As previously described, the Securities and Exchange Commission has, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted a rule to exclude “family offices” from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Rule”).
A federally registered investment adviser must formulate, adopt and maintain, and implement, certain policies specified by SEC rules. That obligation applies regardless of the adviser’s size or scope of activities. Although certain of the policies may seem cumbersome or irrelevant, particularly to an adviser with only a few employees, the SEC will insist on them. The SEC will enforce an adviser’s obligation regarding those policies even in the absence of any material client complaints or any connection with allegedly fraudulent activities.
We previously discussed the SEC’s adoption of new rules with respect to exemptions from investment adviser registration. The new rules replace the old “private adviser exemption” with a new set of exemptions. One of the new exemptions—actually an exception from the definition of “investment adviser”—is for entities that are “family offices” as defined in the new rules.
In rules adopted and released on June 22, 2011, the Securities and Exchange Commission implemented provisions in Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the registration, and exemptions from registration, of investment advisers.
The SEC has recently indicated that it may well delay, to the first quarter of 2012, the date by which certain exempt investment advisers will have to register with the SEC and certain SEC-registered advisers will have to switch to state registration.
The SEC continues to face a daunting task to propose, adopt and implement various rules to effect the changes in the status of investment advisers required by the Dodd-Frank Act. Those required changes include:
The Dodd-Frank Act contemplates those changes to occur by July 21, 2011. The SEC indicated that it expects to complete and adopt final rules regarding those changes by that date, but that it is considering permitting investment advisers affected by those changes to wait until the first quarter of 2012 to register with the SEC or to switch from SEC-registration to state-registration, as the case may be.
OUR TAKE: The delay in the compliance date(s) appears likely, so that investment advisers affected by those changes will have more time to comply with the final rules, when adopted by the SEC. Nevertheless, investment advisers that are likely to be affected by the changes should be prepared to review the final rules promptly and then work diligently to prepare and make the necessary filings.
The SEC has recently proposed rules to require advisors of hedge funds and other private funds to report information for use in monitoring risk to the U.S. financial system as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act
Under the proposed reporting requirements (PDF), private fund advisors would be required to file a new reporting form - Form PF - periodically with the SEC. The amount of information reported and the frequency of reporting would depend on whether the reporting party constitutes a "large private fund adviser" or a "smaller private fund adviser."
The proposed rules define a "large private fund adviser" as an adviser with $1 billion or more in hedge fund, liquidity fund (i.e., an unregistered money market fund) or private equity fund assets under management and a "smaller private fund adviser" as including all other private fund advisers.
As should be expected, large private fund advisers would be subject to heightened information reporting obligations. Information to be reported by large private fund advisors would include, among other things, (1) exposures by asset class, geographical concentration and turnover, (2) the types of asets in each of their liquidity fund's portfolios and (3) certain information relevant to the risk profile of the funds, including the extent of leverage and/or bridge financing by the funds. Smaller private fund advisors would report only basic information regarding the private funds they advise.
Large private fund advisers would be required to file their Form PF quarterly. Smaller private fund advisers would be required to file their Form PF annually.
OUR TAKE: If private fund advisers read the Dodd-Frank Act, they knew that new information reporting requirements were on the way. In its proposed rules, the SEC appears to acknowledge that the benefits of additional reporting requirements should always be examined against the burdens that reporting imposes on the regulated community. Specifically, by breaking private fund advisers into two groups for reporting purposes, the SEC places the majority of the burden on the limited number of large private fund advisers (the SEC estimates only around 200), which the SEC projects account for more than 80% of assets under management. This seems to be a reasonable approach for the SEC to take to implement this component of the Dodd-Frank Act.
As contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC proposed a new rule this week that may affect some advisers to family investment portfolios. A provision in the Dodd-Frank Act, set to take effect on July 21, 2011, exempts a “family office” from registration under the Investment Advisers Act of 1940. The SEC’s proposed rule would define “family office” to include only those offices that provide financial services to a single family. Importantly, any office providing investment advice to more than one family would not be exempted under the proposed rule. The SEC has requested comments on the rule by November 18, 2010.
For additional information on the SEC’s proposed rule, see our Public Securities Alert titled “SEC Proposal Affecting Family Investment Portfolios.”
OUR TAKE: If you currently manage an investment portfolio for one or more wealthy families, you should consult the SEC's proposed rule to determine whether your activities would fall within the new exemption from the Investment Advisers Act.
Gardere’s Securities and Corporate Governance Team has experience and familiarity with federal and state securities laws, enabling us to be strategic advisors to both seasoned and newly public companies.
Jess' principal areas of practice are corporate finance and securities, mergers, acquisitions and divestitures, and corporate governance. Mr. Frey represents clients in connection with a wide range of corporate finance transactions, including initial public offerings, follow-on public equity and debt offerings, secondary offerings and private placements. He has negotiated and structured asset and stock acquisitions and has represented clients in connection with commercial loans. Mr. Frey has also advised clients on compliance with the securities laws, as well as general corporate matters.
