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SEC Adopts Final Rules Regarding Investment Adviser Registration Under Dodd-Frank Act and Extends
Deadline for Compliance
On June 22, 2011, the Securities and Exchange Commission (SEC) adopted final rules relating to the implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that created exemptions from the requirements to register under the Investment Advisers Act of 1940 (the Advisers Act) for advisers to venture capital funds, private fund advisers with less than $150 million in assets under management, and foreign private advisors. The final rules extend the original July 21, 2011 private adviser registration and reporting deadline under the Dodd-Frank Act to March 30, 2012. For SEC registered investment advisers that must
withdraw their federal registration and transition to state registration as a result of the new rules (discussed below), such transition must be made by June 28, 2012. Highlights of the final rules are below.
Exemption for Investment Advisers that Advise Solely Venture Capital Funds
The final definition of "venture capital fund" largely remains the same as the definition proposed by the SEC in November 2010 with one significant change that is beneficial to venture capital fund managers. While the proposed definition only applied to private funds that own solely cash, cash equivalents, short term U.S. treasuries and equity securities of "qualifying portfolio companies," the final definition permits venture capital fund managers to invest up to 20 percent of a fund's aggregate capital commitments in "non-qualifying investments" (i.e., investments by the fund that do not otherwise conform to the requirements of the new rule). This "non-qualifying
basket" was not part of the original proposed rules issued by the SEC and was generally created as an alternative to adopting a long list of specific investment exceptions (such as interests in other venture capital funds, non-convertible debt securities or publicly traded securities) to address the concerns of commentators to the proposed rules regarding occasional deviations from typical venture capital investing activity or inadvertent violations of the definition criteria.
Also worth noting is that the final rules exclude from the definition of venture capital fund the requirement in the proposed rule that the fund provide a significant degree of managerial assistance to, or control, its qualifying portfolio companies. The SEC was persuaded that defining managerial assistance under the rule would introduce additional complexity and may not distinguish venture capital funds from other types of funds. The final rules also adopt largely as proposed the grandfathering provision for a fund that sold securities to one or more unrelated investors prior to December 31, 2010, that held itself out as a venture capital fund at the time of the
offering of the securities, and that does not accept any additional capital commitments after July 21, 2011.
Read the entire article about investment adviser registration.
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