US Securities and Exchange Commission Adopts New Exemptions for Investment Advisers

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On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) was signed into law, amending certain portions of the Investment Advisers Act of 1940, as amended (Advisers Act) effective July 21, 2011.
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Article by Stephanie M. Monaco , Elizabeth M. Knoblock , Amy Ward Pershkow , Jerome J. Roche , Leslie S. Cruz and Adam D. Kanter

Originally published July 15, 2011

Keywords: SEC, investment advisers, new exemptions, foreign private adviser exemption

On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) was signed into law, amending certain portions of the Investment Advisers Act of 1940, as amended (Advisers Act) effective July 21, 2011.1 Among other things, Dodd-Frank repealed the longstanding "private adviser exemption" set forth in Advisers Act Section 203(b)(3). At the same time, Dodd-Frank enacted three new statutory exemptions, each of which is more limited than the exemption repealed, and directed the US Securities and Exchange Commission (SEC) to adopt rules defining the new exemptions. On June 22, 2011, less than one month before the effective date of several of the amendments made as part of Dodd-Frank, the SEC simultaneously issued two releases (together, the "Adopting Releases") implementing these statutory changes and establishing registration deadlines for advisers that no longer qualify for an exemption.2

The "private adviser exemption" has been widely relied upon by managers of hedge funds, private equity funds, real estate funds and securitization special purpose entities, as well as by advisers based outside of the United States, to avoid registration as investment advisers with the SEC. Repeal of the exemption will result in new registration and compliance requirements for many advisers that were previously subject only to the SEC's antifraud jurisdiction and were exempt from substantive regulation. The new exemptions may be available to some advisers that had previously relied on the old exemption, but they are generally much narrower in scope than the old exemption.

Advisers that are currently relying on the private adviser exemption in Section 203(b)(3) but will be unable to rely on any of these new exemptions will be required to apply for registration with the SEC no later than February 14, 2012 (allowing the adviser to be registered by March 30, 2012), so long as they continue to qualify for the old exemption throughout the entire period.3 This Legal Update reviews these new exemptions as they apply both to US-based advisers (US Advisers) and advisers that have their "principal office and place of business" outside of the United States (Non-US Advisers). It also briefly addresses the compliance requirements that will be imposed on advisers that will be required to register with the SEC (or to file reports as an "exempt reporting adviser"), and certain new reporting requirements imposed on existing registrants.4

The New Exemptions

One of the Adopting Releases clarifies three new Dodd-Frank exemptions from registration under the Advisers Act.5 These include exemptions for: (i) "foreign private advisers" (Foreign Private Advisers), (ii) certain "private fund advisers" (Private Fund Advisers), and (iii) advisers that solely advise venture capital funds (Venture Capital Advisers).

Not all of these exemptions are created equal—while the Foreign Private Adviser exemption results in a fairly straightforward exemption from registration, Private Fund Advisers and Venture Capital Advisers are subject to a form of registration "lite" as a result of new reporting requirements applicable to these two exemptions. As such, they are referred to as "exempt reporting advisers" (Exempt Reporting Advisers). Advisers relying on any of the three exemptions remain subject to certain antifraud provisions and rules under the Advisers Act, but Exempt Reporting Advisers are also required to make initial, annual and final filings with the SEC on Form ADV Part 1, the adviser registration form. Certain US Advisers that are Exempt Reporting Advisers may also be subject to state registration in the state(s) where they do business.


"Private Funds". All three exemptions make use of the new defined term "private fund" that was added to the Advisers Act as part of Dodd-Frank. A private fund is an issuer that would be an "investment company" under the Investment Company Act of 1940, as amended (1940 Act), but for the exceptions in Section 3(c)(1), which is generally available for companies with fewer than 100 beneficial owners, or Section 3(c)(7), which is generally available for companies all of whose securities are owned by "qualified purchasers."6

The SEC addressed whether a "fund" with a single investor could be considered a private fund. Generally, the SEC announced the view that single investor "funds" are tantamount to managed accounts and concluded that it would be inconsistent with Advisers Act Section 208(d) to treat such "funds" as private funds.7 However, the SEC also noted that such funds could be considered "private funds" under limited circumstances where the creation of the fund was unrelated to any attempt to circumvent application of the Advisers Act.8 Also, for purposes of all three exemptions, funds are considered to be "clients" of the fund's adviser, but fund investors are not.

