Financial Services Practice


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Financial Services Practice

  1. 1. Financial Services Practice December 2008 2008 Reminder of Annual Requirements for Investment Managers As 2008 comes to a close, many fund managers and other investment managers are busy navigating through continued market turmoil and addressing various challenges to their businesses as a result. Nonetheless, at this time, we thought it would be helpful to remind our clients that manage separate accounts or private funds (“Investment Managers”) of certain obligations that may be applicable to them under various U.S. federal and state laws and CHARLOTTE regulations. In particular, now more than ever in these uncertain times, it is important for all professional asset managers to confirm their compliance with all applicable requirements. CHICAGO Compliance with certain of these obligations is required within specific time periods after the end GENEVA of the calendar year or the Investment Manager’s fiscal year. Other obligations are required on an annual or periodic basis. Certain other obligations may be characterized as a best practice to HONG KONG be undertaken on a periodic basis, as opposed to a strict legal requirement. Thus, the end of the year or the beginning of the new year is a logical time to review and satisfy many of these LONDON obligations. LOS ANGELES What follows below is a summary of the primary annual or periodic compliance-related requirements or best practice obligations for many Investment Managers. Please note that this MOSCOW summary is not intended to provide a complete review of an Investment Manager’s obligations relating to compliance with applicable tax, partnership, limited liability, trust or corporate laws NEW YORK or rules, or non-U.S. or state law requirements. Please note that the following list is not intended NEWARK to be exhaustive, or to provide a detailed statement of the specifics of the particular obligation. The following also does not necessarily include all annual or periodic obligations applicable to PARIS all Investment Managers. Similarly, many of the obligations described below may not be applicable to all Investment Managers. SAN FRANCISCO Requirements for SEC-Registered Investment Advisers WASHINGTON, D.C. Update your Form ADV. Investment Managers that are registered with the Securities and Exchange Commission (“SEC”) as investment advisers under the Investment Advisers Act of 1940, as amended (“Advisers Act”) (such managers, “Registered Managers”) must update their registration forms (i.e., Form ADV Part 1 and Part II) within 90 days of the Registered Manager’s fiscal year end. The update of Part 1 is done on the SEC’s electronic IARD system, while Part II is not filed with the SEC, but is required to be maintained in the Registered Manager’s files. In addition, a Registered Manager must update its Form ADV promptly if certain information becomes inaccurate. Please refer to the General Instructions to the form in order to determine whether the form should be amended promptly. State registered Investment Managers also may be subject to similar requirements.
  2. 2. 2 Satisfy the “brochure” rule. As required by the Advisers Act, Registered Managers must provide, or offer to provide, their private fund investors and separate account clients with a copy of their updated Form ADV Part II, or the equivalent “brochure” statement in lieu of Part II, on an annual basis. Review your required compliance procedures and code of ethics. Under Advisers Act rules, Registered Managers must review their compliance policies and procedures no less than annually to assess their effectiveness. Written evidence of these reviews should be retained. In general, the review should encompass the following areas: General review. According to the SEC, the review should consider any compliance matters that arose during the previous year, any changes in the business activities of the Registered Manager or its affiliates, and any changes in the Advisers Act or its rules that might suggest a need to revise the Registered Manager’s policies and procedures. Although SEC rules require only annual reviews, Registered Managers also should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and legal or regulatory developments. Code of ethics. Registered Managers must review the adequacy of their code of ethics annually and assess the effectiveness of its implementation. In addition, Registered Managers should determine whether they need to provide any ethics-related training of employees, or enhancements to their code in light of current business practices. Business continuity/disaster recovery plans. Registered Managers should review and “stress-test” their required business continuity/disaster recovery plans no less than annually, and make any necessary adjustments. Promulgating and reviewing a business continuity/disaster recovery plan also is recommended for all Investment Managers, whether or not registered. Deliver your fund’s audited financial statements. Under the Advisers Act custody