1. law, govt and politics

Registration
R
i t ti
off P
Private
i t F
Fund
d
Managers – What to Expect and How
t P
to
Prepare
Michael R. Butowsky
Michele L. Gibbons Olga A. Loy
Olga A. Loy
November 5, 2009
Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.
Proposed Legislation: Private Fund Investment Advisers
Registration
g
Act of 2009
9 ((the “2009
9 Registration
g
Act”))
• Released by the Treasury Department on July 15, 2009
• The 2009 Registration Act eliminates the private adviser exemption
•
All advisers to “private funds” with assets > $30m must register
•
“private fund”‐‐any investment fund that would be an “investment company” as defined under the Investment Company Act of 1940 but for the exemptions under Sections 3(c)(1) or 3(c)(7)
•
Exempts small advisers (<$150m of assets under management in the US) from registering and reporting requirements (but must preserve records and make them available to the SEC on request)
•
Exempts from registration managers of private funds that “solely advise Small Business Investment p
g
Companies” and certain other SBIC fund managers
•
Includes option of registering before the effective date
•
No distinction between types of funds (e.g., PE, hedge, VC)
•
October 1, 2009 House bill allows the SEC to exempt October
1 2009 House bill allows the SEC to exempt “venture
venture capital funds
capital funds” from the 2009 from the 2009
Registration Act requirements. Although Capital Markets Subcommittee Chairman Paul Kanjorski (D‐
PA) carved out venture capital funds, those firms would be required to provide similar information via other means
•
Allows for a 1 year transition period to allow time for registrations
Allows for a 1‐year transition period to allow time for registrations
2
Proposed Legislation: The 2009 Registration Act
(
(contd.)
)
• “foreign private advisers” are exempt if:
• no place of business in the United States, • during the preceding 12 months <15 clients in the US and assets under management attributable to clients in US <$25
assets under management attributable to clients in US <$25 million and
g
y
p
• neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any registered investment company or BDC
3
Proposed Legislation: The 2009 Registration Act
(
(contd.)
)
• Registration: If private fund advisers are subject to registration under the 2009 Registration Act, all provisions of the IAA apply (requirement to implement a compliance program, adopt an insider trading policy, disclose information on Form ADV, be subject to the SEC exams, etc.)
• Disclosure:
Disclosure: The 2009 Registration Act authorizes the SEC to promulgate The 2009 Registration Act authorizes the SEC to promulgate
rules requiring disclosures by registered investment advisers to investors, prospective investors, counterparties and creditors of any private fund advised by a registered investment adviser. • SEC Rulemaking authority: enhanced rulemaking authority to define terms used in the IAA, including to classify persons or matters and prescribe different requirements for different classes as well as to “ascribe
different requirements for different classes, as well as to ascribe different different
meanings to terms (including the term “client”).”
4
Proposed Legislation: Current Status
• Oct.
Oct. 27, 2009: House Financial Services Committee passed the 2009 27, 2009: House Financial Services Committee passed the 2009
Registration Act by 67‐1 vote • November 3, 2009: Bill not expected to be presented to the House floor until December 2009
until December 2009
5
Topics to be Covered
• Proposed Legislation
• Code of Ethics
• What is an Investment Adviser?
• Custody
• Fiduciary Duty
• Proxy Voting
• Investment Advisers Act
• Privacy
• Compliance Rules
• Advertising and Marketing
• Registration Process
• Business Continuity
• Disclosure
Di l
• Books and Records
B k
dR
d
• Advisory Agreements
• Solicitation
• Allocation and Trading
Allocation and Trading
• Anti‐Money Laundering
Anti Money Laundering
• Best Execution and Soft Dollars
• SEC Examinations
6
Fiduciary Duty
7
Fiduciary Duty to Clients
• As a fiduciary, an adviser has an affirmative duty of utmost good faith to act in the best interest of the client and to make full and fair di l
disclosure of all material facts, particularly where the adviser’s f ll
i lf
i l l h
h d i ’
interests may conflict with the client’s.
It is unlawful for an adviser to employ any device, scheme or artifice is unlawful for an adviser to employ any device, scheme or artifice
• It
to defraud any client or prospective client or to engage in any transaction practice or course of business which operates as a fraud or deceit upon any client or prospective client The Advisers Act
or deceit upon any client or prospective client. The Advisers Act does not require a transaction to have occurred for actionable fraud to have been committed.
