On August 26, 2020, the SEC Commissioners voted to adopt amendments to expand the definition of “accredited investor” and “qualified institutional buyer”. Historically the test for accredited investor status was only based on a person’s income or net worth but has now been expanded in a limited fashion to include persons with certain financial designations. The amendments will become effective 60 days after publication in the Federal Register, which is expected within 1-2 weeks. Below we have highlighted the applicable updates and we will continue to provide information on this topic as it develops.
With respect to individuals, the following will now also be accredited investors:
(1) individuals with certain qualifying professional certifications, designations and other credentials (currently includes Series 7, Series 65, and Series 82 licensed individuals); and
(2) individuals who are “knowledgeable employees” (which expands the definition from only certain directors, executive officers, etc).
For individuals, the amendments also clarify that natural persons may include the income from “spousal equivalents” for the purposes of calculating joint income and net worth. “Spousal equivalent” is generally defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.
Entities
With respect to entities, the following will now also qualify as accredited investors:
(1) SEC and state-registered investment advisers;
(2) rural business investment companies;
(3) limited liability companies with total assets in excess of $5 million and not formed for the specific purpose of acquiring the securities offered;
(4) entities owning “investments,” as defined in Rule 2a51-1(b) of the Act, in excess of $5 million [note: the intent of this category (4) entities meeting an investments-owned test is to include Native American tribes and other federal, state, territorial, and local government bodies within the accredited investor definition]; and
(5) family offices with at least $5 million in assets under management and their family clients.
Qualified Institutional Buyer Definition Update
Along with the accredited investor update, the definition of “qualified institutional buyer” in Rule 144A will be updated to include entities and any institutional investors that meet the $100 million in securities owned and invested threshold. The scope of the new amendments include Native American tribes, governmental bodies, and bank-maintained collective investment trusts.
Conclusion
While these changes are incremental rather than radical, they are a step in the right direction and hopefully portend further expansion of the definition to allow greater access to the private capital markets. Those parties (investment managers and private placement sponsors) who want to take advantage of the expanded definition will need to speak with legal counsel about updating applicable subscription documents. We will be providing further updates on timing and other matters as they develop.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Open Forum on September 2nd for Legal, Tax & Compliance Questions
There are a ton of hot topics in the digital asset space right now – the price of Bitcoin, DeFi, staking, lending, venture capital, etc – and we want to answer your questions in a unique format where the experts answer your questions directly. Our firm is teaming up with Asbury Legal, Aspect Advisors and Blockchain Tax Partners to host a live discussion where we will talk about what you want to talk about.
September 2, 2020 10:00am Pacific / 1:00pm Eastern
The Host: Bart Mallon, Cole-Frieman & Mallon as Host
The Panel:
Ryan David Williams, Ashbury Legal
Justin Schleifer, Aspect Advisors
Nick Cerasuolo, Blockchain Tax Partners
Join us to get your questions answered by an expert panel during a Live Discussion. Experience a unique collaborative event to explore the latest developments in the Cryptocurrency and Digital Asset sector. Suggested topics for this session include (but are in no way limited to):
• Putting Crypto Investments to Work: Unlocking Full Potential Through Yield and Lending
• DeFi Implications: Market-Making (Liquidity), Governance, and Custody
• Evolving Landscape: Latest Products/Services, Regulations, and Enforcements
Submit your questions in advance and we’ll have answers prepared. You’ll also be able to ask questions during the interactive discussion. We’re excited to talk about anything you want!
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
We hope that you are staying safe and healthy while finding ways to enjoy the summer. As you endeavor to re-establish your routine in our ever-changing “new normal,” we would like to highlight some items we hope will help you stay on top of the business and regulatory landscape in the coming months.
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SEC Matters
Compliance with Regulation Best Interest (Reg BI) was Required as of June 30, 2020. Reg BI established a “best interest” standard applicable to SEC-registered investment advisers (“SEC RIAs”), broker-dealers, and associated persons when making securities recommendations to retail customers. Moving forward, SEC RIAs with “retail customers” must file the new Form ADV, Part 3 (“Form CRS”) electronically via IARD in addition to providing the Form CRS to prospective and existing clients as well as posting the form on their official website. Also, broker-dealers with retail customers must file Form CRS electronically via Web CRD with the understanding that its Form CRS will be made publicly available through BrokerCheck.
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has published Risk Alerts for Reg BI and Form CRS, shedding light on the practical considerations to be aware of during initial examinations following June 30, 2020. For further instructions, please see the SEC’s guidance in response to frequently asked questions on Form CRS. For more complete analysis as to how this new regulatory requirement may apply to you, please visit our LinkedIn page.
“Volcker Rule” Restrictions Eased. Five federal regulatory agencies, including the SEC and Federal Reserve Board, have approved the proposed changes to the “Volcker Rule” which are to take effect as of October 1, 2020. The new final rule effectively narrows the definition of covered funds and gives banks the green light to offer financial services to certain venture capital funds and engage in other activities that the original Volcker Rule was not intended to prohibit. Separately, regulators also relaxed margin requirements applicable to derivatives trades between affiliates.
SEC Turns an Eye Toward Business Continuity Plans (“BCPs”). In light of the widespread disruption caused by COVID-19, the SEC has been submitting requests for information to firms regarding their BCPs. Such information requests have included: (i) the firm’s formal BCP; (ii) company techniques and procedures tailored to address the continuity of operations specific to pandemics; (iii) cybersecurity policies and procedures applicable to remote working; and (iv) general inquiries regarding critical systems and operations impacted by the pandemic. It should be expected that regular examinations will involve a heightened focus on BCPs as well. Please contact us for further information or to request assistance in making sure your BCP is up to date.
Use of the Word “may” Could be Misleading. The SEC has maintained that the use of the word “may” in disclosures to investors can be considered misleading if the underlying conduct or condition is, in fact, actually occurring. The SEC demonstrated its commitment to this position in a recent enforcement action against the manager of a private equity fund which provided operational services to its portfolio companies for which the manager charged additional fees. The manager’s Form ADV disclosed that “under specific circumstances, certain [of the manager’s] operating professionals may provide services to portfolio companies that typically would otherwise be performed by third parties” and that the manager “may be reimbursed” for associated costs. The SEC reasoned that this method of disclosure did not sufficiently disclose the fact that the manager did perform such services and receive such compensation on a routine basis. The manager was ordered to pay approximately $1.5 million in disgorgement of fees plus interest and a $200,000 penalty. The action serves as a reminder to all managers that required disclosures must be routinely reviewed to ensure clear and complete descriptions of existing conflicts of interest.
SEC Proposes Modernized Framework for Fund Valuation. In April, the SEC proposed a new rule which will allow a fund’s board to delegate the determination of fair value to the fund’s investment adviser, subject to certain conditions. The new rule is aimed at clarifying how fund boards can meet their valuation obligations which require them to identify and address significant risks associated with fair value determinations; select, implement, and verify fair value determination methods; actively monitor any third-party services used; adopt and implement policies and procedures; and maintain certain records.
SEC Brings Action Against Manager for Violation of the Custody Rule. As a method of satisfying the “Custody Rule” (Rule 206(4)-2 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”)), many managers of private funds rely on the “Audited Financials Alternative” which requires the delivery of audited financial statements to all limited partners of a fund within 120 days of the end of the fund’s fiscal year. In a recent enforcement action, the SEC censured a New Jersey-based manager and issued a $60,000 fine for violations of the Custody Rule which took place from 2014-2018 when the firm attempted to avail itself of the Audited Financials Alternative. In 2014 and 2015, the firm mailed the audited financial statements to investors 686 days and 927 days late, respectively; while in 2016-2018, the firm failed to engage an audit firm at all. In addition to these violations, the SEC also cited the firm for failing to implement reasonable policies and procedures aimed at preventing such violations of the Custody Rule.
SEC Charges Los Angeles Private Equity Firm with MNPI-Related Compliance Violations. In a recent enforcement action, the SEC issued a stern reminder of the requirement under the Advisers Act that investment advisers must enact and follow written policies reasonably designed to prevent violations of the rules governing the use of material non-public information (“MNPI”), particularly in the case where an investment adviser maintains employee board representation on a public company in its investment portfolio. Despite the fact that the manager had written policies in place during the relevant time period to prevent misuse of MNPI, the SEC reasoned that such policies afforded the manager’s compliance staff too much discretion to be adequately enforced. The SEC ordered the payment of a $1 million penalty.