rules, Registered Managers that manage private funds and that are deemed to have custody of client assets (which generally will be most fund managers) must provide audited financial statements of their fund, prepared in accordance with U.S. generally accepted accounting principles, to the fund’s investors within 120 days of the fund’s fiscal year-end, or 180 days for a fund-of-funds, to avoid complying with the full requirements of the custody rules. Confirm your state notice filings/investment adviser registration renewals. Registered Managers should review their current advisory activities in the various states in which they conduct business and confirm that all applicable state notice filings for the firm are made on IARD. Registered Managers should also confirm whether any of its personnel need to be registered as “investment adviser representatives” in one or more states and, if so, register those persons or renew their registrations with the applicable states, as needed. Fund your IARD account. Registered Managers should confirm that their IARD electronic accounts are adequately funded so as only to cover payment of all applicable registration renewal fees with both the SEC and with any states, for the year. Requirements for Registered CPOs and CTAs Review and update your NFA registration. Registered commodity pool operators (“CPO”) or commodity trading advisors (“CTA”) must update their registration information via the National Futures Association’s (“NFA”) electronic ORS system, and pay their annual NFA membership dues on or before the anniversary date that the CPO’s or CTA’s registration became effective. Failure to complete the review within 30 days following the date established by the NFA will be deemed to be a request for withdrawal from registration. Complete your NFA self-examination questionnaire. Under NFA rules, registered CPOs or CTAs must complete the NFA’s “self-examination questionnaire” on an annual basis. The completed questionnaire is not filed with the NFA. Instead, Investment Managers must retain the questionnaire for their records. Investment Managers that have branch offices should complete a separate questionnaire for each branch office. As part of this review, CPOs/CTAs should review any established compliance policies and procedures, and confirm whether amendments to those procedures, or additional procedures, may be warranted in light of the CPO’s/CTA’s current business. File and distribute your commodity pool certified annual reports. All registered CPOs that manage non-exempt pools and Commodity Futures Trading Commission (“CFTC”) Rule 4.7-exempt pools must file certified annual reports for their pools
  3. 3. 3 with the NFA within 90 days of the pool’s fiscal year-end, or 120 days for a fund-of-funds. The certified reports must be filed electronically through the NFA’s EasyFile system. If it is not possible to comply with this deadline, the Investment Manager must apply to the NFA for additional time to file the certified reports within 90 days after the date on which the certified report was otherwise required to be filed. The Investment Manager also must distribute the certified reports to the pool’s participants within the above 90-day/120-day deadlines. As a reminder, registered CPOs that manage Rule 4.7-exempt pools may be able to avoid the above filing requirements as well as registration as a CPO altogether, under broader exemptions now available under CFTC Rule 4.13. CPOs may wish to review Rule 4.13 to determine if this exemption is available to them. Comply with your NFA-required ethics training policy. Under the NFA’s ethics training rules, registered CPOs or CTAs should periodically consider whether additional ethics-related training of its registered “associated persons” may be needed, in light of the Investment Manager’s required ethics training policies and procedures. Review your NFA-required business continuity/disaster recovery plan. Under the NFA’s rules, registered CPOs or CTAs should periodically “stress test” their required business continuity/disaster recovery plans and make any necessary adjustments. Other Requirements or Best Practices for All Investment Managers Annual privacy notice. Under SEC Regulation S-P and Part 160 of the CFTC Regulations, Investment Managers must provide investors or clients who are natural persons a copy of their privacy policy on an annual basis, even if there are no changes to the privacy policy. In addition, state-registered Investment Managers or Investment Managers who are not registered with the SEC are subject to the Federal Trade Commission privacy requirements and also may be subject to state privacy laws that impose additional requirements. Review and amend your offshore deferred compensation agreements. Virtually all deferred compensation agreements require amendments due to changes in the law under Section 409A of the Internal Revenue Code of 1986, as amended (“Code”) (part of the American Jobs Creation Act of 2004), which set forth rules applicable to the timing of deferral elections and payments of deferred compensation. More