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Investment Adviser Annual and Other Compliance Matters - PDF
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Lorena Nicholson
1 2013 Investment Adviser Annual and Other Compliance Matters This annual memorandum provides clients and friends of Finn Dixon & Herling with brief summaries of selected compliance matters relevant to investment advisers registered with the U.S. Securities and Exchange Commission (the SEC ) pursuant to the U.S. Investment Advisers Act of 1940 (the Advisers Act ). Many of the matters addressed by this update are also applicable to state-registered investment advisers, but state-registered advisers should be aware of the specific requirements of the state or states in which they are registered, as they may differ. Note that certain of the matters addressed by this update are also applicable to exempt reporting advisers. This memorandum does not contain a complete listing of the ongoing compliance and filing obligations of an investment adviser. Rather, it is intended to serve as a reminder of many of the more significant and/or regularly occurring of those obligations and an update regarding certain regulatory developments. For complete information regarding your compliance obligations, you should refer to your compliance policies and procedures and consult with counsel as necessary. The topics addressed by this update are divided into two categories: (i) those matters that must be addressed annually, and (ii) those that must be addressed during the course of the year, either periodically or upon the occurrence of certain events. ANNUAL MATTERS Annual Compliance Review An SEC-registered investment adviser is required to review its compliance policies and procedures no less frequently than annually, to assess their adequacy and the effectiveness of their implementation. Review of Offering Documents Each year, investment advisers to private investment funds should review the funds offering documents (including subscription documents) to ensure that they are materially accurate and up-to-date, and update the offering documents as necessary. Changes may be warranted based upon, for example (but without limitation): changes in applicable laws, rules and regulations; changes in the investment adviser s key personnel; changes in a fund s terms or investment strategy; or changes in service provider relationships. FINN DIXON & HERLING LLP 177 BROAD STREET, 15TH FLOOR, STAMFORD, CT T F
2 Regulatory Development Rescission of CFTC Rule 4.13(a)(4); Changes to CFTC Rule 4.5 Effective December 31, 2012, commodity pool operators ( CPOs ) may no longer rely on Commodity Futures Trading Commission ( CFTC ) Rule 4.13(a)(4) (which was rescinded in 2012) for exemption from registration as a CPO with respect to any private investment fund. Investment advisers and/or their related parties that previously relied upon the exemption were required to either switch to reliance on the exemption in CFTC Rule 4.13(a)(3), register with the CFTC as a CPO or no longer act as a commodity pool operator. In order for the CPO of a private fund to rely on the Rule 4.13(a)(3) exemption, the fund must, among other things: limit initial margin, premiums and required minimum security deposits for the fund s commodity interest positions to 5% of the liquidation value of the fund s portfolio, or limit the aggregate net notional value of the fund s commodity interest positions to 100% of the liquidation value of the fund s portfolio, in each case determined at the time the most recent commodity interest position was established. Note that there are additional criteria that must be satisfied for a CPO to rely on Rule 4.13(a)(3) with respect to a fund. A CPO wishing to rely on Rule 4.13(a)(3) must make an electronic notice filing with the NFA in advance of such reliance. Investment advisers that have registered as CPOs may rely on CFTC Rule 4.7 for relief from certain disclosure, recordkeeping and reporting requirements applicable to registered CPOs with respect to funds that satisfy the requirements of that Rule. Investment advisers to private investment funds should ensure that offering documents of all funds are revised or supplemented to take into account any changes in the advisers CFTC exemption or registration status and to include applicable prescribed disclosures, and should also alert existing fund investors of such changes. CFTC Rule 4.5, which provides an exemption from CPO registration for operators of investment companies registered pursuant to the Investment Company Act of 1940, was also revised in 2012 to re-introduce a requirement that commodity interest positions held by the investment company not exceed the de minimis limits also found in CFTC Rule 4.13(a)(3). This change to Rule 4.5, along with the introduction of a requirement that investment companies for which operators seek to rely on Rule 4.5 not be marketed as commodity pools or as vehicles for investing in commodity interests, became applicable to all CPOs as of December 31, Page 2