Assets Under Management. Both the Foreign Private Adviser exemption and the Private Fund Adviser exemption include an assets under management test as part of the exemption. For these purposes, assets under management are determined based on "regulatory assets under management" (RAUM), a new term meaning how assets under management as calculated according to the revised Form ADV. The rules for calculating RAUM are summarized as follows:

  • Only count portfolios to which an adviser provides "continuous and regular supervisory or management services." Also, if an adviser manages only a portion of a portfolio (e.g., because it is a subadviser), it should count only the portion actually managed.
  • Only count assets held in "securities portfolios" (i.e., portfolios that are at least 50 percent composed of securities). An exception to this general rule is that assets held in a private fund are always counted, even if less than 50 percent of the fund is made up of securities. Private fund RAUM also includes capital commitments.
  • Do not deduct indebtedness or other accrued but unpaid liabilities (e.g., mortgages on real estate or margin for securities would not be deducted).
  • All assets must be valued at market value, or if no market value is available, at fair value. Subject to certain exceptions, assets generally may not be valued at cost, except that the SEC noted that with respect to real estate assets held by a private fund, the assets should be valued the same way as the fund values assets for financial reporting purposes.9


Under new Section 202(a)(30) and amended Section 203(b)(3) of the Advisers Act, the Foreign Private Adviser exemption is available to an investment adviser that:

  • Has no place of business in the United States;
  • Has, in total, fewer than 15 clients in the United States and investors in the United States in private funds advised by the adviser;
  • Has, in the aggregate, less than $25 million in RAUM attributable to such US clients and investors; and
  • Does not hold itself out to the public in the United States as an investment adviser, or act as an adviser to a US-registered investment company.10

Evaluating whether each of these factors has been satisfied can be a complicated analysis. New Rule 202(a)(30)-1 was adopted by the SEC in an attempt to help clarify the evaluation, often by incorporating guidance from the SEC and its staff on existing concepts into the new framework of the Foreign Private Adviser exemption. For example:

Place of Business. The new rule defines "place of business" by reference to existing Rule 222-1, which is used to determine the state(s) in which an adviser has a place of business. Rule 222-1 generally defines a place of business to include any location where an adviser provides investment advisory services or meets or communicates with clients, and any location that is held out to the public as a location at which the advisor does such things. SEC guidance has previously articulated some of the bounds of this definition, under which even temporary locations, such as a hotel room, may be deemed to be a place of business, under certain circumstances.11 The SEC also provided new guidance, explaining that an office from which an adviser performs solely administrative and "back-office" functions (e.g., no research) would not be a place of business for purposes of the exemption, so long as they "are not intrinsic to providing investment advisory services and do not involve communicating with clients."12 The SEC also clarified that a Non-US Adviser would not be presumed to have a place of business in the United States merely because it was affiliated with a US Adviser, although it cautioned that in situations where the Non-US Adviser's personnel regularly conduct activities at the US Adviser's US offices, a place of business could exist.13

Clients and Investors "in the United States". In determining whether a client or investor is "in the United States" for purposes of the exemption, the rule generally incorporates the definition of "US person" from Section 902(k) of Regulation S under the Securities Act of 1933, as amended (Securities Act). Regulation S generally provides that US-resident natural persons, and partnerships and corporations organized under US law, are US persons. The lone deviation from Regulation S is in the context of certain types of discretionary accounts held for the benefit of US persons where the account is held by a non-US affiliate of the adviser. In a note, the rule clarifies that if a client or investor was not a US person at the time of becoming a client, or at each time the investor acquires securities issued by the private fund, as applicable, the client/investor need not be considered a US person. Private funds that have dividend reinvestment plans in place should review existing SEC and staff guidance and consider whether those plans result in the "issuance" of a security to any fund investors that relocate to the United States after making their initial investment.14 In addition, participants in Canadian retirement accounts that invest in funds through those accounts need not be counted as investors if they make additional investments after relocating to the United States if the fund is in compliance with 1940 Act Rule 7d-2.15

