Author: National Law Forum

A group of in-house attorneys developed the National Law Review on-line edition to create an easy to use resource to capture legal trends and news as they first start to emerge. We were looking for a better way to organize, vet and easily retrieve all the updates that were being sent to us on a daily basis.In the process, we’ve become one of the highest volume business law websites in the U.S. Today, the National Law Review’s seasoned editors screen and classify breaking news and analysis authored by recognized legal professionals and our own journalists. There is no log in to access the database and new articles are added hourly. The National Law Review revolutionized legal publication in 1888 and this cutting-edge tradition continues today.

Why Your Qualified Plan – Isn’t

Recently The National Law Review published an article by Ben F. Wells and William M. Freedman of Dinsmore & Shohl LLP regarding Qualified Plans:

There are many generous tax benefits that come from having a “qualified” retirement plan (such as a section 401(k) plan). For example, as an employer, you can deduct your plan contributions, but participating employees don’t have to recognize the contributions as income until they receive a distribution; usually many years later. However, those tax benefits disappear if your plan loses its qualified status.

What can cause a plan to lose its qualified status?

Several things, but there are three types of problems that frequently arise:

  • Failure to adopt required plan amendments in a timely fashion. The IRS issues reams of guidance that require plan amendments. Fail to adopt even one on time, and your plan is technically disqualified.
  • Failure to administer the plan in accordance with its terms. Your plan document probably contains hundreds of pages of fine print and technical jargon. Most employers have never read it, at least not all the way through. But you are required to follow it to the letter. Slip up one time and your plan can be considered disqualified.
  • Failure to satisfy the Internal Revenue Code’s various tests. The Code contains a number of mathematical tests which specify who must benefit from the plan and what benefits must be provided. These tests also prohibit “discrimination” in favor of highly compensated employees and others. Many of those tests are extremely complex and easy to violate. Fail one of them, and fail to correct it within the allowable time periods, and your plan will be disqualified.

How to correct qualification failures

Luckily the IRS has provided ways to correct most qualification failures. For example, their “Employee Plans Compliance Resolution System” or “EPCRS” allows plan sponsors to correct qualification failures through a variety of methods, such as employer contributions, retroactive amendments and corrective distributions. Generally those corrections are designed to put the plan in a position as if the qualification error had not occurred. But these require experienced and knowledgeable advisors to navigate.

Conclusion

To help avoid disqualification, make sure that:

  • Your advisors are monitoring your plan to help eliminate potential causes of disqualification.
  • Your plan document is up to date, and matches the way you actually administer your plan. Don’t make a change to your plan without telling your document provider and third party administrator.
  • Someone in your organization is reviewing your plan’s discrimination testing and dealing with violations.

If you see a problem, correct it as soon as possible – before the IRS audits you. This way you can keep your qualified plan “qualified.”

© 2012 Dinsmore & Shohl LLP

Upcoming Spring 2012 CLE National Institutes

The National Law Review is pleased to bring you information about the ABA’s Upcoming Spring 2012 CLE National Institutes:

Learn and network at these in-person,full-day or multi-day seminars held live in various locations across the country that draw lawyers from across the nation.

Transformation. Repositioning. Adjustment.

The National Law Review recently published an article by Lisa L. Mueller of Michael Best & Friedrich LLP regarding the 2012 China (Suzhou) Service Outsourcing Innovation Development and Investment Promotion Summit:

Transformation. Repositioning. Adjustment. Service + Innovation = Jobs. These were the keys from today’s 2012 China (Suzhou) Service Outsourcing Innovation Development and Investment Promotion Summit in Suzhou, China.

The summit was attended by the Delegation, a number of local government officials, business leaders from Suzhou and other business leaders from around the world. The stage used for the formal presentations contained a large multimedia screen and was surrounded with red flowers, and the podium top had a dozen red roses on it. I was told by an attendee that decorating the stage with flowers is very common in China. Also, the introduction of each speaker was very unique. When introduced and while approaching the podium, a “theme” song was played, the morning session featured the “Star Wars” theme song. Although most of the speakers presented in Chinese, simultaneous translation into English was provided.

As emphasized several times by the various speakers during today’s presentations, service outsourcing has contributed greatly to China’s economic growth. As part of China’s 12th Five Year Plan, and in view of the recent global economic downturn, it is a top priority of the Chinese government to restructure and transform China’s economy. The fundamental purpose of this restructuring and transformation is to ensure the quality of economic growth and enhance the overall competitive strength of China. Therefore, the recurring theme throughout the day was the refocusing of China’s service industry from manufacturing outsourcing, considered to be low-end or low-tech outsourcing, to high-end/high-tech service and international service outsourcing. Innovation is considered to be the key in making the change away from low-end industrial and increasing the overall competitiveness of China’s service outsourcing enterprises. Clearly, China wants to be the worldwide leader in service outsourcing enterprises and is willing to invest the time and resources to achieve this goal.