8
Duties as a Fiduciary and Antifraud Provisions of the
Advisers Act ((Section 206))
• General duty to place the interests of clients first
• May not trade on the basis of inside information
M
tt d
th b i f i id i f
ti
• Have a reasonable basis for investment advice
• Allocate investment opportunities fairly
Allocate in estment opport nities fairl
• Use soft dollars only for the benefit of clients and disclose properly
• Seek best execution Seek best execution
• Resolve trade errors in the client’s favor
• Operate under an ordinary negligence standard
Operate under an ordinary negligence standard
• Recommend only suitable securities
• Follow terms of advisory contracts Follow terms of advisory contracts
9
U.S. Investment Advisers Act
10
Differences in Regulation
Advisers Act
Provision
Unregistered
Advisers?
Topic
Rule 204
204-2
2
Books and Records
No
Rule 204-3
Brochure Delivery
No (but 206)
Section 204A
Insider Trading Procedures
Yes (not state)
Section 205
Contracts
No (but 206)
Rule 205-3
Performance Fees
No (but 206)
Section 206(1)
Fraud
Yes
Section 206(2)
Fraud
Yes
Section 206(3)
Principal/Agency Transactions
Yes
Rule 206(4)-2
Custody
No
Rule 206(4)-3
Solicitor Rule
No (but 206)
R l 206(4)
Rule
206(4)-4
4
Di l
Disclosure
off Adviser
Ad i
Financial
Fi
i l and
d Disciplinary
Di i li
M
Matters
tt
N (b
No
(butt 206)
Rule 206(4)-6
Proxy Voting
No (but 206)
Rule 206(4)-7
Compliance Officer and written Compliance Procedures
No
Rule 206(4)-8
206(4) 8
Anti Fraud (applicable to investors in the fund)
Anti-Fraud
Yes
C
Compliance Procedures and
li
P
d
d
Chief Compliance Officer Rule
Chief Compliance Officer Rule
12
Investment Advisers Act Rule 206(4)-7
• Adopt and Implement Policies and Procedures
• Designate a Chief Compliance Officer
D i
Chi f C
li
Offi
• Recordkeeping
• Annual Review
13
Compliance Manuals
14
SEC Suggested Policies and Procedures
• Portfolio Management Process (including • Safeguarding of Client Assets from allocation of investment opportunities conversion or inappropriate use by advisory among clients and consistency of portfolios personnel;
with clients’ investment objectives, with clients
investment objectives,
• Books and Records (The accurate creation of disclosures by the Adviser and applicable required records and their maintenance in a regulatory restrictions);
manner that secures them from • Trading Practices (including procedures by unauthorized alteration or use and protects which the Adviser satisfies its best execution them from untimely destruction); obligation, uses client brokerage to obtain • Marketing advisory services, including the research and other services (“soft dollar use of solicitors; arrangements”) and allocates aggregated trades among clients);
• Valuation (Processes to value client holdings and assess fees based on those valuations); • Proprietary Trading of the Adviser and Personal Trading Activities of Supervised Persons;
Persons; • Safeguards for Privacy Protection of client records and information; and
d
di f
i
d
• Accuracy of Disclosures made to investors, • Business Continuity Plans.
clients and regulators, including account statements and advertisements;;
15
Additional Policies that may Apply
• Anti‐Money Laundering
• Private Placement
• Supervision of Service Providers (administrators, accountants, etc.)
• Anti‐bribery and Foreign Corrupt Practices Act
• Regulatory Filings (including 13d, 13g and 13f)
16
Compliance Manuals
Each policy in the compliance manuals should address the following:
• Identify risks policy addresses.
• Detect, address and prevent violations.
• Designate who will implement the policies.
• Designate who will supervise the policies.
• Designate who will monitor the policies.
Designate who will monitor the policies
• How will the policies be tested? • How often will the policies be tested? • Who will test the policies? • How will the policies be documented? p
g
p
• Who will be responsible for amending the policies?
• How will policy compliance be documented? • What other policies does this policy affect this policy? • What disclosures should be aligned with this policy? Wh t di l
h ld b li d ith thi
li ?
