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  1. 1. LOWENSTEIN SANDLER PC CLIENT ALERT INVESTMENT MANAGEMENT Practice Group AT T O R N E Y A D V E R T I S I N G COMPLIANCE ISSUES January 2010 To Our Clients and Friends: Act of 1940 (the “Advisers Act”), and require private fund advisers to As 2009 has come to a close and 2010 has begun, it is an appropriate register with the Securities and time to review certain of the past year’s important legal developments Exchange Commission (“SEC”) and that may affect your business and to remind you of issues to assure comply with periodic reporting your compliance with applicable law, regulation and best practices. As a direct result of the recent financial crisis, state and federal requirements. The scope of this regulatory bodies have proposed a wide range of new legislation that regulation remains unclear - both the would have a significant effect on hedge funds, private equity funds, House and Senate have included an federally registered investment advisers, unregistered investment exemption for venture capital funds, advisers and broker-dealers. This summary will address significant and the Senate has retained an legislative developments over the past year, and review yearly exemption for private equity funds. compliance obligations for private investment funds and registered However, registration of at least investment advisers. For further guidance regarding any of the some percentage of pooled information discussed below, please contact a member of the investment advisers appears likely. Lowenstein Sandler Investment Management Group. 2.Disclosure of incentive-based compensation arrangements - SIGNIFICANT reform proposals that have been the new legislation would require DEVELOPMENTS IN 2009 circulated in the House since the “covered financial institutions,” Proposed Legislation beginning of the recent financial crisis. which includes broker-dealers and A similar proposal is currently under Proposed Financial investment advisers with assets consideration in the Senate. Several Regulation under management of $1 billion or provisions found in both bills will have more, to disclose details of their Since the beginning of the recent a direct and substantial effect on incentive-based compensation financial crisis, both houses of Congress hedge funds, private equity funds, and arrangements to federal regulators. have considered a series of sweeping other pooled investment advisers. financial regulatory reform proposals. Certain key aspects of the new 3.Establishment of “too-big-to-fail” On December 11, 2009, the House of legislation are as follows: regulations for the banking Representatives passed H.R. 4173, a 1 Registration of private fund . industry - the new bill would establish comprehensive financial regulatory advisers - the new bill would end the a new federal agency, the Financial reform bill entitled the “Wall Street exemption from federal registration Reform and Consumer Protection Act for investment advisers with fewer of 2009.” The House bill is a composite than fifteen clients found in Section of several of the earlier regulatory 203(b)(3) of the Investment Advisers
  2. 2. Investment Management Practice Group LOWENSTEIN SANDLER PC CLIENT ALERT Services Oversight Council, which SEC, as well as to investment advisers In addition to prohibiting certain would have the authority to identify to “covered investment pools,” which courses of conduct, the Proposed Rule companies that could pose a threat to would include most hedge funds, contains proposed amendments to the the financial stability of the economy, private equity funds, and venture record-keeping requirements of Rule and work with other federal agencies capital funds, as well as registered 204-2 under the Advisers Act. The to develop stricter prudential investment companies. amendments would require advisers standards such as risk-based capital who are registered (or required to be The Proposed Rule seeks to address registered) with the SEC and either requirements, recommended leverage perceived harms of “pay to play” seeks or currently has government limits, and liquidity requirements. practices by (i) prohibiting a covered clients or provides advisory services to 4.Increased regulation of certain investment adviser from providing a “covered investment pool” in which derivatives - the new legislation will advisory services to a government a government entity invests or is impose several new restrictions on the entity for compensation for a period of solicited to invest, to maintain certain derivatives trading market, including two years after such adviser, or its records relating to contributions made mandatory clearing of swaps, covered associates, makes a by such investment adviser or its reporting of swaps that are unable contribution to certain government covered associates. A link to the to be cleared, reservation of capital officials of such government entity; August 11, 2009 Lowenstein Sandler and margin by swap dealers and and (ii) prohibiting a covered client alert analyzing the Proposed major participants, and segregation investment adviser and its covered Rule is available here. of collateral posted to swap dealers. associates from providing payment to 5.General investor protection