Now is the Time for Registration as an Investment Adviser January 17, 2012
2 Lance Friedler, Partner Sadis & Goldberg LLP Lance S. Friedler practices in the firm s Corporate and Financial Services groups. Mr. Friedler regularly counsels clients on structuring and forming U.S. and non-u.s. private investment funds, including the investment manager and general partner entities to such funds. He also counsels investment managers on registration and ongoing compliance issues with the Securities and Exchange Commission, including the preparation of all written compliance policies and procedures. His investment management experience is broad in scope and includes the preparation and negotiation of seed capital arrangements and joint venture arrangements.
3 Ron S. Geffner, Partner Sadis & Goldberg LLP Ron S. Geffner is a member of Sadis & Goldberg LLP and oversees the Financial Services Group. He regularly structures, organizes and counsels private investment vehicles, investment advisory organizations, brokerdealers, commodity pool operators and other investment fiduciaries. Mr. Geffner also routinely counsels clients in connection with regulatory investigations and actions. Mr. Geffner's broad background with federal and state securities laws and the rules, regulations and customary practices of the Securities and Exchange Commission, Financial Industry Regulatory Authority, Commodities Futures Trading Commission and various other regulatory bodies, enables him to provide strategic guidance to a diverse clientele. He provides legal services to several hundred hedge funds, private equity funds and venture capital funds organized in the United States and offshore.
4 Daniel G. Viola, Partner Sadis & Goldberg LLP Daniel Viola oversees the Regulatory Defense and Compliance Group. He structures and organizes brokerdealers and investment advisers and regularly counsels investment professionals in connection with regulatory matters. Mr. Viola served as a Senior Compliance Examiner for the Northeast Region of the Securities and Exchange Commission ( SEC ), where he worked from 1992 through 1996. During his tenure at the SEC, Mr. Viola worked on several compliance inspection projects involving compliance examinations of registered investment advisers to ensure compliance with the Investment Advisers Act, the Investment Company Act, the Securities Act of 1933, and the Securities Exchange Act of 1934. Mr. Viola s examination experience includes financial statement, performance advertising, and disclosure document reviews, as well as analysis of investment adviser and hedge fund issues arising under ERISA and blue-sky laws.
5 Overview Identifying who is required to register as an Investment Adviser Identifying who is an Exempt Reporting Adviser An overview of the Registration Process Updating Your Business in Connection with Registration Establishing a Compliance Program Preparing for and Surviving an SEC Examination
6 Investment Adviser Registration Who is required to register? Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), the Investment Advisers Act of 1940 (the Advisers Act ) was amended and requires many investment advisers previously exempt from registration with the SEC to register. Generally, the Dodd-Frank Act requires all investment advisers that manage $150 million or more in assets to register with the SEC. The new rules under the Advisers Act became effective on July 21, 2011 and generally require existing investment advisers to be registered with the SEC by March 30, 2012.
7 Investment Adviser Registration Who is required to register? (cont.) Exemptions from Registration: Family offices Investment advisers solely to venture capital funds Certain non-u.s. based investment advisers Investment advisers that manage less than $150 million in assets and solely manage hedge funds and private equity funds ( Private Fund Adviser Exemption )
8 Investment Adviser Registration Who is required to register? (cont.) Investment advisers that manage between $100 million and $150 million in assets that manage one (1) or more managed accounts must register with the SEC Investment advisers that manage less than $100 million in assets generally must defer to the relevant investment adviser statutes in the state(s) where they conduct business Investment advisers that can rely on the Private Fund Adviser Exemption may still need to become an Exempt Reporting Adviser with the SEC.
9 Investment Adviser Registration Who is required to register? (cont.) Investment advisers must include all gross assets (including leveraged amounts) in calculating assets under management Investment advisers to private equity funds must include uncalled capital commitments (not just drawn down capital) in calculating assets under management
10 Investment Adviser Registration Who is required to register? (cont.) Non-U.S. Investment advisers. Many investment advisers based outside the United States will be required to register with the SEC. A new Foreign Private Adviser Exemption will apply only where the investment adviser: (i) has no place of business in the U.S.; (ii) has fewer than 15 U.S. clients and investors in private funds; (iii) has less than $25 million in assets under management attributable to U.S. clients and investors in private funds; and (iv) does not: (1) hold itself out generally to the U.S. public as an investment adviser; or (2) act as an investment adviser to a registered investment company or business development company. If an investment adviser fails to meet any one of the criteria, it will be required to register as an investment adviser with the SEC unless another exemption is available. The Dodd-Frank Act does not specifically provide for the registration lite regime that currently applies to many non-u.s. investment advisers.