Counting Clients and Investors. The rule incorporates certain mechanisms for avoiding "double counting" of clients similar to those previously used by advisers relying on the private adviser exemption. For example, accounts of spouses (or new "spousal equivalents")16 may be considered a single "client" for counting purposes. Also for purposes of counting, the rule provides that an adviser need not count a private fund as a client in the United States if at least one investor in the fund is counted as an investor in the United States—however, for purposes of counting assets under management, the full amount of assets of any private fund that is a US person must be counted.17

"Investors" should be determined generally by considering who would be counted for purposes of determining the fund's ability to rely on 1940 Act Sections 3(c)(1) or 3(c)(7). This means the adviser must look at holders of all securities issued by the funds—equity, debt and short-term paper18 —and also at persons that the adviser knows, or should know, have entered into derivative instruments such as total return swaps that effectively provide the holder with the same investment experience as they would receive if they held the actual securities of the private fund.19 Advisers intending to take advantage of the exception should consider revising subscription documents to address this issue. In a change from the proposed rule, "knowledgeable employees," as defined in 1940 Act Rule 3c-5, are not required to be counted under the final rule.


Dodd-Frank also added Section 203(m) to the Advisers Act, providing an exemption for certain advisers to private funds, and directed the SEC to create the specific bounds of the exemption by rule. New Rule 203(m)-1 defines the Private Fund Advisers exemption. Largely unchanged from the original proposal, this exemption applies differently depending upon whether the adviser seeking to rely on the exemption has its "principal office and place of business" inside the United States or outside the United States. An adviser's "principal office and place of business" is defined as the "executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control and coordinate the activities of the investment adviser."

For an adviser that has its principal office and place of business within the United States (US Advisers), all of its clients must be private funds, and the total amount of private fund-derived RAUM must be less than $150 million in total. For an adviser that has its principal office outside the United States (Non-US Adviser):

  • All clients that are US persons (generally determined by reference to Regulation S) must be private funds;
  • The adviser may manage any kind of non-US person client assets (i.e., non-US clients are not limited to private funds);
  • If the adviser has a US office from which personnel assist in managing assets, the personnel may only provide assistance in managing the private funds, and the total RAUM of those private funds cannot exceed $150 million; and
  • If the adviser has no US office, then there is no limit on the amount of assets it may have under management.

Under certain circumstances, the rule affords a grace period for an adviser that relies on the exemption and experiences an increase in RAUM that pushes the adviser over the $150 million limit. An adviser relying on this exemption is only required to calculate its RAUM once each year as part of an annual updating amendment to Form ADV, filed within 90 days after the adviser's fiscal year end. In the event that this filing results in an amount of RAUM in excess of $150 million, the adviser will have 90 days to become fully registered with the SEC. However, this grace period is not available to advisers relying on the exemption that begin advising a client other than a non-private fund client—in such a case, the adviser would be required to become fully registered prior to beginning to manage the new, non-private fund client.

Under Rule 203(m)-1, an adviser has the option to treat as a "private fund" certain other funds that would not normally come within the definition. Specifically, funds that meet other exceptions under 1940 Act Section 3 may, at the adviser's option, be treated as a private fund if they also qualify for the exception in Section 3(c)(1) or Section 3(c)(7)—for example, a real estate fund that relies on Section 3(c)(5)(C) but only sells securities to qualified purchasers. However, any such fund treated as a private fund for these purposes would be required to be treated as a private fund for all purposes under the Advisers Act, such as reporting requirements on Form ADV Part 1 (discussed below).

