Section 13(f) of the Securities Exchange Act of 1934 requires institutional investment managers with investment discretion over $100 million or more of certain equity securities to file quarterly reports disclosing their holdings using Form 13F. For purpose of Form 13F, an “institutional investment manager” is an entity that either invests in, or buys and sells, securities for its own account or exercises investment discretion over accounts owned by any other natural person or entity.

The initial report must be filed within 45 days of the end of the first year in which an institutional investment manager exceeds the $100 million threshold. Thereafter, Form 13F must be filed within 45 days as of the end of each subsequent calendar quarter. Accordingly, managers that exceeded the $100 million threshold as of the last trading day of any month during 2011 are required to make their initial Form 13F filing no later than February 14, 2012 and should be submitted through the EDGAR database.

According to the SEC, the purpose of Form 13F is to collect and disseminate to the public information about the holdings and investment activities of institutional investment managers who exercise investment discretion over certain accounts of equity securities (generally, exchange traded or NASDAQ-quoted securities) having, in the aggregate, a fair market value of at least $100,000,000. The current Official List of Section 13(f) Securities can be viewed through the SEC’s website. Institutional investment managers should review the list every quarter to determine whether Form 13F filings are required.

The SEC has published a set of Frequently Asked Questions About Form 13F that is updated periodically. For additional information, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

Recognizing the rapid growth of the use of social media in the securities industry, the SEC recently released a Risk Alert on the use of social media by investment advisers highlighting concerns that may arise from use of social media by advisers and their associated persons and offering guidance to firms in complying with the antifraud, compliance, and recordkeeping provisions of the federal securities laws as they relate to social media. Social media policies and procedures should be adopted and regularly revisited to ensure they remain effective in the face of rapidly changing technology. Implementing detailed usage guidelines and content limitations as well appropriate procedures to monitor the use of social media are some of the suggestions offered by the SEC in the alert.

Based on these findings, the Division issued a Notice providing guidance concerning how firms can use social media to promote their business while remaining compliant with regulatory requirements.  The Notice states that information on social media websites that contain business-related content or solicitations for advisory services is generally considered advertising and is subject to the same regulatory requirements as other forms of advertising, including recordkeeping requirements and the restrictions on the use of testimonials and misleading statements. Accordingly,  firms should engage in proper record-keeping and monitoring of the use of social media. As referenced in the Notice, there are various technology providers that offer advisers assistance in addressing recordkeeping requirements related to social media content. Particular attention should be paid to any performance information or past specific recommendations communicated through social media, as this may not be an appropriate medium for disseminating such information.

Although no new laws or regulations have been issued relating to the use of social media, the guidance from federal and state regulators is extremely helpful in explaining the application of social media to existing rules and regulations. Firms should carefully review their policies and procedures governing social media in light of the recent regulatory guidance and make enhancements to compliance programs accordingly. For additional information, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

While it is no secret that most advisers to hedge funds and other private funds will be required to register with the SEC as investment advisers by March 30, 2012, less attention has been paid to the fact that some hedge fund managers may be subject to dual registration and regulation with the Commodity Futures Trading Commission (“CFTC”). In early 2011, the CFTC proposed to rescind several exemptive rules relied on by private fund managers to avoid registration with the CFTC as Commodity Pool Operators (“CPOs”), and the agency appears likely to finalize the proposal in early 2012.

Currently, CFTC Rule 4.13(a)(3) provides an exemption from registration as a CPO for operators of certain private funds relying on Section 3(c)(1) of the Investment Company Act so long as the fund limits its activities with respect to futures contracts and commodity options. CFTC Rule 4.13(a)(4) currently exempts operators of private funds relying on Section 3(c)(7) of the Investment Company Act without regard to the extent of the fund’s futures or commodity options activities, provided that interests are offered only to certain highly sophisticated investors. The elimination of these exemptions would mean that hedge fund managers that directly or indirectly trade futures contracts, commodity options, or swaps (which become subject to CFTC jurisdiction as a result of Dodd-Frank) may be required to become dually registered with the SEC and the CFTC, and face potentially duplicative regulatory burdens.

Unlike the elimination of the private adviser exemption under the Advisers Act, the CFTC was not required by Dodd-Frank to rescind these exemptive rules. The CFTC asserts that rescinding the exemptions is consistent with the purpose and intent of Dodd-Frank, although some believe that the CFTC is seeking to hold on to some regulatory jurisdiction over the hedge fund industry. For additional information, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

On December 21, 2011, the SEC adopted final rules to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. The amendments are similar to the proposal (discussed in this prior posting) in that net worth is calculated by excluding only the investor’s net equity in the primary residence (i.e. indebtedness secured by the primary residence is not treated as a liability, except to the extent it exceeds the estimated value of the primary residence).

The final rules include some notable changes from the proposal, however. One such revision is the addition of a grandfathering provision that permits individuals who qualified as accredited investors under the former net worth test to use that test for certain follow-on investments, provided that: (i) the right to purchase the securities was held by the person on July 20, 2010; (ii) the person qualified as an accredited investor on the basis of net worth at the time the person acquired such right; and (iii) the person held securities of the same issuer, other than such right, on July 20, 2010.

