SEC Requires Private Fund Advisers to Register by March 30, 2012

By a split 3-2 vote with two Republican commissioners opposing, the SEC adopted a Final Rule on June 22 that that requires advisers to hedge funds and other private funds to register with the SEC, and require reporting by certain investment advisers that are exempt from registration.  Under amended Form ADV, advisers to private funds will have to provide basic organizational and operational information about each fund they manage, general information about the size and ownership of the fund and the adviser's services to the fund.  They also will have to identify five categories of "gatekeepers" - auditors, prime brokers, custodians, administrators and marketers - that perform critical roles for advisers and the funds they manage.

For many years, private fund advisers generally have avoided registering with the SEC based on an exemption for advisers with fewer than 15 clients - an exemption that counted each fund as a client, as opposed to each investor in a fund.  The exemption, which was eliminated by Title IV of the Dodd-Frank Act, enabled advisers handling large sums of money to avoid SEC oversight.

By unanimous vote, the SEC also adopted a Final Rule which becomes effective July 21, 2011, that establishes new exemptions from SEC registration and reporting requirements for certain advisers, and reallocates regulatory responsibility for advisers between the SEC and states.  Advisers will not have to register if they qualify for one of three new exemptions specified in the Dodd-Frank Act: 

• 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 rules define "venture capital fund" as a private fund that invests primarily in "qualifying investments" (generally, private, operating companies that do not distribute proceeds from debt financing in exchange for the fund's investment in the company), but may hold certain short-term investments.  It also states that a venture capital fund is one that is not leveraged except for a minimal amount on a short-term basis, does not offer redemption rights to investors and represents itself to investors as pursuing a venture capital strategy.  

The new rules also address the allocation of regulatory responsibility between the SEC and states.  Regulation of investment advisers is divided between the two based primarily on the amount of money an adviser manages for its clients.  Prior to Dodd-Frank, advisers could not register with the SEC unless they managed at least $25 million for their clients.  

Dodd-Frank raised the threshold for SEC registration to $100 million by creating a new category of advisers called "mid sized advisers."  A mid-sized adviser, which will not have  to register with the SEC and will be subject to state registration, is one 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, and would be subject to examination by that state, if required to register. 

The SEC also voted unanimously to adopt a Final Rule that provides for "family offices" to be excluded from the Investment Advisers Act.  Family offices are entities established by wealthy families to manage their wealth and provide services to family members, such as tax and estate planning services.  Family offices that do not meet the terms of the exemption will have to register with the SEC by March 30, 2012.