Have You Set Up Your IARD Account?

With the impending deadline for filing Form ADV to register as an investment adviser, you need to jump through some hoops before you can do the filing. First step is visiting the Investment Adviser Registration Depository. Form ADV needs to be filed electronically and this is the electronic mailbox.

But first you need an account. To get an account you need an IARD Super Account Administrator. To get an IARD Super Account Administrator, you need to fill out the SEC Registrant Entitlement Packet (.pdf). It’s a simple form, but you need to mail it back to get your account. (There is an overnight delivery address.)

Once IARD gets the form they are supposed to send you emails with your username and password. Then you need create a financial account. To fund the account you need to use bank wire or check and that has a two day delay in funding.

I’m not trying to give you a tutorial. I’m just pointing that it will take at least a few days for you to get the mechanics set up to file.

There are only eight business days left until the June 6 filing deadline for fund managers. (Unless the SEC acts to extend the deadline.) Seems like its time to get the mechanics moving.

Time for the SEC to Extend a Deadline

Dodd-Frank set a July 21 deadline for changes to the Investment Advisers Act in Title IV:  The Private Fund Investment Advisers Registration Act. This included the  expiration of the private adviser exemption from registration under the Investment Advisers Act, the addition of an new exemption for “venture capital fund advisers” and the increase in the threshold for registration with the SEC to $100 million.

The SEC proposed a new Form ADV in November to deal with these changes. But the final form has not been published.

The SEC proposed a definition of “venture capital fund adviser” in November. The final definition has not been published.

With the increase in the registration threshold to $100 million, about 4,000 investment advisers will be moved to the state authorities for supervision. Many states are still in the middle of revising their statutes and regulations to deal with the changes.

Since the SEC has a 45 day review period on the Form ADV, the filing deadline in June 6. That’s just two weeks away. Throw in Memorial Day weekend in the middle of that to lose a few more days.

In April, the SEC hinted that they would extend the July 21 deadline.  The IARD registration system would not be ready for the new Form ADV until the end of 2011. It sounded like the SEC is not ready.

I think it’s unrealistic for the SEC to release the new regulations and forms in the next two weeks and expect their regulated constituents to be able to pull the pieces together. Actually, it’s probably unrealistic to expect that the SEC will be ready in the next two weeks. They keep talking about have the regulations in place by July 21. That’s 45 days too late. Looking at this week’s SEC meeting, the subject is not on the agenda.

This week, I’m sitting down to start registering on the old Form ADV. The boxes don’t fit very well and some of the dollar amounts are wrong. It may be a waste of time, but we are out of time.

To entertain myself in the face of this deadline, I present the deadline post-it video

Compliance Bits and Pieces

Here are some recent compliance related stories that caught my eye.

My Attorney Just Shattered My Crowdfunding Dreams by Christopher Hytry Derrington and Charles Hertlein in the Huffington Post

In February 2011, I announced on the Huffington Post that my company was going to try to raise investment capital via crowdfunding. Using online social networks, crowdfunding enables entrepreneurs to pitch their businesses to large pools of potential investors. But when I mentioned crowdfunding to my attorney, he said it would be virtually impossible for me to do because the SEC prohibits private business owners from soliciting funds from individual investors.

20 Questions Directors Should Ask about Compliance Committees by Tom Fox

What are some of the questions that the Board of Directors should be asking? We posit that a large public company should have Compliance Sub-Committee of Board members. We list 20 questions below which reflect the oversight role of directors which includes asking senior management and themselves. The questions are not intended to be an exact checklist, but rather a way to provide insight and stimulate discussion on the topic of compliance. The questions provide directors with a basis for critically assessing the answers they get and digging deeper as necessary.

California Extends IA Exemption for Hedge Fund Managers in Hedge Fund Law Blog

California currently has an exemption from the registration requirements for certain fund managers with more than $25M of AUM (Rule 260.204.9).  Back in March California requested input from the investment management community on how they might change the registration requirements when the SEC finalizes its IA registration rules as a result of the Dodd-Frank act.  At that time it was expected that the SEC would finalize its IA registration rules in time for managers to register before the July 21, 2011 registration deadline.  However, the SEC subsequently indicated that it would likely extend the registration deadline until the first quarter of 2012.  From this story by IA Watch, it looks like the Division of Investment Management is moving closer to officially moving the registration deadline to next year.

