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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at the SEC Open Meeting
Items 1 and 2 — Proposals to Implement Investment Adviser Provisions of the Dodd-Frank Act


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
November 19, 2010

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on Nov. 19, 2010.

Today, the Commission will consider a series of proposed rules — all stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act — that broadly relate to the oversight of investment advisers as well as oversight of the security-based swap market.

First, we will consider proposed rule changes designed to give effect to provisions of Title IV of Dodd-Frank that, among other things, increase the statutory threshold for registration by investment advisers with the Commission, facilitate the registration of advisers to hedge funds and other private funds with the Commission, and require reporting by certain investment advisers that are exempt from registration. The proposed changes also include amendments to the Commission’s pay to play rule in response to changes that were made by Dodd-Frank.

We will combine the discussion of those proposals with the second agenda item, which is considering proposed rules relating to the new exemptions under Title IV of the Dodd-Frank Act from Advisers Act registration for advisers to venture capital funds, private fund advisers with less than $150 million in assets under management, and foreign private advisers.

To begin, we will consider proposing rules that would strengthen the SEC’s oversight of investment advisers and fill key gaps in the regulatory landscape for investment advisers.

As required by the Dodd-Frank Act, these proposed rules would implement the requirement that most advisers to hedge funds and other private funds to register with the SEC. They would also implement a new threshold for registering with the SEC, as opposed to registering with state regulators, and they would mandate greater disclosure about private funds.

The enhanced information envisioned by these rules will better enable both regulators and the investing public to assess the risk profile of an investment adviser and its private funds.

In addition, the proposed rules would define the term “venture capital fund” and provide clarity regarding the terms of this and other adviser exemptions under the Dodd-Frank Act.

Registration of Advisers to Hedge Funds and Other Private Funds

Prior to the passage of the Dodd-Frank Act, there was a substantial gap in the registration requirement under the Advisers Act that generally permitted advisers to hedge funds and other private funds to avoid registering with the SEC. As such, the activities and even the mere existence of these advisers and their private funds were out of sight and unknown to regulators and the public.

The financial reform legislation filled this gap by requiring advisers to hedge funds and private equity funds to register with the SEC and to become subject to regulatory oversight. Today’s proposals would implement the Dodd-Frank Act by tailoring our registration form and rules for private fund adviser registration.

Enhanced Information Regarding Private Funds

In addition, today’s proposals would improve the information we gather about investment advisers and their private funds, including information about the size and type of the private fund, as well as information about the auditors, prime brokers, marketers, administrators and custodians of the private funds.

As we have come to learn, the identification of a private fund’s auditor, in particular, as well as prime broker and custodian, can serve as a “red flag” to regulators and investors if these entities are not sufficiently independent or qualified to serve their critical gatekeeper functions. Under today’s proposals, both regulators and the public would have access to this key information. Further, the gatekeepers themselves would be able to check that firms claiming to rely on their services actually are doing so.

Definition of “Venture Capital Fund” and Reporting from Exempt Advisers

While the Dodd-Frank Act requires advisers to hedge funds and other private funds to register under the Investment Advisers Act and subjects them to SEC oversight, Congress exempted from registration advisers to venture capital funds and private funds with less than $150 million in assets. But, at the same time, Congress provided for reporting by these advisers.

Definition of Venture Capital Fund

To give effect to the venture capital provisions, the SEC is required to develop a definition of “venture capital fund.” Crafting such a definition is no small task, and in so doing, our guiding principle has been what Congress considered in providing an exemption from registration and oversight.

Importantly, our proposed definition distinguishes venture capital funds from hedge funds and private equity funds by focusing on the lack of leverage of venture capital funds and the non-public, start-up nature of the companies in which they invest. The rule therefore focuses on the provision of capital for the operating and expansion of start-up businesses, rather than buying out prior investors. This is, however, a challenging line-drawing exercise and I look forward to commenters’ views on whether we can refine our efforts.

In addition to defining venture capital fund, today’s rules would clarify how advisers can determine whether they qualify for the exemption applicable to private fund advisers that manage less than $150 million in the United States. The proposal also includes guidance on the meaning of the “foreign private adviser” exemption in the new law.

Reporting from Venture Capital Advisers and Advisers with $150 Million in Private Fund Assets

While the Dodd-Frank Act exempts advisers to venture capital funds and private funds that manage under $150 million from SEC registration, the Act authorizes the SEC to subject these exempted advisers to a reporting regime. The information that would be collected would allow us to monitor these advisers for systemic risk and investor protection purposes.

The information would include identifying and census-type data about the adviser and the venture capital or other private funds it manages. And, it would include any disciplinary information about the adviser and its personnel.

