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  • Writer's pictureThomas C. Egg

2016 Compliance Checklist for Investment Advisers

With 2015 firmly in the rear-view mirror and 2016 upon us, we thought now would be as a good a time as any to help you plan your regulatory and internal compliance schedule for the upcoming year.

Annual Audits and Recordkeeping

Custody Rule Annual Audit. Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Advisers Act”), also known as the Custody Rule, sets forth the obligations of SEC-registered investment advisers (“RIAs”) with respect to the custody of client funds and securities. Those obligations include:

(1) holding client funds and securities with a qualified custodian (e.g., broker-dealers, banks, etc.) though there are exceptions;

(2) having a reasonable basis to believe the custodian is sending at least quarterly account statements to its clients; and

(3) undergoing an annual surprise examination by an independent public accountant.

An adviser to a pooled investment vehicle may comply with the Custody Rule under either of two methods:

Audit Approach. An adviser is in compliance with the Custody Rule if the pool’s financial statements are audited in accordance with GAAP by an independent public accountant registered with the Public Company Accounting Oversight Board and the audited statements are distributed to investors in the fund, within 120 days after the fund's fiscal year-end.

Surprise Examination Approach. If an adviser is unable or unwilling to comply with the audit approach, it must satisfy the following conditions in order to be in compliance with the Custody Rule: (i) undergo an annual surprise examination conducted by an independent registered public accountant for the pooled investment vehicle; (ii) provide notice to clients concerning custody and have a reasonable basis to believe that the qualified custodian is sending account statements to each client; and (iii) may not self-custody privately issued securities.

Annual Privacy Policy Notice. RIAs must provide individual investors with a copy of the firm's privacy policy on an annual basis, regardless of whether there are changes to the policy.

Pay-to-Play and Lobbyist Rules. Rule 206(4)-5 of the Advisers Act governs “pay-to-play” practices in which RIAs make political contributions to elected officials. The rule applies to SEC-registered investment advisers, exempt reporting advisers and foreign private advisers. Under the rule, an adviser may not receive compensation for providing advice to a government entity, either directly or from a “covered investment pool”, for 2 years after a contribution by the adviser or by any of its “covered associates” to a government official who can influence the award of advisory business. Additionally, an adviser and any of its “covered associates” cannot agree to provide payment to any third-party, directly or indirectly, to solicit government clients unless that person is a “regulated person”. State and local governments have similar rules, thus, we recommend you review state and local lobbyist rules to ensure that lobbyist reporting is current.

Annual Regulatory Filings

Form ADV. RIAs and managers filing as exempt reporting advisers with the SEC or a state securities authority must file an “Annual Updating Amendment” to Form ADV with the SEC and/or state securities authorities within 90 days of the end of their fiscal year (which is March 31st for a December 31st fiscal year). All other amendments should be "other-than-annual amendments". "Other-than-annual amendments" may be filed at any time to update any single question, multiple questions, or the entire form. RIAs must provide clients with a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of material changes with an offer to deliver the updated brochure on request). The brochure and brochure supplement may be delivered electronically with client consent. It should be noted that, for SEC-registered advisers, a “client” for purposes of this rule includes the vehicle(s) managed by the RIA. State-registered advisers need to examine their state's rules to determine who constitutes the "client".

Form PF. All investment advisers, commodity pool operators and commodity trading advisers registered with the SEC with at least $150 million in private funds under management must periodically file Form PF. All private funds with assets under $150 million are not required to file Form PF. Smaller private fund advisers (those fund managers with at least $150 million and less than $1.5 billion in AUM) must file Part 1 of Form PF annually within 120 days of their fiscal year-end. Larger private advisers must file Part 1 and other parts of Form PF in accordance with the following guidelines:

(1) hedge fund advisers with at least $1.5 billion in AUM must file quarterly within 60 days of quarter end reporting;

(2) private equity fund advisers with at least $2 billion in AUM must file annually within 120 days of fiscal year end reporting; and

(3) liquidity fund advisers with at least $1 billion in registered and unregistered money market fund assets must file quarterly within 15 days of quarter end reporting.

