As we discussed in an earlier post, the SEC proposed new rules and amendments to existing rules under the Investment Advisers Act (the “Act”) to implement certain provisions of the Dodd-Frank Act related to hedge fund registration.
In summary, the new rules:
- clarify eligibility for SEC registration for hedge fund and other asset managers
- establish reporting requirements for certain “exempt reporting advisers”
- require greater disclosure by registered IAs and each managed private fund in Form ADV
- clarify the scope of new exemptions from SEC registration
- propose amendments to the “pay to play” rules of the Act
This post will provide an overview of these proposals in greater depth. Please feel free to comment below or contact us with your thoughts on the new rules as we are currently in the process of drafting a comment letter to the SEC about the proposed rules.
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Rule 203A-1 Switching to or from SEC Registration
The new Rule 203A-1 provides state and SEC registered IAs with information on the time requirements for switching registration status.
State-registered switching to SEC-registered: After filing an annual amendment indicating eligibility for SEC registration (and not relying on an exemption from registration under sections 203(l) or 203(m) of the Act discussed below), apply for registration with the SEC within 90 days.
SEC-registered switching to State-registered: After filing an annual amendment indicating you are no longer eligible for SEC registration (and not relying on an exemption from registration under sections 203(l) or 203(m) of the Act discussed below), you must file Form ADV-W to withdraw SEC registration within 180 days of your fiscal year end (unless you are then eligible for SEC registration). Note: during dual registration, the Act and applicable state laws apply.
For full text and overview please see our post on Rule 203A-1.
Rule 203A-5 IA Registration Transition Rules
IAs registered with the SEC on July 21, 2011 must report their AUM (via amendment to Form ADV) to the SEC by August 20, 2011, or 30 days after the effective date of the amendments, and to report the market value of its AUM determined within 30 days of the filing. If such IAs are at that time below the threshold for SEC registration, the IA 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).
In addition, the SEC is also proposing amendments to Form ADV which will require registered IAs to provide additional information regarding: (i) the private funds they advise, including AUM, the nature of the investors in the fund and the fund’s service providers; (ii) their advisory business, including information about the types of clients they have and potentially significant conflicts of interest; and (iii) additional information about non-advisory activities and financial industry affiliations.
For full text and overview please see our post on Rule 203A-5.
Rule 204-4 Reporting by Exempt Reporting Advisers:
Certain “exempt reporting advisers” exempt from SEC registration pursuant to Sections 203(l) and 203(m) of the Act (discussed below) must file Form ADV (but not Form ADV Part 2) with the SEC, following instructions specifically pertaining to such advisers. Such advisers must file their initial Form ADV no later than August 20, 2011.
For full text and overview please see our post on Rule 204-4.
Rule 202(a)(30)-1 Foreign Private Adviser Exemption
This new exemption from SEC registration applies to “foreign private advisers.”
A “foreign private adviser” is an investment adviser that:
- has no place of business in the U.S;
- has less than $25 million in aggregate assets under management from U.S. clients and private fund investors;
- has fewer than 15 U.S. clients and private fund investors; and
- neither holds itself out to U.S. investors as an investment adviser nor acts as an investment adviser to any investment company registered under the Investment Company Act or any company that has elected to be a business development company.
“Foreign private advisers” do not need to comply with the reporting requirements under the new Section 204-4.
For full text and overview please see our post on Rule 202(a)(30)-1.
Rule 203(l)-1 Venture Capital Fund Exemption
This new exemption from SEC registration applies to advisers that solely advise “venture capital funds.”
A “venture capital fund” is a private fund that:
- represents it is a venture capital fund;
- invests in only equity securities of a portfolio company and 80% of such securities must have been acquired directly from the portfolio company;
- has a management company which provides guidance to the portfolio company regarding management and operations of the portfolio company or the fund must control the portfolio company;
- uses less than 15% leverage which may only be short term; and
- provides fund investors with no withdrawal rights except in extraordinary circumstances.
The proposed rule also provides a grandfathering provision for certain presently existing venture capital funds.
For full text and overview please see our post on Rule 203(l)-1.
Rule 203(m)-1 Private Fund Adviser Exemption
This new exemption from SEC registration applies to advisers that solely advise private funds and have AUM in the U.S. of less than $150MM. [HFLB note: the adviser may still be required to register pursuant to state law.] The adviser must aggregate the value of all assets of the private funds it manages to determine whether it falls below the $150MM threshold. AUM must be determined quarterly, with valuation based on the fair value of assets at the end of the quarter. If an adviser’s AUM exceeds $150MM in private fund assets, the adviser must register as an investment adviser with the SEC within one calendar quarter.
For full text and overview please see our post on Rule 203(m)-1.
Rule 206(4)-5 Pay to Play Rules
Under the proposed amendment, an adviser would be permitted to pay a registered municipal advisor, instead of a “regulated person,” to solicit government entities on its behalf if the municipal advisor is subject to the Municipal Securities Rulemaking Board’s (the “MSRB”) pay-to-play rules.
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As with any proposed rulemaking process, there are a number of ambiguities with respect to the proposals and a number of questions regarding the application of certain rules to the certain situations. These issues are expected to be identified during the comment process and hopefully the SEC will be able to modify the proposed rules as appropriate when the final rules are promulgated. One central open issue is the change from SEC to state registration for managers with less than $100MM AUM – it seems pretty clear that most states will not be able to handle an increase in the amount of managers that will be subject to state regulation.
As discussed in the proposals, public comments are due on January 24, 2011.
A full copy of the proposed rules are available here.
Comments received by the SEC on the proposed rules are available for review here.
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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.