Financial Reform Reshapes Investment Adviser Regulations

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act dramatically changes who will be required (or permitted) to register as an investment adviser with the Securities and Exchange Commission (SEC).

Elimination of the Small Adviser Exemption

The Act eliminates the exemption from registration under Section 203(b)(3) of the Investment Advisers Act of 1940 (the Advisers Act) for investment advisers who (i) had fewer than 15 clients in the preceding 12 months; (ii) do not generally hold themselves out to the public as investment advisers; and (iii) do not act as advisers to registered investment companies. The repeal affects many hedge fund, private equity fund and real estate managers, and many fund managers, including certain foreign advisers with U.S. clients, who will be required to register as investment advisers for the first time. The repeal is effective July 21, 2011, and advisers who are then subject to Advisers Act registration must register by that date.

Regulation of Managers of Private Funds

The Act permits the SEC to impose broad recordkeeping and reporting requirements on managers of “private funds,” which encompass most hedge funds and private equity funds that are located in the U.S. or located offshore, but accept subscriptions from U.S. investors.

Venture Capital and Mid-Size Private Fund Adviser Exemptions

The Act provides exemptions from registration for advisers solely to “venture capital funds” and to "private funds" with less than $150 million in assets under management. The exempt advisers will be required to maintain records and provide annual or other reports as the SEC determines. In addition, unless otherwise exempt, such advisers will be required to register with the applicable state regulators.

$100M Threshold for SEC Registered Investment Advisers

The Act increases to $100 million (previously $25 million) the level of assets under management required for SEC registration. Investment advisers currently registered with the SEC with assets under management between $25 million and $100 million will be required to de-register with the SEC and register with the applicable state regulators.

For more information regarding the Act and how it may impact investment advisers, please contact Stephen Hackman or Anthony Aaron.

Sept. 8, 2010

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.