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Offshore Matters
Cayman Island Monetary Authority (“CIMA”) Provides Further Guidance on the Definition of a “Private Fund.” As discussed in our previous update, the Cayman Islands Private Funds Law 2020 (the “PF Law”) now requires any Cayman Islands closed-ended fund that falls under the definition of a private fund (“Private Fund”) to register with CIMA. On May 7, 2020, CIMA issued a notice clarifying such definition under the PF Law. Per CIMA’s new guidance, any “collective investment scheme” is considered to be a Private Fund if all of the following factors are “present or otherwise established”: (i) the undertaking does not have a general commercial or industrial purpose; (ii) the undertaking pools together funds gathered for the purpose of investment with the goal of creating pooled returns for investors; and (iii) the undertaking’s investors have no collective daily control. Notably, the fact that one or more investors exercises daily control over the undertaking does not establish that the undertaking is not a “collective investment scheme” and, thus the undertaking may well still qualify as a Private Fund that must register.
The notice also provides further guidance regarding the treatment of segregated portfolio companies, alternative investment vehicles, practical instructions on the CIMA registration process, as well as valuation and cash monitoring requirements applicable to Private Funds.
CIMA Publishes New Marketing Rules. Effective May 2020, CIMA enacted new rules governing the contents of the offering documents of mutual funds regulated under the Mutual Funds Law (2020 Revision) (“Regulated Mutual Funds”). CIMA published separate rules applicable to the contents of all marketing materials (including offering documents) of Private Funds registered under the Private Funds Law (2020 Revision) (“Registered Private Funds”) which apply prospectively as well as to the marketing materials of all Registered Private Funds with ongoing offerings. Since the new rules applicable to Regulated Mutual Funds and those applicable to Registered Private Funds each mandate a particular disclosure which must be included verbatim in the offering documents, all new offering documents (and all future updates to offering documents) of Regulated Mutual Funds and all marketing materials of Registered Private Funds will be impacted. Please contact us if you think you may be in need of an update to your offering documents or marketing materials.
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Digital Asset Matters
Coinbase Announces Agreement to Acquire Crypto Prime Brokerage Platform. Yet another indicator of the burgeoning demand for digital assets among institutional and professional investors, Coinbase announced its intention to buy Tagomi, a leading cryptocurrency brokerage platform. In addition to providing custody solutions and professional trading features, Tagomi provides its users access to 14 digital asset exchanges from a single account. The acquisition is aimed at creating a digital asset trading experience more aligned with the expectations of professional traders in equities and other traditional markets. The terms of the deal are yet to be announced as the acquisition is pending regulatory review.
SEC Charges San Jose-based Issuer of Unregistered ICO. A blockchain services start-up conducted an unregistered ICO in which it issued Consumer Activity Tokens (“CAT”) to approximately 9,500 investors between June and November of 2017. The SEC determined that the CAT were sold as investment contracts and, as such, were indeed “securities” under the Howey Test which can only be lawfully issued as part of a registered offering or pursuant to a valid exemption under the Securities Act of 1933, as amended. In support of its determination, the SEC’s order reasoned that the issuer’s offering materials (i) created a reasonable expectation by the investor of earning a future profit based on the issuer’s plans of development and marketing of the CAT protocol following the offering; and (ii) assured investors of the liquidity of the CAT on digital asset trading platforms. To settle the charges, the issuer has agreed to pay $25.5 million in disgorgement of funds raised in addition to pre-judgment interest of over $3 million and a penalty of $400,000.
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FINRA Matters
FINRA Shares Remote Working Best Practices. In an effort to help firms navigate challenges associated with many of their employees working from home, FINRA’s recent Regulatory Notice provides guidance to brokerage firms regarding (i) operational considerations during the transition to a remote working model and (ii) maintenance of adequate supervision while doing so. The regulatory notice does not impose further obligations on FINRA regulated entities, but is meant to share best practices which have been and continue to be implemented by firms of all sizes. The notice provided tips and feedback on ways of assisting customers, providing additional support and communication to employees, and maintaining cybersecurity in this new environment. Additionally, the notice discussed methods of maintaining oversight of trading and staff communication with customers, as well as adjustments to ongoing branch inspection programs.
FINRA Warns of Increased Threat of Fraudulent Activity and Scams During COVID-19. The onset of significant economic disruption creates increased opportunities for fraudulent behavior. In a recent Regulatory Notice, FINRA outlined the following four frequently occurring scams: (i) fraudulent account openings and transfers of funds; (ii) firm impersonation schemes; (iii) false information technology inquiries; and (iv) email phishing scams. Most notably, FINRA reminds firms to examine their own compliance policies relating to the opening of accounts to ensure such policies meet the requirements of the following implicated FINRA Rules: 2090 (Know Your Customer), 4512 (Customer Account Information), and 3310 (Anti-Money Laundering Compliance Program). FINRA provides suggested best practices as to how to be a hard target against such behavior and also encourages firms to report any suspicious activity.
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CFTC Matters
CFTC Extends Certain COVID-19 Relief Measures. No-action relief measures enacted by the CFTC during the first quarter of 2020 which were set to expire on June 30 have been extended in large part until September 30, 2020. Included in those extended relief measures are the measures applicable to members of designated contract markets and swap execution facilities, futures commission merchants (“FCMs”) and introducing brokers (“IBs”), floor brokers, retail foreign exchange dealers, swap dealers, swap execution facilities and designated contract markets. In CFTC Letter No. 20-19, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) and the Division of Market Oversight (“DMO”) listed the specific relief measures which will not be extended including (i) audit trail and associated requirements applicable to members of designated contract markets; and (ii) requirements pertaining to the recording of voice communications applicable to swap execution facilities. The DSIO and DMO have also stated that affected market participants should reach out to the applicable contact person at each division with requests for specific relief which shall be considered on a case-by-case basis. Inquiries should be sent to Frank Fisanich, Chief Counsel, DSIO or Roger Smith, Special Counsel, DMO, as appropriate.
Further Relief Provided to FCMs and IBs. In CFTC Letter No 20-15, the DSIO has allowed eligible FCMs and IBs who have received loans under the Paycheck Protection Program, pursuant to the CARES Act, to add back certain amounts under covered forgivable loans when making net capital calculations. DSIO has also allowed FCMs and IBs to add back accrued annual FINRA assessment fees so long as such FCM or IB is a registered broker-dealer with the SEC, qualifies as a small firm as defined by FINRA, and is otherwise eligible for the add-back of accrued unpaid annual assessments per FINRA guidance.
CFTC Extends Phase 5 Compliance Date of Initial Margin Requirements for Uncleared Swaps. In light of continued COVID-19-related disruption, the CFTC has announced it has extended the deadline for compliance with the amended margin requirements for uncleared swaps as applicable to swap dealers and major swap participants for which there is no prudential regulator. The deadline for compliance has been extended a full year until September 20, 2021.
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Other Matters
Private Equity Industry Continues to Battle for Access to Defined Contribution Market. The private equity industry seems to have won a small victory in the form of an Information Letter from the Department of Labor which suggested that private equity investments could be used in multi-asset class investment vehicles such as target-date or target-risk funds. CFM’s own Bart Mallon was quoted in the article released by Barrons discussing this exciting new development which could one day lead to private equity investments being made from investors’ 401(k)s.
Enforcement of California Consumer Privacy Act (“CCPA”) Began July 1, 2020. The CCPA, which has been in effect since January 1, 2020, was not delayed beyond the scheduled enforcement date of July 1, 2020. The California Attorney General confirmed the enforcement date despite the formal request for an extension submitted by more than 60 businesses and trade groups led by the Association of National Advertisers due to COVID-19-related disruption. Please see our previous update for a more complete discussion of the CCPA and its implications for fund managers.
New York’s Stop Hacks and Improve Electronic Data Security Act (“SHIELD Act”) Fully Implemented as of March 21, 2020. The SHIELD Act, New York’s version of the CCPA, made several significant changes to the state’s data protection regime including: (i) expanded definitions of “private information” and covered “breaches”; (ii) increased scope of applicability of data protection laws to include any business that owns or licenses private information of a New York resident; and (iii) a requirement for companies to adopt a program of policies and procedures designed to protect the private information of individuals. Although the SHIELD Act’s data breach notification requirements have been effective since the fall of 2019, covered businesses were required to establish the requisite data protection program as of March 21, 2020.
Reminder: Sexual Harassment Training Requirement under California Law. California state law now requires that all employers with five or more employees provide company-wide sexual harassment training. The first training must be held by January 1, 2021 and thereafter must be held every two years. The law formerly only applied to employers with 50 or more employees but has been expanded under Senate Bill No. 778, which was approved by the governor of California on August 30, 2019.
