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July 2013 Archives

Forming Private Funds: Managing Growth and Change

Investment managers, when forming their first private fund, can claim exemption for the fund from registration as an investment company (pursuant to Section 3(c)(1) of the Investment Company Act of 1940) if the fund (1) has no more than 100 investors; and (2) is not sold in a public offering.  However, in many situations as investor demand increases - threatening to surpass the 100 investor limit - the investment manager decides to initiate a secondary private fund, believing it too will be exempt from registration.  The result is that the manager is managing 2 identical funds with 160 investments.

SEC Proposes New Amendments to Regulation D in Light of Rule 506 Approval

 On July 10 the Securities and Exchange Commission (“SEC”) amended Rule 506 of Regulation D to implement Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”).  The amendments to this Rule caused quite a stir in the securities industry by releasing a long-standing ban on hedge funds preventing general solicitation in the marketplace. In response to this fervor over the controversial passage of Rule 506’s advertising release, further amendments to Regulation D, Form D and Rule 156 under the Securities Act have been proposed by the SEC, changes that are, according to the SEC, “expected to enhance the SEC’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.”Most importantly, these amendments would require an issuer to include additional information about offerings conducted in reliance on Regulation D.  Some of the requirements for the implementation of the revised Rule 506, include:
  • Filing a Form D in Rule 506(c) offerings before the issuer engages in general solicitation;
  • Filing a closing amendment to Form D after the termination of any Rule 506 offering;
  • Explication of certain legends and other disclosures in written general solicitation materials used in Rule 506(c) offerings;
  • Submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission; and
  • The disqualification of any issuer relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply with Form D filing requirements in a Rule 506 offering within the last five years.  
Additionally, the SEC is proposing to amend Rule 156 under the Securities Act to apply to sales literature and advertising produced by private funds. As such, private fund managers and compliance personnel should review information contained within this “anti-fraud” rule and evaluate the potential impact on their firm.For further information on this, or other related topics, please contact us at [email protected] or (619) 298-2880.

"Other" Important Supreme Court Rulings for Investment Advisers

With this year’s U.S. Supreme Court (the “Court”) term coming to a close, there has been a flurry of rulings that may substantially impact the securities industry.  While most are aware of the Court’s decision to invalidate the Defense of Marriage Act (“DOMA”), and the possible windfall that adviser’s may now experience as a result, there was another Court decisions that may also greatly impact investment advisory firms and their Chief Compliance Officers (“CCOs”). In the case of Vance v. Ball State University, the Court reviewed allegations of racial harassment in the workplace, and discussed whether an employee must have the power to tangibly affect the employment status of the victim in order to be considered a supervisor.  The Court decided to narrow the definition of "supervisor" in the workplace, making it so that supervisor means only, as Justice Samuel Alito wrote in the majority's opinion, someone who “is empowered by the employer to take tangible employment actions against the victim."  Thus, “supervisors” are now considered only those with the power to “hire, fire, demote, promote, transfer or discipline” employees. This ruling may be of particular importance to CCOs as a defense to whether or not they may be held liable as supervisors by the Securities and Exchange Commission (“SEC”) in regulatory matters.  Currently, the SEC uses a broad definition of “supervisor,” one that was first formulated in a 1992 case, and a SEC release, involving John Gutfreund.  This standard examines whether or not an individual has the responsibility, ability, or authority to affect the conduct of the employee whose behavior is at issue.   It is unclear just how far the Court’s ruling may extend.  However, it would appear as though the current SEC standard would no longer survive a court challenge.  It will be interesting to see whether or not the SEC responds to this ruling by altering its definition of “supervisor,” or if it will continue with its current interpretation.For further information on this, or other related topics, please contact us at [email protected] or (619) 298-2880.
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