WHAT HAS CHANGED?
- Title IV of the Dodd-Frank Act is also known as the "Private Fund Investment Advisers Registration Act of 2010" (the "PF Act"). The PF Act amends the Investment Advisers Act of 1940 (the "Advisers Act") and eliminates an exemption from investment adviser registration that is often claimed by hedge funds and other private fund managers. This common “Small Investment Adviser” exemption was for advisers with less than $25 million under management and fewer than 15 clients. Even though the PF Act provides some new exemptions that are detailed below many additional managers will be required to register as investment advisers with the Securities and Exchange Commission (the "SEC") when the PF Act becomes effective.
- The PF Act also imposes new record keeping and reporting requirements on private fund managers, transfers regulatory responsibility for certain mid-sized investment advisers from the SEC to the states and amends certain other sections of the Advisers Act.
ARE YOU EXEMPT FROM REGISTERING WITH THE SEC?
The PF Act includes specific exemptions from the registration requirement that will be available to certain private fund advisers. It also disqualifies private fund advisers from claiming certain other existing exemptions in the Advisers Act.
- Foreign Private Advisers. Under the PF Act foreign private advisers are exempt. A foreign private adviser is defined as an investment adviser who has no place of business in the United States, has fewer than 15 clients and investors in the United States in private funds advised by it, has less than $25 million in assets under management attributable to clients in the United States and investors in the United States in private funds advised by it, and doesn't hold itself out as an investment adviser or act as an investment adviser to any registered investment company or as a business development company.
- Venture Capital Fund Advisers. The PF Act exempts from registration under the Advisers Act any investment adviser who provides investment advice solely to one or more venture capital funds. Although exempt from registration, advisers to venture capital funds will be required to maintain such records and provide to the SEC such annual or other reports as the SEC determines are necessary or appropriate in the public interest or for the protection of investors.
- Smaller and Mid-Sized Private Fund Advisers. The PF Act exempts from registration under the Advisers Act any investment adviser who (i) provides investment advice solely to private funds, and (ii) has assets under management in the United States of less than $150 million. These private fund advisers will still be required to maintain such records and provide to the SEC such annual or other reports as the SEC determines are necessary or appropriate in the public interest or for the protection of investors.
- Advisers to Small Business Investment Companies. The PF Act creates an exemption from registration for any investment adviser (other than any entity regulated as a business development company under the Investment Company Act of 1940) whose only clients are small business investment companies licensed under the Small Business Investment Act of 1958 or certain similar or affiliated entities.
- Narrowing of Intrastate Exemption. The PF Act amends Section 203(b)(1) of the Advisers Act to make this exemption unavailable to private fund advisers that might otherwise qualify.
- Revision of Exemption for Commodity Trading Advisers. The PF Act amends Section 203(b)(6) of the Advisers Act to require any private fund adviser who is registered with the CFTC as a commodity trading adviser to register with the SEC as an investment adviser if its business shall become predominately securities-related.
RECORDKEEPING, REPORTING AND EXAMINATION REQUIREMENTS FOR REGISTERED INVESTMENT ADVISERS
- Registrants must maintain records for a period of time to be determined by the SEC.
- Registrants must file reports with the SEC as deemed necessary or for purposes of systemic risk assessments to be conducted by the Financial Stability Oversight Council (the “Council”).
- All records are subject to SEC examination. The SEC can always ask for more information and must share information with the Council.
ADJUSTED DEFINITIONS OF “ACCREDITED INVESTOR” & “QUALIFIED CLIENT”
- A safe harbor provision of Regulation D under the Securities Act is that an issuer may sell its securities in a Rule 506 offering to “accredited investors” and not more than 35 non-accredited investors. “Accredited investors,” for the first four years of the new law, will be defined as those with a net worth of $1 million or more, excluding the value of the investor’s primary residence.
- Investment advisers are permitted to charge otherwise prohibited share based fees to “qualified clients.” Under the new law, a “qualified client” will be defined as any client who has at least $750,000 of assets under management with the investment adviser or who has a net worth (individually or including assets held jointly with spouse) of at least $1,500,000. The SEC is to adjust the dollar amounts used in the definition of "qualified client" for inflation no later than the effective date, and every five years thereafter. Any adjustments to such dollar amounts must be made in multiples of $100,000.
ENHANCED STATE AUTHORITY
The PF Act amends Section 203A of the Advisers Act to prohibit any investment adviser (a "Covered Adviser") from registering with the SEC in lieu of state registration, who (i) is required to be registered and is subject to examination as an investment adviser in the state in which it maintains its principal office and place of business, and (ii) has assets under management between the minimum amount and $100,000,000 (or a higher amount which the SEC may specify). The prohibition does not apply to any Covered Adviser who is an adviser to a registered investment company or a business development company or who would (if not registered with the SEC) be required to register as an investment adviser with 15 or more states. The amendments to Section 203A will transfer authority over certain mid-sized investment advisers from the SEC to the states.
HOW SOON WILL THIS AFFECT YOU?
All provisions of the PF Act discussed here were effective on July 21, 2011, one year after enactment. Prior to that date, fund advisers may voluntarily register with the SEC, subject to applicable SEC rules.
CONTACT THE DECOSIMO FINANCIAL SERVICES GROUP
U.S. 800.782.8382 | CAYMAN ISLANDS 345.943.2100
Karl Jordan, CPA | Domestic and International Principal
Marshall Harvey, CPA, CFE | Assurance Principal
Renee Ford, CPA | Assurance Principal
Brad East, CPA•ABV | Assurance Principal