In 2009, China’s state council approved setting up 21 cities as models of service outsourcing. These cities receive preferential treatment in terms of tax benefits and receipt of certain subsidies. The selected cities themselves have invested heavily in public infrastructure, industrial parks and education and training. One such selected city is Suzhou, the location of today’s summit.

Service outsourcing originated in Suzhou in the 1990′s and has developed rapidly. As of 2011, Suzhou had more than 1,600 service outsourcing enterprises employing approximately 160,000 people. In fact, in 2011, 488 new service outsourcing enterprises were established in Suzhou. Additionally, the signed contract value of Suzhou’s offshore outsourcing services in 2011 was 3.57 billion US dollars, an increase of 57.4% over 2010 with an executed contract value of 2.01 billion US dollars, an increase of 58.6%.

Suzhou hopes to lead the way in the transformation from low-end services to high-end service outsourcing and it appears to be well positioned to do so. Specifically, the city is the source of a lot of talent: (1) it’s home to 20 colleges and universities; (2) it has over 30 Chinese-foreign cooperatively run institutions; and (3) it has a variety of projects with universities such as University of Liverpool, National University of Singapore and the University of Dayton. In addition, Suzhou established the first service outsourcing institute having a capacity to train over 20,000 professionals per year.

Today, government officials described in detail Suzhou’s aggressive economic plan to create a unique service outsourcing industry in the following ten areas:

  1. Software development outsourcing – focus will be on software development in the areas of user operations, production, supply chain, customer relations, human resources and financial control, computer aided design, embedded software, system software, and software testing.
  2. Research and development design outsourcing – focus will be on providing design services in the automotive, electronic products, chip design, and other industries.
  3. Biomedicine research and development outsourcing – focus will be on the development of medical test technology services, animal experiment services, medical non-clinical research and evaluation services, biotechnology services, clinical trials for new pharmaceuticals, preclinical services, drug safety and evaluation, and medical apparatus design, research and development.
  4. Financial background service outsourcing – focus will be on the development of financial outsourcing businesses, including data mining and analysis, financial payment services, credit analysis and rating, insurance services, and financial consulting services.
  5. Animation and creativity outsourcing – focus will be on the development of international animation processing, original animation development, comic digitized applications, and special effects production.
  6. Logistics and supply chain management outsourcing – focus will be on the development of total logistics and supply chain management services in the areas of e-communication, chemicals and pharmaceuticals.
  7. Testing and inspection outsourcing – focus will be to establish “world-renowned” testing and inspection outsourcing enterprises and to actively develop professional analysis and testing services, including software evaluation services, quality inspection and testing services, and consulting services.
  8. Outsourcing in the field of cloud computing – focus will be on the development of software operation services including on-line software delivery services, on-line system maintenance services, IT infrastructure management, data centers, trust and call centers.
  9. Outsourcing in the field of Internet of Things – focus will be on the construction of a smart city and expansion in the business fields including the Internet of Things, development of information processing platforms, development of intelligent building equipment, sensor networks, small grids, and intelligent equipment.
  10. Shared service centers for transnational companies – focus will be on those transnational companies that have settled in Suzhou and encouraging them to establish shared service centers by separating their service businesses.

The government officials of Suzhou are very proud of all that they have achieved with respect to their service outsourcing enterprises and are confident that they can achieve a service outsourcing industry in the above areas. Time will tell.

© MICHAEL BEST & FRIEDRICH LLP

White House Report May Have Long-Term Effect on Consumer Privacy and How Companies Do Business

A recent White House report on consumer  data privacy forecasts a multifaceted approach to fulfilling public expectations regarding the protection of consumer’s personal information.  Although it is uncertain if the report will result in new legislation in the near future, the report could have long-term implications for the current regulatory landscape.

In February 2012 the White House released a report detailing the current administration’s position on consumer privacy, entitled Consumer Data Privacy in a Networked World: A Framework for Protecting Privacy and Promoting Innovation in the Global Digital Economy.  Although it is uncertain if the report will result in new privacy legislation in the near term, the report may still have long-term implications for the current regulatory landscape.

As explained in the report’s Executive Summary, the consumer privacy framework proposed by the administration consists of four key elements: (1) a Consumer Privacy Bill of Rights; (2) a “multistakeholder” process to specify how the principles in the Consumer Privacy Bill of Rights apply in particular business  contexts; (3) effective enforcement; and (4) a commitment to increase interoperability with the privacy frameworks of international partners.1  Below we examine each of these elements.

1. Consumer Privacy Bill of Rights

Building upon Fair Information Practice Principles that were first promulgated by the U.S. Department of Health, Education, and Welfare in the 1970s, the Consumer Privacy Bill of Rights is intended to affirm consumer expectations with regard to how companies handle personal data.2  Although the administration recognizes consumers have “certain responsibilities” to protect their own privacy, it also emphasizes the importance of using personal data in a manner consistent with the context in which it is collected.

