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.

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