On May 20, 2010, the Senate approved sweeping financial reform legislation. Included in the legislation is the Private Fund Investment Advisers Registration Act of 2010 (the "Senate Bill"). While the Senate Bill will need to be reconciled with a similar bill previously passed by the House of Representatives (the "House Bill"), it is now clear that many advisers to private funds that are not currently registered will need to register with the Securities and Exchange Commission ("SEC") as investment advisers. We previously analyzed the Senate Bill and the House Bill in an O'Melveny & Myers Client Alert dated April 5, 2010 (Click to read "Private Fund Investment Advisers Registration Act of 2010").
While the differences between the House Bill and Senate Bill still need to be resolved, there are sufficient similarities between the bills to conclude that the final legislation will have a significant impact on domestic and foreign advisers to private funds by (1) requiring many unregistered advisers with more than US$100 million in assets under management to register with the SEC under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and (2) imposing certain reporting, disclosure and record-keeping obligations on registered and unregistered investment advisers. Both the House Bill and the Senate Bill eliminate the "private adviser exemption," which is the exemption from registration for advisers to private funds who have less than 15 clients during the preceding 12 months and do not hold themselves out to the public as investment advisers.
Both the House Bill and Senate Bill exempt from the requirement to register advisers to venture capital funds and "foreign private advisers." The exemption for foreign private advisers, however, will be available to a very limited number of foreign advisers. Specifically, a foreign adviser would be required to register if (1) it had 15 clients (e.g., managed accounts or pooled investment vehicles) in the U.S. or (2) US$25 million of assets under management are attributable to U.S. investors.
The Senate Bill provides an exemption from registration for advisers to "private equity funds," and tasks the SEC with defining the term "private equity fund." If this exemption is included in the final version of the legislation that is enacted into law, we believe that the SEC will narrowly tailor the exemption. While the SEC has not provided guidance on how it will craft the exemption, one possible approach that the SEC may take is to exclude advisers to funds that make long term controlling investments in operating companies. The SEC may look to Rule 3a-1 under the Investment Company Act of 1940 in defining the term "private equity fund." Under such an approach, only advisers to funds that invest in securities issued by companies: (1) which are controlled primarily by the fund; (2) through which the fund engages in a business other than that of investing, reinvesting, owning, holding or trading in securities; and (3) which are not investment companies would be exempt from registration.
Despite the fact that the final legislation will likely contain a one year transition period from the date of enactment, unregistered advisers to private funds should begin planning for registration by taking the following steps:
- Preparing a written supervisory procedures manual and code of ethics that are tailored to their businesses. Preparing the manual can take a significant amount of time and should be started well in advance of registration;
- Reviewing business activities to identify potential conflicts of interest, such as outside business activities of firm employees, allocation policies between funds with overlapping investment objectives, and conflicts in dedicating time among funds;
- Reviewing the existing compliance infrastructure to determine whether additional resources or compliance personnel are necessary to comply with the Advisers Act and related regulations; and
- Assessing the impact that complying with the Advisers Act will have on ongoing activities.
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For more information on registering with the SEC and an overview of select requirements imposed on registered advisers by the Advisers Act, click here.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
