Form ADV requires a registered investment adviser to state the firm’s assets under management. The new form changed the calculation and the term to “regulated assets under management”. At the same time, the threshold between state and federal registration has been increased from $25 million to $100 million.

I thought it would be useful to look back to 1997 when the regulation of investment advisers was first split at the $25 million level. Warwick Capital Management wanted to stay registered with the SEC and was accused of inflating its assets under management to maintain SEC registration. The main charge was a violation of Section 203A of the Investment Advisers Act. But the firm was also found to have violated section 207 by making an untrue statement of material fact in an SEC filing. Fraudulent intent is not required under Section 207. Even more, violations of Sections 206(1) and 206(2), by falsely representing Warwick’s assets under management and 2003 total performance returns to database services that published the misrepresentations to subscribers in the securities industry. Section 206 prohibits actions would operate as a fraud or deceit on a client.

In 1996 Warwick’s Form ADV listed $5 million of assets under management on a discretionary basis. In 1997 when the registration threshold increased, Warwick inflated assets under management to $26.55 million. That kept the firm under SEC registration and examination, instead of state-level.

Warwick also used inflated numbers in database services that acted as referral sources for Warwick. The amounts differed from those used in Form ADV and even differed from service to service.

Of course, you probably realize the importance of keeping the records that prove performance. Warwick did also. But they were destroyed in a fire, or a smoking chimney, or a flood. When asked by the SEC to make the records available, the firm used those series of excuses. The Administrative judge took the position that records never existed.

It probably comes as no surprise that in addition to inflating assets under management, Warwick inflated performance returns.

Sources:

• In the Matter of Warwick Capital Management (.pdf)

Inflating the Balloon by Terry Feuerborn

These are some compliance-related stories that recently caught my attention.

Compliance officers face multiple options for credentials

Certification and continuing education courses abound for compliance professionals, as the demand for their expertise grows and as they seek new jobs and higher wages. Membership groups and educational programs abound to help professionals increase their skills and understanding of the specific regulations in their industries — or to increase their proficiency at spotting risk and ethics lapses in general — while networking with like-minded peers.

Signed Laws & Rules Around the Corner by William Carleton

One way to remind ourselves how much is at stake in JOBS Act rulemaking – even though the JOBS Act itself has already passed – is to remember what happened to the net worth standard under the accredited investor definition of Regulation D, following the passage of Dodd-Frank.

Top 10 Reasons to Avoid Crowdfunding by Andrew Ledbetter in The Venture Alley

In today’s age of social media success stories, there is something superficially interesting about crowdfunding as a high-level idea. There has certainly been no shortage of attention to crowdfunding in the press and from business people. But in looking at the new JOBS Act exemption for crowdfunding, I see lots of reasons why many companies will avoid it. While this list could be expanded – and will need to be revised as the SEC adopts rules to implement the new exemption – to get things started I offer up these ten reasons: …

Walls of Silence Explained by Howard Sklar

What do you think the reaction of the CCO would be? My first thought about the CCO’s reaction is that it would be, “are you out of your f%&$#ng mind?!” But perhaps that’s not a cultural fit with the company. He might also say, “that’s an interesting perspective.” Which, in one company I know, is the code for “are you out of your f%&$#ng mind?!” One of the first things you have to learn when you go in-house is the company’s (or your boss’) code phrase for “that’s the most boneheaded idea I’ve ever heard!”

At the SEC, Investigations About Investigators Who Investigate Other Investigators by Bruce Carton in Compliance Week

David Kotz, the former SEC Inspector General, departed the agency in January 2012 to rejoin the private sector, and it seemed as if this surge of “investigations of investigations” had ended. It turns out that it has not and, if anything, it seems to be headed for levels of “investigations of investigations” that we have not before reached.

Compliance Balloon by Ront

Almost 40% of US working wives now outearn their husbands. Washington Post reporter Liza Mundy argues that “the Big Flip” in gender roles “is just around the corner” in her new book: The Richer Sex. Soon “women, not men, will become the top earners in households” and that will transform the dynamics of male-female relationships.

Mundy sprinkles interviews with women and men throughout the book to highlight her positions and theories.  She sees the emergence of a country (and world) where both sexes are “freer to make purely romantic choices” based on individual preference rather than constrained by long-held stereotypes about who should be the primary breadwinner. For large parts of the US economy, you don’t need physical strength and stamina to put food on the table and a roof over your head.

