As a result of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress may require your private fund adviser to register with the SEC or with one or more of the state securities commissions. This alert will enable you to determine what your status will be when these regulations take effect in summer 2011.
Mandatory SEC Registration for the Following Private Fund Advisers
- U.S. advisers to large private funds with assets under management (AUM) of $150 million or more.
- Foreign advisers to private funds if the fund has 15 or more U.S. investors and AUM attributable to those U.S. investors of $25 million or more, and the adviser has a place of business in U.S.
Mandatory Exemption from SEC Registration but Still Subject to SEC Oversight
- U.S. advisers solely providing advice to venture capital funds. Not sure if this means you? Well, neither was Congress. The SEC is required to figure out a definition of venture capital funds by summer 2011. Assuming your activity sufficiently fits within the four corners of the SEC's definition and you qualify for this exemption, you will still be subject to certain record keeping and reporting requirements, which the SEC must also create by summer 2011.
- U.S. advisers solely providing advice to private funds with AUM of less than $150 million, but once again you will be subject to record keeping and reporting requirements to be created by the SEC.
- In addition to the oversight by the SEC, both of these types of advisers may also need to register with one or more states as an investment adviser. Please note however that the states have yet to weigh in on the subject.
Mandatory Exemptions Without SEC Oversight
- Family Offices – Once again the SEC is left to define this term, but Congress has instructed the SEC to keep it consistent with existing industry standards.
- CFTC Registered Advisers that Advise Private Funds – The SEC will give a pass to these players provided the business of the fund does not become predominantly securities related.
- Small Business Investment Company Advisers.
Regulation Focused on Quantitative Analysis
- Advisers to "Mid Sized Private Funds" - This is another term not yet defined by the SEC, but presumably will apply to private funds with AUM of less than $150 million but more than $25 million. Although advisers to these funds would seem to be exempt by Congress as described above, the SEC has been given the authority to propose regulation and examination procedures for these advisers taking into account the size, governance, and investment strategy and level of systemic risk posed by such funds. In addition, these advisers will need to determine what registration requirements the various states may impose.
- Advisers with between $25 and $100 million in AUM and subject to exam by the regulators in their home state may not register with the SEC unless that adviser would otherwise be required to register in 15 or more states.
- Accredited Investor Standard to be Adjusted for Inflation – Upon enactment and the following four years, the net worth threshold for the accredited investor test will be equal to $1 million, excluding the value of an investor's primary residence. The SEC is instructed to review this definition and following the four year moratorium may adjust this amount upward.
- Qualified Client Standard to be Adjusted for Inflation – The SEC, within one year from enactment, must adjust this threshold for inflation which permits advisers to charge certain clients performance based fees. At present the threshold is $750,000 per client AUM and $1.5 million net worth.
As stated above, the purpose of this bulletin is to alert you to the fact that both the SEC and/or the various states are about to become a part of your life in the summer of 2011. How meaningful a part of your life and to the extent it will impact the way you do business are questions we will explore in greater detail in future alerts.
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.