17
“Culture of Compliance”
18
Building a Culture of Compliance
• “Tone at the Top” – Senior management must play an active leadership role in compliance
p
y
y
g
• Participation and consistency at every level of management • Communication to and from employees – compliance is everyone’s responsibility
Everyone must be knowledgeable about the compliance program including must be knowledgeable about the compliance program including
• Everyone
why the policies are in place and what risks they are meant to address
• Empower the Chief Compliance Officer
• Implementation and training
Implementation and training
• Documentation and transparency – “If it isn’t written down, it didn’t happen”
• Reviews and audits
R i
d di
• Consistent sanctions and rewards
19
Th R l f h
The Role of the Chief Compliance Officer
Chief Compliance Officer
20
The Chief Compliance Officer
• Sufficient knowledge about the company and the Investment Advisers Act
• Seniority and authorityto implement the procedures
S i it
d th it t i l
t th
d
• Sufficient resources to effectively implement and enforce the policies
• Sufficiently independent:
• Who does the CCO report to?
• Does the CCO have a financial interest in the company?
• How is the CCO’s salary determined?
• Does the CCO have other roles in the company?
D
h CCO h
h
l i h
?
• Does the CCO have other conflicts of interest?
21
Implementation and Testing
22
Implementation and Testing
• Monitoring and reporting including means testing
• Analysis of information collected, which may include analysis Analysis of information collected which may include analysis
by outside sources. Information should be analyzed over time to identify unusual patterns that may point to compliance problems or deficiencies;
bl
d fi i i
• Prompt investigation and documentation of any patterns of compliance exceptions customer complaints or other
compliance exceptions, customer complaints or other suspicious activities; and
• Reporting up the chain as required by the compliance program p
g p
q
y
p
p g
or as otherwise appropriate. 23
The Annual Review
24
The Annual Review
The Adopting Release states that the annual review should
include an evaluation of (1) the effectiveness of the
implementation of the compliance program; and (2) the need
to revise the compliance program as a result of any compliance
matters that arose duringg the p
previous yyear,, anyy changes
g in the
business activities of the adviser or its affiliates, and/or any
relevant regulatory developments.
25
Compliance Profile
Business Matters
• Has the adviserentered new lines of business, developed significant new customers or modified its investment practices or strategies?
• Has the adviser hired any new professionals whose activities should be covered by the compliance program?
p
• Has the adviser implemented new software or automation initiatives?
• Has the adviser’s ownership changed (as a result of a sale of the business or merger)? Has the adviser acquired any new subsidiaries?
• Have there been any other business or organizational changes?
Have there been any other business or organizational changes?
Industry Developments
• Have
Have there been any changes in industry there been any changes in industry “best
best practices
practices” or other standards? Has or other standards? Has
the SEC, FINRA or another relevant regulator proposed or adopted any rules relating to the adviser’s business?
26
Compliance Profile (Cont.)
Complaints and Compliance Exceptions
• Is there a pattern of client complaints or compliance exceptions?
• W
Were remedial actions taken promptly? Is there a pattern in the remedial actions di l i
k
l ?I h
i h
di l i
taken?
• Were complaints or exceptions escalated properly? Problems with the Compliance Program
• Have there been any issues with interpretation or confusion about the application of specific policies and procedures?
• Have there been any compliance concerns not anticipated by the compliance program or violations of specific policies and procedures for which a remedial process was not identified?
f
• Have there been any problems in enforcing the compliance program (e.g., difficulties with respect to specific individuals or matters)?
27
Documenting the Annual Review
The compliance rules require an adviser and fund to maintain any records documenting their compliance program annual review. Relevant documentation may include: An inventory of policies/procedures reviewed;
• An inventory of policies/procedures reviewed;
• An inventory of files and other records reviewed;
• Employee, service provider or other certifications, acknowledgments or representations reviewed;
representations reviewed; • Checklists, reconciliation workbooks, exception records and similar material reviewed;
Records of approvals of variations from established policies/procedures;
• Records of approvals of variations from established policies/procedures;
• Records of interviews (identifying persons involved and topics covered);
• A list of remedial actions reviewed; and
• Changes made to specific policies/procedures during the previous year.
