In the first post on this topic, we provided a simple answer to a question posed by the Director of the SEC’s Division of Investment Management (the “Division”):

To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules?”

Our simple answer was to treat cryptocurrencies as “financial assets” under Article 8 of the Uniform Commercial Code. In the second post, we explained how this simple answer may be hard to implement when it comes to trading cryptocurrencies, because their markets require trades to settle in the next block. Thus, rather than a custodian implementing a portfolio manager’s instruction to settle a trade, a portfolio manager trading a cryptocurrency will normally need to have immediate control over the transfer of the cryptocurrency, which is inconsistent with the custody requirements of the Investment Company Act of 1940 (the “1940 Act”).

In this post, we consider three potential solutions to the dilemma faced by an investment company that must hold cryptocurrency in compliance with the custody requirements of the 1940 Act while allowing its adviser to trade the cryptocurrency.

Continue Reading Why Blockchain Custody Is So Difficult—Paths Forward?

Yesterday, the SEC announced a number of political contribution-related settlements with investment advisers, both registered and exempt.  As background, Rule 206(4)-5 under the Investment Advisers Act of 1940 limits the size of political contributions that certain personnel of an investment adviser may make to state and local officials, among other things.  Specifically, limits apply to contributions to officials or candidates (such as a Governor or State Treasurer) who can influence the investment decisions of public institutional investors (such as state employee pension plans) that are clients of the adviser or invest in the adviser’s funds.  If the relevant contribution threshold is breached, an adviser is prohibited from accepting compensation from the specific public investor for a two-year period.  A quick summary of the settlements appears in the table below.
Continue Reading SEC Enforces Campaign Contributions Rule

Effective August 15, 2016 for SEC-registered investment advisers, most funds or separate accounts that are subject to a performance fee or allocation need to raise their “qualified client” net worth threshold for new investors, new investments from existing investors, or new separate account agreements, from $2 million to $2.1 million.  Other thresholds (such as the same provision’s $1 million threshold for an investor’s assets managed by the same adviser) remain unchanged. 
Continue Reading Update for September 1 Fund Subscriptions: New “Qualified Client” Standard

Currently, many investment advisory firms indicate to the Securities and Exchange Commission (SEC) on their Form ADV filings that they have “relying advisers.”  With the SEC’s adoption on August 25, 2016, of amendments to Form ADV, the landscape for related advisers has changed substantially under a new “umbrella registration” regime.
Continue Reading Form ADV Amendments: Relying Advisers in Focus

As of January 1, 2016, a person defined as a “finder” will become exempt from the broker-dealer provisions of the California Securities Law of 1968, as amended. Under that law, the Commissioner of Business Oversight regulates the activities of broker-dealers. Assembly Bill No. 667, Section 25206.1 will exempt a “finder” from registration with the Commissioner as a broker-dealer.
Continue Reading Welcoming “Finders” in from the Cold in California

The year 2015 is shaping up to have an unusual focus on the center of that string of relationships tracing the path from end-investor to asset class — that is, the nuts and bolts of asset management “operations.”  Click here to read my recent article about key operations-oriented compliance developments for investment advisers in 2015.
Continue Reading Investment Advisers Act Compliance Developments in 2015

Update:  For many filers, May 29 was the deadline for Form BE-10 to be filed with the Department of Commerce’s Bureau of Economic Analysis.  Certain others have obtained an extension, and those with 50 or more foreign affiliates may have until June 30.  The filing requirement applies to many asset management firms or funds. The form’s instructions and funds FAQ seek to demystify who has to file and how a filer should characterize its business.
Continue Reading Form BE-10 Reminder… Plus New FAQs for Funds