Requires Hedge Fund and Private Equity Fund Managers to Register with SEC
As expected President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) on Wednesday July 24, 2010. The Act was designed to address many of the issues that led to the financial crisis of 2008 and is being hailed as the largest financial regulatory bill since the various securities acts of the 1930s.
For most hedge fund and private equity fund managers, the major concern is the requirement that managers register with the SEC by July 24, 2011. Registration, of course, means that firms are going to be required to appoint a chief compliance office, comply with certain advertising restrictions and implement robust recordkeeping procedures. Along with the increased compliance and reporting requirements, managers should be aware that firms will also be subject to surprise or routine SEC audits.
Fund managers who run section 3(c)(1) funds should also be aware of the fact that the definition of both qualified client and accredited investor are affected. The definition of a qualified client will be required to be initially adjusted by the SEC and then will be adjusted every 5 years thereafter. The definition of an accredited investor now does not include the value of an investor’s primary residence. This definition will be subject to adjustment every 4 years.
Other interesting changes:
- Venture Capital Funds – VC funds will not be required to register as investment advisers with the SEC, but the SEC may promulgate rules requiring such managers to keep certain records and make reports to the SEC.
- Registered CPOs not subject to IA registration – a commodity pool operator which provides advice to a private fund which invests in securities will not also need to be registered as an investment adviser unless the CPO’s business becomes predominantly securities-related.
- Recordkeeping – although hedge fund and private equity fund managers will be subject to reporting requirements, there is the possibility for enhanced confidentiality measures for some groups. [This is an issue we will likely hear much more about in the future.]
- Short sale reporting – managers generally with $100M in AUM will be required to report their short positions to the SEC.
- SIPC protection for futures – the Act extends SIPC protection for futures and options on futures in portfolio margining accounts.
- Futures position limits – in the next 6 months the CFTC will be required to impose aggregate position limits on energy products and metals. In the next 9 months the CFTC will be required to impose aggregate position limits on agricultural commodities.
- OTC Derivatives – formerly unregulated derivative transactions will now be regulated by the CFTC, SEC or both. These transactions will generally need to be cleared through central clearinghouses.
Many pundits have noted that most of the “real” change will take place through the agency rule-making process which is expected to commence shortly and last at least 12 months. Both the SEC and CFTC will be releasing rule proposals for comments and we will be reporting on these as they occur.
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Cole-Frieman & Mallon LLP provides legal support and hedge fund compliance services to all types of investment managers. Bart Mallon, Esq. can be reached directly at 415-868-5345.