Limited Liability Entities

Alternative funds are typically formed as either limited partnerships or limited liability companies (LLCs) under Delaware law. Both limited partnerships and LLCs provide several advantages for alternative funds:

• they provide significantly more flexibility than other entity types (eg, corporations) to modify profit sharing (as between the fund sponsor and investors) and to customise economic and governance arrangements;
• as discussed in 2.1.3 Limited Liability, they provide robust protection of investors’ limited liability;
• they facilitate “pass-through” taxation such that the limited partnership or LLC is not subject to an entity-level tax and all items of gain and loss are passed through to the partners; and
• investors both within and outside the United States are most familiar with limited partnerships and LLCs compared to other available entity types.

The choice between a limited partnership or LLC will depend on the business objectives of the fund, tax considerations, the degree of recognition of LLCs by non-US jurisdictions, and other factors. Limited partnerships are the more common choice for alternative funds, but in some cases LLCs may provide additional flexibility in designing the fund, including the ability to institute familiar corporate governance concepts such as a board of directors.

Investor Interests

Investors in limited partnerships or LLCs generally hold limited partnership interests or LLC membership interests representing a proportionate share of the assets of the partnership or LLC. Limited partnership interests and LLC membership interests are not generally represented by shares or certificates in the same manner as interests in corporate entities.

Registration/Approval Requirements

An alternative fund offered in the United States as an exempt private placement is not generally required to register or obtain approval prior to marketing to investors or accepting commitments from investors. That said, the investment adviser may separately be subject to a registration requirement with the Securities and Exchange Commission (SEC) or relevant state regulator in order to engage in an investment advisory business in the United States unless an exemption from registration is available, as discussed in 2.3.3 Local Regulatory Requirements for Non-Local Managers.

Once the fund begins accepting investors, the fund will be required to make a public notice filing on Form D if the fund is relying on the exemption provided by Regulation D discussed in 2.2.3 Restrictions on Investors. The Form D is due no later than 15 days after the date the first investor has made an irrevocable commitment to invest in the fund, unless the fund has opted to pre-file in advance of the closing date. The Form D requires the fund to disclose basic details regarding the offering, including the name and address of the fund and its control persons, the name and address of any placement agents retained in respect of the fund, and the aggregate dollar amount of interests sold to date. Additionally, counterpart filings may be required in states where investors are domiciled under applicable “blue sky” laws of each state.

Key Documentation

While there are no strict requirements regarding the documents required to offer an alternative fund to accredited investors in the United States, the following key documents typically govern the offering and the fund’s terms.

• Private Placement Memorandum: There is no prospectus requirement with respect to private placements. However, it is common practice for alternative funds to issue a private placement memorandum or similar offering document to provide information regarding the fund sponsor, the fund’s investment strategy, the relevant market, risk factors and conflicts of interest, and other important information relevant to a decision to invest. See 2.3.6 Rules Concerning Marketing of Alternative Funds for a discussion of rules relating to the content of offering documents.
• Operating Agreement: The fund will have an operating agreement (often either a limited partnership agreement or LLC agreement) that governs ongoing terms of the fund as between the fund sponsor and the investors, including with respect to investment restrictions, economic terms, payment of expenses, investor governance rights, resolution of conflicts of interest, and periodic reporting and notice requirements.
• Subscription Agreement: In order to subscribe for an interest in the fund, investors are typically required to execute a subscription agreement (and complete a related questionnaire) confirming the amount of the investor’s commitment to the fund and certain other relevant matters, including the investor’s agreement to be bound by the terms of the operating agreement and the investor’s qualification to invest under applicable securities laws.
• Side Letters: It is fairly common for the fund sponsor to negotiate separate side letter agreements with certain investors that modify the terms of the operating agreement as applied to the applicable investor. Side letters are used frequently to address special regulatory, policy, or tax matters applicable to specific investors, and may also cover preferential economic terms, reporting and transparency rights, and representations and warranties. 

