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Form ADV Requirements for Exempt Reporting Advisers

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.

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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.

Filing Deadlines

ERAs would be required to file their initial report on Form ADV by August 20, 2011.

Filing Fee

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.

Other Items

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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Rule 203(m)-1 – Private Fund Adviser Exemption

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SEC Proposed Rule 203(m)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(m)-1 provides an exemption from registration with the SEC to those groups who only advise one or more qualifying private funds and manages less than $150 million in private fund assets. The proposed new rule 203(m)-1 essentially exempts smaller fund managers from SEC registration.

Managers should note, however, that they may still be required to either:

Register as an investment adviser pursuant to state law
Become a reporting adviser subject to proposed Rule 204-4

The proposed rule also provides that the exemption is available for managers who are based outside of the United States and manage funds which are domiciled in the U.S. provided that the funds have less than $150 million in assets.

The full proposed rule is reprinted below.

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§ 275.203(m)-1 Private fund adviser exemption.

(a) United States investment advisers. For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business in the United States is exempt from the requirement to register under section 203 of the Act if the investment adviser:

(1) Acts solely as an investment adviser to one or more qualifying private funds; and

(2) Manages private fund assets of less than $150 million.

(b) Non-United States investment advisers. For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business outside of the United States is exempt from the requirement to register under section 203 of the Act if:

(1) The investment adviser has no client that is a United States person except for one or more qualifying private funds; and

(2) All assets managed by the investment adviser from a place of business in cheapest perscription for xenical the United States are solely attributable to private fund assets, the total value of which is less than $150 million.

(c) Calculations. For purposes of this section, private fund assets are calculated as the total value of such assets as of the end of each calendar quarter.

(d) Transition rule. With respect to the calendar quarter period immediately following the calendar quarter end date that the investment adviser ceases to be exempt from registration under section 203(m) of the Act (15 U.S.C. 80b-3(m)) due to having $150 million or more in private fund assets, the Commission will not assert a violation of the requirement to register under section 203 of the Act (15 U.S.C. 80b-3) by an investment adviser that was previously exempt in reliance on section 203(m) of the Act; provided that such investment adviser has complied with all applicable Commission reporting requirements.

(e) Definitions. For purposes of this section,

(1) Assets under management means the regulatory assets under management as determined under Item 5.F of Form ADV (§ 279.1 of this title).

(2) Place of business has the same meaning as in § 275.222-1(a) of this title.

(3) Principal office and place of business of an investment adviser means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.

(4) Private fund assets means the investment adviser’s assets under management attributable to a qualifying private fund.

(5) Qualifying private fund means any private fund that is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C 80a-8) and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).

(6) Related person has the meaning set forth in § 275.204-2(d)(7) of this title.

(7) United States has the meaning set forth in § 230.902(l) of this title.

(8) United States person means any person that is a “U.S. person” as defined in § 230.902(k) of this title, except that any discretionary account or similar account that is held for the benefit of a United States person by a dealer or other professional fiduciary is a United States person if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.

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Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds. He can be reached directly at 415-868-5345.

Rule 204-4 – Reporting by Exempt Reporting Advisers

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Proposed Rule 204-4 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 204-4 provides that certain “exempt reporting advisers” are required to file Form ADV with the SEC. The instructions to Form ADV will specify which information on Form ADV is to be completed by such “exempt reporting advisers.”

The term “exempt reporting advisers” means an adviser exempt from SEC registration because:

the adviser only advises solely one or more “venture capital funds” (Advisers Act Section 203(l)); or
the adviser acts only as an adviser to private funds and has AUM in the US of less than $150MM (Advisers Act Section 203(m)).

The full proposed revised rule is reprinted below.

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§ 275.204-4 Reporting by exempt reporting advisers.

(a) Exempt Reporting Advisers. If you are an investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you must complete and file reports on Form ADV (17 CFR 279.1) by following the instructions in the Form, which specify the information that an exempt reporting adviser must provide.

(b) Electronic Filing. You must file Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under paragraph (e) of this section.

Note to paragraph (b): Information on how to file with the IARD is available on the Commission’s website at http://www.sec.gov/iard.

(c) When filed. Each Form ADV is considered filed with the Commission upon acceptance by the IARD.

