New Registration Requirements for Investment Advisors

On, July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act").  The Act has several potential impacts on those within the investment management community.  This article is an attempt to explain the important aspects and the impact this new legislation will have on Investment Advisers.

Unless otherwise stated, any changes in law discussed herein generally are effective July 21, 2011.


ADVISER REGISTRATION

1. If you manage any separately managed accounts and have assets under management ("AUM") in excess of $100MM, then you must register with the SEC (even if you only have one account /client).
2. If you have separate accounts and AUM of $25MM - $100MM, then you must register with your home state unless exempt under state law, in which case you must register with the SEC.*
3. If your only clients are investment funds and you have AUM of more than $150MM, then you must register with the SEC. 
4. If you are a non-U.S. adviser with any separate accounts, or with fund assets over $150MM, then you generally must register with the SEC UNLESS you have (1) no place of business in the U.S.; (2) less than $25MM in AUM from U.S. clients and U.S. fund investors; (3) fewer than 15 U.S. clients and fund investors; and (4) do not hold yourself out generally to the public in the U.S. as an adviser.
5. If you have AUM of less than $25MM or are exempt from SEC registration, then you must be registered or find an exemption in any state where you have a place of business or more than 5 clients.*
6. If you are a "Family office" or an adviser solely to one or more "venture capital funds"  (both terms to be defined), then you are exempt from SEC registration.

*It is not clear what state exemptions may change as a result of the Act.


INVESTOR CERTIFICATIONS


You must immediately amend your fund subscription agreement's definition of accredited investors to exclude primary residence from an investor's net worth.  For now, this change seems to apply only to new investors or additional subscriptions from existing investors with no need to expel any existing investors.  This change is effective immediately and requires your prompt attention.


If you are a registered investment adviser ("RIA") and charge performance fees/allocations to any investor in a 3(c)(1) fund, you will need to amend to adjust for inflation the "qualified client" certification obtained from each client/fund investor next year.


SWAPS


You may need to register with the National Futures Association ("NFA") as a Commodity Pool Operator (CPO) if (1) you buy commodities and currently rely on an exemption based on margin and notional exposure percentage limitations because you will now need to include any swaps when determining compliance with such limitations, or (2) you are defined as a "major swap participant" when new rules are adopted.


You may need to report (1) pre-enactment swaps if applicable regulators issue related interim rules, and (2) future swaps which are not accepted for clearing.


MISCELLANEOUS


A.  Reporting:  If you manage funds (whether or not you are a RIA), you WILL be required to maintain records and file reports to the SEC.


Such reports will include a description of funds':

1. amount of AUM
2. use of leverage, including off-balance sheet leverage
3. counterparty credit risk exposure
4. trading and investment positions
5. valuation policies and procedures
6. types of assets held
7. side letters
8. trading practices
9. any other information that the SEC deems to be “necessary or appropriate

B.  Custody:  Future rules under the Act may require RIAs to take further steps to safeguard client assets.


C.  The "Volcker" Rule:  If you are affiliated with a bank, then you generally must not engage in proprietary trading activities 
or sponsoring or investing in a hedge fund, private equity fund or similar entity.


D.  "Bad Boy" Provisions:  If further rules are adopted, then you will be disqualified from using Rule 506 Regulation D offerings if your firm or principals have engaged in certain improper conduct in the past.


E.  Securities Lending:  Within two years, the SEC will promulgate rules designed to raise the transparency of information available to investors with respect to the loan or borrowing of securities.


F.  Shorting and Arbitrage:  The SEC may adopt further reporting rules and restrictions on such activities pursuant to the Act.


G.  Mandatory Arbitration:  The SEC may adopt rules and regulations restricting or prohibiting the use of mandatory arbitration agreements by advisers.

Quick Note on the New Financial Reform Bill

I just wanted to give everybody a quick update about the new Financial Reform Bill signed into law by Obama.  The most important change for me was the update to the accredited investor definition, which is now defined as having $1,000,000 net worth without including the primary residence.  Some pundits are tagging this bill as the largest financial reform act since the Great Depression.  For a full overview of the new reforms, please see the article written by Alex Akesson on HedgeCo.Net.