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CFM Events
CoinAlts Webinar. In lieu of the CoinAlts Fund Symposium, the CoinAlts Webinar Series was held on May 14, 2020. The widely attended event featured updates and analysis of the latest trends in the digital asset space from Cynthia Pederson of Cohen & Co., Lewis Chong of Harneys, Matt Stover and Seth Altman of MG Stover, and our own, Bart Mallon. The event was capped with an enlightening Q&A session featuring Gary Newlin of MG Stover and Matt Perona of Polychain Capital. For a summary of the event, please contact us. On behalf of the CFM team, as well as our co-sponsors, we want to thank all who attended this iteration of the CoinAlts Webinar and we look forward to hosting you at the next installment. Please stay tuned for the announcement of the details of the next event and let us know if you have any specific questions or interesting topics you would like discussed.
Regulation Best Interest (Reg BI) Webinar with Aspect Advisors. CFM co-sponsored a live webinar with Aspect Advisors on May 28, 2020. The discussion covered practical, regulatory, and other considerations regarding Reg BI and the new Form CRS, as described earlier in this update. We would like to thank Justin Schleifer of Aspect Advisors for hosting and look forward to future events. Aspect Advisors is a modern regulatory consultant providing customized compliance solutions to entrepreneurs. The firm has a focus on fintech companies, broker-dealers, and investment managers (hedge fund, VC, PE, RIA, etc.).
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Compliance Calendar Please note the following important dates as you plan your regulatory compliance timeline for the coming months.
Deadline
Filing
June 30
Deliver audited financial statements to investors (private fund managers to fund of funds, including SEC, state and CFTC registrants.
June 30
SEC deadline for initial Form CRS (ADV Part 3) submission through IARD for SEC-registered investment advisers (if necessary).
June 30
CIMA deadline for Cayman Island registered funds with a fiscal year end of December 31 to file the Fund Annual Return and audited financial statements.
June 30
Deadline for making available AIFMD annual report for funds operating in or advertising in the EU (Alternative Investment Funds with a financial year ending on December 31).
July 10
Review holdings to determine Form PF filing requirements.
July 15
SEC deadline to file 2nd Quarter 2020 Form PF for quarterly filers (Large Liquidity Fund Advisers), through PFRD.
July 15*
CFTC 1st Quarterextended deadline for CPOs to file Schedules A and B of CFTC Form CPO-PQR, through NFA EasyFile.
July 20
FINRA deadline to complete annual account Entitlement Certification through IARD (firms with more than one IARD user).
July 30
Collect quarterly Transaction Reports from access persons for their personal securities transactions (SEC registered advisers).
July 30*
Quarterly account statements due (CPOs claiming the 4.7 exemption). DSIO will not recommend an enforcement action against a CPO provided that the statements are distributed by August 14.
July 30
Deliver initial Form CRS (ADV Part 3) to clients qualifying as “retail investors” for SEC-registered investment advisers.
August 14
SEC deadline to file Form 13F for 2nd Quarter of 2020.
August 14
NFA deadline to file Quarterly Commodity Trading Advisor Form PR filing, through NFA EasyFile.
August 28
SEC deadline to file 2nd Quarter 2020 Form PF filing for quarterly filers (Large Hedge Fund Advisers), through PFRD.
August 28
CFTC deadline for CPOs to file Schedules A, B, and C of CFTC Form CPO-PQR, for 2nd Quarter of 2020, through NFA EasyFile.
September 18*
Cayman Islands CRS reporting deadline. The deadline for reports under US FATCA has been extended to November 16, 2020.
October 9
Review transactions and assess whether Form 13H needs to be amended.
October 15
SEC deadline to file 3rd Quarter 2020 Form PF for quarterly filers (Large Liquidity Fund Advisers), through PFRD.
Variable
Distribute copies of K-1 to fund investors.
Periodic Filings
Form D and Blue Sky filings should be current.
*Extended deadline pursuant to COVID-19 pandemic-related relief
Please contactus with any questions or for assistance with any of the above topics.
Sincerely,
Karl Cole-Frieman, Bart Mallon, Lilly Palmer, David Rothschild, & Scott Kitchens
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Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive, and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP services both start-up investment managers, as well as multi-billion-dollar firms. The firm provides a full suite of legal services to the investment management community, including hedge fund, private equity fund, venture capital fund, mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.
We recently announced a Regulation BI webinar that was held in late May. Below is the summary of that webinar from Justin Schleifer of Aspect Advisors. Please reach out to us or Aspect Advisors if you’d like more information on Reg BI or the webinar.
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Thank you – Reg BI webinar overview
Thank you for attending our Regulation Best Interest (Reg BI) webinar last week. I would also like to extend many thanks to my fellow panelists, James Dombach and Paul Merolla from the law firm Murphy & McGonigle, and to Bart Mallon of Cole-Frieman & Mallon for hosting. The webinar provided an overview of Reg BI obligations, defined key terms, reviewed the SEC’s OCIE guidance regarding regulatory expectations, and provided practical suggestions for implementation by broker-dealers (BDs) and registered investment advisers (RIAs) for the June 30 deadline for compliance.
Here are the key take-aways about Reg BI:
When making a recommendation of any securities transaction or investment strategy to a retail customer (as defined), BDs must act in the best interest of the retail customer at the time the recommendation is made.
4 components of obligation:
Disclosure: effective Form CRS content and delivery for BDs and RIAs;
Care: sufficiently understanding the product and the customer;
Conflicts of Interest: review, mitigation/elimination, and disclosure; and
Compliance: effective controls and best practices.
SEC Office of Compliance Inspections and Examinations (“OCIE”) expectations include:
Assessment: Has the Firm sufficiently analyzed and documented its business practices, its registered representatives, and its products to make necessary disclosures?
Implementation: BDs and RIAs are required to provide a brief relationship summary (Form CRS) including appropriate disclosures to both new and existing retail investors.
Documentation: Firms must have policies and procedures that assess potential risks, rewards, and costs of recommendations in light of a retail customer’s investment profile; how the 4 components of obligation will be met; and the process for Form CRS delivery.
If you (or your colleagues) would like to review any of the webinar content, please email Amanda Brown for a link to the recording. If you have any questions about Reg BI or need advice about how to implement at your firm, please reach out to any of our panelists.
We hope you enjoyed this event and if you have any feedback, we would love to hear from you. We look forward to seeing you at our next event!
Best regards,
Justin Schleifer
President of Aspect Advisors
Aspect Advisors
Aspect Advisors is a regulatory compliance consulting firm that provides customized compliance solutions for complex challenges. Our clients are financial service innovators, including fintech companies, registered investment advisers (RIAs), broker-dealers and private fund managers. Our back-office services include regulatory registrations and filings, compliance policies and procedures, conducting annual reviews, outsourced Chief Compliance Officer/FinOP support, and other bespoke items.
Murphy & McGonigle
Murphy & McGonigle is a law firm that serves the litigation, enforcement defense, and regulatory needs of clients across the full spectrum of the financial services industry – from national banks, broker-dealers, investment advisers, and hedge funds, to national and international securities markets and exchanges.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Aspect Advisors and Cole-Frieman & Mallon Both Participating
The below is a press release announcing the Regulation Best Interest webinar next week. All are welcome to join.
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Aspect Advisors Presents Regulation Best Interest Webinar
Reg BI Compliance Implementation for Broker-Dealers and Investment Advisers
SAN FRANCISCO (PRWEB) MAY 21, 2020
Aspect Advisors, a regulatory compliance consulting firm, will be presenting best practices for broker-dealers and investment advisers subject to the new Regulation Best Interest (“Reg BI”) requirements ahead of the June 30 deadline for compliance. The presentation will be made through a live webinar, open to all who register, on May 28th at 1:00pm Eastern time and will feature expert speakers on the new regulation.
Reg BI establishes a new “best interest” standard of conduct for broker-dealers when making recommendations to retail customers regarding any securities transaction or investment strategy involving securities and includes four specified components to the obligations: disclosure, care, conflict of interest, and compliance. The regulation also requires broker-dealers and investment advisers to provide a brief relationship summary (Form CRS) to retail investors.
The May 28 webinar will be a “beyond-the-basics” deep dive discussion into how investment management firms can implement Reg BI requirements. Topics will include: the SEC’s OCIE guidance regarding regulatory expectations, common questions from both a compliance and legal perspective, practical strategies for implementation of requirements, and a question and answer period with participants.
“We have seen the government and regulators pull back on the implementation of various regulations during the COIVD-19 crisis,” said Justin Schleifer, president of Aspect Advisors and panelist. He continued, “however, it appears that Reg BI will not be subject to delay and so investment management firms need to be prepared for the June 30 deadline with real world solutions.”
