Investment Management Updates – May 2020

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SBA Issues Interim Rule on PPP Loan Eligibility

On April 24, 2020, the Small Business Administration released an Interim Rule that provides additional guidance on the rules governing the Paycheck Protection Program (PPP). The Interim Rule specified that “hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.” The Interim Rule also provided a limited safe harbor, allowing applicants to repay their loan in full by May 14, 2020 without penalty for any loans issued before the publication of the Interim Rule.

Learn more in our advisory: Update on Relief Under the CARES Act for Fund Managers

SEC Proposes New Fund Valuation Rule Under the Investment Company Act

On April 21, 2020, the Securities and Exchange Commission (SEC) proposed new Rule 2a-5 under the Investment Company Act of 1940, as amended, that would establish specific requirements for boards of directors of registered investment companies and business development companies to determine the fair value of fund assets and allow boards to assign the fair value determination to investment advisers, subject to the board’s oversight. Historically, the SEC has taken the position that a board may not “delegate” the determination of fair values. Among other required functions, a fund’s board or investment adviser must maintain written policies and procedures for determining the fair value of fund assets, periodically test its valuation methodologies, and assess and manage any material risks associated with its fair value determinations, such as material conflicts of interest.

Under the 1940 Act, if a market quotation for an investment is “readily available,” it must be valued at the market value; if not, the investment is valued at “fair value as determined in good faith by the board.” “Readily available” is not currently defined by the 1940 Act or its rules. The proposed rule provides that “a market quotation is readily available only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date.”

Learn more in our advisory: SEC Proposes New Fund Valuation Rule Under the Investment Company Act

SEC Publishes Four New FAQs for Form CRS

Form CRS’s first compliance deadline of June 30, 2020 is approaching. On April 6, 2020, the SEC published four new FAQs for the filing and delivery requirements for Form CRS. The FAQs generally cover which system Form CRS should be filed with, as well as questions about combined relationship summaries with affiliates and the delivery requirements.

NFA Amends Interpretive Notice for Promotional Materials

Effective April 22, 2020, the National Futures Association (NFA) amended Compliance Rule 2-29 and Interpretive Notice 9003 – NFA Compliance Rule 2-29: Communications with the Public and Promotional Material. The rule and interpretive notice generally require that past performance used in promotional material by a futures commission merchant, introducing broker, commodity pool operator (CPO), or commodity trading adviser (CTA) member or NFA associate must be presented net of all commissions, fees, and expenses. The rule and interpretive notice are now amended to allow for CTA members that are also registered as SEC investment advisers to present past performance to eligible contract participants on a gross basis in nonpublic, one-on-one presentations, subject to certain disclosure requirements. 

CFTC Proposes Amendments to CPO Reporting Requirements Under Form CPO-PQR

On April 14, 2020, the Commodity Futures Trading Commission (CFTC) approved a proposal to amend CPO reporting requirements under Regulation 4.27 and Form CPO-PQR to:

  • Eliminate pool-specific reporting requirements under current Schedules B and C of Form CPO-PQR, other than the pool schedule of investments.
  • Eliminate questions about pool auditors and marketers.
  • Add a new requirement to report legal entity identifiers (LEIs), if any, for CPOs and operated pools. 

The proposed amendments would also eliminate the distinction between “large” CPOs (CPOs with aggregated pool assets under management (AUM) of $1.5 billion or more as of the close of any day during the reporting period) and small or mid-sized CPOs (CPOs with aggregated pool AUM less than $1.5 billion during the reporting period) by requiring all CPOs to file Form CPO-PQR quarterly. Historically, small and mid-sized CPOs were only required to file Form CPO-PQR with the CFTC annually. These proposed changes to Form CPO-PQR would align with the NFA’s Form PQR, which small and mid-sized CPOs are currently required to file quarterly. Once the NFA finalizes its amendments to NFA Form PQR to include LEI reporting, CPOs will be able to satisfy both CFTC and NFA reporting requirements with one form.

CFTC and NFA Issue Relief from Fingerprinting Requirements

In response to the coronavirus pandemic, the NFA suspended its applicant fingerprinting service on March 16, 2020 until further notice. In response to this suspension, the CFTC issued a no-action letter on April 24, 2020, granting temporary relief from its fingerprinting requirements under CFTC Regulations 3.10(a)(2) and 3.12(c)(3). The temporary relief applies to natural persons applying for listing as principals and registration as associated persons of new or existing registrants, subject to certain review, certification, and recordkeeping conditions. The relief is in effect until July 23, 2020 or until the NFA notifies the public that is has resumed processing fingerprints. Principals and associated persons relying on this relief must submit their fingerprints to the NFA within 30 days of the NFA’s public announcement of its resumption of fingerprint processing.

In connection with the no-action relief issued by the CFTC, on April 27, 2020, the NFA issued corresponding relief from the fingerprint requirements under NFA Registration Rules 204(a)(2)(A) and 206(a)(1)(A).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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