As previously discussed, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) significantly altered the jurisdictional boundaries between federal and state registration of investment advisers. Although most advisers seem to be familiar with the adjusted registration thresholds, there is still some general confusion regarding the new registration exemptions, as well as which firms must report to the Securities and Exchange Commission (“SEC”) as Exempt Reporting Advisers (“ERAs”). To help clarify, below is a brief overview of the updated registration requirements, primary exemptions from registration and ERA filing requirements.
Post-Dodd-Frank Investment Adviser Registration Thresholds
- Advisers with assets under management (“AUM”) of at least $100 million must register with the SEC, provided that advisers solely to private funds are generally not required to register with the SEC until reaching AUM of at least $150 million. The new rules implement a transitional exemption allowing such advisers until March 30, 2012 to register.
- Advisers with AUM between $25 million and $100 million (“mid-sized advisers) must register in the state in which they maintain their principal office and place of business, subject to certain exceptions (e.g., New York based mid-sized advisers will need to register with the SEC or report as an ERA, if eligible).
- Advisers with AUM of less than $25 million are prohibited from registering with the SEC (unless based in Wyoming), but may be required to register in the state in which they maintain their principal office and place of business.
Exemptions from SEC Registration
- Private Fund Adviser Exemption – Advisers that solely advise private funds and have AUM of less than $150 million are exempt from registration.
- Foreign Private Adviser Exemption – Advisers that (i) have no place of business in the U.S.; (ii) have, combined, less than 15 U.S. clients and investors in private funds; (iii) have aggregate AUM attributable to U.S. clients and investors in private funds of less than $25 million; and (iv) do not hold themselves out generally to the U.S. public as investment advisers, are exempt from registration.
- Venture Capital Exemption – Advisors that solely advise venture capital funds are exempt from registration. A “venture capital fund” is defined as a private fund that: (i) holds no more than 20 percent of the fund’s capital commitments in non-qualifying investments (i.e. “qualifying portfolio companies” directly acquired by the fund); (ii) does not borrow or otherwise incur leverage (other than limited short-term borrowing); (iii) does not offer its investors redemption rights other than in extraordinary circumstances; (iv) represents itself as pursuing a venture capital strategy; and (v) is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.
- Family Office Exemption – family offices, defined as companies that (i) have no clients other than “family clients”; (ii) are wholly owned by family clients and are exclusively controlled by one or more family members and (iii) do not hold themselves out to the public as investment advisers, are exempt from registration.
Exempt Reporting Advisers
- Advisers relying on the Private Fund Adviser Exemption or the Venture Capital Exemption are considered ERAs, and, as such, will be required to prepare and file Form ADV Part 1A with the SEC by March 30, 2012, as well as comply with certain other reporting and recordkeeping requirements. Note that whether an adviser is considered an ERA will also depend upon where the adviser is located, and that advisers qualifying as ERAs may still be required to register in the state in which they maintain their principal office and place of business.
As state securities commissioners rush to amend their respective investment adviser registration requirements in response to the final SEC rules, it is especially important that advisers consult qualified legal counsel to assure compliance with the evolving regulatory landscape.
Please contact us if you have any questions regarding the new registration requirements or would like to discuss the potential impact of the new requirements upon your firm.