If a real estate adviser makes an election to treat a Section 3(c)(5)(C) fund as a private fund, it could have a profound impact on how the adviser will calculate its RAUM. The adviser will be required to count the fund's assets in its RAUM (because it would not apply the "securities portfolio" test), and would be required to include the value of any outstanding mortgage or other indebtedness on the property, and therefore it could be very difficult for a US Adviser (or a Non-US Adviser that has personnel managing fund assets within the United States) to remain below the $150 million limit if managing real estate funds.


Dodd-Frank added Section 203(l) to the Advisers Act, creating an exemption from registration for advisers that solely advise "venture capital funds." New Rule 203(l)-1 defines "venture capital fund" for these purposes. The definition contains a number of fairly strict requirements regarding the characteristics of the fund, as well as the portfolio companies held by the fund (although some of these requirements were relaxed slightly from those originally proposed).

In order for an adviser to qualify for the Venture Capital Adviser exemption, all of the adviser's clients must be "venture capital funds." Each venture capital fund must be a private fund that meets the following requirements:

  • It must represent to investors and potential investors that it pursues a venture capital strategy (notably, the SEC has indicated that any fund listed in a database of "hedge funds" or that is a component of a hedge fund index would not meet this element);20
  • Immediately after acquisition of an asset (other than a "Qualifying Investment," as defined below, or certain short-term holdings), the cost or fair value of all assets other than Qualifying Investments held by the fund is no more than 20 percent of the fund's aggregate capital contributions plus uncalled capital commitments (the addition of this "nonconforming bucket" is a change from the proposed rule);
  • It does not borrow, issue debt obligations, provide guarantees, or otherwise incur leverage in excess of 15 percent of the fund's aggregate capital contributions and uncalled committed capital, and any such leverage it does incur is for a non-renewable term of no longer than 120 calendar days (subject to certain exceptions for guarantees of obligations of "Qualifying Portfolio Companies," as defined below);
  • The securities it issues may not be redeemed except in extraordinary circumstances; and
  • It is not registered under the 1940 Act and has not elected to be treated as a business development company under that statute.

In order for an investment in a portfolio company to be considered a "Qualifying Investment," the portfolio company must be a "Qualifying Portfolio Company," and generally the fund must hold equity securities of the portfolio company that, subject to certain exceptions, were acquired directly from the company. Although a fund could hold debt securities of a portfolio company, any such debt (and any equity that did not count as a "Qualifying Investment") would count toward the 20 percent non-conforming bucket.

The rule provides that a "Qualifying Portfolio Company" in turn (i) must not have been, at the time of any investment by the fund, a US public reporting company or a company listed or traded on a foreign exchange (or in a control relationship with such a company); (ii) may not have borrowed money or issued debt in connection with the fund's investment in the company and distributed the proceeds of such borrowing or debt issuance in exchange for the investment; and (iii) must not itself be an investment company, a private fund, a 1940 Act Rule 3a-7 fund, or a commodity pool.

Recognizing that many existing funds would not come within the restrictions the SEC was imposing after the fact, the SEC also provided a "grandfathering" provision for certain existing funds. To qualify, the private fund:

  • Must have represented to investors and potential investors at the time of offering that it pursues a venture capital strategy;
  • Must have sold securities to one or more investors not affiliated with the adviser prior to December 31, 2010; and
  • Must not sell any securities to, or accept any committed capital from, any person after July 21, 2011.

Unlike the Private Fund Adviser exemption which permits Non-US Advisers to have clients other than private funds so long as they are all non-US persons, the Venture Capital Adviser exemption does not permit a Venture Capital Adviser to advise any fund other than a venture capital fund, as defined, regardless of whether the fund is a US person. An adviser will be unable to rely on the exemption if it begins providing advice to any client other than a venture capital fund, and accordingly, if no other exemption is available, it must prepare and file its registration application (and wait up to 45 days to become registered) prior to taking on the non-venture capital fund client.