recently, as part of the Emergency Economic Stabilization Act of 2008 signed into law in October 2008, Congress effectively outlawed the ability of Investment Managers to defer compensation earned from their offshore funds beginning in 2009. In addition, among other changes, the law provides that compensation that was previously deferred may not be deferred beyond 2017. Accordingly, Investment Managers that have existing deferred compensation arrangements with their offshore funds should review those arrangements with their advisors and consider whether amendments to those arrangements (or amended elections) are desirable as a result of this new law. Any changes that may be advisable as a result of this new law should be addressed by December 31, 2008 (which, as a reminder, is also the deadline for any changes required by Code Section 409A). Accordingly, if you have not already done so, please contact us as soon as possible to confirm whether changes to your plan should be made. For more information, please refer to our October 2008 Client Briefing, “New Law Eliminates Fund Managers’ Future Offshore Fee Deferrals.” Please click on the link below if you wish to view the briefing. Confirm your ongoing new issues compliance. Under Financial Industry Regulatory Authority (“FINRA”) rules applicable to broker-dealers that are members of FINRA, Investment Managers that purchase “new issue” IPOs for a fund or separately managed client account from such broker-dealers must obtain written representations every 12 months from the account’s beneficial owners confirming their continued eligibility to participate in new issues. This annual representation may be obtained through “negative consent” letters. Review your anti-money-laundering and OFAC programs. In October 2008, FinCEN withdrew its proposed anti-money- laundering regulations for unregistered investment companies, certain investment advisers and CTAs. As a result, most Investment Managers are not required to establish a written anti-money-laundering program under the Bank Secrecy Act, as amended by the USA PATRIOT Act (“BSA”). Nonetheless, the SEC has required Registered Managers to have such policies in place under its examination authority. Also, many counterparties, broker-dealers, and clients/investors have required Investment Managers to maintain such policies. Thus, while not being imposed as a requirement by FinCEN, prudent business practice will dictate that most Investment Managers who previously have instituted anti-money-laundering programs pursuant
  4. 4. 4 to these proposed regulations retain such programs. In those situations, the Investment Manager should review its program, including its anti-money-laundering risk assessment, on an annual basis to determine whether the program is reasonably designed to ensure compliance with the BSA given the business, customer base, and geographic footprint of the Investment Manager. In addition, the Investment Manager should review its compliance program to ensure compliance with the economic sanctions programs administered by OFAC, which are not affected by the recent FinCEN decision to withdraw its rules proposal. The foregoing reviews should be independent and conducted by an outside professional, internal audit, or an appropriate officer or employee of the Investment Manager with knowledge of the BSA and the economic sanctions programs administered by OFAC. Amend your Schedules 13G or 13D. Investment Managers whose client or proprietary accounts, separately or in aggregate, are beneficial owners of five percent or more of a registered voting equity security, and who have reported these positions on Schedule 13G, must update these filings annually within 45 days of the end of the calendar year, unless there is no change to any of the information reported in the previous filing (except the holder’s percentage ownership due solely to a change in the number of outstanding shares). This is in addition to any amendments that may have been required during the calendar year. Investment Managers reporting on Schedule 13D are required to amend their filings “promptly” upon the occurrence of any “material changes,” including (but not limited to) any increase or decrease of one percent or more in their holdings. Investment Managers whose client or proprietary accounts are beneficial owners of ten percent or more of a registered voting equity security also must check to determine whether they are subject to any reporting obligations, or potential “short-swing” profit liability or other restrictions, under Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). File your Form 13F. All “institutional investment managers,” whether or not registered as investment advisers, must file a Form 13F with the SEC if they exercise investment discretion with respect to $100 million or more in securities subject to Section 13(f) of the Exchange Act (generally, exchange-traded securities, shares of closed-end investment companies, and certain convertible debt securities), disclosing certain information regarding their holdings. The first