(d) Filing fees. You must pay FINRA (the operator of the IARD) a filing fee. The Commission has approved the amount of the filing fee. No portion of the filing fee is refundable. Your completed Form ADV will not be accepted by FINRA, and thus will not be considered filed with the Commission, until you have paid the filing fee.

(e) Temporary hardship exemption.

(1) Eligibility for exemption. If you have unanticipated technical difficulties that prevent submission of a filing to the IARD system, you may request a temporary hardship exemption from the requirements of this chapter to file electronically.

(2) Application procedures. To request a temporary hardship exemption, you must:

(i) File Form ADV-H (17 CFR 279.3) in paper format no later than one business day after the filing that is the subject of the ADV-H was due; and

(ii) Submit the filing that is the subject of the Form ADV-H in electronic format with the IARD no later than seven business days after the filing was due.

(3) Effective date – upon filing. The temporary hardship exemption will be granted when you file a completed Form ADV-H.

(f) Final Report. You must file a final report in accordance with instructions in Form ADV when:

(1) You cease operation as an investment adviser;

(2) You no longer meet the definition of exempt reporting adviser under paragraph (a); or

(3) You apply for registration with the Commission.

Note to paragraph (f): You do not have to pay a filing fee to file a final report on Form ADV through the IARD.

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Bart Mallon, Esq. is a lawyer and providers hedge fund registration and compliance services through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Rule 203A-5 – IA Registration Transition Rules

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Proposed Rule 203A-5 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 203A-5 provides that (i) SEC registered investment advisers must report their AUM to the SEC by August 20, 2011 and (ii) if such advisers are at that time below the threshold for SEC registration, the adviser must withdraw from SEC registration by October 19, 2011 (and generally be registered with the state in which the adviser’s maintains its principle office and place of business).

The full proposed revised rule is reprinted below.

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§ 275.203A-5 Transition rules.

(a) Every investment adviser registered with the Commission on July 21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR 279.1) no later than August 20, 2011 and shall determine its assets under management based on the current market value of the assets as determined within 30 days prior to the date of filing the Form ADV.

(b) If an investment adviser registered with the Commission on July 21, 2011 would be prohibited from registering with the Commission under section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not otherwise exempted by § 275.203A-2 from such prohibition, such investment adviser shall withdraw from registration with the Commission by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011. During this period while an investment adviser is registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to the investment adviser’s advisory activities.

(c) If, prior to the effective date of the withdrawal from registration of an investment adviser on Form ADV-W, the Commission has instituted a proceeding pursuant to section 203(e) of the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose cipro dosage terms or conditions upon withdrawal, the withdrawal from registration shall not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

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Bart Mallon, Esq. is a hedge fund lawyer and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

Rule 203A-1 – Switching to or from SEC IA Registration

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Proposed Rule 203A-1 Pursuant to Dodd-Frank Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 203A-1 will replace existing Rule 203A-1. The new rule will provide state and SEC registered investment advisers with information on the time requirements for switching between the registration status. The full proposed revised rule is reprinted below.

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§ 275.203A-1 Switching to or from SEC registration.

(a) State-registered advisers—switching to SEC registration. If you are registered with a state securities authority, you must apply for registration with the Commission within 90 days of filing an annual updating amendment to your Form ADV reporting that you are eligible for SEC registration and are not relying on an exemption from registration genuine viagra online under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).

(b) SEC-registered advisers—switching to State registration. If you are registered with the Commission and file an annual updating amendment to your Form ADV reporting that you are not eligible for SEC registration and are not relying on an exemption from registration under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)), you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC registration within 180 days of your fiscal year end (unless you then are eligible for SEC registration). During this period while you are registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to your advisory activities.

