an elected manager of the limited liability company; or
v. A person is presumed to control a trust if the person is a trustee or managing agent of the trust.
2. “Custody”means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes:
i. Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them;
ii. Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and
iii. Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.
3. Independent public accountant means a public accountant that meets the standards of independence described in rule 2-01(b) and (c) of Regulation S-X (17 CFR 210.2-01(b) and (c)).
4. Independent representative means a person that:
i. Acts as agent for an advisory client, including in the case of a pooled investment vehicle, for limited partners of a limited partnership (or members of a limited liability company, or other beneficial owners of another type of pooled investment vehicle) and by law or contract is obliged to act in the best interest of the advisory client or the limited partners (or members, or other beneficial owners);
ii. Does not control, is not controlled by, and is not under common control with you; and,
iii. Does not have, and has not had within the past two years, a material business relationship with you.
5. Operationally independent: for purposes of paragraph (b)(6) of this section, a related person is presumed not to be operationally independent unless each of the following conditions is met and no other circumstances can reasonably be expected to compromise the operational independence of the related person:
i. Client assets in the custody of the related person are not subject to claims of the adviser's creditors;
ii. advisory personnel do not have custody or possession of, or direct or indirect access to client assets of which the related person has custody, or the power to control the disposition of such client assets to third parties for the benefit of the adviser or its related persons, or otherwise have the opportunity to misappropriate such client assets;
iii. advisory personnel and personnel of the related person who have access to advisory client assets are not under common supervision; and
iv. advisory personnel do not hold any position with the related person or share premises with the related person.
6. Qualified custodian means:
i. A bank as defined in section 202(a)(2) of the Advisers Act or a savings association as defined in section 3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)) that has deposits insured by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. 1811);
ii. A broker-dealer registered under section 15(b)(1) of the Securities Exchange Act of 1934, holding the client assets in customer accounts;
iii. A futures commission merchant registered under section 4f(a) of the Commodity Exchange Act (7 U.S.C. 6f(a)), holding the client assets in customer accounts, but only with respect to clients' funds and security futures, or other securities incidental to transactions in contracts for the purchase or sale of a commodity for future delivery and options thereon; and
iv. A foreign financial institution that customarily holds financial assets for its customers, provided that the foreign financial institution keeps the advisory clients' assets in customer accounts segregated from its proprietary assets.
7. Related person means any person, directly or indirectly, controlling or controlled by you, and any person that is under common control with you.
Cole-Frieman & Mallon LLP provides comprehensive legal support to hedge fund managers. Bart Mallon can be reached directly at 415-868-5345.
This entry was posted in SEC and tagged custody rule, hedge fund custody, Rule 206(4)-2 on September 21, 2011 by Hedge Fund Lawyer.
SEC Increases Threshold for Performance Fees
New Qualified Client Definition Effective September 19, 2011
The Dodd-Frank Act required the SEC to revise upward the dollar thresholds for a person to be deemed a “qualified client” pursuant to Rule 205-3. The qualified client definition is important because SEC registered investment advisers (including hedge fund managers) cannot charge performance fees to those investors who are not qualified clients. Previously an individual needed to have a net worth of $1.5 million or have $750,000 of AUM with the investment adviser. The new thresholds are $2 million and $1 million respectively.
It does not appear that there are any grandfathering provisions that will be applicable and it is currently unclear whether managers will need to seek confirmation from current investors/clients as to whether such investors meet the new qualified client definition. If managers are required to seek additional confirmation from current investors, this will obviously create additional legal and administrative expenses for managers. Regardless, for any future investors/clients, SEC registered investment
advisers (and those groups that will be registering within the next 9 months) should make sure that the new qualified client definition is included in all subscription documents and other investment advisory contracts.
Another important issue is how this change will affect state registered investment advisers. Many state laws and regulations either mirror the federal laws and regulations or make specific reference to Rule 205-3. It is likely that many states will be coming out with guidance on this issue either through notifications or orders, or through legislative changes. Nonetheless, most state registered investment advisers should begin making plans to adapt to the changes at the federal level.
As more information from the states become available, we will be providing updates on this blog.
The notice of the SEC order is reprinted below and can be found here.