Although the requirements for relying on the Foreign Private Adviser exemption are perhaps the least forgiving of the three exemptions, this exemption results in the lowest degree of SEC compliance responsibility. Foreign Private Advisers are not required to make any filings under the Advisers Act, although they remain subject to the general antifraud provisions in Section 206 of the Advisers Act. These advisers are also subject to Rule 206(4)-5, the "pay-to-play rule," which places certain limits on political contributions to US state and local candidates and officials, and Rule 206(4)-8, the pooled investment vehicle antifraud rule, which prohibits fraudulent conduct in connection with prospective and existing investors in funds.


Like Foreign Private Advisers, Exempt Reporting Advisers are subject to the antifraud provision in Section 206 of the Advisers Act, as well as Rules 206(4)-5 and 206(4)-8. In addition, Exempt Reporting Advisers are required to make an initial filing and annual updating filings (within 90 days of fiscal year end) of a subset of items on Form ADV, as well as certain additional interim filings in the event of material changes to certain answers in these filings. They will also be required to make a "final" filing, either when they cease to do business, cease to need to rely on the exemption, or become fully registered with the SEC. Information required to be reported on Form ADV for Exempt Reporting Advisers includes:

  • Item 1—basic identifying information and contact information.
  • Item 2—basis for exemption.
  • Item 3—form of organization and fiscal year end.
  • Item 6—identification of other business activities (e.g., if the adviser is also a broker-dealer).
  • Item 7:

    • Identification of, and certain information regarding, financial industry affiliates, e.g., banks or other investment advisers, except that no affiliate need be disclosed if (i) the adviser has no business dealings with the related person in connection with its advisory services provided to clients; (ii) the adviser does not conduct shared operations with the affiliate (although the SEC considers any shared information technology infrastructure to be "shared operations"); (iii) the adviser does not refer clients or business to the affiliate, or vice versa; (iv) the adviser does not share personnel or premises with the affiliate; and (v) the adviser has no reason to believe that its relationship with the affiliate otherwise creates a conflict of interest with its clients; and
    • Certain detailed information on all private funds advised by the adviser, including:

      • The fund's name, ID number (every private fund will be assigned one), and jurisdiction of organization;
      • Identification of the fund's general partner, manager, trustees and/or directors;
      • Specification of which 1940 Act exemption(s) are relied on by the fund, and specification of whether the fund is relying on Regulation D for exemption from registration under the Securities Act (and if so, a cross-reference to the fund's Form D file number);
      • Identification of any foreign regulatory authorities with which the fund is registered;
      • Master/feeder and fund of fund questions;
      • General identification of the type of fund (e.g., hedge, private equity, venture capital, real estate, securitized asset, etc.);
      • Gross asset value of the fund;
      • Information regarding interest holders (e.g., minimum commitment, approximate number of holders, percentage buckets for how much of the fund is owned by affiliates, non-US persons, or funds of funds);
      • Identification of, and questions regarding, certain fund service providers—auditors, prime brokers, custodians, administrators, and marketers.

    • Non-US Advisers are not required to report any private fund that during the adviser's last fiscal year (i) was not itself a US person, (ii) was not offered in the United States, and (iii) was not beneficially owned by any US person.

  • Item 10—identification of direct and indirect owners of the adviser.
  • Item 11—disclosure of any disciplinary events involving the adviser and its personnel.

These filings will be made through the existing Investment Adviser Registration Depositary (IARD) which is administered by the Financial Industry Regulatory Authority (FINRA), and will be publicly available online. Advisers may be required to file "entitlement forms" with FINRA similar to those that would be required for registered advisers (as discussed below), and it is expected that there will be fees associated with these filings, although details have not yet been made public.

Exempt Reporting Advisers may also be required to register with one or more states. These advisers should review the laws of the state(s) in which they have offices and in which their clients are located.


