More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Securities and Exchange (SEC) on June 8 posted responses to frequently asked questions regarding the implementation of Rule 204(b)-1 and the new Form PF under the Investment Advisers Act of 1940.
The form must be completed by registered investment advisors that manage $150 million or more in assets attributable to private funds. The FAQs cover issues relating to the categorization of hedge funds, liquidity funds and private equity funds under the Rule, as well as aggregation of assets principles and fund of funds reporting issues.
For instance, the Q&A regarding hedge funds is as follows:
Q: The form specifies that a commodity pool is categorized as a hedge fund for reporting purposes. Under Commodity Futures Trading Commission (CFTC) interpretations, a private fund that holds a single commodity interest position may be a commodity pool. Am I required to treat a private fund as a commodity pool if such private fund’s commodity interest positions are de minimis?
A: You should not categorize a private fund as a commodity pool for reporting purposes if the private fund’s commodity interest positions satisfy either of the de minimis tests in Regulation 4.13(a)(3)(ii) issued by the CFTC. Accordingly, you would only have to categorize such a private fund as a hedge fund if it otherwise meets the definition of a hedge fund (i.e., it may charge a performance fee, employ large amounts of leverage, or sell assets short).