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IN THE SPOT LIGHT
Guidance on the Exemption for Advisers to Venture Capital Funds
The SEC’s Division of Investment Management (the “Division”) recently issued new guidance regarding the application of the registration exemption available to investment advisers that advise solely one or more “venture capital funds” as defined in Rule 203(l)-1 of the Advisers Act (the “VC Exemption”). The Guidance clarifies certain situations which allow an investment adviser to qualify under the VC Exemption. In general, to qualify as a “venture capital fund” the fund must be a “private fund” that represents to investors that:
(ii) does not provide an investor with redemption rights other than in extraordinary circumstances;
(iii) holds no more than 20% of the amount of the fund’s aggregate capital contributions and uncalled capital commitments in non-“qualifying investments” (excluding cash and certain short-term holdings);
(iv) does not borrow or otherwise incur leverage in excess of 15% of the fund’s aggregate capital contributions and uncalled capital commitments, and then only on a short-term basis; and
(v) is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.
The Division presented five scenarios that illustrate the VC Exemption. Each involves situations where advisers have asked whether the fund structures or actions would jeopardize their ability to rely on the VC Exemption. For a copy of the Guidance please go to http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-13.pdf
SEC Charges London-Based Hedge Fund Adviser and U.S.-Based Holding Company for Internal Control Failures
The Securities and Exchange Commission charged a London-based hedge fund adviser and its former U.S.-based holding company with internal controls failures that led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.
GLG Partners L.P. and its former holding company GLG Partners Inc. agreed to pay nearly $9 million to settle the SEC’s charges. “Investors depend upon fund advisers to have proper controls in place to ensure that valuations and fees are not inflated,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement. “GLG’s pricing committee did not have the information and time it needed to properly value assets.”
According to the SEC’s order instituting settled administrative proceedings, from November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25 percent private equity stake in an emerging market coal mining company. The overvaluation resulted in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.
The SEC’s order finds that GLG Partners L.P. violated and GLG Partners Inc. caused violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13. The order requires the firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption. The order directs the firms to cease and desist from violating or causing violations of various provisions of the federal securities laws. The firms consented to the order without admitting or denying the charges. The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679, and penalties totaling $750,000.
It seems the GLG firms' compliance personnel failed to monitor the adequacy and effectiveness of their existing compliance program. Perhaps because these were London based firms, or maybe as part of their settlement negotiations, but in this case the SEC did not allege violations of Rule 206(4)-7 or failure of the firm's management and CCO to supervise those responsible for the valuation of the firm's assets.
This case illustrates the importance of on-going monitoring and testing of company policies and procedures and the effectiveness of their implementation. Sometime, what is needed is a fresh set of eyes looking through your procedures and policies before potentially minor issues turn into millions of dollars in costs and bad publicity.
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