Monthly Archives: July 2011

Announcing Cole-Frieman & Mallon LLP


We are pleased to announce today the merger of our respective firms to form Cole-Frieman & Mallon LLP, a law firm focused on the hedge fund industry.  Below is our press release announcing the merger.  We look forward to continuing to provide top-tier legal services to both large and start-up managers and will continue to focus on bringing useful information to the hedge fund community through the Hedge Fund Law Blog.

Many thanks to everyone who has supported this website and our practices over the years.

– Karl Cole-Frieman & Bart Mallon


Cole-Frieman LLP & Mallon P.C. merge to form 3rd largest hedge fund practice based in San Francisco

– Combined firm has over 200 hedge fund industry clients

San Francisco, July 27th, 2011 – Two fast-growing San Francisco based law firms, Cole-Frieman LLP and Mallon P.C., today announced an agreement to combine businesses. The combined firm, known as Cole- Frieman & Mallon LLP, will be a boutique generalist firm focusing on hedge fund managers and hedge fund investors. Karl Cole-Frieman and Bart Mallon will be Co-Managing Partners of the eight person firm, which is headquartered in San Francisco and has a satellite office in New York. With 215 clients in the hedge fund industry, the firm also managed over 100 hedge fund launches in the last two years.

Cole-Frieman & Mallon LLP provides advice on a broad range of corporate, regulatory and litigation matters including hedge fund formation, adviser registration, CFTC and NFA matters, ISDAs and counterparty documentation, loan trading and distressed debt transactions, seed deals, employment and compensation matters and regulatory inquiries.

The firm will also manage the widely read and highly influential Hedge Fund Law Blog (, which focuses on legal issues that impact the hedge fund community.

“This merger will create an industry leading firm that provides a full suite of services to hedge funds and others in the alternative investment community,” says Karl Cole-Frieman. Mallon notes, “Many larger managers are opting to bifurcate their legal work between our firm and a large law firm. Whether the client needs start-up support or more tailored advice, we are able to provide high level, cost-effective services which consider the manager’s needs from a business as well as a legal perspective.”

“There are few firms that can provide an institutional quality product at a reasonable price point. With Cole-Frieman & Mallon LLP we get the benefit of top notch expertise, as well as the personalized service and attention of a boutique firm” said Dennis Carlton, General Counsel of WMD Asset Management, LLC.

Bruce Wilson at North Creek Advisors, LLC adds “Cole-Frieman & Mallon LLP bring to the table a deep understanding of the hedge fund business and hedge fund operations. They are business partners, as well as counselors, who engineer the solutions for their clients.”

About Cole-Frieman & Mallon LLP

Informed by significant in-house and private practice experience at some of the most prestigious Wall Street firms, hedge funds, and law firms Cole-Frieman & Mallon LLP has the business acumen and market knowledge to

provide legal solutions for a wide range of financial services matters. With offices in San Francisco and New York, Cole-Frieman & Mallon LLP has a nationwide practice that services both start-up managers as well as multi-billion dollar firms. Cole-Frieman & Mallon LLP provides a variety of services including: hedge fund formation, advisor registration and counterparty documentation, CFTC and NFA matters, seed deals, internal investigations, operational compliance, regulatory risk management, hedge fund due diligence, marketing and investor relations, employment and compensation matters, and routine business matters. For more information please visit us at:

Karl Cole-Frieman can be reached at 415-352-2300.

Bart Mallon can be reached directly at 415-868-5345.


Form 13H – Large Trader Reporting Requirement

Rule 13h-1 Adopted by SEC

Today the SEC adopted new Rule 13h-1 which requires certain large traders to provide certain information regarding their trading activities to the SEC through a New Form 13H.  A gross overview of the new reporting requirement are provided below.

Who is required to file Form 13H?

All “large traders” must file Form 13H.

A “large trader” is defined as a person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month.

The Form 13H is expected to look substantially similar to the Proposed Form 13H.

Large Trader Identification Number (LTID)

Each large trader which filed Form 13H will be given a LTID. The large trader will be required to provide their broker with the LTID so the broker can track all transactions attributable to the large trader and report such transactions to the SEC.