Whistleblower skirmish: Battling the SEC over how to rat out corp. fraud by Kaja Whitehouse in the New York Post

The US Chamber of Commerce is leading the fight for one side, demanding Schapiro force corporate whistleblowers to report wrongdoing first to executives at their workplace. In the opposite corner is a group of lawyers representing whistleblowers, who have formed the National Whistleblowers Center. They are demanding that Schapiro allow corporate whistleblowers to snitch wherever they feel is best — so they won’t be scared of reporting wrongdoing.

Controls on Political Contributions

In the face of some pay-to-play scandals involving investment advisers and government sponsored investment fund officials, the Securities and Exchange Commission slapped restrictions on the ability of investment advisers and fund managers to make political contributions. Rule 206(4)-5 prohibits an investment manager or fund manager from collecting fees for two years if the firm or “covered associates” make a political contribution to certain elected officials. The ban applies to politicians who can directly or indirectly influence the decision to hire or can directly or indirectly appoint the person who can make the decision.

In talking with other compliance officers, firms are all over the place on how they are putting restrictions and controls in place to prevent the disastrous results that come from violating the rule.

  1. Complete ban on political candidates
  2. Pre-clear all political contributions
  3. Pre-clear any contributions in excess of the de minimis amount of $350/$150
  4. Here’s the rule don’t break it

Regardless of the restrictions, the SEC Rule also imposes a record-keeping obligation on the compliance program. “Covered associates” must report all political contributions.

You can do a periodic certification of the contributions they have made. Since political contribution are in the public records, theoretically you can check the records to make sure that they are not failing to report.

I decided to try some public record searches to see if this was a realistic control.

I assumed the federal databases would be the best so I went to the Federal Election Commission’s Advanced Transaction Query By Individual Contributor. It allows you to search by company name. That makes it easy to run a broad search to find who in the organization has made campaign contributions.

That was a good start, but the least relevant. For the most part, federal elected officials do not control government-sponsored retirement funds. The big exception is if the candidate is currently a state or local official looking to go to Washington.

I turned next to Massachusetts Office of Campaign and Political Finance. Their OCPF Searchable Campaign Finance Database & Electronic Filing System makes it easy to search by employer.

Then I tried California, New York, and Virginia. They were both terrible and I could not find a way to search by employer.

Washington State’s Public Disclosure Commission allows you to search by employer.

The SEC rule just went into effect in March, so I get the sense that compliance programs are evolving as they work with the restrictions and controls. I’m interested to hear you are doing, whether you are searching campaign databases, and the resources you are using. Feel free to leave a comment (anonymous if you like) or send a confidential email to [email protected].

The SEC Uses a Shiny New Tool

Earlier this year the Securities and Exchange Commission announced a new initiative encouraging cooperation. They wanted to start using Cooperation Agreements, Deferred Prosecution Agreements, and Non-prosecution Agreements.

They finally got use one of their shiny new tools. The SEC announced that Tenaris S.A. entered into a Deferred Prosecution Agreement.

The SEC alleged that Tenaris, a global manufacturer of steel pipe products, violated the Foreign Corrupt Practices Act by bribing Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas. Tenaris made almost $5 million in profits from those contracts. As part of the DPA, the SEC is requiring Tenaris to cough up $5.4 million.

In addition to paying cast, Tenaris needs to do the following under the DPA:

  • Cooperate with SEC in the investigation
  • Not break the law
  • Not claim a tax break or seek an insurance claim for $5.4 million penalty
  • Update its code of conduct annually
  • Require each director, officer and management-level employee to certify compliance with the code of conduct
  • Train employees on the FCPA

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Will Private Equity be Exempted from Registration?

In earlier versions of Dodd-Frank, when it was being formulated in the House committee, there was an exemption for private equity fund managers from registration under the Investment Advisers Act. It also had an exemption for venture capital fund managers. Only the venture capital exemption managed to survive.

Of the many attempts to cut back on Dodd-Frank, at least one bill is slowly moving forward. The Small Business Capital Access and Job Preservation Act, H.R. 1082, would exempt advisers to private equity funds from SEC registration under the Investment Advisers Act.

The bill is straightforward:

Except as provided in this subsection, no investment adviser shall be subject to the registration or reporting requirements of this title with respect to the provision of investment advice relating to a private equity fund or funds.

