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Year-End Client Letter

December 19, 2023

It has been a choppy year for the investment management industry. High interest rates and recession fears weighed down fundraising and deal activity across asset classes, despite market gains. Meanwhile, the FTX fallout continued to loom large over the crypto community. Nonetheless, we have seen a rebound in new fund launches and increased client activity in general for several months now—if that shift is to be taken as a positive indicator, 2024 may be shaping up to be a busy year.

With that in mind, we would like to highlight the following legal, regulatory and business matters that may affect you or your clients heading into the new year. As always, feel free to reach out to us should you have any questions.

Firm News

Wes Barnes Promoted to Partner. We are thrilled to announce that Wes Barnes has been promoted to Partner. For those of you who have worked closely with Wes over the years, you likely know that (i) the recognition is much deserved; and (ii) he has zero interest in the fanfare of a firm announcement. Please congratulate him anyway.

Legal and Regulatory Changes

Final Rules for Private Fund Advisers. In August, the Securities and Exchange Commission (SEC) adopted new rules (Rules) under the Investment Advisers Act of 1940 applicable to both SEC-registered investment advisers and unregistered advisers. Among other requirements, the Rules require registered private fund advisers to provide investors with quarterly statements and yearly audited financial statements. In addition, the Rules place significant restrictions on the ability of both registered and unregistered private fund advisers to give preferential treatment to certain investors. For more information regarding how the Rules may impact you or your clients going forward, see our regulatory alert from earlier this year.

Corporate Transparency Act. The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act in 2021, requires entities newly formed or registered to do business in the United States (US) on or after January 1, 2024, to submit beneficial ownership reports to the Financial Crimes Enforcement Network (FinCEN). Entities that were formed or registered to do business in the US prior to January 1, 2024, have a one-year grace period to submit their initial reports. Notably, SEC-registered investment advisers and certain venture capital fund advisers—as well as the pooled investment vehicles those entities advise—are exempted from the beneficial ownership reporting requirements. As currently drafted, there is no exemption for state-registered investment advisers.

Digital Assets

Regulation by Enforcement. If 2022 was defined by the FTX fallout, 2023 was defined by US regulators targeting crypto market participants with a flurry of high-profile enforcement actions, culminating with back-to-back lawsuits against Coinbase and Binance in June. During the same month, the CFTC was awarded a default judgment in its lawsuit against Ooki DAO, a decentralized autonomous organization (DAO), highlighting the risk of holding tokens in DAOs that do not include a “liability wrapper”. In July, a potential securities law framework for digital assets began to take shape from contrasting rulings in the SEC’s lawsuits against Ripple Labs and Terraform Labs, respectively. In August, the SEC announced charges against Impact Theory LLC, an issuer of non-fungible tokens (NFTs), in the first enforcement action against an NFT issuer for offering unregistered securities. Most recently, a federal court of appeals overturned the SEC’s decision to reject a spot bitcoin ETF application by Grayscale Investments and ordered the SEC to revisit the application, paving the way for potentially multiple spot bitcoin ETFs to be approved in 2024.

Other than that, not much going on.

Investment Advisers and Exempt Reporting Advisers

Annual Updating Amendment of Form ADV. Each registered investment adviser (RIA) and exempt reporting adviser (ERA) must file an annual updating amendment to its Form ADV. The amendment must be filed within 90 days of the adviser’s fiscal year-end. If you are a client of our firm, be on the lookout for an email from us within the next couple weeks regarding the annual updating amendment process.
Each RIA should also provide to each client an updated Form ADV Part 2A brochure and a summary of material changes to the brochure, if any (or simply a summary of material changes, if any, accompanied by an offer to provide the updated brochure).
Investment Adviser Registration Depository (IARD) Renewal Fees. Annual renewal fees for SEC and state RIAs, as well as SEC ERAs, were due by December 11, 2023. Notice reminders regarding the fees were sent via email prior to the deadline. Please contact us if you missed the email and/or have not paid the renewal fee.