Mundy speculates that women are better adapting to the knowledge-driven economy of the United States. Middle skill jobs are disappearing. Men lost 75% of the 7 million jobs that disappeared during the Great Recession. Industrial jobs are being outsourced. That means making the educational leap to higher tier jobs. Women receive 57% of bachelor degrees and account for 60% of graduate school enrollment.

Mundy concludes that the bread-winning woman is dramatically changing the face of marriage and quality of marriage. They prefer a marriage of equals, or at least a man with strong career ambition and intellect. That means women would choose being single to being in a bad marriage. With their earning potential, they don’t need a husband for financial support.

Mundy relates the story of a high-powered executive in a lackluster marriage, with a husband that was resentful of his wife’s career. (He didn’t have one.) They fought over getting a dog. He thought the dog would absorb too much of her time and affection. She ended up getting the dog and he got mad. Then she had a brainstorm. Get rid of him and keep the dog. “The dog is very supportive of her achievements.”

This growth of female breadwinners is not just a US phenomenon. It’s happening in South Korea, Japan, Singapore, France, Chile, Ireland, Belgium, Canada, the Philippines, and Norway. As the world economy is starting to rely more on brainpower than musclepower, women are the winning participants in the economy. There is still great inequality. But it’s changing. This book looks ahead to where that may lead as women overtake men as the breadwinners.

I first heard of this book while listening to an interview of Liz Mundy on a podcast of C-SPAN’s Book TV. (Yes, I’m that much of a geek.) The interview was great and prompted me to run down to the library and borrow a copy. I suggest you do the same.

I’m sure you heard in the news that JP Morgan lost $2 billion in a trades using complex derivatives tied to corporate bond defaults. But didn’t we fix this two years ago when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act? It seems like JP Morgan’s mistakes should be the first test of Dodd-Frank. The law fails. It’s just lucky that JP Morgan’s trade was stopped before it destroyed the bank.

By coincidence, Matt Taibbi wrote a piece in Rolling Stone about the failings of Dodd-Frank: How Wall Street Killed Financial Reform. I generally find Mr. Taibbi’s take on finance to be a bit over the top, with more hyperbole in a world that lacks the subtle shades of compromise. This article is no different. But he also gets lots of the right points. Dodd-Frank will not result in financial reform.

Taibbi makes five key points.

1. Strangle it in the Womb

Financial reform started off with some great ideas. But they were watered down as the law progressed through the legislative process. For example, Mr. Volker’s simple concept of banning proprietary trading got twisted and poked, allowing broad exemptions. The Consumer Financial Protection Bureau went from being an independent watchdog to an office under the budgetary constraints of the Federal Reserve System.

2. Litigation

The federal regulators will need to contend with courtroom challenges to their regulations, with industry arguing that they go beyond the scope of the legislation or failed to adequately run a cost-benefit analysis of the regulation.

3. If You Can’t Win, Stall

Many sections of the law are experiencing “unforeseen delays.” Taibbi blames Wall Street lobbyists. I blame the law itself. Dodd-Frank deferred much of the implementation to the regulators, meaning they would need to craft new complex regulations and definitions of key terms that are mere sketched out in the law itself. This overloaded the ability of the regulators to produce new regulations. They are tasked with a ten-fold increase in the rule-making agenda. That means the regulators need more staff and the time to get them up to speed. But Congress largely failed to provide the financial support.

4. Bully the Regulators

When Congress is frustrated with a regulator, they just cut funding. Rather than increase the SEC’s budget to allow for the resources to create and implement the new regulations, Republican congressmen tried to cut the Commission’s budget.

5. Pass a Gazillion Loopholes

Congress is moving bills forward to further undercut Dodd-Frank. We saw that with the Rapid passage of the Jumpstart Our Business Startups Act. (I would argue that it undercuts Sarbanes-Oxley, not Dodd-Frank.) As the balance of power in Congress shifts, parts of financial reform become less viable. I think the true test will come a year from now, after the Presidential election. A Romney win and some Republican congressional wins will likely lead to a rapid erosion of Dodd-Frank.

The one point that Taibbi only alludes to is that Congress does not understand the financial markets or the securities laws. I watched some of the Congressional testimony on the JOBS Act. Only a handful of the member of Congress had any idea what was really in the law. Dodd-Frank is even worse. It was a massive law. I would place a wager that no more than 10 members of Congress actually read the whole law before voting on it. Even fewer understood the implications.

The problem is that the easy of publishing and finding information has nothing to do with it’s quality, veracity, or appropriateness. What you business publishes, what your employees publish, and what your business’s critics publish all affect your business and can affect its bottom line. (Positively or negatively.)