any third party for soliciting advisory Offshore Fund Tax measures - the new bill would business from any government entity Legislation increase individual investor on behalf of such investment adviser. Both houses of Congress have protection by granting the SEC The Proposed Rule also prohibits a proposed legislation that seeks to limit authority to prohibit mandatory covered investment adviser and its the use of foreign tax havens. Senate arbitration clauses in brokerage covered associates from soliciting from Bill 506, proposed in March 2009 and contracts, implementing a uniform others, or coordinating, contributions known as the “Stop Tax Haven Abuse fiduciary duty on broker-dealers and to any government official of a Act,” would tax as domestic investment advisers, and establishing government entity, where such corporations all foreign corporations, whistleblower protections. investment adviser is providing or including offshore investment funds, seeking to provide advisory services to that are managed and controlled in A link to the January 5, 2010 Lowenstein such government entity. the United States and are either Sandler client alert analyzing the new regularly traded on an established bill is available here. The Proposed Rule contains several securities market or hold gross assets exemptions for cases in which the SEC of $450 million or more. Pay-to-Play Regulation believes the risk of pay-to-play practices Most significantly, the Stop Tax On August 3, 2009, the SEC released is low, such as allowing covered Haven Abuse Act would: a proposed rule designed to address associates to make contributions of up to $250 to political candidates for • treat certain foreign corporations certain “pay to play” practices of managed and controlled primarily investment advisers seeking to manage whom they are entitled to vote. Also, in the United States as funds of state or local government a covered adviser may petition the SEC domestic corporations; entities (the “Proposed Rule”). The for an exemption from the two-year Proposed Rule would apply to any ban on compensation; the SEC will • establish legal presumptions against investment adviser registered (or address these petitions on a facts-and- the validity of transactions involving required to be registered) with the circumstances basis. offshore secrecy jurisdictions 2
  3. 3. • increase the period for Internal Most significantly, the Foreign dividend equivalent payments Revenue Service (“IRS”) review of Account Tax Compliance Act of received by foreign individuals. tax returns involving offshore 2009 would: A link to the October/November 2009 secrecy jurisdictions; • require foreign financial institutions Lowenstein Sandler client update (which is defined broadly to include • require tax withholding agents and newsletter, which analyzes the Foreign most foreign hedge funds and private financial institutions to report certain Account Tax Compliance Act of 2009, equity funds) to determine which of information about beneficial owners is available here. its equity holders are United States of foreign-owned financial accounts persons and to report this information On December 9, 2009, the House of and accounts established in offshore to the IRS or otherwise be subject to Representatives passed H.R. 4213, the secrecy jurisdictions; and a 30% withholding tax on its U.S.- “Tax Extenders Act of 2009.” Title V • disallow tax advisor opinions source income and the proceeds of of the Tax Extenders Act is a revised validating transactions in offshore certain sales and other dispositions; version of the proposals set forth in the Foreign Account Tax Compliance secrecy jurisdictions. • deny a tax deduction for interest on Act of 2009. non-registered bonds issued outside Under the proposed act, an offshore the United States; It is unclear whether any of these bills will fund for which investment decisions receive serious consideration in 2010. are made in the United States is • require any individual who holds more generally considered to be managed than $50,000 in a depository or Carried Interest and controlled in the United States so custodial account maintained by a Legislation that the act, if adopted, would cause foreign financial institution to report many offshore investment funds to be on such accounts; On December 9, 2009, the House of subject to U.S. corporate income tax Representatives passed H.R. 4213, the • impose an enhanced tax penalty for “Tax Extenders Act of 2009.” Title VI on their net income. The Stop Tax underpayments attributable to of the Tax Extenders Act would tax Haven Abuse Act also would require undisclosed foreign financial assets; income and gain from carried interests funds to establish anti-money in certain investment services laundering programs and report • extend the limitation period for partnerships as ordinary income. The suspicious transactions, and would assessment of underpayments with carried interest proposal in the Tax close the “offshore dividend tax respect to assets held outside the Extenders Act is the same as the loophole” by requiring withholding United States; proposals in prior bills (H.R. 3996 – tax on payments of certain dividend • require certain tax advisors who The Temporary Tax Relief Act of 2007 equivalents and