On February 6, 2024, the Securities and Exchange Commission (“SEC”) adopted Rules 3a5-4 and 3a44-2 (“Final Rules”) defining the phrase “as a part of a regular business” and identifying activities that would cause people within certain activities to be “dealers” or “government securities dealers.” [1] These revised definitions implicate registration requirements in compliance with Sections 15 and 15C of the Securities Exchange Act of 1934 (“Act”). [2]
The activities that would involve identifying as a “dealer” or “government securities dealer” would include:
1) “Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants;” [3] or
2) “Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity supplying trading interest.” [4]
**If not engaged in these activities, one cannot presume someone could not still identify as a “dealer” or “government securities dealer.”** [5]
What Are the Requirements Under the Final Rules?
Under the Final Rules, and without an applicable exemption, qualified participants must:
1) Register with the SEC under Section 15(a) or 15(c);
2) Become a member of a self-regulatory organization; and
3) Comply with federal securities laws and requirements listed by specific self-regulatory organizations and the Treasury. [6]
Is Anyone Excluded From the Final Rules?
Those exempt from the Final Rules include:
1) A person who has or controls total assets of less than $50 million;
2) An investment company registered under the Investment Company Act of 1940; or
3) A central bank, sovereign entity, or international financial institution. [7]
When Are The Final Rules Effective and Compliance Required?
The Final Rules are effective 60 days after the date of publication of the Final Rules, and the compliance date for the Final Rules is 1 year after the effective date of the Final Rules. [8]
If you have questions about the new Private Fund Rules, or about other compliance or legal matters, we are here to help. Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors, and businesses. Robert Boeche and Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.
[1] Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer in Connection with Certain Liquidity Providers, Exchange Act Release No. 99477 (Feb. 5, 2024) (“Adopting Release”), available at https://www.sec.gov/files/rules/final/2024/34-99477.pdf.
On August 23, 2023, the Securities and Exchange Commission (“SEC”) adopted new rules regarding the regulation of private funds and their advisors, providing an update to the existing compliance rules already in place for investment advisers. [1] These rules created new obligations for investment advisers to private funds in order to increase transparency and “fair” disclosures among investment advisers registered with the SEC to their investors.
When Must Investment Advisers Comply With the Rules?
The compliance date for most of the new rules is March 2025. [2] The costs for advisers to comply with these new rules is expected to be significant.
This rule requires that (i) for the first three quarters of a fund’s fiscal year, a quarterly statement be delivered to fund investors within 45 days of the end of each quarter, and (ii) for the final quarter of a fund’s fiscal year, a quarterly statement be delivered to fund investors within 90 days of the end of that quarter. [3]
The required information is at the fund level and portfolio company level. [4]
Each quarterly statement must include:
A fund-level table with a detailed accounting of all compensation paid or allocated to the RIA/its related persons, fund fees and expenses, and any fee offsets or rebates carried forward during the reporting period to the following quarterly period; [5]
A portfolio investment-level table including a detailed accounting of all portfolio investment compensation allocated or paid to the RIA/its related persons by each covered portfolio investment during the reporting period; [6]
For illiquid funds, standardized investment performance information since such fund’s inception through the end of the covered fiscal quarter, including: [7]
The fund’s gross and net internal rate of return (“IRR”) and multiple on invested capital (“MOIC”), calculated both with and without the impact of fund-level subscription facilities; [8]
The fund’s gross and net IRR and MOIC for the realized and unrealized portions of such fund’s portfolio, calculated both with and without the impact of fund-level subscription facilities; and [9]
(iii) A statement of contributions and distributions. [10]
Preferential treatment (e.g., reduced fees, better info rights) is generally not permitted unless offered to all investors (referred to as the “Preferential Treatment Rule”). [12]
The RIA (fund adviser) must keep detailed records of any notification, consent, or other document is distributed to or received from private fund investors pursuant to the Preferential Treatment Rule, along with a record of each addressee and the corresponding date(s) each document/notice is sent. [13]
The “Restricted Activities Rule” prohibits a fund adviser from charging a fund for (i) regulatory and compliance expenses of the RIA (fund adviser), and (ii) fees and expenses associated with any regulatory exams, unless the RIA distributes a written notice of such expenses (the notice must include the dollar amount of expenses and be delivered to the investors within 45 days after the end of the quarter in which the charge occurs) and gets investor consent. [14]
Fees must be assessed to investors on a pro-rata basis (subject to narrow exemptions – which include prior to charging fees, the RIA sends each fund investor written notice of the non-pro rata charge and a description of how it is fair and equitable under the circumstances). [15]
RIA may not borrow from the fund without investor consent. [16]
(1) Quarterly Statement Rule: Only applies “to investment advisers that are registered or required to be registered with the Commission.” [17]
(2) Preferential Treatment Rule: Applies to all private fund advisers, venture capital fund advisers, foreign private advisers, all other unregistered investment advisers to private funds, and registered advisers to private funds. [18]
(3) Restricted Activities Rule: Applies to all private fund advisers, venture capital fund advisers, foreign private advisers, all other unregistered investment advisers to private funds, and registered advisers to private funds. [19]
If you have questions about the new Private Fund Rules, or about other compliance or legal matters,we are here to help.Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.We represent many broker-dealers, registered representatives, investment advisors, investors, and businesses.Robert Boeche and Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.
