• |

    Oct. 19, 2017

Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues

Rule 206(4)-1 under the Investment Advisers Act of 1940 prohibits investment advisers from including testimonials, certain past specific recommendations and misleading information in marketing materials. The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued a Risk Alert that discusses the six most frequent advertising issues identified in deficiency letters from more than 1,000 adviser examinations, as well as the results of its 2016 “Touting Initiative,” which focused on nearly 70 advisers’ use of awards, rankings, professional designations and testimonials in their marketing materials. This article summarizes OCIE’s findings. See also our three-part advertising compliance series: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods to Test Advertising Review Procedures” (Sep. 28, 2017).

Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)

Section 208(a) of the Investment Advisers Act of 1940, as well as prior statements made by the SEC, make it clear that an investment adviser is prohibited from using its registration status to suggest that the Commission has approved, recommended or sponsored the adviser. The fact remains, however, that being an SEC registered investment adviser (RIA) carries weight in the industry if for no other reason than registration with the Commission is a threshold issue for some investors. This final article in our three-part series outlining the steps that exempt reporting advisers (ERAs) must take to transition to RIA status reviews the key regulatory filings that RIAs must file, examines amendments that ERAs may need to make to their fund documents in anticipation of their change in registration status and provides insight into what newly registered advisers should expect from the SEC examination process. The first article discussed the circumstances under which an ERA would be required to register as an RIA, along with considerations for ERAs augmenting their compliance programs. The second article outlined key policies and procedures that ERAs should consider when drafting their compliance manuals. For more on the examination of RIAs, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017).

OCIE Associate Director Outlines Coordinated Compliance Effort Under Trump Administration

Under the administration of President Trump, enforcement priorities at the highest levels of the SEC and its Office of Compliance Inspections and Examinations (OCIE) share many features with priorities under previous administrations, but subtle differences come into play in the important realms of cybersecurity and private equity. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017). The Commission maintains its hardline stance against failures of disclosure and conflicts of interest, and it continues to pursue former Chair Mary Jo White’s “broken windows” approach. Finally, the recent Supreme Court ruling in Kokesh v. SEC lends new urgency to regulatory investigations and enforcement actions. These points were addressed in a panel discussion at the recent Eleventh Annual Hedge Fund General Counsel and Compliance Officer Summit 2017, hosted by Corporate Counsel and ALM. Moderated by Paul Hastings partner Tram Nguyen, the panel featured Kevin Kelcourse, Associate Director of OCIE; Irshad Karim, counsel and chief compliance officer of Lion Point Capital; and Bruce Karpati, managing director and global chief compliance officer of Kohlberg Kravis Roberts & Co. and former Chief of the SEC’s Asset Management Unit. This article summarizes the key points conveyed by the panelists. For further commentary from Kelcourse, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them” (Feb. 5, 2015); and “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015).

How the New Partnership Audit Regulations Affect Private Funds: Understanding the BBA and Appointing a Partnership Representative (Part One of Two)

The Bipartisan Budget Act of 2015 (BBA) sought to replace existing partnership audit regulations with a streamlined set of rules for auditing partnerships and their partners at the partnership level. Under the final proposed audit regulations (BBA Regulations), the Internal Revenue Service (IRS) can now impose an assessment for underpayment of income tax directly on a partnership, marking a significant departure from the current treatment of partnerships as pass-through entities not subject to federal income tax. A recent presentation by Baker Tilly Virchow Krause offered a comprehensive overview of the BBA Regulations and practical ways for managers to address these changes. The program was moderated by Mark Heroux, a principal at Baker Tilly and former trial attorney in the IRS Office of Chief Counsel, and featured Colin Walsh and Brad Polizzano, Baker Tilly senior manager and manager, respectively. This article, the first in a two-part series, provides an overview of the BBA Regulations, identifies key ways in which they differ from existing partnership audit regulations and explains the new concept of a “partnership representative.” The second article will discuss the treatment of underpayments under the BBA Regulations and the option for partnerships to push out the adjustment to those who were partners during the year that was under review; the application of Accounting Standards Codification 740 to partnerships; the ways in which most managers will need to update their partnership agreements; and the effect of the BBA Regulations on the filing of state tax returns. For additional recent insights from Baker Tilly, see “How Private Fund Managers Can Navigate the Hazards of State Income-Sourcing Rules” (Jul. 13, 2017); and “How Tax Reforms Proposed by the Trump Administration and House Republicans May Affect Private Fund Managers” (Feb. 9, 2017).

Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement

The CFTC’s stated mission is to “foster open, transparent, competitive and financially sound markets.” Essential to fulfilling that mission is vigorous enforcement by the regulator, and as CFTC Chair J. Christopher Giancarlo has made clear, the CFTC will not curtail its duty to enforce the law and punish wrongdoing. The CFTC Division of Enforcement (Division) has attempted to perform this duty by battling manipulation; prosecuting fraud in traditional markets and in new markets, such as virtual currencies; and fighting spoofing. See “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); and “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). Meanwhile, the Division has also aimed to find ways to deter misconduct. As noted by Division Director James McDonald in a recent speech to the NYU Program on Corporate Compliance & Enforcement, to achieve optimal deterrence, the Division needs the endorsement of fund managers and others it polices. To achieve that support, McDonald unveiled the CFTC’s new self-reporting and cooperation program. This article highlights the key points from McDonald’s speech and the mechanics of the new self-reporting regime. For analysis of self-reporting in another context, see “Self-Reporting and Remedying Improper Fee Allocations May Not Be Sufficient for Fund Managers to Avoid SEC Action” (Sep. 15, 2016).

Seward & Kissel Study Examines Key Terms in Seed Deals: Consent Rights, Indemnification and Manager Buyout Rights (Part Two of Two)

Being seeded can undoubtedly jumpstart a manager’s business. Not only does a seed investment allow the manager to launch with a sizeable asset base, but the seed deal itself signals to the industry that the seed investor views the manager as likely to succeed. Both factors often facilitate the manager’s efforts to raise additional capital from institutional investors. For this reason, newly formed managers routinely compete to secure seed deals. All these points were explored in a recent study conducted by Seward & Kissel (S&K). This second article in our two-part series discusses the study’s findings with respect to key seed-deal terms, including participation, capacity, most favored nation and consent rights; transparency terms; and the pros and cons of buyout rights for managers. The first article discussed the current seeding environment, as well as how seeders structure their investments, key-person covenants and lock-up provisions. This article also includes insights from S&K partner Gary Anderson, lead author of the study. For more on negotiating seed deals, see “KKWC and EisnerAmper Panel Details Benefits, Tax Considerations, Common Structures and Terms of Seed Deals” (Jan. 26, 2017); “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Terms With Institutional Investors, Seeding Arrangements and the Convergence of Mutual Funds and Hedge Funds (Part Four of Four)” (Feb. 19, 2015); and “Report Offers Insights on Seeding Landscape, Available Talent, Seeding Terms and Players” (Jan. 8, 2015).

The Hedge Fund Law Report Gains Additional Associate Editor

Shaw Horton has joined the Hedge Fund Law Report’s fast-growing New York-based team as an Associate Editor. Horton joins from Willkie Farr & Gallagher, where he advised clients of varying sizes and profiles on registration statements, offering documents, business expansion proposals, compliance procedures, regulatory filings, best practices and other transactional and regulatory matters. The HFLR encourages readers to contact Horton at +1 (212) 686-5316 or shaw.horton@acuris.com to discuss what they are seeing or hearing in the industry.

Day Pitney Expands Investment Management and Private Equity Practices

Day Pitney has broadened its private equity and investment management practices with the hiring of partners Peter Bilfield, who will act as co-chair of the firm’s investment management and private funds group, and Steven Gold. Both attorneys advise funds, investors, banks and corporations on numerous transactional and regulatory issues, often with cross-border elements. For prior insights from Bilfield, see “What Do the Investor Advisory Committee’s Recommendations Mean for the Future of Marketing of Hedge Funds to Natural Persons?” (Oct. 24, 2014); and “Structuring Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital From U.S. Investors (Part Two of Two)” (Aug. 16, 2012).

Most-Read Articles