Hedge Fund Regulation
|FINAL RULE: SEC Final Rule: Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144a Offerings, approved July 10, 2013|
|FINAL RULE: Implementing Amendments to the Investment Advisers Act - Hedge Fund Registration approved at SEC Open Meeting, June 22, 2011|
|FINAL RULE: Registration and Reporting Exemptions approved at SEC Open Meeting, June 22, 2011|
|FINAL RULE: The SEC final rule on private fund systemic risk reporting was issued at its October 26, 2011 open meeting. The CFTC approved the final rule on October 31, 2011.|
|FINAL RULE: Family Office Definition approved at SEC Open Meeting, June 22, 2011|
|FINAL RULE: The SEC issued the final accredited investor net worth standards rule on December 29, 2011.|
|Final Rule Issue||Effective Date||Compliance Date|
|November 16, 2011||March 31 2012||June 15, 2012*|
|Comment Deadline||Final Rule Issue||Effective Date|
|November 18, 2010||June 29, 2011||August 29, 2011|
|Proposal Date||Final Rule Issue||Effective Date|
|January 31, 2011||December 29, 2011||February 27, 2012|
|Comment Deadline||Final Rule Issue||Effective Date|
|January 24, 2011||July 6, 2011||July 21, 2011|
As mandated by Title IV of the Dodd-Frank Act, the SEC and CFTC have been tasked with creating a framework for the registration and systemic risk mitigation of hedge funds and other private funds. Additionally, the SEC is charged with rulemaking authority for Investment Advisers, and exemption thresholds for family offices, accredited investors, and venture capital funds. Information from systemically significant private funds will be shared with regulators, and the Financial Stability Oversight Council (FSOC).
As of December 2011, five rulemakings have been finalized, including:
- Implementing Amendments to the Investment Advisers Act - Hedge Fund Registration,
- Registration and Reporting Exemptions,
- SEC final rule on private fund systemic risk reporting, and
- Family Offices
- Net Worth Standard for Accredited Investors
The act requires regulators such as the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to propose and finalize new rules and rule changes to comply with the act's mandates. Several proposed rules will alter the requirements, exemptions, and capital thresholds for hedge funds and other private funds.
The Dodd-Frank Act, passed in 2010 in response to the financial crisis of 2008, is designed to give regulators more options and greater flexibility in dealing with "systemically important" institutions. A key provision of Dodd-Frank is the repeal of section 203(b)(3) of the Advisers Act, which exempts any investment adviser from registration if the investment adviser:
- has had fewer than 15 clients in the preceding 12 months;
- does not hold itself out to the public as an investment adviser; and
- does not act as an investment adviser to a registered investment company or a company that has elected to be a business development company (the ‘‘private adviser exemption’’).
Historically, Advisers specifically exempt under section 203(b) are not subject to reporting or recordkeeping provisions under the Advisers Act, and are not subject to examination by SEC staff.
Below is a summary of the Dodd-Frank related rulemaking areas affecting hedge funds and other private funds.
On June 22, 2011, the SEC finalized rules requiring hedge fund and/or private fund advisers to register with the Commission, establishing stricter reporting guidelines and revising the roles states and the SEC play in regulated said advisers. These amendments affect rules under the Investment Advisers Act of 1940.
Advisers that are required to register for the first time as a result of the new rules are allowed to delay their registration until March 30, 2012. Registration exemptions for venture capital fund advisers and specific private fund advisers go into effect on July 21, 2011.
The proposal for investment adviser reporting regulation entered the Federal Register on February 11, 2011. The deadline for public comments was April 12, 2011.
To read more, click here.
On June 22, 2011, the SEC finalized a rule defining “family offices." This term will thus be excluded from the definition of an investment adviser under the Advisers Act and will not be subject to regulation under the Advisers Act. Historically, family offices (entities established by wealthy families for the purposes of private wealth management) have been structured to take advantage of the exemption from registration under section 203(b)(3) of the Advisers Act for any adviser that during the course of the preceding 12 months had fewer than 15 clients and neither held itself out to the public as an investment adviser nor advised any registered investment company or business development company.
The proposal entered the Federal Register on October 18, 2010. The deadline for public comments was November 18, 2010. Final rules were added to the Federal Register on June 29, 2011.
To read more, click here.
The proposed would amend the Dodd-Frank rules to clarify the term "value of primary residence," by adding the phrase "...“calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.”
As a result, under the proposed rule:
- An investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.
- Limiting the amount of indebtedness subtracted from a property's value circumvents the adverse effect of allowing the holder of an "underwater mortgage" (a property whose fair market value is less than the debt secured against it) being allowed to add the underwater amount to one's net worth calculation for accreditation purposes.
The proposal entered the Federal Register on January 31, 2011. The deadline for public comments was March 11, 2011.
On May 20th, 2015 the SEC proposed new changes to reporting forms and to modernize the reporting process. The proposal seeks to update the requirements under the Investment Company Act of 1940, with new forms and changes to distribution of information. Simultaneously proposed with an update to the investment adviser reporting requirements, the proposal will affect all companies that fall under the 1940 act.
Hedge Fund Regulatory News
On April 5, 2012, President Barack Obama signed the JOBS Act, which contained a provision that relaxes the decades-old restrictions on hedge fund marketing. Previously, hedge funds could only be marketed to individuals meeting the accredited investor standards. The law gives the SEC 90 days to amend its hedge fund marketing regulations.  For more information on the subject, see the MarketsReformWiki interview with hedge fund attorney Bart Mallon, "Hedge Fund Marketing and the JOBS Act."
On August 29, 2012, the Securities and Exchange Commission issued a proposed rule that would eliminate the prohibition against general solicitation and general advertising in certain securities offerings, specifically those currently falling under Rule 506 and Rule 144a exemptions. The proposed rule changes were mandated by the Jumpstart Our Business Startups (JOBS) Act. The rule is intended to allow hedge funds and other private offerings greater flexibility in advertising and marketing.
- Regulators see Dodd-Frank help on systemic risk. International Business Times. Retrieved on March 28, 2011.
- Federal Register / Vol. 75, No. 237. U.S. Securities and Exchange Commission. Retrieved on March 28, 2011.
- SEC tightens reins on hedge funds. Washington Post. Retrieved on June 22, 2011.
- SEC approves tightened rules for hedge funds. Boston Globe. Retrieved on June 22, 2011.
- U.S. Hedge Fund Registry, FSA Bribe Scrutiny, Emirates Repo:Compliance. Bloomberg. Retrieved on June 23, 2011.
- SEC approves tightened rules for hedge funds. MarketWatch. Retrieved on June 22, 2011.
- Green Light for Hedge-Fund Ads Means Caution on Main Street. Wall Street Journal. Retrieved on April 17, 2012.