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Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

SEC Proposes New IA and Hedge Fund Registration Rules

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Seeks Public Comment on Proposed Regulations

On November 19, the SEC released proposed rules with respect to the new hedge fund registration requirement under the Dodd-Frank act. The major proposals include the following:

Rules with respect to the manner and process of registration of hedge fund and private equity fund managers.
Reporting requirements for registered hedge fund and other private fund managers. This will include:
- Basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser’s services to the fund.
- Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).
Reporting requirements for non-registered private fund managers (including venture capital funds). This will include:
- Basic identifying information for the adviser and the identity of its owners and affiliates.
- Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
- The disciplinary history of the adviser and its employees that may reflect on their integrity.
- Exempt reporting advisers would file reports on the Commission’s investment adviser electronic filing system (IARD), and these reports would be publicly available on the Commission’s website.
Defining the term “venture capital fund” and the term “foreign private adviser”.
Providing guidance on SEC to state registration for managers who will no longer be allowed to register with the SEC due to increase in registration asset threshold

We will have the opportunity to fully review these proposals over the next few days and will be providing a report on the proposed regulations and will outline the comments we intend to send to the SEC. Public comments on the proposal will be due to the Commission in early January 2011.

The SEC summary of the proposed regulations can be found discount viagra soft gels here. The full texts of the two sets of proposals are below:

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Bart Mallon, Esq. runs the hedge fund law blog and provides registration and hedge fund compliance services to managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

SEC Rulemaking Agenda for Hedge Fund Registration

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Timeline for Proposed & Final Manager Registration Rules Released

The Dodd-Frank bill requires the SEC and CFTC to propose and promulgate final rules with respect to a number of important areas for investment managers. As we have seen, significant time has already been devoted to trying to develop a framework for OTC derivatives clearing. Over the next couple of months, however, hedge fund and private equity fund managers will begin to see how the registration and hedge fund compliance process will proceed under the new laws and regulations.

The SEC has released a timeline for implementing the provisions under Dodd-Frank. While the SEC discusses a number of the major rule making initiatives, below we have only reprinted the items relating to investment adviser registration. We have also provided some of our thoughts on these items. [Note: section numbers reference the Dodd-Frank act.]

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October

§409: Propose rules defining “family office”

This definition will be important because “family offices” are not required to register as investment advisers with the SEC. Family offices which manage the assets of numerous families will need to pay special attention to the proposed rule because it is possible that the SEC may not provide such offices with an exemption or exclusion from the registration provisions.

See SEC Proposes “Family Office” Definition on Hedge Fund Law Blog

Novemeber – December 2010 (planned)

§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds

Private equity fund advisers are going to be carefully reviewing this provision to see if there is any way to escape SEC registration. Depending on the scope of the definition of “venture capital,” managers to private equity funds may be able to find a way to fall outside of registration.

§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act

This will be an important provision for a number of managers who are currently registered with the SEC. Both the SEC and the states want to see an easy and seemless transition from SEC to state registration and there will need to be significant coordination between the SEC, NASAA, the states and FINRA (which runs the investment adviser registration depository).

§418: Propose rules to adjust the threshold for “qualified client”

Changes to the definition of “qualified client” will require hedge fund managers to revise their fund offering documents. Additionally, currently unregistered private equity fund managers should note that they will be subject to the qualified client regulations (i.e. performance fees or the carried interest may be charged only to an investors who fall within the definiton of qualified client). Accordingly, private equity fund managers may need to start thinking about revising their offering documents and/or begin requesting more information from their investors with respect to net worth.

§413: Propose rules to revise the “accredited investor” standard

The SEC has already promulgated guidance with respect to the accredited investor standard which states that an investor’s equity in a primary residence does not count toward the net worth requirement. It is likely that the proposed rules will mirror the guidance.

§926: Propose rules disqualifying the offer or sale of securities in certain exempt offerings by certain felons and others similarly situated

NASAA has lobbied hard to have the ability to have greater control over Regulation D offerings if the promoters of the offerings have previous been subject to certain regulatory or criminal proceedings. Any proposed provision would likely limit the ability of such promoters to offer securities to investors without first going through a rigourous process with each of the states where the securities are sold.

§§404 and 406: Propose (jointly with the CFTC for dual-registered investment advisers) rules to implement reporting obligations on investment advisers related to the assessment of systemic risk

Investment managers with a large amount of AUM will likely be subject to increased reporting requirements to the SEC. The SEC (and the CFTC) will likely use this information (potentially in conjunction with other government agencies) to determine the risk the manager poses to the financial system. It is expect that most, if not all, of the information to be provided to the SEC and CFTC under this provision will not be available to the public, even under a FOIA request.

