Looking at Dodd-Frank outside (the US)
Dermot Butler (pictured), Chairman, Custom House Group Fund Services, outlines some of the key exemptions for investment advisers under the Dodd-Frank rule.
Last summer, in July 2010, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (‘Dodd -Frank Act’) was signed into law and, amongst other things, Title IV of Dodd- Frank amended the “US Investment Advisors Act of 1940” (‘IAA 1940’).
One of the important requirements of Dodd-Frank was that a broad range of both US and non-US fund managers and advisors had to register with the SEC by July this year. With this in mind, in November of last year the SEC published proposed/draft rules relating to the registration on exemptions for certain advisors as permitted under Dodd- Frank. Although these rules are subject to comment it is likely that they will not vary too much from the draft and it is expected that the final rules will be published before mid-year 2011.
The IAA 1940 exempted certain advisors from registering with the SEC. Dodd- Frank replaces this exemption - known as the “Private Advisor Exemption” - with the “Foreign Private Advisor Exemption”. It should be noted however that although the rules outline Dodd-Frank’s terms regarding Foreign Private Advisors (FPA) and exempts some from registration, this exemption does not exempt them from reporting to the SEC.
The repeal of the IAA 1940 Private Advisors Exemption Rule and replacement with Dodd Frank is something that FPAs must consider carefully. This means that any manager of a fund, which is selling or has sold investments to 15 or more US persons must ensure whether they are exempt from Dodd-Frank or whether the new regulations may apply to them.
“So what is an FPA and how can it achieve the exemptions?”
An FPA in the context of Dodd-Frank is an advisor that:
- Has no place of business in the United States
- Has less than 15 clients in the US and that includes individual investors in a fund – i.e. the fund is not considered a single client;
- Has less than US$25million aggregate AUM (assets under management) from such clients; and
- Does not represent itself to the US public to be an investment advisor.
Dodd-Frank has also introduced the “Exempt Reporting Advisor” (ERA) which includes inter alia Venture Capital Funds and advisors of private funds with less than USD150 million AUM in the US.
The joy of qualifying as an ERA is primarily limited to an exemption from SEC registration. I say that because, unlike the exemption offered to FPAs, the ERA would be obliged to comply with certain SEC reporting and disclosure requirements, including, for example, completing and filing parts of the Uniform Application of Investment Advisor Registration (“Form ADV”).
It is interesting to note the change of attitude in the past three years, or certainly since the previous attempt by the SEC to force Hedge Fund managers to register. At that time there was a lot of speculation as to whether the SEC had the resources to not only process the registrations, but also to oversee them and carry out the necessary examinations to ensure they were being complied with by all concerned.
Dodd-Frank brings many more advisors under the SEC Registration and even requires reporting for those that are exempted from the registration. And yet, despite the age of austerity introduced by Mr Obama, I haven’t seen or heard any comment by anyone as to the capability of the SEC to fulfil its obligations under Dodd-Frank, notwithstanding that the SEC will be stretched much further by Dodd-Frank than it would have been by the previous attempt to introduce registration of Hedge Fund managers.
I should point out that these comments are based on my interpretation of the Dodd-Frank act as well as various articles in the industry media and legal comments, of which thousands of words have been written, all of which by people better qualified than I to discuss the subject.
From my point of view, as an alternative investment portfolio (funds and managed accounts) administrator, I can see already that we will have to provide even more reports and data to meet the funds’ and their managers’ compliance obligations, bringing much work to the “IT-Communications” Departments.
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