2016 Proskauer Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds 2016 Proskauer Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds The following annual review (Annual Review) is a summary of some of the significant changes and developments that occurred in the past year and certain recommended practices that investment advisers to hedge funds, private equity funds and other private funds (collectively, private funds) should consider when preparing for 2017. Acknowledgements This Annual Review is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice or render a legal opinion. This Annual Review was prepared by Robert G. Leonard, Michael F. Mavrides, Christopher M. Wells, Howard J. Beber, Niamh A. Curry, Sean J. Hill, Anthony M. Drenzek, Tiffany Kwa, Tiffany Quach, Christopher W. Ryder and Mona Xia with contributions from Philip M. Abelson, Connie N. Bertram, Martin J. Bienenstock, Allan S. Bloom, Ira G. Bogner, Benjamin J. Catalano, Lloyd B. Chinn, John E. Failla, Robert E. Gaut, Edward A. Kwalwasser, Henry J. Leibowitz, Jeremy Leifer, Ying Li, Sigal P. Mandelker, Kristen J. Mathews, Peter McGowan, Timothy W. Mungovan, Joshua M. Newville, Amanda H. Nussbaum, Jonathan E. Richman, Kathy H. Rocklen, Scott K. Rutsky, Catherine Sear, Jay D. Waxenberg, Fabio A. Yamada, Frank Zarb, Chantel L. Febus, Nathan R. Lander, Adam W. Scoll, Susan L. Wiener, Daniella Abel, Martine Agatston, Gabriella A. Ahdoot, Edward J. Canter, Amy G. Drais, Pinchos (Pinny) Goldberg, Michael R. Hackett, Daniel W. Hatten, Lijuan Hou, Mani Kakkar, Lindsay Kroyer, Charles Lee, Alexandre Leal Ribeiro Leite, Charles E. Perez, Rachel J. Peyser, Ebony Ray, Samantha Springer, Jared Zajac and Max D. Brashear. Table of Contents 2016 Developments and Outlook for 2017 ................................................................................................. 1 SEC Examination Priorities and Initiatives .................................................................................. 1 SEC Enforcement Developments ................................................................................................. 5 Record Number of Investment Adviser Cases Filed During FY 2016 ............................... 5 Focus on Private Equity .......................................................................................................... 5 Continued Focus on Fees and Conflict Disclosures ............................................................ 6 Cybersecurity ........................................................................................................................... 7 Insider Trading ......................................................................................................................... 8 Valuation .................................................................................................................................. 8 Pay-to-Play ............................................................................................................................... 9 Focus on “Gatekeepers” in the Fund Industry ..................................................................... 9 Other Enforcement Highlights ............................................................................................ 10 SEC Administrative Proceeding Updates .................................................................................. 10 Courts Rule in Favor of Constitutionality of Administrative Proceedings ..................... 10 Amendments to Rules Governing Administrative Proceedings ...................................... 11 SEC’s Win Rate Increases in Federal Court ........................................................................ 11 SEC Reverses Liability Finding by ALJ ................................................................................. 11 SEC Whistleblower Updates ....................................................................................................... 12 Whistleblower Bounty Program Awards More in 2016 than in All Previous Years Combined ............................................................................................................................... 12 OCIE Staff to Examine Policies and Agreements for Whistleblower Rule Compliance ............................................................................................................................ 12 Continued Scrutiny of Separation Agreements ................................................................ 13 SEC Rulemaking Developments & Other Guidance................................................................ 14 Adoption of Amendments to Form ADV Affecting Advisers of Private Investment Funds ...................................................................................................................................... 14 Proposed Rule Requiring Registered Advisers to Adopt Business Continuity and Transition Plans ..................................................................................................................... 19 Proposed Amendment to Accredited Investor Definition ............................................... 20 Higher Net Worth Threshold Adopted for Qualified Clients .......................................... 20 Proposed Rule on Incentive-based Compensation Arrangements ................................ 20 Speech by SEC Chair on Private Start-Ups and Private Funds ........................................ 21 Private Funds Litigation .............................................................................................................. 22 CFTC Updates ............................................................................................................................... 23 Regulation AT Proposal ........................................................................................................ 23 Proposed Amendments to Annual Report Regulations ................................................... 25 Proposed Amendment to Exemption from Registration for Non-U.S. CPOs and CTAs ........................................................................................................................................ 25 NFA Introduces Late Fee ...................................................................................................... 25 NFA Proposes Collecting Additional Financial Information on Forms PQR and PR .... 26 FINRA/Broker-Dealer Updates ................................................................................................... 26 Capital Acquisition Brokers – A New Alternative for Private Funds Raising Capital .... 26 SEC Takes Action on FINRA and MSRB Pay-to-Play Rules .............................................. 27 State Regulatory Updates ........................................................................................................... 27 New California Law on Increased Disclosure of Private Fund Fees and Expenses ....... 27 Insider Trading Updates ............................................................................................................. 28 Waiting for Salman ............................................................................................................... 29 SEC Enforcement Highlights ................................................................................................ 31 CFTC Tackles Insider Trading ............................................................................................... 32 FCPA Updates .............................................................................................................................. 33 SEC and DOJ FCPA Enforcement Activity ........................................................................... 33 An Expanding and Aggressive Enforcement Environment .............................................. 36 Key Risks for Private Funds .................................................................................................. 37 Anti-Money Laundering Updates .............................................................................................. 38 FinCEN Issues Final Rule on Beneficial Ownership ........................................................... 38 FinCEN Proposed Rule for Registered Investment Advisers ........................................... 39 BEA Filing Updates ...................................................................................................................... 39 Tax Updates .................................................................................................................................. 40 New Due Dates for Tax Returns .......................................................................................... 40 Tax Treatment of Partnership Audits .................................................................................. 40 871(m) Regulations ............................................................................................................... 41 Section 385 Regulations ....................................................................................................... 41 Proposed Regulations under Section 305(c) ..................................................................... 42 PATH Act ...............................................................................................................................