In a press release accompanying the release of the report, the White House summarized the basic tenets of the Consumer Privacy Bill of Rights3:

Transparency—Consumers have a right to easily understandable information about privacy and security practices.

Respect for Context—Consumers have a right to expect that organizations will collect, use and disclose personal data in ways that are consistent with the context in which consumers provide the data.4

Security—Consumers have a right to secure and responsible handling of personal data.

Access and Accuracy—Consumers have a right to access and correct personal data in usable formats, in a manner that is appropriate to the sensitivity of the data and the risk of adverse consequences to consumers if the data are inaccurate.

Focused Collection—Consumers have a right to reasonable limits on the personal data that companies collect and retain.

Accountability—Consumers have a right to have personal data handled by companies with appropriate measures in place to assure they adhere to the Consumer Privacy Bill of Rights.

The outline for the Consumer Privacy Bill of Rights is largely aspirational, in that it does not create any enforceable obligations.  Instead, the framework simply creates suggested guidelines for companies that collect personal data as a primary, or even ancillary, function of their business operations.  As the administration recognizes, in the absence of legislation these are only “general principles that afford companies discretion in how they implement them.”5

Nevertheless, as consumers become more invested in how their personal information is used, a company that disregards the basic tenets of the Consumer Privacy Bill of Rights may be doing so at its own peril.  Although the Consumer Privacy Bill of Rights has not been codified, companies should expect that some iteration of the same principles will ultimately be legislated, or voluntarily adopted by enough industry leaders to render them enforceable by the FTC.  Therefore, companies would be welladvised to make sure they have coherent privacy policies in place now in order to avoid running afoul of guidelines imposed by whatever regulatory framework is implemented later.

2. The “Multistakeholder” Process to Develop Enforceable Codes of Conduct

The report also encourages stakeholders—described by the Administration as “companies, industry groups, privacy advocates, consumer groups, crime victims, academics, international partners, State Attorneys General, Federal civil and criminal law enforcement representatives, and other relevant groups”—to cooperate in the development of rules implementing the principles outlined in the Consumer Privacy Bill of Rights.  Of all the elements comprising the administration’s consumer privacy framework, it is this “multistakeholder” process that will likely see the most activity in coming months.

The report identifies several benefits attributable to this approach6:  First, an open process reflects the character of the internet itself as an “open, decentralized, user-driven platform for communication, innovation and economic growth.”  Second, participation of multiple stakeholders encourages flexibility, speed and creativity.  Third, this approach is likely to producesolutions “in a more timely fashion than regulatory processes and treaty-based organizations.”  Finally, the multistakeholder process allows experts to focus on specific challenges, rather than relying upon centralized authority.

The report contemplates that the multistakeholder process  will be moderated by the U.S. Department of Commerce’s National Telecommunications and Information Administration (NTIA), a view echoed by the press release accompanying the report.7  This process will likely present companies whose operations involve the collection of consumer data online—a rapidly expanding category that encompasses far more than just internet businesses—with an opportunity to shape future internet privacy legislation.

NTIA has already initiated the conversation through the issuance of a Request for Public Comments on the administration’s consumer privacy framework.8  NTIA has suggested the first topic for discussion should be a “discrete issue that allows consumers and businesses to engage [in] and conclude multistakeholder discussions in a reasonable timeframe.”9    As  one example, NTIA has suggested stakeholders discuss how the  Consumer Privacy Bill of Rights’ “transparency” principle should be applied to privacy notices for mobile applications.  When one considers that by some estimates the revenue generated by the mobile application market is expected to reach $25 billion over the next four years, it is clear that even this “discrete” issue alone could result in a significant regulatory impact.10

3. Effective Enforcement

The report further suggests that the Federal Trade Commission (FTC) will play a vital role in the enforcement of the consumer privacy protections outlined by the administration and developed during the multistakeholder process.  The administration admits, however, that in the absence of new legislation, the FTC’s authority in the area of consumer privacy may be limited to the enforcement of guidelines adopted by companies voluntarily.

According to the administration, enforcement actions “by the FTC (and State Attorneys General) have established that companies’ failures to adhere to voluntary privacy commitments, such as those stated in privacy policies, are actionable under the FTC Act’s (and State analogues) prohibition on unfair or deceptive acts or practices.”11  Therefore, in the administration’s view, the guidelines developed during the multistakeholder process would be enforceable under the existing statutory framework.

