Investment Management Updates August 2021

Investment Management, Trading & Markets Updates – August 2021

SEC Increases Threshold for “Qualified Clients” Exemption Under Section 205-3 of the Investment Advisers Act of 1940

On June 17, 2021, the Securities and Exchange Commission (SEC) announced that it will raise the monetary thresholds required to meet the “qualified client” classification under Section 205-3 of the Investment Advisers Act of 1940. Currently, Rule 205-3 provides that a natural person or an entity can be considered a “qualified client” if such person or entity has $1 million or more in assets under management (AUM) with an adviser or if the adviser reasonably believes that the person or entity has a net worth of more than $2.1 million. The amendment to Rule 205-3, which becomes effective on August 16, 2021, increases the threshold for the AUM test to $1.1 million and the threshold for the net worth test to $2.2 million. 

House Financial Services Committee Approves Bill Requiring Disclosure of Derivative Positions on Form 13F

On July 29, 2021, the U.S. House Committee on Financial Services voted to advance the Short Sale Transparency and Market Fairness Act, which proposes modifying Section 13(f) of the Securities Exchange Act of 1934 to, among other things:

  • Require in Form 13F the disclosure of direct or indirect derivative interests or positions, including securities-based swaps.
  • Increase the frequency of Form 13F reporting from quarterly to monthly.
  • Require the SEC to evaluate the use of confidential treatment for positions required to be reported on Form 13F and to issue rules to reduce the use of such confidential treatment, including limiting the duration of confidential treatment and the types of securities eligible for confidential treatment.

Despite its name, the bill currently does not require the disclosure of short sale positions on Form 13F; however, it mandates that the SEC issue new rules to require those disclosures within 180 days of the passing of the bill.

Bipartisan Bill Would Allow Retail Investment in Closed-End Funds Investing in Private Funds and Close Activist Investor Loophole

On June 30, 2021, Rep. Anthony Gonzalez (R–OH) and Rep. Gregory Meeks (D–NY) introduced a new bill that would allow certain retail investors to invest in private securities through closed-end funds. SEC staff guidance currently prohibits a closed-end fund from investing more than 15% of its assets in private funds unless the closed-end fund sells its interests to only accredited investors with a minimum initial investment of at least $25,000. The Increasing Investor Opportunities Act would override the SEC staff guidance by introducing its own prohibition on limiting a closed-end fund from investing any or all of its assets in private funds. The bill is also aimed at protecting closed-end funds from actions by private activist investors by requiring private funds to comply with the same investment limitations and aggregation requirements imposed on registered funds under Section 12(d)(1)(C) of the Investment Company Act of 1940, which would limit a group of affiliated private funds to owning no more than 10% of a closed-end fund’s outstanding voting securities.

FINRA Set to Impose New Filing Obligations for Private Placement Marketing Materials

On July 15, 2021, the Financial Industry Regulatory Authority (FINRA) announced the effective date for rule changes that will impose new filing requirements related to private offerings conducted through FINRA member broker-dealers. As of October 1, 2021, all FINRA members will be required to file with FINRA all “retail communications that promote or recommend” a private offering conducted by or through the member, based on amendments to FINRA Rules 5122 and 5123 recently approved by the SEC. This rule change supplements existing filing requirements, which have generally required only the offering memorandum or similar documents to be filed with FINRA, and will significantly broaden the amount of materials required to be filed with FINRA by broker-dealers participating in private offerings.

New York State Revokes COVID-19 Filing Relief for Blue Sky Notice Filings 

On June 25, 2021, New York Governor Andrew Cuomo declared the end of the state of disaster emergency that had been in place due to the COVID-19 pandemic, thereby also revoking the 90-day filing deadline extension that had been granted to issuers of securities in the state. Any state filing that would have been due between March 1, 2020 and June 25, 2021 is still eligible for the 90-day filing extension; however, any filing that is due after June 25, 2021 must be filed pursuant to normal statutory timelines. Issuers selling covered securities in New York pursuant to Regulation D of the Securities Act of 1933 must file their Form D notices within 15 days of first sale in New York.

Those issuers must also comply with New York’s recently amended blue sky filing requirements, which require most issuers to file Form D notices through the Electronic Filing Depository (EFD) of the North American Securities Administrators Association instead of filing a Form 99 with New York’s Investor Protection Bureau (IPB). For issuers that already have an active Form 99 on file, the IPB will continue to receive amended Form 99s until December 2, 2024. Alternatively, issuers with an active Form 99 on file may choose to transition early to the EFD by filing an electronic notice through the EFD and paying the applicable filing fee. After December 2, 2024, all issuers selling covered securities must have a notice filing record on the EFD.

Media Contact
Nicholas Clarke
Senior Communications Manager
Phone: 212.210.1222

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