Member Article

On June 22, 2011, the Securities and Exchange Commission (the “SEC”) adopted final rules and amendments under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), designed to implement various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The new rules and amendments, among other things, extend the deadline for registration for advisers relying on the private adviser exemption, clarify the eligibility of advisers to register (or remain registered) with the SEC, modify the method advisers use to calculate their assets under management, establish reporting requirements applicable to “exempt reporting advisers” and adopt significant amendments to Form ADV.

Extension of Registration Deadline

Many private fund advisers historically have avoided registration with the SEC by relying upon the “private adviser exemption” set forth in Section 203(b)(3) of the Advisers Act (the “Private Adviser Exemption”). Effective as of July 21, 2011, the Dodd-Frank Act eliminates the Private Adviser Exemption and replaces it with several much more limited exemptions from registration. As a result, many private fund managers (including many hedge fund and private equity fund managers) will be required to register with the SEC and comply with various recordkeeping, reporting and other requirements. Pursuant to new Rule 203-1(e) under the Advisers Act, a private fund manager that was relying on, and was entitled to rely on, the Private Adviser Exemption on July 20, 2011, may delay registration with the SEC until March 30, 2012. To ensure that its registration is declared effective by the SEC before the March 30 deadline, a private fund adviser should file its registration documents with the SEC by February 14, 2012.

Registration of Mid-Sized Advisers

Under the Dodd-Frank Act, advisers with assets under management of between $25 and $100 million (“mid-sized advisers”) generally are prohibited from registration with the SEC. As a result, many mid-sized advisers that are currently registered with the SEC will be required to withdraw their SEC registrations and register with applicable state regulatory authorities. To provide for an orderly transition by mid-sized advisers from SEC registration to state registration, new Rule 203A-5 under the Advisers Act requires: 

• each mid-sized adviser registered with the SEC as of July 21, 2011 to remain registered with the SEC until January 1, 2012 (unless an exemption from registration is otherwise available); 
• each adviser registered with the SEC on January 1, 2012 to (i) file an amendment to its Form ADV by no later than March 30, 2012, and (ii) report the current market value of its assets under management determined within 90 days of the filing; and 
• each mid-sized adviser that is no longer eligible for SEC registration to withdraw its SEC registration by filing Form ADV-W no later than June 28, 2012.

Advisers no longer eligible for SEC registration should ensure that they are properly registered with applicable state regulatory authorities before withdrawing their SEC registrations. Due to the length of time that may be required to register with state regulatory authorities, mid-sized advisers should begin the transition process well before the June 28, 2012 deadline.

If a mid-sized adviser desires to register after July 21, 2011, it will be prohibited from registration with the SEC and must register with applicable state regulatory authorities.

Adoption of “Buffer” for Mid-Sized Advisers

To prevent advisers from having to switch frequently between state and SEC registration as a result of fluctuations in the value of their assets under management, the SEC adopted amended Rule 203A-1 that provides for a “buffer” for advisers with close to $100 million in assets under management to determine whether and when to switch between state and SEC registration. The amended rule raises the threshold above which a mid-sized investment adviser must register with the SEC to $110 million. Once registered with the SEC, an adviser need not withdraw its registration until it has less than $90 million of assets under management (as reported on its annual updating amendment to Form ADV). Advisers are only required to determine their eligibility for SEC registration on an annual basis, in connection with their annual updating amendments.

Exempt Reporting Advisers

As proposed, the SEC adopted a new rule that requires “exempt reporting advisers” to electronically file with the SEC, and periodically update, public reports on Form ADV, using the same process as registered advisers. An “exempt reporting adviser” is an adviser exempt from registration with the SEC under Section 203(l) (provides an exemption for an adviser that advises solely one or more “venture capital funds”) or Section 203(m) (provides an exemption for any adviser that acts solely as an adviser to private funds and has assets under management in the U.S. of less than $150 million) of the Advisers Act.¹ The reports consist of a limited subset of the items in Part 1A of Form ADV, including the following information:

• the name, address, contact information, form of organization and the owner(s) of the adviser;
• other business activities of the adviser;
• disciplinary history of the adviser and its employees; and
• detailed information about each private fund managed by the adviser.

An “exempt reporting adviser” generally is required to file updating amendments to its report filed on Form ADV: (i) at least annually, within 90 days of the end of its fiscal year; (ii) more frequently, if required by the instructions to Form ADV; and (iii) if it ceases to be an “exempt reporting adviser.” An “exempt reporting adviser” must file its initial report on Form ADV no later than March 30, 2012.

To continue reading the alert click here. Additional topics include:

• Calculation of “Regulatory Assets Under Management”
• Amendments to Form ADV 
• Revisions to the Pay to Play Rule

For additional information regarding the new rules and amendments, please contact one of the attorneys below.