filing must occur within 45 days after the end of a calendar year during which the Investment Manager reaches the $100 million filing threshold (calculated as of the last trading day of any month in that year), and within 45 days of the end of each calendar quarter thereafter, for so long as the Investment Manager continues to meet the $100 million filing threshold (again calculated as of the last trading day of any month during the year). File your Form SH. In order to address the SEC’s continuing concern over certain short sale practices, in October 2008 the SEC, following several emergency orders, adopted an interim final temporary rule that requires all Investment Managers who are required to file Form 13F to also separately file with the SEC, on a weekly basis, a list of their daily short sales and short positions in 13F securities on new Form SH. This rule, which expires August 1, 2009, requires Investment Managers to file Form SH no later than the last business day of each calendar week following the week in which they had reportable short sales or positions. Confirm your short sale compliance. In addition, in October 2008 the SEC passed an interim final temporary rule providing for a hard “T+3” delivery requirement for short and long sales, subject to various exceptions. Investment Managers should confirm their continued compliance with these new rules, along with other related, new trading rules involving short sales. For more information regarding Form SH and the new short sale trading rules, please refer to our October 2008 Client Briefing, “SEC Adopts Rules Relating to Short Selling.” Please click on the link below if you wish to view the briefing. Review your fund offering materials. Except for commodity pool disclosure documents that are filed with the NFA, fund offering materials do not automatically “expire” after a certain time period. However, as a general securities law disclosure matter, and for purposes of federal and state anti-fraud laws, Investment Managers must continually ensure that their fund offering materials are kept up to date and contain all material disclosures that may be required in order for the fund investor to be able to make an informed investment decision. Accordingly, now may be an appropriate time for Investment Managers to review their offering materials and confirm whether or not any updates or amendments are needed. In considering whether changes to offering materials may be needed, Investment Managers should especially take into account the impact of the recent turbulent market conditions on their funds. Among other things, Investment Managers should review the fund’s current investment objectives and strategies, valuation practices, redemption policies, and risk disclosures (including, but not limited
  5. 5. 5 to, disclosures regarding market volatility and counterparty risk), their current personnel, service provider and advisor relationships, and any relevant legal or regulatory developments. Review your compliance procedures. Even those Investment Managers that are not registered as investment advisers and therefore are not required to maintain and review formal written compliance policies and procedures should, as a best practice, review no less than annually any established policies and procedures, whether or not they are in writing, to confirm their continued efficacy in light of the Investment Manager’s current business practices and market conditions. Investment Managers that do not have written policies and procedures may wish to consider whether it makes sense to establish written procedures in light of the Investment Manager’s current business. Review your state blue sky filings. Many state securities “blue-sky” filings expire on a periodic basis and must be renewed. Consequently, now may be an appropriate time for an Investment Manager to review the blue-sky filings for its funds and determine whether any updated filings, or additional filings, are necessary. In this regard, Investment Managers should take into account recent changes to Form D, including the imposition of mandatory electronic filing. Review your liability insurance needs. As a general matter, Investment Managers are not required to purchase management liability insurance, such as directors and officers liability coverage, fiduciary liability coverage, or errors and omissions liability coverage. However, in this age of apparently increasing investor lawsuits and continued regulatory scrutiny of hedge funds, it may be prudent for Investment Managers that do not have such coverage to periodically assess whether management liability insurance makes sense for them in light of their current business and, if so, what type of coverage and in what amounts. Investment Managers that do have coverage should consider reviewing the adequacy of such coverage. ERISA-Related Requirements or Best Practices Finally, there have been a number of developments this year under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and related Department of Labor (“DOL”) regulations, that are important to Investment Managers