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SEC Issues Risk Alert to Private Fund Advisers, Part 2

This supplements our previous post relating to a Risk Alert issued by the SEC’s Office of Compliance Inspections and Examinations on June 23. The Risk Alert was directed at investment advisers to private investment funds. While the prior post discussed the portion of the Risk Alert dealing with fees and expenses, this post discusses the SEC’s findings relating to failure to disclose conflicts of interest.

By way of background, the Risk Alert reminds private fund advisers that they owe duties of care and loyalty to the investors in private funds. In order to fulfill the duty of loyalty, the adviser may not prefer his own interests to those of the investors and must disclose to its clients, in a full and fair manner, all material facts relating to the advisory relationship. The scope of the investment adviser’s duties is discussed at length in IA-5248, issued in June 2019, which we have discussed in a previous post.

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As we mentioned in an earlier post, in April of this year the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued separate risk alerts on the subjects of Form CRS and Regulation Best Interest (Reg BI). The risk alerts were designed to provide investment advisers and broker-dealers information regarding the anticipated scope and content of the examinations OCIE will conduct following the filing deadline for Form ADV, Part 3 and following the compliance date for Regulation Best Interest. In this post we examine the new requirements regarding Form ADV, Part 3, which we will refer to as “Form CRS,” and then review the SEC’s Risk Alert relating to Form CRS. Firms seeking to comply with the new requirements should carefully review the 17-page instructions to Form CRS. The SEC has also published a helpful Small Entity Compliance Guide.

Under the new requirements, federally registered RIAs must electronically file Form CRS via the IARD system and must deliver a Form CRS to all retail investors, regardless of net worth or sophistication. Currently registered RIAs or entities who currently have pending applications to become RIAs may file their form CRS at any time, but they must file the initial CRS on or before June 30, 2020. The Form CRS may be filed as part of an initial application to register under Rule 203-1, or as an other-than-annual amendment to the Form ADV under Rule 204-1. Beginning June 30, 3020, any new application will be considered incomplete and will be rejected if it does not contain a Form CRS. Every RIA’s firm must post its Form CRS on its public website, but there is no requirement that a firm without a public-facing website must create one. Continue reading ›

Through updates to the Frequently Asked Questions maintained on its website, the Small Business Administration announced that it has extended the safe harbor date previously announced in Question 31 from May 7, 2020 to May 14, 2020, and that it intends to issue updated guidance relating to the safe harbor before May 14.

By way of background, on April 23, 2020 the SBA issued guidance relating to the certification that must be made by any applicant for a loan under the Paycheck Protection Program (PPP). Specifically, the SBA advised all applicants to consider the truthfulness of the certification in the application regarding the need for the loan to support business operations. The answer to question 31 clarified that all borrowers must carefully consider whether, in light of their current business and access to capital, the loan is necessary, provided the capital is available in a way that would not substantially impair the business. The SBA granted a “safe harbor” by which anyone who had received funds through a PPP loan will be deemed to have made the loan certification in good faith if they return the funds on or before May 7, 2020. A few days later the SBA made it clear that the answer to Question 31 applied to private as well as public companies, through the addition of Question and Answer 37.

The entire process has been sloppy and uncertain. Even the original certification required is vague.  What exactly does it mean that a loan is necessary “to support the ongoing operations of the Applicant.” This question could have been avoided through the development of more thorough, objectively measurable eligibility standards, rather than through such a scatter gun approach.

Due to recent guidance from the Small Business Association (SBA) and the Securities and Exchange Commission (SEC), registered investment advisers (RIAs) should carefully consider their eligibility for a loan under the Paycheck Protection Program, and whether they must disclose the circumstances that led to the loan, or the fact of receiving the loan itself, on form ADV.