h
d
f
l
/
d
d
h
• There are no requirements in Rule 206(4)‐7 as to either the necessity of a written report as part of the annual review of an adviser’s compliance program or the p
content of such a report. 28
Investment Adviser Registration
29
How to Register
• IARD online registration
• Fill out Form ADV
• File Part 1
• Register with the IARD
• Hold Part II
• Fund account (SEC fees waived; state fees)
• Wait for SEC order
Wait for SEC order
• Log on to complete and L
t
l t
d
submit all filings
• SEC approval will be granted SEC approval will be granted
or denied within 45 days
• Adviser must be fully f y
compliant upon the date of registration
30
Form ADV – Part I
• Basic identifying information
• Financial industry affiliations
• Basis for registration
• Conflicts of interest
• Number of employees
• Soft dollars
• Number of clients
• Custodyy
• Types of clients (e.g., individuals, funds, charities)
• Identification of control persons
• Compensation arrangements
Compensation arrangements
• Prior bad acts
• Assets under management
• Private funds
Types of advisory activities
• Types of advisory activities
• Affiliated advisers
• Types of non‐advisory activities (e.g., broker)
• Websites (if any)
31
Form ADV – Part II
• Description of Advisory Services
• Types of Clients
• Types of Investments and Products
f
d
d
• Fees • Methods of Analysis
• Biographies • Conflicts of Interests
• Code of Ethics
Code of Ethics
• Proxy Voting
• Allocation and Trading Disclosure
• Best Execution and Soft Dollar Disclosure
• Privacy Policy
• Proposed
Proposed legislation suggests that additional disclosures regarding funds legislation suggests that additional disclosures regarding funds
and fund advisers may be required
32
State Registration
• State registration requirements for SEC registered investment advisers (requirements differ from state to state):
• Notice Filing ‐ in each state where the adviser has an office and a certain number of clients (numbers vary – but must be at least 6) who are residents of the state.
• Register “investment adviser representatives" ‐ for any representatives of the adviser who annually meet or communicate with more than 10 clients (
(who fall below certain financial standards) in their offices in such states. )
Exams may be required.
• Register “investment adviser representatives" ‐ in a state where third party solicitors who have an office in the state and solicit state residents
solicitors who have an office in the state and solicit state residents (numbers vary) for the adviser. Exams may be required.
33
Investment Advisory Agreements
34
Advisory Agreements
• No Assignment without Client Consent
• Fee Disclosure
Fee Disclosure
• No Hedge Clauses – no waiver of rights against the adviser
• Termination • ADV Delivery (48 hrs. prior or termination right within 5 business days)
• Investment Guidelines
• Disclosures: Privacy, Proxy Guidelines, Code of Ethics and Conflicts of Interest
(§ 205 and Rule 205‐3)
35
All
Allocation and Portfolio Management
i
d P f li M
36
Allocation of Trades
•
• Formula Required ‐ Fair and Equitable.
• No specified methodology (SEC Deviations from formula for:
• De minimus reallocations.
• Priority to clients of the portfolio ffavors objective, mechanical bj i
h i l
criteria over subjective methodologies).
manager who located opportunity.
• Client/investment objective • Pro rata – based on account differences.
size.
•
• Rotational – clients are provided fair access to opportunities over a
opportunities over a reasonable period.
Self‐Dealing
•
•
•
• Percentage Allocation – based on a stated percentage interest client is to receive in issuer
client is to receive in issuer (based on market value of client’s account).
•
Disclosure.
Disinterested consent.
Favoring Certain Clients
Favoring Certain Clients
•
•
37
Offer to client first.
Several SEC proceedings.
Disclosure.
Allocation of Trades
• Bunching of Client Orders:
•
•
•
Not required.
Disclosure.
Aggregation (Bunching) and Affiliates.
• Benefiting one client at the expense of another:
•
•
•
Contra trades
Contra trades.
Different timing (selling or buying ahead).
Short sales.
38
Portfolio Management
• Principal and Agency Cross Transactions
• Process for Identifying and Approving Transactions
• Trade Error Procedures • Investment Guidelines and Restrictions
• Portfolio Pumping and Window Dressing
Portfolio Pumping and Window Dressing
39
Best Execution and
Soft Dollars
Soft Dollars
40
Best Execution Defined
• An adviser’s obligation to obtain best execution has been defined by the SEC as “to execute securities transactions for clients in such a manner that the clients’ total costs or proceeds in each transaction is the most favorable under the circumstances ”
the circumstances.
