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Regulation of Private Fund Managers and other Money Managers under the Financial Reform Bill

Client Advisory

July 30, 2010

Overview

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted on July 21, 2010. Among a broad spectrum of provisions aimed at reforming the U.S. financial system to reduce systemic risk, Title IV of the Dodd-Frank Act contains provisions for the registration of certain investment advisers to private funds, information collection, the creation and filing of certain reports and international cooperation and oversight. Title IV of the Dodd-Frank Act is called the “Private Fund Investment Advisers Registration Act of 2010” (the “Private Fund Act”).

The Act is intended to fill regulatory gaps by having fund managers register.

The Registration, Reporting, Recordkeeping Requirements

Assets Under Management (“AUM”) Threshold for SEC Registration

$100 million or such higher amount as the SEC may determine.

Deadline to register with the SEC for investment advisers newly subject to SEC-registration: 1 year after the date of enactment of the Private Fund Act.

NOTE: Voluntary registration for those entities that will be required to register is permissible prior to the 1 year deadline.

Transition Rule

Unless otherwise specified, the provisions of the Private Fund Act becomes effective 1 year after enactment.

Eliminated Exemption from Registration Requirement:

15 or fewer clients ( e.g., the private adviser exemption)

Deleted as an exemption but see “Foreign Private Adviser.”

Exemptions from Registration Requirement or Exclusions from Definition of Investment Adviser:

1. Foreign Private Adviser

  1. No place of business in the US; and
  2. Has fewer than 15 clients and investors in the US in private funds; and
  3. Has less than $25million  of AUM attributable to clients and investors in the US in private funds which threshold may be increased by the SEC; and
  4. Does not hold itself out to the public in the US as an investment adviser, not advising ‘40 Act company or business development company.

NOTE:    Requires the investment adviser to “look through” the private fund and count the number of U.S. investors in the fund.

              Does not indicate if the 15 client/investor count is for a rolling or calendar year.

2. Private Fund Advisers

Exempts from registration investment advisers solely advising Private Funds with less than $150 million AUM (in the aggregate). 

The SEC will establish the recordkeeping and reporting requirements for such advisers.

3. Family Office

Certain Family Offices will be exempt from the definition of investment adviser.

Anti-fraud provisions of the Investment Advisers Act will still apply.

4. Venture Capital Fund Advisers

Exempts from the registration requirement investment advisers solely advising Venture Capital Funds.

Such advisers shall maintain such records and provide such reports to the SEC as the Commission determines. 

5. Business Development Company (“BDC”)

An investment adviser (other than an investment adviser that elects to be regulated or is regulated as a BDC) is exempt from SEC registration if its advice is limited to:

Small business investment companies that:

  • are licensees under the Small Business Investment Act of 1958 (“SBIA”);
  • receive notice to proceed to qualify for a license under the SBIA from the Small Business Administration; or
  • are affiliated with 1 or more SBIA licensees and have applied for a license under the SBIA.

Additional Registration requirements:

1. Mid-sized Private Fund Advisers

The SEC will determine the registration and examination procedures for investment advisers to Mid-sized Private Funds. 

The SEC must take into account the size, governance and investment strategy of advisers to Mid-sized Private Funds, as well as, whether such advisers pose systemic risk in determining the registration and examination requirements.

2. Commodity Trading Advisors (“CTA”)

An exempt investment adviser registered as a CTA whose business becomes predominately securities-related advice is required to become an SEC-registered investment adviser.

Records required of Private Funds

Maintain and make available to the SEC records and reports regarding the Private Funds subject to SEC inspection. The SEC may make rules that require the filing of records and reports.

Information shall include: 

  • AUM;
  • amount of leverage (including off-balance sheet leverage);
  • counterparty credit risk exposure;
  • trading and investment positions;
  • trading practices;
  • valuation policies and practices;
  • types of assets held;
  • trading practices; 
  • side arrangements or side letters; and
  • other information necessary in the public interest and for the protection of investors or for the assessment of systemic risk.

Filing of reports

The SEC is required to issue rules requiring investment advisers to a Private Fund to file reports containing information the SEC deems necessary and appropriate.

Information Sharing

SEC to keep reports and other information confidential except that information may be disclosed:

  • to the Financial Stability Oversight Council (the “Council”);
  • to Congress “upon an agreement of confidentiality” with Congress;
  • pursuant to a request from a federal department or agency or SRO; or
  • pursuant to a court order in an action brought by the US or SEC.

Each of the foregoing is required to keep such reports and information confidential.

Confidentiality of records and data

Enhanced protection for Proprietary Information of an investment adviser (i.e., not subject to FOIA requests).

Definitions:

1. Private Fund

Funds that would be an investment company but for Section 3(c)(1) or 3(c)(7) exemption under the Investment Company Act.

NOTE: May be a U.S. or offshore entity.

2. Proprietary Information

Includes sensitive, non-public information regarding:

  • the investment or trading strategy of the investment adviser;
  • analytical or research methodologies;
  • trading data;
  • computer hardware or software containing intellectual property; and
  • any additional information that the SEC determines to be proprietary.

3. Venture Capital Fund

Deadline to define term: 1 year after the date of enactment of the Private Fund Act.

4. Mid-sized Private Fund

Undefined and the Private Fund Act does not expressly require the SEC to define the term.

5. Family Office

The SEC to define in a manner that:

  • is consistent with its former policy regarding exemptive orders for family offices;
  • recognizes the range of organizational, management and employment structures employed by family offices; and
  • does not exclude certain “grandfathered” advisers.

Clarification of SEC Rulemaking Authority and Scope

SEC prohibited from defining the term “client” to include investors in a Private Fund if the investment adviser has entered into an advisory agreement with the private fund.

SEC-CFTC Cooperation

The SEC and CFTC are required (after consultation with the Counsel) to enact rules establishing the forms and content of reports to be filed with the agencies by investment advisers registered with both agencies. 

Custodians

SEC may (but is not required to) promulgate rules to require registered investment advisers to take steps to safeguard client assets over which the adviser has custody. 

Suggests that such rules may, among other things, provide for verification of client assets by independent public accountants.

Aiding and Abetting

Grants cause of action to investor to sue persons who aid or abet securities fraud.

Questions regarding this advisory should be addressed to Guy P. Lander (212-238-8619, lander@clm.com) or Della P. Richardson (212-238-8712, or richardson@clm.com).



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
© Copyright 2010

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