and OCIE Exam Hot Buttons Navigating Form ADV Amendments and - - PowerPoint PPT Presentation

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Investment Adviser Compliance and Reporting: Latest Developments and OCIE Exam Hot Buttons

Navigating Form ADV Amendments and Preparing for OCIE Examination Priorities, Including New Scrutiny on ERAs

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, FEBRUARY 17, 2016

Cary J. Meer , Partner, K&L Gates, Washington, D.C. Beth Clark, Of Counsel, K&L Gates, Washington, D.C. Alan K. Halfenger, Partner, ACA Compliance Group, Boston

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Cary J. Meer K&L Gates LLP, Washington, DC and New York City 202.778.9107 cary.meer@klgates.com

Investment Adviser Compliance and Reporting: Latest Developments and OCIE Exam Hot Buttons

February 17, 2016

DC 9964926 v.5

Beth Clark K&L Gates LLP, Washington, DC 202.778.9432 beth.clark@klgates.com Alan Halfenger ACA Compliance Group, Boston 617.589.0904 ahalfenger@acacompliancegroup.com

CURRENT OCIE HOT BUTTONS FOR REGISTERED INVESTMENT ADVISERS AND EXEMPT REPORTING ADVISERS

Examination Trends: From OCIE’s Mouth to Your Ears

“We collect information on everyone. We analyze information on everyone. I think people assume, if they’re not the 9%, the other 91% are out there doing things off the radar screen. But the SEC has gotten very proficient through hiring and staffing and resourcing of financial engineers…”

Drew Bowden, Former Director, OCIE

Source: Exams Not the Only Scrutiny, OCIE Official Warns, Compliance Reporter, October 31, 2012

7

Examination Trends

Source: U.S. Securities and Exchange Commission, SEC Fiscal Year 2014 Agency Financial Report, November 17, 2014

11,438 advisers 2,693 ERAs 16,000 mutual funds 37,000 private funds

8

Examination Trends: Cycle

Source: U.S. Securities and Exchange Commission, FY 2014 Annual Performance Report, February 2, 2015

“…although the staff

examined 10 percent

• f investment advisers

in FY 2014, these advisers represented more than 30 percent

• f the overall assets

under management.”

9

Examination Trends: Observations

• 45% of respondents have undergone an SEC Exam
• 50% of private equity managers that registered as a

result of Dodd-Frank have had an SEC Exam

• 28% of hedge fund managers that registered as a result
• f Dodd-Frank have had an SEC Exam

Source: 2015 Alternative Fund Manager Compliance Survey, ACA Compliance Group, August 2015

10

Examination Trends: Results

2010 2011 2012 2013 2014

Percentage that identifies deficiencies 72% 82% 80% 80% 76% Percentage with “significant finding”1 42% 42% 42% 35% 30% Percentage referred to Enforcement 13% 12%

Source: SEC’s FY 2016 Congressional Budget Justification

1 A “significant finding” is one that may cause harm to customers or clients of a firm, have a high potential to cause harm,

• r reflect recidivist misconduct

11

Examination Trends: Significant Findings

Examiners find a wide range of deficiencies during examinations. Some of the deficiencies are more technical in nature, such as failing to include all information that is required to be in a record. However, other deficiencies may cause harm to customers or clients of a firm, have a high potential to cause harm, or reflect recidivist misconduct. The latter deficiencies are among those categorized as “significant.”

Source: U.S. Securities and Exchange Commission, FY 2014 Annual Performance Report, February 2, 2015

~ 30% of exams result in significant findings

12

SEC Examination Priorities

• OCIE’s 2016 focus on three thematic areas:
• Retail Investors
• Assessing Marketwide Risks
• Use of Data Analytics to identify signs of potential illegal

activity

• Thematic areas are identical to 2015

13

Examination Priorities – Retail Investors

2016

• ReTIRE Initiative
• Exchange-Traded Funds’

compliance with exemptive relief, sales strategies, trading practices, etc.