3 Regulatory Development FATCA Registration On January 18, 2013 the Internal Revenue Service ( IRS ) released final regulations under the Foreign Account Tax Compliance Act ( FATCA ). Beginning in July of this year, a FATCA Registration Portal will be available for offshore private investment funds to register with the IRS in order to comply with the requirements of FATCA. Investment advisers to private investment funds should ensure that the subscription documents of all funds are revised or supplemented in order to facilitate FATCA registration and ensure that the funds comply with the investor due diligence requirements imposed by FATCA. Annual Delivery of Privacy Notice An investment adviser is required by Regulation S-P to provide to clients and investors in funds it advises a notice that describes its privacy policies and practices at least annually during the continuation of the client or investor relationship. Although Regulation S-P applies only to certain categories of natural person clients and fund investors, it is good practice to provide the notice to all clients and private fund investors. Annual Confirmation of Investors New Issue Status Financial Industry Regulatory Authority ( FINRA ) Rule 5130 restricts certain restricted persons (as defined in FINRA Rule 5130) from participating in profits and losses from new issues of equity securities. FINRA Rule 5131 prohibits broker-dealers from allocating new issues to accounts beneficially owned by executive officers and directors of certain companies in exchange for investment banking relationships with those companies, a practice known as spinning. A private fund is restricted from purchasing new issues from a FINRA member broker-dealer if the aggregate beneficial interests in the fund of (i) executive officers and directors of a public company (as defined in FINRA Rule 5131) or covered non-public company (as defined in FINRA Rule 5131) (each, a covered company ), and (ii) persons materially supported (as defined in FINRA Rule 5131) by executive officers or directors of the covered company (any person described in (i) or (ii), a covered person ) exceed 25%, unless the relevant fund restricts the portion of the fund s profits or losses from new issues that is allocated to the covered persons related to such covered company to no more than 25%. Advisers that purchase new issues on behalf of clients must obtain written confirmation every 12 months as to whether their clients, and investors in private investment funds they manage, are restricted persons pursuant to FINRA Rule 5130 or covered persons of covered companies pursuant to FINRA Rule This confirmation may be obtained by sending a letter to each client and/or investor asking them to confirm their status. The letter may be a 2013 Page 3
4 negative consent letter, i.e., a letter indicating that in the absence of any written response to the contrary, the adviser will presume that a client s or investor s status has not changed. Annual Section 13G and 13F Filing Updates See below under the headings Schedule 13D and 13G for Large Positions and Form 13F Holdings and Notice Reports for Institutional Investment Managers. Note that filings may be required as early as February 14 th of each year. Also note that an investment adviser is required to make a determination prior to the initial Form 13F filing in each calendar year as to whether the investment adviser or any of its affiliates and/or the private funds it manages will be required to be a Form 13F filer during that calendar year. Annual Filing of Rule 4.13(a)(3) and Rule 4.14(a)(8) Notices CPOs that rely on CFTC Rule 4.13(a)(3) for exemption from registration with respect to any private investment funds they manage and commodity trading advisers ( CTAs ) that rely on CFTC Rule 4.14(a)(8) for exemption from registration as a CTA must file an annual reaffirmation of the claim of exemption with the National Futures Association (the NFA ) (with respect to each such fund for CPO exemptions) within 60 days after each calendar year end. Regulatory Development Inclusion of Certain Swaps as Commodity Interests Commencing January 1, 2013, CPOs must include all swaps that are not security-based swaps as commodity interests in determining whether the CPO may rely on the CPO registration exemptions in CFTC Rule 4.13(a)(3) or CFTC Rule 4.5 with respect to investment vehicles for which they act as CPO. The term swap includes a broad range of instruments including, without limitation, swaps on interest rates, currencies, commodities and broadbased security indices. The term security-based swaps generally includes instruments based on the yield or value of a single security, loan or narrow-based security index. As a result, total return swaps on single securities and credit default swaps on individual entities or on single obligations of individual entities, for example, are not included as commodity interests in determining qualification for the CFTC Rule 4.13(a)(3) or CFTC Rule 4.5 de minimis exemptions. Regulatory Development Annual CFTC Exemption Notices The requirement that CFTC exemption notice filings be re-affirmed annually is a new requirement that became effective commencing in Page 4