§913: Report to Congress regarding the study of the obligations of brokers, dealers and investment advisers

NASAA has been fighting for a uniform fiduciary standard for brokers and investment advisers. After the Dodd-Frank act was signed into law, the SEC solicited comments from the public on whether there should be a uniform fiduciary standard. The SEC has already received a large number of comments on this very important issue.

§914: Report to Congress regarding the need for enhanced resources for investment adviser examinations and enforcement

The SEC needs more resources. Ultimately the lack of proper funding for this agency will likely lead to the creation of a self regulatory organization for investment managers similar to FINRA for broker-dealers. This is a separate subject which we intend to discuss in future posts.

§919B: Complete study of ways to improve investor access to information about investment advisers and broker-dealers

It will be interesting to see what additional information that the SEC would like advisers to give investors. The Form ADV and Part 2 are publicly available to investors through the SEC’s Advisor Search tool. Additionally, the SEC recently changed the format of Part 2 to provide more information to investors about investment managers.

April – July 2011 (planned)

During this time the SEC will be adopting finalized rules (taking into account public comments on the proposed rules) with respect to the following matters:

reporting obligations on investment advisers related to the assessment of systemic risk
exemption from registration for advisers to venture capital firms
“family office” definition
transition of mid-sized investment buy cialis soft online advisers (between $25 and $100 million in assets under management) from SEC to State regulation
“qualified client” definition
“accredited investor” definition
disqualifying Regulation D offerings by certain felons

Additionally, the SEC may decide to propose rules during this time based on the §913 study conducted on the obligations of brokers, dealers and investment advisers

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Bart Mallon, Esq. runs the hedge fund law blog and provides registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a leading hedge fund law firm. He can be reached directly at 415-868-5345.

Costs to Complete New Form ADV Part 2

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SEC Estimates Preparation Costs of $3,000 to $5,000 for SEC Registered Advisers

We have been reviewing the SEC release related to the amendments to Form ADV Part 2. Specifically we were interested, like many managers, in the amount of time it will likely take to complete the new Part 2. Unlike the old Part 2, which was mostly check the box answers along with a Schedule F which required some prose, the new Part 2 will be in full “plain English” prose. While most SEC registered firms have not yet begun the process to switch to the new Part 2, such advisers will likely begin the process soon and will want to know how much it will cost to complete new Part 2.

According to the SEC, most small and mid-sized SEC registered investment advisers will likely pay anywhere from $3,000 to $5,000 to have a law firm or compliance group complete the new Part 2 on their behalf. Additionally, many states will be requiring new Part 2 so this means that state registered investment advisers will likely need to budget for these expected compliance costs. Below we have reprinted the discussion from the release which specifically discusses the costs involved.

Please note that Mallon P.C. can help registered investment advisers complete new Form ADV Part 2.

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Release No. IA-3060; File No. S7-10-00
Amendments to Form ADV

Starting at page 84

We estimate that some advisers may incur a one-time initial cost for outside legal and compliance consulting fees in connection with preparation of Part 2 of Form ADV. While we received no specific comments on our estimate regarding outside legal costs in the Proposing Release, one commenter did state that compliance consultants assist a significant percentage of advisers in preparing their Form ADV. As a result, we are changing our estimate to reflect a quarter of small advisers using compliance consulting services and a quarter of small advisers using outside legal services and to reflect half of medium advisers using compliance consulting services in lieu of outside legal services and a quarter of medium advisers still using outside legal services. We estimate that the initial per adviser cost for legal services related to preparation of Part 2 of Form ADV would be $3,200 for small advisers, $4,400 for medium-sized advisers, and $10,400 for larger advisers. [324]

[324] Outside legal fees are in addition to the projected hourly per adviser burden discussed above. $400 per hour for legal services x 8 hours per small adviser = $3,200. $400 per hour for legal services x 11 hours per medium-sized adviser = $4,400. $400 per hour for legal services x 26 hours per large adviser = $10,400. The hourly cost estimate of $400 on average is based on our consultation with advisers and law firms who regularly assist them in compliance matters.