Large Trader Recordkeeping & Compliance Requirements

Broker-dealers with large trader clients are required to maintain certain records with respect to the transactions of their large trader clients. Such broker-dealers will be required to have large trader transaction data available the day after transactions are effected.

Effective Date

The effective date of new SEC Rule 13h-1 will be 60 days after the rule is published in the Federal Register. Large traders will have 60 days from the effective date of the new rule to file Form 13H with the SEC.

We will be able to provide more background on the rule as adopted shortly.

The final rule is likely to be similar to the Proposed Rule 13h-1.

The SEC release is reprinted below and can be found here.


SEC Adopts Large Trader Reporting Regime



Washington, D.C., July 26, 2011 – The Securities and Exchange Commission today voted unanimously to adopt a new rule establishing large trader reporting requirements to enhance the agency’s ability to identify large market participants, collect information on their trading, and analyze their trading activity.

The new rule requires large traders to identify themselves to the SEC, which will then assign each trader a unique identification number. Large traders will provide this number to their broker-dealers, who will be required to maintain transaction records for each large trader and report that information to the SEC upon request.

“May 6 dramatically demonstrated the need to enhance the SEC’s ability to quickly and accurately analyze market events. The large trader reporting rule will significantly bolster our ability to oversee the U.S. securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairman Mary L. Schapiro. “This new rule will enable us to promptly and efficiently identify significant market participants and collect data on their trading activity so that we can reconstruct market events, conduct investigations, and bring enforcement actions as appropriate.”

The new rule has two primary components:

First, it requires large traders to register with the Commission through a new form, Form 13H.

Second, it imposes recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions.

The new rule will be effective 60 days after its publication in the Federal Register.


Cole-Frieman & Mallon LLP is a hedge fund law firm which provides legal advice to both large and

start-up fund managers.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.


New York Hedge Fund Manager Registration Post Dodd-Frank Act

SEC Releases Information on Mid-Sized Advisers – New York Managers may be Required to Register with SEC

Currently managers with a place of business in New York are not required to register as investment advisers at the state level with the New York Department of State.  Until the Dodd-Frank Act was passed last year, these managers also were exempt from registration with the SEC because of the old Section 203(b)(3) exemption.  After the Dodd-Frank Act repealed the 203(b)(3) exemption, it was unclear how certain managers (like those managers with a place of business in New York) would be regulated.  Recently the SEC passed final hedge fund registration regulations which, among other things, clarifies how certain mid-sized hedge fund managers will be regulated.  The SEC also recently released a FAQ on how the mid-sized advisers.  The import of the Dodd-Frank Act and the new regulations means that certain New York hedge fund managers will be required to register as investment advisers with the SEC.

Mid-Sized Adviser Overview

A mid-sized adviser is generally an investment adviser with between $25M and $100M of AUM.  Mid-sized advisers are not allowed to register with the SEC unless the mid-sized adviser is located in New York state or Wyoming, in which case they will be required to register with the SEC.  Those mid-sized advisers who are currently registered with the SEC (under the applicable regulations effective prior to the Dodd-Frank Act) will be required to “switch” to state registration by June 28, 2012.  Any mid-sized adviser starting their business after July 21, 2011 will be required to register with the state securities commission or with the SEC if they are in New York or Wyoming.  More technical guidance on accomplishing the “switch” from SEC to state registration is expected to be provided by the SEC and various state regulators in the coming months.

Overview of IA Registration Requirement for New York Managers

Based on the new federal regulations, managers with a principal place of business in New York will be subject to registration/exemption as follows:

Manager provides advice to hedge funds only –> has AUM of between $25M and $150M –> no registration with SEC or state (but will be an Exempt Reporting Adviser required to submit a truncated Form ADV by March 30,2012)

Manager provides advice to hedge funds only –> has AUM of over $150M –> registration with SEC required

Manager provides advice to hedge funds and separate accounts –> has AUM of at least $25M –> registration with SEC required

Managers should note that if they are initially commencing operations they will need to follow the new regulations immediately.

Next Steps for New York Managers

New York based managers who fall within the Mid-Sized category and will need to start making preparations with respect to registering as an investment adviser with the SEC.  The deadline for registration with the SEC will be March 30, 2012.