5 Form PF SEC Rule 204(b)-1 under the Advisers Act requires certain SEC-registered investment advisers to private investment funds to file, at least annually, Form PF, Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors ( Form PF ). A private fund is an issuer that would be required to register under the Investment Company Act of 1940 but for the exemptions provided by Sections 3(c)(1) or 3(c)(7) thereof. Form PF is intended to permit the SEC and the Financial Stability Oversight Council to collect information, identify potential threats to the economic stability of the United States and monitor systemic risks in U.S. financial markets. Form PF was developed by the SEC jointly with the CFTC. Pursuant to a parallel rule adopted by the CFTC ( Rule 4.27 ), a registered investment adviser that is also a commodity pool operator or a commodity trading advisor is required to file Form PF with the SEC, but is exempt from the provision of duplicative information to the CFTC. Advisers to private funds are divided into two groups for purposes of Form PF larger advisers and smaller advisers. The amount of information required to be reported and frequency of reporting is different for each group. So-called exempt reporting advisers (i.e., advisers that advise only venture capital funds or advise only private funds and have less than $150 million in assets under management) are not required to file Form PF. Form PF is divided into four sections. Section 1 of Form PF generally must be completed by every SEC-registered investment adviser that manages one or more private funds and manages private fund assets of at least $150 million. A filer is required to complete portions of Section 1 of Form PF with respect to each private fund it manages. Sections 1a and 1b of Form PF ask general questions about the adviser and its related persons and require information about each private fund managed by the adviser, including, without limitation, investment strategy, gross asset value, net asset value, certain performance information, number of beneficial owners, approximate percentage of the fund s equity that is beneficially owned by its five largest investors, information regarding what percentage of the fund s investors fall into particular categories (e.g., broker-dealers, insurance companies, registered investment companies, pension plans, private funds, sovereign wealth funds, etc.), names and amounts owed to creditors and counterparties, and value of derivative positions. Section 1c of Form PF requires information specifically with respect to hedge funds (as such term is defined in Form PF) that are managed, including the percentage of assets managed using high-frequency trading strategies, significant counterparty exposures (including the identity of counterparties) and information regarding trading and clearing practices. Depending on the type or types of private funds managed, Large Private Fund Advisers are required to complete one or more of the other Sections of Form PF; advisers that are not Large Private Fund Advisers are only required to complete Section 1. Large Private Fund Advisers are SEC-registered investment advisers that, alone or collectively with affiliated advisers, have a least $1.0 billion, $1.5 billion or $2.0 billion in gross assets under management attributable to liquidity funds, hedge funds or private equity funds, 2013 Page 5
6 respectively (each as defined in SEC Rule 204(b)-1 under the Advisers Act). The additional Sections of Form PF required to be filed by Large Private Fund Advisers require more detailed information about the private funds they manage, including leverage and liquidity. In order to determine whether advisers are required to complete the additional sections of Form PF, they must determine assets under management with respect to hedge funds and liquidity funds on a monthly basis, while assets under management with respect to private equity funds must be determined at the end of each fiscal year. Large Private Fund Advisers to private equity funds and advisers that are not Large Private Fund Advisers are required to file Form PF annually within 120 days after the end of their fiscal year. Large Private Fund Advisers to hedge funds and liquidity funds are required to file Form PF within 60 days or 15 days, respectively, after the end of each fiscal quarter. Form PF is required to be filed electronically through the IARD. The fee for each quarterly or annual filing is $150. Regulatory Development Form PF Most investment advisers required to file Form PF will be required to make their first filings following the end of their first fiscal year or quarter, as applicable, ending after December 15, For large hedge fund advisers (at least $1.5 billion in hedge fund assets under management) that are required to file quarterly, the filing deadline is 60 calendar days after the end of the quarter (with an initial 2013 filing date of March 1 for those with a December 31 fiscal year end), and for hedge fund advisers that are required to file annually (between $150 million and $1.5 billion in hedge fund assets under management), the filing deadline is 120 calendar days after the end of the year (April 30, 2013 for those with a December 31 fiscal year end). Certain large hedge fund advisers (those with more than $5 billion in hedge fund assets under management) have already been required to file Form PF with respect to their fiscal quarters ending June 30, 2012 and later. Note that the instructions for Form PF require that certain separate account assets are to be aggregated with hedge fund assets under management for purposes of determining the aggregate value of hedge fund assets under management. Form 13H Pursuant to Rule 13h-1 adopted under the U.S. Securities Exchange Act of 1934 (the Exchange Act ), large traders are required to identify themselves and make certain disclosures to the SEC by filing Form 13H. Rule 13h-1 is intended to assist the SEC in identifying, and obtaining trading information with respect to, large traders. A large trader is, essentially, any person that, directly or indirectly, including through other persons controlled by that person, effect transactions in National Market System (NMS) securities that equal or 2013 Page 6
