2 Autumn 2009on Section 3(c)(1) (sold to fewer than 100 investors) orSection 3(c)(7) (sold exclusively to “qualified purchas-ers”) for its exemption under the Investment CompanyAct of 1940, as amended (the “1940 Act”), and either (1)is organized under the laws of the United States, or (2)has 10% or more of its outstanding securities owned byU.S. persons. The Obama Bill does not require a “foreignprivate adviser” to register with the SEC.
Adisers Act Requirements
All advisers not prohibited or exempted from registrationwith the SEC must file and update their Form ADV annu-ally and whenever certain information contained thereinbecomes inaccurate.
SEC Eaminations and Record-Keepin Requirements
Rule 204-2 under the Advisers Act contains an extensivelist of the records that registered advisers are requiredto keep. An adviser’s records are subject to discretionaryexamination by the SEC at any time.
Deelopment of Compliance Proram and Appointmentof CCO
Rule 206(4)-7 under the Advisers Act requires each reg-istered adviser to adopt and implement written policiesand procedures reasonably designed to prevent violationof the Advisers Act (a “Compliance Program”), to assessits Compliance Program at least annually for sufficiencyand successful implementation, and to designate a ChiefCompliance Officer (“CCO”) responsible for oversight andmanagement of the Compliance Program.
Personal Tradin; Codes of Ethics
When the adviser, its access persons, and/or employeestrade for their own accounts, conflicts of interest canarise, and the SEC has brought a number of enforcementactions against advisers and their employees in this areaunder the antifraud provisions of the Advisers Act. UnderRule 204A-1, registered investment advisers must adoptcodes of ethics that address these issues and adhere tothe specific content requirements of the Advisers Act.
Presentation of Past Performance
Any adviser presenting a past investment performancerecord must disclose all material facts necessary to avoidmisleading clients or creating any unwarranted inferences.In no-action letters, the SEC staff has provided clarifica-tion and detail relating to performance advertising andenforces such guidance under the anti-fraud provisionsof the Advisers Act. The Advisers Act imposes numerousadditional restrictions that are specific to the marketingactivities of registered advisers. These restrictions anddisclosure requirements could be particularly relevant tothe fund-raising documentation of private fund advisers,particularly the disclosure in private placement memo-randa and other marketing materials.
Requirements for Adisers With Custody of Clients’Funds or Securities; Surprise Audits
Registered advisers that have “custody” of client assetsmust maintain those assets (other than certain privatelyoffered securities) with a “qualified custodian” under Rule206(4)-2 of the Advisers Act (the “Custody Rule”). Underthe existing Custody Rule, an adviser must generally havereasonable belief that the qualified custodian sends aquarterly account statement to each client for whom thecustodian has custody of funds or securities, or ensurethat each private fund that it advises is audited annuallyand provide investors with audited financial statementswithin 120 days of each private fund’s fiscal year-end, inorder to avoid being subject to an annual surprise audit byan independent public accountant. On May 20, 2009, theSEC issued proposed amendments to the Custody Rulethat would significantly increase regulation of advisers’custody arrangements, particularly self-custody and cus-tody of client assets with an affiliate, by effectively subject-ing any adviser with “custody” (defined broadly under theCustody Rule to even include authority to deduct advisoryfees from client accounts) to an annual surprise audit,regardless of whether a qualified custodian sends reportsto the client or the adviser provides audited financial state-ments in respect of the private funds it advises.
Requirements for Adisers’ Contracts With Clients
Contracts with a registered investment adviser’s clientsmust contain some specific terms that are set forth inSection 205 of the Advisers Act. The contract languagemust convey that advisory services provided to clientsmay not be assigned to any other person without obtain-ing prior client consent. Advisory contracts generallycannot include provisions that permit compensation tobe based on the performance of a limited partner’s ac-count, unless the performance fee is structured in a waythat exposes the adviser to some downside risk, such asa performance fee imposed as a percentage of assetsunder management, or a “fulcrum fee” that is averagedand fluctuates over a specified period of time. Addition-ally, the performance fee prohibition generally does notapply to an advisory contract with a private fund relying onthe Section 3(c)(7) exemption of the 1940 Act by permit-ting only beneficial owners who are “qualified purchasers”(for non-U.S. funds, this requirement only applies to U.S.