09/07/2010

Dodd – Frank Reform Act Changes Regulation of U.S. Investment Advisers

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) which implements changes in the way U.S. investment advisers are regulated. Among the most significant changes, the Reform Act requires that investment advisers to hedge funds, private equity funds, real estate funds and certain other private funds with assets under management (“AUM”) of $150 million or more:

• register with the Securities and Exchange Commission (“SEC”);
• comply with certain books, records and reporting requirements; and
• be subject to periodic examination;

unless an applicable exemption is available.
The significant provisions of the Reform Act that change the way in which U.S. investment advisers are regulated are summarized below:
Federal Regulation

• The Reform Act amends the Investment Advisers Act of 1940 (the “Advisers Act”) by deleting the “private adviser exemption,” which exempts investment advisers with fewer than 15 clients from registration under the Advisers Act. The general partners, managers and other persons or entities responsible for advising private funds typically rely on this exemption to avoid registration with, and regulation by, the SEC since individual funds are counted as a single client.
• Under the Reform Act, investment advisers to private funds with $150 million or more of AUM will be required to register with, and be regulated by, the SEC, unless one of the exemptions discussed below is applicable.  Investment advisers that fall below this threshold are subject to regulation by the state(s) in which they conduct their business.
• The Reform Act also imposes similar SEC registration and regulation requirements on investment advisers that do not act exclusively for private funds and have $100 million or more of AUM.
• The “intrastate exemption” under the Advisers Act, which exempts investment advisers that do not provide advice regarding securities listed on a national exchange and all of whose clients are residents of the state in which the investment adviser has its principal office and place of business, is also amended by the Reform Act. The amendment narrows the exemption so that investment advisers to private funds cannot rely on the exemption.

Exemptions

• Private Fund Adviser with AUM of less than $150 million
  > The SEC will adopt rules to exempt any investment adviser from registration that solely advises private funds and has AUM of less than $150 million. > These “mid-sized” private fund advisers must still maintain certain records and provide the SEC with annual or other reports the SEC determines to be appropriate.
• Venture Capital Fund Advisers
  > The Reform Act exempts investment advisers to venture capital funds from registration (with respect to investment advice provided to venture capital funds). > These venture capital fund advisers must still maintain certain records and provide the SEC with annual or other reports the SEC determines to be appropriate. > The SEC will adopt rules that define the term “venture capital fund.”
• Family Office Advisers
  > The Reform Act amended the definition of “investment adviser” under the Advisers Act to exempt any “family office,” i.e., advisers to a single family and related entities. > The SEC will adopt rules that specifically define the term “family office.”
• SBIC Advisers
  > Under the Reform Act, investment advisers to small business investment companies that are licensed, or in the process of being licensed, pursuant to the Small Business Investment Act of 1958, will be exempt from registration.

Timing

• The Reform Act becomes effective on July 21, 2011.  Therefore, investment advisers that are not currently registered with the SEC will have until that date to comply, which may require implementation of appropriate policies and procedures and registration.
• The SEC has not indicated when it will release the proposed / final rules implementing the registration, record keeping, reporting and other regulatory requirements of the Reform Act.
• The SEC rule-making could require filing for registration significantly in advance of the July 21, 2011 deadline in order to accommodate registration by the deadline. Investment advisers to private funds may currently register with the SEC pursuant to the Advisers Act.

State Regulation

• The Reform Act precludes investment advisers with less than $100 million of AUM from registering with the SEC.  As a result, any such investment advisers are subject to regulation by the state(s) in which they conduct their business.
• Notwithstanding the AUM threshold discussed above, any investment adviser that would be required to register with 15 or more states will instead be permitted to register with the SEC.