Additionally, the final rule includes a provision that treats incremental debt secured by the residence incurred in the 60 days before the sale of securities as a liability in the net worth calculation, even if the estimated value of the primary residence exceeds the aggregate amount of debt secured by the primary residence. Accordingly, if any such incremental debt is incurred, net worth will be reduced by the amount of the incremental debt.  This approach is intended to prevent individuals from artificially inflating their net worth by borrowing against their primary residence to take advantage of any positive equity shortly before seeking to qualify as an accredited investor in an exempt securities offering.

The effective date of the amended rule is February 27, 2012. Beginning in 2014, and every four years thereafter, the SEC is required by the Dodd-Frank Act to review the definition of “accredited investor” and to make further amendments to the extent it deems appropriate. According the press release announcing the amendments, the SEC has now proposed or adopted more than three-quarters of the rules required by the Dodd-Frank Act. For additional information, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

On December 21, 2011, the California Corporations Commissioner released a notice of proposed rulemaking to create an exemption from the investment adviser registration requirements for advisers to certain private funds. California’s proposed exemption is in response to changes made by the Dodd-Frank Act, and is based on the proposed Model Rule for Exempt Reporting Advisers released last year by the North American Securities Administrators Association (NASAA). Prior to the enactment of Dodd-Frank in July 2010, many advisers to hedge funds, private-equity funds, and venture capital funds relied on the “private adviser” exemption set forth in Section 203(b)(3) of the Advisers Act and a corollary exemption in California set forth in Section 260.204.9 of the California Code of Regulations. In order to conform to the elimination of the “private adviser” exemption and the creation of a new regulatory regime for private fund advisers imposed by Dodd-Frank, California has proposed a successor exemption that is predicated on the high net worth of investors in private funds. The proposed exemption includes certain requirements and safeguards designed to ensure adequate investor protection.

Under the proposed exemption, private fund advisers would be exempt from registration as an investment adviser in California if the following conditions are met:

• the adviser is not subject to certain statutory disqualifications or “bad boy” provisions;
• the adviser files periodic reports on Form ADV containing the information required by exempt reporting advisers under SEC Rule 204-4; and
• the adviser pays the standard investment adviser annual registration fee of $125.

In addition, advisers to one or more funds relying on Section 3(c)(1) of the Investment Company Act that do not fall within the definition of “venture capital company” would be required to comply with the following additional requirements: (1) only “accredited investors” are permitted to invest in the fund; (2) the adviser provides certain disclosures to investors at the time of purchase pertaining to an investment in the fund and the services to be provided by the adviser; (3) the fund is subject to annual audit and the audited financial statements are distributed to each investor in the fund; and (4) performance fees are only charged to investors that meet the definition of “qualified client.”

The Commissioner has released an Initial Statement of Reasons, setting forth the rationale for the new exemption and the comment period for the proposed amendments is open until February 20, 2012. For additional information on the proposed exemption, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

On December 8, 2011, the SEC announced that the national compliance seminar for CCOs and senior personnel at investment management firms is open for registration. The Compliance Outreach Program will be held on January 31, 2012 at the SEC’s headquarters in Washington, D.C., and is designed to assist firms with understanding their regulatory compliance and risk management obligations in order to enhance their compliance programs. The seminar will also be provided via webcast on the SEC’s website. The annual seminar sponsored by the Investment Management Division and the Office of Compliance Inspections and Examinations (“OCIE”) was previously referred to as “CCOutreach,” but has been rebranded to emphasize the importance of compliance firm-wide, and to encourage participation by all senior personnel, as opposed to just compliance officers.

The program is often extremely beneficial in providing insight into the SEC’s examination priorities and what the SEC believes to be areas of particular importance with regard to regulatory compliance in the investment management industry. This year’s program comes at a critical time as the SEC continues to implement a variety of significant changes under the Dodd-Frank Act. Panel discussions will include analyses of some of the most important challenges facing the industry, and will cover the following topics: Compliance and Enterprise Risk Management; Trading Practices; Dodd-Frank Act Reforms; Enforcement-Related Matters; and Custody.

General information about this year’s seminar and registration materials are available online. To learn more about the Compliance Outreach Program or previous programs, or for information about any compliance issues, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

In a recent press release, the SEC announced three enforcement actions against firms for failing to meet their obligations under Rule 206(4)-7 of the Advisers Act, commonly referred to as the “Compliance Program Rule.” Rule 206(4)-7 requires firms to (i) adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations; (ii) annually review the adequacy and effectiveness of compliance policies and procedures; and (iii) designate a chief compliance officer to administer the firm’s compliance program. According to Robert Kaplan, Co-Chief of the Asset Management Unit of the Division of Enforcement, “[t]he failure to adopt and maintain adequate compliance policies and procedures is a significant violation of the federal securities laws.”

