The Dodd-Frank Act Impact on Advisers to Private Funds

Private Investment Fund Bulletin by Jeffrey P. Somers

• Dodd-Frank, signed into law on July 21, 2010, includes the Private Fund Investment Advisers Registration Act of 2010 (the “Act”).

• The Act is effective one year after enactment of Dodd-Frank; in other words, on July 21, 2011.

• The Act repeals the so-called “private adviser exemption” (that is, fewer than 15 clients in the last 12 months and no holding out to the public by the adviser).

• Advisers to private funds (funds exempt under either 3(c)(1) or 3(c)(7) of the Investment Company Act) have generally relied on the private adviser exemption for which purpose a private fund is counted as one client.

• Come next July, advisers to private funds will have to register, either with the SEC or with one or more states.

• At the federal level, exemptions will be available to advisers to venture capital funds (to be defined by the SEC) and family offices (also to be defined by the SEC) and to certain foreign private advisers[1].

• Adviser registration continues to be bifurcated between the SEC and the states; the Act increases the threshold for SEC registration for advisers solely to private funds from $25/$30 million assets under management to $150 million;[2] advisers solely to private funds with less than $150 million assets under management will have to determine if state registration is required; it is estimated that 40% of advisers currently SEC-registered will have to state-register as a result of this change.

• Therefore, advisers to private funds with aggregate assets of $150 million or more (for which purpose, I assume the SEC will look to assets reported to the investors in the funds and/or assets on which fees are charged) will have to register with the SEC beginning next July.

• Advisers to private funds with less than $150 million aggregate assets under management will have to register at the state level unless an exemption is available.

• Advisers to private funds will be subject to recordkeeping and reporting requirements related to advised private funds, including at a minimum (required by the Act; the SEC may add more):

• Assets under management
• Use of leverage, including off-balance sheet
• Counterparty credit risk exposure
• Trading and investment positions
• Valuation policies and procedures
• Types of assets held
• Side letters
• Trading practices

• The SEC may vary the recordkeeping and reporting requirements depending on the type and/or size of the private fund.

• The required records will be deemed to be records of the adviser, making the adviser responsible for the accuracy and completeness of them.

• Supposedly, the private fund information provided to the SEC will be confidential.

• The SEC is required to conduct periodic inspections of private funds.

• For now, we just know the big picture; details will emerge as the SEC proposes and adopts rules.

• We can expect states to be looking at their laws and regulations governing investment advisers in anticipation of a significant uptick in state registrations as a result of the Act.

1. No place of business in US; fewer than 15 US clients, including US persons invested in advised funds (whether domestic US or foreign funds), which have less than $25 million under management with the foreign adviser (directly or in advised funds); no holding out to the public by the adviser.

2. For advisers that provide advice to any clients that are not private funds (this would include a mix of separately managed accounts and private funds), the threshold is $100 million; such advisers will generally have to withdraw from SEC registration and register at the state level.