Currently exempt advisers that are unable to take advantage of any of the new exemptions mentioned above will need to file to register with the SEC no later than February 14, 2012. Such advisers should consider starting the registration and compliance process earlier rather than later. At the time an adviser's SEC registration becomes effective, the adviser must be in compliance with the Advisers Act and its rules. The SEC has 45 days to respond to a filing, by either declaring it effective or starting the process to deny the registration, but need not take the full 45 days. This means that the SEC could declare an adviser's registration effective at any time after filing, so as a practical matter the adviser needs to be ready to be in full compliance before filing. However, the SEC generally does not start the 45-day clock running based on an incomplete filing; for this reason, applicants should ensure that their filings are complete to guarantee a determination within 45 days.

Making sure an adviser's business and operations are compliant with the Advisers Act, and the rules thereunder, can be a lengthy and often costly process, which may involve changes or additions to computer systems and software, personnel, client communications, recordkeeping, etc. One of the most important, and most time consuming, tasks is the creation and implementation of compliance policies and procedures and an overall compliance program. Registered advisers are required to adopt and implement policies and procedures that are reasonably designed to prevent Advisers Act violations and appropriately tailored to the adviser's business and operations (as opposed to an "off-the-shelf" compliance manual). Advisers are also required to appoint a chief compliance officer who will be responsible for the administration and enforcement of the adviser's compliance policies and procedures and overall compliance program.

An adviser's compliance policies and procedures should be tailored to the adviser's business and operations. That said, most advisers, in some fashion, address the following subjects in their policies and procedures:

  • Advisory agreements and account set up;
  • Performance fees;
  • Solicitation/referral arrangements;
  • Client communications and account statements;
  • Review of client accounts;
  • Advertising and marketing;
  • Chief compliance officer/compliance program (including annual reviews and employee training);
  • Personal trading/code of ethics;
  • Insider trading;
  • Custody;
  • Recordkeeping and record destruction;
  • Form ADV updates and other disclosure obligations;
  • SEC examinations;
  • Portfolio management processes (including compliance with client investment objectives and restrictions);
  • Allocation of investment opportunities among clients;
  • Brokerage and trading practices;
  • Trade errors;
  • Aggregation of client trades;
  • Principal trades, agency cross trades and advisory cross trades;
  • Valuation of client assets for purposes of calculating advisory fees;
  • Privacy policy and related procedures;
  • Proxy voting;
  • Pay-to-play/political contributions;
  • Gifts and entertainment;
  • Social media/networking;
  • Speaking with the press and other public communications;
  • OFAC/anti-money laundering/FCPA; and
  • Emergency preparedness/disaster recovery.

Advisers that are currently exempt from registration may have a basic employee or compliance manual, with personal trading, insider trading, political contributions, gifts and entertainment, disaster recovery, OFAC/anti-money laundering and other policies. Such a manual could serve as a starting point for an Advisers Act compliance manual.

Advisers expecting to register with the SEC should test their compliance policies and procedures, and work out any "glitches" or weaknesses, as far as possible in advance of filing for registration. Some advisers do this by giving their procedures a "dry run," operating and functioning as if they were already registered for a period of time before filing for registration. This also provides an opportunity for the chief compliance officer to become more familiar with his or her role and responsibilities. In addition, personnel of the adviser will need to receive education and training regarding the adviser's compliance policies and procedures. Again, all of this should be done well before filing for registration with the SEC.

To register with the SEC, an adviser must prepare and file Form ADV, which consists of several different parts. Part 1 requires general, census-type information about an adviser's business, primarily in check the box or fill in the blank formats, and must be completed and filed electronically. Some examples of the types of information required by Part 1 are noted above in the section discussing Exempt Reporting Advisers.

Part 2 of Form ADV is a narrative brochure in which the adviser must respond to a number of open-ended prompts intended to require disclosure to clients about the adviser's business, affiliations and conflicts of interest. Part 2 consists of two sub-parts: Part 2A, the adviser's brochure, must also be filed electronically and, along with the Part 1, is publicly available; Part 2B, the brochure supplement, covers certain personnel of the adviser and is not filed with the SEC but instead must be maintained in the adviser's records. Both Part 2A and Part 2B of Form ADV must be provided to clients.

