EisnerAmper CCO Roundtable: Perspectives on Beneficial Ownership, Off-Channel Communication, and the Private Fund Adviser Rule

In the ever-evolving regulatory environment of the securities industry, where the Securities and Exchange Commission (“SEC”) continues to propose and adopt new and amended rules, the need for investment advisers’ compliance executives to stay apprised of these rules cannot be overstated. At EisnerAmper’s most recent monthly Chief Compliance Officer (“CCO”) Roundtable Luncheon, nearly a dozen CCOs discussed beneficial ownership, off-channel communications, the Private Fund Adviser Rule, and more.

The event took place on October 12, 2023, at Avra Rockefeller Center in New York City and was co-hosted by Akin Gump Strauss Hauer & Feld LLC, with insights from:

• Louis Bruno, Partner in the Regulatory Compliance Solutions Group at EisnerAmper; and
• Douglas Rappaport and Brian Daly, Partners in the Global Investment Adviser Regulatory practice at Akin Gump Strauss Hauer & Feld LLP.

This is a look at some of what was discussed.

Beneficial Ownership

On October 10, 2023, the SEC adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, resulting in an update to Regulation 13D-G to require market participants to provide more timely information on their positions to ensure investors receive timely material information. Sections 13(d) and 13(g) and Regulation 13D-G require an investor to file either a Schedule 13D or a Schedule 13G, whichever is applicable, with the SEC if the investor owns more than 5% of a covered class of equity securities. The Rules as amended shorten the initial filing deadline for the Schedule 13D to five business days and accelerate the filing deadline for the Schedule 13G. Compliance with the Schedule 13G filing deadlines is September 30, 2024, and compliance with the new data requirement for Schedules 13D and 13G is December 18, 2024.

Off-Channel Communications

In the SEC Press Relea se^[1]August 8, 2023, the SEC settled charges brought against 11 firms for failing to maintain records of off-channel communication as required by the recordkeeping requirements in Rule 17a-3 and Rule 204-2. During the SEC’s investigation, the firms were found to have participated in pervasive and longstanding off-channel communications when employees used messaging platforms such as iMessage, WhatsApp, and Signal to communicate business matters to their clients. The firms admitted to their employees’ conduct and agreed to pay combined penalties of $289 million.

In a separate Press Release^[2] September 29, 2023, the SEC settled charges brought against ten firms for similar recordkeeping violations of the same rules. In these cases, the SEC discovered during its investigation that firms participated in pervasive and longstanding off-channel communications when employees communicated business matters to clients using personal text messages. These firms, like the firms above, admitted to the facts discovered in the investigation and agreed to pay combined penalties of $79 million.

While most cases appear to focus on broker-dealers, investment advisers should undertake to understand the recordkeeping rule and comply with their obligations, specifically regarding off-channel communications.

Private Fund Adviser Rules

On August 23, 2023, the SEC adopted the amended Private Fund Advisers Rule. Under the amended rule, private fund advisers will be required to distribute to investors: (1) quarterly statements detailing fund fees, expenses, and performance; (2) an annual financial statement audit of each private fund; and (3) a fairness opinion or valuation opinion for each adviser-led secondary transaction. In addition, the Rule will prohibit private fund advisers from providing investors with preferential treatment regarding redemptions rights and information if such treatment would have a materially negative effect on other investors. Under the disclosure exception, private fund advisers may provide preferential treatment when the private fund adviser provides disclosure of the preferential treatment to all current and prospective investors. Lastly, the Rule will restrict private fund advisers from engaging in certain activities except where specific disclosures are made to and consent is obtained from investors. Compliance with the quarterly statement and audit requirements is March 14, 2025. Compliance with all other requirements is September 14, 2024 for large advisers with more than $1.5 billion in assets under management and March 14, 2025 for small advisers with less than $1.5 billion in assets under management.

[1] https://www.sec.gov/news/press-release/2023-149

[2] https://www.sec.gov/news/press-release/2023-212