Infographic sources:

• Gartner
• Smarsh compliance survey,
• Ponemon 2011 report
• Symantec 2011 Social Media Protection Flash Poll
• IDC

The key aspect of registration under the Investment Advisers Act is managing conflicts of interest. The financial services industry is full of conflicts. Investment advisers owe a higher level of duty to their clients than broker-dealers. In the case of fund managers, they owe the duty to their funds. One particular concern is a transaction between an investment adviser’s funds.

The SEC recently issued a cease-and-desist order that highlights a fund manager that handled the conflict poorly. I’m assuming the facts in the SEC’s order is true, although Martin Currie neither admits nor denies the allegations in the complaint.

The main focus of SEC’s complaint is that Martin Currie used one fund to rescue another fund. That’s good for investors in one fund and bad for investors in the other fund.

Hedge Fund Investment

The problems began in June 2007 when Martin Currie caused its Hedge Fund to purchase a large quantity of illiquid bonds in a Chinese company: Jackin International Holding. That deviated from the Hedge Fund’s normal equities-trading strategy. Martin Currie realized the investment would cause the Hedge Fund to breach its self-imposed 5% limit on investments in unlisted securities. To cure that problem, Martin Currie obtained approval from the Hedge Fund’s board of directors to modify the 5% limit. However, Martin Currie may have failed to present all material issues and risks for the board’s consideration. After the deal closed, the high-yield Jackin bonds were improperly characterized as cash in the firm’s risk management system. Because of this misclassification, the liquidity and credit risks from the Hedge Fund’s exposure to Jackin were not appreciated at Martin Currie headquarters until after the Hedge Fund had purchased even more Jackin bonds. It’s not clear from the order whether the misclassification was intentional or accidental.

2008 Financial Crisis

Then the 2008 financial crisis rears up and causes a liquidity crunch in the Hedge Fund as investors redeem their interests.  As more liquid assets were sold off to generate cash for redemption, those illiquid Jackin bonds became an increasingly larger part of the portfolio.

Martin Currie also acted as the adviser to a closed end fund: the China Fund. It just so happened that the China Fund was working with a group investors to buy one of Jackin’s subsidiaries: Ugent Holdings. Coincidentally, the sale of Ugent would allow Jackin to repay the bonds held by the Hedge Fund.

Board Approval of the Transaction

The group at the China Fund decided they needed approval of the fund’s board to proceed with transaction. However, the SEC accuses Martin Currie of failing to properly disclose the conflict of interest when it sought the board approval. Board approval does not clear the conflict if the board did not know about the conflict. It’s even worse if the board approval is based on “incomplete and misleading representations.”

On top of the faulty approval, Martin Currie used some dubious pricing and rationale for the China Fund’s investment. Ugent and Jackin’s financial situation had detoriated as a result of the 2008 financial crisis and its earnings and profits had fallen sharply. But Martin Currie used eight month old financial data and due diligence. They pushed ahead without assessing whether the Ugent investment was good for the China Fund. (It certainly was good for the Hedge Fund.)

Second Approval

At the next regular meeting of the China Fund’s board, the Ugent investment was once again presented. Once again the description of the transaction failed to mention that the sales proceeds would ultimately end up in the hands of the Hedge Fund. The Hedge Fund’s bond investment was cashed out at par, solving its liquidity crisis. Now the China Fund was holding $22 million of illiquid convertible bonds of dubious value.

Board approval could have cured the conflict. Without disclosing the conflict, the board approval fails. I would have to assume the board would not have approved the transaction if it knew about the conflict.

Valuation Failure

To compound the problem, Martin Currie failed to follow its procedures for valuation of the shiny, new bonds. The China Fund had adopted FAS 157 and was supposed to value its holding at “fair value.” For non-traded, direct investments like these bonds, the China Fund’s policies called for a valuation at cost, unless there was a material change in value.

Martin Currie failed to point out to the valuation group that Jackin/Ugent was having serious financial problems. Jackin’s auditor issued a going concern warning and Martin Currie failed to inform the valuation group. On top of that the Hedge Fund was selling its remaining interests in Jackin.

Within 19 months of the investment, the China Fund wrote down the investment by 50%. A month later, it wrote it all the way down to $0.

