SEC Adopts Dodd-Frank Amendment to Investment Advisers Act

Securities Fraud Litigation and FINRA Arbitration Lawyer, Russell Forkey, Esq.

In reviewing this post, please keep in mind that this post is being provided for informational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as legal advice. Additionally, the proposal and/or adopted rule  may be further amended, which may or may not be reflected in this post. Consequently, there may be more recent information available for your consideration.

June 24, 2011:

 The Securities and Exchange Commission recently adopted rules that require advisers to hedge funds and other private funds to register with the SEC, establish new exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility for advisers between the SEC and states. The rules adopted by the Commission implement core provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding investment advisers, including those that advise hedge funds.

These rules will give the Commission, and the public,  insight into hedge fund and other private fund managers who previously conducted their work under the radar and outside the vision of regulators.

In addition, the Commission amended rules to expand disclosure by investment advisers, particularly about the private funds they manage, and revised the Commission's pay-to-play rule.

The rules implement a transitional exemption period so that private advisers, including hedge fund and private equity fund advisers, newly required to register do not have to do so until March 30, 2012. The rules regarding exemptions for venture capital fund and certain private fund advisers are effective July 21, 2011. 

Historically a large number of individuals and institutions invest a significant amount of assets in private funds, such as hedge funds and private equity funds.  However, until the passage of the Dodd-Frank Act, advisers managing those assets were subject to little regulatory oversight.

With the Dodd-Frank Act, Congress closed this regulatory gap by generally extending the registration requirements under the Investment Advisers Act .  The new law also provided the Commission with the ability to require the limited number of advisers to private funds that will not have to register to file reports about their business activities.

Further, in acknowledging the Commission's limited examination resources - and in light of the new responsibilities for private fund advisers - the Dodd-Frank Act reallocated regulatory responsibility for certain mid-sized investment advisers to the state securities authorities.

Private Fund Advisors and Commission Registration:

For many years, advisers to private funds have been able to avoid registering with the Commission because of an exemption that applies to advisers with fewer than 15 clients - an exemption that counted each fund as a client, as opposed to each investor in a fund. As a result, some advisers to hedge funds and other private funds have remained outside of the Commission's regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors

Title IV of the Dodd-Frank Act eliminated this private adviser exemption. Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will have to register with the Commission and be subject to its regulatory oversight, rules and examination.

These advisers will be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC registered investment advisers. To provide these advisers with a window to meet their new obligations, the transition provisions the Commission is adopting today will require these advisers to be registered with the Commission by March 30, 2012.

Reporting Requirements for Hedge Fund and Other Investment Advisors:


When investment advisers register with the Commission, they provide information in their registration form that is not only used for registration purposes, but that is used by the Commission in its regulatory program to support its mission to protect investors.  To enhance its ability to oversee investment advisers to private funds, the Commission is requiring advisers to provide additional information about the private funds they manage. The information obtained as a result of these amendments will assist the Commission in fulfilling its increased responsibility for private fund advisers arising from the Dodd-Frank Act.

  The Form

Under the amended adviser registration form, advisers to private funds will have to provide:

  • Basic organizational and operational information about each fund they manage, such as the type of private fund that it is (e.g., hedge fund, private equity fund, or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser's services to the fund.
  • Identification of five categories of "gatekeepers" that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).

These reporting requirements are designed to help identify practices that may harm investors, deter advisers' fraud, and facilitate earlier discovery of potential misconduct. And this information will provide for the first time a census of this important area of the asset management industry.

In addition, the Commission is adopting other amendments to the adviser registration form to improve its regulatory program. These amendments will require all registered advisers to provide more information about their advisory business, including information about:

  • The types of clients they advise, their employees, and their advisory activities.
  • Their business practices that may present significant conflicts of interest (such as the use of affiliated brokers, soft dollar arrangements and compensation for client referrals).

The rules also will require advisers to provide additional information about their non-advisory activities and their financial industry affiliations.

Reporting Requirements for Exempt Advisers:


While many private fund advisers will be required to register, some of those advisers may not need to if they are able to rely on one of three new exemptions from registration under the Dodd-Frank Act, including exemptions for: 

  • Advisers solely to venture capital funds. 
  • Advisers solely to private funds with less than $150 million in assets under management in the U.S.
  • Certain foreign advisers without a place of business in the U.S.

The Commission can still impose certain reporting requirements upon advisers relying upon either of the first two of these exemptions ("exempt reporting advisers").

The Rules

Under the new rules, exempt reporting advisers will nonetheless be required to file, and periodically update, reports with the Commission, using the same registration form as registered advisers.

Rather than completing all of the items on the form, exempt reporting advisers will fill out a limited subset of items, including: 

  • Basic identifying information for the adviser and the identity of its owners and affiliates.
  • Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.
  • The disciplinary history (if any) of the adviser and its employees that may reflect on the integrity of the firm. Exempt reporting advisers will file reports on the Commission's investment adviser electronic filing system (IARD), and these reports will be publicly available on the Commission's website. These advisers will be required to file their first reports in the first quarter of 2012.

Reallocation of Regulatory Responsibility:


Since 1996, regulatory responsibility for investment advisers has been divided between the Commission and the states, primarily based on the amount of money an adviser manages for its clients. Under existing law, advisers generally may not register with the Commission unless they manage at least $25 million for their clients.

The Dodd-Frank Act raises the threshold for Commission registration to $100 million by creating a new category of advisers called "mid-sized advisers." A mid-sized adviser, which generally may not register with the Commission and will be subject to state registration, is defined as an adviser that:

  • Manages between $25 million and $100 million for its clients.
  • Is required to be registered in the state where it maintains its principal office and place of business.
  • Would be subject to examination by that state, if required to register.

As a result of this amendment to the Investment Advisers Act, about 3,200 of the current 11,500 registered advisers will switch from registration with the Commission to registration with the states. These advisers will continue to be subject to the Advisers Act's general anti-fraud provisions.

The Rules:

The Commission is adopting amendments to several of its current rules and forms to:

  • Reflect the higher threshold required for Commission registration.
  • Provide a buffer to prevent advisers from having to frequently switch between Commission and state registration.
  • Clarify when an adviser will be a mid-sized adviser.
  • Facilitate the transition of advisers between federal and state registration in accordance with the new requirements. Advisers registered with the Commission will have to declare that they are permitted to remain registered in a filing in the first quarter of 2012,and those no longer eligible for Commission registration will have until June 28, 2012 to complete the switch to state registration.


The Rule:

The Commission also is amending the investment adviser "pay-to-play" rule in response to changes made by the Dodd-Frank Act. The pay to play rule is designed to prevent an adviser from seeking to influence government officials' awards of advisory contracts through political contributions.

Under the amendment, an adviser will be permitted to pay a registered municipal advisor to act as a placement agent to solicit government entities on its behalf, if the municipal advisor is subject to a pay-to-play rule adopted by the MSRB that is at least as stringent as the investment adviser pay-to-play rule. The MSRB received new authority over municipal advisors under the Dodd-Frank Act. Advisers will also continue to be permitted to hire as a placement agent an SEC registered investment adviser or a broker-dealer that is subject to a pay-to-play rule adopted by FINRA that is at least as stringent as the investment adviser pay-to-play rule. 

If you would like further information on the above or concerning the exemption for advisers to venture capital funds, private fund advisors with less than $150 million in assets under management, and foreign private advisers, please follow the highlighted link.