that accept clients and investors who are ERISA plans. These developments and other important ongoing ERISA compliance considerations are summarized below. Please contact us should you have any questions regarding compliance with any of the following requirements or their applicability to your specific situation. Update and confirm your ongoing ERISA-related compliance generally. As a best practice, Investment Managers that manage “plan assets” should review their existing trading practices and relationships to confirm that they are consistent with current requirements under ERISA. Significant changes in trading practices and policies should also be reviewed for ERISA compliance. Investment Managers also may wish to reconfirm whether their fund-of-funds or other fund investors are “benefit plan investors” for purposes of reconfirming their funds’ compliance with the 25 percent “significant participation” exemption under ERISA. This reconfirmation may be obtained through “negative consent” letters. Review your cross-trading policies and procedures. In 2008, the DOL finalized its regulations on the statutory prohibited transaction exemption for cross-trading. Compliance with the statutory exemption is conditioned upon establishment of specific policies and procedures and advance notice to ERISA clients/investors of these policies and procedures. In the case of ERISA clients with separately managed accounts, actual client consent or revisions to investment management agreements may be required. Review your proxy voting policies and procedures for compliance with recent DOL Interpretive Bulletin. The DOL’s recent Interpretive Bulletin reiterates that proxies may be voted based only on factors that relate to the economic value of the plan’s investment and not based on “unrelated objectives.” The Bulletin also makes clear that a fiduciary may decide not to vote proxies or exercise other shareholder rights when the cost to do so would outweigh the benefit to the plan. Review compliance with ERISA’s fidelity bond requirements, if applicable. In a Field Assistance Bulletin issued in late November 2008, the DOL issued further clarification on ERISA’s fidelity bond requirements. For example, the DOL clarified that an ERISA client/investor will not be subject to the higher $1 million fidelity bond required when a plan invests in company stock if the plan’s only investment in company stock is through commingled funds. As a result, before obtaining the higher bond amount for ERISA clients/investors, Investment Managers with ERISA clients/investors may wish to confirm whether the higher bonding amount is actually required. In addition, the DOL also clarified that it is permissible to use an “omnibus”
  6. 6. 6 clause in the bond, rather than individually identifying each plan, as long as it can be confirmed that each plan is appropriately bonded. The Bulletin also clarifies how to compute the bond amount when multiple plans are covered by one bond. Prepare to address client inquiries on fees and expenses in the coming year. Generally. Throughout 2008, the DOL has been active in proposing additional fee and expense disclosures, both in the form of proposed regulations and in new requirements for annual reporting by plans. The new requirements are likely to affect disclosures applicable to plan investments in certain commingled investment funds. The new provisions address both annual reporting requirements and point-of-sale fee and expense disclosure and target both direct and indirect compensation (such as fees that a plan service provider may receive from parties other than the plan) and conflicts of interest. The new annual reporting requirements will apply in 2009 for ERISA plans with 12/31 fiscal year-ends, and the point-of-sale disclosure regulations could be finalized and become effective in the very near term. For sponsors of collective trusts and managers of 401(k) and other defined contribution plan assets. Be aware that the DOL has also proposed regulations requiring uniform fee and expense reporting and disclosures which are, to a large degree, based on investment company reporting on fees, expenses and performance. As a result, Investment Managers that manage assets for these types of clients/investors should begin to consider whether their fee and expense reporting and disclosure practices will need to be modified to comply with this initiative. For sponsors of over 25 percent hedge funds and private funds filing Form 5500 (Annual Report). If an Investment Manager has previously voluntarily filed a Form 5500 (Annual Report) for any hedge fund or private fund that is treated as ERISA- covered “plan assets” (either by committing to do so in fund disclosure documents or through specific agreements made with investors), the Investment Manager should consider whether it wishes to continue this practice in 2009, given the additional reporting obligations. Otherwise, Investment Managers should be prepared to address the changes to the Form 5500 (Annual Report) filing requirements. Form 5500 filings generally are obligations of ERISA