On November 19, 2010, the Securities and Exchange Commission (the "SEC") released two significant proposals relating to its rulemaking initiative under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was signed into law by President Obama in July of this year.

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

  • The proposed rules provide for the implementation of an exemption from registration for investment advisers that solely advise venture capital funds. In addition to providing a proposed definition (and associated operating restrictions) of a "venture capital fund," the proposed rules also provide a grandfathering exemption for certain investment advisers to funds that may not meet each criterion in the proposed definition.
  • The proposed rules provide for the implementation of an exemption from registration for investment advisers that solely advise private funds and manage less than $150 million in assets. In addition, the proposed rules would amend Form ADV to provide for a uniform method of calculating an investment adviser's assets under management for the purposes of this exemption and certain other items. The proposed rules specify that assets under management must be calculated using a fair value methodology.
  • The proposed rules clarify the requirements for registration with the SEC for certain "mid-sized investment advisers" with assets under management between $25 million and $100 million. Specifically, any such mid-sized investment adviser that can and does rely on an exemption from registration under the law of the state in which it has its principal office and place of business must register with the SEC (absent an available exemption). Additionally, any mid-sized investment adviser that is registered with a state but is not subject to examination by that state's regulatory authority must register with the SEC (again, absent an available exemption).
  • The proposed rules would amend Form ADV to establish certain reporting requirements for certain investment advisers that are exempt from registration with the SEC. Among other items, such investment advisers would be required to provide information relating to (i) their identity (including owners and affiliates); (ii) their managed funds and certain conflicts of interest; and (iii) their disciplinary history.
  • The proposed rules expand the information required to be provided on Form ADV by registered investment advisers that advise private funds, including the disclosure of information relating to managed funds (e.g., the amount of assets held by each fund, the types of investors in the fund, and the investment adviser’s services to the fund) and the disclosure of information relating to the fund's auditors, prime brokers, custodians, administrators and marketers.
  • The proposed rules would amend the political contributions rule that was adopted earlier this year by (i) clarifying that the rule applies to both investment advisers that are exempt from registration but subject to SEC reporting requirements and "foreign private advisers" (as defined by the Dodd-Frank Act and the SEC’s rules thereunder); (ii) including "municipal advisors" (as defined by the Dodd-Frank Act and the SEC’s rules thereunder) as a category of persons or entities that investment advisers may pay to solicit government entities; and (iii) clarifying that legal entities serving as a general partner or managing member of an investment adviser are considered "covered associates" for the purposes of the political contributions rule.
  • The proposed rules provide for the implementation of an exemption from registration for foreign private advisers.

One important item appearing in the SEC's proposals was a reference to the SEC's examination authority with respect to certain investment advisers that are, and will be under the proposed rules, exempt from registration (i.e., investment advisers that utilize the "less than $150 million AUM exemption" and the "venture capital fund exemption"). Specifically, the proposed rules stipulate that the SEC will, pursuant to Section 204 of the Investment Advisers Act of 1940, have the authority to examine the records of such investment advisers. We expect that the SEC will receive extensive comments relating to the possible effects that this examination authority could have on these exemptions from registration.

Lowenstein Sandler's Investment Management Group is thoroughly reviewing the proposed rules and preparing a detailed summary and analysis of the SEC's proposals, which we expect to circulate in the coming weeks, to keep you informed of these proposals and their possible impact on the investment management industry.

In the interim, please contact any of the attorneys listed, or any other member of Lowenstein Sandler's Investment Management Group, for further information on the matters discussed herein.