Industry Insights

Effective Date

On June 22, 2011, the U.S. Securities and Exchange Commission (SEC) adopted final rules and rule amendments to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The impact is significant for advisers of certain privately offered investment funds in the United States, requiring registration with the SEC for many who were not previously required to do so. The final rules extend the deadline for registering with the SEC until March 31, 2012.

Extension to Private Funds

Private funds include hedge funds, private equity funds and other types of pooled investment vehicles excluded from the definition of “investment company” under the Investment Company Act of 1940. Advisers to private funds have been historically exempt from SEC registration due to the “private adviser” exemption under the Investment Advisers Act of 1940 (Advisers Act). The Dodd-Frank Act removed this exemption. Under the new rules and amendments, advisers of private funds will be required to register with the SEC while those who advise solely venture capital funds will be exempt. The rule and rule amendments define “venture capital fund” for purposes of the exemption.

Exemption to Small Funds

Advisers of private funds with less than $150 million in assets under management (AUM) are exempt from registering with the SEC under the new rules. The final rules establish a uniform methodology advisers should use to calculate their AUM for purposes of determining whether they are required to register with the SEC or with state authorities and whether they are exempt. Under the final rules and rule amendments, advisers must calculate their regulatory AUM, which must include all securities portfolios for which an adviser provides continuous and regular supervisory or management services. Regulatory AUM must include:  (i) proprietary assets, (ii) assets managed without compensation and (iii) assets of non-U.S. clients. Regulatory AUM must be determined on a gross basis, and accordingly, advisers are not permitted to subtract outstanding indebtedness or other accrued but unpaid liabilities in their calculations.

Filings with SEC

The impact of new oversight and regulation will be significant. Advisers to private funds required to register should be prepared to submit information and data regularly to the SEC, in addition to reporting requirements under the Advisers Act. Significant new compliance obligations will include establishing a compliance program to ensure the adviser and its employees are meeting their fiduciary duties to clients and providing compliance oversight of the firm. In addition, advisers must adopt a written code of ethics and develop monitoring procedures to ensure the compliance program is properly functioning. Form ADV will be amended to obtain greater information and details from advisers. The SEC and Commodity Futures Trading Commission have proposed a new form to be periodically filed by advisers. Information collected on Form PF (Private Fund) would remain confidential and is intended to assist the Financial Stability Oversight Council (established by the Dodd-Frank Act) in monitoring potential systemic risks posed by private funds. The amount of information and frequency of filing would be determined based on two broad groups – large advisers and small advisers.

Contact Your BKD Advisor

The final rules and rule amendments create new obligations that are significant for certain advisers to private funds. Many private fund advisers who were not previously required to register with the SEC may be required to do so. For more information on how these final rules and rule amendments could affect you, contact your BKD advisor.