Timeline and Costs

While the process of launching an alternative fund is far more streamlined than a public offering, the fundraising process can still require significant time and costs. Various factors will impact the length and cost of the process, including the complexity of the fund’s investment strategy, the size and diversity of the fund’s investor base, the strength of the fund sponsor’s track record and investor relationships, and general economic conditions. Although these factors vary greatly from fund to fund, it is not uncommon for the fund’s operating documents to provide a fundraising period of twelve or more months for the fund sponsor to raise enough capital to reach its target size. 

Provided they do not participate in the management or control of the fund, investors in alternative funds formed as limited partnerships or LLCs do not have any personal liability to the fund, to the other partners or members of the fund, or to the fund’s creditors for the debts, liabilities, or other obligations of the fund. As a result, an investor’s liability is generally limited to the amount of its capital commitment to the fund, except to the extent the fund’s governing documents require investors to contribute amounts in excess of their capital commitments in order to fund certain expenses, liabilities, or other obligations of the fund, subject to the limits and conditions agreed between investors and the fund sponsor. 

Alternative funds are generally subject to minimal disclosure and reporting obligations relative to registered funds and public companies. As noted in 2.1.2 Common Process for Setting Up Investment Funds, there is no prospectus requirement with respect to offerings solely to accredited investors. With the exception of the Form D filing requirement discussed in 2.1.2 Common Process for Setting Up Investment Funds, the securities laws follow a principles-based approach with respect to regulation of what fund sponsors can and cannot say to investors in the course of a fund offering to ensure that investors receive all material information relevant to making a decision to invest and that the information disclosed is not misleading. 

After the alternative fund has admitted investors, ongoing disclosure and reporting requirements are primarily dictated by the operating agreement negotiated between the fund sponsor and investors. Typically, fund terms will include a requirement for the fund sponsor to delivery quarterly reports to investors as well as annual financial statements that have been audited by a reputable audit firm. These disclosures are not provided to regulators and are not generally made publicly available.

Additionally, the investment adviser to the fund may be required to make an annual filing via Form ADV, which generally contains biographical information about the adviser’s business, including high-level information on the fund and its service providers.

The investor base for alternative funds has historically been primarily composed of large, institutional investors – eg, government and corporate pension plans, university endowments, non-profit organisations, sovereign wealth funds, insurance companies, and family offices. High net worth individuals may also invest in alternative funds provided they meet the applicable qualification standards imposed by the fund.

Sponsors of alternative funds typically organise a special purpose vehicle (usually a limited partnership or LLC) to serve as the general partner or managing member of an alternative fund. The general partner or managing member exercises day-to-day control of the fund and is frequently the party entitled to receive any carried interest or similar profits interest with respect to the fund. 

The fund then separately engages the sponsor’s investment adviser entity (which is also typically structured as a limited partnership or LLC) to serve as the investment adviser to the fund. The investment adviser, rather than the general partner or managing member of the fund, typically receives the management fee payable by the fund. 

Securities Act

Under Regulation D of the Securities Act of 1933 (the “Securities Act”), interests in an alternative fund may be offered to an unlimited number of investors that qualify as “accredited investors” and up to 35 non-accredited sophisticated investors (ie, investors that have knowledge and experience in financial and business matters and are capable of evaluating the merits and risks of the prospective investment). In practice, many alternative funds choose to exclude non-accredited investors in order to avoid being subject to additional disclosure obligations that apply only to non-accredited investors. See 2.3.7 Marketing of Alternative Funds for a discussion of additional conditions applicable to alternative funds seeking to rely on Regulation D.

Additionally, an alternative fund will be disqualified from relying on the Regulation D exemption under the “bad actor” rule if any investor that owns 20% or more of the total voting power of the fund is considered a “bad actor” as a result of being subject to a criminal conviction, regulatory or court order, or other disqualifying event covered by the rule.

