Important Annual Requirements; SEC Exam Priorities for 2015; Recent SEC Enforcement Initiatives; New BEA Filing Requirements
Investment advisers registered with the Securities and Exchange Commission (the “SEC”) have certain annual requirements under the Investment Advisers Act of 1940 (the “Advisers Act”), some of which also either apply to “exempt reporting advisers” or warrant consideration as best practices for ERAs. This update reminds investment advisers about certain annual regulatory and compliance obligations, including a number of significant 2015 reporting or filing deadlines.
This update also reminds advisers that are registered as commodity pool operators (“CPOs”) or commodity trading advisors (“CTAs”) with the Commodity Futures Trading Commission (the “CFTC”) and are members of the National Futures Association (“NFA”) of certain CFTC and NFA reporting requirements.
Selected recent regulatory developments that may affect an adviser’s compliance program are noted, including new Bureau of Economic Analysis, Department of Commerce (“BEA”) filing requirements, the SEC’s focus on private equity fund managers and the SEC’s continued concern about cybersecurity. This update also covers SEC examination priorities for 2015 and recent enforcement proceedings that reflect SEC concerns and priorities relevant to advisers.
This update does not purport to be a comprehensive summary of all of the compliance obligations to which advisers are subject; please contact your Sidley attorney to discuss these and other requirements under the Advisers Act, the Commodity Exchange Act and other regulations that may be applicable to investment advisers, CPOs and/or CTAs.1
Amendments to Form ADV; Brochure Delivery to Clients
Annual Updating Amendment
Each registered adviser must file an annual updating amendment to its Form ADV. The annual amendment must be filed within 90 days of the adviser’s fiscal year end; accordingly, an adviser with a December 31, 2014 fiscal year end must file its annual amendment by March 31, 2015. Part 1A and Part 2A (the adviser’s “brochure”) are filed electronically with the SEC via the Investment Adviser Registration Depository (“IARD”) and are publicly available. Part 2B, the brochure supplement, is not required to be filed with the SEC but must be preserved by the adviser and made available, if requested, to the SEC for examination.
IARD will not accept an annual Form ADV updating amendment without (i) an updated Part 2A brochure, (ii) a representation by the adviser that the brochure on file does not contain any materially inaccurate information or (iii) a representation that the adviser is not required to prepare a brochure because it is not required to deliver it to any clients.
Annual Delivery of Brochure to Clients
Within 120 days of its fiscal year end, a registered adviser must deliver to each client for which delivery is required either:
- its updated Part 2A brochure and a summary of material changes to the brochure, if any; or
- a summary of material changes, if any, accompanied by an offer to provide the updated brochure (which, if requested, must be mailed within seven days or delivered electronically in accordance with SEC guidelines).
The brochure is required to be delivered to “clients,” which the SEC staff has acknowledged does not include fund investors; however, many fund advisers voluntarily deliver the brochure to fund investors. Annual delivery of an updated brochure supplement to existing clients is not required; an updated supplement must be delivered only when there is new disclosure of a disciplinary event or a material change to disciplinary information already disclosed.
Key Importance of Accurate and Complete Form ADV Disclosure
Inaccurate, misleading or omitted Form ADV disclosure is a frequently cited deficiency in SEC examinations. Moreover, Form ADV and Form PF are linked electronically, and disclosure in the two forms must be consistent.
Disclosure points of particular importance include, among others:
- An adviser must accurately calculate its regulatory assets under management (“RAUM”). RAUM must be calculated on a gross basis, without deduction of any outstanding indebtedness or other accrued but unpaid liabilities, according to specific instructions provided in Instruction 5.b. of Form ADV: Instructions for Part 1A (the “Part 1A Instructions”).
- An adviser to private funds (i.e., funds that rely on the exclusion from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940) must provide specific information regarding those funds on Form ADV. Accurate identification of the fund type(s) advised, according to specific definitions provided in Instruction 6 of the Part 1A Instructions, is of critical importance in determining an adviser’s Form PF filing category (see “Form PF Reporting Requirements – Determining an Adviser’s Filing Category” below).
- An adviser that has added a new private fund as a client since its last Form ADV annual updating (or other) amendment may need to amend Form ADV to add information regarding the new fund before information regarding the fund can be reported on Form PF. An adviser in this situation may need to file its annual Form ADV amendment early (or file an other-than-annual amendment).3
Annual Form ADV Amendment for Exempt Reporting Advisers
Advisers relying on the “private fund adviser” exemption or the “venture capital fund adviser” exemption from SEC registration are “exempt reporting advisers” (“ERAs”) required to file reports on Form ADV Part 1A with the SEC through the IARD. An ERA, like a registered adviser, must amend its Form ADV at least annually, within 90 days of its fiscal year end, and more frequently if required, as specified in General Instruction 4 to Form ADV. Hence, an ERA with a December 31, 2014 fiscal year end must file its annual updating amendment by March 31, 2015.