In light of the current election cycle and the resulting political landscape, it seems unlikely Congress will pass new consumer privacy legislation in the near term.  Nevertheless, companies should remain mindful that the FTC—and even state Attorneys General—may become more aggressive in addressing flagrant violations of consumers’ privacy expectations.  For instance, California’s Attorney General has explained that her office intends to enforce an agreement that California reached with Apple and other industry leaders earlier this year.  The agreement would require developers of mobile applications to post conspicuous privacy policies that explain how users’ personal information is gathered and used.

Moreover, the increased attention directed at privacy issues by consumer groups and the public at large suggests an inevitable groundswell of support for new privacy legislation.  As Jon Leibowitz, the chairman of the FTC, explained earlier this week, we could see new privacy legislation early in the term of the next Congress.12

4. A Commitment to Increased Operability

Recognizing that other countries have taken different approaches to data privacy issues, the report also encourages the development of interoperability with regulatory regimes implemented internationally.  The administration has suggested a three-pronged approach to achieving increased operability: mutual recognition, development of codes of conduct through multistakeholder processes and enforcement cooperation.

With respect to mutual recognition, the report identifies existing examples of transnational cooperation in the privacy context.  For example, it cites the Asia-Pacific Economic Cooperation’s voluntary system of Cross Border Privacy Rules and also the European Union’s Data Protection Directive.  It appears that the administration, at least for now, will depend upon companies’ voluntary adoption of these international frameworks.

Just as the administration will rely upon the multistakeholder process to develop domestic codes of conduct, it will adopt the same approach to developing globally applicable rules and guidelines.  Although the administration contemplates this process will be directed by the U.S. Departments of Commerce and State, the report does not provide any details.

Finally, the report explains the FTC will spearhead the U. S. Government’s efforts to cooperate with the FTC’s foreign counterparts in the “development of privacy enforcement priorities, sharing of best practices, and support for joint enforcement initiatives.”13

1  Report at 1. 

2  Although businesses are also “consumers,” the report appears to focus on protecting individuals’ personally identifiable information. 

3  We Can’t Wait: Obama Administration Unveils Blueprint for a “Privacy Bill of Rights” to Protect Consumers Online, February 23, 2012, Office of the Press Secretary. 

4 To illustrate the “context” principle, the report provides the example of a hypothetical social networking provider.  Users expect that certain biographical information will be collected in order to improve the service; however, if the provider sells the same biographical information to an information broker for advertising purposes, that use is more attenuated from users’ expectations.  Therefore, the latter use is not consistent with the “context” in which the biographical information was provided. 

5  Report at 2. 

6  Report at 23. 

7  We Can’t Wait, February 23, 2012, Office of the Press Secretary (“In the coming weeks, the Commerce Department’s National Telecommunications and Information Administration will convene stakeholders … .”). 

8  Docket No. 120214135-2135-01, February 29, 2012. 

9 Moving Forward with the Consumer Privacy Bill of Rights, Lawrence E. Strickling, Assistant Secretary for Communications and Information, February 29, 2012. 

10 According to Markets & Markets, a market research company and consulting firm. 

11 Report at 29. 

12 U.S. Agency Seeks Tougher Consumer Privacy Rules, The New York Times, March 26, 2012. 

13 Report at 33. 

© 2012 McDermott Will & Emery

Inside Counsel presents the 12th Annual Super Conference in Chicago

The National Law Review  is pleased to bring you information about the upcoming 12th Annual Super Conference in Chicago sponsored by Inside Counsel.

 Reasons why you should Attend This Year’s Event:
  1. Who Should Attend – General Counsel and Other Senior Legal Executives from Top Companies Attend SuperConference:Meet with Decision Makers: You’ll meet face-to-face with senior-level in-house counsel
  2. Networking Opportunities: SuperConference offers several networking opportunities, including a cocktail reception, refreshment breaks, and a networking lunch.
  3. Gain Industry Knowledge: You will hear the latest issues facing the industry today with your complimentary full-conference passes.
  • Chief Legal Officers
  • General Counsel
  • Corporate Counsel
  • Associate General Counsel
  • CEOs
  • Senior Counsel
  • Corporate Compliance Officers

The 12th Annual IC SuperConference will be held at the NEW Radisson Blu Chicago.
Radisson Blu Aqua Hotel

221 N. Columbus Drive

Chicago, IL 60601

Don’t forget – The early discount deadline using the NLR discount code is February 24th!

13th Great-Idea China Sourcing & New Industrial Delegation to China – Day 2

Recently an article by Lisa L. Mueller of Michael Best & Friedrich LLP regarding the 13th Great-Idea China Delegation appeared in The National Law Review:

We woke up to a bright, beautiful and warm morning in Shanghai. The nice weather was greatly appreciated as the Delegation was up and out early, traveling to the Shanghai Pudong Software Park (Park). The Park is only 12 years old and is currently home to 1,086 companies. Two of these companies are in Forbes’ Top 20. Additionally, companies such as Citi, Texas Instruments, Olympus, Sony, Kyocera, Tell Labs and Qualcomm, each have offices within the Park.

