On June 22, 2011, the Securities and Exchange Commission (SEC) held an open meeting to consider approving three final rule proposals relating to the implementation of various portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Specifically, the Commission approved the Dodd-Frank Implementation Release (the Implementation Release), the Dodd-Frank Exemptions Release (the Exemptions Release) and the Family Office Release. The first was approved by a 3-to-2 vote and the other two were approved unanimously.
As expected, the SEC approved deferring the effective date for an investment adviser that is required to register with the SEC under Dodd-Frank to March 30, 2012. Newly registered investment advisers will therefore need to submit registration materials no later than mid-February 2012.
This extension is intended to give these advisers time to develop the necessary compliance infrastructure and complete the registration process. The extension will also provide the SEC with additional time to refine its registration systems to support both the expected influx of new registrants as well as the transition of many advisers from federal to state registration. In addition to the registration deadline extension, the SEC approved a deadline of June 28, 2012, for those advisers that will need to transition from federal to state registration under the new regulations.
The Implementation Release also includes amendments to Form ADV that are designed to elicit additional information from advisers to private funds, including: structural information about the funds they manage, identification of key service providers to those funds (e.g., prime brokers and auditors), adviser business practices and conflicts of interest (e.g., use of affiliated brokers, receipt of “soft dollar” benefits and payment of referral or solicitation fees).
The SEC staff and commissioners spent a considerable amount of time discussing the “Exempt Reporting Adviser” status and the reporting that the SEC would require of these advisers. The rules contained in the Exemptions Release will require Exempt Reporting Advisers (which include Private Fund Advisers, defined below, and advisers to venture capital funds that are not required to register) to complete and file through the IARD system a subset of the information gathered through Form ADV. Specifically, these advisers will be required to provide basic identifying information, details of the private funds they manage and any other business activities they conduct, and any relevant disciplinary information. This was the most controversial aspect of the Implementation Release and what, we believe, caused the split vote on this rule adoption. The dissenting commissioners seemed to be most worried about the slippery slope that this created for Exempt Reporting Advisers – namely, that they would effectively be registered despite being officially “exempt.”
Also as part of the Exemptions Release, the SEC addressed the new Private Fund Adviser Exemption, which applies to advisers managing only private funds with less than $150 million in aggregate assets under management. The Exemptions Release provides a uniform method for determining assets under management and states that the determination need be undertaken annually. This differs from the quarterly determination that was originally proposed.
The SEC also addressed the bifurcation of supervisory authority over investment advisers between the SEC and the relevant state securities regulators. An adviser with assets under management between $25 million and $100 million is not eligible for registration with the SEC as an investment adviser unless:
- it is not required to register as an investment adviser in the state in which it maintains its principal place of business, and
- if registered, it would not be subject to an investment adviser examination program in that state.
One interesting side effect of this Dodd-Frank provision is that to the extent the state securities laws maintain the existing de minimis exemptions under their registration requirements (which many states currently have), the expected transition by many advisers from federal to state registration may not occur.
The SEC provided that only three states — New York, Minnesota and Wyoming — will be considered to not have an examination program for investment advisers. Wyoming is the only state that does not require registration, as there is no statute allowing for such. New York and Minnesota currently do not have a routine examination program in place for registered investment advisers. As a result, an adviser with its principal place of business in Wyoming would be required to register with the SEC as an investment adviser if it has assets under management in excess of $25 million and does not qualify for the Private Fund Adviser Exemption. An adviser in New York or Minnesota, on the other hand, that has assets under management between $25 million and $100 million may choose between state and federal registration, because it will be eligible for either.
The Exemptions Release also provided a final definition of a “venture capital” fund for purposes of the exemption from registration for managers of venture capital funds. The definition remains largely as proposed – with the significant caveat that the requirement that 100 percent of a venture capital fund’s assets be held in “qualifying investments” was reduced to 80 percent. This change allows venture capital funds some latitude in making investments that will benefit their investors that may not be purely venture capital type investments.
The Family Office exemption is one of the remaining adviser registration exemptions under federal law. The Family Office Release adopted a final definition of a “family office,” which did not vary significantly from the definition proposed late last year, although there was some fine tuning based on the comment letters the SEC received.