substitute dividend assist U.S. individuals in acquiring a and H.R. 6275 – The Alternative amounts to non-U.S. investors. A link direct or indirect interest in a foreign Minimum Tax Relief Act of 2008). to the June/July 2009 Lowenstein entity to file an information return Sandler client update newsletter, The Tax Extenders Act, if enacted, disclosing the identity of the foreign which analyzes the Stop Tax Haven would overhaul the tax treatment of entity and the individual investors; Abuse Act, is available here. carried interests by treating as ordinary • require shareholders of a passive income (i) income received from an More recently, in October, both foreign investment company to file “investment services partnership houses of Congress considered informational returns; interest”; and (ii) gain on the versions of the “Foreign Account Tax disposition of an investment services • enhance tax rules and penalties Compliance Act of 2009,” which partnership interest, except to the relating to foreign trusts with U.S. seeks to revise and add reporting and extent such income or gain is beneficiaries; and other requirements relating to income attributable to a partnership interest from assets held abroad. • require withholding of tax on acquired on account of a contribution 3
  4. 4. Investment Management Practice Group LOWENSTEIN SANDLER PC CLIENT ALERT of cash or other property. Moreover, 150 million range. Within the last year, “operationally independent” from the legislation would subject such several states, including Massachusetts, such related persons. Investment ordinary income to self-employment Connecticut, and New Jersey, have advisers to pooled investment tax. The legislation would also require introduced bills in their state legislatures vehicles must still obtain a surprise that gain be recognized by a partnership that range from increasing investor examination for any non-pooled in the case of distributions of appreciated privacy rights to increasing registration investment vehicle assets unless a property by the partnership with respect requirements and regulatory standards separate exemption from such to any investment services partnership for investment advisers to the extent requirement applies; interest as if the partnership had sold the not preempted by federal law. • except for investment advisers to property at the time of the distribution. Final Legislation pooled investment vehicles subject to an annual audit by a PCAOB Unrelated Business Custody Rules registered independent public Taxable Income On December 30, 2009, the SEC issued accountant, investment advisers are H.R. 3497 was introduced in July 2009. final rules regarding amendments to required to have a reasonable belief, The legislation would allow U.S. tax- Rule 206(4)-2 under the Advisers Act formed after “due inquiry,” that exempt investors to invest in domestic relating to the custody of client assets account statements are sent by a funds without incurring unrelated by registered investment advisers. The qualified custodian directly to business income tax (“UBIT”) by amendments are designed to provide advisory clients; adding a special rule providing that additional safeguards relating to the “acquisition indebtedness” would not protection of client funds or securities. • where an adviser, or a related person of an adviser, maintains client funds include indebtedness incurred by such The most significant requirements and securities as a qualified custodian, partnership in purchasing or of the new legislation are: the investment adviser is required to carrying certain qualified securities • mandatory annual surprise examination obtain an internal control report from or commodities. of advisers by an independent public a PCAOB registered independent accountant to verify client assets public accountant (and the surprise State Regulation with exceptions for (i) investment examination summarized above must In addition to the significant increase advisers to pooled investment also be conducted by a PCAOB in the regulatory power of the federal vehicles subject to an annual audit registered independent public government contemplated by the by an independent public accountant); and above proposals, investment advisers accountant that is registered with may face increased state regulation as and subject to regular inspection by • advisers to pooled investment well in the coming year. In October the Public Company Accounting vehicles that distribute the pool’s 2009, the North American Securities Oversight Board ( the “PCAOB”) audited financial statements to Administrators Association (“NASAA”) (provided that the audited financial investors must, in addition to issued a press release calling for an statements are delivered to the pool’s obtaining an annual audit by a increase in state regulation of investors within a specified timeframe), PCAOB registered independent public investment advisers. State regulation (ii) investment advisers that have accountant, obtain a final audit of would presumably cover smaller custody solely because of their the pool’s financial statements upon investment advisers with assets under authority to deduct advisory fees liquidation of the pool and distribute management below the thresholds from client accounts, and (iii) the financial statements to pool contemplated to trigger the investment advisers that have investors promptly after the registration requirements in the custody solely as a result of their completion of the audit. Congressional financial regulatory bill, “related persons” holding client Registered advisers must comply which is expected to fall in the $100- assets, if such investment adviser is with the revised rule by March 12, 4
