Monthly Archives: June 2012

California Department of Corporations Announces Additional Changes to Proposed Private Fund Adviser Exemption

On June 18, 2012 the California Department of Corporations (DOC) published notice of additional changes to its proposed private fund adviser exemption regulation (10 CCR §260.204.9) and a new 15-day public comment period.

As reported earlier, the DOC’s proposed rule provides a California corollary to the new federal regulatory exemption for private fund advisers with assets under management of less than $150 million. Under the proposed rulemaking, certain California private fund advisers will be exempt from the DOC’s investment adviser registration requirement if the adviser: (1) is not subject to statutory disqualification under SEC Rule 262 of Regulation A; (2) files periodic reports on Form ADV containing the information required by federally exempt private fund advisers; and (3) pays an annual fee of $125. Under the DOC’s proposed rule, a private fund adviser is defined as an “investment adviser who provides advice solely to one or more qualifying private fund(s)” and a qualifying private funds is an issuer “that qualifies for the exclusion from the definition of an investment company under section 3(c)(1), 3(c)(5), or 3(c)(7) … of the Investment Company Act of 1940…”

The revised exemption was initially proposed on January 6, 2012. Comments received on that initial proposal resulted in a number of changes to the rule, necessitating the new public comment period. The changes to the proposed rule are fairly non-controversial. They include:

-Expansion of the definition of “qualifying private fund” to include issuers that qualify for an exclusion from registration as an investment company under Section 3(c)(5)of the Investment Company Act of 1940;

-For advisers who qualify for the exemption because their funds are excluded from registration as an investment company under Section 3(c)(1) or 3(c)(5) of the Investment Company Act of 1940:

  •  A requirement that audited financials to be prepared by a CPA that is registered with the PCAOB and be delivered to the fund’s investors within 120 days of the end of the fund’s fiscal year (or 180 days for a fund of funds), and
  • Prohibition of charging performance fees to any investor that is not a “qualified client” as defined by SEC Rule 205-3(d) (17 CFR § 275.205-3(d)); and

– Expansion of the definition of “venture capital company” to include corresponding federal definitions.

The existing California private fund exemption was extended to July 16, 2012, but cannot be extended again. The new rule, therefore, should be finally adopted by the Department no later than that date.

For additional information about reporting obligations of private fund advisers, or any other securities law concern, please contact Sarah Weber at or (619)298-2880.

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SEC Releases FAQs re: Form PF

On June 8, 2012 the SEC’s Division of Investment Management issued an initial set of frequently asked questions (FAQs) related to the filing of Form PF on the PFRD (Private Fund Reporting Depository). Investment advisers registered with the SEC and their related persons (including commodity pool operators and commodity trading advisers required to register as investment advisers) who manage one or more private funds with assets under management (AUM) of at least $150 million are required to file Form PF. The requirement came into effect last year with the SEC’s unanimous adoption of Rule 204(b)-1 under the Advisers Act (see this helpful article published by JLG last year on Form PF).  Under the rule, private fund advisers’ reporting obligations vary based on the type of private fund managed and the adviser’s AUM.

The topics covered by the new FAQs include:

  • Aggregation requirements for determining reporting status. The FAQ on aggregation clarifies that advisers with parallel managed accounts (i.e., a managed account that pursues substantially the same investment objective and strategy, and invests side by side in the same positions, as the private fund) should count the assets towards their AUM only if the parallel managed account is dependent on the private fund. A parallel managed account is dependent only if its value is less than the value of the private fund.
  • Timeframe for reporting when AUM or fund characteristics reach reporting thresholds. The FAQ explains that a private fund should be reported as a hedge fund for the particular quarter if it meets the definition of hedge fund on the last day of any month in the fiscal quarter immediately proceeding the fund’s most recently completed fiscal quarter. In other words, a fund with a fiscal year end of December 31st should be characterized as a hedge fund on September 30th if it met the definition on the last day of April, May or June.
  • Categorizations of funds for reporting purposes. This FAQ makes clear that if a private fund’s offering documents allow the fund to employ leverage or sell assets short, it must be characterized as a hedge fund – even if the fund does not actually employ such tactics.