Pointing the Finger of Blame

Although I used the name Martin Currie liberally above, the investment advice was coming from different units of the company and separate individuals in the organization.  Martin Currie cooperated with the SEC, including refunding losses incurred by the China Fund and refunding management fees. The firm also terminated an unidentified project manager who directed the misrepresentations to the board. I assume that project manager is subject to further investigation, perhaps by the investigators who can subject the project manager to jail time.

Even with the cooperation, Martin Currie was subject to a fine in excess of $8 million. From the press release, it sounds like the problem was discovered as part of an SEC examination and gives credit to an SEC examination conducted by Jason Rosenberg and Lucas Tepper under the supervision of Mavis Kelly.

To some extent, this case in another in a long string of cases where fund managers took in appropriate steps to stay alive during the 2008 financial crisis. There were no safe places to put money. The robust underwriting standards of the 2007 boom collapsed under the weight of a global financial crisis and a stark new reality. Some managers stepped up and did the right thing by investors, hoping they would appreciate the honesty. Others locked down the funds keeping investors from jumping into lifeboats, claiming the boat is just in rough waters and not sinking. Others took dubious actions trying to cover up their failings.

Remember that it was the redemptions from the 2008 financial crisis that finally brought down the Madoff ponzi scheme after years (decades?) of deceit. Even this master swindler could not hide from a global financial crisis.

Sources:

• SEC Charges Scotland-Based Firm for Improperly Boosting Hedge Fund Client at Expense of U.S. Fund Investors – SEC Press Release
• SEC’s Order Against Martin Currie (.pdf)

Image of Success or Failure is from Todd Ehlers

Our favorite part of the site is the silver whistle pictured on the homepage. Emblazoned with the agency’s logo, the whistle is a nod to the S.E.C.’s status as the whistleblower of wrongdoing on Wall Street. (And would make a good gag gift for Harry Markopolos.)

When we asked Mr. Nester whether actual, S.E.C.-branded whistles were available for sale to the general public, he replied, “Unfortunately, the cool-looking whistle is available only as a jpeg.”

Why Companies Shouldn’t ‘Do’ Compliance by Dov Seidman in Forbes.com

To be truly effective in shifting behavior, and moving an organization forward, leadership must move from a “governance, risk and compliance” to a “governance, culture and leadership” mindset. Focusing on actions that will build and maintain a values-based system of “governance, culture and leadership” will mean less compliance activity, less cost, and more compliance as a result of real, tangible and sustainable behavior change.

Trust, or verify? by William Carleton

When startups and private companies raise money today from angel investors, they count on the investors to self-certify they are accredited.

Sure, companies might ask prospective investors to fill out questionnaires, and might otherwise draw attention to the significance of the investor’s rep (“these securities are being sold to you under a Rule 506 exemption, the validity of which is based, in part, on your representation to us that you are in fact accredited . . . “); but no issuer today asks to see the prospective investor’s tax returns, nor bank balances, nor the appraised value of her art collection.

The SEC, Accredited Crowdfunding, And The Art Of Hair Splitting by Joe Wallin

If this argument is going to inform the SEC’s rulemaking on this subject, and if the SEC believes that this is what the legislative history indicates should inform the rulemaking, then it is unlikely we are going to see a continuation or retention of a check-the-box or questionnaire regime for advertised offerings. However, for non-advertised offerings, perhaps the old regime can continue. And in fact, the argument can be made that it should continue because if there is no advertising then the heightened risk which prompted these verification processes be added won’t exist. Of course, it remains to be seen whether the SEC will require verification in just offerings in which there is general solicitation, or all offerings.

‘Say on Pay’ vote destroys $500MM+ in shareholder value by Marc Hodak in Hodak Value

Aviva’s shareholders, saw the departure of Andrew Moss, their CEO, after his pay package was voted down. While it’s difficult to interpret any given Say on Pay vote, it’s a fair assumption that these votes respond to headline news about a company. In the case of Aviva, the headline appeared to be “Insurer performing badly; CEO pay goes up.” So, here is what the shareholders have wrought: …

[T]he stock drop has cost Aviva’s shareholders over $500 million, even accounting for the general slump in the market over the last couple of days. The shareholder’s putative complaint was that the board had agreed to pay Mr. Moss a $1.86 million bonus, on top of his $1.55 million salary. So, it appears that the shareholders, in their trading capacity, have penalized the company with a half billion dollar CEO changeover cost because they believed, in their proxy voting capacity, that two million dollars was too much to pay their CEO in a bonus.