The SEC charged OMNI Investment Advisors Inc. and its CCO for failing to adopt and implement written compliance policies and procedures, and leaving its advisory representatives completely unsupervised. The firm’s CCO was barred from a compliance and supervisory position in the industry and the firm subsequently deregistered. The SEC found that Asset Advisors LLC violated the Compliance Program Rule by failing to develop a compliance manual that was sufficiently customized to the firm’s advisory business and named a CCO who failed to adequately prepare himself for the role. In this instance, the firm was required to cease operations and dissolve.  Finally, Feltl & Company Inc. was assessed approximately $200,000 in penalties and disgorged funds for failing to devote enough resources to the firm’s compliance program. Feltl was permitted to continue operations, but must provide a copy of the SEC’s order to past, present and future clients, and prominently post a summary of the order on its website.

The enforcement actions come as part of the Enforcement Division’s new compliance program initiative, which is intended to work closely with SEC examiners to bring enforcement actions against firms that fail to address and remediate compliance deficiencies. This is the latest development in the SEC’s renewed focus on identifying and penalizing investment advisers that fail to take compliance obligations seriously. For additional information, or for assistance in developing or enhancing your firm’s compliance program, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

The SEC’s annual Government-Business Forum on Small Business Capital Formation is sure to focus heavily on various means to remove current legislative and regulatory burdens on the ability to raise capital. I attended last year’s Forum, which focused on many of these issues, but this year, the industry can point to several bills that have passed the House of Representatives by overwhelming margins designed to facilitate capital-raising by amending current exemptions from registration or adopting new ones. In addition, two industry organizations have staged a rally in Washington to coincide with the Forum urging the U.S. Senate and the SEC to adopt a proposal for crowdfund investing.

The three House bills that were passed by significant margins and subsequently sent to the Senate include: (1) H.R. 1070 (the “Small Company Capital Formation Act of 2011”), which would increase the exemption under Section 3(b) of the Securities Act of 1933 from $5 million to $50 million; (2) H.R. 2930 (the “Entrepreneur Access to Capital Act”), which would add a new Section 4(6) to the Securities Act thereby creating a “crowdfunding” exemption from registration; and (3) H.R. 2940 (the “Access to Capital for Job Creators Act”) which would require the SEC to remove the prohibition on general solicitation or advertising for offerings under Rule 506.

The passage by the Senate of any of all of these bills would mark a significant change in the legislative and regulatory obstacles currently facing exempt offerings of securities. The Forum will bring these issues to the forefront and may provide a much-needed push for the Senate and the SEC to carefully consider revising the available exemptions from registration under the Securities Act of 1933.

For additional information about the SEC Forum on Small Business Capital Forum or the status of the recent legislative proposals, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

On November 9, 2011, the SEC issued a press release announcing that the SEC filed a total of 735 enforcement actions in its fiscal year ending September 30, the most ever in a single year in SEC history. More than $2.8 billion in penalties and disgorgement were ordered as result of the enforcement actions. The SEC views the increase in the overall number of enforcement actions as evidence that it is fulfilling its mission of protecting investors and maintaining market efficiency, and credits the increase to the recent reorganization of the Division of Enforcement, the most significant since its establishment in the 1970s. In addition to the increase in the total number of enforcement actions, the number of enforcement actions related to investment advisers and broker-dealers also increased substantially. A single-year record of 146 enforcement actions pertaining to investment advisers and investment companies were filed, up 30% from 2010. The 112 enforcement actions against broker-dealers amounts to a 60% increase from the previous year.

This trend seems likely to continue. Not only has the SEC expressed its intention to focus on bringing more enforcement actions, the Dodd-Frank Act has provided regulators more sources of support for enforcement efforts.  For example, the new whistleblower program enables the SEC to potentially pay whistleblowers who provide the SEC with credible information about securities law violations that lead to successful enforcement actions.  The elimination of the private adviser exemption also will provide the SEC with new direct regulatory oversight of advisers to private funds.  Consequently, it is more critical than ever for firms to establish and maintain effective compliance programs and set a “tone at the top” to encourage a strong compliance culture throughout the firm.

For additional information about the implications of the SEC’s increased enforcement efforts and how firms should respond, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.

As discussed in this previous Compliance Corner post, the SEC recently amended Form ADV Part 1A to incorporate numerous changes to the registration, reporting, and recordkeeping requirements imposed by the Dodd-Frank Act. The IARD system has now been updated to reflect the Form ADV Part 1A revisions and as a result, firms filing new applications for registration or amendments to existing applications will be required to provide significant additional information required by the new Form. The Form ADV Instructions and Glossary of Terms has also been revised to reflect the new requirements and definitions used throughout Form ADV.

As amended, Form ADV (now officially named the “Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers”) requires firms to provide more detailed information about private funds they advise, information about the number and types of clients of the adviser, whether the firm holds itself out as specializing in certain types of investments, and more specific information about the number of employees of the firm that are investment adviser representatives, licensed insurance agents, registered representatives of a broker-dealer, or perform advisory functions. In addition, firms must provide more details pertaining to the adviser’s other business activities and financial industry affiliations. The SEC has provided a redlined version of Form ADV Part 1A showing the substantive changes made from the prior version.

For additional information or for assistance with the new requirements of Form ADV, please contact Zac Rosenberg, Compliance Consultant by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by phone at (619) 278-0020.