Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Hedge Fund Regulation ?Advisers Act

By J Robert Brown Jr.

Elimination of the Advisers Act Exemption for Advisers to Private Funds and Foreign Private Advisers.

Title IV 85 is the 'Private Fund Investment Advisers Registration Act of 2010' and eliminates some exemptions from registration that previously existed.86  In Section 402, the Act adds definitions of 'private fund' and 'foreign private adviser' to the Advisers Act. A private fund is a fund that would be an investment company as defined in the Company Act but for the application of § 3(c)(1) or § 3(c)(7) of the Company Act.87 A foreign private adviser is an investment adviser with no place of business in the United States, fewer than fifteen clients in the United States, and no marketing in the United States.88

Section 403 of the Act eliminates the exemption formerly found in § 203(b) of the Advisers Act for advisers to private funds and creates only a limited exemption from Advisers Act registration for foreign private advisers. As a result, private fund investment advisers and many foreign private advisers will have to register under the Advisers Act when previously they were exempt from such registration.89 Many of the other amendments to the Advisers Act will have to await SEC rule-making. The rule-making activities may include additional reporting and risk and disclosure requirements for investment advisers to their clients and to the SEC. Section 406 of the Act (amending § 211 of the Advisers Act) adds a new reporting requirement for private fund investment advisers, which the SEC must establish after consultation with the CFTC and the new Financial Stability Oversight Council.90 The Act does retain some exemptions, including an exemption for advisers to venture capital funds91 and for advisers to private funds with less than $150,000,000 under management.92

Possible Elimination of the Advisers Act Exemption for Broker-Dealer and Establishment of a Standard of Care.

Section 913 of the Act requires the SEC to undertake a study to, among many other things, consider the standard of care under the Advisers Act93 and consider eliminating the current exemption from registration under the Advisers Act for broker-dealers.94 The Act goes on to give the SEC specific authority to commence rule making 'as necessary or appropriate in the public interest' for the protection of retail customers and to address the standards of care for brokers, dealers, investment advisers, and associated persons when providing personalized investment advice about securities to retail customers.95 In addition, the Act adds a section to the 1934 Act permitting the SEC to adopt rules with respect to a broker-dealer or an investment adviser that establishes a standard of conduct when dealing with customers, and directs that the standard of conduct for broker-dealers and investment advisers be the same.96

Increase in State Supervisory Responsibility

Under current law, investment advisers with less than $25,000,000 under management are subject to state regulation if (like Colorado97) the state has an investment adviser registration requirement. The Act increases this threshold to $100,000,000 'or such higher amount' as the SEC may determine.98 Investment advisers with a lesser amount under management but who would otherwise be required to register with fifteen or more states are permitted to register under § 203 of the Advisers Act rather than be subject to so much duplicative and potentially contradictory state regulation.

Additional Obligations Imposed on Investment Advisers

In direct response to the Bernard Madoff and other scandals, the Act adds § 223 to the Advisers Act which requires registered advisers to take steps necessary to safeguard client assets, including verifying assets through an independent audit 'as the [SEC] may by rule prescribe.'?

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

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86 Section 419 provides that the provisions of Title IV become effective one year after enactment of the
Private Fund Investment Advisers Registration Act of 2010.

87 The Act, § 402(a), amending § 202 of the Advisers' Act by adding § 202(a)(29). Section 3(c)(1) exempts entities that would otherwise be treated as investment companies if there outstanding securities are beneficially owned by not more than 100 persons; § 3(c)(7) provides an exemption from Company Act regulation if all of the entities outstanding securities are owned by 'qualified purchasers' and is not planning to make a public offering, among other conditions. The term 'qualified purchaser' is defined in § 2(a)(51) of the Company Act to include a natural person who owns not less than $5,000,000 in investments, or any person acting for his or her own account and for other qualified purchasers with more than $25,000,000 under discretionary management.

88 The Act, § 402(a), amending § 202 of the Advisers Act by adding § 202(a)(30).
89 The registration requirement is contained in § 203 of the Advisers Act.
90 Established by § 111 of the Act. The rules must be adopted within twelve months of the enactment of the
Private Fund Investment Advisers Registration Act of 2010.
91 The Act, § 407, amending § 203 of the Advisers Act by adding subsection (l). The new section requires the
SEC to adopt rules defining venture capital funds not later than one year after enactment.
92 The Act, § 408, amending § 203 of the Advisers Act by adding subsections (m) and (n).
93 The Act, § 913(c)(9).
94 The Act, § 913(c)(10). The exemption is in § 202(a)(11)(C) of the Advisers Act.
95 The Act, § 913(f).

Full post as published by The Race to the Bottom on August 01, 2010 (boomark / email).