What is Private Equity? from the Private Equity Growth Capital Council

In my ongoing quest to distinguish what’s a security and what’s not a security, a new case came down from Missouri on the topic. Disgruntled purchasers of condominiums at the Branson Landing Hilton Promenade Boutique Hotel felt they got a bad deal and sued the seller/issuer to get their money back: Obester v. Boutique Hotel (.pdf)

The owners claim the seller/issuer represented that the condominiums would be rented out and they would receive a portion of the profits, generating substantial revenue. I assume the investment did not turn out to be a financial windfall. According to the claim, the hotel rented its inventory of unsold units at a discounted rate.

Fee simple ownership of the “bricks and mortar” of real estate is not a securities transaction. “The offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security.” As you move further away from that model, you move closer and closer to the ownership a security than the ownership of real estate. The line between the two is not a bright line.

As with the Hard Rock San Diego case still working its way through the federal courts in California, combining the sale of real estate with a management agreement starts making the real estate look like a security.

In the Boutique Hotel case, the court goes back to the Howey case and uses a four part test to determine if there is an investment contract, where there is

1. an investment of money,
2. a common enterprise,
3. a reasonable expectation of profits, and
4. a reliance on the entrepreneurial or managerial efforts of others.

The court draws a distinction between a vertical commonality and a horizontal commonality to create a common enterprise. Vertical looks at the relationship between the seller and the purchaser. Horizontal focuses on the pooling of interests among investors. It’s an interesting way to look at the analysis, but it ends up not being decisive to the court.

What kills the securities claim is that the owners were not required to participate in the rental program. An owner could chose to not rent out its condominium or rent it out on its own. That means the business arrangement did not have a reliance on the entrepreneurial or managerial efforts of others.

That distinguishes the arrangement from the one being contested in the Salameh / Hard Rock San Diego case. San Diego restricted the rental program to the one run by the seller/issuer. Under San Diego zoning, the units had to be sold for non-residential use and be managed as part of the hotel.

These cases do little to help me decide when an interest in a manager-managed limited liability company is a security. But it’s clear that there is still a big gray space between what is a security and what is not a security.

Sources:

• Obester v. Boutique Hotel (.pdf)
• Condo Rental Programs Are Not Investment Contracts by Ernest E. Badway in Fox Rothschild’s Securities Compliance Sentinel
• When is Real Estate a Security?
• What is a Security? Is Real Estate a Security?

Section 201 of the recently passed Jumpstart Our Business Startups Act will change the advertising limits on private funds and any other company that raises capital through the private placement safe harbor in Rule 506 of Regulation D. That rule has historically prevented the use of general solicitation and advertising in selling private fund interests. Section 201 requires the SEC to lift the ban through a new rulemaking and gave the SEC 90 days (July 4) to do so.

I still find it strange that Congress did not just create revise the underlying statutes to allow solicitation and advertising in private offerings not registered with the SEC. Instead, Congress took the convoluted route of requiring the SEC to change a rule that interprets a statutory provision of the Securities Act. That injects some uncertainty into what limitations, if any, the SEC will continue to require after July 4 (or whenever the new rule goes into effect).

There are a few other points in Section 201 that concern me and make me worry about fundraising in the post JOBS Act regulatory world.

First, Section 201 limits sales only to accredited investors when using general advertising or solicitation. Currently, a Rule 506 offering can have up to 35 non-accredited investors. That would typically include friends and family investors. It would also include employees.

Second, Section 201 requires the SEC to include a requirement that the issuer take reasonable steps to determine accredited investor status using methods determined by the SEC. That could radically change the current practice and safeguards in the fundraising process.

Third, I’m concerned what the effect will be for a fund or other issuer that ends up selling to a non-accredited investor. A fund can take reasonable steps to determine if a potential investor is accredited. But the investor could be deceptive. That would leave the fund in violation even though it reasonably believed the investor was accredited.

Fourth, Section 201 purports to lift the ban across all federal securities law. In particular, I’d prefer clarification that the advertising and solicitation applies to the Section 3(c)(1) and 3(c)(7) of the Investment Company Act that permits most private funds to avoid regulation under that law.

In looking through the comments letters to Section 201, I see that I am not alone in these concerns.

The American Bar Association’s Federal Regulation of Securities Committee does a a great job of focusing on my fourth concern and asks for a clear statement that “an offering of fund shares pursuant to Rule 506 or Rule 144A utilizing general solicitation or general advertising will not be a ‘public offering’ for the purposes of Section 3(c)(1) or 3(c)(7) of the Investment Company Act.”

The letter also requests clarification of the reasonable belief standard in the Rule 501 definition of accredited investor.