The panelists will include James Dombach and Paul Merolla from the law firm Murphy & McGonigle and Justin Schleifer from Aspect Advisors. Host of the panel Bart Mallon, from the law firm Cole-Frieman & Mallon, stated “the goal of this panel is to provide broker-dealers and investment advisers with practical advice on this important new regulation.” He went on to state that “implementation in normal times would be involved so this webinar is both timely and important.”
About Aspect Advisors: Aspect Advisors is a regulatory compliance consulting firm that provides customized compliance solutions for complex challenges. Our clients are financial service innovators, including fintech companies, registered investment advisers (RIAs), broker-dealers and private fund managers. Our back-office services include regulatory registrations and filings, compliance policies and procedures, conducting annual reviews, outsourced Chief Compliance Officer/FinOP support, and other bespoke items.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Cole-Frieman & Mallon Presenting a Digital Asset Legal Update for 2020
We are excited to present our first webinar to update the industry on the various updates applicable to digital asset managers. We will be providing the US legal update during the webinar and will be covering the following topics:
Proposed Laws (state and federal)
Wyoming Update
SEC Digital Asset Priorities
The Courts
Structuring Trends
Below is our invitation for the event – it is free to join and all are welcome. Look for coming posts providing an overview of the content from the webinar. As always, please contact us if you’d like to be added to any mailing lists.
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With the rescheduling of our 2020 CoinAlts Fund Symposium to Fall of 2021, we are excited to announce our new CoinAlts Webinar Series, beginning on Thursday, May 14th at 11:00am PT.
Hear from industry experts on the investment, legal and operational issues that digital asset managers are facing in today’s climate.
After the panel, we are excited to host a Q&A session with Matt Perona from Polychain Capital.
If you would like to submit a question for consideration to one of the founding sponsors or Matt Perona, you will have the opportunity to do so upon registration. For those unable to join, the webinar will be available for replay within 24 hours.
We look forward to having you!
All the best,
Cole-Frieman & Mallon LLP
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
The first quarter of
2020 saw an unprecedented combination of challenges, not only industry-wide but
on a global scale as well. Notwithstanding the prevailing circumstances, the
first quarter was busy for investment managers and service providers with
filing deadlines, regulatory changes, and compliance updates. As we continue
through 2020, we have put together this update and checklist to help managers
stay on top of the business and regulatory landscape in consideration of the
global pandemic affecting nearly every aspect of the industry and our
lives.
Please note COVID-19 related matters appear at the end of this update.
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SEC
Matters
SEC Releases 2020
Examination Priorities. The SEC Office of Compliance Inspections and
Examinations (“OCIE”), which conducts examinations of SEC-registered
investment advisers, investment companies, broker-dealers, and others,
publishes an annual
list of examination priorities for
the upcoming year that provides insight to managers regarding issues that will
be examined and an opportunity for advisers to prepare and improve such areas
before examination.OCIE’s 2020 exam priorities are as follows: Retail
Investors (including seniors and those saving for retirement); Market
Infrastructure; Information Security; Focus Areas Relating to Investments
Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors;
Anti-Money Laundering Programs; Financial Technology and Innovation (including
Digital Assets and Electronic Investment Advice); and oversight of the
Financial Industry Regulatory Authority (FINRA) and Municipal Securities
Rulemaking Board (MSRB). In particular, Information Security and Cybersecurity
were focuses of the publication. OCIE released observations that focus on certain
approaches taken by market participants in regards to governance and risk management,
access rights and controls, data loss prevention, mobile security, incident
response and resiliency, vendor management, and training and awareness.
SEC Division of Trading and Markets Releases FAQ on Regulation Best Interest (Reg BI). Reg BI establishes a “best interest” standard for broker-dealers and associated persons when making recommendations to retail customers involving securities. Since adopting Reg BI on June 5, 2019, the SEC has released responses to frequently asked questions about the regulation, covering topics surrounding Retail Customers, Recommendations, Disclosure Obligations, Care Obligations, Conflict of Interest Obligations, and Compliance Obligations. It should be noted that like all staff guidance, the FAQ does not have legal force or effect, but represents the views of the staff of the Division of Trading and Markets. Reg BI was met with much skepticism as critics found the new regulation ambiguous in many regards. Hopefully the SEC’s guidance will be the first step in addressing this perceived ambiguity. Firms are expected to comply with Reg BI by June 30, 2020.
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FINRA
Matters
Amendments to the
FINRA New Issue Rule (Rule 5130) and Anti-Spinning Rule (Rule 5131) Became
Effective as of January 1, 2020. Generally, the amendments to the FINRA New
Issue Rules broaden the types of investors that are exempt from the rules’
restrictions and narrow the types of the securities offerings that are subject
to the New Issue Rules. As a result of the amendment, among other things, FINRA
member broker-dealers may now sell new issues to additional kinds of investors
directly or through investments in private investment funds. Amendment to Rules
5130 and 5131 includes expanding the ways that foreign investment companies can
fall within the general exemption, broadening the definition of family
investment vehicles, including foreign employee retirement benefits plans under
the exemption, excluding sovereign entities from the definition of “Restricted
Persons,” and other changes.
FINRA Releases 2020 Risk Monitoring and Examination Priorities Letter. The 2020 Risk Monitoring and Examination Priorities Letter outlines the priorities for FINRA’s risk monitoring, surveillance, and examination programs for the year. The letter includes a list of practical considerations and questions for firms to use as guidance in evaluating their compliance, supervisory, and risk management program. Among the new or emerging areas in the industry, FINRA discusses compliance with obligations relating to Regulation BI, Form CRS, communications with the public, communications via digital channels, sales of initial public offering (IPO) shares, digital assets, cybersecurity, and other items.
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Digital
Asset Matters
SEC Commissioner
Proposes 3-Year Safe Harbor Period for Crypto Token Sales. As
mentioned in Commissioner Peirce’s speech, cryptocurrency and
digital asset entrepreneurs are faced with a regulatory Catch 22. In order to
build a decentralized network in which a token provides access to a function of
the network or serves as a means of exchange, a crypto project needs to get its
tokens into the hands of users. However, such would-be networks generally
cannot freely distribute their tokens to potential users due to existing
federal and/or state securities laws. Consequently, these would-be networks
cannot mature into functional decentralized networks that are not dependent
upon single persons or groups to carry out the essential managerial or
entrepreneurial efforts (under the Howey Test). To address this
uncertainty, Commissioner Peirce formally proposed a safe harbor for token
projects, allowing a three-year time window for networks to mature and become
sufficiently decentralized so as not to fall under the “securities” definition
contemplated under the Howey Test. If adopted, the safe harbor
would impose strict requirements on such crypto projects, including source code
disclosures, transaction history disclosures, personal disclosures, public
notices and filings, and other conditions. Additionally, the safe harbor would
be available for tokens that were previously sold in a registered offering or
pursuant to a valid exemption under the Securities Act of 1933, as
amended.
SEC Wins Injunction
against Telegram in Landmark Digital Assets Case. On
March 24, U.S. District Judge Kevin Castel of the Southern District Court of
New York issued an injunction against
Telegram Group Inc. (“Telegram”), the messaging app company that raised $1.7
billion in 2018 selling Gram tokens to investors in the largest ICO to date. In
October 2019, the SEC
sought to enjoin Telegram from
distributing the Gram tokens on the grounds that the company had violated
federal law for the sale of unregistered securities. The SEC was granted the
preliminary injunction, preventing Telegram from distributing the Gram tokens
to investors. The Court stated it “finds that the delivery of Grams to the
Initial Purchasers, who would resell them into the public market, represents a
near certain risk of a future harm, namely the completion of a public
distribution of a security without a registration statement.” Despite the
ruling, it has been reported that the Telegram Open Network (TON) Community
Foundation remains optimistic as they believe that TON can always be launched
by anyone considering the network code is available.
Crypto Crash Leads to
BitMEX Outage, Liquidations. As the price of
Bitcoin crashed from $8,000 to nearly $3,700 in less than 24 hours on March 13,
BitMEX faced
a 25 minute outage during a day when nearly $1 billion in leveraged long
positions were liquidated industry-wide. BitMEX has faced criticism for the
outage, with some speculating that it may have shut down intentionally to avoid
the possibility of its Bitcoin perpetual swap collapsing to zero due to forced
liquidations. BitMEX has stated that a hardware issue caused the outage. No
matter the cause, this event highlights the necessity for digital asset
managers, especially those using leverage to trade digital assets, to ensure
their fund documents contain the necessary disclosures regarding counterparty
risk and digital asset exchange risks.