Investment Company Act

Alternative funds offered through a private placement will also typically rely on one of several available exemptions from registration as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) (which would subject the fund to requirements applicable to registered funds, as summarised in 3.3.9 Post-marketing Ongoing Requirements). The two primary exemptions used by alternative funds under the Investment Company Act require the alternative fund to either:

• limit the number of investors so that the fund is not owned by more than 100 persons; or
• limit investors to only those that have sufficient investible assets to be considered “qualified purchasers”.

Generally, an investor will be considered a “qualified purchaser” if it falls into one of a few enumerated categories, including if it is (i) a natural person that has at least USD5 million of investments or (ii) an entity that has at least USD25 million of investments.

Exchange Act

An alternative fund relying on Regulation D and the qualified purchaser exemption would not be subject to a cap on the number of investors under the Securities Act or the Investment Company Act. However, the Securities Exchange Act of 1934 (the “Exchange Act”) separately provides that an alternative fund with 2,000 or more investors would be subject to onerous public reporting and record-keeping requirements. As a result, alternative funds will generally seek to limit the number of investors to 1,999 or less. 

Alternative funds are generally subject to less regulatory scrutiny than their retail fund counterparts, and the offering of interests in alternative funds is primarily governed by three legal regimes: the Securities Act, the Exchange Act, and the Investment Company Act. Additionally, investment advisers to alternative funds are governed by the Investment Advisers Act of 1940 (the “Advisers Act”).

Securities Act

Under the Securities Act, any offering of securities with a US nexus must be registered with the SEC, unless an exemption from registration is available. While public offerings in the United States must be registered under the Securities Act, private placements of securities are exempt from registration and offer funds an opportunity to avoid the costs, restrictions, and compliance burdens associated with registration. A private placement is an offer or sale of securities that is made in reliance on Section 4(a)(2) of the Securities Act or Regulation D or Regulation S thereunder.

Exchange Act

Rule 10b-5 under the Exchange Act prohibits funds from engaging in fraud, making any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statements made not misleading. A fact is material if there is a “substantial likelihood” that a reasonable investor would consider it important in its decision-making. In order to avoid potential liability under this rule, the fund and the fund sponsor should ensure that the offering documents and marketing materials are complete, accurate, and truthful. The Exchange Act also governs the activities of registered broker-dealers, who act as placement agents to funds and their investment advisers.

Investment Company Act

All entities that fall under the definition of an “investment company” that issues securities to US persons, whether publicly or privately, must either register as an investment company under the Investment Company Act or find an exemption from such registration. An issuer who falls under the definition of “investment company” and cannot rely on an available exemption would be required to register with the SEC, and, accordingly, be subject to an array of substantive requirements, including, among other things, public filings and financial reporting, limits on affiliate transactions, limits on capital structure (ie, asset coverage restrictions), and compliance and record-keeping burdens.

Alternative funds typically rely on one of the explicit exclusions from the definition of “investment company” available under Section 3(c) of the Investment Company Act. These exclusions include alternative funds that limit their investors to no more than 100 persons or that limit their investors to “qualified purchasers”, as described in 2.2.3 Restrictions on Investors.

Commodity Exchange Act

Certain alternative funds that trade swaps, commodities, futures, or derivatives and their investment advisers may be regulated by the Commodity Futures Trading Commission under the Commodity Exchange Act (CEA). In particular, certain alternative fund general partners or managing members may need to register or seek exemption from registration as a commodity pool operator and their investment advisers may need to register or seek exemption from registration as a commodity trading adviser.

Generally, non-local service providers are generally not subject to US registration requirements in the alternative fund context. As noted in the preceding section, placement agents are regulated under the Exchange Act and generally need to be registered with the SEC, the Financial Industry Regulatory Authority Inc. (FINRA) and the states in which they operate. Foreign placement agents may enter into chaperoning arrangements with US broker-dealers to allow them to access the US markets without being registered themselves, subject to significant restrictions.

