Publications

In recognition of the unprecedented challenges facing investment advisers in the wake of the novel coronavirus (COVID-19) pandemic, U.S. regulators have issued various forms of relief from certain compliance obligations. Below is a round-up of key initiatives issued by the U.S. Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) to ease certain compliance burdens of investment advisers during this period of disruption and uncertainty.

SEC Custody Rule Relief

Inadvertent Receipt of Securities from a Client (Revised Question II.1)

Rule 206(4)-2 (the “Custody Rule”) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), requires an SEC registered investment adviser (an “RIA”) who inadvertently receives securities from a client to return the securities to the sender within three or five business days (depending on the type of asset) to avoid being deemed to have custody of such client assets under the Custody Rule. Acknowledging that an RIA’s personnel may be unable to access mail or deliveries at an office location due to the implementation of the firm’s business continuity plan in response to the coronavirus, the staff of the SEC’s Division of Investment Management (the “Division”) revised Question II.1 of its Custody Rule frequently asked questions (“Custody Rule FAQ”) to indicate that, in such circumstances, the Division would not consider the RIA to have received client assets at that office location until firm personnel are able to access the mail or deliveries at that location.

Filing of Form ADV-E on Completion of Surprise Custody Examination (New Question IV.7)

In the new Question IV.7 of its Custody Rule FAQ, the Division indicated that it would not recommend enforcement action against an RIA for a violation of the surprise examination provisions of the Custody Rule if the investment adviser reasonably believed that its independent public accountant would complete its examination and submit Form ADV-E by the 120-day deadline imposed by the Custody Rule, but failed to do so due to logistical disruptions related to the coronavirus. To rely on this relief, the independent public accountant must file such report as soon as practicable, but no later than 45 days after the original due date.

Delay in Distribution of Audited Financial Statements (Modified Question VI.9)

In our March 20, 2020 Coronavirus Update (available here), we noted that the SEC had not issued any targeted relief extending the requirement to provide audited financial statements within 120 days of a private fund’s fiscal year end (180 days for a fund of funds) for RIAs who rely on the audited financial statement delivery provisions to comply with the Custody Rule. We commented, however, that the Division had previously issued general guidance in response to existing Question VI.9 of its Custody Rule FAQ that it would not recommend enforcement action against an RIA for its failure to distribute the fund’s audited financial statements within the 120-day (or 180-day) period under certain “unforeseeable circumstances.” Since then, in response to concern raised by the Investment Advisers Association (the “IAA”) that, due to the coronavirus, RIAs may not receive audited financial statements from accounting firms in time to meet the required deadlines, the SEC staff directed the IAA to the “unforeseeable circumstances” language in Question VI.9 as being responsive to concerns about such delays.

Maintaining Custody of Certain Privately Issued Securities at a Qualified Custodian (New Question VII.4)

In the new Question VII.4 of its Custody Rule FAQ, the Division indicated that it would not recommend enforcement action against an RIA who cannot maintain physical certificates of privately issued securities with a qualified custodian as required under the Custody Rule because the qualified custodian is not accepting physical certificates due to circumstances related to the coronavirus. The relief is conditioned on satisfaction of the following requirements:

1. the physical certificates can be used only to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer;
2. ownership of the security is recorded on the books of the issuer or its transfer agent (or person performing similar functions) in the name of the client;
3. the physical certificates contain a legend restricting transfer;
4. the physical certificates are appropriately safeguarded by the RIA and can be replaced upon loss or destruction; and
5. the RIA makes and retains (in accordance with the Rule 204-2 of the Advisers Act) a record of the custodian’s closure.

The Custody Rule FAQ is available here.

SEC Form ADV and Form PF Filing and Delivery Relief

In our March 16, 2020 Coronavirus Update (available here), we discussed the order issued by the SEC on March 13, 2020, pursuant to its “public interest” powers under Section 206A of the Advisers Act, providing relief from certain Form ADV and Form PF filing deadlines for investment advisers impacted by the coronavirus (the “Original Order”). Recognizing that investment advisers and other market participants continue to face challenges in meeting the requirements addressed in the Original Order in a timely manner, the SEC issued a new order on March 25, 2020 (the “New Order”). The New Order supersedes the Original Order.

