Private fund advisers that have been exempt from registering with the SEC under the Investment Advisers Act of 1940 (the “Advisers Act”) may soon be required to register due to changes made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act eliminates the “private adviser exemption” commonly used by the private equity and venture capital industry and replaces it with a new scheme of exemptions and exclusions. As a result, many private fund managers will be required to register with, and/or report to, the SEC for the first time in 2011. The SEC has proposed rules to implement the Dodd-Frank Act changes as they pertain to the Advisers Act, and final rules are expected from the SEC soon.

As currently proposed by the SEC, the following fund managers will not be required to register under the Advisers Act:

  • Fund managers with less than $150 million in assets under management in one or more funds
  • Fund managers that only advise venture capital funds
  • Fund managers that qualify as foreign private advisers
  • Fund managers that only advise SBICs
  • Fund managers that are family offices

Under the proposed new rules, fund managers that are no longer exempt or excluded from registration must be registered by filing Form ADV with the SEC by July 21, 2011. Registration is not automatically granted, however, so fund managers that must register should submit registration materials well in advance of the registration date.

In addition to completing the registration process, registered investment advisers must comply with the SEC’s periodic reporting and internal compliance requirements. Registered investment advisers must disclose information regarding both their own organization and the funds they manage, including fund assets, investment strategy, the number and type of investors, service provider information and other details. Registered investment advisers must also develop and implement a compliance program that includes policies, procedures and the appointment of a compliance officer to oversee the adviser’s investment activities and ensure compliance with the Advisers Act.

Under the proposed new rules, fund managers that are exempt from registration by virtue of having less than $150 million in assets under management or advising only venture capital funds will also be subject to new record keeping and reporting requirements. These fund managers must disclose certain limited information to the SEC on Form ADV, including information regarding organization, ownership, business activities that pose conflicts of interest, disciplinary actions, and an overview of private funds advised, no later than August 20, 2011. This is in addition to any state compliance requirements, which fund managers will have to consider in each state in which they solicit investors.

Private fund managers should consult with counsel as soon as possible to determine their obligations under the new regulatory framework. Though final regulations have not yet been issued, compliance dates are drawing near, and there is no guarantee those dates will be extended. Fund managers that must register should begin compliance efforts well in advance of the compliance date.