The SEC FAQ on Mid-Sized Advisers is reprinted in full below and can be found



Division of Investment Management:

Frequently Asked Questions Regarding Mid-Sized Advisers

What is a “mid-sized adviser”?

A “mid-sized adviser” is an investment adviser that has between $25 million and $100 million of assets under management.

Are mid-sized advisers required to register with the Securities and Exchange Commission?

After July 21, 2011, a mid-sized adviser must register with the Securities and Exchange Commission if it:

i. is not required to be registered as an adviser with the state securities authority in the state where it maintains its principal office and place of business; or

ii. is not subject to examination as an adviser by the state where it maintains its principal office and place of business.

A mid-sized adviser that does not meet either one of these two requirements is prohibited from registering as an adviser with the Commission after July 21, 2011, but will have to register with the state securities authorities. There are a few exceptions to the general prohibition from SEC registration in rule 203A-2, such as for certain multi-state investment advisers and pension consultants. In addition, a mid-sized adviser that is required to register with the SEC, may elect to not register if it can rely on an exemption from registration, such as those for certain advisers to private funds.

In which states would a mid-sized adviser not be “subject to examination” by the state securities authority?

New York or Wyoming.

A mid-sized adviser with its principal office and place of business in either of those states is not “subject to examination” by the state securities authority and would have to register with the SEC. A mid-sized adviser with its principal office and place of business in any other state is “subject to examination.” This information will be updated promptly upon notification by a state securities authority of any change to examination status.

How does a mid-sized adviser determine if it is “required to be registered” in the state where it maintains its principal office and place of business?

A mid-sized adviser should consult the investment adviser laws or the state securities authority for that state to determine if it is required to register as an investment adviser in that state.

When is a mid-sized adviser that is no longer eligible for Commission registration required to switch to state registration?

A mid-sized adviser registered with the Commission as of July 21, 2011 must remain registered with the Commission until January 1, 2012 (unless an exemption from Commission registration is available). Each adviser registered with the Commission on January 1, 2012 must file an amendment to its Form ADV no later than March 30, 2012, which for most advisers will be their annual updating amendment. A mid-sized adviser that is no longer eligible for Commission registration will need to be registered with the state securities authorities by June 28, 2012, and must withdraw its Commission registration by filing Form ADV-W, indicating it is filing a “partial withdrawal,” no later than that date.

The adopting release amending Form ADV, dated June 22, 2011 (the “Adopting Release”) can be found at: .

Amended Form ADV can be found at: .

Amended Form ADV instructions can be found at: and .


Cole-Frieman & Mallon LLP is a law firm which provides advice hedge fund managers on state registration and compliance matters.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

Stop Tax Haven Abuse Act Introduced by Senator Levin

Bill Would Have Significant Impact on Private Funds

On July 12, 2011, United States Senator Carl Levin (D – Michigan) introduced the Stop Tax Haven Abuse Act of 2011 (the “Bill”). A prior version of the Bill was introduced in 2009. The Bill contains several provisions of interest to private fund managers, including provisions that:

  • Treat foreign corporations whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes;
  • Clarify under the Foreign Account Tax Compliance Act (“FATCA”) when foreign financial institutions and U.S. persons must report foreign financial accounts to the IRS;
  • Treat Credit Default Swap (“CDS”) payments sent offshore from the United States as taxable U.S. source income; and
  • Require Anti-Money Laundering (“AML”) programs for hedge funds, private equity funds, and formation agents to ensure screening of offshore clients.

The Bill also authorizes the Treasury Secretary to take special measures against foreign jurisdictions or financial institutions that impeded U.S. tax enforcement as well as imposes additional disclosure requirements on multinational corporations by requiring them to include basic information on a country-by-country basis in their filings with the SEC. Notably, the Bill does not include a controversial proposal in the 2009 bill that specifically identified 34 “Offshore Secrecy Jurisdictions,” including the Cayman Islands and British Virgin Islands.

Foreign Corporations Treated as Domestic Corporations

Section 103 of the Bill prevents companies that are run from the United States from claiming foreign tax status if those foreign corporations

have gross assets of $50 million or more. The provisions indicate that gross assets includes “assets under management for investors, whether held directly or indirectly.” For corporations primarily holding investment assets, the management and control is treated as occurring primarily in the United States if “decisions about how to invest the assets are made in the United States.” These provisions if enacted could potentially eliminate any benefits of establishing offshore funds, which are primarily established for offshore and U.S. tax-exempt investors.

