The new calendar year brings with it new rules for fund sponsors and, as a result, myriad process updates sponsors must make to comply with the requirements.

This article will explain the timeline, non-compliance risks and targeted solutions for several new requirements, including the Corporate Transparency Act, the effectiveness of the Securities and Exchange Commission’s (SEC’s) new Marketing Rule, and the potential for other SEC proposals to be finalized.

The Corporate Transparency Act
In-short: This will require massive amounts of new personal data to be disclosed to the U.S. government.

Timeline: On September 29, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released the first set of final regulations for the Beneficial Ownership Information Reporting Requirements under the Corporate Transparency Act (the CTA).

Under the CTA, reporting companies formed prior to the January 1, 2024, effective date will have until January 1, 2025, to file a report disclosing identifying information about the reporting company and its beneficial owners. Reporting companies formed on or after January 1, 2024, will have 30 days to file the report, which must include identifying information on the reporting company, beneficial owners,and applicants. Once the report has been filed, reporting companies will have to file updates within 30 days of a change in their information.

A reporting company is defined to include any entity that is a corporation, a limited liability company, or any entity created by filing with a secretary of state or any similar office under the law of a state or Indian tribe. Excluded from reporting companies are SEC-registered investment advisors, venture capital fund advisors and funds that are advised by a SEC-registered investment advisor or venture capital fund advisor. Despite the large number of exemptions, the Reporting Rule is expected to have a significant impact on private investment funds that are not exempted. While registered investment advisors are exempt from the reporting requirements under the Reporting Rule, private fund advisors and family offices are not exempt. In addition, certain kinds of pooled investment vehicles, such as real estate vehicles relying on the Section 3(c)(5)(c) exemption under the Investment Company Act of 1940, are not exempted.

Risks for non-compliance: The CTA will provide essential information to law enforcement, national security agencies and others to help prevent criminals, terrorists, proliferators and corrupt oligarchs from hiding illicit money or other property in the United States. An inability to generate the identifying information or a FinCEN identifier per the timeline above will greatly increase the risk of non-compliance. The risk of non-compliance should be kept low with minimum cost expenditures relative to the cost of non-compliance and a FinCEN investigation. Required identifiers include the following:

• Name

• Date of birth

• Residential address

• Unique identifying number

• Photograph of person from an acceptable government-issued identification document (e.g., passport or driver’s license)

Targeted solution: Advisors should begin to review and determine which entities will be considered reporting companies and, for each reporting company, which individuals will be classified as the beneficial owners and applicants, keeping in mind that the applicants of a reporting company formed before January 1, 2024, are not required to disclose.

Institutions that regularly establish entities and advisors with substantial control over entities (e.g., trustees, directors, senior-level employees) should establish internal processes to efficiently monitor and disclose the required identifying information.

SEC’s Marketing Rule
In short: This will require more sensitivity around the review of marketing materials.

Timeline: On December 22, 2020, the SEC adopted reforms under the Investment Advisers Act of 1940 (the Advisers Act) to modernize marketing rules that govern investment advisor advertisements and payments to solicitors. Compliance is required by November 4, 2022, and SEC exams will start in 2023 with specific review areas, as discussed below.

Risk factors for non-compliance: In advertisements, sponsors should consider if they can substantiate material statements of fact and if all relevant disclosures are clearly and prominently included. There will be greater scrutiny if there is a lack of substantiation.

During exams, the SEC will specifically be looking for prohibited data points (as listed below):

• Gross performance, unless the advertisement also presents net performance

• Any performance results, unless they are provided for specific time periods (not applicable to the performance of private funds)

• Any statement that the SEC has approved or reviewed any calculation or presentation of performance results

• To the extent an advertisement includes the performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar investment policies, objectives and strategies as the portfolio being offered in the advertisement, with limited exceptions

• Performance results of a subset of investments extracted from a portfolio, unless the advertisement provides or offers to provide promptly the performance results of the total portfolio

• Hypothetical performance, unless the advisor adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the advisor provides certain additional information

• Predecessor performance, unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising advisor and the accounts that were managed by those personnel at the predecessor advisor are sufficiently similar to the accounts that they manage at the advertising advisor

Targeted solution: Consider whether you need to update or revise written policies and procedures (including training, supervisory, oversight and compliance) to ensure they are reasonably designed to prevent violations (by the advisors and their supervised persons) of the Marketing Rule, including by having third-party (e.g., law firm) reviews of marketing materials.

Investment advisors must make and keep certain records, such as all advertisements they disseminate, including certain internal working papers, performance-related information and documentation for oral advertisements, testimonials and endorsements.

Potential For Other Final SEC Rules
On February 9, 2022, the SEC announced proposed new rules under the Advisers Act targeting private funds and their investment advis0rs (the Proposed Rules). The Proposed Rules mark a massive divergence from the SEC’s long-established approach to fund compliance, which emphasizes disclosure and relies on private contractual relationships to regulate the behavior of industry participants, toward a regime that directly regulates the relationships between and among investment advisors and investors. A proposed timeline, risk factors and solution are still to be determined once the rules are finalized.

John Beals and Benedict Kwon are partners in Nixon Peabody’s Corporate practice and co-lead the firm’s Investment Funds team. Matthew Bobrow is an associate in the firm’s Corporate practice and also part of the Investment Funds team.