  5. 5. 2010, except as described below: particular, the SEC has articulated a institutions and creditors to develop • advisers required to obtain a surprise desire to increase disclosure of daily and implement written Identity Theft examination must enter into a written short sale volume and transaction Prevention Programs to detect, agreement with an independent information, and to require twice prevent, and mitigate identity theft public accountant that provides that monthly fails-to-deliver data. and other fraudulent activity in relation the first examination will take place to customer accounts. The Federal by December 31, 2010; FBAR Filing Deadline Trade Commission (“FTC”) initially A U.S. person or entity that has a mandated that businesses subject to • advisers required to obtain an internal the Red Flags Rule develop and financial interest in, or signature or control report must obtain the implement Identity Theft Programs by comparable authority over, any foreign report within six months of financial account must annually file a November 1, 2008. However, the FTC becoming subject to the Report of Foreign Bank and Financial has extended the deadline several requirement; and Accounts (“FBAR”) with the IRS if the times, most recently to June 1, 2010. • advisers must provide responses to the value of such account exceeds The Red Flags Rule applies to “financial revised Form ADV in their first annual $10,000 at any time during the year. institutions” and “creditors” that amendment after January 1, 2011. The IRS has taken the position that maintain “covered accounts.” A offshore hedge funds are foreign covered account includes any account Regulation of Short Sales financial accounts for FBAR purposes, that a financial institution or creditor On October 15, 2008, the Securities and therefore, U.S. investors in offers or maintains, primarily for and Exchange Commission (the “SEC”) offshore hedge funds should file an personal, family, or household adopted an interim final rule (the FBAR. Failure to do so may result in purposes, that involves or is designed “Interim Rule”) requiring institutional civil and criminal penalties. to permit multiple payments or investment managers to file information The IRS deadline for FBAR filing for transactions (i.e., consumer accounts). on Form SH disclosing their short sales 2008 generally was June 30, 2009. The definition also encompasses, of and positions in section 13(f) However, the IRS pushed back the however, “any other account” that a securities, other than options. The rule filing deadline to June 30, 2010 for “financial institution or creditor offers extension was set to expire on August persons with a financial interest in, or or maintains for which there is a 1, 2009. However, on July 27, 2009, signature authority over, a foreign reasonably foreseeable risk to the SEC issued Rule 204, which makes financial account in which the assets customers or to the safety and the Interim Rule permanent, with are held in a commingled fund, such soundness of the financial institution some important changes. as a hedge fund. A link to the or creditor from identity theft, Like the Interim Rule, Rule 204 seeks August/September 2009 Lowenstein including financial, operational, to curtail abusive “naked” short selling Sandler client update newsletter, compliance, reputation, or litigation by making certain information which analyzes FBAR filing obligations risks.” This second element of the available to the public through reports and the FBAR filing extension, is definition of “covered accounts” by self-regulatory organizations available here. targets small business and sole (“SROs”). However, Form SH, which proprietorship accounts, which are imposed detailed restrictions on short Red Flags Rule presumably more vulnerable to identity sales under the Interim Rule, was As of June 1, 2010, businesses in theft and other fraudulent activity than allowed to expire under Rule 204. the financial industry, including accounts carried on behalf of large Instead, the SEC is currently working SEC-registered broker-dealers and businesses or sophisticated parties. directly with SROs to determine how investment advisers, are required to be SEC-registered broker-dealers carrying best to make available to the public in compliance with the “Red Flags customer accounts are subject to the information concerning short sales. In Rule,” which requires certain financial Red Flags Rule. 5
