Ropes & Gray's Private Investment Fund Update: November 2012

REGULATORY DEVELOPMENTS

SEC Publishes Letter to Private Fund Industry Regarding Presence Exams

On October 9, 2012, the United States Securities and Exchange Commission (the "SEC") published a letter to newly registered investment advisers to introduce the National Exam Program (the "NEP") and provide certain information about upcoming examinations and the topical areas that may be examined. Over the next two years, the NEP will begin conducting focus, risk-based examinations with respect to newly registered investment advisers of private funds (the "Presence Exams"). These Presence Exams have three primary phases: engagement; examination; and reporting:

Engagement Phase.During the engagement phrase, the NEP will engage in a nationwide outreach program to inform newly registered investment advisers about (among other things) their obligation under the Investment Advisers Act of 1940 (the "Advisers Act") and the Presence Exams. In anticipation of the engagement phase, the NEP and the SEC has published various compliance materials, staff letters, staff issued no-action letters, interpretive guidance risk alerts, and other documents available on the SEC's website. A link to the speech given by Director Carlo di Florio earlier this year, discussing examinations of private equity firms in more detail, is available here. Examination Phase.During the examination phase, the NEP will review one or more of the following areas that the NEP deems to be "higher-risk" with respect to the firm: ° Marketing: The NEP staff may review marketing materials and evaluate whether all materials are in compliance with the Advisers Act and are not false or misleading. Portfolio Management: The NEP staff may review a firm's portfolio decision-making practices and allocation of investment opportunities, and evaluate whether such practices are consistent with the disclosure provided to investors. Conflicts of Interest: The NEP staff may review the procedures, policies and controls used to identify, mitigate and resolve certain conflicts of interests (including conflicts relating to allocation of investments, fees, and transactions with affiliated parties). Safety of Client Asset: The NEP may review the policies and procedures to protect client assets from loss or theft, and evaluate whether such policies are in compliance with the Advisers Act. Valuation: The NEP staff may review the valuation policies and procedures, including methodology for valuing illiquid or difficult to value investments, and the methods for calculating management and performance fees. Reporting Phase. Following the completion of the examination phase, the NEP intends to report its observations and conclusions to the SEC and the public. Such observations may include common practices, industry trends and significant issues. The NEP staff will contact an investment adviser separately if it is selected for an examination. Please consider whether your firm would be prepared for an exam if you received a notice from the NEP staff.

Industry Groups React to Proposed Rules to Remove Prohibitions on General Solicitation and General Advertising in Certain Regulation D Offerings

The Jumpstart Our Business Startups Act, enacted earlier in 2012 (the "JOBS Act"), directed the SEC to amend Rule 506 of Regulation D ("Rule 506") of the Securities Act of 1933, as amended (the "Securities Act"), to allow issuers to engage in "general solicitation" and "general advertising" in offerings made under Rule 506, so long as all purchasers of the securities in such offerings are accredited investors.

On August 29, 2012, the SEC proposed an amendment to Rule 506 to implement these provisions of the JOBS Act. If adopted as proposed, the amendment will provide certain private equity funds, hedge funds and other private funds with substantially more flexibility in marketing fund interests. More information on the proposed amendment is available here.

However, significant questions remain and several industry and consumer groups submitted comments to the proposed amendment on various issues, including:

Verification. The proposed rule includes the steps fund sponsors may be required to take under new Rule 506(c) to verify that investors are "accredited investors." While proposed Rule 506(c) does not contain any required methods or establish any safe harbor for issuers to follow in verifying the accredited investor status of purchasers, the SEC's guidance from the...