7 exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. Persons that become large traders and have not previously filed Form 13H must do so promptly after first effecting transactions equal to or greater than the threshold activity level. The definition of large trader is intended by the SEC to focus on the ultimate parent company of an entity or entities that employ or otherwise control the individuals that exercise investment discretion. To that end, a parent company can comply with the self-identification requirement of Rule 13h-1 on behalf of its subsidiaries. Large traders are required to file an updated Form 13H within 45 days after the end of each calendar year and promptly following the end of a calendar quarter if any of the information on the form becomes inaccurate for any reason. Form ADV - Annual Updating Amendment An SEC-registered investment adviser is required to file and maintain current Form ADV, Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers. Exempt reporting advisers are also required to file Form ADV Part 1 through the IARD system, but only some items in Form ADV Part 1 must be completed. Form ADV is filed through the Investment Adviser Registration Depository ( IARD ) system, a web-based electronic filing system operated by FINRA. Each SEC-registered investment adviser must update Form ADV annually, no later than 90 days after the end of its fiscal year, by filing an annual updating amendment with the SEC through the IARD. The annual updating amendment must include revised information for all required sections of the form that have become inaccurate in any way. There is a filing fee of up to $225 for an annual updating amendment ($150 for exempt reporting advisers), which amount must be in an adviser s IARD daily account before the annual updating amendment can be filed. For SEC-registered investment advisers, the annual updating amendment must include an updated version of an adviser s brochure (Form ADV Part 2A) in PDF format, along with, or including, a summary of material changes from the previous brochure. Annual Offering of Brochure to Clients SEC Rule under the Advisers Act requires that an SEC-registered investment adviser deliver to each client, within 120 days of the end of the adviser s fiscal year, (i) a free updated brochure (Form ADV Part 2A) that includes a summary of material changes from the brochure filed by the adviser in the previous fiscal year or is accompanied by a summary of material changes, or (ii) a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. An offer to deliver an updated brochure must be accompanied by a website address and a telephone number and address for obtaining the complete brochure, as well as the website address for obtaining information about the adviser through the Investment Adviser Public Disclosure website ( If the adviser chooses the latter approach, it must preserve a copy of the summary of material changes that it delivers to clients Page 7
8 Annual Corporate/LLC/LP filings with Relevant Jurisdictions of Formation and Qualifications Investment advisers and any private investment funds they manage are subject to annual corporate, limited liability company or limited partnership filings and tax payments in the jurisdictions of formation of the adviser and of the fund entities. Filings may also be required in jurisdictions in which an entity is qualified to do business. Funds formed in non-u.s. jurisdictions may also be required to make additional regulatory filings, including the filing of financial statements with appropriate authorities. Delivery of Audited Financial Statements by Funds in Satisfaction of Custody Rule Requirements SEC Rule 206(4)-2 under the Advisers Act (the custody rule ) provides that SEC-registered investment advisers that manage private investment funds and are deemed to have custody of the funds assets (which will include many registered advisers that serve as the general partners, managing members or trustees of funds) may satisfy certain requirements of the custody rule by delivering to fund investors annual audited financial statements of the funds, prepared in accordance with U.S. generally accepted accounting principles. The custody rule requires that these financial statements be delivered within 120 days of a fund s fiscal year end (180 days for funds of funds). If an adviser that manages funds does not expect to, or is unable to, meet this requirement, it must comply with additional requirements of the custody rule during the fiscal year. FBAR Filings An investment adviser must file a Report of Foreign Bank and Financial Accounts on Form TD F (the FBAR ) if the adviser has a financial interest in any foreign bank or brokerage accounts. Pending further guidance from the Internal Revenue Service and/or the Financial Crimes Enforcement Network of the Department of the Treasury, an adviser or certain of its personnel may also be required to file FBARs for (i) certain accounts over which it has signature or other authority; and/or (ii) certain foreign funds that it manages. The FBAR for a calendar year must be received by the Department of the Treasury no later than June 30 of the next succeeding year. Annual Federal and State Form D Filings See below under the heading Federal and State Form D Filings. IARD Renewal Account Funding The first action of the annual updating cycle for registered investment advisers and exempt reporting advisers occurs at the end of each year, when the adviser s IARD renewal account must be funded to provide for the payment of system processing fees for investment adviser representatives (if any) and annual state renewal fees. State renewal fees will be due, for the adviser itself and for each registered investment adviser representative (if any), for each state with which the adviser and any investment adviser representatives have notice Page 8