Wyoming Plans to Create New Bank Dedicated for Digital Assets. Wall Street and crypto veteran Caitlin Long recently announced a plan for Wyoming corporation, Avanti Financial Group Inc., to apply for a bank charter under Wyoming’s special-purpose depository institution law. Under the name “Avanti Bank & Trust,” the future bank is partnering with Blockstream to provide payment, custody, securities, and commodities activities for institutional customers using digital assets (“Avanti”). Though Avanti has yet to submit the bank charter application, the company has raised $1 million in seed funding and has eight products in the works that are not currently available in the U.S. market, including custody for security tokens. If successful, Avanti will be the first U.S. bank dedicated for digital assets.
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Offshore
Matters
Cayman Islands Mutual
Funds Law (2020 Revision). Effective February 7, 2020, the Cayman Islands
Government enacted an amendment to the Mutual Funds Law (2020 Revision).
The 2020 Revision requires registration of previously exempt Section 4(4) Funds
(generally, private funds with not more than 15 investors) with the Cayman
Island Monetary Authority (“CIMA”). The 2020 Revision operates retroactively,
meaning mutual funds that were previously exempted from registration under
Section 4(4) will now need to comply with the registration requirements by
August 7, 2020. Registration is similar to the requirements for Section 4(3)
Funds, including the ‘four-eyes’ principle that necessitates funds to have at
least two natural persons in management roles.
Cayman Islands Private
Funds Law 2020 (“PF Law”). Effective February 7, 2020 (the “Effective
Date”), the PF Law
requires any Cayman Islands closed-ended fund that falls under the definition
of a “private fund” to register with CIMA. Previously, “private funds” were not
required to register with CIMA. A vehicle will be a “private fund” where: (1)
its principal business is offering and issuing investment interests; (2) its
investment interests carry an entitlement to participate in the profits or
gains of the vehicle and are not redeemable or re-purchasable at the option of
the investor, i.e. are closed-ended; (3) its purpose or effect is the pooling
of investor funds with the aim of spreading investment risks and enabling
investors to receive profits or gains from such vehicle’s investments; (4) the
investors do not have day-to-day control over the investments; (5) its
investments are managed as a whole by or on behalf of the operator, directly or
indirectly, for reward based on the assets, profits or gains of the vehicle;
and (6) it does not constitute a “non-fund arrangement,” as listed in the
schedule to the PF Law. The regulations do provide certain transitional
provisions for private funds that began business at any time prior to the
Effective Date. Such transitional funds will have six months from the Effective
Date to register with CIMA and comply with the PF Law.
European Union (EU) Announces Cayman Islands is a Non-Cooperative Jurisdiction for Tax Purposes. Effective February 18, 2020, the EU Economic and Financial Affairs Council announced that the Cayman Islands was moved to Annex 1 of Non-cooperative jurisdictions (“Annex 1”) for failing to timely implement appropriate regulations relating to economic substance in the area of collective investment vehicles. For investors or clients using Cayman structures, the move to Annex 1 will have limited or no direct practical consequence. The move to Annex 1 is not expected to trigger prevention of the use of special purpose vehicles established in non-EU jurisdictions under Article 4 of the EU Securitisation Regulation, or result in any EU level sanctions. While the Cayman Islands Government has announced the start of the delisting process, the situation is currently being monitored as dialogue continues between the EU and listed jurisdictions.
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Other
Matters
Important Second Circuit Opinion on Insider Trading. In United States v. Blaszczak, No. 18-2825 (2d Cir. Dec. 30, 2019) (“Blaszczak”), the Second Circuit denied application of any personal benefit test to insider trading charges brought under both the criminal securities fraud provisions added in the 2002 Sarbanes-Oxley Act (Title 18) and the wire fraud statutes. Although this precedent controls only in criminal cases, this Second Circuit decision has made it significantly easier for prosecutors to obtain insider trading convictions. The personal benefit test requires prosecutors to show that a tipper acquired a personal benefit by disclosing confidential information in order to charge the tipper or tippee with insider trading. The implications of the ruling are potentially far-reaching as Blaszczak may become expansive precedent for prosecutors seeking to lower the bar for insider trading prosecutions. Analysts, such as the two former hedge fund analysts to whom Blaszczak was charged, that usually communicate with company employees and executive insiders may be at higher risk for insider trading prosecution because the government may not need to allege or prove that the tipper breached a duty of confidentiality or exchange for a personal benefit. While the cascading impact following Blaszczak is yet to be known, it is clear that the Second Circuit ruling has the potential to significantly expand insider trading liability.
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COVID-19
Pandemic-Related Updates
SEC Regulatory Relief
for Funds and Investment Advisers Affected by COVID-19. The
SEC
announced it will provide conditional relief to
investment advisers affected by COVID-19. TheSEC order grants relief for
advisers from certain Form ADV and Form PF filing obligations. Registered
investment advisers (“RIAs”) and exempt reporting advisers affected by COVID-19
can expect conditional relief regarding amendments and reports on Form ADV,
respectively. Further, the order provides conditional relief for RIAs affected
by COVID-19 in regards to delivering amended brochures, brochure supplements or
summaries of material changes to clients where the disclosures are not able to
be timely delivered. Private fund advisers affected by COVID-19 can also expect
relief from Form PF filing requirements. To rely upon the relief, the order
requires a statement of notification to Commission staff (promptly via email to
the SEC at [email protected])
of the intention to rely upon the order and the disclosure of information in
the form of a brief description by the adviser of the reasons why it could not
file or deliver its Form ADV or Form PF on time. Clients and investors of the
adviser must also be notified. Disclosure in regards to reliance upon the order
for Form PF filings should be made promptly via email to the SEC at [email protected].
The order requires filing Form ADV and/or Form PF, as applicable, as soon as
practicable, but not later than 45 days from the original deadline. For general
questions or concerns related to impacts of coronavirus on the operations or
compliance of funds and advisers, please contact us.
California’s Attorney
General Announced No Delay on Enforcement of CCPA. On
March 17, a group of over 30 trade associations and businesses sent a letter to
California’s Attorney General pushing to postpone the enforcement of the California Consumer Privacy Act
(“CCPA”). The CCPA, which took effect on January 1, is expected to be enforced
by the Attorney General starting July 1. The group who sent the letter
requested a January 1, 2021 enforcement date in order to give businesses more
time to prepare for enforcement given that, given the current climate of
COVID-19, many are unable to prepare for enforcement and most are in need of
prioritizing other business concerns, such as the well-being and health of
their employees. Press reports of various statements by members of the Attorney
General’s office in response to this request strongly suggest that enforcement
will not be delayed. In addition, the Attorney General recently released
proposed revisions to clarify the service provider exemption. One such revision
would allow service providers to use personal information internally to improve
their services subject to certain limitations. Nevertheless, fund managers
should prepare for enforcement of the CCPA as scheduled.
Investment Management
Firms May Be Considered Essential Financial Businesses Under Federal Guidance
and State Orders. The Cybersecurity and Infrastructure Security
Agency (“CISA”) lists asset management as
a vital component of our nation’s critical infrastructure. As the federal risk
advisor, CISA created guidance to help state and local governments ensure that
employees essential to operations are able to continue working. In
consideration of CISA’s guidance, whether or not investment management firms
would be considered essential financial businesses may depend upon each State’s
directives. Generally, the best practice for firms moving forward is to require
workers to telework or work-from-home if possible, but allow supporting
personnel to continue selective operations in the office in order to ensure the
firm’s continued operation.Please read here for a state-by-state
analysis of the exceptions provided in each States’ executive orders regarding
essential business activities in light of the COVID-19 public emergency
response.
Amidst Extreme
Volatility Managers Must Assess Material Terms in Live Trading Agreements.
Given extreme market volatility, managers must assess the deal terms governing
trading agreements such as ISDA master agreements, prime brokerage agreements,
and others as certain provisions and triggering events may detrimentally affect
hedge funds in the midst of
current market conditions. Provisions regarding NAV triggers, force
majeure, material adverse change/effect, counterparty powers, business day
determinations, business disruptions, etc. and should be reviewed in light of
current market conditions. In particular, for fund managers with ISDAs in
place, please read this article by Dave Rothschild, a
Partner at Cole-Frieman & Mallon LLP (“CFM”).
Additional Information
on COVID-19 for Investment Managers. We have
summarized a number of items from various authorities that pertain to
investment managers. This article details the following
matters:
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
CFTC Extended Deadlines for CPOs Due to COVID-19.
SEC Update to Form ADV and Custody Rule FAQs, Relating to “Work From Home”.
NFA Relief for Commodity Pool Operators, Relating to “Work from Home”.
FINRA Pandemic-Related BCP, Guidance and Regulatory Relief, Relating to Regulatory Filings, “Work from Home,” Cybersecurity, and Forms U4 and BR.