The actual SEC Order can be found here: SEC Order – Qualified Client Definition
Washington, D.C., July 12, 2011 – The Securities and Exchange Commission today issued an order that raises, to adjust for inflation, two of the thresholds that determine whether an investment adviser can charge its clients performance fees. The order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This entry was posted in SEC on July 13, 2011 by Hedge Fund Lawyer.
Annual ADV Updating Amendment for IA Firms
Under SEC and state regulations, a registered investment advisory firm must file its annual amendment to Form ADV within 90 days of the end of its fiscal year. For most firms this means that the Annual Updating Amendment is due by March 31. In addition to the traditional updates which firms need to make on Form ADV, advisers will also need to be aware of the new regulations with respect to ADV Part 2 which may require the adviser to complete a new form ADV part 2 during the updating process. We are making special note of the updating requirement earlier than usual because of the new ADV 2 requirement.
Overview of Major Items on ADV to Update
When a firm completes an annual update to Form ADV, the firm should go through each question and make sure disclosures are accurate and up to date. In general the firm’s chief compliance officer will complete the update or work with an outside investment adviser compliance firm or law firm to complete the update.
Some of the key items of Form ADV which need to be updated include:
Employees (Items 5.A. and 5.B.)
Number of clients (Items 5.C. and 5.H.)
Number of accounts (Item 5.F.)
Assets under management (Item 5.G.)
Other material changes can also be disclosed on the Annual Updating Amendment, such as changes to reportable disciplinary and financial disclosures, contact information, custody, and ownership. [Note: these items need to be updated on Form ADV within 30 days of when they take place.]
While Part 1 of Form ADV can be completed using the online form on the IARD system, the new ADV Part 2 must be filed electronically as a text-searchable PDF. You will not be able to
submit a PDF file of a scanned copy Part 2 on the IARD system.
New Regulations Regarding ADV Part 2
IA firms applying for SEC registration as of January 1, 2011 and existing firms filing Annual Updating Amendments are now required to use the new Part 2A, the “firm brochure.” In addition, the SEC has established the following compliance dates regarding Part 2B, the “brochure supplement:”
SEC Compliance Dates for Delivery of Brochure Supplements to Clients
SEC Compliance Dates Extensions*
New/Prospective Clients Existing Clients New/Prospective Clients Existing Clients
New IA registrants Applying as of 01/01/11, deliver upon registering Applying between 01/01/11 and 04/30/11, begin delivering by 05/01/11
Applying after 04/30/11, deliver upon registering Applying between 01/01/11 and 04/30/11, deliver by 07/01/11.
Existing IAs Upon filing Annual Updating Amendment Within 60 days of filing Annual Updating Amendment Registered as of 12/31/10 with fiscal year ending 12/31/10 through 04/30/11, begin delivering by 07/31/11
Registered as of 12/31/10 with fiscal year ending after 04/30/11, deliver upon filing Annual Updating Amendment Registered as of 12/31/10 with fiscal year ending 12/31/10 through 04/30/11, deliver by 09/30/11
Registered as of 12/31/10 with fiscal year ending after 04/30/11, deliver within 60 days of filing Annual Updating Amendment
*On December 28, 2010, the SEC extended the compliance dates by four months to provide certain IAs more time to deliver the brochure supplement.
Incorporating the New ADV Part 2 for State Registrations
Because not all states have adopted the new ADV Part 2, state-registered IAs should check their state rules to confirm whether they need to use the new form or if they can continue to use the old form. In many states, the next amendment to Form ADV must include the new ADV Part 2, even if it is not the Annual Updating Amendment. For example, as of January 1, 2011, states including Alaska, California, Connecticut, Indiana, Maine, Maryland, Massachusetts, Ohio, Oregon, and Tennessee are requiring that registered IAs use the new ADV Part 2 as part of any amendment, as well as the required Annual Updating Amendment.
For more information on ADV Part 2, especially with respect to state adoptions, please see our update on new ADV Part 2.
For information on expected costs to prepare the new Form ADV 2, please see this post.
Bart Mallon provides investment adviser registration and compliance services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.
This entry was posted in SEC and tagged ADV annual amendment, annual amendment, form ADV on January 31, 2011 by Hedge Fund Lawyer.