Electronic filings are accomplished through the IARD. To access the IARD, an adviser needs to complete and mail to FINRA an entitlement packet and designate an account administrator, who will be primarily responsible for determining who can access the adviser's IARD account and otherwise update and file Form ADV. The entitlement process may take up to one week, depending on the volume of requests. There are filing fees associated with filing Form ADV (ranging from $40 to $225, depending on the adviser's RAUM), and state notice filing fees, which vary widely by state (some up to $500). Advisers will need to fund their IARD accounts in advance to pay for these fees, which can take two days to process.

There are likely to be myriad other tasks that must be completed before an adviser becomes registered with the SEC. For example, the adviser may need to update various existing documents (e.g., client agreements, service provider agreements, client communications, advertising or marketing materials, offering or other disclosure documents, website text) to reflect its registration status or otherwise to bring them into compliance with Advisers Act requirements. Depending upon the circumstances, the updating process could take a considerable amount of time, particularly if client involvement is needed. Advisers to funds that anticipate being in the middle of an offering process at the time of registration should consider bringing all fund marketing material into compliance with Advisers Act requirements now, so that they are not forced to revise marketing materials and offering documents mid-way through an offering.

Other Issues

In addition to the exemptions discussed above, the Adopting Releases touched on other issues impacting registered advisers and advisers that are exempt from registration.

Pay-to-Play. Advisers Act Rule 206(4)-5, the pay-to-play rule, was amended to apply to Foreign Private Advisers and Exempt Reporting Advisers, as well as registered advisers. It was also revised to adjust the types of third parties that these advisers may use to solicit "government entities," as defined under the rule. As revised, an adviser may use: (i) another investment adviser that is acting in compliance with the rule; (ii) an SEC-registered and FINRA-member broker or dealer, provided that FINRA promulgates a pay-to-play rule acceptable to the SEC; or (iii) a registered municipal advisor, provided that the Municipal Securities Rulemaking Board promulgates a pay-to-play rule acceptable to the SEC. In connection with these changes, the SEC extended the compliance date for the third party solicitation portion of the rule from September 13, 2011 to June 13, 2012.

Unibanco/Cross-Border. The SEC has, for the time being, left intact the existing guidance of the SEC staff regarding the cross-border and affiliated entity issues addressed in the line of letters beginning with Unibanco.21 However, the SEC noted that the Unibanco line of letters was based on the private adviser exemption contained in existing Section 203(b)(3), which is soon to be repealed, and that the SEC staff will provide additional guidance going forward, as appropriate.22 The SEC also appeared to affirm the existing staff position that the substantive provisions of the Advisers Act should not apply to Non-US Advisers' activities with respect to "offshore" funds.23

Subadvisers. The SEC explained that for the purposes of determining whether an adviser qualified for an exemption, an adviser acting as a "subadviser" to another adviser could essentially put itself in the "primary" adviser's shoes. For example, an adviser that subadvised solely venture capital funds could rely on the Venture Capital Adviser exemption, notwithstanding that it might also consider the primary adviser to be a "client."

Transition Rule. As was widely expected based on public comments from the SEC staff, the SEC extended through Q1 2012 any filing requirements for advisers currently relying on the private adviser exemption in current Section 203(b)(3). However, the extension is premised upon the adviser qualifying for the exemption as of the date the statute will be repealed, July 20, 2011, and continuing to qualify for that exemption through the date of eventual registration, no later than March 30, 2012 (however, because it takes up to 45 days to register, all advisers that will be required to register must file no later than February 14, 2012).

Form PF. Although the SEC referenced proposed Form PF in several different places in the Adopting Releases, the form has not yet been finalized. It is currently expected that only fully registered advisers—not Foreign Private Advisers and not Exempt Reporting Advisers—will be required to file Form PF, which will require additional disclosure regarding advised private funds.

Recap of Important Dates

Existing Registrants. Must file an amended Form ADV Part 1A no later than March 30, 2012, and if required to transition to state registration, must withdraw from SEC registration and transition to state registration no later than June 28, 2012.