An ERA relying on the private fund adviser exemption must calculate annually the private fund RAUM that it manages and report the amount in its annual Form ADV amendment. If a U.S.-based ERA reports in its annual amendment that it has $150 million or more of private fund RAUM or has accepted a client that is not a private fund, the adviser is no longer eligible for the private fund adviser exemption.4 A private fund adviser that has complied with all ERA reporting requirements but is no longer eligible for the private fund adviser exemption because its RAUM meets or exceeds $150 million may apply for registration with the SEC up to 90 days after filing the annual amendment and may continue advising private fund clients during this period. An adviser relying on this exemption, however, must be registered with the SEC (or, if pertinent, with one or more states) prior to accepting a non-private fund client. This transition period is not available to an adviser that otherwise would not qualify for the private fund adviser exemption (for example, an adviser that accepts a managed account). The transition period also is not available to advisers relying on the venture capital fund adviser exemption; such advisers must register under the Advisers Act before accepting a client that is not a venture capital fund.
Annual Compliance Program Review
Rule 206(4)-7 under the Advisers Act (the “Compliance Rule”) requires an SEC-registered adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder by the adviser and its supervised persons. The Compliance Rule does not enumerate specific elements that must be included in the compliance policies and procedures.5 Rather, the SEC staff has indicated that it expects a registered adviser’s policies and procedures to be based on an assessment of the regulatory and compliance risks present in the adviser’s business that may cause violations of the Advisers Act (a “risk assessment”) and a determination of controls needed to manage or mitigate these risks.
Periodic and Annual Review
The Compliance Rule also requires a registered adviser to review at least annually the adequacy of its policies and procedures and the effectiveness of their implementation. The required annual review may be conducted in stages throughout the year or all at once, depending on what works best for the adviser; as a matter of “best practices,” however, it is recommended that an adviser conduct periodic reviews throughout the year. The SEC staff has stated that an adviser’s compliance program should continue to evolve over time in conjunction with an ongoing risk assessment (and re-evaluation) process.
The annual review should include consideration of any developments during the year that might suggest a need to revise the adviser’s compliance program, including, among other things:
- review of material compliance matters that arose;
- changes in the adviser’s business activities or operations (for example, entering into a new line of business); and
- changes to applicable laws, rules or regulations.
The review process should incorporate reasonable “forensic” (i.e., looking at trends over time) and “transactional” (i.e., spot) tests to detect gaps in the compliance program or instances in which the adviser’s policies and procedures may have been circumvented or are not operating effectively.
The adviser should document the annual review, as well as steps taken to revise or enhance the compliance program to reflect the results of the review. Upon examination, the SEC will require the adviser to produce documentation evidencing the required annual review.
Report to Management
As a best practice, an adviser’s senior management, at least annually, should convene a special meeting to review the effectiveness of the adviser’s compliance policies and procedures. A formal written report summarizing the conclusions of senior management should be filed in the adviser’s compliance records, together with a memorandum summarizing the responses, if any, made to perceived deficiencies or inadequacies, as well as evaluating the approach taken to any specific compliance problems that may have occurred during the year.
Training and Annual Certification
The SEC staff has emphasized the importance of advisers’ educating their supervised persons concerning the general principles as well as the specific requirements of the adviser’s compliance program. Pertinent training should take place on at least an annual basis and more frequently as convenient or necessary (for example, when a new employee joins the firm).
An adviser’s compliance policies and procedures should be documented in a compliance manual that is distributed to all supervised persons. All supervised persons should be required to execute and deliver at least annually a certificate stating that they have read (or reread) and understand the provisions in the compliance manual (including any revisions or updates), including the code of ethics and the adviser’s policies and procedures designed to detect and prevent insider trading.
Exempt Reporting Advisers
An ERA, as an unregistered adviser, is not required to adopt a comprehensive compliance program pursuant to the Compliance Rule or to comply with certain other rules under the Advisers Act. Unregistered advisers, however, are still subject to the anti-fraud provisions of the Advisers Act. An ERA therefore should adopt reasonable compliance policies, procedures and oversight to avoid even the appearance of a violation of the anti-fraud provisions and the ERA’s fiduciary duty to clients. Like a registered adviser, an ERA is subject to the “pay-to-play” rule under the Advisers Act as well as the Advisers Act requirement that an adviser adopt policies and procedures reasonably designed to prevent insider trading. As a best practice, an ERA should review at least annually the adequacy of its policies and procedures and make any needed revisions.
Advisers Registered as CPOs and/or CTAs—NFA Self-Examination and Attestation
NFA believes that all NFA members should regularly review the adequacy of their supervisory procedures. To satisfy their continuing supervisory responsibilities, NFA members must review their operations on a yearly basis using NFA’s Self-Examination Questionnaire, which includes a general questionnaire that must be completed by all NFA members and supplemental questionnaires (e.g., CPO and CTA) that must be completed as applicable.
After reviewing the annual questionnaires, an appropriate supervisory person must sign and date a written attestation stating that he or she has reviewed the NFA member’s operations in light of the matters covered by the questionnaire. A separate attestation must be made for each branch office, and if the branch office reviews its own operations then the main office must receive a copy of the questionnaire’s signed attestation. (A “branch office” is an office of the NFA member other than the main office, not a separate entity affiliated with the NFA member.)
