Division of Investment Management

SEC’s Division of Investment Management Issues Letter Regarding Independent Verification Required by Rule 206(4)-2 Under the Advisers Act

On April 25, 2016, the Staff of the Division of Investment Management of the Securities and Exchange Commission issued a no-action letter that provides that it would not recommend enforcement action to the Commission under Section 206(4) of, and Rule 206(4)-2 under, the Investment Advisers Act of 1940 if an investment adviser does not obtain a surprise examination by an independent public accountant (as is generally required) where it acts as a sub-adviser in an investment advisory program for which a “related person” “qualified custodian” is the primary adviser (or an affiliate of the primary adviser), and the primary adviser is responsible for complying with Rule 206(4)-2.  A “related person” of another generally is a person who is directly or indirectly controlling or controlled by the other person or under common control with such person.  A “qualified custodian” is a bank, a registered broker-dealer, a registered futures commission merchant and certain foreign financial institutions.”

The Staff’s position was based, in particular, on the following:

  1. the sole basis for the sub-adviser having custody is its affiliation with the qualified custodian and the primary adviser;
  2. the primary adviser will comply with Rule 206(4)-2 (including by having client funds and securities in the investment advisory program verified by a surprise examination conducted by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”) pursuant to an agreement entered into by the primary adviser);
  3. the sub-adviser does not: (i) hold client funds or securities itself; (ii) have authority to obtain possession of clients’ funds or securities; or (iii) have authority to deduct fees from clients’ accounts; and
  4. the sub-adviser will continue to be required to obtain from the primary adviser or qualified custodian annually a written internal control report prepared by an independent public accountant registered with and subject to regular inspection by the PCAOB as required by Rule 206(4)-2(a)(6).

Guidance on the Exemption for Advisers to Venture Capital Funds

The Division of Investment Management of the SEC recently issued Guidance on the Exemption for Advisers to Venture Capital Funds under five different scenarios.  The Guidance generally provides that the fund structures or actions described will not jeopardize the ability of advisers to rely upon the venture capital fund adviser exemption.  Guidance Update.

Disclosure and Compliance Matters for Investment Companies that Invest in Commodity Interests

The Staff of the Division of Investment Management of the SEC has published a Guidance Update with respect to Disclosure and Compliance Matters for Investment Company Registrants that Invest in Commodity Interests.  Although this Guidance is directed primarily to investment companies registered under the Investment Company Act of 1940, it sets forth principles of general applicability to all investment fund and investment advisers.  Among other things, the Guidance discusses the need: (i) to disclose the risks associated with investing in commodities; (ii) to ensure that performance presentations that are included in marketing materials are not materially misleading; and (iii) for an effective compliance and risk management function.  It concludes by emphasizing that a Risk and Examinations Office has recently been created within the Division of Investment Management, and this office, in coordination with the SEC’s Office of Compliance Inspections and Examinations, will focus on risk management activities related to commodity interests and other derivatives.  Guidance.

SEC No-Action Letter on the Registration of Affiliates of Registered Advisers

On January 18, the SEC Division of Investment Management issued a No-Action Letter in response to a request from the American Bar Association Subcommittee on Hedge Funds, exempting from registration under the Investment Advisers Act of 1940 certain control affiliates of SEC registered advisers, subject to the fulfillment of certain conditions. The No-Action Letter also confirms prior SEC staff guidance from 2005, which provides a registration exemption to special purpose vehicles created by registered advisers. SEC No-Action Letter.

SEC Division of Investment Management Letter to the North American Securities Administrators Association Indicates Possibility of Extension to Private Fund Adviser Registration Deadline Under the Dodd-Frank Act

On April 8, 2011, the Division of Investment Management of the SEC issued a letter to the North American Securities Administrators Association stating that the Division anticipates that by July 21, 2011 the SEC will complete its rulemaking implementing the provisions of the Dodd-Frank Act requiring the withdrawal of registration of certain “mid-sized advisers” and providing new exemptions for advisers that have relied upon Section 203(b)(3) of the Advisers Act, but expects in connection therewith that the SEC will “consider providing additional time for investment advisers affected . . . to come into compliance” until the first quarter of 2012. Letter.