The PPP Loan Certification
In order to qualify for a PPP loan, an applicant must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Our view of this language was that it was very broad, so as to apply to any business that reasonably anticipated a reduction in revenue that could result in curtailment of its current operations. If an RIA believed in good faith that its revenue will decrease or has decreased as a result of the pandemic, and also anticipated that it will have to terminate any employees without the loan, then it is eligible for the loan. Since the primary purpose of the loan program was to minimize unemployment, in our view such an RIA should have easily been able to make the certification in good faith. However, later SBA guidance effectively altered the standard, and any RIA who applied for a loan should reevaluate the certification under the new standard.

April 23, 2020 — SBA Guidance
There was political backlash in mid-April when it was revealed that certain large companies, including publicly-traded companies that had access to capital markets, were receiving PPP loans. This led the Small Business Administration to issue formal Q&A guidance last Thursday, April 23, 2020. As a result of the guidance, the SBA stated that, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. While it is tempting to read the SBA guidance as applicable only to large businesses with access to capital, the Q&A made it clear that the “significantly detrimental” standard applies to “all borrowers.”Furthermore, while the guidance could be interpreted to apply only to public companies, the SBA clarified that it applied to private companies by updated guidance issued on April 28, 2020.

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As the saying goes, “a rising tide lifts all boats.” This expression is commonly used in the investment world to mean that in bull markets, all portfolios tend to rise, no matter how poorly constructed. However, when the market changes directions sharply, as it has over the last thirteen trading days, poorly constructed portfolios sink more precipitously than the overall market.

The stock market has never before plunged by 18% off of its all-time high over such a short time frame. The main driver of the decline had been, prior to this week, concern over the impact that the spreading Coronavirus will have on the US economy. On Monday, March 9, however, news of an oil trade war caused a further, more precipitous decline. But the 18% decline in the market in the last few trading days represents the broad equity markets. Investors whose portfolios are overconcentrated in individual stocks or market sectors are experiencing even worse declines. To continue the boat metaphor, some portfolios will be sunk or will crash against the rocks. Continue reading ›

Parker MacIntyre is proud to announce that it is a co-sponsor of She Leads, an upcoming financial education and empowerment workshop specifically geared to the unique needs of women in the workforce seeking to secure, protect, and grow their wealth. She Leads is a free event produced and organized by the Office of Georgia Secretary of State Brad Raffensperger in partnership with Investor Protection Trust (IPT), Investor Protection Institute (IPI) and the Association for Financial Counseling & Planning Education® (AFCPE®). The workshop will be held on Friday, May 3, 2019 in Atlanta.

In announcing the firm’s co-sponsorship of She Leads, Steve Parker, Managing Principal at Parker MacIntyre, has stated that “we at Parker MacIntyre are thrilled to be a part of this effort to enhance financial and investment awareness in Georgia, and wholly support Secretary Raffensperger’s initiatives on this front.” Secretary Raffensperger has announced a financial literacy platform, including a series of events aimed at educating Georgians on the importance of investing and money management. She Leads is the second event hosted by the Secretary since taking office in January 2019. As described in the event’s agenda, the goal of She Leads is “to empower women with an increased knowledge about money, their personal relationship with money, and financial issues and strategies that are available to increase and leverage wealth.” Continue reading ›

Parker MacIntyre welcomes Thomas W. Zagorsky as a guest contributor to the RIA Compliance Blog.  Tom is a long-time friend of, and collaborator with, our firm.  His wealth of legal experience includes serving as Assistant Commissioner of Securities for the State of Georgia from 2013 to 2015 and a practice of law, both with private law firms and investment banking and private funds, for nearly 15 years.  He specializes in hedge fund formation, private securities offerings and other aspects of securities and investment services law.  Tom is well-versed in the rules and regulations relating to investment advisers, including private fund advisers, managers of private equity funds and other pooled investment vehicles.

Tom has kept a keen eye on recent statutory and rule developments impacting issues such as crowdfunding, private placement reform, and other statutory and regulatory innovations relating to corporate finance and capital formation.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.

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