Other Annual Reminders for Registered Advisers and ERAs
Other annual obligations, as pertinent, include (non-exclusive list):
Review of Disclosure and Offering Documents. An adviser should review all disclosure documents (including fund offering materials) at least annually to ensure that disclosure is accurate, up-to-date and consistent across documents (including filings with the SEC and other regulators) and with the firm’s compliance policies and procedures. Advertising materials and pitch books should also be reviewed.
Annual Personal Securities Holdings Report. On an annual basis, a registered adviser must collect from each “access person” (by a date specified by the adviser) an annual personal securities holding report containing certain required information regarding securities holdings and securities accounts. The information must be current as of a date no more than 45 days prior to the date the report is submitted.
Annual Delivery of Privacy Notice. An adviser must provide clients and fund investors who are natural persons with a privacy notice disclosing the adviser’s practices for maintaining privacy of nonpublic personal information, both at or before the establishment of the customer relationship and annually thereafter.
Annual “Bad Actor” Recertification. Private funds and other issuers are not permitted to rely on the exemption from Securities Act of 1933 (“Securities Act”) registration provided by Rule 506 of Regulation D if the pertinent offering involves certain “bad actors.” For continuous or other offerings of long duration, an adviser must update, on a reasonable basis, its factual inquiries (e.g., by e-mail or questionnaire) to determine whether any covered persons have “disqualifying events.”
Annual Eligibility for “New Issues.” An adviser should verify annually the eligibility of clients and fund investors to participate in new issues of publicly offered securities, to make sure “restricted persons” are properly identified and their participation appropriately restricted.
Form D and “Blue Sky” Filings. Form D filings for private funds with ongoing offerings lasting longer than one year must be amended annually, on or before the first anniversary of the initial Form D filing. On an annual basis, an adviser also should review blue sky filings for each state to ensure any renewal requirements are met.
Annual Affirmation of CFTC Exemptions. Advisers claiming an exemption from registration under CFTC Rules 4.13(a)(1), 4.13(a)(2), 4.13(a)(3) or 4.13(a)(5) or exclusion from CPO registration under Regulation 4.5, and CTAs claiming an exemption from CTA registration under Regulation 4.14(a)(8) must affirm the applicable notice of exemption or exclusion within 60 days of each calendar year end — March 2, 2015 — or be deemed to have requested a withdrawal of the applicable exemption or exclusion.
Confirming Affirmation of Investors/Clients Claiming Exemptions. In connection with their compliance with NFA Bylaw 1101 (the NFA’s prohibition on doing business with non-members that are required to be members), registered CPOs and/or CTAs have until March 31, 2015 to confirm that their investors/clients claiming an exemption or exclusion under CFTC Rules 4.5 or 4.13(a) (or Regulation 4.14(a)(8)) have affirmed their own exemptions or exclusions.
Recent Regulatory Developments That May Affect an Adviser’s Compliance Program
The following selected regulatory developments may affect the compliance programs of certain advisers. Advisers should review these and other changes in applicable laws, rules, regulations and/or SEC staff guidance to determine whether compliance policies and procedures need to be added or revised.
New BEA Reporting Requirements
The BEA recently adopted two new survey forms: Form BE-13, for reporting new direct investments by foreign entities into the United States, and Form BE-10, for reporting existing direct investments by U.S. entities abroad. Unlike many other BEA surveys, an investment manager or investment fund that falls within the scope of these forms is required to report, whether or not the BEA contacts the investment manager. See “New BEA Reporting Requirements for Cross Border Direct Investments” at the end of this update for further information.
SEC Focus on Private Equity Fund Managers and Allocation of Fees and Expenses
The SEC staff is scrutinizing fees and expenses charged to fund investors, with special attention to the practices of private equity fund managers. In May 2014, OCIE Director Andrew J. Bowden noted that “[w]hen we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in control over 50% of the time.”6 A major staff focus is expense allocation, both (i) between the manager and its clients and (ii) among the separate accounts, co-investment vehicles and funds advised by the manager. Other issues include allegations of hidden or unclear fees; inflated fees and expenses charged to portfolio companies; acceleration of monitoring fees; shifting expenses from the manager to the funds, including the use of “operating partners” that appear to be full members of the manager’s team; and, with respect to all of these issues, concerns that procedures for investor disclosure and consent are inadequate.
Private fund advisers should assess all pertinent disclosure and offering documents to ensure that fees and expenses a client will bear are adequately disclosed. Expense allocation policies and practices should also be reviewed for possible updating. Each client should bear only those expenses that are permissible under the pertinent documentation, and expenses that are attributable to the adviser and one or more clients must be allocated in a fair manner.