Beginning January 2024, several new laws began to take effect, impacting various professionals – specifically those U.S. businesses and entities who file documents with the secretary of state. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) began accepting Beneficial Ownership Information Reports (“BOI report” or “BOIs”) in January in an effort to increase transparency surrounding entity ownership. Those who fail to comply could receive significant penalties – including fines and/or imprisonment.
This law affects every U.S. corporation, limited liability company, limited partnership, and other entity! The reach of this law is very expansive and applies to virtually every business and entity.
What is the Corporate Transparency Act & Beneficial Ownership Information?
The Corporate Transparency Act (“the Act”) was implemented as federal preventative legislation to monitor and punish actors who seek to fraudulently conceal their entity ownership and operations from Congress, whether for businesses, LLPs, corporations, and the like. [1] The Act requires entities operating in the United States to report specific beneficial information, including information about those who own or control their entities. [2]
FinCEN requires that all “reporting companies” file BOI reports as long as they do not fall under any exemptions. [3] “Reporting companies” comprise both domestic and foreign entities including corporations, LLCs, or other companies that have filed documents in a U.S. State or Tribal jurisdiction and are registered to do business in the U.S. [4]
Moreover, a beneficial owner of a company includes “any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interests of a reporting company,” and there can be multiple beneficial owners for one entity. [5]
FinCEN expects that most entities will be able to submit their own BOIs for their companies, but those who need assistance may consult with professionals such as attorneys or accountants for help with submissions. [6]
Reports need only to be submitted one time, unless amendments must be made, and must provide the following information about each beneficial owner of a business [7]:
Name;
Date of birth;
Address; and
I.D. number and issuer from a non-expired U.S. driver’s license, passport, or other identification document issued by a State, local government, or Indian tribe. If none of these are viable options, submission of a non-expired foreign passport with an image of the document is sufficient. [8]
Companies required to comply must be aware of the following deadlines to file BOI reports [9]:
(1) Existing companies: If created or registered to do business in the United States before January 1, 2024, must file initial beneficial ownership report by January 1, 2025. [10]
(2) Newly created or registered businesses in 2024: If created or registered to do business in the United States on or after January 1, 2024, and before January 1, 2025, companies have 90 calendar days to file after receiving actual OR public notice that registration of their business is effective. [11] a. 90 days begins to run from the time the company receives actual notice of effective business registration OR after a secretary of state provides public notice of the business registration, whichever is earlier. [12]
(3) On or After January 1, 2025: If created or registered on or after January 1, 2025, has 30 calendar days from actual or public notice of effective creation or registration. [13]
There are no filing fees associated with submitting an initial BOI report, or any amendment thereafter.
Who is Exempt From Reporting Requirements?
There is a list of 23 types of entities exempt from The Corporate Transparency Act reporting requirements, some of which include: (1) securities reporting issuers, (2) pooled investment vehicle, (3) broker of dealer in securities, (4) investment company, (5) investment adviser, and 18 others. [14] For a more extensive list, please review page 4 of the FinCEN BOI Compliance Guide.
Failure to timely comply with the Act, or provide accurate information, can be severe. The ACT divides penalties into three categories: (1) unknowing violation, (2) willful failures, and (3) violations in pursuit or as part of another federally illegal act. Penalties include a $500 daily civil penalty (up to $10,000 per violation) and a possible two-year prison sentence for those that do not provide or update beneficial ownership information with FinCEN. [15]
If you have questions about the Corporate Transparency Act, or about other compliance or legal matters,we are here to help.Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.We represent many broker-dealers, registered representatives, investment advisors, investors, and businesses.Robert Boeche and Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.
