Rules Implementing Dodd-Frank Act Amendments to the Investment Advisers Act
A Small Entity Compliance Guide1
The Securities and Exchange Commission (“Commission”) adopted new rules and rule amendments on June 22, 2011 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). These rules and amendments:
Private Fund Advisers and Commission Registration
Title IV of the Dodd-Frank Act eliminated the private adviser exemption on which many advisers, including those to many hedge funds, private equity funds and venture capital funds, relied in order to avoid registering with the Commission under the Investment Advisers Act of 1940. Consequently, many previously unregistered advisers will be subject to the same registration requirements, regulatory oversight, and other requirements that apply to SEC-registered investment advisers.
To provide advisers relying on the private adviser exemption with a window to meet their new obligations, the Commission adopted transition provisions that require advisers relying on the exemption on July 20, 2011 to be registered with the Commission by March 30, 2012. Because initial applications for registration can take up to 45 days to be approved, these advisers should file a complete application, both Part 1 and a brochure(s) meeting the requirements of Part 2 of Form ADV, at least by February 14, 2012.
Form ADV Reporting Requirements for Investment Advisers
To enhance its oversight capabilities, the Commission amended Form ADV, the investment adviser registration form, to require additional information about the private funds advisers manage. Specifically, advisers filing Form ADV will have to provide:
In addition, other amendments to the adviser registration form are intended to improve the Commission’s regulatory program and require all registered advisers to provide more information about their advisory business, including information about:
The form also requires advisers to provide additional information about their non-advisory activities and their financial industry affiliations.
Reporting Requirements for Exempt Reporting 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. The Commission imposed reporting requirements upon advisers ("exempt reporting advisers") relying upon either of the exemptions for:
Under the new rules, exempt reporting advisers are required to file, and periodically update, reports with the Commission, using Form ADV – the same form registered advisers are required to file. Rather than completing all of the items on the form, exempt reporting advisers fill out a limited subset of items, including, but not limited to:
Exempt reporting advisers must 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 prior law, advisers generally could not register with the Commission unless they managed at least $25 million for their clients.
The Dodd-Frank Act raised 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 is subject to state registration, is defined as an adviser that:
Generally, these advisers will switch from registration with the Commission to registration with the states, but will continue to be subject to the Advisers Act's general anti-fraud provisions. Mid-sized advisers that advise a registered investment company or a business development company, however, will be required to remain registered with the Commission.
The Commission adopted amendments to several rules and forms that reflect the higher threshold required for Commission registration, and also:
The Commission also amended the investment adviser "pay-to-play" rule in response to 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 is 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 the Commission has determined 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 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 the Commission has determined is at least as stringent as the investment adviser pay-to-play rule.
The final adopting release and related rules can be found on the Commission's website at http://www.sec.gov/rules/final/2011/ia-3221.pdf. The proposing release can be found on the Commission's website at http://www.sec.gov/rules/proposed/2010/ia-3110.pdf. Answers to frequently asked questions regarding mid-sized advisers can be found on the Commission’s website at http://www.sec.gov/divisions/investment/midsizedadviserinfo.htm.
The text of the amended rules can be accessed through the "Laws and Rules" section of the Division of Investment Management page of the Commission's website at http://www.sec.gov/divisions/investment.shtml. Amended Form ADV can be accessed at: http://www.sec.gov/rules/final/2011/ia-3221-appd.pdf. Amended Form ADV instructions can be accessed at: http://www.sec.gov/rules/final/2011/ia-3221-appa.pdf and http://www.sec.gov/rules/final/2011/ia-3221-appb.pdf.
Contacting the Commission
The Commission's Division of Investment Management is happy to assist small investment advisers with questions regarding these new rules and amendments. The Division's Office of Investment Adviser Regulation answers questions submitted by e-mail and telephone. You can submit a question by e-mail to firstname.lastname@example.org and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Investment Adviser Regulation at (202) 551-6787. Questions on other investment management matters concerning small companies may be directed to the Division's Office of Chief Counsel by e-mail at IMOCC@sec.gov, or by telephone at (202) 551-6825.
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