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Kent Barnes, Legal Counsel, US Bancorp

Demystifying Dodd-Frank

By Kent Barnes - On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act). The Act, which is set to become effective on July 21, 2011, is a comprehensive suite of regulatory reforms intended to contain risk in the financial services industry through tightened regulation, increased consumer safety, and stricter oversight of public companies.  

Requirement to Register with the Securities Exchange Commission (the “SEC”)

Title IV of the Act, referred to as the Private Fund Investment Advisers Registration Act of 2010 (the Registration Act), contains a broad overhaul of the regulatory landscape from investment advisers to private funds and revamps the registration requirements and exemptions under the Investment Advisers Act of 1940 (the Advisers Act). Included in these sweeping changes, and perhaps most significant to private fund investment advisers, is the elimination of the “private adviser” exemption, whereby investment advisers with fewer than 15 clients who meet certain other requirements are exempt from registration with the SEC. Under the Registration Act an investment adviser will be required to register with the SEC unless it meets the following requirements:

  • Has assets under management under USD25 million.
  • Meets the definition of a “Mid-Sized Investment Adviser.”
  • Satisfies one of the exemptions or exclusions included in the Act or otherwise provided for in the Advisers Act.  

Impacts of SEC Registration
For investment advisers that manage private funds and who have historically been exempt from registration with the SEC, this Act will likely result in a greater compliance burden and higher operating costs. Absent an exemption, exclusion, or prohibition, private fund investment advisers will be required to maintain certain records and file reports regarding the funds they advise. In addition to disclosing certain information to the SEC, clients, and other investors through Form ADV, registered investment advisers will also be required to disclose the following information:

  • AUM
  • Conflicts of interest
  • Information on uses of leverage
  • Counterparty credit risk exposure
  • Trading and investment positions
  • Trading practices
  • Pricing/valuation policies and practices
  • Types of assets held
  • Side arrangements/letters
  • Such other information that the SEC deems necessary 

Private fund investment advisers who remain unregistered will still be required under the Registration Act to maintain such records and provide the SEC with such reports as the SEC deems necessary and appropriate in the public interest and for the protection of investors and the assessment of systemic risk. As the Registration Act empowers the SEC to, at its discretion, request the same information and disclosures from both registered and unregistered investment advisers, all investment advisers need to be completely transparent and prepared for an SEC examination.
How an Administrator Can Help
In order to prepare for and meet the SEC requirements outlined above, advisers must either develop an infrastructure that can anticipate and prepare for SEC disclosure reporting requirements, or, rely on a third-party administrator to be their servicing partner.
One of the biggest concerns we are seeing from an adviser’s perspective as it relates to the new regulations is its ability to build a scalable infrastructure to handle a broader range of reporting, compliance, and internal control needs and to do so in a timely and accurate fashion. In addition, advisers should expect SEC disclosure requirements to include a review of the back-end processing of reporting, including technology automation and the efficiency of data integration between the portfolio accounting system, investor accounting system, tax reporting, investor reporting tools, and reconciliation with the custody or prime broker accounts. Any “off-line” or manual processes may present an operational risk in the perspective of the SEC and advisers should be prepared to demonstrate the viability and accuracy of these functions.
Regulators will likely review and need to be satisfied with all policies, procedures, and internal controls regarding investor information. For example, if advisers deliver investor statements electronically or provide investors access to documents through a Web portal, they may be asked to include a detailed description of the application’s security access, password administration, and confidentiality measures. Being prepared and able to describe all internal and external policies, procedures, and resources available will allow advisers to exude confidence to the SEC in relation to the support of their various technology applications and interfaces.
A third-party administrator will not only help support SEC disclosure requirements, but will also give advisers confidence that they can provide the SEC with accurate information in a timely manner. This is because a qualified administrator will have robust systems and extensive experience supporting and implementing regulatory requirements related to reporting, compliance, and internal controls.
As Legal Counsel within U.S. Bancorp Fund Services, Kent Barnes specializes in the legal needs of pooled investment products and alternative investment structures. Mr Barnes brings more than 10 years of securities experience; having previously served in the securities industry for seven years as legal counsel and FINRA licensed representative and for a mutual fund and alternative product administrative firm. In addition, Mr Barnes specialized in private placements, corporate, and securities law while with the third largest law firm in Milwaukee.
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