SEC Form D. Form D is used to file a notice of an exempt offering of securities with the SEC. The notice must be filed by companies and funds that have sold securities without registration under the Securities Act of 1933 (the “33 Act”) in an offering based on a claim of exemption under Rule 504, 505 or 506 of Regulation D or Section 4(5) of that statute. A Form D filer must file an amendment to the form annually, on or before the first anniversary of the most recent previously filed notice, if the offering is continuing at that time.

Schedule 13G/D and Section 16 Filings. Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “34 Act”) require that beneficial owners of more than 5 percent of certain voting equity securities disclose information relating to their ownership by filing either a Schedule 13D or Schedule 13G with the SEC.

Schedule 13D is a long-form beneficial ownership disclosure statement which is required when an adviser directly or indirectly acquires beneficial ownership of more than 5 percent of certain voting equity securities. It should be noted that acquisition is not limited to a purchase of securities. For example, the establishment of a group of investors could be deemed to result in an acquisition. Advisers need to keep in mind that Schedule 13D must be filed within 10 days after the acquisition – which is calculated from the trade date, not the settlement date of the triggering transaction.

Schedule 13G is a short-form beneficial ownership disclosure statement which is required when an adviser directly or indirectly possesses beneficial ownership of more than 5 percent of certain voting equity securities. Schedule 13G filing is available to persons or entities who:

(1) acquire the securities in the ordinary course of business;

(2) not with the purpose nor the effect of changing or influencing the control of the issuer; and

(3) qualify as (i) qualified institutional investors (e.g., RIAs), (ii) passive investors or (iii) exempt investors.

Insofar as RIAs are concerned, Schedule 13G must be filed within 45 days of the end of the calendar year in which the beneficial owner acquired more than 5 percent and within 10 days of the end of the calendar month in which the RIA acquired more than 10 percent. Schedule 13G must be updated annually.

Section 16 imposes certain reporting obligations on “insiders” associated with a company once the company becomes public. For purposes of these reporting requirements, insiders are deemed to include: directors, certain officers and stockholders (owning, directly or indirectly, more than 10 percent of the company’s common stock or other class of equity securities registered under Section 12 of the 34 Act). Pursuant to Section 16(a), an insider must report his or her initial acquisition of the company’s equity securities by filing Form 3 within 10 days of the occurrence of one of the following triggering events:

(1) The company initially lists equity securities on an exchange pursuant to Section 12(b) of the 34 Act;

(2) The company’s first registration statement under Section 12(g) of the 34 Act becomes effective; or

(3) The filer becomes a director, officer or 10% stockholder of the company.

Changes in insider ownership of public company equity securities are reported on Form 4 and must be submitted to the SEC within 2 business days. Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. Form 5 must be filed no later than 45 days after the end of the company’s fiscal year.

Form 13F. An adviser must file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain section 13(f) securities within 45 days after the end of the year in which the adviser reaches the $100 million filing threshold. From that point on, the adviser must submit 13F filings within 45 days of the end of each calendar quarter. The Form 13F report requires disclosure of the name of the institutional investment manager that files the report, and, with respect to each section 13(f) security over which it exercises investment discretion, the name and class, the CUSIP number, the number of shares as of the end of the calendar quarter for which the report is filed, and the total market value. The SEC publishes a list of securities subject to 13F reporting which is updated quarterly.

Form 13H. Advisers who meet the SEC’s “large trader” thresholds (in general, transactions in exchange-listed securities which equal or exceed (i) 2 million shares or $20 million fair market value during any calendar day or (ii) 20 million shares or $200 million fair market value during any calendar month) are required to file an initial form 13H with the SEC within 10 days of crossing the threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. Additionally, any changes to information contained in Form 13H requires quarterly update filings following the quarter in which the change occurred.