“any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person…”

The letter falls short in its comments to the verification practice. It merely asks the SEC to have the rule reflect “current custom and practice” without letting the SEC what the customs and practice is. (It’s asking the investor to fill out a questionnaire.)

In it’s comment letter, the Managed Fund Association focuses on reasonable steps for the verification process.

In general, each potential hedge fund investor must complete a subscription document provided by the fund’s manager that provides a detailed description of, among other things, the qualification standards that a purchaser must meet under the federal securities laws. In completing the subscription materials, each investor must identify which applicable qualification standard it meets. In addition to these procedures, many hedge funds managed by MFA members obtain further assurance of the qualification of their investors by virtue of minimum investment thresholds that meet or exceed the net worth requirement in the definition of accredited investor.

The Managed Fund Association also asks that the knowledgeable employee exemption be extended to Rule 506. With private funds, investors prefer (demand?) that senior management have a significant investment in the fund. This aligns interests among the investors and management. When operating under the Section 3(c)(7) exemption from the Investment Company Act, the issue then becomes how a private investment fund can provide an equity ownership to key employee when it’s unlikely that your key employees will have the $5 million in investments needed to qualify as  a Qualified Purchaser. The SEC established Rule 3C-5 to allow “knowledgeable employees” to invest in their company’s private fund without having to be a qualified purchaser. The rule also exempts these knowledgeable employees from the 100 investor limit under the Section 3(c)(1) exemption from the Investment Company Act. The Managed Fund Association recommends

that as part of the implementation of Section 201, the SEC amend the definition of “accredited investor” to include those individuals who meet the definition of “knowledgeable employee” in Rule 3c-5 under the Investment Company Act.

The New York City Bar splits the verification process by asking for a principle-based approach with a non-exclusive safe harbor. Their comment letter points out the body of existing practice and asks the SEC to build on it, rather than replace it.

The clock is ticking and the SEC has very little time to produce a proposed rule for comment. I wouldn’t be surprised to see the SEC miss the deadline given all of the other rule making piled up in front of them. That means the advertising may have to wait that much longer.

Sources - Comment letter from:

• Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association
• Robert E. Buckholz, Chair, Committee on Securities Regulation, New York City Bar Association
• Jeffrey W. Rubin, Chair, Federal Regulation of Securities Committee, Business Law Section, American Bar Association, New York, New York

One item that I picked up from PEI’s recent Private Fund Compliance Conference is the new way you need gather information about investors in your private fund for Form PF. I put Form PF to the side because my filing is not required until next year. However, there is a key March 31, 2012 date in the Adopting Release for Form PF (.pdf).

In Section 1b, Item B. Question 16 (.pdf)Form PF  asks the manager to “specify the approximate percentage of the reporting fund’s equity that is beneficially owned” by the listed category of investors. You need to file Form PF if you listed private funds in your Form ADV.

The catch in the instruction is:

With respect to beneficial interests outstanding prior to March 31, 2012, that have not been transferred on or after that date, you may respond to this question using good faith estimates based on data currently available to you.
(my emphasis)

If you are fundraising now, it looks like you need to make sure your subscription documents require the investor to self-select their designation. I suppose you also need to do some diligence to make sure the selection is correct.

Even if you’re not fundraising, you need to address this change for any transfers in a private fund after March 31, 2012.

The analysis for which sections of Form PF you need to fill out is a bit complicated. But every private fund needs to fill out Section 16 and answer the question about the beneficial ownership of the fund. Every private fund needs to start gathering information about their investors using this data scheme:

(a) Individuals that are United States persons (including their trusts);
(b) Individuals that are not United States persons (including their trusts);
(c) Broker-dealers;
(d) Insurance companies;
(e) Investment companies registered with the SEC;
(f) Private funds;
(g) Non-profits;
(h) Pension plans (excluding governmental pension plans);
(i) Banking or thrift institutions (proprietary);
(j) State or municipal government entities (excluding governmental pension plans);
(k) State or municipal government pension plans;
(l) Sovereign wealth funds and foreign official institutions; or
(m) Investors that are not United States persons and about which the foregoing beneficial ownership information is not known and cannot reasonably be obtained because the beneficial interest is held through a chain involving one or more third-party intermediaries.
(n) Other

Sources:

• Form PF Adopting Release (.pdf)
• Private Fund Reporting Depository
• Form PF and Investor Representations in Subscription Agreements in Compliance Avenue
• Real Estate Funds and Form PF