• Supervision of branch office staff
• Fee selection and reverse

churning

• Variable annuity sales

suitability

• Public pension advisers and

potential conflicts of interest

2015

• Fee selection and reverse

churning

• Sales practices used with regard

to the movement and supervision of retirement assets

• Suitability of recommendations

to invest retirement assets

• Supervision of branch office staff
• “Alternative” investment

companies

• Fixed-income investment

companies

14

Examination Priorities – Marketwide Risks

2016

• Cybersecurity
• Regulation Systems

Compliance and Integrity entities’ policies and procedures

• Liquidity controls of mutual

funds, ETFs, and private funds with exposure to illiquid fixed-income securities

• Annual examinations of all

systematically important clearing agencies

2015

• Monitoring the largest U.S.

broker-dealers and asset managers to assess individual firm risks and maintain early awareness of developments industrywide

• Annual examinations of all

systematically important clearing agencies

• Cybersecurity
• Potential equity order routing

conflicts

15

Examination Priorities – Data Analytics

2016

• Identify individuals with a track

record of misconduct and examine the firms that employ them

• Pump-and-dump schemes or market

manipulation of microcap stocks

• Identify and examine introducing

brokers and registered representatives that appear to be engaged in excessive trading

• Broker-dealer anti-money laundering

programs

• Suitability issues and breaches of

fiduciary obligations in promotion

• f new, complex, and high-risk

products

2015

• Identify individuals with a track

record of misconduct and examine the firms that employ them

• Pump-and-dump schemes or market

manipulation of microcap stocks

• Identify and examine introducing

brokers and registered representatives that appear to be engaged in excessive trading

• Broker-dealer anti-money laundering

programs

16

Examination Priorities – Other Initiatives

2016

• Examinations of newly registered

municipal advisors

• Private placement due

diligence, disclosure, and suitability

• Never-before-examined

investment advisers and investment companies

• Private fund adviser fees and

expenses and side-by-side management practices

• Transfer agents’ safeguarding
• f securityholder funds
• Reviews of exempt reporting

advisers 2015

• Examinations of newly

registered municipal advisors

• Examinations of proxy advisory

service firms

• Never-before-examined

investment companies

• Private equity fees and

expenses

• Examinations of transfer agents,

especially those involved with microcap securities and private

• fferings

17

OVERVIEW OF KEY 2015 INVESTMENT ADVISER ENFORCEMENT CASES

Chair White on Enforcement

“Vigorous and comprehensive enforcement protects investors and reassures them that our financial markets operate with integrity and transparency, and the Commission continues that enforcement approach by bringing innovative cases holding executives and companies accountable for their wrongdoing sending clear warnings to would-be violators.”

Source: SEC Announces Enforcement Results for FY 2015, SEC Press Release, 2015-245 (October 22, 2015)

19

Enforcement Update: Results

Fiscal Year 2015

• 807 enforcement actions
• 507 for violations of Federal

Securities Laws

• 300 were either against

issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil junctions, or other orders

• Approximately $4.2 billion in

disgorgement and penalties Fiscal Year 2014

• 755 enforcement actions
• 413 for violations of Federal

Securities Laws

• 342 were either against

issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil junctions, or other orders

• $4.16 billion in disgorgement and

penalties

20

Enforcement Update: Results

(continued)

• FY15
• First-ever cases involving:
• Private equity adviser for misallocating broken-deal expenses
• Failure to report a material compliance matter to a fund board
• Distribution-in-guise
• FCPA action against a financial institution
• SEC rule prohibiting the use of confidentiality agreements to

impede whistleblower communication with the SEC

• FY14
• First-ever pay-to-play case

21

Enforcement Update: Penalties

Source: The Wall Street Journal

22

, ,

Enforcement Update: Asset Management Unit 2015 Priorities

Advisers to Registered Investment Companies

• Valuation
• Performance advertising
• Investment guideline compliance
• r undisclosed strategies
• Fund governance
• Fund distribution

Advisers to Separately Managed Accounts and/or Retail Accounts

• Conflicts of interest
• Fee arrangements
• Compliance under Enforcement

Division’s “Compliance Program Initiative” Advisers to Hedge Funds and Private Funds