In determining what information to collect about these so-called “exempt but reporting” advisers, we have tried to focus on the data we believe would be essential to understanding who these advisers are and the types of private funds they are managing. We also focused on information, such as disciplinary information, that would be of strong interest to the investing public.

At the same time, however, we were mindful of Congress’ determination that these advisers not be subject to the full panoply of regulation. Therefore, we are not proposing that these advisers provide comprehensive disclosure about their conflicts of interest, business practices, and compensation structures, which would be required in the Part 2 narrative brochure of a registered adviser.

SEC Versus State Oversight

Another issue addressed by the Dodd Frank Act was the need to allocate regulatory resources more efficiently between the SEC and state regulators. Given the SEC’s limited resources, we have only been able to examine roughly 10 percent of the investment advisers registered with us in each of the last two years. The result is that many advisers registered with the SEC are not examined regularly.

In light of these concerns, the Dodd-Frank Act raised the threshold required for an investment adviser to register with the SEC from $25 million to $100 million. As a result, an estimated 4,100 investment advisers will now register with and be overseen by state securities authorities — and not by the SEC. But, the SEC and state securities authorities will share anti-fraud jurisdiction over these mid-sized advisers. Today’s proposals would facilitate the switch from SEC to state registration for mid-sized advisers.

* * *

We seek to give fair and meaningful effect to Congress’s intentions through the rules we propose today. While we are not required to have these rules in place until the one-year anniversary of enactment of the Act in July, we felt it was important to issue our proposals relatively early. We expect that the constructive feedback we receive through the notice and comment process will enable us to refine these proposals as necessary. As a result, we hope to finalize these rules in advance of the one-year deadline to give clarity to advisers seeking to determine their registration status before next July.

Finally, while not the subject of today’s deliberation, it is important to recognize that the Commission’s job is not yet complete in proposing implementation of the Dodd-Frank Act’s enhancements to the regulatory oversight of investment advisers. As part of a separate rulemaking to be taken up in early 2011, we anticipate that we will consider a proposal to help us assess systemic risk posed by private fund advisers. The proposal will permit us to collect additional information from private fund advisers that would be reported on a non-public basis pursuant to the Dodd-Frank Act and used to inform the Financial Stability Oversight Council and us about the systemic risk profile of private fund advisers and the private funds they manage.

At least some part of today’s proposals will touch virtually every investment adviser. For instance, the proposals would clarify whether — or with which regulatory authorities — an investment adviser must register. In addition, the proposals would require additional information be reported to us and the public about an adviser’s business practices and risk profile. The proposals also would provide greater clarity regarding how investment advisers calculate their assets under management for regulatory purposes. I believe today’s proposals will have a substantial, pro-investor impact.

I would like to thank those who contributed substantial amounts of time, energy and effort in crafting this set of proposals: From the Division of Investment Management, Buddy Donohue, Bob Plaze, Penelope Saltzman, Sarah Bessin, David Vaughan, Matt Goldin, Dan Kahl, Daniele Marchesani, Jennifer Porter, Melissa Roverts, Tram Nguyen, Devin Sullivan, Keith Kanyan, Rick Sennett, Bryan Morris, and Jaime Eichen.

This group was assisted by David Becker, Meridith Mitchell, David Blass, Lori Price, Bob Bagnall, Cathy Ahn, Jill Felker, Sarah Buescher, and Vince Meehan in the Office of the General Counsel; Henry Hu, Bruce Kraus, Harvey Westbrook, and Matthew Carruth in the Division of Risk, Strategy, and Financial Innovation; Norm Champ; Gene Gohlke, Jim Reese, Jackie Sturgill, Karen Stevenson and Brian Snively in the Office of Compliance Inspections and Examinations; Lori Schock, Mary Head, Rich Ferlauto and Owen Donley in the Office of Investor Education and Advocacy; Jeff Minton and Paul Beswick in the Office of the Chief Accountant; Bruce Karpati in the Division of Enforcement; and Jamie Brigagliano, Lourdes Gonzalez, David Shillman, Joseph Furey, Alton Harvey, and Linda Sundberg in the Division of Trading and Markets; and Troy Beatty in the Office of International Affairs.

I also want to thank my colleagues on the Commission and our counsels for their contributions.

Before turning to staff to hear more detail about today’s proposals, I would like to acknowledge Buddy Donohue, as today represents his last Commission open meeting and indeed his last day serving the nation’s investors as the Director of the SEC’s Division of Investment Management.

Buddy, my fellow Commissioners and I wish you well. Each of us has benefitted greatly from your knowledge of the investment management industry and your wise counsel on regulatory matters. You have been a true public servant who brings practical guidance and in-depth analysis to every issue you tackle on behalf of investors. Thank you for your tremendous service — and we look forward to hearing the details of the proposal.



Modified: 11/19/2010