Employment Considerations for Investment Management Firms Addressing COVID-19.
SEC Temporary Final Rule 10(c) to Address Form ID Notarization Issues.
SEC’s Office of Compliance Inspections and Examinations Off-Site Exams via Correspondence for Information on Firms’ Business Continuity Plans.
SEC Guidance Relating to Federal Proxy Rules for Annual Meetings, “Virtual” Meetings, and Presentations of Shareholder Proposals.
SEC No-Action Relief for Consolidated Audit Trail Obligations.
Short-Selling Bans in Austria, Belgium, France, Italy, and Spain.
Tax Matters for Investment Managers.
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CFM
Events
CFM 2020 IA/BD
Compliance Update with Aspect Advisors. We held our
2020 compliance update with Aspect Advisors in January. The discussion covered the critical
compliance priorities in our industry for the New Year and decade. We’d
like to thank Aspect Advisors
for their help with this compliance update and look forward to future
events. Aspect Advisors is a modern regulatory consultant providing
customized compliance solutions to entrepreneurs. The firm has a focus on
fintech companies, broker-dealers, and investment managers (hedge fund, VC, PE,
RIA, etc.).
Bitcoin Mining Panel
Event in San Francisco. As we have seen certain venture capital
firms increase their investment in bitcoin mining and infrastructure, CFM
decided to hold an event discussing the current investing environment,
regulatory considerations, and infrastructure landscape for bitcoin mining. The
discussion was presented by Michael Fitzsimmons of Williams Trading and
featured a panel of bitcoin mining experts – Mathew D’Souza of Blockware
Solutions, Thomas Ao of MCredit and Yida Gao of Struck Capital. For a summary
of the event, please see our overview.
Regulation Best Interest (Reg BI) Webinar. Please stay tuned for more information on an upcoming live webinar, co-sponsored by CFM and Aspect Advisors, discussing practical, regulatory, and other considerations regarding Reg BI and the new Form CRS. We have previously written about Reg BI and how it pertains to private fund managers and investment advisers here. If you are interested in attending and have any questions for us to cover during the webinar, please contact us.
Compliance Calendar Please note the following important dates as you plan your regulatory compliance timeline for the coming months:
Deadline
Filing
March 30
SEC deadline to update and file Form ADV – Part 1A, 2A, and Part(s) 2B, as applicable, through IARD.
April 10
Amendment to SEC Form 13H due if necessary.
April 15
SEC deadline to file 1st Quarter 2020 Form PF filing for quarterly filers (Large Liquidity Fund Advisers), through PFRD.
April 15
FinCEN deadline to file Report of Foreign Bank and Financial Accounts on FinCEN Form 114. Required for U.S. person with financial interest in, or signature authority over, one or more foreign financial accounts with total value over $10,000 at any time in 2019.
April 29
Distribute Form ADV Part 2 to existing clients.
April 29
Distribute audited financial statements to private fund investors that have not invested in fund of funds.
April 29
SEC deadline to file Annual Form PF for annual filers (Large Private Equity Fund Advisers and Smaller Private Fund Advisers).
April 29
Collect quarterly Transaction Reports from access persons for their personal securities transactions.
May 1
SEC filing opens for Form CRS, through IARD.
May 15*
CFTC deadline for Commodity Pool Operators to file Schedules A and B of CFTC Form CPO-PQR, through NFA EasyFile.
NFA deadline for CFTC-registered CPO of CFTC Regulation 4.7 Pool or Non-Exempt Pool to file 2019 Annual Report and distribute to pool participants.
May 15
SEC deadline to file Form 13F for first quarter of 2020.
May 15
NFA deadline to file Quarterly Commodity Trading Advisor Form PR filing, through NFA EasyFile.
May. 29
SEC deadline to file 1st Quarter 2020 Form PF filing for quarterly filers (Large Hedge Fund Advisers), through PFRD.
May 29
CFTC deadline for Commodity Pool Operators to file Schedules A, B, and C of CFTC Form CPO-PQR, for first quarter of 2020, through NFA EasyFile.
May 29
CFTC deadline for Commodity Pool Operators to file NFA Form PQR for first quarter of 2020 with CFTC and NFA, through NFA EasyFile.
June 12*
Distribute Quarterly NAV Report (registered commodity pool operators claiming the 4.7 exemption) to pool participants.
June 26
Distribute audited financial statements to private fund investors that have invested in fund of funds.
June 30
SEC deadline to file Form CRS, through IARD if necessary.
Variable
Distribute copies of K-1 to fund investors.
Periodic FIlings
Form D and Blue Sky filings should be current.
*Extended deadline pursuant to COVID-19 pandemic-related relief
Please contact us with any questions or for assistance with any of the above topics. Sincerely, Karl Cole-Frieman, Bart Mallon, Lilly Palmer, David Rothschild, & Scott Kitchens
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Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive, and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP services both start-up investment managers, as well as multi-billion-dollar firms. The firm provides a full suite of legal services to the investment management community, including hedge fund, private equity fund, venture capital fund, mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please visit us at colefrieman.com.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Below is our compilation of communications that are relevant to investment managers. Please let us know if you are looking for additional information and we will strive to update this as time goes on. Stay safe and sane – CFM 4/14/20
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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act). On March 27, Congress passed the $2 Trillion CARES Act, the largest financial relief bill in history, aimed at providing financial assistance to businesses and individuals to alleviate the economic fallout caused by the COVID-19 public health crisis. A core focus of the CARES Act is $350 billion in financial aid for small businesses through federal loans under a new Small Business Administration (“SBA”) loan program called the Paycheck Protection Program (the “PPP”). Here is our post on highlights of the program in regards to financial relief for small businesses.
SEC Regulatory Relief for Funds and Investment Advisers Affected by COVID-19. The SEC announced it will provide conditional relief to investment advisers and investment funds affected by COVID-19. In particular, the SEC order grants relief for investment advisers from certain Form ADV and Form PF filing obligations. Disruptions caused by COVID-19 to transportation, access to facilities, support staff and the ability for gatherings, among other things, may prevent or delay investment advisers and investment funds from meeting regulatory obligations. As a result, registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) affected by COVID-19 can expect conditional relief regarding the filing of amendments to Form ADV and reports on Form ADV part 1A, respectively. Further, the order provides conditional relief for RIAs affected by COVID-19 in regards to delivery of amended brochures, brochure supplements or summaries of material changes to clients where the disclosures are not able to be timely delivered. Private fund advisers affected by COVID-19 can also expect relief from Form PF filing requirements. For an entity seeking reliance upon the conditional relief, the SEC order requires a statement of notification to Commission staff (promptly via email to the SEC at [email protected]) of the intention to rely upon the order and the disclosure of information in the form of a brief description by the adviser of the reasons why it could not file or deliver its Form ADV or Form PF on time. Clients and investors of the adviser must also be notified. Disclosure in regards to reliance upon the order for Form PF filings should be made promptly via email to the SEC at [email protected]. The order requires filing Form ADV and/or Form PF, as applicable, as soon as practicable, but not later than 45 days from the original deadline. The Commission and the staff are continuing to assess the impacts and will be considering further relief designed to help funds and advisers to continue operations and meet regulatory deadlines. For general questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.
CFTC Extended Deadlines Due to COVID-19. The CFTC has extended deadlines for Commodity Pool Operators (“CPOs”) in light of recent world events, most notably the COVID-19 global pandemic. The extensions only apply to CPOs which have reporting obligations, generally this means fully registered CPOs and those subject to Rule 4.7 relief. Moreover, these extensions only apply to CPOs “where compliance is anticipated to be particularly challenging or impossible because of displacement of registrant personnel from their normal business sites…in response to the COVID-19 pandemic.” The extension applies to (i) Form CPO-PQR where small and mid-size filers must file their annual Form CPO-PQR by May 15, 2020 and large filers (who were already expected to deliver the annual Form CPO-PQR) may file their Q1 2020 Form CPO-PQR by July 15, 2020; (ii) Pool annual reports under CFTC Rule 4.7(b)(3) and 4.22(c), such annual reports were originally due on April 30, 2020 but the extension allows CPOs to deliver these annual reports to the NFA and pool participants no later than 45 days after the original due date of April 30, 2020 (note: CPOs may also seek up to an additional 180 days from the end of their fiscal year to file under the “hardship” provisions of CFTC Rule 4.22(f); and (iii) Periodic account statements under Commission Regulations 4.7(b)(2) or 4.22(b), these monthly or quarterly reports for periods ending on or before April 30, 2020 may be delivered to pool participants within 45 days after the end of the reporting period. Such relief by the CFTC is not without conditions – if CPOs do indeed rely on such extensions they must: (i) Establish and maintain a sufficient supervisory system reasonably designed to supervise the activities of personnel while working from alternative or remote locations during the COVID-19 pandemic; and (ii) return to ordinary compliance with all CFTC rules covered by the relief as the COVID-19 pandemic abates. Moreover, CPOs should thoroughly document the activation and application of any relevant business continuity policy in response to COVID-19 as the matter could easily become an item of interest on future NFA exams.