Strengthening FATCA Provisions

The U.S. Foreign Account Tax Compliance Act (“FATCA”) imposes a 30% withholding tax on U.S. persons holding offshore accounts on certain “withholdable payments” to “foreign financial institutions” which do not provide information about their U.S. accounts to the Internal Revenue Service. A “withholdable payment” is generally any U.S. source income, such as interest, dividends, rents, royalties and other fixed or determinable income (“FDAP”). Non-U.S. private funds will generally qualify as foreign financial institutions (“FFI”). In order for an offshore fund to avoid withholding, it must enter into an agreement with the U.S. Treasury to identify its U.S. investors, if there are any.

Section 102 of the Bill would expand the definition of a foreign financial institution to include entities that engage in derivative transactions. Section 102 also creates presumptions of U.S. control for purposes of certain legal proceedings for entities with accounts opened at non-FATCA institutions when those entities are established by or receive assets from U.S. persons.

Treatment of Credit Default Swaps

Existing tax laws allow CDS payments to avoid taxation if sent from the United States to persons offshore, such as an offshore hedge fund or foreign bank. Section 104 of the Bill would treat CDS payments sent offshore from the United States as taxable U.S. source income.

Anti-Money Laundering Programs for Hedge Funds

Sections 203 and 204 of the Bill would impose anti-money laundering requirements on unregistered investment companies, including hedge funds and private equity funds, and formation agents. Hedge funds would be required to establish AML programs; ascertain the identity of investors, including beneficial owners of foreign entities; and submit suspicious activity reports. Agents engaged in the business of forming corporations or other legal entities would also be required to establish AML programs.

Our Thoughts

The Bill will still need to survive a vote by both the Senate and the House and ultimately be signed by the President before becoming law.  There is likely to be some time before this Bill moves forward (especially considering the current focus on the debt ceiling) which means plenty of time for the industry to lobby against this effort.  However, the bill highlights the unpopularity of the investment management industry with certain members of Congress and it is no surprise we see proposed taxing provisions- the U.S. needs more tax revenue and investment managers are an easy group to target.  We see this every couple of years when various members of Congress propose to increase the carried interest for fund managers.  It will be interesting to see how this plays out and we will provide periodic updates on the situation.

For more information about the Bill, refer to Senator Levin’s July 12, 2011 press release.  Senator Levin has also released a summary of the bill as well as his floor statement introducing the bill.


Cole-Frieman & Mallon LLP is a law firm which provides advice with respect to domestic and offshore hedge fund operations.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.


Private Equity Fund Manager Registration Exemption Approved by House Committee

Small Business Capital Access and Job Preservation Act Moves Toward Vote

The SEC recently finalized the new investment adviser registration regulations and under those regulations private equity fund managers will be required to be registered with the SEC.  However, Congress has recently been taking steps that may ultimately mean that private equity fund managers will escape registration requirements.

The Small Business Capital Access and Job Preservation Act (the “Bill”) proposed in March, would amend the Investment Advisers Act to provide an exemption from registration for some private equity fund managers.  Recently the House Committee on Financial Services (“Committee”) amended and approved the Bill which will ultimately need to be passed by the full House and Senate before being presented to the President for signature. The amended text makes an exemption from registration available to advisers of private funds that have outstanding debt that is less than twice the amount investors have committed to the private funds (less than a 2-1 leverage ratio).

Proposed Requirements for Private Equity Fund Managers

The amended Bill would require the SEC to define “private equity fund” and to promulgate reporting and record-keeping requirements for those private equity fund managers who utilize the exemption. Specifically, the SEC would have to enact rules that require the managers “to maintain

such records and provide to the Commission such annual or other reports as the Commission taking into account fund size, governance, investment strategy, risk, and other factors, as the Commission determines necessary and appropriate in the public interest and for the protection of investors….”  The SEC will be required to issue any regulations within 6 months of the date the Bill is signed into law.

This means that while PE fund managers would be exempt from registration, there would still be fairly significant compliance responsibilities.  Essentially these managers would face a regulatory regime similar to exempt reporting advisers.