Cybersecurity preparedness emerged as a key SEC concern during 2014 and remains an OCIE exam priority for 2015. The SEC staff has made it clear that it expects advisers to implement policies and procedures reasonably designed to protect confidential data and the firm’s information technology system. Such protocols should address, for example, identification and assessment of cybersecurity risks; detection of unauthorized activity; risks associated with vendors and other third parties; and procedures for responding to a cyber attack. Should a breach of an adviser’s information system occur, the SEC may consider it a breach of the adviser’s fiduciary duty if reasonable protections were not in place.
CFTC Relief Removes Certain Impediments to Use of Rule 506(c)
In September 2014 the CFTC staff issued exemptive relief to CPOs from compliance with CFTC rules that had posed an impediment to the use of new Rule 506(c) under the Securities Act, which eliminated the prohibition against “general solicitation” and “general advertising” in private offerings of securities, subject to certain conditions. The relief may lead to increased use of Rule 506(c) by private funds that are commodity pools.7
Municipal Adviser Registration
Final SEC rules governing the regulation of municipal advisors, including the requirement that municipal advisors register with the SEC, took effect on July 1, 2014. An SEC-registered investment adviser that is providing investment advice to a municipal entity pursuant to an advisory agreement within the scope of the Advisers Act is excluded from the definition of municipal advisor. (This exclusion does not apply to ERAs or state-registered investment advisers.) However, an investment adviser that provides advice concerning the issuance of municipal securities (e.g., with respect to structure, timing and terms), advice concerning municipal derivatives or advice related to the solicitation of a municipal entity must register as a municipal advisor absent another applicable exemption or exclusion.
Preparing for an SEC Examination
The books and records of all SEC-registered advisers are subject to compliance examinations by the SEC staff, including the records of any private funds to which the adviser provides investment advice. ERAs also are subject to SEC examination, although the SEC has indicated that it does not expect to examine ERAs on a routine basis. Generally, an adviser being examined is required to provide the SEC with access to all books and records related to its advisory business, whether or not they are required to be kept.
The SEC staff generally conducts a risk-based exam strategy. The SEC staff has indicated that in most cases, the staff considers the quality of the adviser’s compliance systems and its internal control environment when determining the scope of the examination and the areas to be reviewed. Depending on the nature of the examination, the staff often will contact an adviser in advance and provide a detailed document request list before commencing the examination. Lists will vary depending on the nature and focus of the examination.
Certain proactive steps should be taken to prepare for the contingency of an examination. For example, an adviser should:
- obtain and review sample SEC document request lists to anticipate likely SEC staff requests;
- ensure that its disclosure documents (including filings with the SEC and other regulators), compliance policies and procedures and actual business and compliance practices are all consistent;
- review results from periodic and annual compliance reviews in order to make sure that findings have been addressed;
- review previous SEC examination findings (if any) to make sure that past deficiencies have been remedied; and
- consider conducting a mock audit.
Most advisers that are examined receive an “exam results” letter, outlining technical and/or more serious compliance weaknesses or violations. It is critically important that the adviser address all deficiencies, including revisions (as needed) to its compliance program and/or disclosure documents. Even minor deficiencies, if not corrected, may be considered serious by the SEC staff when the next exam occurs, and the staff may take administrative or other enforcement action against such “recidivist” behavior.
SEC Examination Priorities for 2015
On January 13, 2015, the SEC’s National Exam Program (the “NEP”) released its list of examination priorities for 2015 (the “Release”).8 The Release highlights areas that the SEC staff perceives to have heightened compliance risk. Compliance officers should take note of these areas of concern and assess areas for improvement.
OCIE’s current examination priorities, as outlined in the Release, are organized around three themes:
- Retail Investors. The staff will examine a variety of matters related to retail investors, including “alternative” investment companies.
- Market-Wide Risks. The staff will examine for structural risks and trends that involve multiple firms or entire industries. According to the Release, OCIE intends to focus on monitoring the largest U.S. broker-dealers and asset managers to assess risk at individual firms and maintain early awareness of developments industry-wide. OCIE will continue its cybersecurity initiative, assessing cybersecurity controls across a range of industry participants.
- Data Analytics. The Release emphasizes that significant enhancements in data collection and analysis in recent years have made OCIE more efficient and effective in analyzing massive amounts of data from registrants in order to detect potential regulatory violations and better understand each firm’s business prior to examination. The Release also notes that OCIE will use its evolving analytical capabilities to identify and examine registrants that may be engaged in illegal activity, and to identify individuals with a track record of misconduct and examine the firms that employ them.
Other priorities and initiatives include:
- Proxy Voting. OCIE will examine select proxy advisory service firms, including how they make recommendations on proxy voting and disclose and mitigate potential conflicts of interest. OCIE also will examine investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
- Private Equity Fees and Expenses. OCIE will continue to conduct examinations regarding allocation and disclosure of fees and expenses, given the high rate of deficiencies observed among private equity fund managers in this area.