New Registrants. Advisers unable to rely on any of the new exemptions must:

  • If in existence prior to July 21, 2011, and able to continue to rely on the "private adviser exemption" contained in the current version of Advisers Act Section 203(b)(3), file Form ADV Part 1A and Part 2A no later than February 14, 2012.
  • If in existence prior to July 21, 2011 but would, during the period between July 21, 2011, and February 14, 2012, fail to qualify for the old "private adviser exemption" (e.g., because the adviser is about to take on its fifteenth client), file Form ADV Part 1A and Part 2A immediately, prior to taking on the fifteenth client (or otherwise failing to qualify).
  • If organized after July 21, 2011, the adviser must file Form ADV Part 1A and Part 2A immediately, prior to beginning to advise any clients.

Exempt Reporting Advisers. Must file Form ADV Part 1A no later than March 30, 2012.

Pay-to-Play. Third party solicitation provisions come into effect on June 13, 2012.


1 For a full overview of Dodd-Frank, see "Understanding the New Financial Reform Legislation," available at

2 See Rules Implementing Amendments to the Investment Advisers Act of 1940, Advisers Act Release No. 3221 (June 22, 2011), available at ("Implementing Release"), Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less than $150 Million in Assets Under Management, and Foreign Private Advisers, Advisers Act Release No. 3222 (June 22, 2011) [76 Fed. Reg. 39646 (July 6, 2011)], available at ("Exemptions Release," and together the "Adopting Releases").

3 This compliance date is premised upon the adviser qualifying for the exemption as of the day before that section of the statute will be repealed, July 20, 2011. Advisers who are not currently relying on, or eligible to continue relying on, the existing private adviser exemption (or any new exemption) must register before acting as an adviser to new clients. See "Recap of Important Dates" below, for more information on relevant registration deadlines.

4 This Legal Update does not address issues relating to the re-drawing of the lines between SEC and state registration for US Advisers and the new division of responsibility between the SEC and the various states.

5 Dodd-Frank also created exemptions for certain advisers to small business investment companies and for "family offices." These exemptions are not addressed in this Legal Update. However, final rules implementing the family office exemption can be found at, "Family Offices, Advisers Act Release No. 3221 (June 22, 2011) [76 Fed. Reg. 37983 (June 29, 2011)].

6 The SEC also confirmed that a fund organized outside the US relying on existing SEC and staff guidance imposing the requirements of Section 3(c)(1) or Section 3(c)(7) would be considered a "private fund."

7 See Exemptions Release, supra note 2, at nn.323-25, and accompanying text.

8 See id.

9 The SEC explained that under limited circumstances, real estate assets may not need to be fair valued, although it noted that the Financial Accounting Standards Board has a current project underway that may in the future require fair valuation of real estate assets. Implementing Release, supra note 2, at n.100 and accompanying text.

10 Advisers Act Section 202(a)(30).

11 See Rules Implementing Amendments to the Investment Advisers Act of 1940, Advisers Act Release No. 1633 (May 15, 1997) [62 Fed. Reg. 28112 (May 22, 1997)].

12 Exemptions Release, supra note 2, at n.493 and accompanying text.

13 See id. at nn.494-95 and accompanying text.

14 See id. at n.480 and accompanying text (citing Securities Act Release No. 929 (July 29, 1936)).

15 See id. at nn.481-85 and accompanying text.

16 This term is defined in the new family office rules. See supra note 6.

17 See Exemptions Release, supra note 2, at n.429.

18 Holders of short-term paper must be considered for these purposes even though they are not considered for purposes of determining the availability of the exception under 1940 Act Section 3(c)(1).

19 See Exemptions Release, supra note 2, at n.443.

20 See id. at text following n.272.

21 See, e.g., Uniao de Bancos de Brasileiros S.A., SEC Staff No- Action Letter (Jul. 28, 1992).

22 See Exemptions Release, supra note 2, at nn.507-516 and accompanying text.

23 See id. at n.515 and accompanying text.

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