Unregistered Advisers. Advisers that are neither RIAs nor SEC ERAs must register or, if solely advising private funds, file as an exempt reporting adviser with the SEC upon reaching $25 million in regulatory assets under management (RAUM). If your firm is neither an RIA nor SEC ERA, please contact us prior to exceeding the $25 million threshold to discuss registering as an RIA or filing as an SEC ERA, as appropriate.

Form PF. An investment adviser must file Form PF if it (i) is registered or required to be registered with the SEC; (ii) advises one or more private funds; and (iii) has at least $150 million in private fund assets under management. Note that “private fund assets under management” only includes the portion of an adviser’s RAUM attributable to private funds that it advises. Advisers must file Form PF on an annual basis within 120 days of the fund’s fiscal year-end.

Form CRS. SEC RIAs that advise “retail clients” are required to file and deliver Part 3 of Form ADV (also known as Form CRS) to such clients. Form CRS should be written in plain English and provide retail clients with succinct information about the adviser’s services to retail clients, fees and costs, conflicts of interest, etc. A “retail client” is any natural person who seeks or receives advisory services primarily for personal, family or household purposes. Notably, investment funds are not retail clients (even if underlying investors in the fund are natural persons that would otherwise be retail clients).

Annual Compliance Review. RIAs should review their compliance program annually. The annual review should evaluate, at a minimum, the firm’s Code of Ethics, privacy policy, marketing policies, recordkeeping procedures, the Business Continuity plan, trading restrictions, trading practices, conflicts of interest, ERISA disclosures and compliance violation procedures.

Each RIA must also provide its investors with a copy of its privacy policy on an annual basis, even if no changes have been made to the privacy policy.

Private Investment Funds

Verification of New Issues Status. Fund managers must conduct an annual verification of each account to ensure investors are eligible to participate in initial public offerings or new issues pursuant to FINRA Rules 5130 and 5131. While the initial verification requires affirmative representations by account holders, FINRA allows subsequent verifications to be completed using negative consent letters.
Annual Audited Financial Statements. RIAs (and many state ERAs) that manage private funds are generally required to distribute audited financial statements to each fund investor within 120 days of each year-end.

Form D Annual Amendments.  Form D filings for funds maintaining continuous offerings must be amended annually on or before the anniversary of the Form D filing or the filing of the most recent amendment. When amending Form D, the fund should review the entire form and ensure all information is up to date.

Blue Sky Filings.  Fund managers should review their state blue sky filings to ensure they have met any applicable state renewal requirements.

Updating Offering Documents. Private fund managers should review and update fund offering documents each year to address any changes to the investment strategy and fund structure, required risk disclosures, regulatory and tax matters, etc. Please contact us if you need assistance updating your fund offering documents.

Commodity Trading Advisors and Commodity Pool Operators

Annual Reaffirmation of CPO Exemption. Commodity pool operators (CPOs) and commodity trading advisors (CTAs) relying on an exemption from registration with the Commodity Futures Trading Commission (CFTC) are required to reaffirm their exemption eligibility within 60 days of the calendar year-end.

Forms PQR and PR. Registered CPOs and CTAs must file generally CPO Form PQR and CTA Form PR, respectively, using the NFA’s EasyFile system. Registered CPOs must file CPO Form PQR on a quarterly basis within 60 days of each quarter-end. Registered CTAs must file CTA Form PR on a quarterly basis within 45 days of each quarter-end.

CPO Annual Report Updates. Registered CPOs—including CPOs utilizing the CFTC Regulation 4.7 exemption—must distribute an Annual Report to each participant in each pool that they operate, as well as submit a copy of the Annual Report and key financial balances to the National Futures Association (NFA), within 90 days of the pool’s fiscal year-end. An independent certified public accountant must certify the Annual Report.
Updating Disclosure Documents. Registered CPOs and CTAs should also check the date of their most recent disclosure documents. Registered CPOs and CTAs are generally prohibited from soliciting clients with a disclosure document that has not been updated within the past 12 months.

If you would like to discuss or require assistance with any of the above items, please do not hesitate to contact Kevin Cott at As always, we appreciate your continued business and support. From all of us at Cott Law Group, we wish you a happy and healthy New Year.