During our visit we were taken to the first location and given a short presentation describing the size of the Park, the various campuses that comprise the Park and the development cost of each campus. After the presentation, we traveled to a second location which was quite stunning, as it contained a central lake surrounded by several buildings and beautiful landscaping. The lake contained docks that were staffed with paddle and small motor boats. Interestingly, the campus was very quiet; there was very little activity, at least on the outside, and strangely, we saw very few people during our visit.

After completing our visit to the Park, the Delegation traveled to a restaurant in downtown Shanghai specializing in Peking duck. The duck arrived after course number two, each course being anywhere from 2-3 different dishes, and was followed thereafter, by four additional courses. Favorites among the Delegation included the duck skin and meat, which were presented on separate plates, deep-fried fish in red sauce, and wheat rolls stuffed with duck. I particularly enjoyed the spicy jellyfish, which was a new experience for me.

After lunch, we boarded a bus to travel to the town of Suzhou. Suzhou was founded in 514 B.C. and its history dates back more than 2,500 years. Suzhou is frequently referred to as the “Venice of the East” or the “Venice of China” for its beautiful canals and stone bridges. Suzhou also has a number of magnificent gardens. In fact, several of Suzhou’s classical gardens were named UNESCO World Heritage Sites in 1997 and 2000.

Upon our arrival in Suzhou we were taken to Dushu Lake Hotel. The hotel blends traditional Suzhou architecture with cutting-edge contemporary design. There is a beautiful story the locals tell regarding Dushu Lake:

“Ancient stores tell the tale
of a small branch that fell
from the moon into the lake
and grew into a large single-branch there.

Locals believe that those who live
around the lake will be
Blessed with happiness.”

The hotel is located in the Suzhou Industrial Park (SIP). The SIP is the largest cooperative project between the Chinese and Singapore governments. SIP covers an area of 288 square kilometers, of which, the China-Singapore cooperation area covers 80 square kilometers.

After a wonderful buffet dinner, the Delegation was treated to a nighttime cruise on Jinji Lake.

Tomorrow the Delegation will participate in the 2012 China Service Outsourcing Innovation Development and Investment Promotion Summit and China-Europe CIO Summit.

In addition to reporting on the day’s activities, I thought it might be interesting to profile some of the people comprising the Delegation. Therefore, I will try in each blog to introduce you to one or two people in the Delegation.

Delegate Spotlight: Thomas Gephart from Irvine, California, US.

Tom is the founder and managing partner of “Ventana,” which is Spanish for “window”. Ventana was founded in 1974 and is a leading multi-stage equity firm. Specifically, Ventana invests in the best of breed innovative companies with technology products and services that meet the challenging global demands of commercial industrial, technological, federal, and international customers. Most impressively, Ventana has provided more than 30 years of syndicated financing for 100 plus portfolio companies totaling 3.2 billion US dollars from Southern California to Latin America, and Europe to Asia.

Tom has an engineering degree and worked for several years for Hughes Aircraft and then TRW, Inc.  After TRW, Tom was hired to find and develop new products for AMP, Inc. After AMP, Tom started his own electronic components business that ultimately had two divisions. Three years after Tom started his business he sold it and founded Ventana.

Tom is currently working on forming a China-US strategic alliance and innovation region cross-border fund and hopes to launch the fund later this year. In working on forming this fund, Tom has observed that the Chinese government seems particularly interested in moving technology to China, and once here has no problem paying for its commercial development. Specifically, in Tom’s opinion, the Chinese government is interested in things that are “explosive” and beneficial to Chinese society and is willing to pay for them. Once this China-US fund has been completed, Tom hopes to form a similar fund between India and the US.

Delegate Spotlight: Martin Venzky-Stalling from Hamburg, Germany.

Martin works as a senior advisor for the Technology Development Center for Industry (TDCI) at Chiang Mai University in Chiang Mai, Northern Thailand. Martin’s role with TDCI is to assist with the development of a Science and Software Park and creating links between government, universities and private sectors. In addition to the Science and Software Park project, Martin also supports the local government with a creative economy initiative called, “Chiang Mai Creative City.” This initiative aims to establish Chiang Mai as the international center for creative industries, including software, crafts, and graphic design.

Prior to moving to Chiang Mai, Martin was Senior Vice President for International Operations at PCCW (Hong Kong Telecoms), Director of Consulting at Ovum in London and Associate Director with the Global IT, Communications, and Entertainment (ICE) Strategy Group of PricewaterhouseCoopers. Martin specializes in strategy development, market entry, technology enabled business transformation, and launching new entities.

