Mitigation of Investment Adviser Business Interruption and Regulatory Noncompliance Risks Related to COVID-19—Update

Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

UPDATE: Since the publication of our Investment Adviser Alert, the staff of the SEC Division of Investment Management has issued several new and updated responses to Coronavirus (COVID-19) FAQs, expanding on prior guidance regarding funds and advisers affected by COVID-19.


  • SEC temporarily eases notarization requirements and clarifies that reliance on COVID-19 temporary relief will not be a risk factor for adviser examinations.
  • Several FAQs address Custody Rule issues.
  • Certain relief provided for registered investment companies and business development companies (BDCs) affected by COVID‑19.

Investment advisers

  • Relief from the Form ID notarization process for certain filers. The SEC has adopted a temporary final rule to provide relief from the Form ID notarization process for certain filers where circumstances related to COVID-19 render it impracticable or impossible to obtain a notarization in a timely fashion. From March 26, 2020 through July 1, 2020, temporary paragraph (c) to Rule 10 of Regulation S-T under the Securities Act of 1933 will allow filers to gain access to the EDGAR system on a temporary basis without initially providing the required notarization to the manually signed document, provided that the filer indicates on the face of the signed document that it could not obtain the required notarization due to circumstances relating to COVID-19. Filers seeking access to EDGAR in reliance on the temporary final rule may be asked to provide documents, on a supplemental basis, to support their application and assist the staff in validating the request. Once the codes are issued, the filer may commence filing.
  • Custody Rule requirements.

- Updated response to FAQ addresses compliance when a pooled investment vehicle fails to distribute its audited financial statements by the applicable deadline due to certain unforeseeable circumstances (Question VI.9). (Modified April 27, 2020)

- New FAQ and response regarding inability to complete surprise examinations (Question IV.7) confirm that the staff would not recommend enforcement action against an adviser for a violation of the Custody Rule if the adviser reasonably believed that its independent public accountant would complete its examination and submit Form ADV-E to file its certificate of accounting by the 120-day deadline, but the accountant failed to do so due to logistical disruptions related to COVID-19, as long as the independent public accountant files such report as soon as practicable, but not later than 45 days after the original due date. (Posted March 30, 2020)

- New FAQ and response regarding custody of certain privately issued securities that are evidenced by physical certificates (Question VII.4) address the temporary inability of custodians to accept physical certificates for a period of time due to COVID-19. The staff confirmed that, if an adviser does not maintain the certificates with a qualified custodian, the staff would not recommend enforcement action under the Custody Rule for the duration of such COVID-19-related closure and until such time as physical certificates can reasonably be placed with a qualified custodian (or similar securities can reasonably be issued in compliance with the privately offered securities exception). The relief is granted on condition that:

(1) the physical certificates can only be used 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 adviser and can be replaced upon loss or destruction; and

(5) the adviser makes and keeps (in accordance with the terms of Advisers Act Rule 204-2) a record of the custodian’s closure. (Posted April 2, 2020.)

  • Disclosure requirements related to PPP loans. In response to Question II.4. regarding reporting or disclosure obligations relating to receipt of loans pursuant to the Paycheck Protection Program (PPP) established by the U.S. Small Business Administration in connection with COVID-19, the SEC reiterated an adviser’s fiduciary obligation of making “full and fair disclosure to clients of all material facts relating to the advisory relationship.” Accordingly, disclosure requirements regarding the receipt of a PPP loan would have to be examined by each adviser under its own facts and circumstances. The SEC provided the following examples:

If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance. If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact. In addition, if your firm is experiencing conditions that are reasonably likely to impair its ability to meet contractual commitments to its clients, you may be required to disclose this financial condition in response to Item 18 (Financial Information) of Part 2A of Form ADV (brochure), or as part of Part 2A, Appendix 1 of Form ADV (wrap fee program brochure).” (Posted April 27, 2020)

  • Participating adviser’s obligations when wrap fee sponsor is unable to deliver Brochure to program clients on time. The FAQs include a participating adviser’s question (Question II.5.) regarding what steps it and the wrap fee sponsor it contracted with must take to avail themselves of the temporary exemptive relief granted by the SEC in its March 25, 2020 order (Advisers Act Release No. 5469) (Order), if the sponsor is unable to deliver Form ADV Part 2 (Brochure) to clients of the wrap fee program by the delivery deadline, due to circumstances related to COVID-19. The staff responded that the participating adviser, like any investment adviser, must satisfy the disclosure, notice and other conditions of the Order.