NASAA is seeking comments on this proposed model rule. Comments should be submitted electronically to [email protected] or by mail to NASAA, Attn: Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002 by January 24, 2011.
New Form ADV Part 2 Update & Overview
Registered investment advisers (both SEC and state) will need to file their annual form ADV update within 90 days of the end of the fiscal year, which for most firms will be March 31, 2011. For many firms this will mean that they will also need to draft and submit the new Form ADV 2 which was adopted by the SEC in July of 2010 (see previous post). As many firms have had many questions about the new form, including what new content is required and how long it will take to complete the new form, this article will provide a summary of:
Background on the new Part 2
The structure and disclosure items of the Firm Brochure (Part 2A)
The structure and disclosure items of the Brochure Supplement (Part 2B)
Overview of states which have adopted new Part 2
On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted a new Part 2 that became effective October 12, 2010. The old Part II (and Schedule F which qualifies much of the information on the old Part II) contained a series of check-the-box options and also provided much of the same information which is also provided on Form ADV. The new Part 2 will no longer be in the check-the-box format. Instead, it will take the form of a narrative brochure written in plain English–the purpose of which is to provide clients with a more clear disclosure of the adviser’s business practices, conflicts of interest, and background.
The new Part 2 consists of three parts:
The “Firm Brochure” (Part 2A)
SEC-registered firms and firms registered in states that have adopted the new Part 2 must complete.
Filed electronically on the IARD system.
A Wrap Fee Program Brochure (Part 2A, Appendix 1)
The “Brochure Supplement” (Part 2B)
Not filed electronically.
The SEC has not provided a specific form that IAs must use when preparing the new Part 2. The following provides general guidelines on how to structure the Firm Brochure and Brochure Supplement, as well as what content to include. A full version of the new Part 2 instructions is available here. Firms applying for SEC registration for the first time after January 1, 2011 are required to use the new Part 2. Existing SEC-registered firms may use either the old Part II or the new Part 2 between October 12, 2010 and December 31, 2010. However, beginning January 1, 2011, firms will have to use the new Part 2 for their 2011 annual updating amendment.
More information about the filing and delivery deadlines for the new Part 2A and 2B are available here.
Firm Brochure (Part 2A)
The Firm Brochure requires an adviser to provide information about the firm’s business practices and conflicts of interest. Many of the disclosure items are similar to those required in the old Part II, such as a discussion of the advisory business and the types of clients. However, new disclosure items include a discussion of material changes since the last annual amendment as well as a discussion of potential conflicts of interest and how the firm will address such conflicts.
The Brochure consists of 18 separate disclosure items for SEC-registrations and additional items specifically for state-registrations. Each item must be addressed, even if it is not applicable to the adviser. The adviser may simply state it is not applicable. The following is a summary of the disclosure items in the Firm Brochure:
Firm name, business address, contact information, website (if any) and the date of the Brochure.
Specific disclaimer stating the Brochure was not approved by the SEC or any state authority.
If the firm refers to itself as a “registered investment adviser,” a specific disclaimer that registration does not imply a certain level of skill or training.
If the firm is making an annual update, the Brochure must discuss material changes in the Brochure since the last annual update in a summary. The summary can also be a separate document attached to the Brochure.
Must be detailed enough so that clients can locate topics easily.
Must list items in the same order as they are listed in the Brochure, and contain the same headings.
Describe the firm, how long it’s been in business, and identify the principals.
Describe the types of advisory services offered.
If the firm specializes in a particular type of services, e.g. financial planning, quantitative analysis, etc. provide greater detail.
If the firm provides investment advice only with respect to limited types of investments, explain and disclose that advice is limited in such way.
Explain whether the firm tailors advisory services and whether clients can impose restrictions on investments.
If the firm participates in wrap fee programs, describe the differences in how such accounts are managed versus other accounts and disclose that the firm receives a wrap fee.
If the firm manages client assets, disclose the amount managed on a discretionary basis and the amount managed on a non-discretionary basis.
Describe how the firm is compensated and provide a fee schedule. Note: This requirement is not required for Brochures delivered solely to qualified purchasers.
