The Securities and Exchange Commission has layered two tests for bad actors on to private fund managers. On Form ADV, the fund manager will need to disclose bad actor events. Then the second test comes under the new Rule 506(d) that also requires disclosure for bad actors in private placements and a bar for recent bad actors. From a compliance perspective, the question comes down to how do you deal with certifications.
Unfortunately, the employees for Form ADV disclosure are potentially different than the employees than the 506(d) disclosure and bans. For 506(d) its limited to “officers participating in the offering.”
Participation in an offering would have to be more than transitory or incidental involvement, and could include activities such as participation or involvement in due diligence activities, involvement in the preparation of disclosure documents, and communication with the issuer, prospective investors or other offering participants.
I’m not sure that helps much for fund managers. It does mean that you can exclude administrative assistants.
For Form ADV, the disclosure pertains to
Your advisory affiliates are: (1) all of your current employees (other than employees performing only clerical, administrative, support or similar functions); (2) all of your officers, partners, or directors (or any person performing similar functions); and (3) all persons directly or indirectly controlling you or controlled by you.
The Form ADV disclosure is potentially for a broader group of employees. Your organization may have employees who are not clerical, but are also not officers participating in the offering.
I think it’s probably just easier to require every employee to fill out the questionnaires. Then you can get into the weeds of the analysis if there is a disclosure event.
That leads to the next item which is the questionnaires. The main concept between the two are the same. If your employees have been involved in financial crimes, you need to disclose that information. However, the time frames, laws covered, and conviction status vary between each regulatory requirement.
I tried to sit down and create a unified questionnaire that would address disclosures for both Form ADV and Rule 506(d). In ended up being a huge pain in the neck and I gave up. I have two separate questionnaires that I require all employees to deliver. Let me know if you have come up with a unified questionnaire.
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