The conduct of an investment advisory business in the United States is subject to regulation under the Advisers Act. The Advisers Act defines an “investment adviser” as any person who engages in the business of providing advice to others or issuing reports or analyses regarding securities for compensation. Alternative fund managers would generally be considered investment advisers for the purposes of the Advisers Act.

Registration of Investment Advisers

Any entity meeting the definition of an investment adviser that uses US jurisdictional means in connection with an advisory business must register with the SEC as an investment adviser under the Advisers Act or find an available exemption from registration thereunder. Registration as an investment adviser imposes legal, record-keeping, and disclosure burdens on advisers that must be considered during the registration process. For example, SEC-registered advisers must adopt written policies and procedures and codes of ethics to govern their activities, comply with detailed disclosure and advertising restrictions, develop internal controls and procedures subject to internal audit, and meet other Advisers Act requirements. Additionally, all SEC-registered advisers are subject to SEC examination, investigation, and enforcement liability.

Exemptions

A non-local manager may avoid registration if it qualifies for one of the following exemptions:

• The foreign private adviser exemption is available to an investment adviser that: (i) has no place of business in the United States; (ii) has, in total, fewer than 15 clients or investors in the US; (iii) has aggregate assets under management attributable to these US clients or investors of less than USD25 million; and (iv) does not hold itself out generally to the public in the United States as an investment adviser.
• The private fund adviser exemption is available to any investment adviser whose principal place of business is outside the United States and that solely advises one or more qualifying private funds, if the adviser’s assets under management from a place of business in the United States are, in the aggregate, less than USD150 million.

Reporting Obligations of Exempt Advisers

An adviser that qualifies for and elects to rely on the private fund adviser exemption must make filings with the SEC as an exempt reporting adviser (ERA) within 60 days of first relying on such exemption. While not subject to registration or the full scope of the substantive provisions of the Advisers Act, an ERA is required to comply with several provisions of the Advisers Act, as well as certain rules and regulations thereunder.

An adviser relying on the foreign private adviser exemption is not required to make any filing with the SEC.

Filings in the alternative funds space generally do not require regulatory approval. As noted in 2.1.4 Disclosure Requirements, notice filings may need to be made with federal regulators after the fund has been sold in the United States and with individual states thereof.

The United States does not distinguish between pre-marketing and marketing in the same manner as some other jurisdictions.

As noted in 2.3.1 Regulatory Regime, Rule 10b-5 under the Exchange Act prohibits funds from engaging in fraud, making any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statements made not misleading.

Additionally, an investment adviser to an alternative fund may be subject to Rule 206(4)-1 under the Advisers Act (the “Marketing Rule”). The Marketing Rule imposes a set of principles-based disclosure rules applicable to advertisements of a registered investment adviser and requires, among other things, the publication of “net” performance metrics any time gross performance is shown and limitations on the use of hypothetical and predecessor performance. When a placement agent is used, FINRA rules may also impact the way an alternative fund is marketed.

Regulation D

As noted in 2.3.6 Rules Concerning Marketing of Alternative Funds, alternative funds commonly rely on the exemption from registration provided by Regulation D of the Securities Act. Regulation D includes two main exemptions from registration for offers and sales of securities by issuers: Rule 506(b) and Rule 506(c). The key difference between these two exemptions is that Rule 506(b) prohibits the use of “general solicitation” and “general advertising” in connection with offerings, while Rule 506(c) allows the use of general solicitation and general advertising, provided that the issuer takes reasonable steps to verify that all purchasers of securities are “accredited investors”.

Restriction on General Solicitation and General Advertising

In practice, many alternative funds rely on the exemption provided by Rule 506(b), and therefore are prohibited from engaging in general solicitation or general advertising while the offering of interests in the fund is ongoing. Frequently, fund sponsors will avoid general solicitation by conducting the offering of interests in the fund so that the offering reaches only those who have a pre-existing relationship with the fund sponsor. Additionally, the fund sponsor will be prohibited from engaging in any advertising activity that could have the effect of conditioning the market or soliciting investors for the offering.