  6. 6. Investment Management Practice Group LOWENSTEIN SANDLER PC CLIENT ALERT Although the Red Flags Rule does not Massachusetts resident, whether in YEAR END CHECKLISTS specify the contents of a regulated paper or electronic form, develop and entity’s Identity Theft Prevention implement a written information Private Investment Funds Program, the FTC has issued protection and security program, as Compliance Policies. As we have “Guidelines” to assist in its design. well as adhere to certain other privacy noted in prior Investment Management The Guidelines identify twenty-six guidelines. The deadline for compliance Alerts, the requirements pertaining to possible Red Flags, falling into five registered investment advisers and to with the regulations is March 1, 2010. categories: (i) alerts, notifications, or unregistered advisers have continued A link to the October/November 2009 warnings from a consumer reporting to merge, and more and more Lowenstein Sandler client update agency; (ii) suspicious documents; (iii) unregistered managers are adopting newsletter, which discussed the suspicious personally identifiable best practices and improving their Massachusetts regulations and the existing compliance policies. Whether information (e.g., a social security number that does not match the compliance deadline extension, is your firm is currently federally registered Social Security Administration’s Death available here. or will be required to register in the Master File); (iv) unusual use of—or near future, you should review your suspicious activity relating to—a New York Legislation compliance policies periodically to covered account; and (v) notice from Changes Requirements verify that they are adequate and that customers, victims of identity theft, for Effectiveness of your firm is adhering to them. law enforcement, or other persons Powers of Attorney New Issues Certifications. If you regarding possible identity theft in Executed by Individuals purchase “new issues” (defined by connection with covered accounts held Legislation in the state of New York NASD Rule 2790 as adopted by FINRA by a financial institution or creditor. amended the New York General to mean equity securities issued in an Failure to comply with the Red Flags Obligations Law pertaining to powers initial public offering), your broker (or, Rule may result in enforcement action of attorney, effective as of September if you are a fund-of-funds that invests by the FTC, including civil liability for 1, 2009. The legislation requires that indirectly in new issues, the underlying nominal, actual or punitive damages, powers of attorney executed by funds) will require that you certify and attorneys’ fees. A link to the each year as to whether the fund is a individuals in the state of New York be October/November 2009 Lowenstein “restricted person” within the meaning signed by both the principal and the Sandler client update newsletter, of the rule. To do so, you must re-certify agent (with each signature being which analyzes the Red Flags Rule, is the status of investors in your fund as notarized) and contain certain available here. restricted persons or unrestricted conspicuous legends noting both persons. Please contact us if you warnings to the principal and duties of require documentation to obtain such Massachusetts Privacy the agent in order to be valid. The re-certifications from your investors. Regulations legislation does not affect powers of Privacy regulations adopted by the Updating Offering Documents. attorney executed by entities. Although Massachusetts Office of Consumer Offering documents should be reviewed the legislation also does not impact Affairs and Business Regulation (201 from time to time to verify that they the validity of individual powers of CMR 17.00: Standards for the contain a current, complete and accurate Protection of Personal Information of attorney previously executed in New description of your fund’s strategy, Residents of the Commonwealth) York, the legislation does currently management, soft dollar and require that any person or entity provide that execution of any power of brokerage practices; that they comply (including private investment funds attorney after September 1, 2009 will with current law and regulation; and based outside of Massachusetts) revoke all prior powers of attorney that they reflect current disclosure maintaining personal information of a unless expressly provided otherwise. trends. We would be happy to assist 6
  7. 7. you in reviewing and, if necessary, information reflected in the schedule is inaccurate or incomplete must be updating your offering documents to different at December 31 than that corrected and the correction must be reflect changes in law, regulation and previously reported, you are generally distributed to pool participants within disclosure practices. required to amend the schedule by twenty-one (21) days of discovering February 14 of the following year the defect. Blue Sky and Local Securities (February 16 for 2010). Matters. You should continue to inform Investment Company Act us of all offers or sales of fund interests. In addition, if the fund (again, including Compliance. If your fund is a 3(c)(1) Offers to U.S. persons may trigger affiliated funds) acquires a greater fund—that is, it relies on the exemption filing obligations in a given offeree’s than ten percent (10%) interest in a from registration as an investment state of residence. Offers to foreign class of equity securities registered company because it has one hundred persons may require filings in the under the 1934 Act, the fund has an (100) or fewer investors—you must country of a given