As we’ve discussed previously, the SEC has proposed two new exemptions from SEC registration for certain firms who would otherwise be required to register with the SEC as investment advisers:
- Section 203(l) (see Rule 203(l)-1) generally exempts investment advisers who only advise one or more “venture capital funds” and
- Section 203(m) (See Rule 203(m)-1) generally exempts investment advisers who only advise private funds and have AUM in the U.S. of less than $150MM.
To implement these new exemptions and to assist the SEC with identifying such advisers, their owners, their business models, and any potential risks to investors, proposed Rule 204-4 would require these “exempt reporting advisers” (“ERAs”) to submit, and to periodically update, reports to the SEC by completing specific items on Form ADV.
This article provides an overview of what information ERAs would have to report.
ERA Reporting Items
Proposed Rule 204-4 requires exempt reporting advisers to provide the SEC with the following items on Form ADV:
- Item 1 – Identifying Information
- A new question would require ERAs (and registered advisers) to indicate whether the adviser had $1 billion or more in AUM to assist the SEC in identifying excessive incentive-based compensation arrangements.
- ERAs (and registered advisers) would be required to provide contact information for the adviser’s chief compliance officer, indicate whether any control person is a public reporting company, and add “limited partnership” as a cohise advisers can select to indicate how their organization is formed.
- Item 2C – SEC Reporting by Exempt Reporting Advisers
- Item 3 – Form of Organization
- Item 6 – Other Business Activities: this item would require the ERAs to indicate the advisers other business activities. The list of activities would be expanded to include trust companies, registered municipal advisors, registered security-based swap dealers, majority security-based swap participants, and accountant firms.
- Item 7 – Financial Industry Affiliations from Private Fund Reporting: this item would be expanded as Item 6 will be expanded.
- Item 10 – Control Persons
- Item 11 – Disclosure Information
- ERAs (and registered advisers) would have to indicate whether the disclosure (i.e. criminal, regulatory) pertains to the adviser or any of its supervised persons
- Schedule A – Direct Owners
- Schedule B – Indirect Owners
- Schedule C – Amendments to Schedule A and B
- Schedule D
- Items 6 and 7.A. would require additional information corresponding with the answers provided in Items 6 and 7 in the main part of Form ADV.
- Item 7.B. would require ERAs (and registered advisers) to provide more information about the private funds they (and not their related persons) advise, which generally includes all pooled investment vehicles, regardless of whether they are organized as limited partnerships.
- Item 7.B.1. would require ERAs (and registered advisers) to provide more information about the basic organizational, operation, and investment characteristics of the fund, amount of assets, nature of the investors, and service providers.
- Part A of Item 7.B.1. would also require additional information including:
- the name of the fund (including an option to preserve the anonymity of the private fund client);
- the state or country where the fund is organized;
- the name of the general partner, directors, trustees or other persons with similar positions;
- the organization of the fund (e.g. master-feeder);
- regulatory status of the fund; and
- other questions about the fund’s investment activities (e.g. size of the fund, gross/net assets, minimum investment amounts, conflicts of interest, etc.)
- Part B of Item 7.B.1. would require ERAs (and registered advisers) to provide information about the 5 types of service providers that generally perform the “gatekeeper” role for a fund–auditors, prime brokers, custodians, administrators and marketers.
The ERA would not be required to prepare a client brochure (Form ADV Part 2).
Updates to Form ADV
In addition to filing an initial Form ADV, ERAs would also be required to file updating amendments (pursuant to the new amendment to Rule 204-1). Rule 204-1 would require ERAs, like registered advisers, to amend Form ADV:
- at least annually, within 90 days of the fiscal year end;
- more frequently, as required by Form ADV. The new General Instruction 4 of Form ADV would require ERAs to update Items 1, 3, and 11 if they become inaccurate in any way. They would be required to update Item 10 if it becomes materially inaccurate; and
- pursuant to Rule 204-4, the ERA would have to amend Form ADV when it ceases to be an ERA (indicate it is filing a final report pursuant to Rule 204-4). Note: many times, the adviser would be simultaneously applying for registration.
ERAs would be required to file their initial report on Form ADV by August 20, 2011.
The ERAs would have to pay a filing fee charged by FINRA. Currently, the SEC anticipates that the fees would be the same as those for registered IAs and range from $40 to $200, based on AUM.
Why Form ADV?
The SEC has proposed for ERAs to use Form ADV to meet their reporting requirement because the Buy viagra china Form ADV and IARD system are already established and doing so avoids additional delay and expense related to creating a new form. In addition, many ERAs will already have to use Form ADV for their state registrations – using Form ADV allows such advisers to satisfy the state requirement and Rule 204-4 in a single filing. The ERA reports filed via Form ADV will be publicly available on the SEC’s website.
Other Changes to Form ADV
Form ADV would be re-titled to reflect its dual purpose–as the “Uniform Application for IA Registration” and “Report by Exempt Reporting Advisers.” The ERA would indicate that it was reporting to the SEC, rather than registering with the SEC.
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Bart Mallon Esq. is a hedge fund attorney and provides hedge fund compliance services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.