• Conflicts of interest
• Valuation
• Compliance and controls
• Undisclosed and misallocated

fees and undisclosed conflicts

• Performance advertising

All Advisers

• Recidivism

Source: IA Watch 17th Annual IA Compliance Conference, SEC Speech, Julie M. Riewe, Head of the AMU within the Enforcement Division (February 26, 2015)

23

• In re Blackstone Management Partners LLC

et al., Investment Advisers Act of 1940 (“IAA”)

• Rel. No. 4219 (Oct. 7, 2015)
• $39 million in disgorgement and civil money penalties

settlement by investment adviser to private equity funds because (1) inadequate disclosure of “accelerated monitoring fees” and (2) the adviser negotiated fees for legal services for which the adviser received a greater discount than did the funds

• Key Takeaway: Full transparency of fees and conflicts of

interest is critical

Receipt of Unauthorized or Inadequately Disclosed Fees

24

• In re Taberna Capital Management, LLC et al.,

Securities Exchange Act of 1934 (“SEA”) Rel. No. 75814 (Sept. 2, 2015)

• Settlement involving the payment of $21 million in

disgorgement and civil money penalties by adviser responsible for managing CDOs because the adviser received “exchange fees” that were not contractually

• authorized. The fees were inaccurately characterized as

compensation for third-party costs

• Key Takeaway: An adviser may only receive fees to which it is

contractually entitled, and fees must be accurately characterized

Receipt of Unauthorized or Inadequately Disclosed Fees (continued)

25

• In re First Eagle Investment Management LLC and FEF

Distributors LLC, IAA Rel. No. 4199 (Sept. 21, 2015)

• In the first case brought under the SEC’s Distribution-in-guise Initiative

(focusing on whether advisers are being reimbursed for distribution expenses in the guise of something else), an adviser to mutual funds and its wholly owned broker-dealer, acting as fund distributor, agreed to pay nearly $40 million to settle SEC charges that they unlawfully caused their funds to pay nearly $25 million for distribution-related services. Although the payments were characterized as payments for “sub-TA services,” the SEC concluded that they were payments for distribution expenses

• Key Takeaway: Unless part of a 12b-1 plan, the adviser has to bear the

costs associated with marketing the funds

Use of Registered Fund Assets to Pay for Expenses the Adviser Should Have Borne

26

• In re Kohlberg Kravis Roberts & Co., LP, IAA Rel.
• No. 4131 (June 29, 2015)
• In the first SEC case to charge a private equity adviser with

misallocating broken-deal expenses, a private equity firm that specializes in buyouts and other transactions agreed to pay $28.5 million because the funds had reimbursed a large portion

• f broken-deal expenses, but other co-investors had not

contributed to those expenses

• Key Takeaway: Funds should not be required to shoulder the cost for nearly

all of the expenses incurred to explore potential investment opportunities if those opportunities also benefit co-investors who do not share those costs

Use of Registered Fund Assets to Pay for Expenses the Adviser Should Have Borne (continued)

27

• In re Welhouse & Associates, Inc. and Mark P.

Welhouse, SEA Rel. No. 75319 (June 29, 2015)

• In a case that relied heavily on the Commission’s data-driven

initiative to identify potentially fraudulent trade allocations, the Commission charged that the sole owner of an adviser to 72 separately managed accounts purchased options in an omnibus account and then delayed allocation of the purchases until he saw whether the securities appreciated in value. The matter is in litigation

• Key Takeaway: The Commission’s data-driven initiative is highly focused on

aberrational trading

Improper Trade Allocations by Cherry-Picking Favorable Trades

28

• In re Alphabridge Capital Management LLC et al.,

IAA Rel. No. 4135 (July 1, 2015)

• In a case that settled for $5 million, the SEC charged an

adviser to hedge funds with using inflated, internally derived valuations for unlisted, thinly traded residential mortgage-backed securities, even though it claimed to be using independent price quotes from broker-dealers. The SEC charged that the adviser supplied its own prices for broker-dealers to pass off as their own and scripted the broker-dealers’ conversation with the auditor

• Key Takeaway: The integrity of the portfolio valuation process is

critical, especially for illiquid securities. An adviser cannot claim to use market-grounded prices if it is using something else