It still leaves you with issue of how to define “private equity fund or funds.” The SEC would have 6 months to define the term. Even if the SEC extends the deadline for registration and even if this bill gets passed quickly, that would leave a very narrow window for a private equity fund manager to determine if they need to register.

The first contingency seems destined. Most fund manager CCOs that I’ve talked to are not expecting the July 21 deadline to be in place. Everyone is expecting the deadline to be extended into the first quarter of 2012. They’re just wondering what is taking the SEC so long to make it official.

The bigger question is whether this bill be passed quickly and whether it will be passed at all. Certainly there is some legislative support for the exemption. It had been in earlier versions of Dodd-Frank. The risks of private equity are not the same risks as hedge funds. On the other hand, the some Congressional testimony about the bill focused on the leverage buyout sector of private equity. Many associate this high leverage business model with all of private equity.

The bill was forwarded by the Subcommittee on Capital Markets and Government Sponsored Enterprises to the full House Committee on Financial Services. It still has a long way to go and its future is uncertain. Continue moving forward with implementing your compliance program.

For those of you who need a brush-up on the legislative process, Schoolhouse Rocks still tells it best:

Sources:

Is the SEC Going to Reform Advertising Rules?

Advertising and corporate communications is a rough area for compliance when used in capital formation. The rules are restrictive, not always intuitive, often vague, and in direct opposition to the revenue-hungry side of the company.

Last week, the House Committee on Oversight and Government Reform heard testimony on “how securities regulations have harmed public and private capital formation in the United States.”

“Economists now estimate that the market for underwritten initial public offerings in the U.S. have plummeted from an annual average of 530 during the 1990s to about 126 since 2001. Meanwhile, the number of companies listed on the major American exchanges peaked in 1997 at more than 7,000. Today, there are approximately 4,000. Furthermore, private capital formation in the U.S. is increasingly difficult, as demonstrated by Facebook’s recent decision to issue its high-profile private offering to foreign investors but not Americans.”

Since I’m in the private equity sector, I care more about the limitations placed on private capital formation. SEC Chairman re-stated the justification for the ban on general advertising under Regulation D.

“The ban was designed to ensure that those who would benefit from the safeguards of registration are not solicited in connection with a private offering.”

“I recognize that some continue to identify the general solicitation ban as a significant impediment to capital raising for small businesses. I also understand that some believe that the ban may be unnecessary because those who do not purchase the offered security would not be harmed by the solicitation that occurs. At the same time, the general solicitation ban is supported by others on the grounds that it helps prevent securities fraud by making it more difficult for fraudsters to attract investors or unscrupulous issuers to condition the market. We need to balance these considerations as we move forward in analyzing this issue.”

Barry Silbert, CEO of Second Market phrased it nicely:

It should not matter that non-accredited individuals know that unregistered securities are available for sale. No one prohibits car manufacturers from advertising, even though children under the legal driving age are viewing the advertisements. The general solicitations prohibition unnecessarily limits the pool of potential investors, thereby restricting companies’ ability to raise capital to fuel growth.

Chairman Shapiro said the SEC staff is looking at the offering rules and whether the general solicitation ban should be revisited. Given all of the rule-making from Dodd-Frank, it’s hard to imagine that the SEC will find the bandwidth to revisit the rule in the near future.

Sources:

Image is Reaching for Blue Skies by Kelvin Tan
CC BY 2.0

Compliance Bits and Pieces for May 13

These are some compliance related stories that recently caught my attention.

Are Girl Scout Cookies Evil? by Chris MacDonald in the Business Ethics Blog

Well, apparently nothing is safe from criticism. Girl Guide cookies, as it turns out, are under attack for being made with palm oil, a tropical oil the production of which has been blamed for deforestation and for endangering the habitat of orangutans. Girl Scout cookies, in their current form, are apparently evil.

Division of Investment Management Requests Extensions of Deadlines for Mid-Sized Advisers and Private Fund Advisers in Compliance Avenue

IA Watch is reporting that the Division of Investment Management has formally requested that the Securities and Exchange Commission (SEC) move to next year the deadlines for mid-sized advisers (certain advisers with between $25 million and $100 million in assets under management) to switch to state registration and for private fund advisers with more than $150 million in assets under management to register with the SEC.  IA Watch states: “The formal request moves this closer to becoming reality, should the Commission act on it.”

