In rules adopted and released on June 22, 2011, the Securities and Exchange Commission implemented provisions in Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the registration, and exemptions from registration, of investment advisers.
In brief, the rules replace the existing “private adviser exemption”—for advisers that do not “hold themselves out” to the public as an investment adviser and that have fewer than 15 clients in the preceding 12-month period—with the following set of exemptions from registration:
- Advisers only to “venture capital funds.” For this purpose, a “venture capital fund” is a private fund that:
- represents itself as pursuing a venture capital strategy,
- is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company under the Investment Company Act,
- invests at least 80% of its committed capital in “qualifying investments” (which generally are equity securities issued by non-public entities),
- does not borrow or otherwise incur leverage, other than borrowing a limited amount for a limited period, and
- does not offer redemption rights to its investors, other than in extraordinary circumstances.
- Advisers only to “private funds” with less than $150 million of assets under management in the United States. For this purpose, a “private fund” is a pooled investment fund that is not required to be registered as an “investment company” under the Investment Company Act.
- Non-U.S. advisers that are “foreign private advisers.” For this purpose, a “foreign private adviser” is an adviser that:
- does not have any place of business in the U.S.,
- has a total of fewer than 15 clients in the U.S., including investors in the U.S. in private funds,
- has assets under management for clients in the U.S. of less than $25 million, and
- does not hold itself out to the public in the U.S. as an investment adviser.
- Entities that are “family offices.” For this purpose, a “family office” is generally an entity that:
- has only “family clients” (which generally consist only of current and former family members, key employees of the family office, non-profit and charitable organizations and trusts established and funded exclusively by family clients, entities wholly owned and controlled exclusively by and for the benefit of family clients, and certain trusts and estates funded by family clients or the sole beneficiaries of which are family clients),
- is wholly owned by family clients and controlled exclusively by family members or family entities, and
- does not hold itself out to the public as an investment adviser.
The first two exemptions permit an adviser to avoid registration with the SEC, but do not relieve the adviser from requirements to file annually certain information with the SEC. The fourth exemption is actually an exception to the definition of “investment adviser.”
As contemplated by the Dodd-Frank Act, the SEC’s rules will require many advisers that are relying on the private adviser exemption to register. The SEC has delayed the deadline for registration until March 30, 2012.
OUR TAKE: With the adopted rules (which are not significantly different from the proposed rules), currently exempt advisers should now be evaluating their status and either documenting their eligibility for one or more of the new exemptions or preparing to register as an investment adviser.