9 filed or registered. The renewal account must be fully funded by early December of each year. More information can be found on the IARD website: TIC Form SLT The Department of the Treasury requires that certain persons (including investment advisers) who are U.S. resident end-investors in long-term foreign securities, U.S. resident custodians of long-term foreign securities and/or U.S. resident issuers of U.S. securities held by foreign residents, file reports on Treasury International Capital ( TIC ) Form SLT with the Federal Reserve Bank of New York ( FRBNY ). TIC Form SLT must be filed with respect to (a) a person s holdings of long-term securities of foreign issuers (as defined in the instructions to the form), and (b) the holdings by foreign residents of such person s long-term U.S. securities (for example, securities issued by a U.S. private fund), unless the aggregate fair value of all such holdings of such person (including all members of such person s consolidated group) is $1 billion or less. In determining whether it (or another member of its consolidated group) is obligated to file a report on Form SLT, each U.S. resident investment adviser must take into account all investments in long-term foreign securities that are held for the account of its own portfolio or for the portfolios of its U.S. clients, unless such securities are held by U.S. resident custodians (such as prime brokers, banks or other entities that manage or administer the custody or safekeeping of securities for investors). Accordingly, a U.S. resident investment adviser that manages or advises a U.S. resident investment fund that invests its assets in foreign investment funds, must take into account, in determining whether the holdings of such adviser and the other members of its consolidated group meet or exceed the $1 billion threshold, the value of the U.S. resident investment fund s holdings of securities of the foreign investment funds unless such securities are held by a U.S. resident custodian. In particular, it should be noted that a U.S. resident investment adviser that manages a U.S. resident feeder fund that invests in a foreign master fund must include in such adviser s aggregate holdings the fair value of the feeder fund s investment in the master fund. Once the consolidated total of all reportable long-term U.S. and foreign securities for a reporting entity has a total fair market value equal to or more than $1 billion on the last business day of a reporting month, the reporting entity must submit a report for that month. In addition, the reporting entity then must also submit a report for each remaining month in that calendar year, regardless of the consolidated total of reportable securities held in subsequent months during that year. OTHER PERIODIC COMPLIANCE MATTERS Holdings and Transactions Reports Pursuant to Personal Trading Policy An SEC-registered investment adviser is required to have a Code of Ethics that includes policies and procedures regarding the personal trading of persons with access to certain information regarding the adviser s advisory business. Such policies and procedures must, 2013 Page 9
10 among other things, require that each reporting person provide (i) a holdings report at least once in every 12-month period on a date that the adviser selects, and (ii) transaction reports no later than 30 days after the end of each calendar quarter. Amendments to Form ADV Form ADV must be amended promptly if: information provided in response to Part 1A Item 1 (Identifying Information), Item 3 (Form of Organization), Item 9 (Custody except 9.A.(2), 9.B.(2), 9.E. and 9.F.) or Item 11 (Disclosure Information disciplinary) becomes inaccurate in any way; information provided in response to Part 1A Item 4 (Successions), Item 8 (Participation or Interest in Client Transactions), or Item 10 (Control Persons including Schedules A and B) becomes materially inaccurate; or information provided in Part 2 (the brochure) becomes materially inaccurate (an adviser is not required to update its brochure between annual amendments solely because the amount of client assets managed has changed or because the adviser s fee schedule has changed, but if an adviser is updating its brochure for a separate reason in between annual amendments, and the amount of client assets the adviser manages listed in response to Item 4.E, or its fee schedule listed in response to Item 5.A, has become materially inaccurate, the adviser should update that item(s) as part of the interim amendment). Amendments to the information required by Part 1A Items 2, 5, 6, 7, 9.A.(2), 9.B.(2), 9.E., 9.F. or 12 may be deferred until the time that an investment adviser files its annual updating amendment of Form ADV, even if prior to such annual update the responses to those items have become inaccurate. Investment Adviser State Notice Filings Certain states require investment advisers that have a place of business in the state, or more than a de minimis number of clients (usually five) in the state, to notice file in the state. Notice filing for an adviser usually involves simply checking an additional box for the relevant state on the adviser s Form ADV Part 1 and paying an annual fee to the state (through the IARD). In certain cases, certain personnel of the adviser may be required to register as investment adviser representatives in a state. Schedule 13D and 13G for Large Positions Under Section 13(d) of the Exchange Act, a person whose acquisitions of securities of an issuer results in beneficial ownership of more than five percent (5%) of a class of the issuer s equity securities that is registered under the Exchange Act must file with the SEC a Schedule 13D within 10 days of the acquisition (unless the person is eligible to file Schedule 13G, as discussed below). Schedule 13D discloses, among other things: 2013 Page 10