Provide other compensation-related disclosures: whether fees are deducted from client assets or whether clients will be billed for fees; any other types of fees (custodian fees, mutual fund expenses, brokerage/transaction costs); payment of fees in advance or arrears; and asset-based sales charges or service fees.
Discuss whether the firm charges performance-based fees or supervised persons manage accounts that pay such fees; and discuss how the fees are charged.
In addition, if the firm or supervised persons also manage accounts that do not charge such fees, discuss the potential conflicts of interest and how the firm will address such conflicts.
Describe the firm’s clients.
Describe any requirements for opening/maintaining an account.
Describe the methods of analysis and investment strategies used to formulate investment advice. Disclose that investing in securities involves risk of loss.
For significant investment strategies or methods of analysis, discuss material risks involved with such strategies and methods. If there are significant or unusual risks, discuss in detail. If strategies involve frequent trading, discuss how frequent trading affects performance.
If the firm recommends primarily a particular type of securities, explain the material risks. If there are significant or unusual risks, discuss in detail.
Disclose material facts about legal or disciplinary events about the firm or a management person. This item lists events that are presumed to be material if they occurred in the prior 10 years, unless (1) the event was resolved in the firm’s or the management person’s favor, or was reversed, suspended or vacated, or (2) the firm rebutted the presumption of materiality to determine that the event is not material.
In the interest of full and fair disclosure of material facts, disclose events not on the list, events not presumed material, and/or events that are more than 10 years old.
The Firm can rebut events that are presumed material.
Discuss whether the firm or management persons are registered or have pending applications to register as broker-dealers, broker-dealer reps, FCMs, CPOs, CTAs, or associate persons.
Describe material relationships with related financial industry participants (e.g. broker-dealers, registered reps of broker-dealers, investment companies or other pooled investment vehicles, FCMs, CPOs, CTAs, accounting firms, law firms, real estate brokers, etc.).
Describe material conflicts of interest that arise from such relationships and how those conflicts are addressed.
If the firm selects or recommends other investment advisers for clients, the firm must disclose compensation arrangements (if any) with those advisers and any other business relationships with such advisers, as well as any material conflicts of interest and how the firm address them.
Include a summary of the code of ethics and state a copy is available upon request.
If the firm or a related person:
(i) recommends to clients, or buys or sells for client accounts, securities in which the firm or a related person has a material financial interest;
(ii) invests in the same securities (or related securities, e.g., warrants, options or futures) that the firm or a related person recommends to clients; or
(iii) recommends securities to clients, or buys or sells securities for client accounts, at or about the same time that the firm or a related person buys or sells the same securities for the firm’s own (or the related person’s own) account, then the firm must describe the practice and discuss conflicts of interest (including how such conflicts are addressed).
Describe how the firm selects brokers and determines the reasonableness of brokers’ compensation
If the firm receives research or other products or services other than execution from a broker-dealer or a third party in connection with client securities transactions (“soft dollar benefits”), disclose the firm’s practices and discuss the conflicts of interest they create. Provide more detail for products/services that do not qualify under the Section 28(e) safe harbor.
If the firm considers, in selecting or recommending broker-dealers, whether the firm or a related person receives client referrals from a broker-dealer or third party, disclose this practice and discuss the conflicts of interest it creates.
If the firm routinely recommends, requests or requires that a client direct the firm to execute transactions through a specified broker-dealer, describe the firm’s practice or policy.
If the firm permits a client to direct brokerage, describe the practice.
Describe whether and under what conditions the firm aggregates the purchase or sale of securities for various accounts.
If the firm periodically reviews client accounts, describe the frequency and nature of review, as well as the titles of the persons who conduct the review.
If accounts are reviewed on other than a period basis, describe what triggers review.
Describe the content and indicate the frequency of regular reports.
If a non-client provides economic benefit to the firm for providing investment advice or services to clients, describe the arrangement, potential conflicts of interest and how such conflicts are addressed.
If the firm or related persons compensate any non-supervised persons for referrals, describe the arrangement and compensation.
If the firm has custody of client assets and a qualified custodian sends quarterly, or more frequent, account statements directly to your clients, explain that clients will receive account statements from the broker-dealer, bank or other qualified custodian and that clients should carefully review those statements.