© MICHAEL BEST & FRIEDRICH LLP

With Form PF Compliance Dates Quickly Approaching, Advisers Managing $150 Million or More of Private Fund Assets Should Begin to Prepare

An article about Form PF Compliance written by Eric R. Markus, Victor B. Zanetti, and William L. Rivers of Andrews Kurth LLP recently appeared in The National Law Review:

On October 26, 2011, the Securities and Exchange Commission (the “SEC”) adopted Rule 204(b)‑1 under the Investment Advisers Act of 1940 (the “Advisers Act”) to require certain investment advisers that advise private funds to periodically complete and file the SEC’s new Form PF.1 Rule 204(b)-1 implements sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and is intended to provide the SEC with information relevant to assessing the risks that certain advisers and funds pose to the stability of the financial system. Although Form PF is filed confidentially and exempt from the Freedom of Information Act, the SEC is permitted to share this information with other federal agencies (most notably the Commodity Futures Trading Commission and the Financial Stability Oversight Council).

The requirements of the rule and Form PF are novel and the amount of information required to be assembled can be—at least in certain instances—quite substantial. With the initial compliance dates for investment advisers to certain large private funds approaching in June 2012, now is the time for investment advisers to become familiar with this new regulatory requirement, to determine when their initial Form PF filing will be due, and to identify and begin to assemble the types and extent of the information that will be required.

The full text of the adopting release and the final rule is available here. The full text of Form PF is available here.

What Investment Advisers Are Subject to Rule 204(b)-1 and Must File Form PF?

The new rule requires any investment adviser registered (or required to register) with the SEC under the Advisers Act that advises one or more “private funds” and has, in aggregate, $150 million or more in private fund assets under management to file Form PF. For purposes of determining whether they meet certain regulatory thresholds established by Form PF, related advisers must aggregate their assets under management; however, related advisers do not need to aggregate their assets if they are “separately operated.”2

What is a “Private Fund”?

The term “private fund” is defined in Section 202(a)(29) of the Advisers Act as any issuer “that would be an investment company,” as defined in the Investment Company Act of 1940, as amended (the “ICA”), but is excepted by virtue of the exemptions provided in Section 3(c)(1) (funds with fewer than 100 beneficial owners) or Section 3(c)(7) (funds owned exclusively by qualified purchasers) of the ICA. Real estate funds relying on the exemption provided in Section 3(c)(5) of the ICA are not required to file Form PF (although many real estate funds, because of the nature and structure of their investments, rely on the exemptions provided under Section 3(c)(1) or (7) and therefore may be required to file).

Form PF establishes different treatment—in terms of initial filing dates, the frequency of filings and the content of those filings—based on the characteristics of the private funds involved and their advisers. The most important distinction that Form PF draws in this regard is between “Large Private Fund Advisers” and all other investment advisers to private funds.

What is a “Large Private Fund Adviser”?

A “Large Private Fund Adviser” is defined as a private fund adviser that meets any one or more of the following criteria:

  • it has at least $1.5 billion in regulatory assets under management attributable tohedge funds as of the end of any month in the most recently completed fiscal quarter;
  • it has at least $1.0 billion in combined regulatory assets under manage­ment attributable to liquidity funds and registered money market funds3 as of the end of any month in the most recently completed fiscal quarter; and/or
  • it has at least $2.0 billion in regulatory assets under management attributable toprivate equity funds as of the last day of the adviser’s most recently completed fiscal year.

How are Regulatory Assets Under Management Calculated?

The term “regulatory assets under management” has the same meaning given to it in the SEC’s recent amendments to Part 1A, Instruction 5.b of Form ADV. This definition measures assets under management gross of outstanding indebtedness and other accrued but unpaid liabilities.

In addition, in order to prevent an adviser from restructuring the way it manages money to avoid compliance with Form PF, the rule requires regulatory assets under management to include (a) assets of managed accounts advised by the adviser that pursue substantially the same investment objective and invest in substantially the same positions as private funds advised by the firm unless the value of those accounts exceeds the value of the private funds with which they are managed; and/or (b) assets of private funds advised by any of the adviser’s “related persons” other than related persons that are separately operated.

What is a “Hedge Fund”?

Form PF defines a “hedge fund” as any private fund that is not a securitized asset fund4 if it meets any of the three following criteria:

  • it is permitted to pay one or more investment advisers (or their related persons) a performance fee or allocation calculated by taking into account unrealized gains;
  • it is permitted to borrow an amount in excess of one-half of its net asset value (including any committed capital); and/or
  • it is permitted to sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration).

Note that for purposes of the first criteria above, the fund must only be authorized to pay a fee based on unrealized gains (the classification applies whether or not the performance fee is actually paid). In the Adopting Release, the SEC clarified that the periodic calculation or accrual of performance fees based on unrealized gains solely for financial reporting purposes (as many private equity funds do) will not cause a private fund to be classified as a hedge fund. For purposes of the second and third criteria cited above, the private fund must be authorized to undertake such activities; actually undertaking the activities is not required.5

What is a “Liquidity Fund”?