offeree’s residence. obligation to file reports of beneficial continually monitor the number of ownership on Forms 3, 4 and 5, as investors and the attribution rules Privacy Notices. Investment advisers under the Investment Company Act of well as corresponding potential liability and investment funds must have 1940, as amended. The attribution for short-swing profits under Section privacy policies in place. In addition to rules provide that if an investor that is 16 of the 1934 Act. being distributed at the time of itself relying upon Section 3(c)(1) or subscription, privacy notices must be Furthermore, quarterly reports of equity Section 3(c)(7) (for example, a “fund distributed at least once per year and holdings by institutional investment of funds”) holds more than ten percent more often if there are any changes to managers are required on Form 13F (10%) of the equity interests in the the policy/notice. We believe that the where certain equity assets under fund, the fund must “look through” best time for the annual distribution of management total $100,000,000 or this investor and count as the hedge the notice is with your annual financial more. If the fund (together with all fund’s own investors each of the statements and/or tax reports. affiliated investment funds) reaches partners or shareholders of the fund this threshold, please let us know, and investor. Therefore, potential investments Beneficial Ownership Reporting we will provide information regarding greater than ten percent (10%) of the Requirements. If your fund (including, how and when to file Form 13F and fund’s equity made by entities must be for this purpose, affiliated investment the required weekly reports of short analyzed to verify that they will not funds) acquires more than five percent sale activity on Form SH. subject the fund to regulation as an (5%) of a class of equity securities registered under the Securities Exchange Registered Commodity Pool investment company by exceeding the one hundred (100) investor limit. In Act of 1934, as amended (the “1934 Operators. If your fund is a commodity addition, if an entity not relying on Act”) (i.e., the equity securities of most pool, you must prepare an annual Sections 3(c)(1) or 3(c)(7) invests more publicly traded companies), you must report for each pool in accordance than forty percent (40%) of its total monitor and comply with the reporting with the rules of the Commodity assets in the fund, regulators will requirements of the Williams Act by Futures Trading Commission (“CFTC”) “look through” such entity for filing a Schedule 13D or a Schedule and file such report with the CFTC and purposes of counting beneficial owners. 13G. A Schedule 13D must be amended the National Futures Association. In Furthermore, if an entity is created for upon any material change in the facts addition, unless your fund qualifies for the purpose of investing in a 3(c)(1) contained therein, including the an exemption, you must update your fund, then the regulators also will acquisition or disposition of securities disclosure documents periodically, as “look through” the entity, regardless in an amount equal to one percent or you may not use any document dated of its percentage ownership. more of the class being reported. If, more than nine (9) months prior to the on the other hand, you have filed a date of its intended use. Furthermore, ERISA Compliance. If the aggregate short-form Schedule 13G, and the documents that are materially amount invested in the fund by 7
  8. 8. Investment Management Practice Group LOWENSTEIN SANDLER PC CLIENT ALERT benefit plan investors (e.g., employee management rights in at least one of Compliance Policies and Code of benefit plans, individual retirement its portfolio companies. Ethics. Federally registered investment accounts (IRAs) and entities the advisers must adopt and maintain underlying assets of which include Registered Investment detailed compliance policies and a plan assets) were to equal or exceed Advisers code of ethics, and appoint a Chief twenty-five percent (25%) of the Annual Updating Amendments to Form Compliance Officer. If you have not aggregate investments in the fund ADV. Any investment adviser who is already done so, please contact us (excluding investments by the fund’s registered with the SEC must amend immediately so that we may assist managers), the fund would be subject its Form ADV at least annually, within you in creating and/or documenting to various Employee Retirement ninety (90) days after the end of the compliance procedures tailored to Income Security Act of 1974 (“ERISA”) adviser’s fiscal year. Your annual updating your business. In addition, compliance requirements. Prior federal legislation amendment must update all items on policies and procedures must be has modified the types of plans that the form. Part 1A, however, must be reviewed by the registered adviser are to be counted for the purposes of updated electronically on the SEC’s at least annually. The first review is the twenty-five percent (25%) electronic Investment Adviser Registration required to be conducted within threshold (i.e., governmental plans, Depository (“IARD”) system and must eighteen (18) months after the church plans and foreign plans are no specify that it is an