Recent Enforcement Proceedings
During its 2014 fiscal year, the SEC brought a number of large, complex cases, but also remained focused on pursuing smaller, compliance-related violations through streamlined investigative and settlement approaches. Enforcement actions of relevance to investment advisers included, among others:9
- Pay-to-Play. The SEC brought its first-ever enforcement action under the Advisers Act “pay-to-play” rule, charging a venture capital fund adviser with providing advisory services within two years after prohibited contributions to two political candidates. The SEC also charged the firm and an affiliated adviser with improperly acting as unregistered advisers. Each of the advisers, which had significantly overlapping businesses, separately claimed status as an ERA. The SEC found that because the firms were operationally integrated, they should have been integrated as a single adviser for purposes of registration requirements and hence were not eligible to rely on the claimed registration exemptions.10
- Private Equity Fund Fees and Expenses. The SEC brought its first action arising from the current focus on fees and expenses charged by private equity fund managers, alleging fraud in the allocation of expenses to funds managed by the adviser charged.11
- Missed or Late Filings. Under a new initiative using quantitative analytics to identify high rates of filing deficiencies, the SEC brought charges against 34 individuals and companies (including 10 investment firms) for violating Securities Exchange Act of 1934 filing requirements (Section 13(d), Section 13(g) and Section 16 filings).12 This effort is consistent with the SEC’s “broken windows” enforcement initiative, which aims to uncover and address even the smallest infractions.
- Insider Trading. During the fiscal year, the SEC charged 80 people in cases involving trading on the basis of inside information. According to SEC reports, the agency also is developing and implementing next generation analytical tools to help identify patterns of suspicious trading.13
- Custody. The SEC continued to focus on the safety of client assets and custody. Three investment advisory firms were charged with failures to comply with Advisers Act custody rule requirements, including failing to maintain client assets with a qualified custodian and to engage an independent public accountant to conduct required surprise exams.14
- Aberrational Performance. The SEC continued its proactive risk identification initiatives, such as the Aberrational Performance Inquiry that uses proprietary analytics to identify hedge funds with suspicious returns.15
The SEC also continued to target violations of Rule 105, an anti-manipulation rule that prohibits firms from improperly participating in public offerings after short-selling those same stocks during a restricted period.16
The SEC’s whistleblower program has seen increased activity. In 2014 the SEC brought first-ever charges under its new authority to bring anti-retaliation enforcement actions and awarded its largest-ever whistleblower award (more than $30 million).17
Cooperation with foreign regulators is a prominent theme in the SEC’s Strategic Plan, Fiscal Years 2014-2018 (the “Strategic Plan”).18 According to the Strategic Plan, the SEC requests supervisory cooperation assistance from foreign authorities, and responds to such requests from foreign regulators, both through formal mechanisms and on an ad hoc basis. The SEC’s enforcement program also has seen “a dramatic increase” in its coordination efforts with foreign authorities. As stated in the Strategic Plan, “[t]he SEC is committed to further expanding its coordination with these entities in order to strengthen the [SEC’s] ability to hold wrongdoers accountable.”
Form PF Reporting Requirements
Most registered advisers to private funds are required to file Form PF on either a quarterly or annual basis (advisers that are exempt from SEC registration, including ERAs, are not required to file Form PF). The information contained in Form PF is designed, among other things, to assist the Financial Stability Oversight Council (“FSOC”) in its assessment of systemic risk in the U.S. financial system. Form PF, which is a joint form between the SEC and the CFTC with respect to Sections 1 and 2 of the form, is filed with the SEC via the Private Fund Reporting Depository (PFRD) electronic filing system and is not publicly available.
Given the volume and complexity of the work involved, many private fund advisers face a number of challenges in preparing Form PF, including making decisions regarding (and documenting) assumptions and methodologies, due to the ambiguous or subjective nature of a number of Form PF’s instructions, definitions and questions. The SEC staff has provided assistance with respect to these issues and other Form PF questions, both directly in response to private inquiries and in FAQs posted (and periodically updated) on the SEC’s web site.19
Who Must File
An SEC-registered investment adviser is required to file Form PF if it (i) advises one or more private funds and (ii) collectively with related persons (other than related persons that are separately operated) had RAUM of $150 million or more attributable to private funds as of the end of its most recently completed fiscal year.
A CFTC-registered CPO or CTA that is also registered with the SEC as an investment adviser (a “dual registrant”) is required to file Form PF and submit information with respect to each advised commodity pool that also is a private fund. Because commodity pools are considered hedge funds for purposes of Form PF, the filing adviser must complete the sections of the form applicable to hedge funds for each commodity pool reported on Form PF. For a dual registrant, filing Form PF can serve to satisfy certain CTFC Form CPO-PQR reporting requirements. Dual registrants also have the option of using Form PF to satisfy certain CFTC reporting requirements with respect to commodity pools that are not private funds in lieu of completing certain sections of Form CPO-PQR.20
To avoid duplicative reporting, Form PF information regarding sub-advised funds should be reported by only one adviser. The adviser that completes information in Form ADV Schedule D Section 7.B.1 with respect to any private fund is also required to report that fund on Form PF. If, however, the adviser reporting the private fund on Form ADV is not required to file Form PF (e.g., because it is an ERA), then another adviser, if any, to the fund, if required to file Form PF, must report the fund on Form PF.
