'40 Act Compliance CONSULTING

Whether or not your firm is required to register with the SEC or the state depends on whether the firm meets the definition of "investment adviser." Most private fund managers provide advice with respect to securities and would, therefore, qualify. The form provides certain assets under management thresholds for state versus SEC registration, calculated on a gross basis. There are two parts to the registration: Part I is primarily used by SEC for risk-assessment purposes and organized in a box-checking and fill-in-the-blank style. However, Schedule D provides the registrant an opportunity to disclose, in summary style, any explanatory or corrective information relative to the answers provided in the form, past or present. In addition, Section 7.(B).1 of Schedule D requires  an adviser to consider whether its special purpose vehicle is a private fund or a subsidiary holding assets of a private fund (see IM Guidance Update). Certain exceptions apply based on asset levels, characterization of assets, and whether advisory services are provided at the subsidiary level. Part 2 (A & B) provides additional disclosure about the firm and its investment strategy, risks, trading and other operational practices, and conflicts of interest in a narrative form that must be delivered to prospective clients before or at the time of engagement with the firm and annually thereafter. Part 2B supplements Part 2A with information on each advisory associate that provides investment advice to the firm's clients. Material amendments to the firm's registration on Form ADV must be made promptly. Effective Oct 1, 2017, amendments to the form impose additional disclosure requirements on advisers who manage separate accounts and streamlines registration for private fund advisers operating as a single advisory business. In addition, advisers will be required to disclose information related to the adviser's internet presence, physical office locations, outsourced compliance services. Other technical changes apply. Finally, the amendments impose additional record keeping requirements related to calculated returns. The SEC will likely review each part of Form ADV, past and current. The firm's records should include documentation on calculations related to assets under management and number of client accounts, among other quantifiable data. 

ADVISORY AGREEMENTS, PPMs & OTHER CONTRACTUAL ARRANGEMENTS 

Section 205 of the Investment Advisers Act requires a registered adviser or adviser required to register with the SEC to include in its advisory contracts certain provisions and prohibitions (with certain exceptions) related to fees, assignment of the contract, notifications of partnership changes, hedge and indemnification clauses, and termination penalties. Section 206 of Investment Advisers Act imposes various anti-fraud provisions and disclosure requirements on an adviser regardless of whether the adviser is required to be registered under Section 203. The SEC can bring enforcement action under Section 206 without proof that an adviser intended to commit fraud against its client. The SEC need only show that an adviser's neglect to disclose material information operated as a fraud in breach of the adviser's fiduciary duty to its client. Firms must take great care to disclose in their offering documents all material facts pertaining to the services and fees charged to clients and other operational matters relevant to the management of client assets. In addition, there must  be clear evidence of a symbiotic relationship between the adviser's operational environment and controls, its disclosures to clients, and its fees and services. A firm's first line of defense against enforcement action of fraud is a vigilant compliance program that periodically tests against the firm's disclosures and contractual arrangements with clients and service providers.