We estimate that the initial per adviser cost for compliance consulting services related to initial preparation of the amended Form ADV will range from $3,000 for smaller advisers to $5,000 for medium-sized advisers.[325]

[325] Outside compliance consulting fees are in addition to the projected hourly per adviser burden discussed above. Based on consultation with compliance consulting firms who regularly assist investment advisers in Form ADV preparation, we estimate that small advisers will incur expenses of $3000 per year for the initial preparation of the new Form ADV and medium advisers will incur expenses of $5000 per year for the initial preparation of the new Form ADV.

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Other related hedge fund law articles:

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.

Form ADV Part 2 and State Registration

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A couple of weeks ago the SEC announced that they approved certain updates for Form ADV Part 2 . While these forms will be required for managers who are subject to registration with the SEC (under the new rules, those managers with either $100 or $150 million of assets under management depending on the circumstance), the states are still determining how they are going to handle new Part 2. We have done a preliminary investigation by calling a number of the more popular states and found that most states are planning to implement new Part 2, but are not sure when the requirement will be finalized. From our research, Texas is the only state that has set a date for implementation of new Part 2.

The list of states is below. We will continue to update this list.

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Arizona – will require but not sure starting when
California – will require but not sure when
Colorado – will require but not sure starting when
Connecticut – discussing now and will have a decision at the end of the month
Illinois – will require but not sure starting when
Massachusetts – will require but not sure starting when
Texas – will require starting 01/11

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Other related hedge fund law articles:

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.

SEC Approves ADV Part II Update

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New Form to Require More Disclosure

On July 21, the SEC approved changes to the Form ADV Part II which are designed to provide more and better information to investors. Currently Part II (and Schedule F which qualifies much of the information on Part II) contains a series of check the box options and also provides much of the same information which is also provided on Form ADV. The changed proposed below will go into effect 60 days from the publication in the Federal Register which means that most advisers will need to have the new Part II in place by the first quarter of 2011. In addition to traditional investment advisers, the new Part II disclosure requirements will also be applicable to hedge fund managers who are subject to registration after the passage of the Dodd-Frank reform bill.

The proposed major changes include the following:

Increased narrative – currently Part II and Schedule F are composed of a series of check the box answers describing an adviser’s business. The SEC wants to move towards more of a narrative, “plain English” approach to disclosure which will be “clear and concise”.
Discussion of advisory business and fee structure – more disclosure will be required about the advisor’s business and the fee structure. Increased disclosure will be required about expenses like brokerage and custody fees.
Performance fee discussion – the big issue is that if a manager charges performance fees to some accounts and not others, the manager will need to explain the conflicts of interest which are involved.
Discussion of investment methodology and risk factors – the manager will be required to explain the material risks involved in the investment program.
Disciplinary information – all disciplinary information material to the adviser’s business will need to be disclosed. If there is new disciplinary disclosures which become necessary after the relationship has been established, the adviser will need to promptly update the client.
Supplements – the adviser will need to provide supplements to the client regarding the specific person who will be providing investment advice to the client. This supplement will include information about the person’s education, business experience, disciplinary history, etc.

After the changes become effective, both hedge fund managers and other investment advisers will need to update their forms and also update their compliance manuals and policies and procedures. Managers should also note that the information included in Part II will be publicly available online.

While we completely agree with appropriate and easy to understand disclosure, some of the proposed changes may have the unintended effect of creating brochures which are so long and comprehensive that investors will simply not read them. For example, we have discussed “prospectus creep” and there is the possibility for this to happen with the Part II -especially with respect to risk disclosures. Managers and lawyers will certainly err on the side of over-disclosure instead of under-disclosure when faced with a potential risk factor which may or may not be “material” in the eyes of the SEC (see, especially, the Goldman case).

What we see with the supplements is essentially a first step towards developing a self-regulatory organization (SRO) to oversee investment advisers. FINRA has shown a willingness to take on this responsibility and it has become an even greater likelihood as the SEC is tasked with greater responsibilities under the Dodd-Frank bill. While we believe that a SRO can relieve much of the regulatory burden of a government agency (see the NFA), we must note that all SROs have their own issues and this must be weighed against the increased costs (both in time and money) to investment advisers.

Text of Chairman Shapiro’s speech can be found here.
SEC News Release can be found here.

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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.