The FAQs address fairly high level issues, disappointing some industry members who had been seeking more detailed guidance from the agency. The SEC has indicated it intends to release a second set of FAQs with further detail, but no timeline has been announced. For additional information about how to fulfill your Form PF obligations, or any other securities law concern, please contact Sarah Weber at or (619)298-2880.

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GAO Calls On SEC to Strengthen Oversight of FINRA As Congress Weighs Investment Adviser SRO Legislation

On May 30, 2012, the federal Government Accountability Office (GAO) released a report , mandated by Dodd-Frank, on its study of the SEC’s oversight of FINRA. The report is critical of the agency’s oversight of FINRA, calling on the agency to direct FINRA to conduct “retrospective reviews” of its rules and to identify ineffective rules that should be abandoned.

The report notes the “SEC has conducted limited or no oversight of [certain] aspects of FINRA’s operations, such as governance and executive compensation.” In its response to a draft of the report, the agency maintained it operates “a robust program for the oversight of FINRA” but indicated that SEC Chairman Mary Schapiro had already requested staff to “encourage FINRA to consider additional methods to conduct retrospective reviews of its rules to assess whether [those] rules are achieving their intended purpose.” The SEC’s response also agreed with the report’s recommendations that the Office of Compliance Inspections and Examinations (OCIE), the department with primary responsibility for FINRA oversight, implement a more comprehensive, risk-based approach to its oversight of the SRO.

The report comes just one week before the House Financial Services Committee is set to hold a hearing on legislation that would move direct oversight of investment advisers, which currently rests with the SEC, to a new self-regulatory organization that FINRA is vying to become. The proposed law, H.R. 4624, would amend the Investment Advisers Act of 1940 to create “National Investment Adviser Associations” that, like FINRA’s oversight of Broker-Dealers, would be supervised by the SEC. Proponents of the bill argue that an SRO will increase oversight of advisers. Opponents of the legislation, however, are pointing to the GAO study as further evidence that adding a new layer of oversight will not address the bill’s purported concerns about investor protection.

For additional information about these issues or any other securities law concern please contact Sarah Weber at or (619)298-2880.

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SEC Announces Charges in South Florida Ponzi Scheme

On May 22, 2012 the SEC announced the filing of a complaint in Federal District Court in the Southern District of Florida alleging violations of federal securities laws by two Fort Lauderdale residents – George Levin and Frank Preve. The SEC alleges that Levin and Preve raised over $157 million from 173 investors in less than two years by issuing promissory notes from Levin’s company and interests in a private investment fund they created in 2009. The funds were used to purchase bogus legal settlements from a former prominent Florida attorney, Scott Rothstein, who used investor funds to make payments due other investors and is currently serving a 50-year prison term as a result. The SEC’s complaint notes that Levin and Preve’s fund, Banyon Income Fund, was the largest source of capital for Rothstein’s Ponzi scheme.

The SEC’s complaint alleges the fund’s private placement memorandum, which Levin had ultimate responsibility for, stated that there were safeguards in place to protect investor money. In reality, though, the fund purchased the fake settlements without seeing any legal documents or taking any steps to verify their legitimacy. Further, the SEC alleges that even as Rothstein’s scheme was collapsing, Levin and Preve sought new investor money, touting the success of their “investment strategy” and falsely stating the fund had collected half of the $1 billion in settlements it had purchased previously, and was due another $550 million. By the time the fund offering began in May 2009, however, Rothstein had apparently ceased making payments on those settlements. Bankruptcy court records from 2009 showed that the fund invested $775 million in Rothstein’s Ponzi scheme.

For additional information case or any other securities law concern please contact Sarah Weber at or (619)298-2880.

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