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SEC Comment Letters

SBIA Comment Letters to the
Securities and Exchange Commission


SEC Issues Proposed Rule Requring SEC-Registered Advisers to Create Business Continuity Plans

On June 28, 2016, the SEC released a proposed rule which will require SEC-registered advisers, including those advising private equity funds, to implement written business continuity and transition plans reasonably designed to address operational and other risks related to a significant disruption in the investment adviser's operations.  The proposed rule would also amend rule 204-2 under the Advisers act to require advisers to make and keep all busincess continuity and transition plans that are currently in effect or at any time within the past five years were in effect.  SBIA submitted comments on the proposal on September 6, 2017.

SEC Submits Comment Letter on Proposed Rule Impacting BDC Unfunded Commitments and Use of Derivatives


On December 11, 2015, the SEC released a new rule proposal on the use of derivatives and financial commitment transactions by registered investment companies and BDCs.  The new proposed Rule 18f-4 of the ’40 Act would supersede prior staff guidance and prior IC Release 10666. Most BDCs would be impacted by the proposed rule by now being required to set aside "qualified coverage assets" (cash or cash equivalents) to cover their "unfunded commitments", which could include revolving credit facilities and delayed draw loans to portfolio companies.

SBIA's government affairs team submitted a comment letter to the Securities & Exchange Commission on March 28, 2016 on the proposed rule. SBIA sought feedback from across our BDC membership and crafted a comment letter on the proposed rule that sought to balance the approaches sought by our members.

Please feel free to review our comment letter, which is available here.


SBIA Submits Comment Letter on SEC Accredited Investor Report


 On December 18, 2015, the SEC released the results of a study required under the Dodd-Frank Act, which required the SEC to evaluate the current definition of “accredited investor” under the securities laws. The report made a number of recommendations to change the definition, including updating the financial thresholds for inflation, and expanding the sophistication requirements of the investor beyond financial thresholds. SBIA submitted a comment letter on the study on February 2, 2016, highlighting the lack of evidence presented in the report and suggesting a need to raise the financial thresholds.    


SEC Released Proposed Rule Amending Form ADV & Investment Adviser Regulations – Input Requested


The SEC released a new Proposed Rule on May 20, 2015, amending Form ADV and the Investment Adviser regulations for registered investment advisers (RIAs). Generally, all advisers to private funds (including those registered at state level, exempt reporting advisers, or SEC-registered advisers) are required to submit Part 1-A of Form ADV.  The proposed rule dramatically increases the amount of information collection on Form ADV, which may pose significant additional reporting burdens on advisers to private funds. SBIA intends to be the voice of the industry on this important rulemaking.

SBIA intends to comment on the proposed rule and is seeking member feedback.  Please contact Chris Hayes, SBIA’s Legislative & Regulatory Counsel via email, if you have any feedback on the changes to the regulations and Form ADV.  Comments are due 60 days after publication in the Federal Register (which will occur in the next day or so).

The new rules make changes to:

·         Investment Advisers Act: Rule 204-2 (Books & Records) and Rule 203A-5

o   Rule 204-2 (Books & Records Rule): These changes will require advisers to make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person. The rules would also require advisers to maintain originals of all written communications received and copies of written communications sent by an investment adviser related to the performance or rate of return of any or all managed accounts or securities recommendations. 

o   Rule 203A-5: Dodd-Frank Act prohibited from SEC registration those advisers that have RAUM between $25 million and $100 million. Rule 203A-5 provided a temporary exemption from this prohibition to facilitate the transition, caused by Dodd-Frank, from SEC to state registration. The SEC now plans to eliminate this rule because the transition to state registration was completed in June 2012.

·         Form ADV (Changes to Part 1A)

o   Additional Separately Managed Account Information Collected: Changes to collect additional information about separately managed accounts.  Advisers would now be required to provide certain aggregate information on separately managed accounts that they advise, including information on regulatory assets under management (RAUM), investments, and use of derivatives and borrowings (Form ADV, Part 1A, Section 7.B.(1) of Schedule D and Form PF). The amendments are designed to help the staff’s ability to carry out their risk-based examination program and other risk assessment and monitoring activities.

§  Advisers will have to report the approximate percentage of separately managed account RAUM invested in ten broad asset categories (such as equity securities, government bonds, etc.). The information would be reported annually for most advisers, but with those over $10 billion in RAUM in separately managed accounts, they would collect both mid-year and year end data.

§  Advisers with at least $150 million and less than$10 billion in RAUM attributable to separately managed accounts, the SEC would require reporting the number of accounts that correspond to certain categories of gross notional exposure, and the weighted average amount of borrowings (as percentage of net asset value (NAV)) in those accounts. Reporting on the use of borrowings and derivatives would only be required with respect to separately managed accounts with a NAV of at least $10 million.

§  Advisers would have to update the derivatives and borrowings information annually when filing their annual update to Form ADV.

