Alert April 03, 2012

Guidance on the Treatment of Private Fund Portfolio Companies for Purposes of Form ADV

On March 30, 2012, the staff of the SEC’s Division of Investment Management (the “Staff”) supplemented its “Frequently Asked Questions on Form ADV and IARD” (the “FAQ”) to address certain Form ADV disclosure obligations regarding an adviser’s “advisory affiliates” that may apply with respect to an operating company (particularly an operating company in the financial industry) because the adviser has a private fund client (e.g., a private equity fund or venture capital fund) that has taken a significant ownership interest in the company, and/or persons associated with the adviser participate in the company’s management in connection with the investment.  Under these circumstances, the adviser could be regarded as having indirect “control” of the operating company, thereby making the company an “advisory affiliate” as to which the adviser must report in response to various items in Form ADV.  The Staff stated that it would not recommend enforcement action under these circumstances if an adviser does not treat such an operating company (and/or the persons it controls) as an advisory affiliate (i) for purposes of Item 7 of Part 1A (identification of financial industry affiliations) and Item 10 of Part 2A (material business relationships with financial industry affiliates), unless the adviser has a business relationship with the operating company unrelated to the investment by the adviser’s private fund client, which relationship otherwise creates a conflict of interest between the adviser and the fund, or (ii) for purposes of Item 11 of Part 1A (disciplinary information).