Form PF defines a “liquidity fund” as any private fund “that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.” Thus, a liquidity fund would be a private fund that resembles a registered money market fund.

What is a “Private Equity Fund”?

Form PF defines a “private equity fund” as any private fund that is not a hedge fund, liquidity fund, securitized asset fund, real estate fund,6 or venture capital fund7 and does not provide investors with a right to redeem their interests in the ordinary course.

Does the SEC’s Focus on Hedge Funds, Liquidity Funds and Private Equity Funds Mean that Other Types of Private Funds are Not Subject to Rule 204(b)(1) and Form PF?

No. As the charts below show, an investment adviser that is not a Large Private Fund Adviser and that does not advise any hedge funds, liquidity funds or private equity funds must still prepare and file Form PF if it advises private funds with $150 million or more in private fund assets.

What are the Initial Compliance Dates for Form PF?

Form PF and Rule 204(b)-1 establish June 15, 2012 as the initial “compliance date” for any registered investment adviser (or an adviser that is required to register) that meets one or more of the following criteria:

  • it has at least $5.0 billion in regulatory assets under management attributable to hedge funds as of the last day of its fiscal quarter most recently completed prior to June 15, 2012;
  •  it has at least $5.0 billion in combined regulatory assets under management attributable to liquidity funds and registered money market funds as of the last day of its fiscal quarter most recently completed prior to June 15, 2012; and/or
  • it has at least $5.0 billion in regulatory assets under management attributable to private equity funds as of the last day of its first fiscal year to end on or after June 15, 2012.

An adviser subject to the June 15, 2012 compliance date as a result of its advice to hedge funds and/or liquidity funds/money market funds will need to file its initial Form PF for the first fiscal quarter ending after June 15, 2012. For most such advisers, this will be for the fiscal quarter ending June 30, 2012 (and will be due August 29, 2012 for hedge fund advisers and July 15, 2012 for liquidity fund advisers). An adviser subject to the June 15, 2012 compliance date as a result of its advice to private equity funds will need to file its initial Form PF for the first fiscal year ending after June 15, 2012. For most such advisers, this will be for the fiscal year ending December 31, 2012 (and will be due April 30, 2013).

For all investment advisers that are not subject to the June 15, 2012 compliance date, the compliance date will be December 15, 2012. However, whether such advisers will be filing with respect to the first fiscal quarter or first fiscal year ending after that date (and the deadline for such filing) will depend on the type of private funds advised and the amount of assets under management as set forth in Table I below.

TABLE I

Regulatory assets under management for the fiscal quarter or year (as the case may be) ending immediately after June 15, 2012 are, for hedge funds and liquidity funds, measured as of the last day of the fiscal quarter ending immediately prior to such date, and for private equity funds measured, as of the last day of the fiscal year ending immediately prior to such date. For any other Form PF filing under Rule 204(b)-1, regulatory assets under management, for quarterly Form PF filers, are measured as of the end of each month in the immediately preceding fiscal quarter (and the threshold is passed if, as of any month end, the assets under manage­ment exceed the relevant threshold), and, for annual Form PF filers, are measured solely as of the last day of the immediately preceding fiscal year.

What Type of Information Must Be Included in the Form PF?

As with other issues under the new Form PF, the answer to this question depends on the size and nature of the private funds advised. Investment advisers to private funds (other than Large Private Fund Advisers) have much more limited disclosure obligations than Large Private Fund Advisers. In addition, as it relates to Large Private Fund Advisers, the additional disclosures required have been tailored to whether the private fund advised is a hedge fund, liquidity fund or private equity fund. Table II below summarizes the information requirements imposed by Form PF.

TABLE II

Investment Advisers should start now to determine whether they will be required to file the new Form PF, to determine the applicable filing date for any form PF filing, and to identify and begin to assemble the required information necessary to complete the form.

1. See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Release No. IA-3308; File No. S7-05-11 (October 31, 2011) (the “Adopting Release”).

2. An adviser is not required to aggregate its private fund assets with those of a related person if the adviser is not required to complete Section 7.A of Schedule D to its Form ADV with respect to such related person. The criteria for excluding a related person from Section 7.A of Schedule D to an adviser’s Form ADV include (i) the adviser having no business dealings with the related person in connection with advisory services provided to its clients; (ii) the adviser not conducting shared operations with the related person; (iii) the adviser not referring clients or business to the related person, and the related person not referring prospective clients or business to the adviser; (iv) the adviser not sharing supervised persons or premises with the related person; and (v) the adviser having no reason to believe that its relationship with the related person otherwise creates a conflict of interest with its clients.

3. An adviser that manages liquidity funds and registered money market funds must combine the assets in those funds for purposes of determining whether it qualifies as a Large Private Fund Adviser.