CFTC/NFA Certifications. Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”) seeking to rely on certain Commodity Futures Trading Commission (“CFTC”) registration exemptions (such as Rule 4.13(a)(3) for CPOs and Rule 4.14(a)(8) for CTAs – de minimis exemptions) are required to file such claims electronically with the National Futures Association (“NFA”) and must re-certify annually within 60 days of the end of the calendar year. Registered CPOs and CTAs must also regularly file certain forms with the CFTC and/or the NFA. For example, every registered CPO must file NFA Form PQR quarterly though each CPOs specific filing requirements will be dictated in part by the CPO’s aggregated gross pool assets under management. All registered CTAs are required to file Form CTA-PR with the CFTC within 45 days of the calendar year end and each NFA-member CTA must file the form on a quarterly basis within 45 days of the calendar end quarter.

Form SLT. U.S. investment advisers and U.S.-resident funds (including those managed by non-U.S. investment advisers), among others, may be required to file the Treasury International Capital (“TIC”) Form SLT. “U.S.-resident end-investors” (which includes investment advisers and funds) are required to report all investments if the consolidated total of all “reportable long-term securities” has a total fair market value of at least $1 billion on the last business day of the reporting period. Reporting entities are required to file Form SLT on a monthly basis with the Form being due no later than the 23rd day of the following calendar month. It should also be noted that once a Form SLT has been filed for a reporting period in a given calendar year, the reporting entity is required to file a Form SLT for every month remaining in that calendar year – even if the fair market value of the “reportable long-term securities” drops below the $1 billion threshold.

Internal Compliance Matters

Soft Dollars. Section 28(e) of the 34 Act provides a safe harbor from liability for advisers who use client funds to purchase brokerage and research services for managed accounts. Under Section 28(e), an adviser that exercises investment discretion may lawfully pay commissions to a broker at rates higher than those offered by other brokers if:

(1) the services provided by the broker constitute eligible brokerage and research under Section 28(e);

(2) the manager determines the services provide lawful and appropriate assistance in the performance of his or her investment decision-making responsibilities; and

(3) the manager makes a good faith determination that the amount of commission paid is reasonable in light of the value of products and services that are obtained from the broker-dealer.

Advisers utilizing soft dollar programs should make sure commission balances from the prior year have been addressed.

Annual Compliance Review. Under Rule 206(4)-7 of the Advisers Act, an RIA is required to:

(1) adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws;

(2) review, no less frequently than annually, the adequacy of the policies and procedures established and the effectiveness of their implementation; and

(3) designate an individual (chief compliance officer) to be responsible for administering the policies and procedures.

FATCA. The Foreign Account Tax Compliance Act (“FATCA”) mandates that certain financial institutions (including advisers to pooled investment funds) identify and disclose direct and indirect US investors and withhold U.S. income tax on nonresident aliens and foreign corporations or be subject to a 30 percent US withholding tax. Funds need to monitor their compliance with FATCA.

New Issue Status. Advisers need to confirm, on an annual basis, the eligibility of investors participating in initial public offerings or new issues under Financial Industry Regulatory Authority (“FINRA”) Rules 5130 and 5131.

ERISA Status. The mere mention of the Employee Retirement Income Security Act of 1974 (“ERISA”) can strike fear into the heart of the most stout-hearted compliance managers. In order to avoid falling within the purview of ERISA, a fund must insure either: (i) that they have less than 25 percent in dollar amount of benefit plan investor funds or (ii) the fund must meet certain requirements to be more like an operating company (e.g., real estate operating company (REOC) or venture capital operating company (VCOC)). Because of the potentially adverse consequences associated with failing to track ERISA investors in private funds, it is strongly recommended that advisers confirm or re-confirm the ERISA status of investors on an annual basis. Funds relying on the REOC and VCOC exemptions will have testing periods related to the date of their initial long-term investment.


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This article is provided by AldrichEgg LLC for educational and information purposes only.  It is not intended and should not be construed as legal advice.

©2016 AldrichEgg LLC, 46 Main Street, Suite 106, Sparta, New Jersey 07871.  All rights reserved.

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