The Securities and Exchange Commission (SEC) recently adopted final rules that implement the part of the Dodd-Frank Act that fundamentally changes the regulation of advisers to hedge funds, private equity funds, venture capital funds and other pooled investment entities. The final rules:
- Establish a grace period for fund managers to certain large funds who must register under the Investment Adviser Act of 1940 (the “Advisers Act”) as a result of Dodd-Frank’s repeal of Section 203(b)(3) of the Advisers Act, the so-called “15 Client Exemption.”
- Address the definition of venture capital fund for the purpose of creating a “Venture Capital Exemption” mandated by Dodd-Frank and provide for a grandfathering provision for advisers to existing venture capital funds that may not qualify for the new Venture Capital Exemption
- Create a new “Private Fund Adviser Exemption” implementing an exemption for advisers to private funds having in the aggregate less than $150 million in assets under management in the United States
While these final rules provide exemptions for avoiding registration, the final rules also implement a Dodd-Frank mandate that requires advisers relying on the Venture Capital Exemption or the Private Fund Adviser Exemption to provide reports to the SEC. This new class of advisers, termed “Exempt Reporting Advisers” by the SEC, will be required to complete and file with the SEC a subset of information otherwise provided by registered investment advisers in Form ADV. Finally, the new rules establish certain definitive compliance dates that should be considered by advisers impacted by this new private fund adviser regulatory regime.
The rules are contained in two extensive SEC releases issued on the same day (SEC Release No. IA-3221 and SEC Release No. IA-3222).
This Alert provides a brief summary of the SEC final rules and a discussion of who might be affected by these final SEC rules and forthcoming state initiatives. This Alert does not discuss current initiatives taken in implementing a related Dodd-Frank mandate that generally prohibits “mid-sized advisers” (meaning investment advisers with between $25 million and $100 million in assets under management) from registering or remaining registered with the SEC. That topic was addressed in a separate Alert entitled “SEC Adopts Rules Implementing Dodd-Frank Amendments to Advisers Act and Providing for the Transition of Mid-Sized Advisers to State Registration.” We recommend private fund advisers in this category who are currently registered with the SEC to review this earlier Alert to obtain a summary of the transition process from SEC to state registration and other related topics.
The definitive compliance dates that should be considered by advisers impacted by this new private fund adviser regulatory regime are as follows:
July 20, 2011
- Advisers relying on the 15 Client Exemption on this date may delay registration with the SEC until March 30, 2012
July 21, 2012
- Dodd-Frank’s repeal of the 15 Client Exemption becomes effective
- Advisers to venture capital funds that will not qualify for the new “Venture Capital Exemption” but seek to rely on the SEC created “grandfathering provision” must stop selling securities and accepting capital commitments by this date
January 1, 2012
- Exempt Reporting Advisers may begin filing their initial SEC reports
February 14, 2012
- Advisers that had relied on the 15 Client Exemption and that must register with the SEC should file their investment adviser application for registration on Form ADV
March 30, 2012
- Advisers required to register with the SEC as a result of the repeal of the 15 Client Exemption must be registered by this date
- Exempt Reporting Advisers must file first reports by this date
Who Could Potentially Be Affected?
These new SEC rules and their anticipated state counterparts will affect a wide range of private fund advisers, including managers of hedge, venture capital and private equity funds. Depending on whether a fund’s holdings are characterized as securities, advisers to real estate and other privately offered funds may also be impacted, in varying degrees, by these initiatives. For a more detailed discussion of these recent SEC private adviser rules, please click here.
For More Information
Advisers to pooled investment vehicles needing assistance in determining the impact of the SEC initiatives on their advisory operations, evaluating the availability of exemptions from investment adviser registration, or applying for registration and meeting the compliance obligations entailed by such registration, should contact the following members of the firm’s Corporate Finance and Securities practice group or anther member of the practice group:
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