Investment Company Act

As noted in 2.2.3 Restrictions on Investors, an alternative fund may also be restricted to selling interests solely to persons who are “qualified purchasers” depending on the exemption applicable to the fund.

No authorisation or notification is required prior to marketing an alternative fund.

If an alternative fund has filed a Form D, it will be obligated to update the filing on an annual basis for so long as the fundraising continues, and more frequent updates may be necessary depending on whether there are material changes to the information contained therein. Some states may also require updates to be made to their state-level notice filings. Depending on the type of investment, some alternative funds may be subject to additional federal filing obligations.

An investment adviser to an alternative fund that is registered with the SEC or is an ERA will be required to update its Form ADV on an annual basis (and more frequently if certain information changes). Certain registered investment advisers will also be required to file a Form PF with the SEC on a periodic basis, including information about the private funds that they advise or manage.

Generally, participation in alternative funds by US investors is restricted to investors that meet applicable sophistication requirements. These eligibility thresholds allow the alternative fund to avoid the burdensome registration requirements of the Securities Act and Investment Company Act (which provide heightened protection for retail investors). Depending on the type of investment, some alternative funds may be subject to additional federal filing obligations.

The SEC generally communicates via email or telephone with alternative fund sponsors; face-to-face meetings are uncommon. As alternative funds are not directly regulated, the most common source of interaction with the regulator comes in the form of examinations of a fund’s investment adviser. Registered investment advisers are regularly examined by the SEC for compliance with federal securities laws.

There are three main types of retail funds: open-end funds, closed-end funds, and unit investment trusts (UITs).

Open-End Funds

Open-end funds consist mostly of mutual funds and exchange-traded funds (ETFs). Mutual funds pool investor money and offer daily pricing, sales and redemptions of shares to investors. All mutual funds transactions are made directly with investors or through investment professionals such as brokers (and not on a listed securities exchange). Mutual funds may not offer preferred shares but may offer different share classes with different investment minimums. Mutual funds qualify for “pass-through” tax treatment, meaning that there is no taxation of the entity itself. Each mutual fund typically has an investment adviser registered under the Advisers Act, as well as a principal underwriter that is registered under the Exchange Act and is a FINRA member.

Exchange-traded funds, in contrast to mutual funds, trade intraday on listed securities exchanges. Authorised participants are financial institutions that buy and sell an ETF’s shares at net asset value (NAV) in large quantities known as creation units. Authorised participants then redeem creation units in kind for a part of the ETF portfolio. The price of ETF shares is determined by both its NAV and supply and demand.

Mutual funds and exchange-traded funds may not have more than 15% of assets invested in illiquid securities. Common legal vehicles for mutual funds and ETFs are limited liability companies, limited partnerships, business or statutory trusts, and corporations.

A main advantage of open-end funds is that they often have smaller minimum investments and are generally liquid. However, as a result of allowing investors to redeem their shares at will (hence the high liquidity), a downturn in the market may cause the fund to sell at lower prices to cover the redemptions.

Closed-End Funds

Closed-end funds do not issue redeemable securities. The traditional closed-end fund typically offers a fixed number of shares in an initial public offering whose price is determined by supply and demand. In addition to the traditional model for closed-end funds, other types of closed-end funds include interval funds, tender offer funds, and business development companies (BDCs).

Interval funds and tender offer funds are not generally traded on a listed exchange. Interval funds offer shares continuously at NAV and repurchase their own shares periodically. Tender offer funds also offer their shares continuously at NAV but are not mandated to repurchase shares and only do so when authorised by the fund’s board of directors. BDCs, while not registered under the Investment Company Act, generally elect to be regulated pursuant to certain provisions thereunder. BDCs are designed to provide capital to middle-market companies in the United States and their shares may be traded on- or off-exchange. BDCs generally offer profit-sharing compensation to management and may use more leverage than other funds registered under the Investment Company Act.

