While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has forever changed the landscape of securities offerings and banking in America, it is still largely a bill yet to become a bill. Many agencies have been tasked with writing regulations to supplement the act, and while many rules have been written, some agencies have hardly begun.
For example, the SEC has adopted numerous rules affecting “private funds” that are applicable to both hedge funds and private equity funds.1 The rules require most private funds to register with the SEC as registered investment advisers (if the fund has assets under management in excess of $150 million) or with the state or states in which the fund is domiciled. The registration deadline was February 22, 2012, giving the SEC sufficient time to complete its review of the Form ADV by March 30.
To accomplish this aspect of the SEC’s rule, it has instructed the Office of Compliance Inspections and Examinations (OCIE) to determine whether investment advisers have adopted appropriate written compliance policies and procedures that deal specifically with a particular fund’s business – the days of having generic, off-the-shelf manuals are over. Instead, the OCIE will review a fund’s policies and interview its staff and principals to determine if the policies and procedures are reasonably designed to meet the risks identified in the fund’s risk assessment and to ensure that the procedures are consistent with the adviser’s actual operational practices.
The SEC has also begun to stress the need for a “top-down” culture of compliance within private funds, seeking to ensure that a private fund’s chief compliance officer is kept informed about all daily operational issues confronting funds, and that whistle-blowers, addressed with specificity in the Dodd-Frank Act, are protected. In addition, the act revises the “accredited investor” standard (in Rule 501 of Regulation D) to exclude the value of the primary residence of a natural person (including the corresponding value of related debt) from the net worth calculation. Most recently, the SEC adopted amendments to Rule 205-3 under the Investment Advisers Act of 1940, which raise the net worth and assets under management eligibility requirements for “qualified clients” who pay performance fees to investment advisers from $1 million to $2 million.
The Dodd-Frank Act also includes the Volker Rule, which seeks to restrict banks from making certain kinds of speculative investments. Specifically, it prohibits a bank or institution that owns a bank from engaging in proprietary trading and from owning or investing more than a small percentage of its assets in private funds. It should be noted that the Volker Rule and other aspects of the Dodd-Frank Act continue to be criticized (specifically, SIFMA has begun to lobby strongly against it) and numerous issues remain with regard to the rules that have been or will be written pursuant to the Dodd-Frank Act.
The 3,000-page bill impacts banks, thrift institutions, insurance companies and rating agencies. Mortgage loans, derivatives, credit cards, and commercial and consumer loans will all be subject to new rules. It likely will take months, if not years, for the various regulatory agencies mandated to implement these new rules to be able to respond.