Monthly Archives: January 2012

The End of the General Solicitation and Advertising Prohibition for Private Funds?

Earlier this month, the Managed Fund Association (“MFA”), the largest lobbyist for the alternative investment industry, petitioned the SEC to amend Rule 502(c) of Regulation D to eliminate the prohibition on general solicitation or general advertising with respect to private funds. This longstanding prohibition prevents private funds that are exempt from registration under the safe harbor of Reg D from engaging in “general solicitation” and “general advertising.” The ban, set forth in Rule 502(c), prohibits issuers from offering or selling “securities by any form of general solicitation or general advertising, including, but not limited to…Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio…”

The MFA asserts that technological changes, and Rule 502(c)’s innate vagueness, make compliance with the prohibition both unnecessarily risky for private funds and extremely costly to funds and the economy as a whole. Fund managers “expend considerable time and resources when making any sort of communications or participating in industry events, and often…refrain from such activity” entirely to avoid the risk of losing the protection of Reg D. This over-cautious stance results in a “lack of publically available, verified information about hedge funds,” which in turn has created the perception that “the industry [is] secretive,” likely “discourage[ing] institutional investors from allocating capital to private funds.”  The MFA argues that lifting the prohibition will lead to a change in this misperception about the industry and allow potential investors to “gather information about private funds at relatively low costs and lead to the more efficient allocation of capital.” MFA – and other supporters of this reform – assert that increased investment in such funds will fuel the economy since many hedge funds are exposed to risks that traditional retail investors commonly avoid.

The MFA’s petition is not the first call for the rollback of the advertising and solicitation ban for private funds. The Senate and the House both introduced legislation that would mandate similar changes to Reg D. Indeed, as noted in the MFA’s petition, the SEC itself has questioned the necessity of the ban with respect to the exemption under Section 3(c)(7) of the Investment Company Act , which only allows sales to “qualified purchasers” – defined as individuals with at least $5 million in investments and institutions with at least $25 million in investments . Only time will tell whether the SEC or Congress will implement reform, but the voices in favor of a change seem to be getting louder.

If you have any question about compliance with Reg D, or any other compliance concern, please post your comments here or contact the author at

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Investment Adviser Update: Deadline for Filing Amendment to Form ADV Part 1 Approaching

As previously reported by JLG, in June 2011 the SEC adopted new rules implementing amendments to the Investment Advisers Act created by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act increased the statutory threshold for registration by investment advisors with the SEC from $25 million in assets under management (“AUM”) to $100 million.

In order to facilitate this change and allow those registrants who will no longer be required to register with the commission to transition to state oversight, all SEC registered investment advisers (regardless of their fiscal year-end) must file an amendment to Form ADV Part 1 between January 1, 2012 and March 30, 2012.

In addition to completing the newly required additional information in this form, the AUM information in Form ADV Part 1, Item 5, must be updated to December 31, 2011 for this filing. For advisers that have a fiscal year-end of December 31, the form should be filed as their “annual amendment.” For those advisers with a different fiscal year-end date, the form should be filed as an “other than annual amendment.”

After this filing is completed, any SEC registered investment adviser with AUM less than $100 million must file with one or more state authorities, and then withdraw registration from the SEC by June 28, 2012. Advisers with their principal place of business in Wyoming or New York will remain registered with the SEC because these jurisdictions do not subject investment advisers to examination.

For additional information about Form ADV or transitioning from SEC to state registration, please contact us at or by phone at (619) 298-2880.

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New Guidance for Investment Advisers & Social Media: Should Advisers Dislike Their Likes?

On January 4th the Securities and Exchange Commission (“SEC”) issued a cease and desist order against an Illinois man, Anthony Fields, posing as a Registered Investment Adviser (“RIA”) who was using his LinkedIn account to scam investors, “offer[ing] more than $500 billion in fictitious securities through various social media websites.”

The same day, highlighting the agency’s focus on enforcement in the ever-evolving world of social media, the SEC issued guidance on an RIA’s use of social media in a new National Examination Risk Alert, Investment Adviser Use of Social Media (the “Alert”), highlighting three areas of concern:

  • The need for Compliance policies and procedures concerning social media;
  • Third-party content on an RIA’s social media site (and  whether “liking” is a prohibited testimonial); and
  • Recordkeeping responsibilities with respect to social media.

Social Media Compliance Regulatory Concerns

The Alert gives a list of factors for RIAs to consider in developing an effective compliance oversight program with respect to the use of social media. This includes using sampling or search methodologies to monitor content and communications by employees. Other recommendations include:

  • Implementation of “usage guidelines” that lay out appropriate and inappropriate uses of social media, as well as articulation of clear guidelines with respect to acceptable content;
  • Establishing appropriate monitoring of social media site posts, including periodic or real-time monitoring; and
  • The assessment of information security risks that may be posed by social media sites, particularly protecting sensitive customer and firm proprietary information.

Third-Party Content (Dislike Your Likes)

Third-party postings on an RIA’s social media site, including merely clicking “like,” may be interpreted as an improper testimonial.  As described by the Alert, “If, for example, the public is invited to ‘like’ an IAR’s biography posted on a social media site, that post could be viewed as a type of testimonial prohibited by Rule 206(4)-1(a)(1).”  Consequently, a conservative approach may be to limit third-party postings and establish notifications to monitor posts real-time.

Recordingkeeping Responsibilities for Social Media

The recordkeeping obligations under the Advisers Act do not distinguish between different types of media. The Alert provides new guidance on factors for RIAs to consider as they adopt recordkeeping policies and procedures for social media, including: determining whether each communication is a required record; establishing employee training programs to educate advisory personnel on do’s and don’ts; and testing to ascertain compliance with social media policies.

RIAs and their employees should take this new and extremely useful guidance to heart as they navigate the world of social media. For additional information, please contact the author at


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