annual updating adoption of the compliance policies. longer counted for the purposes of the amendment. In addition to providing The compliance policies and twenty-five percent (25%) threshold). the annual updating amendment, a procedures review should focus on an You should monitor on an ongoing registered adviser is required to amend evaluation of the effectiveness of the basis the level of investments by (and, with respect to Part 1, file) certain policies and procedures and the need benefit plan investors, and, to the parts of its form whenever the for revisions as a result of any extent your fund approaches the information on it becomes inaccurate. compliance issues that arose during twenty-five percent (25%) threshold, the prior year, any changes in the State Filing Requirements. In addition, you should contact us to discuss the business activities of the investment a given state’s laws may require a application of ERISA rules and the adviser and/or any regulatory changes. federally registered adviser to make alternatives for compliance. We recommend that this review be notice filings and to pay fees in the conducted relatively early in the year Annual VCOC Certification: As a state if it has clients or a place of so that it does not conflict with time condition to investment in a venture business therein. Laws vary significantly periods when quarter-end or year-end fund or a private equity fund, an ERISA from state to state. For example, New matters are pressing. Policies that are plan investor may require the fund to York requires that a federally registered materially changed as a result of such provide an annual venture capital investment adviser that has more than review should be redistributed to all operating company (“VCOC”) five clients residing in the state complete appropriate personnel. In addition, certification stating that the fund a notice filing by adding New York as Schedule F of Form ADV must contain qualifies as a VCOC and is deemed not a notice filing state on the IARD, and a description of the code of ethics and to hold “plan assets” subject to ERISA. that the adviser submit to the Office of a statement that the adviser will provide A fund will be a VCOC if (a) at least the Attorney General a copy of Part II, upon request the code of ethics to any fifty percent of the fund’s portfolio Schedule F and any other part of the current or prospective client. investments (as determined on the Form ADV that is not on the IARD. fund’s annual valuation date) are venture There may also be certain licensing Annual Delivery of Form ADV. capital investments in operating or qualification requirements for Every year, a federally registered companies for which the fund has representatives of state-registered adviser must deliver (or offer in writing management rights, and (b) the fund investment advisors. Please contact us to deliver) to each advisory client a has and exercises substantial with any state-specific questions. written disclosure statement 8
  9. 9. LOWENSTEIN SANDLER PC CLIENT ALERT INVESTMENT MANAGEMENT Practice Group containing the information required We trust that this letter is a useful Peter D. Greene by Part II of Form ADV. The written reminder of the regulatory issues 646 414 6908 offer to deliver the written disclosure relevant to your business. Please statement may be included in other contact us if you have any questions Sherri Venokur or require further information. 212 204 8698 communications with the client, such as in an annual investor letter. We appreciate the opportunity to serve Elaine M. Hughes Custody. In order for federally you, our clients, and we value your 973 422 6502 business. We wish you all the best for registered investment advisers that 2010 and look forward to working Scott H. Moss advise pooled investment vehicles to with you throughout the year. 973 597 2334 avoid both the quarterly statements and surprise examination requirements The Investment Management Group Andres Rueda (discussed in more detail above), Lowenstein Sandler PC 646 414 6869 audited financial statements prepared in accordance with GAAP must be Robert G. Minion Matthew A. Magidson sent to all investors in such pooled 973 597 2424 646 414 6952 investment vehicles within one hundred twenty (120) days after the Allen B. Levithan Richard Bernstein end of the pooled vehicle’s fiscal year 973 597 2406 973 422 6714 (one hundred eighty (180) days for funds-of-funds). Please contact us if Marie T. DeFalco Cole Beaubouef you have any question about what 973 597 6180 973 597 2322 your practice should be. Lowenstein Sandler makes no representation or warranty, express or implied, as to the completeness or accuracy of this Client Alert and assumes no responsibility to update the Client Alert based upon events subsequent to the date of its publication, such as new legislation, regulations and judicial decisions. Readers should consult legal counsel of their own choosing to discuss how these matters may relate to their individual circumstances. New York Palo Alto Roseland 1251 Avenue of the Americas 590 Forest Avenue 65 Livingston Avenue New York, NY 10020 Palo Alto, CA 94301 Roseland, NJ 07068 212 262 6700 650 433 5800 973 597 2500 © 2010 Lowenstein Sandler PC. In California, Lowenstein Sandler LLP.