Investment Management

Archive for February 2012

Posted on Saturday, February 18 2012 at 2:58 pm by

SEC Tightens Rules on Performance Fees Charged by Investment Advisers

On February 15, 2012, the SEC issued a revised version of Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which is the rule regarding performance fees that may be charged by registered investment advisers (the “Revised Rule”). The Revised Rule will require clients eligible to pay performance-based fees (“qualified clients”) to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. These rule changes conform Rule 205-3’s dollar thresholds to the levels set by an SEC order in July 2011.

Similar to the recently revised definition of “accredited investor” found in Rule 501 of the Securities Act of 1933, which we discussed here, the Revised Rule excludes the value of the investor’s home and certain related debt from the net worth calculation. In addition, the Revised Rule also adds certain grandfathering provisions permitting advisers to continue to charge certain clients performance fees if such clients were considered “qualified clients” and had the performance-based fee arrangement with the adviser prior to the establishment of the new dollar thresholds described above. In addition, newly registering investment advisers are permitted to continue charging performance fees to those clients they were already charging performance fees prior to registration.

We encourage registered investment advisers that charge performance fees to their clients to review and, as necessary, update their client agreements and/or fund offering documents to help ensure compliance with the Revised Rule.

The SEC’s release regarding the Revised Rule, is available here.

Posted on Monday, February 13 2012 at 10:16 am by

CFTC Narrows Registration Exemptions for Private Fund and Mutual Fund Advisers

On February 9, 2012, the Commodity Futures Trading Commission (“CFTC”) significantly overhauled several of its rules relating to commodity pool operators (“CPOs”), including amending CFTC Rule 4.5 and rescinding CFTC Rule 4.13(a)(4).

The amended Rule 4.5 significantly limits the ability of advisers to registered investment companies (i.e., mutual funds) to rely on the rule’s exclusion from CFTC regulation, and will likely require many advisers to mutual funds that invest in commodity futures, commodity options and swaps to register as CPOs with the CFTC. Compliance with amendments to Rule 4.5 as set forth in CFTC Rule is required by the later of December 31, 2012 or within 60 days following the CFTC’s adoption of final rules defining the term “swap”.

The rescission of CFTC Rule 4.13(a)(4) eliminates the CPO registration exemption typically used by advisers to private funds that are offered to highly sophisticated investors (commonly referred to as “qualified purchaser funds” or “3(c)(7) Funds”). An adviser who previously relied upon CFTC Rule 4.13(a)(4), will now either have to restrict its commodity interest trading to qualify for the de minimus exemption available under CFTC Rule 4.13(a)(3) or register as a CPO. Those who are required to register, may be able to qualify for Rule 4.7, which applies a less burdensome system of regulation to CPOs that advise funds offered only to “qualified eligible persons”, a term that includes “qualified purchasers” eligible to invest in 3(c)(7) Funds. Advisers that have relied upon the CFTC Rule 4.13(a)(4) registration exemption prior to the effective date of the amendments (likely to be in April 2012) will have until December 31, 2012 to register as a CPO or qualify for another exemption from registration. The compliance date for all other advisers will be the effective date of the amendments.

The CFTC Rule is available here.