Overvaluation of Illiquid Assets

29

• In re Lynn Tilton et al., IAA Rel. No. 4053

(Mar. 30, 2015)

• In a valuation case that is being contested, the

Commission charged that an adviser to three CLO funds with more than $2.5 billion in assets, much of which was invested in distressed loans, valued nearly all the loan assets at their price of acquisition even though many of the borrowers had made only partial or no interest payments

• Key Takeaway: The Commission will carefully scrutinize whether

valuations of illiquid assets are updated to reflect current conditions

Overvaluation of Illiquid Assets (continued)

30

• In re Gray Financial Group, Inc. et al., Securities Act of

1933 (“SA”) Rel. No. 9789 (May 21, 2015)

• In a case that is currently being litigated, the SEC charged that

an adviser that provided consulting services to pension and profit sharing plans, endowments, and other entities steered its public pension fund clients to invest in alternative investment fund products that did not comply with state law investment restrictions for public pension funds. The Commission charged that the adviser knowingly violated its fiduciary duty

• Key Takeaway: Advisers need to be particularly focused on state law

investment restrictions that may apply to public-entity clients

Violation of Public Clients’ Investment Restrictions

31

• In her February 26, 2015, remarks to the 17th Annual Investment Advisers

Compliance Conference, Julie Riewe stated that, in nearly every matter in the Asset Management Unit, the unit is exploring whether the adviser discharged its fiduciary obligation to identify conflicts and (1) either eliminate them or (2) mitigate them and disclose them to boards or investors. She said, “Over and over again we see advisers failing to properly identify and then address their conflicts”

• In re Guggenheim Partners Investment Management LLC, IAA Rel. No. 4163

(Aug. 10, 2015)

• In an action alleging that an adviser to institutional clients, high-net-worth clients, and private

funds failed to disclose a $50 million loan that a senior executive of the adviser had received from an advisory client, the adviser settled by paying a $20 million penalty. The Commission alleged that the adviser did not disclose the loan to the compliance department or clients

• Key Takeaway: Advisers must be vigilant in disclosing conflicts

Failure to Disclose Conflicts

• f Interest

32

• In re BlackRock Advisors LLC and Bartholomew Battista,

IAA Rel. No. 4065 (Apr. 20, 2015)

• In the first SEC case to charge a violation of Rule 38a-1 under the

Investment Company Act (requiring the disclosure of “each material compliance matter” to the board), the Commission charged that an adviser to registered funds, private funds, and separately managed accounts should have disclosed to the registered fund’s board that one

• f the adviser’s portfolio managers had founded a company that formed

a joint venture with a publicly owned company in which the fund had a significant interest. The Commission also charged the chief compliance

• fficer with causing certain violations, which led to a dissent by

Commissioner Gallagher. The adviser paid $12 million to settle the matter

• Key Takeaway: Conflicts of interest created by outside business activities

must either be eliminated or be disclosed to the board and advisory clients

Failure to Disclose Conflicts

• f Interest (continued)

33

• SEC v. Lee D. Weiss et al. (D. Mass., filed Sept. 29, 2015)
• In a case that is being litigated, the SEC charged that an adviser to individual

clients and hedge funds, without adequate disclosure of conflicts, caused clients to invest more than $40 million in companies in which the owner of the adviser had a significant interest

• Key Takeaway: Material conflicts have to be eliminated or disclosed
• In re Fenway Partners, LLC et al., IAA Rel. No. 4253 (Nov. 3, 2015)
• In a case that settled for $10.2 million, the SEC charged that an adviser to a

private equity fund, as well as four executives, steered portfolio company management fees to an affiliate without adequate disclosure or offsetting those fees against the advisory fee paid by the fund, and that employees of the adviser

• r an affiliate received $15 million from the proceeds of the sale of one of the

portfolio companies

• Key Takeaway: Private equity advisers have to be particularly vigilant when

entering into arrangements with affiliates or when receiving payments from portfolio companies

Failure to Disclose Conflicts

• f Interest (continued)

34

• The IAA Custody Rule (Rule 206(4)-2) requires that advisers who

have custody of client assets put in place a set of procedural safeguards to prevent loss of those assets. The Commission frequently brings enforcement actions for failure to comply with the Custody Rule