11 the acquirer s identity and related information, the source and amount of funds or other consideration used to make the acquisition, the purpose of the acquisition, and the number of shares beneficially owned. The occurrence of any material change in any of the facts set forth in a filed Schedule 13D will, in general, trigger a new filing requirement i.e., an amendment to the previously filed Schedule 13D must be filed promptly. A material change includes, without limitation, a material change in the percentage of the class of securities beneficially owned (an acquisition or disposition of beneficial ownership of one percent (1%) or more of the class of securities is deemed to be material). Schedule 13G is a short form statement that certain passive investors may file in lieu of Schedule 13D under certain circumstances. Depending upon circumstances, an initial Schedule 13G filing must be made either: (A) within 45 days after the end of the calendar year in which the filing requirement arises; or (B) within ten days after the filing requirement arises. Schedule 13G must be amended under certain circumstances including: (A) for certain investors, within 45 days after the end of a calendar year in which there are any changes in the information reported therein; and (B) within ten days after the end of the first month in which certain changes in ownership occur. If a Schedule 13G filer ceases to be a passive investor (i.e., if the filer holds the securities with the purpose of changing or influencing control of the issuer), such filer is required to file a Schedule 13D within ten days of the change in investment purpose. There is a ten day cooling off period after such filing during which the investor may not purchase securities of the issuer or its controlling entities and may not vote securities of the issuer. Form 13F Holdings and Notice Reports for Institutional Investment Managers If an investment adviser exercises investment discretion with respect to proprietary and/or client accounts holding in the aggregate more than $100 million of 13F Securities (which are generally exchange-traded equity securities and are listed on a 13F Securities List published by the SEC) on the last trading day of any calendar month of any calendar year, the adviser is an institutional investment manager and must file a Form 13F with the SEC at the following times: within 45 days after the last day of such calendar year (i.e., by February 14 of the subsequent calendar year); and within 45 days after the last day of each of the first three calendar quarters of the subsequent calendar year (i.e., by May 15 for March 31 holdings, August 14 for June 30 holdings, and November 14 for September 30 holdings) Page 11
12 Form 13F requires disclosure of information regarding the holdings of 13F Securities by the investment manager, its affiliates and client accounts. Section 16 Filings Section 16 of the Exchange Act addresses transactions in securities of an issuer by directors, officers and principal stockholders of the issuer. Section 16 applies to every person who is directly or indirectly the beneficial owner of more than ten percent (10%) of any class of an issuer s equity securities that is registered under Section 12 of the Exchange Act and to every director and officer of any issuer that has a class of equity securities so registered (all such persons being referred to herein as Insiders ). Note that a registered investment adviser is not deemed to be the beneficial owner of certain securities held for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business. Section 16(a) imposes various reporting obligations on Insiders including: initial beneficial ownership statement (Form 3) (due within 10 days after the Insider becomes such a beneficial owner, director, or officer); report of changes in beneficial ownership (Form 4) (due before the end of the second business day following the day on which the subject transaction has been executed); and annual statement of beneficial ownership (Form 5) reporting transactions not previously reported on Form 4 (due within 45 days of the issuer s fiscal year-end). Federal and State Form D Filings Securities of private investment funds are generally sold in the U.S. pursuant to SEC Rule 506 of Regulation D under the U.S. Securities Act of 1933 (the Securities Act ). SEC Rule 503 of Regulation D requires that issuers relying on Regulation D file a notice of sales of security on Form D with the SEC electronically no later than 15 calendar days after the first sale of securities in the offering. Most states in which sales are made in a Rule 506 offering also require that issuers submit to the state a copy of the Form D filed with the SEC, a consent to service of process and a fee. For continuous offerings such as those by an open-end investment fund, the Form D filed with the SEC must be periodically amended: to correct a material mistake of fact or error in the previously filed notice, as soon as practicable after discovery of the mistake; to reflect a change in the information provided in the previously filed notice as soon as practicable after the change occurs, except for certain enumerated items including, without limitation: o the amount of securities sold in the offering; o the total number of investors who have invested in the offering; and 2013 Page 12