Update: Trends in Capital Introduction 2010

Here is the link to the published research report, Capital Introduction Trends in 2010, written by Daniel Golyanov at Carbon360.

Trends in 2010

I recently wrote an opening letter for the Carbon 360 survey on "Trends in Capital Introduction in 2010" and thought I would share it with you:

As the hedge fund industry stabilizes, we expect investors to become more active. 2010 should be a prosperous year for alternative investments. The managers and investors who survived 2008 and 2009 are the cream of the crop, providing third party marketers and capital introduction firms with a vast array of opportunity. As hedge funds go, so goes the capital introduction industry.

In that mode of thought, transparency and risk management are the popular trends. I would expect new regulations to affect how third party marketers and capital introduction teams are able to conduct business. But this change is not to be feared, but rather embraced. If we can work with regulators to legitimize the industry and overcome the scandalous actions of a select few, I am all for it. This will be a major theme ongoing.

I expect institutional investors to be more receptive to newer managers, fee structures to remain stable, and foreign investors to invest more in the US and vice versa. Europe should lose market share to Asia, and new markets will open up as countries move from developing markets to developed markets. Proprietary trading and hedge funds owned by large US banks will most likely weaken or disappear under the current administration and, more importantly, current US economy sentiment, leading to opportunities for independent investment management companies. Overall, I expect 2010 to build on the strength of the latter half of 2009.

If you have a chance to check out the survey, please do. The respondents include third party marketers, internal marketers, and capital introduction teams.

Third Party Marketing Survey

HedgeCo and Carbon 360 have teamed up for the Trends in Capital Introduction Report 2010 Edition, and right now we need your help. If you are a third party marketer or work in capital introduction, please take the time to fill out this brief survey. The report will be free for anybody who participates in the survey. Thank you for your time.

Evan Rapoport Presents the HedgeCo Fall 2009 Capital Introduction Round Tables

By: Alex Thompson

Evan Rapoport, co-founder and managing partner of HedgeCo.Net, is holding a capital introduction event Tuesday, November 10th at the US Trust Building in Midtown Manhattan. He will be present six different fund managers including Doug Cass to investors composed of some of the largest fund of funds, family offices, and high net worth investors. While seating is limited, there are still a few spots left. If you would like to attend and are an accredited investor, please click here to register for the event

Web 2.0 and Your Hedge Fund

Part 4: Social Networking

Without question, social media has experienced a meteoric rise in popularity over the past few years. In fact, most hedge fund managers and/or their staff have some sort of social networking presence on sites such as Facebook, Twitter, LinkedIn, and MySpace. While these sites offer a tremendous opportunity to connect with colleagues and build relationships, their use also carries with it a hidden risk. Most notably, given the easy accessibility of such information, investors are increasingly scrutinizing the pages of firms' key employees during the due diligence process. As a result, you would be wise to follow a few simple precautions.

First, bear in mind that anything you or your employee posts on their page will be viewed by fellow professionals. For example, posting a funny profile picture on your page may be funny to you, but to the potential investor conducting due diligence, it may mean something else. That same rule applies to any quotes, links, photos, or messages you post on your page as well. A good rule of thumb: If that if a given picture or quote isn't appropriate to share around the office, it's probably not appropriate to post on the web.

Perhaps the most popular site for professional networking is LinkedIn. For the hedge fund manager, the site offers several advantages. With relative ease, you can list your contact information and job description, not to mention any projects you are currently working on. Perhaps more importantly, you can network with potential investors and pre-qualify them. Your online acquaintances potentially meet the definition for the pre-existing relationship rule. Point being, this online network offers the similar benefits as more expensive alternatives, such as hedge fund conferences, but at little or no cost.

As I mentioned above, social networking can serve as a powerful marketing tool to highlight not only your own expertise, but also your fund's. Furthermore, given the breadth of marketing restrictions placed on the hedge fund industry, you would be wise to consider utilizing social networking to increase your fund's exposure. The results just might surprise you!