Determining an Adviser’s Filing Category
The scope of required Form PF disclosure, the frequency of reporting and filing deadlines differ based on the RAUM of the adviser attributable to different types of private funds (in particular, hedge funds, liquidity funds and private equity funds). Accurately determining an adviser’s filing category is a critical first step. Specific definitions of fund types are provided in the Form ADV Part 1A Instructions and the Form PF: Glossary of Terms.
The RAUM thresholds applicable to different categories of Form PF filers are summarized in the chart below. An adviser meeting only the minimum $150 million private fund RAUM reporting threshold, or a large private equity fund adviser, must file Form PF only annually within 120 days of its fiscal year end. A large liquidity fund adviser or large hedge fund adviser must file quarterly, within 15 days (for large liquidity fund advisers) and 60 days (for large hedge fund advisers) of its fiscal quarter end.
Advisers are required to follow certain aggregation instructions for purposes of determining whether or not they meet the de minimis $150 million private fund asset threshold for reporting on Form PF as well as the pertinent large private fund adviser thresholds. Aggregation also is required for large hedge fund advisers to determine whether any hedge fund is a “qualifying hedge fund” subject to additional reporting requirements. The aggregation instructions (and, conversely, certain netting instructions for fund of funds advisers and others whose funds invest in other private funds) may raise challenging interpretive issues for many advisers.
Frequency of Reporting and Filing Deadlines
The reporting frequency and upcoming filing deadlines for different categories of Form PF reporting advisers are summarized below. The filing deadlines set forth in the following table are for advisers with a December 31 fiscal year end.
How the SEC Staff Uses Form PF Data
While the primary aim of Form PF was to create a source of data for FSOC’s assessment of systemic risk, the SEC also is using the data to support its own regulatory programs, including examinations, investigations and investor protection efforts.21 OCIE staff generally reviews an adviser’s Form PF filing as a part of its pre-exam evaluation and reviews information contained in the filing for inconsistencies with other information obtained during an exam, such as due diligence reports, pitch books, offering documents, operating agreements and books and records. In addition, OCIE staff typically looks for discrepancies between an adviser’s Form PF filing and any publicly-available documents related to the adviser, including the adviser’s Form ADV and brochure. Enforcement staff also obtains and reviews Form PF filings in connection with ongoing adviser investigations.
Reporting Requirements for Certain Investment Advisers on CFTC and NFA Form CPO-PQR and/or Form CTA-PR
Many advisers to privately offered funds and registered investment companies are required to register as CPOs and/or CTAs with the CFTC with respect to certain commodity pools that they advise and to become members of NFA. CFTC-registered CPOs and CTAs must report certain information on CFTC and NFA Form CPO-PQR (also referred to herein as CFTC Form PQR and NFA Form PQR, as applicable) and Form CTA-PR, respectively. The forms must be filed electronically using NFA’s EasyFile System.
CFTC and NFA Reporting Requirements on Form CPO-PQR
Each registered CPO must file NFA Form PQR quarterly, as described below. The scope of required disclosure, the frequency of reporting and whether or not a given Form CPO-PQR filing is required by the CFTC is determined generally by the CPO’s aggregated gross pool assets under management (“Gross AUM”). As in the case of Form PF, Form CPO-PQR filers are required to follow certain aggregation instructions for purposes of determining the applicable filing category.
Based on the information that the CPO enters on the Cover Page of Form CPO-PQR, all subsequent screens of the Form will be dynamically generated to present only required schedules.22 Because NFA’s Form PQR filing has been incorporated into the CFTC’s form, there are not separate filings for the CFTC and NFA. NFA Form PQR now consists of certain questions of CFTC Form PQR Schedule A and step 6 of CFTC Schedule B (Schedule of Investments).
As noted above, advisers that are dually registered with the SEC and the CFTC can satisfy certain CFTC Form PQR filing requirements by filing Form PF.23 For example, a large CPO that is a quarterly Form PF filer can file Form PF Sections 1 and/or 2 in lieu of CFTC Form PQR Schedules B and C within 60 days of quarter end. Similarly, a mid-sized CPO that is an annual Form PF filer can file Form PF Sections 1.b and 1.c in lieu of CFTC Form PQR Schedule B and is required only to submit Schedule A of CFTC Form PQR on an annual basis. However, all registered CPOs are subject to quarterly NFA reporting requirements (for non-exempt pools). Note, however, that whereas a mid-sized CPO must meet its CFTC Form PQR reporting obligation within 90 days of calendar year end, the filing deadline for an annual Form PF filer is 120 days from fiscal year end. Hence, a mid-sized CPO that wishes to meet a portion of its CFTC reporting requirements through Form PF may need to file its Form PF within 90 days (rather than 120 days) of its year end.
With respect to co-CPOs, the CPO with the greater Gross AUM is required to report for the pool. If a pool is operated by co-CPOs and one of the CPOs is also a dual registrant that files Form PF Sections 1 and/or 2 (and thus is only required to file CFTC Form PQR Schedule A), the non-investment adviser CPO must nevertheless file the applicable sections of CFTC Form PQR.