The New Order (a) extends the period of filing and delivery due dates from April 30, 2020 to June 30, 2020, and (b) removes the Original Order’s conditions requiring an investment adviser who relies on the relief to (i) include, in its email correspondence to SEC staff and on its website, as applicable, the reason it is unable to meet a filing deadline or delivery requirement, and (ii) provide an estimated date of filing or delivery completion.

In order to claim relief under the New Order, an adviser must now meet the following conditions:

1. the investment adviser is unable to meet a filing or delivery deadline due to COVID-19 related circumstances;
2. the investment adviser relying on the New Order with respect to the filing and/or delivery requirements of Form ADV promptly (a) emails the SEC at IARDLive@sec.gov, and (b) discloses on its public website (or if it does not have a public website, promptly notifies its clients and/or private fund investors), that it is relying on the New Order;
3. the investment adviser relying on the New Order with respect to the filing requirements of Form PF promptly notifies the SEC, via email at FormPF@sec.gov, that it is relying on the New Order; and
4. the investment adviser files the Form ADV or Form PF, as applicable, and delivers the brochure (or summary of material changes) and brochure supplements as soon as practicable, but not later than 45 days after the original due date.

The New Order is Release No. IA 5469 and is available here.

Anticipating an investment adviser’s concern that its reliance on the relief may signal certain red flags to the SEC, the SEC’s Office of Compliance Inspections and Examinations (OCIE) recently stated that it “is fully aware of the regulatory relief that was provided to registrants in response to COVID-19” and that it “believes it is important to communicate to registrants that reliance on regulatory relief will not be a risk factor utilized in determining whether OCIE commences an examination. We encourage registrants to utilize available regulatory relief as needed.” Furthermore, the Division referenced OCIE’s statement in responding to Question II.2 of its Coronavirus (COVID-19) Response FAQs – “Will SEC staff view an adviser’s reliance on the temporary relief provided in response to COVID-19 as a risk factor for examining the adviser’s business continuity plans?

The OCIE Statement on Operations and Exams is available here and the Division’s Coronavirus (COVID-19) Response FAQs is available here.

SEC Form ADV Updating Relief

Our March 20, 2020 Coronavirus Update (available here) discussed the Division’s new Form ADV FAQ indicating that it would not recommend enforcement action against RIAs and exempt reporting advisers who do not update either Item 1.F of Part 1A or Section 1.F of Schedule D of their Form ADVs to include as additional offices of the investment adviser remote locations from which employees are temporarily working provided the employees are temporarily teleworking from such locations as part of the firm’s business continuity plan due to circumstances related to the coronavirus. As we previously noted, investment advisers should take care to update their Form ADV to include locations from which employees conduct investment advisory business due to arrangements unrelated to the implementation of the adviser’s business continuity plan.

The Form ADV FAQ is available here.

CFTC Form CPO-PQR Filing and Distribution Relief

On March 20, 2020, the CFTC issued a no-action letter (“Letter 20-11”) to registered commodity pool operators (“CPOs”) in response to the coronavirus pandemic which provides for extensions of certain filing deadlines summarized below.

1. Filing of Form CPO-PQR under CFTC Regulation 4.27.
   The deadline for small and mid-sized CPOs to file their 2019 annual report on Form CPO-PQR was extended until May 15, 2020.
   The deadline for large CPOs to file their quarterly report on Form CPO-PQR for the quarter ending March 31, 2020 is extended until July 15, 2020.
2. Pool Annual Reports under CFTC Regulations 4.7(b)(3) and 4.22(c). The deadline for filing any pool annual reports that would otherwise be due on or before April 30, 2020 is extended by 45 days. This relief does not foreclose a CPO from requesting an additional extension of time not to exceed a total of 180 days from the pool’s fiscal year-end.
3. Pool Periodic Account Statements under CFTC Regulation 4.7(b)(2) or 4.22(b). The deadline for distributing periodic account statements to pool participants on either a monthly or quarterly basis in respect of any reporting period ending on or before April 30, 2020, is extended by 45 days.

Letter 20-11 is available here.

For more information on the topic discussed, contact:

• Beth Smigel  |  smigel@thsh.com  |  212-702-3176