Investment Management Firms May Be Considered Essential Financial Businesses Under Federal Guidance and State Orders. The Cybersecurity and Infrastructure Security Agency (CISA) lists asset management as a vital component of our nation’s critical infrastructure. As the federal risk advisor, CISA created guidance to help state and local governments ensure that employees essential to operations are able to continue working. In consideration of CISA’s guidance, whether or not investment management firms would be considered essential financial businesses may depend upon each State’s directives. Generally, the best practice for firms moving forward is to require workers to telework or work-from-home if possible, but allow supporting personnel to continue selective operations in the office in order to ensure the firm’s continued operation.Please see our post for a state-by-state analysis of the exceptions provided in each States’ executive orders regarding essential business activities in light of the COVID-19 public emergency response.
SEC Update to Form ADV and Custody Rule FAQs, Relating to “Work From Home”. Two circumstances are at the forefront of this update, where 1) advisers might otherwise be required to identify home offices as places of business on the Form ADV; and 2) advisers may inadvertently receive securities from clients at an office location at which the advisers’ personnel may not have access to mail or deliveries. In regards to the first circumstance, the SEC FAQ indicates it would not take action against advisers who do not update Item 1F of Part 1A or Section 1F of Schedule D of their Form ADVs to represent remote/home offices from which employees are working as additional offices, unless the remote office arrangement (other than one’s principal office and place of business) is unrelated to the firm’s business and continuity plan. In regards to the second circumstance, under the Custody Rule, an investment adviser that inadvertently receives client funds or securities are required to return such securities to the client within three to five business days; otherwise, such adviser may be deemed to have custody of such securities. The SEC has revised the Custody Rule such that client assets are not considered received until firm personnel are able to access the mail or deliveries. As with most conditional relief provided by the SEC in light of COVID-19, the adviser must be unable to access mail or deliveries as a result of the circumstances caused by COVID-19.
NFA Relief for Commodity Pool Operators, Relating to “Work from Home”. Commodity pool operators (“CPO”), commodity trading advisors (“CTA”), and other NFA members implementing contingencies pursuant to their business continuity plans that permit employees, including registered Associated Persons (“APs”), to work from home, will not be subject to disciplinary action relating to the requirements that firms list as a branch office on its Form 7-R any location other than the main business address and that each branch office must have a branch office manager in compliance with Rule 2-7 that requires successful completion of the Series 30, Branch Manager Examination. The relief requires that the CPO or CTA implement and clearly document alternative supervisory methods and activities, especially surrounding recordkeeping requirements.
FINRA Pandemic-Related BCP, Guidance and Regulatory Relief, Relating to Regulatory Filings, “Work from Home”, Cybersecurity, and Forms U4 and BR. Member firms experiencing complications resulting from COVID-19 should contact their Risk Monitoring Analysists or relevant FINRA department to seek extensions. FINRA may waive late fees and provide conditional relief based on the member firm’s circumstances. As discussed earlier, firms are reminded to review, revaluate, and update their BCPs in consideration of pandemic preparedness. FINRA member firms are encouraged to contact their assigned FINRA Risk Monitoring Analyst to discuss the implementation of their BCPs, as well as challenges in such implementation, including disruption of business operations. In regards to remote offices or telework arrangements, FINRA expects member firms to maintain a supervisory system that is designed to supervise the activities of each associated person working remotely. FINRA further recommends steps to reduce the risk of a cybersecurity breach, including: “(1) ensuring that virtual private networks (VPN) and other remote access systems are properly patched with available security updates; (2) checking that system entitlements are current; (3) employing the use of multi-factor authentication for associated persons who access systems remotely; and (4) reminding associated persons of cybersecurity risks through education and other exercises that promote heightened vigilance.” In regards to Form U4/Form BR, FINRA is temporarily suspending the requirements to update Form U4 information about office employment addresses for registered persons and Form BR information regarding branch office applications for any newly opened temporary office location or space-sharing arrangements. Additionally, if a member firm relocates personnel to a temporary location that is not currently registered as a branch office, the firm must provide written notification to its FINRA Risk Monitoring Analyst. The notification should indicate at minimum the office address, the names of the member firms involved, the names of registered personnel, a contact telephone number, and expected duration, if possible.
Employment Considerations for Investment Management Firms Addressing COVID-19. With the spread of COVID-19, many employers are concerned about the health and safety of their employees and evaluating the steps that should be taken in response. We recommend that managers establish policies and procedures regarding COVID-19 and to ensure that any policies and procedures are uniformly applied, to avoid the risk of employee discrimination. If any employees exhibit flu-like symptoms, employers may ask such employees if they would like to seek medical attention and may require symptomatic employees to go home without violating the American Disabilities Act. If an employee’s condition could pose a “direct threat”, i.e. a significant risk of substantial harm to the health and safety of the individual or others that cannot be eliminated or reduced by reasonable accommodation, employers may also request that an employee be tested for COVID-19. If an employee tests positive for the virus, all employees who were in close contact with such employee should be sent home for a 14-day self-monitoring period, and other employees in the same work location should be informed of their potential exposure. As a reminder, employers should always ensure the confidentiality of employee medical information. As many workplaces shift to remote working, employers should make certain that their policies address the provision and proper use of technologies necessary for remote work. Managers should be especially careful to ensure adequate controls and safeguards are in place to protect confidential or sensitive information, particularly client information. Managers with questions policies and practices to address COVID-19 should speak with their firm’s outside counsel.
California’s Attorney General Pressed to Postpone Enforcement of CCPA. On March 17, a group of over 30 trade associations and businesses sent a letter to California’s Attorney General pushing to postpone the enforcement of the California Consumer Privacy Act (“CCPA”). The CCPA, which took effect on January 1, is expected to be enforced by the Attorney General starting July 1. The group who sent the letter requested a January 1, 2021 enforcement date in order to give businesses more time to prepare for enforcement given that, given the current climate of COVID-19, many are unable to prepare for enforcement and most are in need of prioritizing other business concerns, like the well-being and health of their employees. The Attorney General’s office has not officially responded to the letter, and an advisor to the Attorney General suggested that enforcement will either continue as planned or be pushed until CCPA revisions can be finalized. The Attorney General recently released proposed revisions clarifying the service provider exemption. One such revision would allow service providers to use personal information internally to improve their services subject to certain limitations. Fund managers should prepare for enforcement of the CCPA as planned, while awaiting a formal response from the Attorney General.
SEC Temporary Final Rule 10(c) to Address Form ID Notarization Issues. In recognition of the issues caused by the COVID-19 public health crisis for entities and individuals who require access to file in EDGAR and the requisite notarization of the authorized signature on the Form ID application required by Rule 10(b) of Regulation S-T, the SEC announced a temporary rule to allow applicants for EDGAR access to upload a signed copy of the Form ID without notarization. The temporary rule requires that within 90 days of obtaining access to EDGAR, applicants must obtain notarization of the authorized signature on a copy of the completed Form ID and upload it as correspondence to their EDGAR account.
SEC’s Office of Compliance Inspections and Examinations (OCIE) Off-Site Exams via Correspondence for Information on Firms’ Business Continuity Plans (BCP). The SEC’s OCIE has begun off-site examinations through correspondence requests for responses and documents related to firms’ written Business Continuity Plans, Pandemic Continuity of Operations Plans, and/or equivalent informal plans or guidance (collectively, “BCP”). Firms are expected to provide copies or locations of their BCPs and any firm-issued policies, procedures, guidance and other information tailored to address continuity of business operations relating to pandemics and specifically COVID-19. Additionally, the OCIE asks for written responses to questions regarding what aspects of plans have been implemented, what limitations firms have faced in their abilities to operate critical systems, whether working remotely has affected oversight of third-party vendors, whether the firms are prepared to operate remotely for several weeks (e.g. 3+) or months, if required, etc. As the economic and operational pressures resulting from COVID-19 are affecting businesses and the industry at large, firms are strongly encouraged to revisit and enhance their BCPs in light of the threats posed by significant business disruptions.