plan investors and not required of Investment Managers except when Investment Managers agree to undertake this reporting obligation. Prepare to address client inquiries on hard-to-value assets. In 2008, a regional office of the DOL took the position, in an audit letter to a plan under examination, that ERISA’s fiduciary requirements require use of an independent third party to value hard-to-value or illiquid assets. The ERISA Working Group also has recently held hearings on hard-to-value ERISA plan assets. Given these developments, and the focus on FAS 157, Investment Managers with clients/investors should expect that such clients/investors will be reviewing investment policies, establishing or updating valuation policies, and otherwise seeking greater transparency in valuation from their Investment Managers. Review gift and gratuity policies for compliance with DOL audit guidelines. The DOL issued revised audit guidelines in August 2008 reflecting the DOL’s enforcement policy for gifts and gratuities to plan fiduciaries. They generally provide that gifts or gratuities of $250 per year or less may be deemed “insubstantial” and not a breach of fiduciary duty, provided that the gifts and gratuities did not violate any applicable policies. Importantly, these guidelines will affect not only Investment Managers of ERISA plan assets, but also ERISA clients/investors of Investment Managers. As a result of these new audit guidelines, Investment Managers can expect that ERISA clients/investors may have revised their own gift and gratuity policies over the past year. Review any investment strategies focused on economically targeted investments applicable to ERISA clients. Investment Managers who manage plan assets using strategies that involve “economically targeted investments” (“ETI”) (i.e., investments selected for the economic benefits they create apart from their investment return to the plan) should review the DOL’s 2008 Interpretative Bulletin on ETI. The Bulletin identifies only very limited circumstances under which an ERISA fiduciary may consider factors other than the economic interest of the plan. In order to make an ETI, the fiduciary must conclude that the ETI is “economically indistinguishable” from alternative investments and “truly equal” based on both qualitative and quantitative considerations. Review effect of downgraded or defaulted asset-backed securities on ERISA clients. Investment Managers invested in such securities on behalf of ERISA clients/investors should evaluate whether the default, downgrade, or other restructuring may result in a recharacterization of debt interests as equity interests for ERISA compliance purposes and generally consider
  7. 7. 7 whether such securities warrant additional ERISA review. Such a recharacterization may cause prohibited transaction exemptions to become unavailable or otherwise create compliance issues for ERISA clients/investors. Review developments in the law applicable to governmental plan clients. Investment Managers who manage the assets of governmental plans (which are not subject to ERISA) should review developments in the past year in the law applicable to those plans that may affect plan investments. States and municipalities continue to adopt laws that limit or restrict permissible investments by public pension plans, such as laws that limit investment in certain countries or impose limits on certain categories of investments. In addition, portfolio declines may require rebalancing from alternative or private equity investments to the extent governmental plan-enabling laws limit these types of investments to a specified percentage of the plan’s overall assets. If you have any questions regarding the matters discussed in this Client Briefing or would like assistance in complying with any of the above requirements, please contact any of the Winston & Strawn professionals listed below: Chicago (312) 558-5600 Milton K. Buckingham (312) 558-6212 Christine A. Edwards (312) 558-5571 Margaret Lomenzo Frey (312) 558-7945 Basil V. Godellas (312) 558-7237 Marla J. Kreindler (312) 558-5232 Andrew J. McDonough (312) 558-6079 Wesley G. Nissen (312) 558-5804 Michael M. Philipp (312) 558-5905 Julie K. Stapel (312) 558-5531 Mark S. Weisberg (312) 558-8070 New York (212) 294-6700 Robert A. Boresta (212) 294-4711 Edmund S. Cohen (212) 294-2634 Eric L. Cohen (212) 294-3540 Deborah J. Goldstein (212) 294-6847 Edward J. Johnsen (212) 294-4741 Washington (202) 282-5000 Michael A. Mancusi (202) 282-5729 Paul S. Pilecki (202) 282-5730 San Francisco (415) 591-1000 William L. Harvey (415) 591-1425 Paris +33 (0)1 53 64 82 82 Jérôme Herbet +33 (0)1 53 64 82 04 London +44 (0)20 7105 000 Zoe J. Ashcroft +44 (0)20 7105 0025 These materials have been prepared by Winston & Strawn LLP for informational purposes only. These materials do not constitute legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Receipt of this information does not create an attorney-client relationship. No reproduction or redistribution without written permission of Winston & Strawn LLP. © 2008 Winston & Strawn LLP.