Each CPO that is an NFA member must file NFA Form PQR on a quarterly basis within 60 days of the quarters ending in March, June and September and a year-end report within 60 or 90 days (depending on the size of the CPO) of the calendar year end. Large CPOs that file the required CFTC Form PQR schedules on a quarterly basis satisfy their NFA Form PQR filing requirements through filing CFTC Form PQR.24
CPOs that file Form PF with the SEC in lieu of certain portions of CFTC Form PQR are required to file NFA Form PQR with the NFA on a quarterly basis within 60 days of the quarter end, except for the December 31 quarter, when the filing will be due within 90 days.25
CFTC Form PQR and NFA Form PQR filing requirements are summarized in the following chart.
Each registered CTA is required to file an annual Form CTA-PR with the CFTC within 45 days of the calendar year end, and each CTA that is an NFA member is required to file a quarterly NFA Form CTA-PR within 45 days of the calendar quarter end.26 The same form is used for both the CFTC and the NFA filings. All Form CTA-PR filings are made through NFA’s EasyFile System.
New BEA Reporting Requirements for Cross Border Direct Investments
The BEA has adopted two new survey forms, Form BE-13, for reporting new direct investments by foreign entities into the United States, and Form BE-10, for reporting existing direct investments by U.S. entities abroad. Unlike many other BEA surveys, an investment manager or investment fund that falls within the scope of these forms is required to report, whether or not the BEA contacts the investment manager.
Form BE-13 is to be used for reporting each new “direct investment” (ownership of a direct or indirect voting interest of 10 percent or more) by a foreign entity in a newly-established, newly-acquired, or newly-merged U.S. entity. Form BE-13 imposes a reporting obligation that is retroactive to new establishments, new acquisitions or new mergers (“reportable transactions”) that have occurred since January 1, 2014. Form BE-13 reporting requirements only apply to transactions that result in “direct investments,” a voting interest of 10 percent or more held directly or indirectly by a foreign entity in a U.S. entity. The type of Form BE-13 that a U.S. entity must file depends on the total actual or projected cost (more than $3 million, or $3 million or less) and type (new acquisition, new establishment or new merger) of reportable transaction. The BEA has prepared a guide entitled “Which Form Do I File?” that provides examples of the transactions that should be reported on each version of Form BE-13.
Generally, for reportable transactions that occur after November 26, 2014, the deadline for filing Form BE-13 is 45 days after the date the acquisition is completed (whether or not it involves a merger) or the new legal entity is established. For reportable transactions that occurred between January 1 and November 26, 2014, the deadline for filing Form BE-13 was January 12, 2015, but the BEA, at least for the time being, appears to be taking a flexible approach with regard to the deadlines. U.S. entities that discover they have one or more reportable transactions after the applicable deadline may request extensions of the filing deadline from the BEA. A U.S. entity also is required to file a Form BE-13 if the BEA contacts the U.S. entity concerning Form BE-13, within 45 days of the date of being contacted.
The purpose of Form BE-10 is to capture information on each “direct investment” (ownership of a direct or indirect voting interest of 10 percent or more) held by a U.S. entity in a foreign entity at any time during the U.S. entity’s prior fiscal year. The BEA’s final rules do not indicate that there is any minimum size (in terms of assets, sales, or net income) below which a U.S. entity with direct investments abroad will be exempted from filing Form BE-10; so a U.S. investment adviser that manages funds with direct investments abroad will likely be required to report. U.S. entities will (i) report on Form BE-10A, with larger entities (in terms of assets, sales or net income) being required to provide more detailed information, and (ii) report for each of the foreign entities in which they have a direct investment (a “foreign affiliate”) on Forms BE-10B, BE-10C or BE-10D, depending on the size of the foreign affiliate and whether the U.S. entity holds a majority voting interest.
Form BE-10 filings will be due on either May 29, 2015, for a U.S. entity (considered on a consolidated basis) that is required to file fewer than 50 Form BE-10s, or on June 30, 2015, for a U.S. entity (considered on a consolidated basis) that is required to file 50 or more Form BE-10s.
1 This update does not address non-U.S. regulatory developments. For example, non-European fund managers that are marketing their alternative investment funds in European Union Member States are required to file an “Annex IV report” on a regular basis to the regulator of each EU Member State in which its alternative investment fund is being marketed and meet other regulatory and reporting requirements. See Sidley Austin LLP, Investment Funds Update, “AIFMD 2014 Update – private placements: Where did we end up, and where are we going?” (September 8, 2014), available at http://www.sidley.com/2014-09-08-Investment-Funds-Update.
3 See Form PF: General Instructions, available at https://www.sec.gov/about/forms/formpf.pdf. A private fund must have an identification number for both Form ADV and Form PF reporting. The instructions state, “If you need to obtain a private fund identification number [obtained by filing Form ADV] and you are required to file a quarterly update of Form PF prior to your next annual update of Form ADV, then you must acquire the identification number by filing an other-than-annual amendment to your Form ADV …. [and] must complete and file all of Form ADV Section 7.B.1 for the new private fund.”
