The Impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the Registration Obligations of Private Fund Advisers

President Barack Obama signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (S. 3217) ("Act"), a comprehensive suite of regulatory reforms that significantly changes the regulatory framework and level of supervision of the financial services industry. "Title IV – Regulation of Advisers to Hedge Funds and Others" of the Act, cited therein as the "Private Fund Investment Advisers Registration Act of 2010" ("Advisers Registration Act"): (1) sets forth requirements and limitations with respect to federal and state registration of investment advisers; (2) introduces additional provisions relating to advisers to hedge funds, private equity funds and venture capital funds; (3) adjusts the accredited investor standard and the qualified client standard; and (4) includes requirements for further studies and reports relating to the private fund industry. The provisions of the Advisers Registration Act generally become effective on July 21, 2011, with the expectation that investment advisers will elect to register and comply with the applicable provisions of the Act and the Investment Advisers Act of 1940, as amended ("Advisers Act"), prior to the expiration of the one-year transition period.

Many investment advisers that manage private funds ("private fund advisers")1 and presently are not registered as investment advisers, will be required under the Advisers Registration Act to: (1) register with the Securities and Exchange Commission ("SEC") within the one-year transition period noted above; and (2) comply with certain provisions of, and rules under, the Advisers Act that are applicable only to SEC-registered investment advisers. Chief among these requirements are provisions and rules relating to: (1) performance fee arrangements; (2) the marketing of advisory products and services; (3) the custody of client assets; (4) disclosures to the SEC, clients and investors on Form ADV; and (5) the establishment and maintenance of a compliance program reasonably designed to prevent violations of the Advisers Act, including appointment of a chief compliance officer and adoption of compliance policies and procedures.2 As such, advisers who must register following the enactment of the Advisers Registration Act will need to appoint a chief compliance officer and conduct a comprehensive review of their policies and procedures to ensure compliance with these and other requirements of the Advisers Act prior to registration.

Modification to Registration Provisions

Changes to Exemptions from Registration Available to Private Fund Advisers

The Advisers Registration Act eliminates or significantly limits the availability of several previously-existing exemptions from registration for private fund advisers. In particular, the Advisers Registration Act: (1) eliminates the "private adviser" exemption currently set forth in Section 203(b)(3) of the Advisers Act, which exempts investment advisers with fewer than 15 clients who meet certain other requirements from registration with the SEC; (2) includes a new limited exemption for certain "foreign private advisers," as described below; (3) prevents a private fund adviser from relying on the "intrastate adviser" exemption currently set forth in Section 203(b)(1) of the Advisers Act; and (4) requires that a private fund adviser relying on the commodity trading advisor ("CTA") exemption from registration, currently provided in Section 203(b)(6) of the Advisers Act for an adviser that is registered with the Commodity Futures Trading Commission ("CFTC") as a CTA, to register with the SEC as an investment adviser if, at any point after the enactment of the Advisers Registration Act, the business of the CTA "become[s] predominantly the provision of securities-related advice."3

Modifications to SEC vs. State Registration Thresholds

The Advisers Act and rules thereunder currently establish thresholds for registration of investment advisers, which do not advise registered investment companies, with either the SEC or the various states, when an adviser has its principal place of business in a U.S. jurisdiction that regulates investment advisers. Although the Advisers Registration Act retains the current provision requiring advisers to have assets under management ("AUM") in excess of $25 million in order to be eligible to register as an investment adviser with the SEC4, the Advisers Registration Act effectively increases the AUM threshold to $100 million, if the adviser: (1) is required to be registered in its home state (i.e., the state in which it maintains its principal office and place of business) and (2) is subject to examination by that state. This provision will have the result of requiring many "mid-sized" U.S. investment advisers to register with one or more states rather than with the SEC. However, to avoid subjecting an adviser to registration in numerous states, the Advisers Registration Act permits an adviser with between $25 million and $100 million AUM to register with the SEC where such adviser would otherwise be required to register with 15 or more states due to the operation of this provision.

Additionally, the Advisers Registration Act provides an exemption from registration under the Advisers Act to any investment adviser who acts solely as an investment adviser to private funds, provided such adviser's AUM in the United States are less than $150 million ("Private Fund Adviser Exemption"). However, such adviser will be required to maintain such records and provide the SEC with such annual or other reports as the SEC determines to be necessary and appropriate in the public interest or for the protection of investors. Thus, private fund advisers having less than $150 million in aggregate AUM in the United States, at a minimum, will be subject to record keeping and annual reporting requirements, as shall be determined by the SEC pursuant to subsequent rule-making.

In summary, the application of some of these thresholds will: (1) enable an investment adviser (e.g., a private fund adviser) that is regulated by its home state, but is not required to register with its home state, to...

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