11 Investment Adviser Registration Who is required to register? (cont.) Non-U.S. Investment advisers A non-u.s. based investment adviser that can rely on the Foreign Private Adviser Exemption does not need to register as an investment adviser with the SEC or become an Exempt Reporting Adviser
12 Exempt Reporting Advisers Exempt Reporting Advisers are investment advisers that avoid full SEC registration by relying on either the Private Fund Adviser Exemption or the exemption that applies to investment advisers solely to venture capital funds Exempt Reporting Advisers are not required to become registered with the SEC as advisers, or to come into compliance with all of the provisions of the Investment Advisers Act of 1940 Exempt Reporting Advisers will be required to submit regular reports to the SEC
13 Exempt Reporting Advisers (cont.) Investment advisers who file as Exempt Reporting Advisers are: required to prepare and file Form ADV Part IA with the SEC by March 30, 2012 and newly formed investment advisers should file as Exempt Reporting Advisers within 60 days from the date that they form their first hedge fund, private equity fund or venture capital fund subject to certain provisions of the Investment Advisers Act of 1940, including the anti-fraud provisions should establish written policies and procedures subject to pay-to-play rules not required to undergo routine SEC compliance examinations, but are still subject to the SEC s examination authority
14 Registration and Exempt Reporting Adviser guidelines for investment advisers located in New York New York based investment advisers that manage pooled investment vehicles and/or separately managed accounts and have less than $25 million in assets under management must register with New York if the adviser has six or more New York based clients Investment advisers with between $25-$100 million in assets under management ( mid-sized advisers ) generally must register with the SEC. However, if a mid-sized adviser only advises pooled investment vehicles it can avoid full registration with the SEC, but it must file as an Exempt Reporting Adviser if it has between $25-$150 million in assets under management Since New York does not have an examination program, mid-sized investment advisers in New York with at least one separately managed account must register with the SEC Investment advisers with over $150 million in assets under management are required to register with the SEC
15 Registration and Exempt Reporting Adviser guidelines for investment advisers located in Connecticut Recently adopted federal exemptions for Connecticut based investment advisers allow many advisers to avoid full SEC and state registration Connecticut based investment advisers with under $100 million in assets under management who advise one (1) or more separately managed accounts must register with the State of Connecticut Investment advisers with a place of business in Connecticut and between $0 and $150 million in assets under management who advise only pooled investment vehicles are able to avoid full SEC registration by filing as Exempt Reporting Advisers Connecticut based investment advisers with over $150 million in assets under management are required to register with the SEC
16 Registration and Exempt Reporting Adviser guidelines for investment advisers located in California Investment advisers with less than $25 million in assets under management do not have the option of registering as Exempt Reporting Advisers and must register with the State of California Investment advisers with a place of business in California and who manage between $25 and $150 million in assets under management and who advise only pooled investment vehicles must file as an Exempt Reporting Adviser by March 30, 2012 California based investment advisers that only advise pooled investment vehicles and manage over $150 million in assets under management are required to register with the SEC California based investment advisers that advise separately managed accounts and have over $100 million in assets under management are required to register with the SEC On May 13, 2011, the California Department of Corporations published a Status Quo Letter allowing advisers with a place of business in California who were previously relying on the Private Fund Adviser Exemption to continue to rely on the exemption until final rules were adopted. California is expected to finalize the new rulings by mid-march 2012.
17 An Overview of the Registration Process Obtain entitlement codes and passwords to IARD electronic filing system Prepare Form ADV Parts I and II Prepare SEC compliant policies and procedures File Form ADV with the SEC The SEC will typically approve a new filing within 45 days of submission
18 Best Practices for Newly Registered Investment Advisers Review and update marketing materials such as due diligence questionnaires, marketing brochures and/or tear sheets Review and update offering documents of investment products directly advised or sub-advised Review and update investment management agreements
19 CCO Annual Requirements Update Form ADV Satisfy the brochure rule Annual new issue eligibility questionnaire Review required compliance procedures and code of ethics; including: soft dollar review, best execution review, trade errors, insider trading and marketing reviews, e.g., investor communications and ddqs Review business continuity plans and email retention Deliver audited financial statements to pooled vehicle clients to satisfy self-custody rules Deliver Privacy Policy Confirm ERISA compliance 25% test for benefit plan investors Review offering documents, side letters and investment management agreements Review anti-money laundering procedures Amend 13G or 13Ds, File 13F filings Review Blue Sky Filings and other SRO registration requirements Review liability insurance needs Class Action filings
20 Annual Review of Compliance Procedures Books and Records Financials Registration ADV, U4, Firm, IARs, ADV Delivery Fees Advertising Ads, Websites, Business Cards, Seminars, RFPs, Pitch books Privacy Policies Supervisory/Compliance Supervisory Procedures, Compliance Procedures, Policies, Code of Ethics Investment Activities Adherence to Investment Policy, Fairness, Conflicts Trading & Brokerage Practices Performance Reporting Custody Solicitors Pooled Investment Vehicles (Hedge Funds) Insider Trading Proxy Voting BCP AML Unethical Business Practices Section 206 Unsuitable Recommendations Contracts Unauthorized trades Excessive Fees Borrowing from client Valuation
21 Suggestions for Updating Internal Compliance Programs a) Re-emphasize that employees have a duty to report wrongdoing internally b) Highlight that failure to report internally may be participation in or aiding/abetting the wrongdoing i. Grounds for sanctions, including termination from job c) Note that reporting wrongdoing can lead to promotion, higher salary or other benefits i. Counteracts financial incentive to act as Whistleblower instead of reporting internally d) Better practice is not to mention Whistleblower Program i. Plants idea to ignore compliance program that is not intent of Whistleblower Program ii. Could be viewed as implicit threat/evidence of intent to retaliate
22 SEC Examination Emphasis Risk assessments, corporate governance, and enterprise risk management Does firm have good risk management over technology? Do management, internal audit work well together? How are the firm s culture and ethics?
23 Enterprise Risk Management SEC focusing further on total firm management More routinely interview senior management Evaluate tone at the top Compliance plus market and credit risk Evaluate how firm protects clients in all aspects As broad as firm s operations Includes reputational risk Role of Chief Compliance Officer in total enterprise risk management
24 More SEC Exam Considerations Adequacy of Policies and Procedures Adequacy of Annual Review Do they reflect what the firm is doing? Do they reflect new business activities? Are they updated for new regulations? Ability to produce books and records timely and accurately (problems heighten concerns and lengthen exams).
25 Sadis & Goldberg LLP If you have questions, please contact: Lance Friedler 212.573.8030 lfriedler@sglawyers.com Ron S. Geffner 212.573.6660 rgeffner@sglawyers.com Daniel G. Viola 212.573.8038 dviola@sglawyers.com