In a no-action letter dated January 18, 2012, the SEC (“the Commission”) provided additional guidance and relief from registration to certain registered investment advisers (“RIAs”) with special purpose vehicles (“SPVs”). In a 2o05 no-action letter, the Commission had provided exemptive relief from investment adviser registration to SPVs created by RIAs who act as the general partner or managing member to a private fund that the …
2011 Start-Up Hedge Fund Survey
The law firm of Stewart Kessel LLP recently conducted a survey of its hedge fund clients to determine what the most popular hedge fund strategies, fee and liquidity provisions and fund structures are for start-up managers. According to the study, approximately 50% of the firm’s clients followed an ‘equity or equity related’ strategy, of which a third were focused on U.S. equities, with the remainder …
Virginia Proposes New IA Registration Exemption for Private Fund Advisers
On February 14, 2012, the Virginia Division of Securities and Retail Franchising (the “Securities Division”) proposed the adoption of a new rule exempting certain managers to certain private funds based on the North American Securities Administrators Association (“NASAA”) model exemption for investment advisers solely to private funds. The new rule would exempt advisers to private funds excluded from the definition of investment company under Section …
Private Offerings in New York: How an “Integration Clause” bars an Investor from Relying on the Offerors’ Representations
By Kaiser Wahab, Counsel Anyone in business should be careful to note whether their contracts contain “integration clauses.” A so called integration clause makes the contract “king” in terms of the promises and representations of a party to a transaction. In other words, if there is an integration clause in a contract that says “X”, even if one party may have orally maintained “Y” throughout …
NYC Changes Stance on UBT Attributable to Hedge Fund Managers
Certain New York City based hedge fund management companies have recently been audited with respect to how they account for certain expenses under the City’s Unincorporated Business Tax (“UBT”). Since a statutory amendment to the UBT law was passed over 15 years ago, hedge fund management companies located in NYC have bifurcated the structure of their operations by creating who advisory entities for the fund. …
Commodity Mutual Funds Required to Register with CFTC
On February 9, 2012, the CFTC adopted final rules that, among other changes, amend Rule 4.5 which had provided relief to registered investment companies (e.g. mutual funds) from registration as commodity pool operators. Rule 4.5 as amended imposes significant new conditions on claiming the exclusion. These changes will result in the need for CPO registration in situations where an investment company’s investment program has a …
CFTC Rescinds and Modifies Certain Exemptions to Registration for CTOs and CTAs
On February 9, 2012, the CFTC adopted final rules regarding changes to Part 4 of the Commission’s regulations regarding registration and compliance obligations for CPOs and CTAs. The new rules: rescind registration exemptions available for commodity pool operators (“CPOs”) offering commodity pools to sophisticated and creditworthy investors under CFTC regulation 4.13(a)(4); rescind relief from the certification requirement for annual reports providing certain pools offered only …
New Small Offering Exemption Proposal Gains Momentum
Spurred on by calls from the President to jump start small business, Congress has, in the past several months, taken up a various pieces of legislation aimed at facilitating small company financing. One such piece of legislation is H.R. 1070 which, if enacted, would allow small companies to raise up to $50 million in a twelve month period without undergoing the burdensome process of an …
SEC Brings Naked Short Selling Action Against Brothers
January 31, 2012, the SEC charged against two brothers for engaging in naked short selling in violation of Rule 203(b)(1) and (3) of Regulation SHO. While short selling is legal, sellers must locate shares to borrow before selling them short and must deliver borrowed shares before a specified date. Jeff Wolfson, and his brother Robert, allegedly generated $17 million in ill gotten gains from naked …
Massachusettes Adopts New Private Fund Adviser Registration Rules
On January 12, 2012, the Massachusetts Securities Division adopted new rules for the registration of investment advisers solely to 3(c)(7), venture capital or 3(c)(1) funds, where all investors in the 3(c)(1) fund are “qualified clients”. The rules replace the existing exemption which allowed advisers to “institutional buyers” including private funds, such as hedge funds, in which each investor is accredited and has invested at least …
Your Investment Adviser on Facebook: SEC Issues Release on Advisers and Social Media
On January 4, 2012 the SEC’s Office of Compliance Inspections and Examinations released an Alert regarding the use of social media by registered investment advisers and the policies and procedures they have in place in connection with social media (such as Facebook, Twitter and blogs). In reviewing compliance programs the SEC encouraged advisers to consider the following factors in respect to the standards for investment …
SEC Clarifies Registration Requirements for Affiliated Advisers
On January 18, 2012, the SEC issued ‘no action’ guidance permitting investment advisers to private funds to include certain affiliated advisers in their Form ADV registration. When a manager advises one or more private funds or certain managed accounts through a structure involving multiple entities such structure will be regarded as a “single advisory business” if such affiliated entities are: subject to a uniform compliance …
Easing the Ban on General Solicitation
As Congress grapples with ways to kick start the economy and spur small business growth and hiring, one proposal gaining momentum is to relax or even eliminate the long-standing ban on general advertising or solicitation imposed on private companies seeking to raise capital under the private placement rules of Reg D of Section 4(2) of the 1933 Securities Act.
Finders Exception to Broker-Dealer Registration in the Capital Introduction Space
As competition for capital has steadily increased for private companies and private funds, issuers and managers have turned to the services of third party marketers (“TPMs”) to raise capital or sell their funds to prospective investors. In the hedge fund space, TPMs typically demand an exclusive arrangement with the fund and approximately 20% of all fees. But due to the nature of their services and …
SEC Provides Guidance for Cyber-Security Disclosure
As digital technology and operating online has become ever more important for American companies, the risk associated with deliberate cyber-attacks and unintentional cyber-incidents has caught the attention of regulators. On October, 13, 2011, the Securities and Exchange Commission provided guidance to public companies concerning their duty to disclose these risks under the securities laws.[1]
California Proposes Private Fund Manager Exemption From IA Registration
California has proposed a new exemption for registration of investment adviser to private funds meant to replace the interim regulations implemented as a stop gap measure by the State after the passage of Dodd-Frank on July 11, 2011.
Structural Difficulties Posed by Hedge Funds Investing In Illiquid Securities
As the number of hedge funds pursuing similar strategies has grown, managers have increasing looked to private equity and other illiquid assets to generate alpha. However, the traditional hedge fund structure is meant to facilitate investing in liquid securities that are readily marked-to-market. Housing illiquid assets under the traditional hedge fund model can result in a variety of potential problems in the area of taxation, …
If You Live There It Doesn’t Count: SEC Adopts New Accredited Net Worth Standard
In order to conform to the requirements of Dodd-Frank, the SEC has amended its rules to exclude the value of a person’s primary residence from net worth calculations used to determine whether such individual is an “accredited investor” for purposes of qualifying for certain private offerings under the securities laws. SEC rules permit certain private and limited offerings to be made without registration, and without …
SEC Proposes New Investor Disclosure Requirements for Hedge Funds Using Third Party Marketers
On October 18, 2011, the SEC released a notice of FINRA’s filing of Proposed Rule 5123 (the “Proposed Rule”) which would require FINRA members and associated persons to: 1) provide to investors disclosure
SEC Takes Enforcement Action Under Aberrational Performance Inquiry Initiative
On December 1, 2011, the SEC announced enforcement actions against three separate advisory firms and six individuals for various misconduct including improper use of fund assets, fraudulent valuations, and