Support for the Bill

Supporters of the Bill essentially assert that because private equity funds neither caused nor contributed to the financial crisis, it would be unduly burdensome for these fund managers to register with the SEC. Specifically, supporters point to the costs associated with registration, the jobs created by the funds, and the general lack of systemic risk posed by the funds.

According to the Committee report, registration would be burdensome because:

“advisers to private equity funds will be required to calculate the value and performance of each of their funds on a monthly basis, which will in turn require advisers to private equity funds to calculate the value of each company in which the fund has invested on a monthly basis as well. Such valuations are time consuming and costly, and they divert much-needed capital and effort away from job creation and investment activities.”

The Committee received testimony stating:

“As of June 30, 2009, companies that received backing from private equity investment funds employed more than 6 million people. Studies show that the workforces of companies acquired by private equity firms increased by an average annual rate of 5.7 percent, compared to 1.1 percent for all U.S. companies. The Committee also received testimony about the costs of registering with the SEC, which some have estimated to be as high as $500 million industry-wide…”

The concerns were primarily that the burden imposed by the registration requirements could inhibit the creation of more jobs, with struggling or growing companies receiving less capital from such funds. The amended Bill would provide relief from registration for advisers to private equity funds that are levered by less than a 2-1 ratio.

Final Thoughts

Private equity fund managers should not stop beginning preparations to register as investment advisers with the SEC.

The Bill is a long way from being enacted into law – it still must be passed by the full House, the full Senate, and signed by the President. It will then take (at least) another 6 months for the SEC to issue final rules regarding record-keeping and reporting and to clarify the definition of “private equity fund.” Even with the Dodd-Frank registration deadline pushed back to March 30, 2012, waiting until the Bill and its accompanying rules and regulations are finalized would leave managers of these funds with little time to register in the event they ultimately do not fall within the exemption in its final form.

The Committee’s report is available here.

The full text of the Bill is available here.


Cole-Frieman & Mallon LLP is a law firm which provides adviser registration, compliance and legal support to SEC registered fund managers.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.

Hedge Fund Registration Rules Finalized

Registration required by March 30, 2012

We are obviously a bit late on reporting that the hedge fund registration regulations were finalized by the SEC recently (see releases at end of the post).  We are not going to detail all aspects of the regulations in this post, but we will be examining some of the more important issues related to the release over the coming weeks and months.

We do want to provide a quick overview of some of the more important items with respect to the new regulations.  These include:

  1. registration for many hedge fund managers will be required by March 30, 2012 [note: managers will need to file Form ADV with the SEC no later than February 14, 2012 to meet this deadline]
  2. Form ADV has been amended in a number of ways which provide more information regarding a fund’s activities and counterparties
  3. Exempt Reporting Advisers (“ERAs”) will need to complete and file a truncated version of Form ADV by March 30, 2012 [note: ERAs will be subject to recordkeeping requirements and will be subject to SEC examination]
  4. many currently registered fund managers will need to switch from SEC registration to state registration during the first part of 2012

IA Registration Overview and Exemptions

After the passage of the Dodd-Frank Act it was clear than many fund managers would be required to register as investment advisers with the SEC.  In general the following are the registration requirements/exemptions for asset managers:

  • managers to only hedge funds (no managed accounts) must register as an IA with the SEC if Regulatory AUM (discussed below) is over $150M
  • managers to hedge funds and managed accounts must register as an IA with the SEC if Regulatory AUM is over $100M
  • mid-sized advisers ($25M to $100M) will be subject to state registration, if applicable [note: some mid-sized advisers will be subject to SEC registration regardless]
  • managers to only VC funds are exempt from registration;
    • VC funds may have up to 20% of their assets in non-VC investments
    • while managers to VC funds will not be required to register as IAs with the SEC, they will still be Exempt Reporting Advisers and will thus need to completed the truncated Form ADV by March 30, 2012
  • non-U.S. managers who have a place of business in the U.S. and have U.S. clients (either directly or as investors in their fund) will generally be required to register as an IA with the SEC or will be deemed to be an ERA [note: non-U.S. managers with U.S. clients or investors will only be exempt from IA registration with the SEC in only limited circumstances]
  • private equity fund managers are generally going to be treated the same as hedge fund managers according to these regulations