SEC Guidance Relating to Federal Proxy Rules for Annual Meetings, “Virtual” Meetings, and Presentations of Shareholder Proposals. Under state law, issuers are generally required to hold annual meetings with security holders. Issuers with securities registered under Exchange Act Section 12 are required to comply with federal proxy rules when soliciting proxy authority from their shareholders in connection with the annual meeting. These federal proxy rules include the delivery of proxy material such as definitive proxy statements and proxy cards. Under the relief, the SEC takes the position that an issuer that has mailed and filed its definitive proxy materials can notify shareholders of a change in the date, time, or location of its annual meeting without mailing additional soliciting materials or amending its proxy materials if the issuer: 1) releases a press announcement of the change; 2) files the announcements as definitive additional soliciting material on EDGAR; and 3) takes all reasonable steps necessary to inform other intermediaries in the proxy process and other relevant market participants. In regards to issuers contemplating “virtual” shareholder meetings, issuers are reminded that the ability to conduct “virtual” meetings is governed by state law and the issuer’s governing documents. Issuers intending on conducting such “virtual” meetings are expected to notify its shareholders, intermediaries in the proxy process, and other market participants with clear logistical details of how shareholders can access, participate, and vote in such meetings. Lastly, the guidance encourages issuers to provide shareholder proponents or representatives with alternative means of presenting their proposals during the 2020 proxy season. To the extent such a shareholder proponent or representative cannot present a proposal due to COVID-19, the SEC would consider this to be “good cause” under Rule 14a-8(h) to exclude the proposal for any meetings held in the following two calendar years.
SEC No-Action Relief for Consolidated Audit Trail (“CAT”) Obligations. The SEC Division of Trading and Markets is providing no-action relief for small and large broker-dealers that are required to report trade and order data for all National Market System (“NMS”) securities and over-the-counter (“OTC”) equity securities. Under Section 19(b)(1) of the Securities Exchange Act of 1934, industry members of a national securities exchange or members of a national securities association (“Members”) are required to report to the CAT, a central depository that receives data on NMS securities and OTC equity securities, among other things. Prior to this relief, broker-dealers would have been required to submit member data to the CAT by April 20, 2020. This deadline has been extended to May 20, 2020. Self-regulatory organizations (“SROs”) responsible for ensuring compliance with the CAT NMS Plan will also not take disciplinary action against their members consistent with this relief. Notwithstanding the above, broker-dealers are reminded to conduct production readiness testing and certification processes 14 days prior to reporting.
Short-Selling Bans in Austria, Belgium, France, Italy, and Spain. Under EU Short Selling Regulation, the EU member states of Austria, Belgium, France, Italy, and Spain have enacted temporary short-selling bans to prevent destabilizing trading following market decline resulting from COVID-19. Each European countries’ temporary bans vary in scope, and in particular, which stocks are regulated by each ban. Generally, the scope of the bans include prohibitions on creating or increasing net short positions and involve shares, including cash and derivative short positions. Most bans do not apply to indexed financial instruments when the shares subject to the ban represent less than 20% to 50% of the composition of the index, depending on the EU member state ban. For more information in relation to each respective ban, please see the full order of the decisions for each of the following countries: Austria, Belgium, France, Italy, and Spain.
Tax Matters. In consideration of the impacts of COVID-19, many states are passing budgets, emergency COIVD-19 supplemental appropriation and extension of certain deadlines. Please see our post for an outline of certain tax deadlines in salient jurisdictions.
Amidst Extreme Volatility Managers Must Assess Material Terms in Live Trading Agreements. Given extreme market volatility, managers must assess the deal terms governing trading agreements such as ISDA master agreements, prime brokerage agreements, and others as certain provisions and triggering events may detrimentally affect hedge funds in the midst of current market conditions. Such negotiated provisions regarding force majeure, material adverse change/effect, counterparty powers, business day determinations, business disruptions, etc. and should be reviewed in light of current market conditions. In particular, for fund managers with ISDAs in place, please read this article by Dave Rothschild, a partner of CFM.
For general questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Certain tax deadlines in the following salient jurisdictions may or may not be further extended due to disruption caused by COVID-19 as of the time of this publication:
CALIFORNIA
The deadline for tax filing and payment is extended until July 15 for all individuals and business entities for the following: 2019 tax returns; 2019 tax return payments; 2020 1st and 2nd quarter estimate payments; 2020 LLC taxes and fees; and 2020 non-wage withholding payments.
Payroll Tax: Employers may request up to a 60-day extension to file their state payroll reports and/or deposit payroll taxes without penalty or interest by following the instructions of the Employee Development Department (EDD).
San Francisco
Businesses with less than $10 million in gross receipts may defer their first quarter business taxes (which under normal circumstances must be pre-paid by April 30th) until February 2021. The deferral is applicable to gross receipts tax, payroll expense tax, commercial rents tax and homelessness gross receipts tax.
No interest payments, fees or fines will accrue as a result of the deferral. Further details are available in the announcement from the Office of the Mayor.
No relief has been provided with respect to property tax.
Illinois has yet to announce an extension of
deadlines for tax filings and payments as of the date of this publication.
NEW YORK
On March 16, 2020, the New York State Tax
Department announced that it had not extended the deadline to file personal
income tax or other tax returns. New
York has yet to announce an extension of deadlines for tax filings and payments
as of the date of this publication.
New York has waived fines for businesses that
have missed the sales tax deadline of March 20, 2020. There is no waiver of accrued interest.
New York City
The city is in the process of establishing the Small Business Continuity Fund which intends to provide financing to businesses demonstrating at least a 25% decrease in revenue caused by COVID-19.
For general questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
Investment Management Firms May Be Considered Essential Financial Businesses Under Federal Guidance and State Orders.
The Cybersecurity and Infrastructure Security Agency (CISA) lists asset management as a vital component of our nation’s critical infrastructure. As the federal risk advisor, CISA created guidance to help state and local governments ensure that employees essential to operations are able to continue working. In consideration of CISA’s guidance, whether investment management firms would be considered essential financial businesses may depend upon each State’s directives. Generally, the best practice for firms moving forward is to require workers to telework or work-from-home if possible, but allow supporting personnel to continue selective operations in the office if necessary to ensure the firm’s continued operation.
CALIFORNIA
California Executive Order N-33-20 orders “all individuals living in the State of California to stay at home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors” as outlined by CISA. As discussed earlier, asset managers are included under CISA’s guidance and should be permitted to allow supporting personnel to continue operations in their California offices.
CONNECTICUT
Connecticut Executive Order No.7H orders that “non-essential businesses or not-for profit entities shall reduce their in-person workforces at any workplace locations by 100% not later than March 23, 2020 at 8:00 p.m. Any essential business or entity providing essential goods, services or functions shall not be subject to these in-person restrictions.” The order defines “essential businesses” as those that, “include, but not be limited to, the 16 critical infrastructure sectors as defined by the Department of Homeland Security” and as outlined by CISA. Asset managers are included under CISA’s guidance and should be permitted to allow supporting personnel to continue operations in their Connecticut offices.
DELAWARE
Delaware Fourth Modification of the Declaration of a State of Emergency defines “essential businesses” as those that employ or utilize workers in financial services who support financial operations, such as those engaged in the selling, trading, or marketing of securities, those engaged in giving advice on investment portfolios, and those staffing data and security operations centers.” Under this definition, asset managers should be permitted to allow personnel to continue operations in their Delaware offices.
ILLINOIS
Illinois Executive Order 2020-10 orders that “all Essential Businesses and Operations are encouraged to remain open. To the greatest extent feasible, Essential Businesses and Operations shall comply with Social Distancing Requirements as defined in this Executive Order, including by maintaining six-foot social distancing for both employees and members of the public at all times.” Under the order, Essential Businesses are defined as including financial institutions. Accordingly, it is reasonable to take the position that asset managers should be permitted to allow personnel to continue operations in their Illinois offices.
NEW JERSEY:
New Jersey Executive Order No. 107 allows flexibility for businesses with employees that are unable to work-from-home or perform telework. In such situations, the order requires businesses to use its best efforts to allow the minimum number of workers necessary to ensure that essential operations can continue. Accordingly, it is reasonable to conclude that asset managers have the discretion to decide which, if any, personnel can continue selective operations in their New Jersey offices in order to ensure the firm’s continued operations.
NEW YORK
New York Executive Order No. 202.6 orders that employers “reduce the in-person workforce at any work locations by 100%…” with exception to “an entity providing essential services or functions.” In a release expanding on the definition of “Essential Businesses” for the purposes of Executive Order 202.6, such essential financial institutions include “services related to financial markets.” Accordingly, it is reasonable to take the position that asset managers should be permitted to allow personnel to continue operations in their New York offices.
For general questions or concerns related to impacts of coronavirus on the operations or compliance of funds and advisers, please contact us.
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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon is a boutique law firm focused on providing institutional quality legal services to the investment management industry. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.
