President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010. Title IV of that Act imposed many changes on investment advisers and hedge funds and other pooled investment funds that are managed by advisers. Most of those new laws were scheduled to become effective on July 21, 2011. However, in April 2010, the SEC told state regulators this deadline for mid-sized advisers to register with the states may be extended because the SEC had not completed its rulemaking and the IARD system used by advisers to register would have to be re-programmed. On June 22, 2011, the SEC adopted several rules which extended the deadline for certain provisions in Dodd-Frank and gave advisers and hedge funds needed guidance in several areas.
Although I don’t yet have the final rules, I have included a summary of those rules from two press releases issued by the SEC.
In press release 2011-133, the SEC described rules that it adopted that included, but are not limited to, the following:
1. Private-fund advisers that must register as investment advisers with the SEC for the first time because of Dodd-Frank must be registered by March 30, 2012.
2. On their application for registration, Form ADV, private-fund advisers will have to provide the following: (a) basic organizational and operational information about each fund they manage, (b) general information about the size and ownership of the fund, (c) general fund data, (d) the adviser’s services to the fund, and (e) identification of the “gatekeepers” that assist the adviser and the private fund (i.e., auditors, prime brokers, custodians, administrators, and marketers).
3. Form ADV was amended (yes, again) to include information about (a) the types of clients advised,
(b) the adviser’s employees, (c) the adviser’s advisory activities, and (d) their business practices that may present significant conflicts of interest. (Some of this seems duplicative of the information already required. When we see the final rule, we may be able to make some distinctions.)
4. Although exempt from registration, the SEC imposes the following duties on advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in assets under management in the U.S.
a. File and periodically update reports with the SEC using Form ADV. This information will be filed electronically on the IARD system and will be available to the public.
b. Instead of completing the entire Form ADV, these “exempt reporting advisers” will disclose (a) basic identifying information about the adviser, (b) the identity of its owners and affiliates, (c) information about the private funds the adviser manages, (d) information about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest, and (e) the disciplinary history of the adviser and its employees that may reflect on the integrity of the advisory firm.
5. Dodd-Frank requires that advisers who have assets under management of between $25 million and $100 million switch their registration from the SEC to the applicable state(s), if certain requirements are met. The new rule states that:
a. Advisers registered with the SEC will have to declare that they are permitted to remain SEC registered in a filing to be made in the first quarter of 2012.
b. Advisers who no longer are eligible for SEC registration will have until June 28, 2012, to complete the switch to state registration.
6. The relatively new pay-to-play rule was amended to allow an adviser to pay a registered municipal advisor to act as a placement agent to solicit government entities on its behalf, if the municipal advisor is subject to a pay-to-play rule adopted by the MSRB that is at least as stringent as the investment adviser pay-to-play rule.
7. The SEC defined “venture capital fund,” which was undefined in Dodd-Frank.
In press release 2011-134, the SEC defined “family offices,” which was also left undefined by Dodd-Frank. Family offices are entities established by wealthy families to manage their wealth and provide other services to family members. Historically, family offices used the private adviser exemption to avoid registration as an investment adviser, but Dodd-Frank eliminated the private adviser exemption. Dodd-Frank exempted family offices from registration as an investment adviser and left the definition up to the SEC.
According to the new rule, a family office that is exempt from registration is any company that:
1. Provides investment advice only to “family clients,” as defined in the rule;
2. Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule; and
3. Does not hold itself out to the public as an investment adviser.
Family offices that do not meet this definition must register with the SEC or with the applicable state(s) by March 30, 2012.
The new rule states that existing exemptive orders from the SEC remain effective and that certain family offices may be deemed to meet the new definition under a grandfathering provision.
