On June 22, 2011, the Securities and Exchange Commission (the “SEC”) approved certain final rules relating to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as it applies to investment advisers. The final rules address three areas:

  1. facilitating the registration of investment advisers to hedge funds and other private funds, including the reallocation of regulatory responsibility for smaller investment advisers between the SEC and the states;
  2. establishing certain exemptions from registration; and
  3. defining “family office.”

A brief description of certain important items addressed in the final rules is provided below.

Investment adviser registration delayed to March 30, 2012

  • The final rules provide that investment advisers currently relying upon the Section 203(b)(3) “private adviser” exemption to registration (which Dodd-Frank eliminated effective July 21, 2011) will have until March 30, 2012, to register with the SEC (absent an available exemption from registration).

Exemptions for certain private fund advisers and advisers to venture capital funds

  • The final rules establish two exemptions from registration for (i) investment advisers that solely advise private funds and have assets under management in the United States of less than $150 million, and (ii) investment advisers that solely advise “venture capital funds.” With respect to the “less than $150 million” exemption, the final rules note that single-investor funds will generally not be considered “private funds” for the purposes of the exemption (except in certain limited circumstances, such as where a fund seeks to raise capital from multiple investors but has only a single, initial investor for a period of time and where a fund only has one investor due to redemptions by other investors). With respect to the “venture capital” exemption, the final rules permit venture capital funds to make limited, non-qualifying investments (i.e., non-venture capital investments) in amounts of up to 20% of capital commitments immediately after any acquisition. Under the final rules, the 20% basket may be calculated by using either historical cost or fair value, as long as the same method is applied to all investments of a qualifying venture capital fund in a consistent manner during the term of the fund.

Registration exemption for Foreign Private Advisers

  • The final rules establish an exemption from registration for “foreign private advisers.” This exemption generally applies to an investment adviser that (i) has no place of business in the United States and does not hold itself out generally to the public in the United States as an investment adviser, (ii) has fewer than 15 clients in the United States and investors in the United States in private funds advised by the investment adviser, and (iii) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25 million.

Reporting requirements for Exempt Reporting Advisers

  • The final rules establish public reporting requirements for investment advisers who meet the “less than $150 million” and “venture capital” exemptions from registration described above, creating what the SEC refers to as “exempt reporting advisers.” These exempt reporting advisers will be required to publicly file and periodically update a subset of the information required on Form ADV Part 1. The required disclosures will relate to, among other items, (i) basic identifying information about the investment adviser’s owners and affiliates, (ii) the private funds managed by the investment adviser and its business activities presenting potential conflicts of interest, and (iii) information regarding disciplinary action taken against the investment adviser or certain of its employees. In connection with the release of the final rules, the SEC stated that it does not intend to subject these exempt reporting advisers to routine examinations but will, however, exercise its authority to examine such exempt reporting advisers if there are indications that it should do so.

Expanded Form ADV reporting

  • Investment advisers to private funds will be required to disclose certain items on Form ADV about each fund they manage, including information relating to the fund’s business operations, the size and the ownership of the funds, and information relating to “critical gatekeepers,” such as auditors, administrators, prime brokers, custodians and marketers.

Registration for midsized investment advisers

  • The final rules generally raise the threshold for registration with the SEC to $100 million and also reallocate the regulation of certain midsized investment advisers (i.e., those with assets under management between $25 million and $100 million) between the SEC and the states. Midsized investment advisers will generally be required to register in the state of their principal office and place of business if the state requires registration and the investment adviser will be subject to examination by the state. The final rules also address which states do not subject registered investment advisers to examination. Importantly, New York is one such state. Therefore, any midsized investment adviser with a principal office and place of business in New York will be required to register (or maintain its registration) with the SEC, absent an available exemption from registration.

Revised method for calculating assets under management

  • The final rules establish a revised method for calculating advisory assets under management for registration, exemption and reporting purposes. Under the final rules, investment advisers must include in the assets under management calculation on a gross basis (i.e., without deduction of any outstanding indebtedness or other accrued but unpaid liabilities) family or proprietary assets, assets managed without receiving compensation, and assets of foreign clients. With respect to private funds, investment advisers must include in the assets under management calculation the value of any private fund over which they exercise continuous and regular supervisory or management services, regardless of the nature of the assets held by the fund.

Filing Form ADV amendment in 2012

  • Investment advisers registered with the SEC as of January 1, 2012 will be required to file an amended Form ADV by March 30, 2012 indicating whether the investment adviser is eligible to remain registered with the SEC under the final rules. If an investment adviser is not eligible to remain registered with the SEC, it must withdraw its registration by June 28, 2012.

Family Office exclusion

  • The final rules establish an exclusion from the definition of “investment adviser” for advisers to a “family office.” The final rule provides three principal conditions for the exclusion: the entity must (i) provide advice only to family clients (as defined by the rule), (ii) be wholly owned by family clients and controlled by family members and/or family entities, and (iii) not hold itself out to the public as an investment adviser. The final rule defines “family clients” as family members (lineal descendants spanning 10 generations, including spouses), key employees, family client trusts, estates, charitable organizations and nonprofit organizations funded exclusively by the family. The exclusion does not extend to family offices serving multiple families, and such family offices would be required to avail themselves of an available exemption from registration or seek exemptive relief from the SEC.