Feb. 7, 2019

Lessons Learned From How Advisers Dealt With the October 2017 Amendments to Form ADV (Part One of Two)

On October 1, 2017, sweeping changes went into effect to the Form ADV (October 2017 Amendments). The 2019 Form ADV season marks the second time that advisers will be providing the information required by the October 2017 Amendments. Although the process should be smoother this time around, fund managers must be consistent with the approaches and methodologies that they used in last year’s filing. This two-part series outlines the lessons learned from the annual updating amendments filed by fund managers in March 2018, with a focus on ways managers dealt with the new disclosures required by the October 2017 Amendments. This first article examines key takeaways from last year’s filings, as well as the detailed disclosures that advisers are now required to provide with respect to managed account clients and their other office locations. The second article will explore the umbrella registration option available through the October 2017 Amendments, as well as the new disclosure requirements relating to a fund manager’s use of social media, regulatory assets under management by client type and chief compliance officer. See our two-part series on the October 2017 Amendments to Form ADV and the recordkeeping rule: “What Investment Advisers Need to Know About Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 3, 2016); and “What Investment Advisers Need to Know About Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016).

OCIE’s Risk Alert on Electronic Messaging: A Review of Best Practices (Part One of Two)

The use of electronic messaging by employees of registered investment advisers poses challenges in terms of compliance with certain provisions of the Investment Advisers Act of 1940 (Advisers Act) and the rules thereunder, most notably Rule 204‑2 (the Books and Records Rule). The SEC Office of Compliance Inspections and Examinations (OCIE) recently conducted a limited-scope examination initiative of advisers designed to obtain an understanding of the forms of electronic messaging used by advisers and their employees; the risks of that use; and the challenges in complying with certain provisions of the Advisers Act. Based on the results of that initiative, OCIE recently issued a National Exam Program Risk Alert that identifies the practices OCIE staff believe may assist advisers in satisfying their record-retention obligations under the Books and Records Rule, as well as implementing and designing electronic messaging policies and procedures under Rule 206(4)‑7 (the Compliance Rule). This first article in our two-part series analyzes how the Books and Records Rule and the Compliance Rule impact the ways in which advisers and their employees may use electronic messaging for business purposes, the sweep initiative that led to the Risk Alert and OCIE’s recommended best practices. The second article will explain four key steps that investment advisers should take with respect to those best practices. For coverage of other OCIE Risk Alerts, see “Five Ways to Avoid Common Violations of the Cash Solicitation Rule Identified in OCIE’s Recent Risk Alert” (Nov. 29, 2018); “How to Avoid the Eight Best Execution Compliance Issues in OCIE’s Latest Risk Alert” (Aug. 30, 2018); and “OCIE Risk Alert Warns of Six Most Frequent Fee and Expense Compliance Issues” (May 3, 2018).

How Private Fund Managers Can Navigate the Final Regulations on Partnership Representatives (Part Two of Two)

The Bipartisan Budget Act of 2015 introduced sweeping changes to how partnerships will be audited by the U.S. Internal Revenue Service, not the least of which is the requirement that, effective for audits of tax years beginning after December 31, 2017, partnerships appoint a “partnership representative” to act on behalf of the partnership during those audits. In a two-part guest series, Amanda H. Nussbaum and Kimberly A. Condoulis, partner and associate, respectively, at Proskauer Rose, provide an overview of the final regulations issued in August 2018 that govern the role of the partnership representative, including its designation, authority and removal. This second article addresses the removal of a partnership representative by the partnership, resignation of a partnership representative and key factors that partnerships should consider when selecting a partnership representative. The first article discussed in detail the process for appointing a partnership representative and the authority of the partnership representative. For more on the new partnership audit rules, see “The Effect of 2017 Tax Developments on Advisers to Private Funds: New Partnership Audit Rules, Tax Reform, Blockers, Discounted Gifting, Fee Waivers and State Nexus Issues” (Nov. 30, 2017). For additional commentary from Nussbaum, see “Harbinger Capital Partners Offshore Manager Settles New York Tax Evasion Case for $30 Million” (Nov. 8, 2018).

Trends in the Use of Subscription Credit Facilities: Structuring Considerations Negotiated With Lenders and Important LPA and Side Letter Provisions (Part Two of Two)

The increasing popularity of subscription credit facilities with fund managers has prompted questions about how to structure the facilities to both account for varied investor bases and accommodate other fund types – such as hedge funds – so that they can take advantage of them. These were some of the items addressed in a recent webinar, which was moderated by Rorie A. Norton, Editor of the Hedge Fund Law Report, and featured Thomas Draper, partner at Foley Hoag, and Michael C. Mascia, partner at Cadwalader. This second article in a two-part series details key considerations when banks calculate the size of a subscription credit facility based on a fund’s investor base and ways to account for certain structural components, as well as provisions to be addressed when preparing fund limited partnership agreements and side letters that facilitate a smooth adoption of the facility. The first article described ways the market has adjusted its use of these facilities to account for certain concerns raised by investors; the economic and logistical benefits they offer; and steps that certain hedge funds and credit funds are taking to adopt them. See “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017); and “Financing Facilities Offer Hedge Funds and Managers Greater Flexibility (Part Two of Three)” (Jun. 9, 2016).

Investor Survey Finds Growing Interest in Private Market Vehicles, Lower Return Expectations and Continuing Fee Pressures

PitchBook’s 2018 Annual Institutional Investors Survey asked several dozen private fund investors about their allocation preferences, investment processes, relationships with managers, preferred investment vehicles, return expectations and the means by which they measure those returns. This article summarizes PitchBook’s key findings. For another recent survey on the alternative investments industry, see our two-part coverage of ACA’s 2018 compliance survey: “SEC Exam Experience and Insider Trading Controls” (Dec. 13, 2018); and “Fees, Expenses and Custody” (Dec. 20, 2018).

New Locke Lord Partner Gerald A. Francese Talks Technology and the Private Funds Space

Gerald A. Francese has joined the New York office of Locke Lord as a partner in the firm’s corporate practice group. Francese represents public and private companies, financial services institutions, investment advisers, investment companies and investors. For additional insight from Francese, see “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations’” (Oct. 11, 2012).