Speech by SEC Commissioner:
"Implementing Dodd-Frank: The Changing Investment Adviser Regulatory Landscape"
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
November 19, 2010
The Dodd-Frank Act significantly impacts the SEC's regulatory regime governing investment advisers. As today's proposals explain this legislation:
- Redistributes registration of advisers among the states as compared to the Commission;
- Requires investment advisers to private funds to register with the Commission, while exempting others; and
- Requires reporting and record-keeping by advisers that are exempt from registration.
This legislation redraws definitions and categories in the investment adviser arena. In particular, the Dodd-Frank Act tasked the Commission with the following tough challenges.
How to create and expand an existing Advisers Act regime with so many new categories . . . exempt but reporting advisers, mid-sized state-registered advisers, and venture capital fund advisers?
How to build a regime that protects investors while simultaneously proposing exemptions from SEC registration for certain entities?
The Commission's priority as it moves forward should be to oversee a regulatory regime that serves the needs of investors, provides essential information to regulators, and prophylactically deters opportunities for fraud.
This is not work for the faint of heart and I want to highlight the staff's work here. My thanks go to all of our staff, across the agency that worked on these proposals and to the Division of Investment Management, in particular. These are nuanced proposals and I want to commend the staff's efforts to take into account the existing regulatory landscape, modern-day business practices, and current technology. These proposals are ones that, if adopted, could be implemented immediately within the existing infrastructure of the Investment Adviser Registration Depository (IARD) and would not need to wait for the establishment of a new entity. Moreover, and fortunately, the IARD is self-funded to facilitate improvements and updates such as this.
I would also like to highlight and compliment the regulators that are our state counterparts. An undertaking of such a massive scale can only take place if the regulators work hand in hand. I appreciate the staff of various state regulatory bodies and the National Association of Securities Administrators Association (NASAA) working so closely with our own SEC staff toward a seamless transition for such a large amount of entities. The investment adviser regulatory relationship has always been a shared partnership between the SEC and the states and it is nice to see that foundation is strong as we prepare for a new chapter of investment adviser oversight.
I want to highlight a few aspects of the proposals before us today.
Assets Under Management
The Commission's proposals for the first time strive to set forth a uniform way of calculating regulatory assets under management. In July, when we considered the amendments to Form ADV, I spoke out about the need to have a coherent and consistent Assets Under Management calculation — one that regulators, industry participants, and investors alike could rely on. Thus, I am pleased that today's proposal makes great strides in that direction. In a regulatory and business world where the amount of assets under management is significant for a host of reasons including eligibility for exemptions from our registration provisions, it is important that the calculation that produces that number be the same for all industry participants.
To that end, the release asks a series of questions designed to elicit answers to whether the uniformity and consistency of the calculation proposed could be improved. For example, the release asks whether we should require that advisers measure fair value as required by GAAP or other international accounting standards. It is important to note that there is an active convergence project on the measurement of fair value taking place between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board. It is expected that converged standards regarding fair value will be issued just a few months from now. So it appears that there is a real opportunity for a requirement to measure fair value pursuant to US GAAP that leads to both greater uniformity and comparability, while also being manageable for advisers inside and outside the U.S.
First Public Database of Private Fund Information
I also want to underscore that these proposals would support the creation of the first publicly available database of basic private fund adviser information. While it is true that some information about private fund advisers has been publicly available because a number of private fund advisers have voluntarily registered with us, it is also true that this is a narrow slice. Unfortunately, this voluntary and limited number of filings, do not provide basic, and uniform, information about private fund advisers as a whole.
Congress had a keen interest in changing this and directed the Commission to create, in the public interest and for the protection of investors, a comprehensive adviser regime that includes private fund advisers. The Dodd-Frank statute states that the Commission shall require exempt but reporting advisers to maintain records, which we have the authority to inspect, and to submit reports as the Commission determines necessary and appropriate in the public interest and the protection of investors. Our current proposals would require exempt but reporting advisers to disclose basic information about their business, affiliates and owners, gatekeepers, and disciplinary history. This is basic, elemental information that all advisers should have readily available.
This means that if adopted, there will be for the first time a publicly accessible foundation of basic information that will aid investors in their due diligence efforts and further help investors and other industry participants protect against fraud.
Venture Capital Exemption
Finally, the last issue I would like to touch on is the exemption for venture capital fund advisers. What matters most to me about this exemption is did we get it right? Do the conditions taken in the aggregate define and distinguish an adviser to a venture capital fund from advisers to private equity or other private funds?
In my experience representing VC funds and advisers during their formation and capital raising, as well as when they are making investments, I have seen VC fund advisers provide key management assistance to many companies they invest in, but not to every company. In cases where a particular VC fund adviser does not have a seat on the board, it often seems that adviser will look to other VC funds advisers who they have invested along side of and have a history of working with. The proposal may impair such investment. Is this a necessary condition or should it be allowed under certain circumstances? Additionally, while the capital of VC funds generally is invested in preferred stock, sometimes the funds hold cash or treasuries in anticipation of another round. I am interested to hear whether the proposal reflects these and other business realities of VC funds.
Taken as a whole, today's proposals, if adopted, should significantly affect the investment advisory industry, the state and federal regulators and, ultimately, investors. The impact of these proposals cannot be underestimated — nor can we underestimate the importance of getting this right. I am committed to doing so and look forward to considering the public comment.