Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has adopted rules implementing amendments to the Investment Advisers Act of 1940 (the IAA). The IAA and new rules require advisers to private funds to register with the SEC and create exemptions from registration for certain advisers. Transition rules will require non-exempt advisers to register with the SEC by March 30, 2012. The new exemptions from registration became effective July 21, 2011. Previously, many managers of funds relied on the so-called “private adviser” exemption, which exempted an adviser from registration so long as it had fewer than 15 clients over the prior 12 months, did not hold itself out as an investment adviser, and did not act as an investment adviser to a registered investment company or a business development company. This private adviser exemption was eliminated by the Dodd-Frank Act. Therefore, managers of funds should take care to re-evaluate their compliance with the IAA and applicable state laws.
New Exemption for Private Fund Advisers
The IAA and associated regulations now include exemptions from registration for “venture capital fund” and “private fund” advisers. The “private fund” adviser exemption applies to advisers with less than $150 million in total assets under management in “qualifying private funds,” provided that such advisers have no other clients. Generally, a qualifying private fund is defined by the IAA to include an issuer that would be an “investment company” under the Investment Company Act of 1940, except for the exclusions provided in Sections 3(c)(1) and 3(c)(7) of the Act. Though exempt from federal registration, such private fund advisers are defined as “Exempt Reporting Advisers” (ERAs) and are subject to reporting and recordkeeping requirements. ERAs are required to file certain parts of Form ADV Part I each year.
Under the SEC’s transition rules, ERAs who had relied on the old private adviser exemption may continue to do so for the time being, but must file an initial report on Form ADV Part I through the online IARD system between January 1, 2012 and March 30, 2012.
Interplay Between Federal and State Regulations
The amount of assets under management triggers whether an adviser is subject to state or federal regulation. Advisers with $25 million or less in assets under management are considered “small advisers” and are required to register in the state in which they do business unless (i) they are exempt from registration; (ii) they have their principal office and place of business in a state that does not regulate investment advisers; or (iii) they qualify for a Rule 203-2 exemption allowing them to register with the SEC in spite of their small amount of assets under management.
The Dodd-Frank Act also created a new category of “mid-sized advisers,” which have assets of $25 million to $100 million under management. Though primarily regulated by the state in which they maintain their principal office and place of business, such advisers must register with the SEC if (i) the adviser is not required to be registered as an investment adviser in that state (for example, if it falls under a state exemption), or (ii) if registered with the state, the adviser would not be subject to examination as an investment adviser by the state securities administrator.
Minnesota Investment Advisers
The SEC’s rules release (Release No. IA-3221) noted that Minnesota did not advise the SEC that advisers registered in Minnesota are subject to state examination. Subsequently, the Minnesota Department of Commerce clarified that it does examine advisers registered in the state. Therefore, Minnesotan “mid-sized advisers” who were previously registered at the federal level must switch to state registration, unless they are exempt. Minnesota investment advisers whose only clients are institutional or accredited investors are exempt from registration in Minnesota under Minn. Stat. Section 80A.58 Section 403(b)(1). Such exempt mid-sized fund advisers are therefore now subject to federal regulation. If they can claim the new private fund adviser exemption, they can avoid federal registration but must comply with the rules for ERAs, as set forth above.