Financial Services Practice
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
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.
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
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
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
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
or rules, or non-U.S. or state law requirements. Please note that the following list is not intended
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.
Requirements for SEC-Registered Investment Advisers
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
www.winston.com 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.
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
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
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
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
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
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”
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
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