Specifically, the participating adviser must disclose on its public website (or if it does not have a public website, provide notice as described in the Order) that it is relying on the Order. In the case of clients that primarily or exclusively interact with the participating adviser through the wrap fee program sponsor, the SEC advised the sponsor should also consider posting on its public website notice that the participating adviser is relying on the Order to further inform existing clients regarding the availability of updated Brochure disclosures.

The Order also requires the participating adviser to notify the staff via email that it is relying on the Order. In the staff’s view, a wrap fee program sponsor could promptly notify SEC staff via email on the participating adviser’s behalf that the participating adviser is relying on the Order if, in its email to the staff, the sponsor identifies each individual participating adviser that is relying on the Order and represents that it has authority to submit the email on behalf of those participating advisers. If the participating adviser is also relying on the Order with respect to any clients for which the sponsor is not contractually obligated to deliver the Brochure, the participating adviser would need to separately satisfy this notice condition.

Consistent with the Order, the participating adviser’s Brochure must be delivered to existing clients as soon as practicable, but not later than 45 days after the original due date. The relief provided in the Order is time-limited. Please refer to the Order for details on the period for which relief is available. (Posted April 27, 2020)

Registered Investment Companies

Through several orders (collectively, the IC Order), the SEC provided certain relief for registered investment companies and business development companies (BDCs) affected by COVID‑19. (See the Investment Adviser Alert.)

  • The IC Order did not provide relief from prospectus filing requirements or requirements to deliver a prospectus to new investors. In this regard, in response to Investment Companies Question III.1, the staff of the Division of Investment Management recently reminded investment company issuers of their obligations under section 10(a)(3) of the Securities Act of 1933 to update the information in their prospectuses, including the required underlying certified financial statements. To the extent that an investment company is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, the investment company should engage with the Division of Investment Management. (Please see below for SEC contact information.)
  • Temporary relief from other obligations:

- Temporary additional funding flexibility relief (including to borrow money from certain affiliates) to obtain short-term funding is available to (1) registered open-end management investment companies other than money market funds (open-end funds) and (2) insurance company separate accounts registered as unit investment trusts (separate accounts), subject to the conditions in the IC Order. The IC Order does not extend the temporary relief for borrowing to closed-end funds.

- Temporary relief for issuers (including investment companies) from the requirement to furnish certain proxy soliciting and other materials in areas where the issuer’s common carrier has suspended delivery service and the other conditions in the IC Order are satisfied.

- Additional temporary flexibility for BDCs to issue and sell senior securities and participate in certain joint enterprises or other joint arrangements that would otherwise be prohibited by Section 57(a)(4) of the Investment Company Act of 1940 and Rule 17d-1 thereunder, subject to the conditions in the IC Order.

- Response to FAQ III.5. confirms the staff’s view that if a closed-end fund’s net asset value declines by more than 10 percent due to market conditions associated with COVID-19, the Division of Investment Management would not object to the fund satisfying Item 34.1 of Form N-2 by filing a prospectus supplement pursuant to Rule 497 under the Securities Act of 1933 (instead of amending its prospectus) if the fund notifies its Disclosure Review and Accounting Office staff reviewer, at least one business day in advance, of the name(s) of the closed-end fund(s) which intend to so file.

- No-Action letter permitting certain affiliates to purchase debt securities from a mutual fund, under the circumstances and subject to the conditions described in the letter.

- No-Action letter permitting certain affiliates to purchase securities from a money market fund, under the circumstances and subject to the conditions described in the letter.

SEC Division of Investment Management contact information for COVID-19 matters (Question I.1).

[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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