STRAIT Regulatory Update

STRAIT REGULATORY UPDATE

To our valued clients:

STRAIT’s compliance team has been tracking fast moving regulatory events in light of COVID-19.  Relevant regulatory actions are summarized below.

REGULATORY RELIEF AND INTERPRETIVE GUIDANCE

  • Form ADV and Form PF: the SEC has granted temporary and conditional relief from the deadline to file these forms for firms impacted by the virus. Some things to consider if thinking about availing yourself of this relief: 1. You'll have to notify the SEC and your investors (in the case of Form ADV) that you are seeking relief and describe how you have been impacted; 2. Does this mean you'll have to update your risk disclosures in the Form ADV and/or via PPM supplement? 3. Does this mean that you are expected to/should initiate your disaster recovery plan? 4. Does this mean you'll have to demonstrate in a future regulatory exam that in fact you were impacted, how you responded, and how that relates to your disaster recovery plan? You should probably be considering the above anyway. But, we are advising our fund administration and compliance clients that we are willing and able to meet the standard deadline for them, and all things being equal, we probably should go ahead and do so. https://www.sec.gov/rules/other/2020/ia-5463.pdf
     
  • Delivery of Audited Financials: SEC staff are directing firms concerned about their ability to provide to LPs within 120 days of the fiscal year audited financial statements as required under the custody rule to its FAQ VI.9, which states: 

    Question VI.9 Q: If a pooled investment vehicle is subject to an annual audit and its adviser is relying on the "audit provision" under rule 206(4)-2(b)(4), would the adviser be in violation of the rule if the pooled vehicle fails to distribute its audited financial statements within 120 days after the end of its fiscal year?"

    A: The Division would not recommend enforcement action for a violation of rule 206(4)-2 against an adviser that is relying on rule 206(4)-2(b)(4) and that reasonably believed that the pool's audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances. (Modified March 5, 2010.)”
    https://www.sec.gov/divisions/investment/custody_faq_030510.htm?_cldee=dGNpcHBlcm1hbkBjaXBwZXJtYW4uY29t&recipientid=contact-197647c4861fe71180ebc4346bad526c-3baf6ab9d0a9476091509b5f258a3619&esid=273994df-9468-ea11-a811-000d3a8c9bad
     
  • Inadvertent Custody:  SEC staff have updated FAQs noting that it would not recommend enforcement for violation of the custody rule if an adviser inadvertently received securities at its vacant offices during this crisis.  Quoted in relevant part in response to FAQ II.1:  

    “We understand that an adviser’s personnel may be unable to access mail or deliveries at an office location due to the firm’s business continuity plan in response to circumstances related to coronavirus disease 2019 (COVID-19). In such circumstances, the Division would not consider the adviser to have received client assets at that office location until firm personnel are able to access the mail or deliveries at that office location. (Modified March 16, 2020.)”
    https://www.sec.gov/divisions/investment/custody_faq_030510.htm?_cldee=dGNpcHBlcm1hbkBjaXBwZXJtYW4uY29t&recipientid=contact-197647c4861fe71180ebc4346bad526c-3baf6ab9d0a9476091509b5f258a3619&esid=273994df-9468-ea11-a811-000d3a8c9bad 
     
  • Temporary Teleworking vs. ADV Remote Office Disclosure: SEC staff have updated FAQs to note that employees temporarily working remotely in light of the crisis will not trigger a remote office disclosure in the Form ADV.  

    Q: My firm has employees who are temporarily conducting investment advisory business from a temporary location other than their usual place of business (their homes, for example) as part of the firm’s business continuity plan due to circumstances related to coronavirus disease 2019 (COVID-19). Item 1.F of Part 1A requires information about a firm’s principal office and place of business. Section 1.F of Schedule D requires information about “each office, other than your principal office and place of business, at which you conduct investment advisory business.” Is my firm required to update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses of its employees?

    A: No. As long as the employees are temporarily teleworking as part of the firm’s business continuity plan due to such circumstances, staff would not recommend enforcement action if the firm does not update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses. (Posted March 16, 2020)”
    https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#item1f?_cldee=dGNpcHBlcm1hbkBjaXBwZXJtYW4uY29t&recipientid=contact-197647c4861fe71180ebc4346bad526c-3baf6ab9d0a9476091509b5f258a3619&esid=273994df-9468-ea11-a811-000d3a8c9bad 
     
  • NFA Pool Financial Statements: We understand the NFA is notifying members that pools required to file financial statements with the NFA may file an extension request using its EasyFile System if provided before the statement due date.
    https://www.nfa.futures.org/electronic-filing-systems/Help_Guide_for_Filing_Notices_and_Extensions_for_CPOs.pdf?_cldee=dGNpcHBlcm1hbkBjaXBwZXJtYW4uY29t&recipientid=contact-197647c4861fe71180ebc4346bad526c-3baf6ab9d0a9476091509b5f258a3619&esid=273994df-9468-ea11-a811-000d3a8c9bad


POTENTIAL FOR NEW/AMENDED REGULATORY FILINGS

  • Form 13H: Many hedge fund advisers are trading more than they normally do lately. Be sure to consider whether you must file a Form 13H with the SEC as a “Large Trader”: a person (including a commonly controlled group) whose transactions in commonly reported/processed/collected securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. 
     
  • Transition from SEC to State Registration: If you are an SEC registered investment adviser whose regulatory AUM has recently dipped below the $100 million threshold required for that status, you do not need to rush to transition to state registration. You are not required to deregister with the SEC unless you have less than $90 million in AUM. You are not required to measure your regulatory AUM until after your annual updating amendment to the Form ADV. If your regulatory AUM decreases during the year, you would not be required to transition from SEC to state registration until your next annual updating amendment. The transition from SEC registration to state registration is then required within 180 days after the end of your fiscal year.  


SHORT SALE BANS AND REPORTS

 
BUSINESS CONTINUITY AND DISASTER RECOVERY


STRAIT
STRAIT’s Regulatory Compliance Directors and Associates are attorneys with extensive experience in the development of business continuity/disaster recovery plans and crisis management. They are available to aid RIAs in need of assistance and are also available to provide:

  • Compliance Consulting
  • Launch Services
  • Regulatory Filings
  • Compliance Program Design
  • Full Compliance Program Outsourcing


Daryoush Niknejad
Compliance Director, General Counsel
daryoush.niknejad@straitcapital.com | LinkedIn