Since the Dodd-Frank Act eliminated the private adviser exemption that many investment advisers relied on to avoid registering with the SEC, hedge fund and private equity fund managers now face a deadline of March 30, 2012 to file their registration forms and become be subject to the same registration requirements, regulatory oversight and other requirements that apply to other SEC-registered investment advisers.
Importantly, investment advisers that are now subject to registration because of Dodd-Frank must file Form ADV by no later than February 14, 2012 to satisfy the 45-day review period before the March 30, 2012 registration deadline.
Under the Investment Advisers Act of 1940, an advisory firm or person that falls within the definition of “investment adviser” and has at least US$100 million of assets under management is required to register with the SEC unless it qualifies for an exemption. Historically, many investment advisers to private funds relied on an exemption (the “Fifteen Client Exemption”) from registration under Section 203(b)(3) of the Advisers Act available to those advisers with fewer than 15 clients in the preceding 12 months who do not hold themselves out to the public as investment advisers and who do not act as advisers to registered investment companies or business development companies.
As noted above, the Dodd-Frank Act repealed this Fifteen Client Exemption, requiring many previously unregistered advisers to register with the SEC by March 30, 2012.
However, the SEC has also adopted rules pursuant to the Dodd-Frank Act which created new exemptions from the registration requirements of the Advisers Act:
• Private Fund Adviser Exemption. Investment advisers with less than $150 million of assets under management in the United States and that advise only private funds are exempt from the registration requirements of the Advisers Act. Such investment advisers are still required to file Part 1A of Form ADV within 60 days of first relying on the exemption (the first such filing must be made between January 1 and March 30, 2012) and within 90 days of the investment adviser’s fiscal year end on an annual basis thereafter.
• Foreign Private Adviser Exemption. “Foreign private advisers” are also exempt from the registration requirements of the Advisers Act. Under the Dodd-Frank Act, an investment adviser qualifies as a “foreign private adviser” if it (i) has no place of business in the United States; (ii) has fewer than 15 U.S. clients and investors in private funds advised by the adviser; (iii) has less than US$25 million (or such higher amount as the SEC may determine by rulemaking) of aggregate assets under management attributable to U.S. clients and investors in private funds advised by the adviser; and (iv) does not hold itself out as an investment adviser in the United States.
• Venture Capital Fund Adviser Exemption. Investment advisers to “venture capital funds” are exempt from the registration requirements of the Advisers Act as well. To qualify for such exemption, an investment adviser may only advise venture capital funds. Investment advisers claiming exemption are subject to the same reporting requirements as those investment advisers relying on the private fund adviser exemption described above.
• Mid-Sized Advisers Rule. The Dodd-Frank Act also created a new category of “mid-sized advisers”. A mid-sized adviser may not register with the SEC if the investment adviser (i) has less than US$100 million of assets under management, (ii) is required to be registered as an investment adviser with the state(s) in which it maintains its principal office(s) and place(s) of business; and (iii) upon registering in the state(s), would be subject to examination as an investment adviser by such state(s).
If none of these new exemptions apply, hedge fund and private equity fund managers must undergo SEC registration.
Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. It provides the means for registered firms to comply with their obligations to disclose material financial and disciplinary information to clients. Within 45 days, the SEC must grant registration or institute an administrative proceeding to determine whether registration should be denied. The SEC can deny registration if the investment adviser makes false or misleading statements in its application, has been convicted of a felony, or if it or any of its related persons has any securities-related convictions, injunctions or similar disciplinary events.
The current version of Form ADV consists of Parts 1 and 2 and a series of Schedules:
• Part 1 is primarily for SEC use. Part 1 requires information about the adviser’s business, ownership, clients, employees, business practices (especially those involving potential conflicts with clients), and any disciplinary events of the investment adviser or its employees.
• Part 2, which can be given to clients to satisfy the “brochure rule”, is primarily for client use. It contains information such as the types of advisory services offered, the adviser’s fee schedule, and the educational and business background of management and key advisory personnel of the adviser. It also contains information about arrangements that the adviser has that involve conflicts, such as when the investment adviser engages an affiliate to execute client transactions.
All applications for registration as an investment adviser with the SEC must be submitted electronically through an Internet-based filing system called the Investment Adviser Registration Depository. Once registered, an adviser must update Form ADV at least once a year, and more frequently if required by instructions to the form.
Follow "Law of the Market" on Twitter. Click here.