Unlike open-end funds, closed-end funds are not subject to the 15% limit on investing in illiquid securities. Closed-end funds are also permitted to issue preferred shares and are more likely to utilise leverage compared to open-end funds. A disadvantage of closed-end funds is that their share prices are subject to fluctuations in the market and, due to their increased use of leverage, may be susceptible to greater losses in the event of a market downturn.

Unit Investment Trusts

UITs are passive vehicles without a board of directors which have a predetermined maturity. When a UIT reaches the end of its term, the fund is terminated, and its assets are sold off. Some ETFs, such as the first ETF established in 1993, qualify as UITs. UITs are advantageous for raising capital efficiently for a specific purpose. A potential disadvantage is that should the trust terminate before the maturity of its stock, investors will lose projected gains.

To register with the SEC, open-end funds and ETFs use Form N-1A, while closed-end funds and BDCs register using Form N-2 when registering their shares under the Securities Act. Both forms require the submission of a prospectus, a statement of additional information (SAI) and a section for other information such as corporate organisational documents, compliance policies, and certain material contracts. The prospectus summarises the fund’s investment objectives and strategies and describes its fees and costs. The SAI provides an in-depth description of the fund’s management and compensation structure.

UITs register using Form S-6 and Form N-8B-2. These forms include a prospectus and exhibits similar to the N-1A and N-2, but do not require an SAI. Privately owned BDCs register under the Exchange Act using Form 10, which calls for a description of the company’s business, a list of officers and directors, and other financial information pursuant to Regulation S-K under the Exchange Act.

Once the registration statements have been filed, the SEC reviews and provides comments to which the retail fund must respond. Once the SEC decides it has gathered enough information, it will declare the registration of the fund to be effective. Open-end funds must update their registration statements each year in the form of a post-effective amendment to the Form N-1A, while closed-end funds are exempt from this requirement if they provide informative shareholder reports yearly. Setting up a retail fund is generally an expensive and time-consuming process, which can be further exacerbated based on the extent of comments from the SEC.

All retail funds offer limited liability to their investors, as investors will not be subject to losses greater than the amount they have invested.

Under the Investment Company Act, open-end funds must provide annual and semi-annual reports to shareholders that are “visually engaging” and provide information that investors would want to know when monitoring their portfolios. ETFs are also required to provide a daily disclosure of their portfolios’ holdings.

Closed-end funds must also provide annual and semi-annual reports to shareholders. BDCs report like normal reporting companies under the Exchange Act (ie, quarterly financial results on Form 10-Q, annual financial results on Form 10-K and periodic material updates on Form 8-K).

As of 2020, closed-end funds must also provide an annual management discussion of the fund’s performance to the SEC under the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act.

There are multiple types of investors in retail funds, including the general public investing through online brokerage platforms, as well as institutional investors, such as banks, insurance companies, pension plans, and other private or public funds.

Retail funds are most often structured as limited partnerships, LLCs, or statutory trusts.

Although retail funds with a public offering are allowed to sell to any investor, these funds may restrict their offerings to certain investors, such as those that meet eligibility thresholds based on net worth or income. Closed-end funds may only charge a performance-based fee on a fund’s capital gains if each of the fund’s US investors meets the definition of a “qualified client” under the Advisers Act.

There are four main legal regimes that concern retail funds: the Securities Act, the Exchange Act, the Investment Company Act, and the Advisers Act. The Securities Act governs whether an issuer can offer or sell securities in the United States and broadly prohibits the use of deception, manipulation, or fraud in securities transactions. The Exchange Act established the SEC and granted it the power to regulate and discipline brokerage firms and securities exchanges. The Investment Company Act regulates both open-end and closed-end funds and ensures that investors have sufficient information to make an informed investment decision while aiming to prevent or mitigate conflicts of interest and self-dealing by the fund and/or its affiliates. The Advisers Act governs the conduct of managers providing investment advice to US clients and has plenary anti-fraud provisions that apply to investment advisers regardless of whether or not they are registered with the SEC.