§  Advisers have to identify any custodians that account for at least 10 percent of separately managed RAUM and the amount of the advisers RAUM attributable to separately managed accounts held at the custodian.

o   Umbrella Registration Is Incorporated into Form ADV: Changes to establish a more efficient method for registration of multiple private fund adviser entities operating a single advisory business on one Form ADV (umbrella registration). Form ADV is being amended to incorporate umbrella registration into the Form. The current Form ADV was designed to register single legal entities. Advisers of private funds are frequently organized using multiple legal entities, and staff guidance has provided guidance to private fund advisers using umbrella registration within the confines of the current form. The creation of uniform filing requirements regarding umbrella registration in the new Form ADV will provide more consistent data about, and create a clearer picture of, groups of advisers that operate as a single business by grouping Form ADV data for each legal entity registered under the umbrella. Guidance for using the current form re: umbrella registration was put forth in a no-action letter in 2012, available here:

§  Umbrella registration will be available where a filing adviser and one or more relying advisers conduct a single fund advisory business and each relying adviser is controlled by or under common control with the filing adviser. The following conditions will determine whether this registration is available:

1)      The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients and are otherwise eligible to invest in the private funds advised by the filing adviser/relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds.

2)      The filing adviser has its principal office and place of business in the U.S. and therefore all substantive provisions of the Advisers Act and the rules apply to the filing advisers and each relying advisers dealings with each of its clients, regardless of whether any client or the filing adviser or relying adviser providing the advice is a U.S. person.

3)      Each relying adviser, its employees, and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, therefore, each relying adviser, its employees, and the persons acting on its behalf are “persons associated with” the filing adviser.

4)      The advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the Commission.

5)      The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with rule 204A-1 under the Advisers Act and a single set of written policies and procedures adopted and implemented in accordance with rule 206(4)-(7).

§  New Schedule R on Part 1-A: A new schedule R would have to be filed for each relying adviser. This would include identifying information, basis for SEC registration, and ownership information about each relying adviser, some of which is already being filed on existing Form ADV. 

§  New Question on Schedule D:  Requires advisers to identify the filing advisers and relying advisers that manage or sponsor private funds reported on Form ADV.

o   Other New Information Collected on Form ADV

§  Additional information collected includes:

·         Adviser websites/social media websites.

·         CIK numbers (even when adviser is not publicly reporting).

·         Additional information about adviser office locations (other than principal office and place of business) and 25 largest offices in terms of employees.

·         Adviser CRD branch numbers if applicable from each office and securities-related activities conducted from each office, and other investment-related business conducted from each office.

·         Amend beyond merely reporting the name/contact info for the advisers Chief Compliance Officer (CCO), and report whether the CCO is compensated/employed by any person other than the adviser for 3rd party compliance providers.

·         Require advisers to report their own assets within a range, rather than just check a box if $1 billion or more on current form (to evaluate conflicts of interest between parallel managed accounts and RICs/BDCs advised by the adviser).

·         Obtain additional information concerning wrap fee programs.

·         Require an adviser to report the number of clients and RAUM attributable to each category of clients as of the date the adviser determines it’s RAUM – previously a range was only required.

·         Requiring an adviser to require reporting on the number of clients for whom an adviser provided advisory services but does not have RAUM.

·         Advisers that report client assets in Part 2A of Form ADV differently from RAUM under Part 1A of Form ADV would be required to check a box noting that election.

·         New question added asking the approximate amount of an adviser’s RAUM attributed to non-US clients.

·         Add a requirement that advisers report the RAUM of all parallel managed accounts related to a RIC or BDC that is advised by the adviser.

·         Adviser must provide identifying numbers (PCAOB/CIK numbers) in several questions to understand relationships of advisers to other financial services providers.

·         New question requiring advisers to report the percentage of a private fund owned by qualified clients, as defined in Rule 205-3 of the Advisers Act.


In submitting comments, SBIA "encouraged the SEC strongly to consider the impact on smaller private funds engaging in small business investing while proposing its regulations. Of particular impact to our members are the changes in the Proposed Rules that permit umbrella registration, and impact the reporting requirements for certain investment advisers on Form ADV." The SBIA Comment Letter can be found here.

SBIA Comments on Proposed Recommendations by the Investor Advisory Committee to the Commissioners of the Securities & Exchange Commission on the Accredited Investor Definition for Rule 506 Offerings


On October 9, 2014, the Investor Advisory Committee of the SEC, a Dodd-Frank creation, voted to approve the recommendations of it's Investor as Purchaser and Investor Education subcommittees in regard to the "accredited investor" definition as it applies to natural persons. A review of the "accredited investor" definition is mandated on a regular schedule by Dodd-Frank, and the SEC and GAO have been conducting studies on whether the definition is appropriate.  Currently, almost all private equity fund and SBIC investors must be "accredited investors" to invest in the private placements that are offered by these funds.  The current definition requires that a natural person have $200,000 in annual income individually or $300,000 jointly with a spouse, or $1 million in net worth (excluding primary residence) to qualify as "accredited."

 The Committee recommended that the Commission evaluate potentially raising the financial thresholds for "accredited investors" to a higher monetary threshold to compensate from inflation since they were implemented in 1982.  The Committee also suggested that the Commission look at other ways to "accredit" investors including looking at how sophisticated they are based on non-monetary factors, such as holding a CFA accreditation, having work experience in the financial industry or other factors.  

The Committee's recommendations are available here.

SBIA submitted a comment letter to the Committee opposing any movement in the financial thresholds due to the impact on capital formation this would have, and the decrease in the pool of accredited investors for private offerings. We supported the approach to establish sophistication in other ways, so long as these thresholds are not changed as a method for qualifying to invest.  Moreover, we addressed a number of issues raised by the Committee.

SBIA's letter, submitted to the Committee on October 8, 2014, is available here.


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