On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act), which significantly changes the regulation of financial
institutions and the financial services industry. In addition to
the widely publicized provisions of the new law governing
systemically important financial firms (i.e., firms
"too-big-to-fail"), proprietary trading by financial
institutions, and the regulation of depository institutions, to
name a few, the Dodd-Frank Act also contains sweeping changes to
the regulation of other securities industry participants, such as
investment advisers to private equity funds, hedge funds, venture
capital funds, and family offices. These new provisions are
contained in the Private Fund Investment Advisers Registration Act
of 2010 (the Registration Act or the Act), which was promulgated as
part of the Dodd-Frank Act. The Dodd-Frank Act also contains new
regulations intended to improve investor protection and strengthen
the regulation of broker-dealers. This alert summarizes the
principal aspects of these new regulatory provisions.
Registration of Fund Advisers
The Registration Act contains a number of changes to the Investment
Advisers Act of 1940 (the Advisers Act), which will result in
certain investment advisers to private investment funds now being
required to register with the Securities and Exchange Commission
(SEC). Under prior law, an investment adviser to a private equity
fund, hedge fund, or other private investment fund was not required
to register with the SEC under the Advisers Act as long as the
adviser had less than 15 clients during any 12-month period, was
not an adviser to a registered investment company or a business
development company, and did not hold itself out as an investment
adviser. This is known as the "private adviser
exemption," and has been relied on by many private equity and
hedge fund managers to avoid registration. In addition, an
exemption has been available for advisers that provide advice to
private funds within a single state, otherwise known as the
"intrastate exemption." The Registration Act eliminates
both the private adviser and intrastate exemptions and replaces
them with a number of new exemptions for advisers to "private
funds," which will reorder the regulatory oversight of fund
managers. For these purposes, the Registration Act defines
"private fund" to be any fund that would be an investment
company but for the exemptions contained in Sections 3(c)(1) or
3(c)(7) of the Investment Company Act of 1940 (the ICA), which
covers nearly all hedge funds and private equity funds.
In this regard, the Registration Act provides for the following new
registration exemptions under the Advisers Act for private fund
advisers:
- Investment advisers whose only clients are "venture capital funds" will be exempt from registration. However, advisers relying on this exemption will be required to comply with certain recordkeeping and SEC reporting obligations. The SEC is required to issue regulations defining the term "venture capital fund" within one year of the law's enactment.
- Advisers whose only clients are private funds and who have assets under management in the U.S. of less than $150 million will be exempt. Advisers relying on this exemption also will be required to comply with certain recordkeeping and SEC reporting obligations.
- Foreign advisers who have no place of business in the U.S., have, in the aggregate, less than 15 clients and investors in the U.S. in private funds, and who have less than $25 million in assets under management attributable to clients in the U.S. also will be exempt. U.S.-based investors in offshore funds count towards the "15-client" determination, which makes this exemption very limited.
- Advisers currently registered with the Commodity Futures Trading Commission as commodity trading advisers will be exempt from SEC registration so long as the business of the adviser does not become predominantly the provision of securities-related advice, which will be further defined by subsequent regulatory action.
- Advisers to small business investment companies will be exempt from SEC registration.
- In addition, "family offices" will now be excepted out of the Advisers Act's definition of "investment adviser," thereby effectively providing a registration exemption for these types of advisers. The SEC is required to define the term "family office" by subsequent regulatory action.
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.
