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
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  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]

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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.