• In re Water Island Capital LLC, Investment Company Act of 1940

(“ICA”) Rel. No. 31455 (Feb. 12, 2015)

• An investment adviser to mutual funds paid a $50,000 civil money penalty to

settle an action charging that the adviser failed to implement policies and procedures to ensure that all cash collateral was held in the custody of the funds’

• bank. Instead, for a nine-month period, cash collateral was held by broker-dealer

counterparties

• Key Takeaway: Section 17(f)(5) of the ICA generally requires that if an

investment company maintains securities in the custody of a qualified bank, the cash proceeds from the sale of those securities should also be kept in the custody of the bank

Violation of the Custody Rule

35

• In re Sands Brothers Asset Management LLC et al., IAA Rel.
• No. 4273 (Nov. 19, 2015)
• The Commission brought an action against an investment advisory firm

to pooled investment vehicles, as well as against two owners and a former CCO, because the firm violated the Custody Rule after being reprimanded for violations a few years before. In particular, the firm took no action in response to a 2010 order requiring it, among other things, to submit to a surprise examination and distribute audited financials within the time periods imposed by the Custody Rule. The respondents agreed to pay a $1 million penalty and be suspended for a year from raising money from new or existing investors. The former CCO agreed to pay a $60,000 penalty and be suspended for one year from acting as a CCO or appearing or practicing before the SEC as an attorney

• Key Takeaway: Recidivists can expect harsh treatment from the Commission

Violation of the Custody Rule (continued)

36

• In re UBS Willow Management LLC et al., SA Rel. 9964

(Oct. 19, 2015)

• The Commission charged that the adviser to a fund changed

strategy from a long-credit investment strategy (investing in distressed debt) to a short-credit investment strategy (investing in credit default swaps) without updating the fund’s offering memorandum to reflect the change. The adviser agreed to settle by paying $20.5 million in disgorgement, compensation, and civil money penalties

• Key Takeaway: Advisers must provide investors and boards with accurate

information about a fund’s investment strategy

Misrepresentation of Investment Strategy

37

• In re Virtus Investment Advisers, Inc., IAA Rel. No. 4266

(Nov. 16, 2015)

• An adviser to mutual funds agreed to pay $16.5 million to settle charges

that it misled mutual fund investors and others regarding the performance of its “AlphaSector rotation strategy” by stating that the strategy had been used since April 2001 and that its track record had significantly outperformed the S&P 500 Index from April 2001 to September 2008. In addition, the sub-adviser inflated the historical performance of the strategy by incorrectly implementing signals in advance of when such signals actually could have occurred

• Key Takeaway: Advisers need to take steps to verify claims of the

subadviser before they incorporate those claims into their advertising materials

Misrepresentations Regarding a Fund’s Performance

38

• In re Arthur F. Jacob, CPA and Innovative Business

Solutions, SEA Rel. No. 76079 (Oct. 5, 2015)

• In addition to charging a number of other violations, the SEC

charged that an adviser to 30 client households misrepresented to clients that his trading strategy was safe, involved little or no risk, and produced guaranteed, predictable profits. The Commission charged that, contrary to these representations, the investments included inverse exchange-traded funds and other securities known to be speculative and highly volatile. The matter is in litigation

• Key Takeaway: Advisers cannot understate the risks of their investment

strategy

Misrepresentations Regarding Investment Risks

39

• Rule 30(a) of Regulation S-P requires every registered investment adviser

(and others) to adopt policies and procedures reasonably designed to ensure the security and confidentiality of customer records, protect against any anticipated threats or hazards to such records and information, and protect against unauthorized access to or use of customer records or information

• In re R.T. Jones Capital Equities Management, Inc., IAA Rel. No. 4204

(Sept. 22, 2015)

• The Commission fined an adviser with separately managed accounts $75,000 for failing to

establish required policies and procedures in advance of a cybersecurity breach

• Key Takeaway: With the increasing barrage of cyberattacks on financial firms, firms

must be vigilant in adopting and implementing policies and procedures to protect clients’ information from such attacks