• Advisers, as fiduciaries, have an obligation to seek best execution of clients’ transactions.
ti
f li t ’ t
ti
41
Product or Service Valuation/Transparency
• Advisers Act – Best Execution Determination (Release 23170)
• Best
Best execution definition: execution definition: “The
The money manager must: execute securities transactions money manager must: execute securities transactions
for clients in such a manner that the client’s total cost or proceeds in each transaction is the most favorable under the circumstances.”
g
y
g
g
• What gets taken into account: “A money manager should consider the full range and quality of a broker’s services in placing brokerage including, among other things the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the money manager.”
• Best execution is relevant to private equity funds as well as to hedge funds
• Soft dollaring is present in situations where the adviser benefits from the portfolio transactions of the client (e.g., obtaining proprietary or third party products and services) in exchange for the direction of client transactions.
• Conceptual basis for the permissibility of soft dollaring is disclosure and knowing consent
• Section 28(e) vs Non Section 28(e)
42
Evaluating Best Execution – Factors
• Best execution committee should periodically and systematically review best execution i
i
h ld
i di ll
d
i ll
i b
i
determinations and approve brokers and other service providers.
• Best execution can be based upon a variety of factors, including among others: •
The value of the research provided (soft dollar arrangements)
The value of the research provided (soft dollar arrangements)
•
Execution capability
•
Commission rates
•
Financial responsibility
•
Responsiveness
•
Reputation and Integrity
•
Facilities
•
Financial Services Offered
Financial Services Offered
•
Willingness and ability to commit capital
•
Access to underwriting offerings and secondary markets
•
Reliability in executing trades and keeping records
•
Fairness in resolving disputes The timing and size of particular orders
•
Available liquidity
•
Current market conditions
•
Trading Experience
43
Code of Ethics
Code of Ethics and Insider Trading
d
d
44
Code of Ethics
• Rule 204A‐1 (Compliance Date February 1, 2005)
• Standards of Conduct
• Require advisory personnel to comply with applicable U.S. Securities Laws
• Provisions designed to prevent the disclosure of inside Provisions designed to prevent the disclosure of inside
information (recommendations, holdings, transactions)
• “Access Persons” must report personal securities holdings
• Pre‐clearance of IPOs and private placements
• Require Advisory personnel to report violations of the Code
• Signed Acknowledgements
• Provide Code of Ethics to clients upon request
45
Custody
46
The Custody Rule
• Client assets over which an investment adviser has custody must be held by a “qualified custodian” (e.g., a registered broker‐dealer).
• Clients need to be given certain information about the custodian (i.e., name, address and the manner in which di (i
dd
d h
i hi h
the assets are held).
• Clients must receive account statements either from the Cli t
t
i
t t t
t ith f
th
custodian or from the adviser. If sent by the adviser, there must also be a surprise audit by an independent p
y
p
accountant.
47
Custody and Private Investment Funds
• General partner, managing members and others who have access to the assets of the private investment funds they operate are deemed to have custody and thus must comply
operate are deemed to have custody, and thus must comply with the revised Custody Rule.
• If a private investment fund’s assets are maintained with a qualified custodian and the fund is audited at least annually and audited financial statements are provided to investors within 120 days of the end of the fund’s fiscal year, (180 days for fund of funds) there is no need for the custodian or adviser to provide periodic account statements to the investors.
• Proposed amendments to the Custody Rule would require Proposed amendments to the Custody Rule would require
surprise audits if adviser fees are withdrawn from the investor’s account.
48
Proxy Voting
49
Proxy Voting – Rule 206(4)-6
• Fiduciary Duty to vote proxies in the best interests of clients
• Adopt and implement written policies and procedures for voting proxies (Identify and resolve conflicts of interest)
• Describe proxy voting policies and procedures to clients and provide a copy to clients upon request
Disclose to clients how they may obtain information about how to clients how they may obtain information about how
• Disclose
the adviser voted
• Exceptions (foreign securities)
p
(
g
)
• ERISA
50
Privacy
51
Privacy Rules and Regulations for
Investment Advisers
• Under the Gramm‐Leach‐Bliley Act, the SEC adopted regulations which require:
• Establish a Privacy Policy ‐ All regulated institutions must clearly, conspicuously, and annually disclose their policies for collecting and sharing customers’ nonpublic, personal information. Such policies sharing customers
nonpublic personal information Such policies
should describe:
• information that is collected;
• information that is disclosed to affiliates and non‐affiliated third parties; and,
• persons within the financial institution who receive such information;
• how the information of former customers is shared;
• procedures to protect the security and confidentiality of information; and,
• disclosures required by the Fair Credit Reporting Act.
