On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The public policy reasons for this bill were to control or reduce the systemic risk that exists in our financial system and to protect consumers. Although this bill significantly affects large banks and insurance companies, it also will affect many smaller, but important, players in the financial services industry here in South Carolina and around the country. Specifically, the Dodd-Frank bill directly affects investment advisers, broker-dealers, and hedge funds.
Regarding investment advisers, under the new legislation, more investment advisers will have to resister with State securities regulators instead of registering with the U.S. Securities and Exchange Commission. Previously, investment advisers with assets under management of less than $25,000,000 had to register with the applicable State securities regulator. The new legislation requires that by July 21, 2011, investment advisers with AUM of less than $100,000,000 register with the applicable State securities regulator. (Some exceptions apply.) Additionally, the new legislation eliminated the private fund exemption from registration and imposed a requirement on many advisers to private funds (e.g., hedge funds) to register as investment advisers with the SEC. The new legislation requires investment advisers who act solely as an adviser to private funds and who have AUM of $150,000,000 or more to register as investment advisers with the SEC. Under the Dodd-Frank bill, these hedge fund managers, whether registered or not, will have to keep records, make them available to the SEC or other regulators, and/or be subject to examination. The new legislation will also impose additional costs on investment advisers. These changes generally are effective on July 21, 2011.
The Dodd-Frank bill gives the SEC the ability to impose a fiduciary standard on broker-dealers. The fiduciary standard, which is currently applicable to investment advisers, means that investment advisers must always make decisions and recommendations that are in the best interests of their clients. This is a high standard of care. Broker-dealers have generally been held to a lesser standard of care when making recommendations to clients. If the SEC imposes this higher standard of care on broker-dealers, the potential liability of broker-dealers will increase.
The new consumer protection agency created in the Dodd-Frank bill will not directly oversee investment advisers and broker-dealers. Their existing regulators will retain this oversight jurisdiction.
The new legislation also affects private offerings of securities under Regulation D of federal securities laws. The Dodd-Frank bill changed the definition of “accredited investor” and “qualified client.” For example, for determining net worth, accredited investors under the new legislation should no longer include the fair market value of their primary residence. The new legislation also requires the Comptroller General of the United States to study whether private funds should be overseen by a newly formed self-regulatory organization.
Many of the burdens, restrictions, and costs imposed on the financial services industry by the Dodd-Frank bill are unknown. The SEC and other regulatory bodies will have to write and approve many pages of regulations that will define the true extent of the new legislation.