Failure to Adopt and Implement Adequate Cybersecurity Policies and Procedures

40

• In re Pekin Singer Strauss Asset Management Inc. et al., IAA Rel.
• No. 4126 (June 23, 2015)
• The SEC charged that an investment adviser to high-net-worth clients and a fund

hired a CCO who had limited prior experience and training in compliance; the CEO at the time failed to provide the CCO with sufficient guidance regarding his duties and responsibilities and did not provide him with staff to assist with compliance; the CCO lacked experience, resources, and knowledge as to how to adopt and implement an effective compliance program; because of his other responsibilities, the CCO was only able to devote 10% ─ 20% of his time on compliance matters; he failed to complete timely annual compliance program reviews; he told the CEO that he needed help, but the CEO delayed in providing additional resources; and the lack of resources contributed to delays in completing compliance reviews

• As part of the settlement, the Commission suspended the former CEO from

association in a compliance and supervisory capacity for 12 months, ordered the firm to pay a civil money penalty of $150,000, and ordered the former CEO to pay a fine of $45,000

Inadequate Compliance Procedures or Resources

41

• In re Wolverine Trading LLC and Wolverine Asset

Management LLC, SEA Rel. No. 76109 (Oct. 8, 2015)

• The Commission charged that an investment adviser who

provided discretionary investment services to high-net-worth clients violated Section 204A of the Investment Advisers Act, which requires policies and procedures reasonably designed to prevent the misuse of material nonpublic information, but did not charge an independent insider trading violation. In that case, an adviser and its affiliated broker-dealer shared information despite information barrier procedures that were intended to ensure that they conduct business as separate and distinct organizations

• Key Takeaway: Procedures must not only be established; they must also be

vigorously maintained and enforced

Inadequate Compliance Procedures or Resources (continued)

42

CASES AGAINST CHIEF COMPLIANCE OFFICERS

• IAA Rule 206(4)-7 requires investment advisers to adopt and

implement written policies and procedures reasonably designed to prevent violations of the Act and to appoint a chief compliance

• fficer responsible for “administering” the policies and procedures
• In re BlackRock Advisors, LLC, IAA Rel. No. 4065 (Apr. 20, 2015):
• Charged CCO with causing compliance-related violations related to outside

business activities because he allegedly “knew or should have known” that the violations were not reported to the funds’ boards in violation of Rule 38a- 1(a)(4)(iii)(B)

• The order states that, as CCO, he was “responsible for the design and

implementation of [the firm’s] written policies and procedures,” and “did not recommend written policies and procedures to assess and monitor [certain]

• utside activities and to disclose conflicts of interest to the funds’ boards and to

advisory clients”

• The CCO was fined $60,000 and ordered to cease and desist from violating IAA

206(4), Rule 206(4)-7, and ICA Rule 38a-1

44

CCO Cases

• In re SFX Financial Advisory Management Enterprises, Inc., IAA Rel.
• No. 4116 (June 15, 2015)
• In a case involving misappropriation of client assets, the Commission charged

that the CCO failed to “effectively implement” a compliance policy requirement to review “cash flows in client accounts” and thereby “caused” the firm’s violation of IAA Sections 206(4) and 206(4)-7

• The compliance officer paid a fine of $25,000 and was ordered to cease and

desist from violations of IAA Sections 206(4) and 207 and Rule 206(4)-7

• On June 18, 2015, Commissioner Gallagher issued a statement on

why he dissented from those two decisions. He stated that CCOs are responsible for “administering” compliance policies and procedures but that responsibility for “implementation” rests with the adviser itself

• On June 29, 2015, Commissioner Aguilar responded, stating that

CCOs who do their jobs “competently, diligently, and in good faith” should not fear the SEC. He stated that between 2009 and 2014, the number of IAA cases brought against CCOs ranged from 6%─19%

45

CCO Cases (continued)

• On Oct. 24, 2015, Andrew (“Buddy”) Donohue, Chair White’s Chief
• f Staff, addressed the liability of chief compliance officers
• He repeated that the Commission is not “targeting” CCOs
• He quoted earlier statements by Chair White that compliance officers who

perform their responsibilities “diligently” need not fear enforcement action

• He stated that SEC actions against compliance officers tend to involve

compliance officers who:

• Affirmatively participated in the underlying misconduct,
• Helped mislead regulators, or
• Had clear responsibility to implement compliance programs and “wholly

failed to carry out that responsibility”

• Given the degree to which hindsight informs enforcement actions,

the fact that the SEC says it is not “targeting” CCOs or charging CCOs who performed their responsibilities “diligently” may provide cold comfort

46

CCO Cases (continued)

PROPOSED REVISIONS TO FORM ADV

SEC Proposal for Revisions to Form ADV

• Proposed May 20, 2015
• Collection of Information on Separately Managed Accounts (“SMAs”)
• Applies to nonpooled investment vehicles
• Would need to report annually (or annually with semi-annual data for

registered investment advisers (“RIAs”) with at least $10 billion of regulatory assets under management (“RAUM”) attributable to SMAs):

• Percentage of RAUM attributable to SMAs in 10 broad asset categories

(exchange-traded equities, U.S. government/agency bonds)

• Percentage of SMA assets invested in derivatives (increased reporting for

advisers with $10 billion or more of RAUM)

• Identify custodians that account for at least 10% of RAUM attributable to SMAs

and identify amount of RAUM at each custodian

48

• Information Regarding an Adviser’s Business and Affiliations
• Includes:
• Disclose website addresses for social media platforms
• Total number of advisory offices and information about the

25 largest offices

• Whether CCO is employed by or compensated by someone other than the

adviser (or a related person)

• If report RAUM differently in Part 2A than in Part 1A, would be required to check

a box

• Percentage of RAUM attributable to non-U.S. clients
• Report RAUM of all “parallel managed accounts”
• Additional information regarding sponsors of wrap fee programs
• Require adviser to report percentage of private fund assets owned by qualified

clients

SEC Proposal for Revisions to Form ADV (continued)

49

• Umbrella Registration (2012 ABA No-Action

Letter):

• Proposal includes changes to Form ADV to clarify

which questions must be answered by the “filing adviser” and which questions must be answered by “relying advisers”

• Reporting must be consistent with reporting on

Form PF

SEC Proposal for Revisions to Form ADV (continued)

50

51

• Ms. Meer has been structuring private funds as limited

liability companies, limited partnerships,

• ffshore

corporations, common trust funds and business trusts, and preparing disclosure documents and

• rganizational

documents for such entities since the mid-1990s. Her clients include hedge fund and private equity fund sponsors, as well as sponsors of funds-of-funds and funds-of-one. Some of these manager are stand-alone entities and some are part of large financial institutions. She also advises investment advisers, private fund managers, and investment companies on compliance issues, including under the Investment Advisers Act of 1940 and whether their commodity interest-related trading or advice would require them to register as commodity pool operators or commodity trading advisors. She also advises institutional investors in connection with their investment in third-party private funds.

Cary J. Meer, Partner K&L Gates, Washington, D.C. and New York City 202.778.9107 cary.meer@klgates.com

52

• Ms. Clark concentrates her practice in the investment

management and securities areas, where she advises participants in the financial services industry. In particular, she focuses on creating and counseling U.S. and non-U.S. private funds, including hedge funds, private equity funds, and venture capital funds. She structures U.S. funds as limited liability companies, limited partnerships, and trusts and establishes “offshore” funds. She prepares and negotiates the necessary documentation associated with private securities

• fferings,

including disclosure and

• rganizational documents, service provider agreements, and

filings and registrations. She advises as to obligations under federal securities laws, state laws and rules, and self- regulatory organization rules.

Beth Clark, Of Counsel K&L Gates, Washington, D.C. 202.778.9432 beth.clark@klgates.com

53

• Mr. Halfenger has over 20 years of global compliance
• experience. Prior to joining his current firm he served as

Global Chief Compliance Officer at Bain Capital in Boston. Previously, he held roles as a senior compliance officer and counsel at prominent hedge fund managers, private banks, and brokerage and investment banking firms.

Alan K. Halfenger, Partner, ACA Compliance Group, Boston 617.589.0904 ahalfenger@acacompliancegroup.com