The Dodd-Frank Wall Street Reform and Consumer Protection Act will significantly change the regulatory regime governing investment advisers, particularly investment advisers to private funds, such as hedge funds and private equity funds, a report by law firm Pillsbury says.
The primary purpose of the new rules and requirements is to “fill the regulatory gap,” by requiring advisers to private funds to register as investment advisers with the Securities and Exchange Commission or state securities regulators, unless an exemption applies, and provide information about their activities to the SEC.
Currently, advisers with USD25m or more of assets under management may register with the SEC. However, under the Dodd-Frank Act, advisers with assets under management of USD100m or more will be required to register as investment advisers with the SEC, unless an exemption applies.
An adviser with assets under management of less than USD100m and that is subject to state regulation will generally be required to register as an investment adviser with the state regulator of the state in which such adviser is located.
By increasing the threshold for SEC registration to USD100m, the Dodd-Frank Act will allow the SEC to focus its time and resources on large advisers, which presumably present a greater systemic risk to the US economy than small to mid-sized advisers, the report by Jay B. Gould and Michael G. Wu says.
Currently, a large number of investment advisers are not registered with the SEC in reliance upon the “private adviser exemption,” under Section 203(b)(3) of the Investment Advisers Act of 1940. The “private adviser exemption” generally exempts an adviser from the registration requirements if it has had fewer than 15 clients during the preceding 12-month period, does not hold itself out as an investment adviser and does not advise registered investment companies or business development companies.
The Dodd-Frank Act will eliminate this exemption, which will require many unregistered advisers to register with the SEC, unless another exemption applies.
Although the Dodd-Frank Act will eliminate the “private adviser exemption,” it will create several new exemptions from the registration requirements for advisers to private funds.
Advisers with less than USD150m of assets under management in the US and that only advise private funds will be exempt from the registration requirements of the Advisers Act. However, the SEC may (i) require such advisers to maintain such records and make such reports as the SEC by rulemaking determines is necessary or appropriate in the public interest and to protect investors, and (ii) implement registration and examination procedures for such advisers, which would take into account the size, governance, investment strategy and level of systemic risk posed by such advisers.
Advisers to venture capital funds will be exempt from the registration requirements of the Advisers Act. To qualify for this exemption, an adviser may only advise venture capital funds. The SEC may require such advisers to maintain certain records and reports, if the SEC determines that such reporting and recordkeeping requirements are necessary or appropriate in the public interest or for the protection of investors.
Foreign private advisers will be exempt from the registration requirements of the Advisers Act. Under the Dodd-Frank Act, an adviser qualifies as a “foreign private adviser” if it (i) has no place of business in the US, (ii) has fewer than 15 US clients and investors in private funds advised by the adviser, (iii) has less than USD25m (or such higher amount as the SEC may determine by rulemaking) of aggregate assets under management attributable to US clients and investors in private funds advised by the adviser, (iv) does not hold itself out as an investment adviser in the US, and (v) does not advise any registered investment company or business development company.
Family offices will be excepted from the definition of investment adviser, and will generally not be subject to the requirements of the Advisers Act, including the registration requirements.
Any adviser that is registered with the Commodity Futures Trading Commission as a commodity trading adviser will be exempt from the registration requirements under the Advisers Act, provided that such adviser does not predominantly provide advice with respect to securities.
Any adviser that solely advises small business investment companies will be exempt from the registration requirements under the Advisers Act.
The Dodd-Frank Act will narrow the exemption for intra-state advisers. Currently, the intra-state adviser exemption exempts an adviser with clients that are all residents of the state in which the adviser maintains its principal office from the registration requirements under the Advisers Act. The exemption will be narrowed, as it will no longer be available to advisers to private funds.