13 o the amount of sales commissions, finders fees, etc., if the change, together with all other changes in that amount since the previously filed notice, does not result in an increase of more than 10%; annually, on the first anniversary of the most recently filed notice, if the offering is continuing at that time. Any amendment must include updated responses to all items. Note: Certain states also require that periodic filings be made and renewal fees paid with respect to continuous offerings. The penalties for failure to make such periodic renewal filings in certain states (such as New Hampshire) can be significant. Anti-money Laundering; OFAC Compliance; U.S. Sanctions Programs Investment advisers should periodically review their anti-money laundering and economic sanctions program compliance policies and procedures to ensure that they are adequate and are being followed. Economic sanctions programs administered by the Office of Foreign Assets Control ( OFAC ) are applicable to all investment advisers, and advisers should therefore periodically check whether any clients or fund investors have been added to the List of Specially Designated Nationals and Blocked Persons maintained by OFAC. TIC and BEA Forms The TIC reporting system of the Department of the Treasury collects data for the United States on cross-border portfolio investments between U.S. residents and foreign residents, while the Bureau of Economic Analysis ( BEA ) collects data with respect to, among other things, cross-border direct investments between such U.S. and foreign residents. A direct investment is an investment in which a resident of one country obtains a degree of influence over the management of a business enterprise in another country. In general terms, the threshold used to define direct investment is ownership of at least 10% percent of the voting securities of an incorporated business enterprise or the equivalent interest in an unincorporated business enterprise (with special rules applying in the context of an investment in a limited partnership). A portfolio investment is any international investment which is not a direct investment. Advisers may be required to complete and file a number of TIC and/or BEA forms, with such requirements being triggered by varying levels (or thresholds), expressed as a dollar amount and calculated on varying bases, of either foreign investment in such advisers or members of their consolidated reporting groups, or the level of foreign investment by such advisers and the members of their consolidated reporting groups. Filings may be required to be made as often as monthly or as infrequently as every five years and certain transactions may give rise to a filing obligation. Advisers should consult with counsel to determine what, if any, TIC and/or BEA reporting obligations they may have. * * * * * * 2013 Page 13
14 The foregoing summary of compliance matters covers some, but not all, of the requirements applicable to investment advisers in connection with their SEC registration and their investment advisory business. Investment advisers that are also registered as commodity pool operators and/or commodity trading advisors, or as broker-dealers, are subject to additional compliance requirements. State-registered investment advisers may also be subject to additional requirements, such as the provision of annual financial statements to state securities regulators. Certain of the compliance requirements described above do not apply to exempt reporting advisers. If you have questions concerning the matters discussed above, or would like more detailed information, please contact one of the attorneys referenced below. Erik A. Bergman, or Matthew S. Eisenberg, or Harold B. Finn III, or Richard D. Kilbride, or Finn Dixon & Herling LLP is a law firm with extensive experience providing corporate, transactional, investment management, securities, tax, executive compensation, bankruptcy and litigation counsel. Our clients include large and small corporations, venture capital and private equity firms, financial institutions, hedge funds and other investment funds, investment advisers, broker-dealers, public and private businesses, executives, management teams and entrepreneurs. Copyright 2013 Finn Dixon & Herling LLP. All Rights Reserved. FDH COMPLIANCE SERIES. These materials are intended to inform our clients and friends about developments in the law. They are not intended to constitute a legal opinion or advice or to address any client s legal problems or specific situations. The format of these materials, and the complex nature of the subject matter, required the making of general statements that summarize an extremely complex body of law and that may be incomplete in some respects. In addition, these materials speak as of the version date set forth below and may not reflect subsequent developments in the law or interpretations thereof. Accordingly, the reader is cautioned against using any of this material in specific situations without obtaining the advice of competent counsel. In light of the foregoing, and the general nature of these materials, these materials should not be regarded, or relied upon, as legal advice. Version: January 31, 2013 { } 2013 Page 14