Investment Adviser Registration

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), Congress passed the Private Fund Investment Advisers Registration Act of 2010 (“Act”).  The Securities and Exchange Commission (“SEC”) recently adopted rules to implement the Act that will significantly impact many private fund managers.  Notably, the Act eliminates the “private adviser exemption” and adjusts the jurisdictional boundaries between federal and state regulation of investment advisers.  Under the new regulatory framework, investment advisers with assets under management (“AUM”) of (i) $100 million or more will generally be required to register with the SEC (advisers to solely private funds with AUM of less than $150 million are exempt from registration); (ii) between $25 million and $100 million will generally be required to register at the state level (if the adviser’s home state does not require registration or examination, the advisor will be required to register with the SEC); and (iii) $25 million and under will generally be required to register at the state level (subject to exemption).

The SEC also implemented changes to the reporting, disclosure and record keeping requirements of investment advisers.  The new rules include significant changes to Form ADV and to the reporting requirements of registered investment advisers regarding private funds, as well as requiring a new category of advisers – exempt reporting advisers – to file the SEC’s new Form ADV, Part 1A.

Both existing and newly formed advisers are strongly encouraged to consult with qualified legal counsel to determine how the new regulatory framework will affect their respective registration statuses.  For further reference, below is a general overview of the registration process.

• Manually complete entitlement forms: In order to register as an investment adviser, the first step is to complete the entitlement forms that can be found in the Investment Adviser Registration Depository (“IARD”) entitlement packet. It is important that each manager select the form appropriate to its filing requirements.

• Pay all applicable fees, such as the IARD firm system processing fee, firm state registration fees, investment adviser representative system processing fees, investment adviser representative state registration filing fees, etc.

• Complete Form ADV Part I: Form ADV Part I is available within the IARD system, and includes basic identification questions as well as a list of disclosure questions regarding each investment adviser. The purpose of completing this form is to ensure that the investment adviser’s information is publicly available through the IARD website.

• Complete Form ADV Part II: Form ADV Part II is no longer completed in checkbox format; it now must be completed as a written firm brochure, including all required written supplemental brochures, as an exhibit to Part I that all clients and potential clients will receive. The firm brochure should be a brief overview of the firm’s business practices. Each supplemental brochure should provide further explanation of the answers in each investment adviser’s Form ADV Part I.

• Form U4: Form U4 can also be found in the IARD system and must be completed for all investment adviser representatives.  For state registered investment advisers, each investment adviser representative will be subject to certain proficiency requirements.  It varies by state, but typically all representatives must pass either the Series 65 exam or the Series 66 exam and the Series 7 exam (however, many states waive the proficiency requirements with respect to representatives who possess certain industry certifications, such as CFPs and CFAs).   

In addition to the steps above, each adviser’s hedge fund attorney should help prepare an appropriate investment management agreement for the adviser and develop appropriate compliance infrastructure, as required on a state-by-state basis.

The investment adviser registration process varies in length for each state – and even within states for different advisers depending on the adviser’s responsiveness, the assigned examiner, etc. – but can generally be completed within six weeks.  SEC registrations tend to be more streamlined and can typically be completed within four weeks or less.

Please contact us for a free consultation if you have any questions regarding the investment adviser registration process.