If the firm also provides statements, urge clients to compare such statements with those provided by the qualified custodian.
If the firm has discretionary authority over accounts, disclose this, along with any limitations clients may place on that authority.
Discuss procedures before discretionary authority is assumed.
Describe voting policies for client securities, if any. Discuss any conflicts of interest and how such conflicts are addressed. Explain that a copy of the policies are available upon request.
If the firm does not vote client securities, disclose that fact.
If the firm requires or solicits prepayment of more than $1,200 in fees per client, 6 months or more in advance, include a balance sheet for the most recent fiscal year.
If the firm has discretionary authority over client assets, custody of client funds or securities, or require prepayment discussed above, discuss any financial conditions that purchase nolvadex are reasonably likely to impair the ability to meet contractual commitments with clients.
Discuss any bankruptcy petitions during the past 10 years.
Identify and describe the formal education and business background of principal executive officers and management persons.
Describe any business in which the firm is actively engaged (other than the provision of investment advice) and amount of time spent.
In addition to the fees discussed in Item 5, if the firm or a supervised person is compensated for advisory services with a performance-based fee, explain how the fees are calculated and discuss the conflict of interest.
Disclose material facts about certain disciplinary items and other financial industry relationships or arrangements.
Brochure Supplement (Part 2B)
The Brochure Supplement requires an adviser to provide information about the certain advisory personnel. The following is a summary of the disclosure items in the Brochure Supplement.
The Firm must prepare a Brochure Supplement for (i) any supervised person who formulates investment advice for the client and has direct client contact and (ii) any supervised person who has discretionary authority over the client’s assets. A Supplement is not required if the supervised person has no direct client contact and has discretionary authority over client assets only as part of a team. Note: If investment advice is provided by a team of more than five supervised persons, Brochure Supplements only need to be prepared for the five supervised persons with the most significant responsibility for the day-to-day advice.
Identify the advisory firm and the supervised persons covered in the Supplement (include name, business address, and phone number).
Standard disclaimer similar to the one in the Firm Brochure.
Describe the supervised person’s formal education and business background for the past 5 years.
Include professional designations, if any.
Discuss the material facts related to any legal or disciplinary events that are material to a (prospective) client’s evaluation of supervised persons. This item lists events that are presumed to be material if they occurred in the prior 10 years, unless (1) the event was resolved in the supervised person’s favor, or was reversed, suspended or vacated, or (2) the firm rebutted the presumption of materiality to determine that the event is not material.
Disclose any event for which the supervised person has ever resigned or otherwise relinquished a professional attainment, designation or license in anticipation of it being suspended or revoked (other than for suspensions or revocations for failure to pay membership dues), if the firm knows or should have known that the supervised person relinquished his or her designation or license.
Note: If a Brochure Supplement is delivered electronically, the firm may disclose that a supervised person has a disciplinary event and provide a ink to BrokerCheck or IAPD (along with an explanation of how the client can access the disciplinary history).
If the supervised person is actively engaged in any investment-related business, including registration (or pending registrations) as a broker-dealer, registered representative of a broker-dealer, futures commission merchant (“FCM”), commodity pool operator (“CPO”), commodity trading advisor (“CTA”), or an associated person of an FCM, CPO, or CTA, disclose this fact and describe the business relationship.
If a non-client provides an economic benefit to the supervised person, describe the arrangement (not including regular salary).
Discuss how supervised persons are supervised, including how the firm monitors advice provided to clients.
Provide the name, title, and phone number of the person responsible for supervising the supervised persons.
Disclose material facts about certain disciplinary items.
Discuss any bankruptcy petitions.
[Note: the SEC recently extended the date for compliance with Part 2B.]
States That Have Adopted the New Part 2
The following states have followed suit and adopted the new Part 2 or informally indicated an intent to do so.
Alaska – adopted the new Part 2 (more information available here)
October 12, 2010 – December 31, 2010: IA applicants and currently registered IAs may use either the old Part II or new Part 2.
As of January 1, 2011: IA applicants are required to use the new Part 2 and registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
Arizona – adopted the new Part 2 (more information available here)
October 12, 2010 – January 1, 2011: currently registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update
As of January 1, 2011: IA applicants must use the new Part 2.
