Investment Advisers Regulation

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Gavel.png FINAL RULE: Implementing Amendments to the Investment Advisers Act - Hedge Fund Registration approved at SEC Open Meeting, June 22, 2011
Gavel.png FINAL RULE: Registration and Reporting Exemptions approved at SEC Open Meeting, June 22, 2011
Gavel.png FINAL RULE: Investment Adviser Performance Compensation rules approved on Feb. 15, 2012.
Gavel.png FINAL RULE: Political Contributions by Certain Investment Advisers: Ban on Third-Party Solicitation; Extension of Compliance Date, approved on June 13, 2012.
Dodd-Frank Timeline, Investment Adviser Performance Compensation, SEC
Proposal Date Final Rule Issue Effective Date
May 13, 2011 February 22, 2012 May 22, 2012
Dodd-Frank Timeline, Rules Implementing Amendments to the Investment Advisers Act of 1940, SEC
Final Rule Issue Effective Date Compliance Date
July 19, 2011 September 19, 2011 March 30, 2012
Dodd-Frank Timeline, Adviser Exemptions, SEC
Comment Deadline Final Rule Issue Effective Date
January 24, 2011 July 6, 2011 July 21, 2011
Political Contributions by Certain Investment Advisers, SEC
Final Rule Issue Effective Date Compliance Date
June 13, 2012 June 11, 2012 TBA*

The Dodd-Frank Act mandated numerous studies, rule changes, and proposed new rules regarding the relationships and responsibilities of investment advisers, broker-dealers, and their clients.

The SEC meeting on June 22, 2011 finalized rules concerning amendments to the Investment Advisers Act of 1940, as well as registration exemptions for reporting by certain investment advisers. An SEC notice concerning investment adviser performance compensation regulation was published on May 10, 2011. The comment deadline for this proposal is July 11, 2011.

Final rules from the June 22, 2011 SEC Meeting

The meeting on June 22, 2011 finalized rules proposed at the SEC open meeting on November 19, 2010 regarding the provisions of Title IV of the Dodd-Frank Act, the statutory threshold for registration by investment advisers with the Commission, hedge fund adviser and private fund adviser registration with the Commission, and exemptions for certain advisers.[1] Final rules are listed below.

Rules Implementing Amendments to the Investment Advisers Act of 1940

Final rules:

  • Advisers to private fund must provide to the SEC:
  1. "basic organizational and operational information about each fund they manage, such as the type of private fund that it is (e.g., hedge fund, private equity fund, or liquidity fund), general information about the size and ownership of the fund, general fund data, and the adviser's services to the fund; and
  2. identification of five categories of 'gatekeepers' that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers)."
  • Under Dodd-Frank, exemptions exist for:
  1. "advisers solely to venture capital funds;
  2. advisers solely to private funds with less than $150 million in assets under management in the U.S.; and
  3. certain foreign advisers without a place of business in the U.S."

Exempt advisers will still be required to file a limited set of information with the SEC.

  • The SEC raised its Commission registration threshold to $100 million and created a new category of advisers called "mid-sized advisers." Advisers who were formerly required to register with the SEC and are now subject to state regulation have until June 28, 2012 to complete the registration transition.
  • Advisers registered with the SEC will be allowed to hire registered municipal advisers for government investment activities, as long as the FINRA and/or MSRB pay-to-play rules are at least as stringent as the investment adviser pay-to-play rule.
  • The SEC created new exemptions for:
  1. "advisers solely to venture capital funds;
  2. advisers solely to private funds with less than $150 million in assets under management in the United States; and
  3. certain foreign advisers without a place of business in the United States."
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The original proposal and corresponding comment letters, added to the Federal Register on December 10, 2010, are listed below.[2]

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Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management, and Foreign Private Advisers

Final rules:

Advisers solely to venture capital funds, solely to private funds with less than $150 million in assets under management in the U.S., or certain foreign advisers without a place of business in the U.S. are able to claim exemption from registration and reporting under the Dodd-Frank Act.

Under the new rule, a "venture capital fund" is defined as a private fund that:

  • "invests primarily in “qualifying investments” (generally, private, operating companies that do not distribute proceeds from debt financings in exchange for the fund’s investment in the company); may invest in a “basket” of non-qualifying investments of up to 20 percent of its committed capital; and may hold certain short-term investments;
  • is not leveraged except for a minimal amount on a short-term basis;
  • does not offer redemption rights to its investors; and
  • represents itself to investors as pursuing a venture capital strategy."

A grandfathering provision is put in place by the SEC for funds that have used venture capital strategy and have made that abundantly clear by the end of 2010. These funds are generally considered to be venture capital funds under the new rule.

A new statutory exemption is put in place by the new rule for private fund advisers with less than $150 million in assets under management in the U.S.

Foreign advisers that do not have a place of business in the U.S. are exempt if they have:

  • "less than $25 million in aggregate assets under management from U.S. clients and private fund investors; and
  • fewer than 15 U.S. clients and private fund investors."

The definition of "foreign private adviser" is also clarified by the SEC in this rule with regard to the exemption statute.

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The original proposal and corresponding comment letters, added to the Federal Register on December 10, 2010, are listed below.[3]

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SEC Final Rule: Investment Adviser Performance Compensation

The SEC revised its original proposed rule to raise certain dollar thresholds that must be met before investment advisers are allowed to collect performance compensation in the form of fees from their clients.[4]

Under the following circumstances, advisers are allowed to charge these fees:

  1. The client has at least $1 million under management with the adviser (formerly $750,000).
  2. The adviser reasonably believes the client has a net worth of $2 million (formerly $1 million).

Adjustments for inflation will be made every five years to determine whether or not clients are qualified under the Dodd-Frank Act.

A new grandfather clause was added to the final rules allowing registered investment advisers to continue charging performance fees for clients who were already counted as "qualified clients" or who were already being charged performance fees before the rules were passed.

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SEC Final Rule: Political Contributions by Certain Investment Advisers: Ban on Third-Party Solicitation; Extension of Compliance Date

On June 13, 2012, the Federal Register published a final SEC rule that extends the date by which advisers must comply with the ban on third party solicitation in rule 206(4)–5 under the Investment Advisers Act of 1940, the ‘‘pay to play’’ rule. The Commission is extending the compliance date in order to ensure an orderly transition for advisers and third-party solicitors as well as to provide additional time for them to adjust compliance policies and procedures after the transition.

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References

  1. SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act. SEC. Retrieved on June 22, 2011.
  2. SEC Announcements - SEC Proposes Rules to Improve Oversight of Investment Advisers. SEC. Retrieved on November 19, 2011.
  3. SEC Announcements - SEC Proposes Rules to Improve Oversight of Investment Advisers. SEC. Retrieved on November 19, 2011.
  4. SEC Tightens Rules on Advisory Performance Fee Charges. SEC. Retrieved on February 15, 2012.

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