52
Privacy Rules and Regulations for
Investment Advisers
• Delivery of Privacy Policy ‐ This notification—written or electronic—
must be provided to:
• “Consumers” (those who do not have an ongoing relationship with the firm, as customers do), with certain exceptions, before this information is shared with non‐affiliated third parties; and
• “Customers” when they establish a relationship with a financial institution and annually thereafter.
• Provide an Opportunity to “opt out” ‐ Both consumers and customers must be given notice of procedures and a reasonable t
tb i
ti
f
d
d
bl
means to prevent their financial institutions from transferring their nonpublic, personal information to a nonaffiliated third party.
• Establish
Establish prohibitions on account information disclosures ‐
prohibitions on account information disclosures All All
financial institutions may not disclose account numbers for credit card, deposit, or transaction accounts to any non‐affiliated third parties for use in phone, mail, and email marketing.
53
The Safeguard Rule
• The SEC’s Standard for Safeguarding Privacy
• Registered investment advisers must adopt policies and procedures that address administrative, technical and d
h
dd
d i i
i
h i l d
physical safeguards for the protection of customer records and information. These policies and procedures must be reasonably designed to:
• Ensure the security and confidentiality of customer records and information;
• Protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
• Protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer. 54
Advertising and Marketing
55
Definition of an “Advertisement”
• An “Advertisement” includes • any written communication addressed to more than one y
person;
• any notice or announcement in any publication, or by radio or television which offers any analysis, report, or publication regarding securities; or
• any graph, chart, formula or other device for making h h t f
l
th d i f
ki
securities decisions, or any other investment advisory services regarding securities.
56
Advertising Rules
• Testimonials
• Past Specific Recommendations
• Graphs, Charts, Formulas, and other Devices
• Presentation of Performance Information*
• Actual and Model Results
• Calculating Composites
• Manner of Selection of Accounts • No Untrue Statements of Material Facts or Statements that are otherwise False or Misleading
otherwise False or Misleading
• Disclosure of all Material Information
57
Books and Records
58
Books and Records – Rule 204-2
• In general, under the Advisers Act all required books and records must be maintained and preserved in the p
adviser’s office for two years after the last entry date and three additional years in an easily accessible place • Records for performance must include background and calculations and must be retained for 5 years after the d t fl t
date of last use (grandfathering for new registrants?)
(
df th i f
i t t ?)
• The fund’s records are considered to be part of the adviser’ss records
adviser
records
• No specific format required, but electronic records must be preserved to prevent alteration or destructions
be preserved to prevent alteration or destructions
59
Books and Records
• Business Accounting Records
• Adviser Related Records
• Journals and ledgers.
• Communications to and from clients.
li t
• Order and trade tickets.
• Bills and statements.
Bills and statements
• Advisory agreements (and all other advisory‐related agreements)
agreements).
• Balance sheets and financial statements.
• Adviser’s publications and recommendations.
• C
Custodial records, if t di l
d if
applicable.
• Adviser
Adviser advertisements (with advertisements (with
basis for advertising performance).
• Bank statements and checks.
p p
y
• Personal and proprietary security transaction records
• Retain records.
60
Third Party Solicitors
61
Solicitors Rule – Advisers Act Rule 206(4)-3
• Cash solicitations may not be made to a disqualified person (found to have violated U.S. securities laws within the last 10 years).
• Agreement must be in writing.
• Unaffiliated solicitors must obtain client acknowledgement:
• Describe the nature of the relationship with adviser;
• Disclose that the solicitor will be paid by the adviser
• Describe payment terms; Describe payment terms;
• Describe additional fees, if any, client will pay as a result of the solicitation and
• Deliver Form ADV Part II
D li
F
ADV P t II
• Non‐cash disclosures.
Does it apply to solicitations for hedge funds?
• Does it apply to solicitations for hedge funds?