4. A securitized asset fund is a private fund whose main purpose is to issue asset backed debt securities.

5. This test does not require that the fund’s organizational documents expressly prohibit such leverage or short-selling as long as “the fund in fact does not engage in these practices … and a reasonable investor would understand, based on the fund’s offering documents, that the fund will not engage in these practices.” SeeAdopting Release at page 28.

6. A real estate fund is defined as a private fund that invests primarily in real estate and real estate-related assets as long as it is not a hedge fund and does not provide investors the right to redeem in the ordinary course.

7. A venture capital fund is defined by reference to Rule 203(l)-1 of the Advisers Act. That rule is complex, subject to various exceptions, definitions and other discussions, and easily could be the subject of its own client alert. In short, a venture capital fund is defined as a private fund that: (i) holds no more than 20 percent of the fund’s capital commitments in certain non-qualifying investments; (ii) does not incur leverage, other than limited short-term borrowing; (iii) does not offer its investors a right to redeem except in extraordinary circumstances; (iv) represents itself as pursuing a venture capital strategy; and (v) is not registered as a business development company.

8. For purposes of calculating the amount of regulatory assets under management by a manager to a liquidity fund, regulatory assets under management include the combined assets under management attributable to all liquidity funds and registered money market funds.

9. A “Large Private Fund Adviser” includes (i) any adviser that has at least $1.5 billion in regulatory assets under management attributable to hedge funds, (ii) any adviser that has at least $1.0 billion in regulatory assets under management attributable to liquidity funds and registered money market funds, or (iii) any adviser that has more than $2.0 billion in regulatory assets under management attributable to private equity funds.

10. An adviser solely to private funds other than hedge, liquidity and private equity funds would not be a Large Private Fund Adviser regardless of the assets under management in those funds.

11. See Note 9.

12. Form PF requires additional disclosures in Section 2b by Large Private Fund Advisers with respect to any hedge fund that has a net asset value of at least $500 million.

13. See Note 10.

© 2012 Andrews Kurth LLP

2012 Young Professionals in Energy International Summit

The National Law Review is pleased to bring you information on the 2012 Young Professionals in Energy International Summit:

2012 YOUNG PROFESSIONALS IN ENERGY INTERNATIONAL SUMMIT

April 23-25, 2012
Planet Hollywood Resort & Casino
Las Vegas, Nevada

About the YPE:

Young Professionals in Energy (“YPE”) is the first and only interdisciplinary networking and volunteer organization for people in the global energy industry – a place where bankers can connect with engineers, accountants with geologists and so on. Our mission is to provide a forum for knowledge sharing and camaraderie among future leaders of the energy industry.

The event will feature panel discussions and presentations by YPE members from around the world on such vital energy issues as the world oil supply, shale, renewable energy, career issues and funding new energy projects.

Confirmed speakers include YPE members from the American Petroleum Institute, ExxonMobil, Fulbright & Jaworski L.L.P. the India Ministry of Petroleum and Natural Gas, the Nevada Institute for Renewable Energy Commercialization, Pemex, the University of Southern California and the U.S. Dept. of Commerce.

Highlighting the three-day conference is a keynote speech by Daniel Yergin, author of the best-selling “The Quest: Energy, Security and the Remaking of the Modern World (www.danielyergin.com).

Internet Marketing for Attorneys: How Blogging Is Like Sex

Recently The National Law Review published an article by Stephen Fairley of The Rainmaker Institute regarding Internet Marketing for Attorneys:

Did that headline grab you? It certainly did me when I saw this infographic from an India-based social media marketing firm:

blogging is like sex

The point is, that to be effective, blogs need to grab and hold the attention of your readers. Blogs hold a unique position in the online media landscape because they have become an accepted source of information. Here are some tips on how to successfully grow your blog:

Engage with other online communities. Become known on other relevant blogs by contributing valuable content to pick up audiences for your own blog.

Write about what you know. If you are passionate about your law practice, share it.

Provide engaging content. Be the spark that starts smart conversations online.

Answer questions. Solicit feedback and keep the conversation going.

Offer real value. Dive deep into your subject matter to keep readers wanting more.

Create content to match needs. Speak to your target market in your blog about the legal issues that concern them.

Make readers feel good. If someone posts a thoughtful comment, respond to it with appreciation. If you disagree, do so gracefully.

Give more than you get. Offer readers something of value like a free e-book or newsletter subscription. Post on a regular schedule so your readers are always getting something new from you.

© The Rainmaker Institute

ICC Institute Masterclass for Arbitrators

The National Law Review is pleased to bring you information about the upcoming ICC Conference  Masterclass Arbitrators:

Join us for an intensive 2 1/2 day training for professionals interested in working as international arbitrators!

June 4-6, 2012 at ICC Headquarters in Paris.