Federal Court Rules that Private Invocation of Dodd-Frank Anti-Retaliation Whistleblower Section Requires Providing Information to SEC in Jim Hamilton’s World of Securities Regulation

In a case of first impression, a federal court ruled that the anti-retaliation whistleblower protection provisions of the Dodd-Frank Act require a prospective whistleblower to show that he either provided the information to the SEC, or that his disclosures fell specific categories listed in the whistleblower provisions. Further, even if the prospective whistleblower did not provide the information directly to the SEC, he could still be covered by Section 922 of Dodd-Frank if he gave information to outside counsel hired by the company’s independent directors to investigate the allegation and who he alleges reported it to the SEC. (Egan v. TradingScreen, Inc. et al., (SD NY), 10 Civ 8202 (LBS), May 4, 2011).

Treasury Clarifies FBAR Regulations for Private Investment Funds in the Harvard Law School Forum on Corporate Governance and Financial Regulation

On March 28, 2011, the Final Regulations, issued by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“Treasury”) relating to the filing of Reports of Foreign Bank and Financial Accounts (“FBAR”) became effective. Notably, the Final Regulations do not require ownership interests in, or signing or other authority over, private investment funds, such as hedge funds and private equity funds, to be reported on FBARs, although Treasury will continue to study the issue. The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in the calendar year 2010, and for all subsequent years.

The SEC Remains Behind the Times on Social Media by Bruce Carton in Securities Docket

The Securities and Exchange Commission continues to dip its toe into the social media waters, but it’s doing so in such a cautious, disjointed way that it undermines the usefulness of powerful online communication tools.

Raj is Guilty. Nobody Is Surprised.

If you read about the evidence, you can’t really be surprised that Raj Rajaratnam was found guilty of insider trading. That he was found guilty on all counts was mildly interesting, but not much.

We may get some interesting new legal developments in insider trading law from the appellate decisions. But probably not. The case seems solid. It does not pose the more interesting legal analysis seen in the charges brought in some of the expert network case.

The most interesting aspect of Raj’s case is the government’s use of wiretaps and surveillance. The typical insider trading case relies on some extremely timely trades and a clear opportunity to have acquired knowledge about a significant corporate action. With Raj, his own voice betrayed him. The government was willing to spend considerable considerable effort to gather evidence.

Was it a legal victory? How do you measure success from a legal perspective?:

“We started out with 37 stocks, we’re down to 14,” defense attorney John Dowd said today after his client was found guilty on 9 counts of insider trading and 5 counts of conspiracy. “The score is 23 to 14 for the defense. We’ll see you in the Second Circuit.”

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The SEC Is Making it Harder for Investment Advisers to Earn Performance Fees

The Securities and Exchange Commission is proposing to raise the dollar thresholds for someone to be considered a “qualified client.”

The definition of a qualified client is set out in Rule 205-3. This is an exemption to the Section 205(a)(1) general prohibition on performance fees.  Section 205(e) grants the SEC the power to create an exemption from the limitation “on the basis of such factors as financial sophistication, net worth, knowledge of and experience in financial matters, amount of assets under management, relationship with a registered investment adviser,” and other factors. The SEC created an exemption in Rule 205-3 for “qualified clients.”

Section 418 of the requires the SEC to adjust the standard for a Qualified Client for the effects of inflation within one year and then every five years.

Back in August I predicted the standard would be raised to a minimum investment of $1 million and the minimum net worth would rise to $2 million. I was proven wrong about my prediction of a rise in the accredited investor standard.

The SEC is proposing that the standard increase to a minimum investment of $1 million and the minimum net worth would rise to $2 million. As to net worth, they are excluding the value of a person’s primary residence.

The SEC is using the same primary residence calculation they used in the “new” accredited investor standard. So, if you owe more on your mortgage than the value of your house, then you need to treat the overage as a negative asset. Once again, owning a house can only be a negative for the SEC standards.

While I used the CPI-I standard as the benchmark for inflation, the SEC chose to use the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”), published by the Department of Commerce

One of the comments the SEC is seeking in the proposed rule is whether the PCE index is the appropriate measure of inflation.

As for private  funds, Rule 205-3(b) requires a look -through from the fund to the investors in the fund. Each “equity owner … will be considered a client for purposes of the” limitation.  If the fund is relying on the 3(c)(7) exemption from the Investment Company Act then the fund’s investors should be “qualified purchasers”  and you won’t need to look much further. If the fund is using the 3(c)(1) exemption, then it will need to take a closer look at its investors to make sure that each is a qualified client.

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