Other Items

The following are some of the important items from the releases:

  • Form PF – Release 3221 makes specific reference to a “Form PF release” which indicates that the SEC will be moving forward with the highly controversial reporting form.
  • Regulatory AUM – a new definition for AUM called regulatory assets under management will be used when determining the thresholds for registration. The big issue is that the definition will include leverage (gross assets) and will also include uncalled capital commitments.  The Release 3221 essentially states that the new Regulatory AUM definition is necessary for more consistent

    reporting of AUM and because Form PF will essentially rely on the new definition.

  • Buffer for Mid-Sized Advisers – there is a buffer zone around the $100M mark for certain managers.  This buffer is put into place so that managers do not have to continually switch to and from SEC registration as AUM increases or decreases.  The buffer is $10M each way meaning a manager will not be required to register with the SEC until AUM reaches $110M and a SEC registered manager would not need to de-register or switch to state registration until the manager had less than $90M AUM.
  • Family Office – family offices are exempt from SEC IA registration.  The SEC defined the term “family office” (see Release IA-3220).

The SEC press release announcing the new regulations and providing an overview of the new regulatory requirements can be found here.

The full releases are below:

  • Release IA-3222 [Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers]
  • Release IA-3221 [Rules Implementing Amendments to the Investment Advisers Act of 1940]
  • Release IA-3220 [Family Offices]


Cole-Frieman & Mallon LLP provides registration, compliance and other legal services for hedge fund managers.  Bart Mallon can be reached directly at 415-868-5345; Karl Cole-Frieman can be reached at 415-352-2300.


SEC Increases Threshold for Performance Fees

New Qualified Client Definition Effective September 19, 2011

The Dodd-Frank Act required the SEC to revise upward the dollar thresholds for a person to be deemed a “qualified client” pursuant to Rule 205-3. The qualified client definition is important because SEC registered investment advisers (including hedge fund managers) cannot charge performance fees to those investors who are not qualified clients. Previously an individual needed to have a net worth of $1.5 million or have $750,000 of AUM with the investment adviser. The new thresholds are $2 million and $1 million respectively.

It does not appear that there are any grandfathering provisions that will be applicable and it is currently unclear whether managers will need to seek confirmation from current investors/clients as to whether such investors meet the new qualified client definition. If managers are required to seek additional confirmation from current investors, this will obviously create additional legal and administrative expenses for managers. Regardless, for any future investors/clients, SEC registered investment

advisers (and those groups that will be registering within the next 9 months) should make sure that the new qualified client definition is included in all subscription documents and other investment advisory contracts.

Another important issue is how this change will affect state registered investment advisers. Many state laws and regulations either mirror the federal laws and regulations or make specific reference to Rule 205-3. It is likely that many states will be coming out with guidance on this issue either through notifications or orders, or through legislative changes. Nonetheless, most state registered investment advisers should begin making plans to adapt to the changes at the federal level.

As more information from the states become available, we will be providing updates on this blog.

The notice of the SEC order is reprinted below and can be found here.

The actual SEC Order can be found here: SEC Order – Qualified Client Definition


SEC Issues Order Raising Performance Fee Rule Dollar Limit to Adjust for Inflation



Washington, D.C., July 12, 2011 – The Securities and Exchange Commission today issued an order that raises, to adjust for inflation, two of the thresholds that determine whether an investment adviser can charge its clients performance fees. The order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC's Order

Rule 205-3 under the Investment Advisers Act allows an investment adviser to charge a client performance fees if the client meets certain criteria, including two tests that have dollar amount thresholds. Under today’s order, an investment adviser will be able to charge performance fees if the client has at least $1 million under the management of the adviser, or if the client has a net worth of more than $2 million. Either of these tests must be met at the time of entering into the advisory contract. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.

The Dodd-Frank Act requires that the Commission issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011 and every five years thereafter. The Commission published a notice of its intent to issue the order on May 10, 2011. The Commission also proposed amendments to rule 205-3, which are currently under consideration.

The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.


Bart Mallon is an attorney with a practice focused on hedge funds and investment adviser registration. He can be reached directly at 415-868-5345.