4 An ERA based outside of the United States will lose the exemption if it advises (i) private fund assets of $150 million or more at a place of business in the United States, (ii) a U.S. client other than a private fund (e.g., a managed account for a U.S. institution or pension plan) or (iii) any non-private fund assets at a place of business in the United States. For purposes of this exemption, a single investor fund or “fund of one” generally will be deemed to be a managed account.
5 In the adopting release for Rule 206(4)-7, “Compliance Programs of Investment Companies and Investment Advisers,” IA-2204 (December 17, 2003), the SEC staff stated that an adviser’s policies and procedures, at a minimum, should address the following issues to the extent they are relevant: portfolio management processes; trading practices; proprietary and personal trading; accuracy of disclosures; safeguarding of client assets; recordkeeping; marketing advisory services; valuation; privacy; and business continuity plans.
6 Andrew J. Bowden, Director, Office of Compliance Inspections and Examinations, Speech: “Spreading Sunshine in Private Equity,” Private Equity International (PEI), Private Fund Compliance Forum 2014, May 6, 2014.
7 Sidley Austin LLP, Investment Funds Update, “CFTC Staff Paves Way for Broader Advertising of Certain Private Funds” (September 16, 2014), available at http://www.sidley.com/09-16-14-Investment-Funds-Update.
8 SEC Office of Compliance Inspections and Examinations, National Exam Program, “Examination Priorities for 2015” (January 13, 2015).
9 See SEC Press Release 2014-230, “SEC’s FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases” (October 16, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543184660.
10 SEC Press Release 2014-120, “SEC Charges Private Equity Firm With Pay-to-Play Violations Involving Political Campaign Contributions in Pennsylvania” (June 20, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542119853.
11 SEC Press Release 2014-41, “SEC Announces Charges Against Arizona-Based Private Equity Fund Manager in Expense Misallocation Scheme” (February 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540849548.
12 SEC Press Release 2014-190, “SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings: Nearly Three Dozen Charged in Enforcement Initiative to Root Out Repeated Late Filers” (September 10, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678.
13 Supra note 9.
14 SEC Press Release 2013-230, “SEC Charges Three Firms With Violating Custody Rule” (October 28, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540098359.
15 Supra note 9; SEC Press Release 2013-259, “SEC Charges London-Based Hedge Fund Adviser and U.S.-Based Holding Company for Internal Control Failures” (December 12, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540491613.
16 SEC Press Release 2014-195, “SEC Sanctions 19 Firms and Individual Trader for Short Selling Violations in Advance of Stock Offerings,” (September 16, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542963767.
17 SEC Press Release 2014-118, “SEC Charges Hedge Fund Adviser With Conducting Conflicted Transactions and Retaliating Against Whistleblower: First SEC Case Under New Authority to Bring Anti-Retaliation Enforcement Actions” (June 16, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542096307; SEC Press Release 2014-206, “SEC Announces Largest-Ever Whistleblower Award” (September 22, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543011290.
18 U.S. Securities and Exchange Commission, “Strategic Plan Fiscal Years 2014-2018” (September 2014), available at http://www.sec.gov/about/sec-strategic-plan-2014-2018.pdf.
19 See Form PF Frequently Asked Questions, available at http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml (most recently updated on December 5, 2014). FINRA, as administrator for the PFRD filing system, also posts information to assist Form PF filers, including PFRD System Frequently Asked Questions. (most recently updated on September 6, 2014).
20 Regardless of any reporting on Form PF, however, all registered CPOs and CTAs are required to file at least Schedule A of CFTC Form PQR and Form CTA-PR, as applicable, and comply with the requirements of NFA Form PQR.
21 See U.S. Securities and Exchange Commission, “Annual Staff Report Relating to the Use of Data Collected from Private Fund Systemic Risk Reports” (August 15, 2014), available at http://www.sec.gov/reportspubs/special-studies/im-private-fund-annual-report-081514.pdf.
22 See Form CPO-PQR Filing System Overview (on the NFA website).
23 Form PF filing deadlines are based on adviser fiscal year (or quarter), while Form CPO-PQR/Form CTA-PR filing deadlines are based on the calendar year (or quarter). Note that dual registrants with a fiscal year that differs from the calendar year may have difficulty using Form PF to satisfy their CFTC Form PQR filing obligations.
24 As noted above, all registered CPOs must file CFTC Form PQR Schedule A. Quarterly CFTC Form PQR filers also file Schedule B, which contains a Schedule of Investments.
25 While Form PF may fulfill certain CFTC filing requirements, it does not fulfill the NFA quarterly filing requirements.
26 See CTA Form PR Manual (on the NFA website), available at http://www.nfa.futures.org/NFA-electronic-filings/CTA-PR-System-Help.pdf.
The following Sidley lawyers or your regular contacts at the firm would be pleased to provide more information.
|James B. Biery
|Laurin Blumenthal Kleiman
|Jonathan B. Miller
|Mark D. Whatley
Sidley Investment Funds Practice
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