62
Anti‐Money Laundering
63
Anti-Money Laundering – Legal Provisions Applicable
to Investment Advisers
• Statutes
•
International Money Laundering International
Money Laundering
Abatement and Anti‐terrorist Financing Act of 2001 (Title III of U.S.A. Patriot Act, Public Law 107‐56).
•
Bank Secrecy Act (31 U.S.C. §5311‐5355 (Chapter 53)) (as amended by Title III of USA Patriot Act).
•
• Financial Crimes Enforcement Network; Special Information Sharing Procedures To Deter Money Laundering and Terrorist Activity, 31 CFR Part 103 (Final Rule).
•
• Principal Regulators
Federal Criminal Money Laundering ede a
a o ey au de g
Statutes (18 U.S.C. 1956‐1957).
• Regulations:
•
OFAC Regulations (31 C.F.R. 500‐598).
USA Patriot Act Regulations ‐
USA
Patriot Act Regulations Final, Final
Interim and Proposed:
• Financial Crimes Enforcement Network; Anti‐Money Laundering Programs for Unregistered Investment Companies 31
Unregistered Investment Companies, 31 CFR Part 103 (Proposed Rule).
64
•
SEC
•
Treasury
•
FinCEN
•
IRS
•
OCC
•
SROs: FINRA, CFTC
Proposed Rule for Registered Advisers and Private
Investment Funds
• On September 18, 2002, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released a set of proposed rules under the USA PATRIOT Act which would expand the application of the USA PATRIOT Act to registered investment advisers and a wide range of unregistered investment companies. FINAL RULES HAVE NOT YET BEEN ADOPTED.
• The rules will require each adviser and fund which is subject to the Act to:
Act to:
• Develop internal policies, procedures and controls; Designate an Anti‐Money
Money Laundering Compliance Officer; Laundering Compliance Officer;
• Designate an Anti
• Provide for independent and periodic testing of the anti‐money laundering program; and
• Establish an ongoing training program.
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Why Adopt Procedures Before the
Rule is Adopted?
p
• Final Rule is imminent
• Current obligations under the Bank Secrecy Act
C
bli i
d h B kS
A
• Representations to Banks and Brokers
• Representations to Third Parties (SEC No‐Action Letter)
• Fund of Funds
• Offshore Funds
• Protect Investor Identities
Protect Investor Identities
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Business Continuity
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Business Continuity Plans
• No specific requirement under the Advisers Act (yet)
• Fiduciary duty requires that client assets and y
y q
transactions are reasonably safeguarded from foreseeable delay or harm
• Disclosure (not insurance)
• Key man and successor provisions
• Essential for compliance with other fiduciary duties: privacy, custody, insider trading, code of ethics and books and records
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SEC Examinations
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SEC Inspections
• First inspection is typically within the first year of registration (every 1 to 4 years thereafter, depending on risk ratings)
• The purpose of the inspection is to determine whether an adviser is conducting activities:
d i i
d i
i ii
• In accordance with the Advisers Act
• Consistent with disclosures made to clients
• With adequate systems and compliance policies and procedures • Deficiency or No Finding Letter or referral to the SEC Division of Enforcement
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Please join us for the continuation of this series
• Thursday, November 12 – Advisers Act Compliance • Thursday, November 19 – Advertisement Rules and Private Placement Compliance
• Thursday, December 4 – SEC Examinations
• Please register and submit questions
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Thank you
IRS CIRCULAR 230 NOTICE. Any advice expressed within as to tax matters was neither written nor intended by the sender or Mayer Brown LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under US tax law. If any person uses or refers to any such tax advice in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then (i) the advice was written to support the promotion or marketing (by a person other than Mayer Brown LLP) of that transaction or matter, and (ii) such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
Disclaimer: This Mayer Brown LLP presentation provides comments and information on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Participants should seek specific legal advice before taking any action with respect to the matters discussed herein.
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Michael R. Butowsky, Partner
Michael
R B to sk Partner
New York
+1‐212‐506‐2512
[email protected]
y@ y
Olga A. Loy, Partner
Chicago
+1‐312‐701‐8093
1 312 701 8093
[email protected]
Mitch L. Gibbons, Partner
Mitch
L Gibbons Partner
Houston, New York
+1‐713‐238‐2623
+1‐212‐506‐2180
[email protected]
Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.