Under Section 12(d) of the Investment Company Act, open- and closed-end funds cannot generally: (i) own more than 3% of the voting stock of another registered investment company (RIC); (ii) have more than 5% of their total assets in a single RIC’s securities; or (iii) have more than 10% of their total assets in any number of RIC securities.

The Investment Company Act sets forth various requirements on specific service providers for retail funds, certain of which are specifically formulated with respect to operational differences between US and non-US providers. 

Non-local managers (including sub-advisers) to retail funds are required to be registered as investment advisers under the Advisers Act and are subject to the full suite of Advisers Act regulation.

Obtaining regulatory approval from the SEC with respect to the formation of retail fund typically takes several months. The process may be longer or shorter depending on the intricacy of the fund structure and strategy and the extent of any SEC comments.

Fund sponsors must adhere to specific rules and regulations when pre-marketing retail funds and are subject to SEC and FINRA oversight. Prior to marketing, retail funds must generally be registered with the SEC under the Securities Act. However, there may be available exemptions permitting retail funds to engage in communication with the public prior to being registered, depending on (i) the type of securities being offered; (ii) the type of communication; (iii) the intended audience; and (iv) the timing of the communication in relation to the offering.

Fund sponsors must ensure that all marketing materials are fair, balanced, and not misleading. These materials must be filed with FINRA within ten business days of first use and must include specific disclosures, such as the fund’s total annual operating expense ratio. Furthermore, depending on where and how the fund is marketed, state-specific securities laws may require additional filings or notices. Fund sponsors must also adhere to the anti-fraud provisions of the Securities Act.

So long as a retail fund is properly registered under the Securities Act, there are no limits on the types of investors the fund may market to, subject to any investor-eligibility requirements that may be imposed by the fund.

Retail funds are generally registered under both the Securities Act and the Investment Company Act but may choose to register only under the Investment Company Act. Registration under the Securities Act requires approval from the SEC before a fund can be declared effective, which can be a cumbersome and time-consuming process that involves the regulator reviewing the fund’s registration statement before providing any comments to be implemented. Once the SEC declares the registration statement effective, the fund can be marketed broadly to US investors. Registering under the Investment Company Act allows a fund to go effective immediately and only requires notification to the SEC, though the fund cannot be offered publicly. Additionally, funds may need to register with or otherwise notify state securities regulators depending on the states in which they plan to market.

Fund sponsors that have marketed a retail fund must adhere to several ongoing requirements to ensure transparency and regulatory compliance. On the federal level, these include filing annual and semi-annual reports with the SEC, Form N-PORT (monthly portfolio holdings filed quarterly), and Form N-CEN (annual census-type information). These filings, in addition to continuous anti-money laundering and “know your customer” obligations imposed by various federal regulations and any applicable state-specific reporting requirements, create a robust regulatory regime with which a fund must comply during the post-marketing stages of the fund’s life cycle.

Further, open-end funds must calculate their NAV daily, while closed-end funds may make these calculations daily or periodically.

Regulation Best Interest (“Reg BI”) broadly requires broker-dealers to act in the best interest of retail investors when recommending securities transactions. Reg BI enhances the standard of conduct beyond existing suitability obligations. With respect to regulatory reporting, retail funds must comply with the Investment Company Act, which mandates detailed disclosure and reporting requirements as described in 3.3.9 Post-Marketing Ongoing Requirements. Retail funds must also make regular filings with the SEC, which provide transparency regarding the fund’s holdings, financial condition, and performance and ensure ongoing investor protection.

The SEC engages with registrants during the filing process, generally via telephone or email. Face-to-face meetings with SEC officials also occasionally occur, particularly for complex issues, with the SEC’s regional offices facilitating such interactions. Additionally, the SEC provides various channels for inquiries and feedback, including hotlines, email, and public forums.