Feb. 14, 2019

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

On October 1, 2017, significant changes went into effect to the Form ADV (October 2017 Amendments). In adopting those changes, the SEC sought to gather additional information from SEC-registered investment advisers regarding their managed accounts and other aspects of their advisory businesses to enhance the regulator’s ability to carry out its risk-based examination program. The October 2017 Amendments also offered groups of affiliated advisers operating a single advisory business a more streamlined approach to registering with the SEC using a single Form ADV. This two-part series outlines the lessons learned from those annual updating amendments filed by fund managers, with a focus on how managers dealt with the new disclosures required by the October 2017 Amendments. This second article explores the umbrella registration option available pursuant to 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. The first article examined the 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. For more on addressing the October 2017 Amendments to Form ADV, see “A Roadmap of Potential Landmines for Fund Managers to Avoid When Completing the Revised Form ADV” (May 25, 2017).

The Tax Cuts and Jobs Act One Year Later – Updates and Structuring Considerations for Private Funds and Their Managers (Part One of Two)

December 22, 2018, marked the first anniversary of the signing of the Tax Cuts and Jobs Act (Tax Act). The impact of this landmark piece of legislation continues to be felt throughout the investment funds industry. In a two-part guest series, Michele Gibbs Itri, partner at Tannenbaum Helpern Syracuse & Hirschtritt, provides a brief overview of the Tax Act’s key provisions affecting private equity funds and their respective portfolio companies; hedge funds; and private fund managers, as well as updates on these provisions since the enactment of the Tax Act, including a discussion about possible tax structuring strategies and other considerations going forward for investment managers and their funds. This first article addresses the Tax Act’s impact on carried interest earned by fund managers, the self-employment tax and corporate versus pass-through structures, as well as the new limitation on the deduction of business interest. The second article will explore the effect of the elimination of miscellaneous itemized deductions; the disallowance of deductions for excess business losses; changes to net operating loss deductions; the tax treatment of gain or loss realized on the sale of a partnership interest by a foreign partner; and modifications to the controlled foreign corporation regime and other international tax rules. For more on the Tax Act, see “Planning Strategies for Private Fund Managers Under the Tax Cuts and Jobs Act” (Jun. 7, 2018); and “New Tax Law Carries Implications for Private Funds” (Feb. 1, 2018). For additional insights from Itri, see “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?” (Feb. 1, 2013).

OCIE’s Risk Alert on Electronic Messaging: Four Key Steps Advisers Should Take (Part Two of Two)

After the SEC Office of Compliance Inspections and Examinations (OCIE) noticed an increase in the use of electronic messaging by investment adviser personnel for business-related communications, it conducted a sweep examination initiative to better understand the types of electronic messaging used by advisers and their employees; the risks of that use; and the challenges in complying with certain provisions of the Investment Advisers Act of 1940 (Advisers Act). The results of that initiative informed OCIE’s recent National Exam Program Risk Alert, which identifies practices OCIE staff believe may assist advisers in satisfying their obligations under both Rule 204‑2 (the Books and Records Rule) and Rule 206(4)‑7 (the Compliance Rule) under the Advisers Act. This second article in our two-part series explains four steps that investment advisers should take with respect to the best practices described in the Risk Alert. The first article analyzed 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. For more on electronic communications, see “ACA 2018 Compliance Survey Examines Electronic Communications, Personal Trading and Corruption Risk (Part Two of Two)” (Jun. 14, 2018).

ACA Program Reviews Federal Pay to Play Rules (Part One of Two)

A recent ACA Compliance Group (ACA) program provided a comprehensive overview of the panoply of federal, state and local pay to play rules with which fund managers must contend. The program featured Ki P. Hong, partner at Skadden, and Elaine Vincent, consultant at ACA. This first article in our two-part series summarizes the four federal pay to play rules. The second article will review state and local pay to play rules; traps for the unwary; and compliance policies and procedures. For additional commentary from ACA, see “ACA Panel Examines Compliance Issues Faced by Credit Managers” (Nov. 15, 2018); and “Developing a 2018 Compliance Budget: How Investment Advisers Can Make the Most of Limited Resources” (Dec. 21, 2017).

SEC Settles First Two Enforcement Actions Against Robo-Advisers

The SEC has made clear that firms that provide automated, software-driven investment advice – i.e., robo-advisers – are subject to the same fiduciary duties as other investment advisers. The SEC recently settled its first two enforcement actions against robo-advisers, asserting that both advisers made false and misleading statements to investors; lacked adequate compliance policies and procedures; and engaged in other misconduct. This article analyzes the SEC charges and the terms of the settlements. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017); and 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 for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

Samantha Hutchinson Joins Cadwalader’s Global Fund Finance Team in London

Cadwalader announced that Samantha Hutchinson has joined the firm’s global finance team in London as partner. Hutchinson advises financial institutions and private market managers across the U.K., Europe, the U.S. and Canada, and she will co-lead, along with partner Jeremy Cross, Cadwalader’s European fund finance team. For commentary from another Cadwalader partner, see “What Fund Managers Can Learn About Cyber-Breach Disclosure From Yahoo’s $35 Million SEC Settlement” (May 10, 2018).