California – adopted the new Part 2 (more information available here)
October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs may use either the old Part II or the new Part 2.
As of January 1, 2011: IA applicants will have to file the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
Colorado – will require but not sure starting when
Connecticut – adopted the new Part 2 (more information available here)
October 12, 2011 – December 31, 2010: IA applicants and currently registered IAs may use either the old Part II or the new Part 2.
As of January 1, 2011: IA applicants will have to use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
As of January 1, 2011: IAs registered on or before December 31, 2010 should file the new Part 2, no later than June 1, 2011.
Illinois – will require but not sure starting when
Indiana – adopted the new Part 2 (timelines may have been updated) (more information available here)
October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs may use either the old Part II or new Part 2.
As of January 1, 2011: IA applicants are required to use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
Maine – adopted the new Part 2 (more information available here)
As of January 1, 2010: IA applicants must use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
Maryland – adopted the new Part 2 (more information available here)
As of October 12, 2010: IA applicants must use the new Part 2 as part of its initial application and any amendment.
October 12, 2010 – December 31, 2010: currently registered IAs and those pending registration as of October 12, 2010 may use either the old Part II or the new Part 2 for any amendments
As of January 1, 2011: registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
Massachusetts – adopted the new Part 2 (more information available here)
October 12, 2010 – December 31, 2010: currently registered IAs are required to file the registrant’s next annual updating amendment using the new Part 2; until such time, the registrant may use the old Part II for regular amendment filings.
Ohio – adopted the new Part 2 (more information available here)
October 12, 2010 – December 31, 2010: IA applicants and currently registered IAs filing amendment may use either the old Part II or the new Part 2.
As of January 1, 2011: currently registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update. IA applicants are required to use the new Part 2.
As of April 30, 2011: registered IAs must have converted to the new Part 2.
Oregon – adopted the new Part 2 (more information available here).
October 12, 2010 – January 1, 2011: IA applicants and currently registered IAs filing amendment may use either the old Part II or the new Part 2.
As of January 1, 2011: IA applicants must use the new Part 2 and registered IAs will need to incorporate the new Part 2 as part of any amendment or required annual update.
Tennessee – adopted the new Part 2 (more information available here).
As of January 1, 2011: applicants must use the new Part 2 and registered IAs must file the new Part 2 by no later than the registrant’s next amendment filing or its annual updating amendment filing, whichever comes first.
Texas – currently in comment period, final approval expected in mid-2011, encouraging use of the new Part 2 (more information available here).
This entry was posted in SEC and tagged form adv part 2, investment adviser registration, new form adv part 2 on January 19, 2011 by Hedge Fund Attorney.
SEC Extends Compliance Date for “Brochure Supplement,” Part 2B of Form ADV
On July 21, 2010, the Securities and Exchange Commission (“SEC”) adopted amendments to cheap viagra brand Part 2 of Form ADV that became effective October 12, 2010. Part 2A of Form ADV, the “firm brochure,” contains information about the advisory firm itself. Part 2B of Form ADV, the “brochure supplement,” contains information about the advisory personnel.
On December 28, 2010, the SEC issued a four-month extension for the Part 2B compliance dates. The new compliance dates for Part 2B are as follows:
New IAs – All newly registered IAs filing their applications for registration with the SEC from January 1, 2011 through April 30, 2011, have until May 1, 2011 to begin delivering Part 2B to new and prospective clients. These advisers have until July 1, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for newly-registered IAs filing applications for registration after April 30, 2011 remain unchanged.
Existing registered IAs – All IAs registered with the SEC as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to begin delivering Part 2B to new and prospective clients. These advisers have until September 30, 2011 to deliver Part 2B to existing clients. The compliance dates for delivering Part 2B for existing registered IAs with fiscal years ending after April 30, 2011 remain unchanged.
The compliance dates for Part 2A remain unchanged. More information about the compliance dates initially set by the SEC are available here.
For the full SEC release, please see SEC Extends Compliance Deadline for ADV Part 2.
This entry was posted in SEC and tagged brochure supplement, form ADV, form adv part 2 on December 31, 2010 by Hedge Fund Lawyer.